** **

**SECURITIESAND EXCHANGE COMMISSION**Washington,D. C. 20549

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**FORM 10-K**

 

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended June 30, 2002**

 

**Commission file number 000-21277**

 

**FTD, Inc.**(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 DriveDowners Grove, IL 60515-5420**(Address of principal executive offices)

Registrant’stelephone number, including area code: **(630) 719-7800**

Securities registeredpursuant to Section 12(b) of the Act:**None**

 

Securities registeredpursuant to Section 12(g) of the Act:**Class ACommon Stock, par value $0.01 per share**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. YES ý NO o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate marketvalue of the Registrant’s Class A common stock, par value $0.01 per share(“Class A Common Stock”) held by non-affiliates of the Registrant as ofSeptember 5, 2002 was $39,850,491.  Asof September 5, 2002, there were 14,499,273 outstanding shares of theRegistrant’s Class A Common Stock, and 2,098,750 outstanding shares of theRegistrant’s Class B convertible common stock, par value $0.0005 per share(“Class B Convertible Common Stock” and, together with Class A Common Stock,“Common Stock”).

**DOCUMENTS INCORPORATED BY REFERENCE.**

Portions of theRegistrant’s proxy statement (to be filed pursuant to Regulation 14A) for the2002 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated byreference in Items 10, 11, 12 and 13 of Part III hereof.

 

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**PART I**

**Item1. BUSINESS**

**Overview**

FTD, Inc., formerly knownas IOS Brands Corporation, (the “Registrant” or the “Company”) is a Delawarecorporation that was formed in 1994. As used in this Form 10-K, the terms the“Registrant” or the “Company” refer to FTD, Inc. and its wholly-ownedsubsidiary, Florists’ Transworld Delivery, Inc., a Michigan corporation (“FTD”or the “Operating Company”). The operations of FTD, the Company’s principaloperating subsidiary, include those of the Company’s indirect wholly-ownedsubsidiaries FTD.COM INC. (“FTD.COM”), Renaissance Greeting Cards, Inc.(“Renaissance”) and FTD Canada, Inc. Substantially all the Company’s operationsare conducted through FTD and its subsidiaries.

The Company, supported byits worldwide FTD brand which utilizes the FTD Mercury Man logo, is a leadingprovider of floral services and products to member florists and consumers.Through its florist business, the Company provides products and services, suchas clearinghouse services, technology products and services and floral shopsupplies, to approximately 20,000 member florists in the U.S. and Canada, andthrough affiliated or related organizations, connects approximately 28,000additional florists in 152 countries outside of North America.   The consumer business segment is comprisedof FTD.COM, a leading Internet and telephone marketer of flowers and specialtygifts.  FTD.COM sells directly toconsumers, primarily through its www.ftd.com Web site and its1-800-SEND-FTD toll-free telephone number.

**2002Merger of the Company with FTD.COM**

Effective June 28, 2002,the Company, FTD and FTD.COM completed a merger transaction (the “2002 Merger”)pursuant to which FTD.COM became an indirect wholly-owned subsidiary of theCompany and the former public stockholders of FTD.COM became stockholders ofthe Company.  The Company accounted forthe 2002 Merger using the purchase method of accounting.  Pursuant to the 2002 Merger, eachstockholder of FTD.COM, other than the Company or its other direct or indirectwholly-owned subsidiaries, received 0.26 shares of Class A Common Stock foreach share of FTD.COM common stock owned at the time of the 2002 Merger.  Additionally, all outstanding options topurchase shares of FTD.COM common stock were converted into options to purchaseshares of Class A Common Stock and all restricted shares of FTD.COM commonstock were converted into restricted shares of Class A Common Stock, inaccordance with the same exchange ratio and continue to be subject to the samerestrictions and vesting schedule as existed prior to the 2002 Merger.

In connection with the2002 Merger, the controlling stockholders of the Company entered into agovernance agreement with the Company that requires the Company to nominatedesignated representatives of the controlling stockholders to the Company’sBoard of Directors (the “Board”) for so long as the controlling stockholderscontinue to own certain specified percentages of Common Stock.  Thecontrolling stockholders also entered into a registration agreement with theCompany at the time of the 2002 Merger that may require the Company to registertheir shares of Common Stock on June 28, 2003, or sooner in the case ofofferings initiated by the Company following the 2002 Merger.  Under theterms of the registration agreement, the controlling stockholders have agreednot to sell or distribute any of their shares of Common Stock prior to December28, 2002.  These shares will alsocontinue to be subject to further limitations under the Securities Act of 1933,as amended, and the registration agreement.

**TheFormation and Termination of Relationship with FTD Association**

Pursuant to an Agreementand Plan of Merger dated August 2, 1994 (the “1994 Merger Agreement”), amongthe Company, FTD Acquisition Corporation, a Delaware corporation, and Florists’Transworld Delivery Association, a Michigan non-profit cooperative associationfounded by a group of retail florists in the United States in 1910 (the “OldAssociation”), the Company acquired all of the outstanding equity of the OldAssociation on December 19, 1994 (the “Acquisition”).  The Operating Company was the surviving corporation following theAcquisition and upon consummation of the Acquisition, the Operating Companybecame a wholly-owned subsidiary of the Company. Immediately following theAcquisition, the Old Association was converted from a non-profit corporation toa for-profit corporation and renamed “Florists’ Transworld Delivery, Inc.” TheCompany, through the Operating Company, operates all of the businessesconducted by the Old Association prior to the Acquisition except for certaintrade association activities which were being conducted by FTD Association, anOhio non-profit corporation organized in connection with the Acquisition and 

 

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structured as amember-owned trade association (the “Association”). Neither the Company nor theOperating Company had any ownership interest in the Association.

In connection with theAcquisition, the Association and FTD entered into a Mutual Support Agreement,dated December 18, 1994 (the “Mutual Support Agreement”), and a TrademarkLicense Agreement, dated December 18, 1994 (the “Trademark Agreement” andtogether with the Mutual Support Agreement, the “Association Agreements”). TheAssociation Agreements, among other things, provided for: (i) existing andfuture members of the Association to have the exclusive right, subject toexecution of a Trademark Agreement with the Operating Company, to use the FTDlogo and other FTD trademarks in connection with the operation of a retailflorist shop; (ii) all members of the Association in good standing to beprovided access to FTD’s clearinghouse services, Mercury Network and certainother FTD services and products; (iii) the Operating Company to pay theAssociation an amount equal to a percentage of the value of every floral ordercleared through FTD’s clearinghouse service; and (iv) the Operating Company andthe Association were to be able to designate up to 20% but not fewer than twoindividuals to be elected to the other’s board of directors.

On April 30, 2001, FTDentered into a Termination Agreement with the Association, which becameeffective as of June 29, 2001 (the “Termination Agreement”). The TerminationAgreement, which contains limited two-year non-compete provisions, terminatesthe Association Agreements.  Asconsideration for the dissolution of the contractual relationship between theCompany and the Association pursuant to the Termination Agreement, FTD agreedto pay the Association $14.0 million, $12.6 million which was paid on June 29,2001 and $1.4 million which was paid July 1, 2002. In fiscal 2001, the Companyrecorded $14.5 million of expenses related to this transaction, includingprofessional fees.

**Operations**

The Company’s primaryoperations include its florist business and consumer business segments.  Composition of the Company’s reportablesegments for fiscal years 2001 and 2000 have been reclassified to conform tothe current year presentation.

The following tableillustrates the percentage of the Company’s total revenue generated by theCompany’s segments as a percentage of total revenue for the three fiscal yearsended June 30, 2002, 2001 and 2000:
| ***Revenues***     |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|
|               |   |     |   |     |   |     |   |
| Florist business   |   | 52.6     | %      | 61.6     | %      | 66.9     | %      |
| Consumer  business |   | 47.4     |   | 38.4     |   | 33.1     |   |
| Total revenues     |   | 100.0    | %      | 100.0    | %      | 100.0    | %      |

 

*Florist business.* The floristbusiness segment includes revenue associated with the services and productsprovided to member florists, primarily comprised of services and products asdescribed below.

Clearinghouse services. Clearinghouse services primarilyconsist of the provision of billing and collection services to both the sendingand receiving florists in flowers-by-wire transactions. Revenues from theclearinghouse are generated by retaining a percentage of the sales price oforders sent through the clearinghouse and are recorded in the month the ordersare filled.  Revenue is also generatedfrom the monthly access fee charged to member florists and credit cardprocessing services provided to member florists. Cash rebates, which are earnedby florists under a customer incentive program in conjunction with the creditcard processing service offered by the Company, are classified ascontra-revenue, in accordance with Emerging Issues Task Force (“EITF”) IssueNo. 01-9, *Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products)*.

Publications products andservices.  Publications products and services primarilyconsist of a telephone directory of FTD member florists that is published on aquarterly basis in both CD-ROM and paper book form. Revenues relating topublications are recognized in the periods in which the publications areissued.  Additionally, the Companyprovides services related to the set up and maintenance of florists’ Web sitesfor FTD Florists’ Online hosted through FTD.COM’s www.ftd.com Web sitepursuant to a Web site hosting agreement with FTD.COM.  Revenue for FTD Florists’ Online Web sitehosting is recognized ratably over the one-year life of the agreement.

Mercury network services. The Company’s Mercury Network is a proprietary telecommunicationsnetwork linking the Company and approximately 50% of the Company’s memberflorists.  Florists who are linked bythe Mercury Network are able to transmit orders cleared through the Company orthrough competing clearinghouses and to send each other messages based on a perorder or per message fee.  Revenues forthe services related to the processing of orders (including transmissioncharges) are recorded in the period the service is provided.

 

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Mercury computerequipment products and services.  Mercurycomputer equipment and software sales include both the sales and leasing ofhardware and software designed for the floral industry.  The software provides a variety of optionsas it offers access to the Company’s Mercury Network to allow for sending andreceiving orders, billing capabilities, order-entry capabilities, an interfaceto various accounting software packages and a comprehensive range of payrolland accounting functions.  The Companyfollows the provisions of Statement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition*,**as amended by SOP 98-9*, SoftwareRevenue Recognition with Respect to Certain Arrangements*, requiringrevenue earned on software arrangements involving multiple elements (i.e.,software products, upgrades/enhancements, post-contract customer support,installation, training, etc.) to be allocated to each element based on therelative fair values of the elements. The Company recognizes revenue fromsoftware products (including specified upgrades/enhancements) at the time ofshipment for systems sold.  For systemsthat are being leased, the Company recognizes revenue ratably over the periodof the lease agreement.  Support revenueis recognized over the period of the support agreement. Installation andtraining revenues are recognized at the time of occurrence.

Specialty wholesalingproducts.  The Company sells both FTD-branded andnon-branded holiday and everyday floral arrangement containers and products.  The Company also sells packaging,promotional products and a wide variety of other floral-related supplies,including greeting cards and the Floral Selections Guide, a counter displaycatalog published by FTD featuring FTD products for all occasions. Bycapitalizing on the Company’s sourcing expertise and volume purchases, theCompany is able to provide florists with a broad selection of products atcompetitive prices.   Sales of floristshop supplies are recorded when the products are shipped.

*Consumer business.*  FTD.COM is anInternet and telephone marketer of flowers and specialty gifts, which beganselling products directly to consumers through the 1-800-SEND-FTD toll-freetelephone number in 1993 and electronically to consumers through the www.ftd.comWeb site in 1994.  FTD.COM offerssame-day delivery of floral orders to nearly 100% of the U.S. population.  The majority of orders are fulfilled by agroup of independent FTD florists who adhere to FTD.COM’s quality and servicestandards.  FTD.COM offers over 400floral arrangements and over 800 specialty gift items, including gourmet giftbaskets, holiday gift sets, bath and beauty products, garden products andstuffed animals.

Orders placed throughFTD.COM’s Web site or 1-800-SEND-FTD typically are paid for using a creditcard.  When a customer makes a purchasethat will be fulfilled by an FTD florist, FTD.COM processes the order, chargesthe customer’s credit card and transmits the order to the Mercury Network.  The Mercury Network then transmits the orderto the fulfilling florist.  FTD.COMcharges the customer a service fee of $8.99 for floral orders placed throughits Web site and $9.99 for floral orders placed through the toll-free telephonenumber, 1–800–SEND–FTD, prior to any promotional discounts.

Orders from FTD.COM’sspecialty gift selection are fulfilled by a manufacturer or a third partydistributor based on a pre-negotiated price. FTD.COM charges the customer shipping and handling fees for thesespecialty gift product orders.  Amounts chargedto the customer for the product and shipping and handling are recorded asrevenue while the pre-negotiated price of the product and the costs incurredfor shipping and handling are recorded as costs of goods sold and servicesprovided.

Order revenue and servicefees are reported net of discounts. FTD.COM recognizes 100% of the order value as revenue and the associatedcosts of goods sold and services provided when the order is fulfilled.

**Marketingand Advertising**

The Company providesextensive marketing and advertising programs on both national and locallevels.  FTD’s national advertisingpromotes FTD florists, FTD branded products, the www.ftd.com Web siteand the toll-free telephone number, 1-800-SEND-FTD.

The florist businesssegment’s marketing program utilizes a mix of broadcast and cable televisionadvertisements, magazine advertisements and newspaper supplements. Sponsorshipsare also a major part of the florist business segment’s marketing efforts.  These include a major sponsorship relationshipwith the Tournament of Rosesâ Association, which generates significantexposure for FTD during the annual Rose Paradeâ.

The florist businesssegment also supplies advertising and marketing tools on a local basis for FTDflorists.  FTD florists are providedwith ad slicks for newspaper print advertising, point-of-sale items, radioscripts and television tapes to be tagged with individual shopinformation.  In addition, FTD floristscan purchase customizable direct mail pieces through FTD.

The consumer businesssegment’s marketing program utilizes a mix of offline, online, direct andcustomer loyalty marketing strategies. In fiscal year 2000, the consumer business segment deployed anintegrated marketing campaign focused on customer 

 

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acquisition whichutilized various offline advertising vehicles to acquire customers, includingbroadcast and cable television, newspaper print, magazine print, radio andoutdoor advertising.  In fiscal years2001 and 2002, the consumer business segment significantly reduced its offlineadvertising in an effort to achieve a more balanced marketing program focusedon both customer acquisition and retention.

The consumer businesssegment’s online advertising consists of primarily online advertisements andlinks on shopping and search-oriented Web sites.  The consumer business segment has established an advertisingpresence on several Web sites, such as Yahoo! and MSN.com.

The consumer businesssegment’s direct marketing campaign focuses on the development of relationshipswith companies that have large consumer databases, including United Airlines,American Airlines AAdvantage Marketing Programs and credit card issuers, suchas American Express.  The consumerbusiness segment utilizes statement inserts, e-mail and online placements andoffers discounts, mileage awards and point awards for purchases to market tothese consumers.

The consumer businesssegment’s customer loyalty marketing strategies focus on the utilization of itsextensive database of customer information to enhance its customer retentionefforts.  The consumer business segmentutilizes printed catalogs, e-mail and other direct marketing pieces to marketto its existing customers.  In addition,Internet customers can establish an account that stores an address book,occasion reminders and billing information and allows for the review ofprevious purchases.

**Seasonality**

The Company generated18.7%, 23.5%, 28.4% and 29.4% of its total revenue in the quarters ended September30, December 31, March 31 and June 30 of fiscal year 2002, respectively. TheCompany’s quarterly revenue and operating results typically exhibit seasonalitysimilar to that experienced in fiscal year 2002.  For example, revenue and operating results tend to be lower forthe quarter ending September 30 because none of the most popular floralholidays, which include Valentine’s Day, Easter, Mother’s Day, Thanksgiving andChristmas, fall within that quarter. In addition, depending on the year, thepopular floral holiday of Easter sometimes falls within the quarter endingMarch 31 and sometimes falls within the quarter ending June 30. Thisseasonality is also affected by increased revenues in the quarter ended March31 attributable to the increased floral orders and shipments of Mother’s Dayholiday products.  In addition, yearover year total revenue and operating results will fluctuate in the firstquarter related to the revenue generated from the Floral Selections Guide,which is published bi-annually in odd-numbered fiscal years.  As a result, comparisons of results ofoperations from one quarter to the immediately preceding quarter or the samequarter of the preceeding year may not be relevant when evaluating the Company’shistorical financial performance and predicting the Company’s futureperformance. The Company’s working capital, cash and short-term borrowings alsofluctuate during the year as a result of the factors set forth above.

**Trademarks**

The Company’s intellectual property portfolio includesservice marks, trademarks and collective trademarks that distinguish theservices and products offered by the Company or its member florists from thoseoffered by others.

The “FTD” word mark and the “Mercury Man” logo areregistered in the United States, Canada and other jurisdictions throughout theworld for various products and services. These marks are used directly by the Company or under license by memberflorists and  FTD.COM.

Other registered trademarks and service marks of theCompany include “FTDA,” “Florists’ Transworld Delivery,” “Mercury” and “MercuryNetwork.”  The Company also hasregistered collective trademarks which are used under license by its memberflorists and FTD.COM for floral products and related items.  These collective trademarks include “AutumnSplendor,” “Big Hug,” “Birthday Party,” “Chicken Soup,” “Sweet Dreams,” “ThanksA Bunch” and the “FTD Anniversary Bouquet.” In addition, the Company has applied to register certain othertrademarks, service marks and collective trademarks in the United States andother countries, and likely will seek to register additional marks, asappropriate.  It is possible that someof these applications to register additional marks will not result inregistrations.

The Company also usesvarious marks under license, including the “Interflora” mark.  The Company is the exclusive licensee to usethis mark in North America and South America, as well as other countriesincluding, but not limited to, Japan, South Korea, Panama, Philippine Islands,Puerto Rico and the Virgin Islands.

 

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** **

**Competition**

The Company competes inthe extremely fragmented floral services industry with a large number ofwholesalers, service providers and direct marketers of flowers and gifts. Theprincipal competitor of the Company’s florist business segment is Teleflora LLC(“Teleflora”).  Teleflora and FTD arethe largest floral service providers in the United States based on membership,after giving effect to Teleflora’s acquisition of American Floral Services,Inc. in November 2000.  Teleflora offerssome products and services that are comparable to those offered by the Company,and most florists subscribe to one or more of these competing services. Theprincipal competitor of the Company’s consumer business segment is1-800-FLOWERS.COM, Inc., which offers similar floral and specialty gift itemsto consumers through a Web site and a toll-free telephone number.

The Operating Company issubject to certain operating restrictions pursuant to the Modified FinalJudgment, dated November 13, 1990, of the United States District Court for theEastern District of Michigan in *United States of America v. Florists’ TelegraphDelivery Association*, Civ. No. 56-15748, and *United States of America v. Florists’Transworld Delivery Association*, Civ. No. 66-28784 (collectivelyreferred to as the “Consent Order”). Among its terms, the Consent Orderprohibits FTD from restricting membership to florists who are not subscribersof a competing clearinghouse. The Consent Order expires on August 1, 2005.

**Employees**

At June 30, 2002, theCompany employed approximately 679 full-time employees. The Company considersits relations with its employees to be good. None of the Company’s employees iscurrently covered by a collective bargaining agreement.

**Item2. PROPERTIES**

The Company’s principalexecutive offices, consisting of approximately 120,000 square feet of officespace, are owned by the Company and are located in Downers Grove, Illinois. Inaddition, the Company leases office space in Sanford, Maine for its Renaissanceoperations, an independent warehouse and distribution facility in Cincinnati,Ohio for product distribution and office space in Medford, Oregon for one ofits internal call centers.  TheCompany’s management believes its facilities are adequate for its currentoperations.

**Item3. LEGAL PROCEEDINGS**

The Company, FTD, FTD.COMand the directors of the Company and FTD.COM have been named as defendants infive class action lawsuits filed in the Court of Chancery for New Castle Countyin Wilmington, Delaware by individual stockholders of FTD.COM on behalf of allformer public stockholders of FTD.COM: *Frances Howland v. FTD.COM et al.*, CivilAction No. 19458 NC; *Johnathon Anderson v. Richard Perry et al.*,Civil Action No. 19459 NC; *Stephen Gluck v. Richard C. Perry,* CivilAction No. 19461 NC; *Geoff Mott v. IOS Brands Corp.*, CivilAction No. 19468 NC; and *Highwood Partners, L.P. v. IOS Brands Corp.*,Civil Action No. 19556 NC.  Theselawsuits were filed beginning on March 5, 2002, after the press releaseannouncing the 2002 Merger was issued. The complaints generally make essentially the same allegations, namelythat:

•                  the offer by the Company to exchange 0.26 shares ofClass A Common Stock for each share of FTD.COM common stock is inadequate,

•                  the individual defendants breached the fiduciaryduties they owed in their capacity as directors by, among other things, failingto conduct an auction or otherwise check the market value of FTD.COM beforevoting to accept the merger proposal,

•                  the Company and its board of directors prevented theFTD.COM board of directors from conducting a meaningful review of thetransaction, and

•                  the Company, FTD.COM and certain individual defendantstimed the 2002 Merger to deny public stockholders the full potential increasein FTD.COM’s stock price following the 2002 Merger.

The lawsuits seek, amongother things, to recover unspecified damages and costs and to enjoin or rescindthe 2002 Merger.  The Company and theother defendants intend to defend themselves vigorously against these lawsuits.

In addition, the Companyis involved in various lawsuits and other matters arising in the normal courseof business.  In the opinion ofmanagement of the Company, although the outcome of these claims and suits areuncertain, they should not have a material adverse effect on the Company’sfinancial condition, liquidity or results of operations.

 

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**Item4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

The following matterswere submitted to the Company’s stockholders at a special meeting of itsstockholders held on June 27, 2002:
| Proposal #1 |   | Ratification and approval of amendments to the  Company’s Certificate of Incorporation and By-laws that, among other things,  changed the Company’s corporate name from IOS Brands Corporation to “FTD,  Inc.”, increased the number of authorized shares of Common Stock the Board of  Directors is authorized to issue and created a classified board of directors. |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 12,077,004 |   | 52,029      |   | 17,653      |   |

 
| Proposal #2 |   | Ratification and approval of proposed one-time  contingent bonus payments of $5,321,174 and $3,237,467 made to each of Robert  L. Norton, the Chairman, President and Chief Executive Officer of the Company,  and Michael J. Soenen, the President and Chief Executive Officer of FTD.COM,  respectively, in connection with the 2002 Merger. |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 10,468,673 |   | 194,116     |   | 11,266      |   |

 
| Proposal #3 |   | Ratification and approval of the FTD, Inc. 2002 Long-Term  Equity Incentive Plan (the “2002 Equity Incentive Plan”) which provides for  grants of stock options, stock appreciation rights, restricted stock and  performance awards to directors, officers and other employees of the Company  and its subsidiaries and persons who engage in services for the Company and  its subsidiaries. |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 
| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 10,526,213 |   | 102,420     |   | 45,422      |   |

 

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**PART II**

**Item5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

The Class A Common Stockis quoted on the Nasdaq National Market under the symbol “FTDI.”  As of June 30, 2002 there were approximately2,083 holders of record of Class A Common Stock.  There currently is no public market for the Class B ConvertibleCommon Stock. As of June 30, 2002 there were three holders of record of Class BConvertible Common Stock.  The holdersof Class A Common Stock are entitled to one vote per share while the holders ofClass B Convertible Common Stock have no voting rights; provided, however, thatthe holders of Class B Convertible Common Stock have the right to vote as aseparate class in certain cases involving mergers, consolidations,reorganizations or recapitalizations in which the holders of Class BConvertible Common Stock receive different consideration on a per share basisthan holders of Class A Common Stock, but shall not be entitled to voteseparately as a class on any amendment that simply increases or decreases thenumber of shares of such class.  TheClass B Convertible Common Stock is convertible into shares of Class A CommonStock pursuant to the provisions of the Company’s Restated Certificate ofIncorporation.

The Company has not paidany cash dividends on its Common Stock since its inception.  Any future determination as to the paymentof dividends will be at the discretion of the Board and will depend on theCompany’s financial condition, results of operations, capital requirements,compliance with charter and contractual restrictions and such other factors asthe Board deems relevant.

In addition, under theterms of the Company’s Credit Agreement dated as of September 27, 2001, by andamong the Company, FTD and Harris Trust and Savings Bank (the “2001 CreditAgreement”), the Company may not declare or pay any dividend or make anydistribution (other than dividends or distributions payable solely in capitalstock of the Company) on shares of its Common Stock to holders of such CommonStock if at the time of such proposed dividend, or immediately after givingeffect thereto, certain financial conditions are not satisfied.

Because the Class ACommon Stock was only reported on the Nasdaq National Market on June 28, 2002,the first day of public trading, trading activity in the Class A Common Stockwas limited and did not, as of that date, constitute an “established publictrading market.”  The table below setsforth the high and low sales prices as reported in the Nasdaq National Marketfor Class A Common Stock on June 28, 2002.
| **Period**                            |   | **High** |   | **Low** |   |
|---------------------------------------|--------|----------|--------|---------|--------|
| 2002:                                 |   |     |   |    |   |
| 4th  quarter (June 28 — June 30) |   | $        | 12.87  |    | $      | 12.00 |   |
|                                  |   |     |   |    |   |
|                                       |        |          |        |         |        |  |  |

 

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**Item 6. SELECTED FINANCIAL DATA**

 

The following table sets forth the Company’s selectedhistorical data for the 1998 through 2002 fiscal years. The selected historicalstatement of operating data for the 1998 through 2002 fiscal years was derivedfrom the Company’s audited consolidated financial statements. The financialdata is qualified by reference to, and should be read in conjunction with, theCompany’s consolidated financial statements and the notes to those statementsand “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” appearing elsewhere in this Form 10-K.  Certain amounts in the Company’s fiscal years 1998 through 2001financial statements have been reclassified to conform to the current yearpresentation.

 
|                                         |   | **Fiscal  year ended June 30,**                         |    |
|----------------------------------------------|--------|---------------------------------------------------------|---------|
|                                         |   | **2002**                                                |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                         |   | ***(Dollars in thousands except for  per share data)*** |    |
|                                         |   |                                                    |    |
| **Statement of Operations:**                 |   |                                                    |    |   |   |   |   |   |   |   |   |
| Total revenues                               |   | $                                                       | 325,266 |   | $ | 305,995 |   | $ | 264,834 |   | $ | 209,385 |   | $ | 179,675 |   |
| Cost of goods sold and services provided     |   | 177,328                                                 |    | 159,879 |   | 135,069 |   | 95,894 |   | 86,955 |   |
| Gross profit                                 |   | 147,938                                                 |    | 146,116 |   | 129,765 |   | 113,491 |   | 92,720 |   |
| Selling, general and administrative expenses |   | 127,280                                                 | (1)     | 120,826 | (2) | 152,871 | (3) | 102,747 |   | 80,406 |   |
| Income (loss) from operations                |   | 20,658                                                  |    | 25,290 |   | (23,106 | ) | 10,744 |   | 12,314 |   |
| Other expense, net                           |   | 3,400                                                   | (4)     | 18,660 | (5) | 4,006 |   | 13,799 | (4) | 10,415 | (4) |
| Income tax expense (benefit)                 |   | 6,718                                                   |    | 3,401 |   | (7,586 | ) | (194 | ) | 1,637 |   |
| Minority interest (6)                        |   | 2,525                                                   |    | 1,908 |   | (4,389 | ) | — |   | (1 | ) |
| Net income (loss)                            |   | $                                                       | 8,015   |   | $ | 1,321 |   | $ | (15,137 | ) | $ | (2,861 | ) | $ | 263 |   |
|                                         |   |                                                    |    |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share              |   | $                                                       | 0.55    |   | $ | 0.09 |   | $ | (0.99 | ) | $ | (0.19 | ) | $ | 0.02 |   |
| Diluted earnings (loss) per share            |   | $                                                       | 0.54    |   | $ | 0.09 |   | $ | (0.99 | ) | $ | (0.19 | ) | $ | 0.02 |   |
|                                         |   |                                                    |    |   |   |   |   |   |   |   |   |
| **Other Data:**                              |   |                                                    |    |   |   |   |   |   |   |   |   |
| Depreciation and amortization                |   | $                                                       | 9,421   |   | $ | 9,487 |   | $ | 8,628 |   | $ | 7,307 |   | $ | 9,570 |   |
| Capital expenditures                         |   | $                                                       | 4,453   |   | $ | 3,952 |   | $ | 15,655 |   | $ | 8,970 |   | $ | 1,942 |   |
|                                         |   |                                                    |    |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                      |   |                                                    |    |   |   |   |   |   |   |   |   |
| (at end of period)                           |   |                                                    |    |   |   |   |   |   |   |   |   |
| Working capital (deficit)                    |   | $                                                       | 19,683  |   | $ | 13,736 |   | $ | 778 |   | $ | (8,285 | ) | $ | (4,148 | ) |
| Total assets                                 |   | 231,901                                                 |    | 175,351 |   | 171,466 |   | 144,697 |   | 154,486 |   |
| Long-term debt, including current portion    |   | 47,000                                                  |    | 54,875 |   | 54,750 |   | 51,750 |   | 58,130 |   |
| Total equity                                 |   | 114,217                                                 |    | 51,139 |   | 47,849 |   | 23,778 |   | 27,924 |   |

 

(1)          During the year ended June 30, 2002, theCompany recorded the following as a component of selling, general andadministrative expenses:

•                  Compensation expense of $8.7 million related to bonuspayments paid to executive officers, in addition to related employer payrolltaxes, in connection with the 2002 Merger.

•                  A gain of $2.6 million attributable to the settlementof a claim against the developer of an unlaunched version of FTD.COM’s Website.

•                  Severance costs of $2.2 million for certain formeremployees.

•                  Merger expenses of $1.6 million incurred by FTD.COMrelated to the 2002 Merger.

•                  A $1.4 million gain attributable to the termination ofcertain future post-retirement health care benefits. The Company providescertain post-retirement health care benefits to qualifying retirees under theterms of its qualified retirement plan.

 

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 This termination of benefits caused adecrease in the Company’s post-retirement health care obligation attributed toprior services rendered.

•                  A gain of $1.1 million attributable to a singlebusiness tax refund related to prior years’ filings.

•                  An impairment loss for internal use software in theamount of $0.4 million that had been used to process clearinghouse and relatedtransactions for member services.

(2)          In the second quarter of fiscal year2001, the Company recorded a $0.5 million gain, reflected in selling, generaland administrative expenses, attributable to the settlement of a third partyvendor cancellation fee for less than the amount originally accrued in thefourth quarter of fiscal year 2000 by FTD.COM.

(3)          In the fourth quarter of fiscal year2000, the Company recorded a $4.4 million charge, reflected in selling, generaland administrative expenses, associated with the write-off of development workrelated to an unlaunched version of FTD.COM’s Web site. Additionally, in thesame quarter of fiscal year 2000, FTD.COM terminated one of its Internet portaldistribution agreements. In conjunction with this termination, the Companyrecorded a $2.3 million charge, reflected in selling, general andadministrative expenses.

(4)          In September 2001, the Company and FTDentered into the 2001 Credit Agreement. As a result of entering into the 2001 Credit Agreement, unamortizeddeferred financing costs associated with the then existing debt were expensed,resulting in a net loss on extinguishment of debt of $0.6 million.  In December 1998, the Company repurchasedthe $60.0 million aggregate principal amount of 14% Senior Subordinated Notes dueDecember 15, 2001 (the “Notes”). The aggregate repurchase price totaled $64.2million and consisted of the $60.0 million principal on the Notes and a $4.2million pre-payment penalty. As a result of the repurchase of the Notes, $1.7million of unamortized discount and $1.2 million of deferred financing costsassociated with the Notes were expensed in December 1998. Accordingly, the losson the repurchase of the Notes totaled $7.1 million. In November 1997, theCompany and FTD entered into a credit agreement with a group of banks led byBank One Capital Markets, Inc., as agent (the “1997 Credit Agreement”).  As a result of entering into the 1997 CreditAgreement, unamortized deferred financing costs associated with the thenexisting debt were expensed, resulting in a net loss on extinguishment of debtof $1.3 million.  These expense itemsare reflected in other expense, net in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 145, *Recission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13, and Technical Corrections. *

(5)          In the fourth quarter of fiscal year2001, FTD recorded a termination charge of $14.5 million, reflected in otherexpense, net related to the dissolution of a contractual relationship betweenFTD and a member-owned trade association pursuant to the Termination Agreement.

(6)          In fiscal year 1998, the minorityinterest benefit represents the minority’s interest in Renaissance, which waspurchased for cash by FTD in fiscal year 1998. In fiscal years 2000 through2002, the minority interest expense (benefit) represents the minority’sinterest in FTD.COM through the date of the 2002 Merger.

**Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

The following discussionshould be read in conjunction with the consolidated financial statements andnotes to those statements that appear elsewhere in this Form 10-K.  The following discussion containsforward-looking statements that reflect the Company’s plans, estimates andbeliefs.  The Company’s actual resultscould differ from those discussed in the forward-looking statements.  Factors that could cause or contribute toany differences include, but are not limited to, those discussed under thecaption “Forward-Looking Information” and elsewhere in this Form 10-K.

**Operations**

The Company generates itsrevenue from two business segments, the florist business segment and theconsumer business segment.  Compositionof the Company’s reportable segments for fiscal years 2001 and 2000 has beenreclassified to conform to the current year presentation.

*Florist business.* The floristbusiness segment includes revenue associated with the services and productsprovided to member florists, primarily comprised of services and products asdescribed below.

 

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Clearinghouse services. Clearinghouse services primarilyconsist of the provision of billing and collection services to both the sendingand receiving florists in flowers-by-wire transactions. Revenues from theclearinghouse are generated by retaining a percentage of the sales price oforders sent through the clearinghouse and are recorded in the month the ordersare filled.  Revenue is also generatedfrom the monthly access fee charged to member florists and credit card processingservices provided to member florists. Cash rebates, which are earned byflorists under a customer incentive program in conjunction with the credit cardprocessing service offered by the Company, are classified as contra-revenue, inaccordance with EITF Issue No. 01-9.

Publications products andservices.  Publications products and services primarilyconsist of a telephone directory of FTD member florists that is published on aquarterly basis in both CD-ROM and paper book form. Revenues relating to publicationsare recognized in the periods in which the publications are issued.  Additionally, the Company provides servicesrelated to the set up and maintenance of florists’ Web sites for FTD Florists’Online hosted through FTD.COM’s www.ftd.com Web site.  Revenue for FTD Florists Online Web sitehosting is recognized ratably over the one-year life of the agreement.

Mercury network services. The Company’s Mercury Network is a proprietary telecommunicationsnetwork linking the Company and approximately 50% of the Company’s memberflorists.  Florists who are linked bythe Mercury Network are able to transmit orders cleared through the Company orthrough competing clearinghouses and to send each other messages based on a perorder or per message fee.  Revenues forthe services related to the processing of orders (including transmissioncharges) are recorded in the period the service is provided.

Mercury computerequipment products and services.  Mercurycomputer equipment and software sales include both the sales and leasing ofhardware and software designed for the floral industry.  The software provides a variety of optionsas it offers access to the Company’s Mercury Network to allow for sending andreceiving orders, billing capabilities, order-entry capabilities, an interfaceto various accounting software packages and a comprehensive range of payrolland accounting functions.  The Companyfollows the provisions of SOP 97-2, as amended by SOP 98-9, requiring revenueearned on software arrangements involving multiple elements (i.e., softwareproducts, upgrades/enhancements, post-contract customer support, installation,training, etc.) to be allocated to each element based on the relative fairvalues of the elements. The Company recognizes revenue from software products(including specified upgrades/enhancements) at the time of shipment for systemssold.  For systems that are beingleased, the Company recognizes revenue ratably over the period of the leaseagreement.  Support revenue isrecognized over the period of the support agreement. Installation and trainingrevenues are recognized at the time of occurrence.

Specialty wholesalingproducts.  The Company sells both FTD-branded andnon-branded holiday and everyday floral arrangement containers andproducts.  The Company also sellspackaging, promotional products and a wide variety of other floral-relatedsupplies, including greeting cards and the Floral Selections Guide, a counterdisplay catalog published by FTD featuring FTD products for all occasions. Bycapitalizing on the Company’s sourcing expertise and volume purchases, theCompany is able to provide florists with a broad selection of products atcompetitive prices.   Sales of floristshop supplies are recorded when the products are shipped.

*Consumer business.*  FTD.COM is anInternet and telephone marketer of flowers and specialty gifts, which beganselling products directly to consumers through the 1-800-SEND-FTD toll-freetelephone number in 1993 and electronically to consumers through the *www.ftd.com*Web site in 1994.  FTD.COM offerssame-day delivery of floral orders to nearly 100% of the U.S. population.  The majority of orders are fulfilled by agroup of independent FTD florists who adhere to FTD.COM’s quality and servicestandards.  FTD.COM offers over 400floral arrangements and over 800 specialty gift items, including gourmet giftbaskets, holiday gift sets, bath and beauty products, garden products andstuffed animals.

Orders placed throughFTD.COM’s Web site or 1-800-SEND-FTD typically are paid for using a creditcard.  When a customer makes a purchasethat will be fulfilled by an FTD florist, FTD.COM processes the order, chargesthe customer’s credit card and transmits the order to the Mercury Network.  The Mercury Network then transmits the orderto the fulfilling florist.  FTD.COMcharges the customer a service fee of $8.99 for floral orders placed throughits Web site and $9.99 for floral orders placed through 1–800–SEND–FTD,prior to any promotional discounts.

Orders from FTD.COM’sspecialty gift selection are fulfilled by a manufacturer or a third partydistributor based on a pre-negotiated price. FTD.COM charges the customer shipping and handling fees for thesespecialty gift product orders.  Amountscharged to the customer for the product and shipping and handling are recordedas revenue while the pre-negotiated price of the product and the costs incurredfor shipping and handling are recorded as costs of goods sold and servicesprovided.

Order revenue and servicefees are reported net of discounts. FTD.COM recognizes 100% of the order value as revenue and the associatedcosts of goods sold and services provided when the order is fulfilled.

 

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Marketing and promotionsexpense is related to the Company’s extensive marketing and advertisingprograms on both national and local levels. FTD’s national advertising promotes FTD florists, FTD branded products,the www.ftd.com Web site and the toll-free telephone number,1-800-SEND-FTD.

The florist businesssegment promotes its products and services primarily through broadcast andcable television advertisements, magazine advertisements and newspapersupplements.  Sponsorships are also amajor part of the florist business segment’s marketing efforts.  The florist business segment also suppliesadvertising and marketing tools on a local basis for FTD florists.  FTD florists are provided with advertisingtools such as ad slicks for newspaper print advertising, point-of-sale items,radio scripts and television tapes to be tagged with individual shopinformation.  In addition, FTD floristscan purchase customizable direct mail pieces through FTD.

The consumer businesssegment’s marketing program utilizes a mix of offline, online, direct andcustomer loyalty marketing strategies. In fiscal year 2000, the consumer business segment deployed anintegrated marketing campaign focused on customer acquisition which utilizedvarious offline advertising vehicles to acquire customers, including broadcastand cable television, newspaper print, magazine print, radio and outdooradvertising.  In fiscal years 2001 and2002, the consumer business segment significantly reduced its offlineadvertising in an effort to achieve a more balanced marketing program focusedon both customer acquisition and retention. Online advertising consists of primarily online advertisements and linkson shopping and search-oriented Web sites. The direct marketing campaignfocuses on the development of relationships with many companies that have largeconsumer databases, in addition to utilizing statement inserts, e-mail andonline placements and offers discounts, mileage awards and point awards forpurchases to market to these consumers. The customer loyalty marketing strategies focus on the utilization ofits extensive database of customer information to enhance its customerretention efforts.

General andadministrative expenses primarily consist of direct corporate expenses,customer service expenses in both business segments and technology developmentexpense.

In view of the rapidlychanging nature of the Company’s consumer business and seasonal variations inthe revenues and operating results of the Company’s florist and consumerbusiness segments, the Company believes that comparisons of its revenues andoperating results for any period with those of the immediately preceding periodor the same period of the preceding fiscal year may be of limited relevance inevaluating the Company’s historic financial performance and predicting theCompany’s future financial performance. For example, revenues and operatingresults tend to be lower for the quarter ending September 30 because none ofthe most popular floral holidays, which include Valentine’s Day, Easter,Mother’s Day, Thanksgiving and Christmas, fall within that quarter. Inaddition, depending on the year, the popular floral holiday of Easter sometimesfalls within the quarter ending March 31 and sometimes falls within the quarterending June 30. Also, seasonality is attributable to increased revenues in thequarter ended March 31 relating to the increased floral orders and shipments ofMother’s Day holiday products.  Inaddition, year over year total revenue and operating results will fluctuate inthe first quarter related to the revenue generated from the Floral SelectionsGuide, which is published bi-annually. As a result, comparisons of results of operations from one quarter tothe immediately preceding quarter or the same quarter of the preceding year maynot be relevant when evaluating the Company’s historical financial performanceand predicting the Company’s future performance. The Company’s working capital,cash and short-term borrowings also fluctuate during the year as a result ofthe factors set forth above.

**Yearended June 30, 2002, compared to year ended June 30, 2001**

***Total revenues***
|              |   | **Year ended June 30,** |    |     |   |
|-------------------|--------|-------------------------|---------|----------|--------|
|              |   | **2002**                |    | **2001** |   | **% Change** |   |
|              |   | **(in thousands)**      |    |     |   |
| Florist business  |   | $                       | 171,197 |     | $      | 188,478 |   | (9.2 | )% |
| Consumer business |   | 154,069                 |    | 117,517  |   | 31.1 |   |
|              |   |                    |    |     |   |   |   |
| Total revenues    |   | $                       | 325,266 |     | $      | 305,995 |   | 6.3 |   |

 

Total revenues increasedby $19.3 million, or 6.3%, to $325.3 million for the year ended June 30, 2002,compared to $306.0 million for the year ended June 30, 2001, for the reasonsdiscussed below.

The florist businesssegment revenue decreased by $17.3 million, or 9.2%, to $171.2 million for theyear ended June 30, 2002, compared to $188.5 million for the year ended June30, 2001. This decrease was primarily due to the full year effect of a plannedsignificant reduction in the number of specialty wholesaling products, inparticular, supplies for seasonal bouquets, offered to florists in fiscal year2002.  Additionally, the year ended June30, 2001 included revenue of $3.9 million attributable to the Floral Selections

 

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Guide, which ispublished bi–annually. The decrease was also due to a decrease intechnology-related revenues resulting from Mercury equipment sales and fewernetwork transmissions in the year ended June 30, 2002 compared to the sameperiod last year. The Company has two agreements with a competing floralservice provider that provide a guaranteed minimum order fee for ordersprocessed over the Mercury Network. These agreements comprised $1.9 million, or1.1%, and $2.0 million, or 1.1%, respectively, of the Company’s floristbusiness segment revenue for the years ended June 30, 2002 and 2001. During thethird quarter of fiscal year 2002, one of the agreements expired and theCompany has received a notice of non-renewal for the period beginning September1, 2002 related to the other agreement. Although the Company is currentlynegotiating with the floral service provider to renew the existing contract,there can be no assurance this will occur. In the event the floral serviceprovider does not agree to renew this agreement, the Company’s revenue andoperating results could be adversely affected. The Company is currently inarbitration related to the $1.6 million receivable from the floral serviceprovider.  Membership in FTD increasedfrom approximately 14,000 to 20,000 members at June 30, 2001 and 2002,respectively. This increase in membership is primarily attributable toaggressive sales efforts in the last six months of fiscal year 2002.

The consumer businesssegment revenue increased by $36.6 million, or 31.1%, to $154.1 million for theyear ended June 30, 2002, compared to $117.5 million for the year ended June30, 2001. This increase was primarily due to continued growth in order volumeand average order value.  The totalorder volume was approximately 2.6 million for the fiscal year ended June 30,2002, representing a 28.2% increase over the prior fiscal year order volume ofapproximately 2.0 million.  The increasein orders was due in part to FTD.COM’s purchase of certain assets of NationalFlora, Inc. (“National Flora”) for $9.1 million in November 2001. SeeNote 3 of the Notes to the Consolidated Financial Statements for adiscussion of the National Flora purchase. Internet orders were 80.8% of totalorders for the fiscal year ended June 30, 2002, compared to 85.1% for thefiscal year ended June 30, 2001.  Thedecrease in the percent of internet orders to total orders was principallyattributable to the acquisition of National Flora, which primarily generatesorders from telephone sales.  

***Total costs of goods sold and services provided***
|                                            |   | **Year ended June 30,** |    |     |   |
|-------------------------------------------------|--------|-------------------------|---------|----------|--------|
|                                            |   | **2002**                |    | **2001** |   | **% Change** |   |
|                                            |   | **(in thousands)**      |    |     |   |
| Florist business                                |   | $                       | 56,572  |     | $      | 65,948 |   | (14.2 | )% |
| Consumer business                               |   | 118,180                 |    | 91,689   |   | 28.9 |   |
| Corporate                                       |   | 2,576                   |    | 2,242    |   | 14.9 |   |
|                                            |   |                    |    |     |   |   |   |
| Total costs of goods sold and services provided |   | $                       | 177,328 |     | $      | 159,879 |   | 10.9 |   |

 

Total costs of goods soldand services provided increased by $17.4 million, or 10.9%, to $177.3 millionfor the year ended June 30, 2002, compared to $159.9 million for the yearended June 30, 2001.  As a percent ofrevenue, gross margins decreased to 45.5% for the year ended June 30, 2002 from47.8% for the year ended June 30, 2001, primarily attributable to the higherpercentage of total sales in the Company’s lower margin consumer businesssegment.

Costs of goods sold andservices provided associated with the florist business segment decreased by$9.3 million, or 14.2%, to $56.6 million for the year ended June 30, 2002,compared to $65.9 million for the year ended June 30, 2001. This decrease wasprimarily attributable to decreased revenues in the florist business segment,as previously noted.  As a percent ofrevenue, the florist business segment’s gross margin increased to 67.0% for theyear ended June 30, 2002 from 65.0% for the year ended June 30, 2001 as aresult of a change in the revenue mix in the florist business segment.

Costs of goods sold andservices provided associated with the consumer business segment increased by$26.5 million, or 28.9%, to $118.2 million for the year ended June 30, 2002,compared to $91.7 million for the year ended June 30, 2001. This increase wasprimarily attributable to increases in order volume. As a percent of revenue,the consumer business segment’s gross margin increased to 23.3% for the yearended June 30, 2002 from 22.0% for the year ended June 30, 2001, primarily as aresult of operating improvements, including efficiencies in order entryprocessing, and increases in specialty gift orders, which typically have highergross profit margins.

Costs of goodssold and services provided associated with corporate activities increased by$0.4 million, or 14.9%, to $2.6 million for the year ended June 30, 2002,compared to $2.2 million for the year ended June 30, 2001.   These costs are related to the development and support of theinternal corporate technology platforms. The increase is primarily due to additional hardware and software maintenanceexpenses in fiscal year 2002.

 

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***Advertising and selling costs***
|                          |   | **Year ended June 30,** |   |     |   |
|-------------------------------|--------|-------------------------|--------|----------|--------|
|                          |   | **2002**                |   | **2001** |   | **% Change** |   |
|                          |   | **(in thousands)**      |   |     |   |
| Florist business              |   | $                       | 52,966 |     | $      | 54,340 |   | (2.5 | )% |
| Consumer business             |   | 14,969                  |   | 13,471   |   | 11.1 |   |
|                          |   |                    |   |     |   |   |   |
| Advertising and selling costs |   | $                       | 67,935 |     | $      | 67,811 |   | 0.2 |   |

 

Advertising and sellingcosts increased by $0.1 million, or 0.2%, to $67.9 million for the year endedJune 30, 2002, compared to $67.8 million for the year ended June 30, 2001.

The advertising andselling costs associated with the florist business segment decreased by $1.3million, or 2.5%, to $53.0 million for the year ended June 30, 2002, comparedto $54.3 million for the year ended June 30, 2001.  This decrease was primarily due to reduced marketing andpromotion expenditures resulting from the shift from an offline marketingprogram focused on year-round advertising to a floral holiday-centric planfocused on Christmas, Valentine’s Day, Easter and Mother’s Day, in addition toa decrease in commissions provided to sending florists.

The advertising and selling costs associated with theconsumer business segment increased by $1.5 million, or 11.1%, to $15.0 millionfor the year ended June 30, 2002, compared to $13.5 million for the year endedJune 30, 2001. The increase was primarily due to an increase in offlineadvertising expenses and direct marketing expenses, partially offset by adecrease in online advertising expenses. During the second quarter of fiscalyear 2002, the Company began incurring costs for yellow pages advertising relatedto the acquisition of certain assets of National Flora, which contributed tothe increase in offline advertising expenses. The number of direct marketingprograms has increased over the last year with the addition of severalcorporate partnerships, which has led to increased direct marketing costs.  Online advertising expenses decreasedprimarily due to lower annual contractual obligations.  In connection with the marketing andpromotional efforts, the total customer base (defined as all persons who havepurchased at least once through the www.ftd.com Web site or FTD.COM’stoll-free telephone number, 1-800-SEND-FTD) increased by 45%, or 1,546,000customers, to 4,985,000 customers as of June 30, 2002 from 3,439,000 customersas of June 30, 2001. This increase includes the addition of 321,000 customersin connection with the acquisition of certain assets of National Flora.

 

***General and administrative costs***

 
|                             |   | **Year ended June 30,** |   |     |   |
|----------------------------------|--------|-------------------------|--------|----------|--------|
|                             |   | **2002**                |   | **2001** |   | **% Change** |   |
|                             |   | **(in thousands)**      |   |     |   |
| Florist business                 |   | $                       | 13,098 |     | $      | 15,939 |   | (17.8 | )% |
| Consumer business                |   | 12,375                  |   | 12,360   |   | 0.1 |   |
| Corporate                        |   | 33,872                  |   | 24,716   |   | 37.0 |   |
|                             |   |                    |   |     |   |   |   |
| General and administrative costs |   | $                       | 59,345 |     | $      | 53,015 |   | 11.9 |   |

 

General andadministrative costs increased by $6.3 million, or 11.9%, to $59.3 million forthe year ended June 30, 2002, compared to $53.0 million for the year ended June30, 2001.

The general andadministrative costs associated with the florist business segment decreased by$2.8 million, or 17.8%, to $13.1 million for the year ended June 30, 2002,compared to $15.9 million for the year ended June 30, 2001.  This decrease was due to a reduction intraining and support related to Mercury Technology and a decrease inadministrative costs related to sales of floral supplies to floral shops.

Excluding a $2.6 million gain attributable to thesettlement of a claim against the developer of an unlaunched version ofFTD.COM’s Web site, a $1.6 million charge related to costs associated with the2002 Merger recorded in fiscal year 2002 and a $0.5 million gain in fiscal year2001 attributable to the settlement of a third party vendor cancellation feefor less than the amount originally accrued by FTD.COM in the fourth quarter offiscal year 2000, general and administrative costs associated with the consumerbusiness segment increased by $0.5 million, or 4.0%, to $13.4 million for theyear ended June 30, 2002, compared to $12.9 million for the year ended June 30,2001.

 

 

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Excluding compensationexpense related to bonus payments of $8.7 million paid to executive officers inconnection with the 2002 Merger, as discussed further in Note 2 of the Notes toConsolidated Financial Statements, severance costs of $2.2 million for certainformer employees, a $1.4 million post-retirement health care benefits gain dueto the termination of certain future benefits, a gain of $1.1 millionattributable to a single business tax refund related to prior years’ filingsand a write-down of $0.4 million for internal use software that had been usedto process clearinghouse services which were all recorded in the year endedJune 30, 2002, general and administrative costs associated with corporatefunctions increased $0.4 million, or 1.4%, to $25.1 million for the year ended June30, 2002, compared to $24.7 million for the year ended June 30, 2001.

Interest income decreasedby $0.5 million, or 29.6%, to $1.0 million for the year ended June 30, 2002,compared to $1.5 million for the year ended June 30, 2001.  The decrease was primarily due to loweraverage interest rates in fiscal year 2002 compared to fiscal year 2001.  Interest expense decreased by $1.9 million,or 35.7%, to $3.3 million for the year ended June 30, 2002, compared to $5.2million for the year ended June 30, 2001. The decrease was primarily due to lower average borrowing rates.

In September 2001, theCompany and FTD entered into the 2001 Credit Agreement.  As a result of entering into the 2001 CreditAgreement, unamortized deferred financing costs associated with the thenexisting debt were expensed, resulting in a net loss on extinguishment of debtof $0.6 million in fiscal year 2002. This expense is reflected in other expense, net in accordance with SFASNo. 145.  Other expense, net for theyear ended June 30, 2001 consisted primarily of $14.5 million in expensesrelated to the Termination Agreement.

Income tax expense forthe years ended June 30, 2002 and 2001 was $6.7 million, reflecting aneffective tax rate of 39%, and $3.4 million, reflecting an effective tax rateof 51%, respectively.  The fiscal year2002 effective tax rate reflects a $1.5 million reduction in the valuationallowance for deferred tax assets due to the expected realization of suchassets through the generation of future taxable income.

The minority interest inearnings of subsidiary was an expense of $2.5 million and $1.9 million for theyears ended June 30, 2002 and 2001, respectively.  The increase was a result of an increase in the consumer businesssegment net income. Pursuant to the 2002 Merger, FTD.COM became an indirectwholly-owned subsidiary of the Company and the former public stockholders ofFTD.COM became stockholders of the Company. As such there is no minority interest liability on the consolidatedbalance sheet at June 30, 2002.  Theminority’s interest in FTD.COM was 14.62% at June 30, 2001.

Net income increased by$6.7 million to $8.0 million for the year ended June 30, 2002, compared to netincome of $1.3 million for the year ended June 30, 2001, for reasons discussedabove.

**Yearended June 30, 2001, compared to year ended June 30, 2000**

***Total revenues***
|              |   | **Year ended June 30,** |    |     |   |
|-------------------|--------|-------------------------|---------|----------|--------|
|              |   | **2001**                |    | **2000** |   | **% Change** |   |
|              |   | **(in thousands)**      |    |     |   |
| Florist business  |   | $                       | 188,478 |     | $      | 177,248 |   | 6.3 | % |
| Consumer business |   | 117,517                 |    | 87,586   |   | 34.2 |   |
|              |   |                    |    |     |   |   |   |
| Total revenues    |   | $                       | 305,995 |     | $      | 264,834 |   | 15.5 |   |

 

Total revenues increasedby $41.2 million, or 15.5%, to $306.0 million for the year ended June 30, 2001,compared to $264.8 million for the year ended June 30, 2000, for the reasonsdiscussed below.

The florist businesssegment revenue increased by $11.3 million, or 6.3%, to $188.5 million for theyear ended June 30, 2001, compared to $177.2 million for the year ended June30, 2000. This increase was primarily due to an increase in the monthly accessfees charged to florists, revenue attributable to the Floral Selections Guide,as described in Note 1 of the Notes to the Consolidated Financial Statements,as well as an increase in equipment sales and support fees charged to Mercuryequipment customers, offset in part by decreased credit card processingrevenue. The Company has agreements with certain floral service providers thatprovide a guaranteed minimum order fee for orders processed over the MercuryNetwork during these periods. Membership in FTD declined from approximately 18,000 to 14,000 members,at June 30, 2000 and 2001, respectively. The Company believes that this declinein membership was primarily attributable to the increase in monthly access feescharged to FTD florists.

 

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The consumer businesssegment revenue increased by $29.9 million, or 34.2%, to $117.5 million for theyear ended June 30, 2001, compared to $87.6 million for the year ended June 30,2000.  This increase was primarily dueto increases in the order volume and average order value placed by consumersthrough the www.ftd.com Web site and the 1-800-SEND-FTD toll-freetelephone number. Total order volume was approximately 2.0 million for thefiscal year ended June 30, 2001, representing a 29% increase over the priorfiscal year order volume of approximately 1.6 million.  The increase was primarily a result of anincrease in Internet orders of 45% over the prior fiscal year, partially offsetby a decrease in telephone orders. Internet orders were 85% of total orders for the fiscal year ended June30, 2001 compared to 76% for the fiscal year ended June 30, 2000.

***Total costs of goods sold and services provided***
|                                            |   | **Year ended June 30,** |    |     |   |
|-------------------------------------------------|--------|-------------------------|---------|----------|--------|
|                                            |   | **2001**                |    | **2000** |   | **% Change** |   |
|                                            |   | **(in thousands)**      |    |     |   |
| Florist business                                |   | $                       | 65,948  |     | $      | 63,498 |   | 3.9 | % |
| Consumer business                               |   | 91,689                  |    | 69,352   |   | 32.2 |   |
| Corporate                                       |   | 2,242                   |    | 2,219    |   | 1.0 |   |
|                                            |   |                    |    |     |   |   |   |
| Total costs of goods sold and services provided |   | $                       | 159,879 |     | $      | 135,069 |   | 18.4 |   |

 

Total cost of goods soldand services provided increased by $24.8 million, or 18.4%, to $159.9 millionfor the year ended June 30, 2001, compared to $135.1 million for the year endedJune 30, 2000. This increase was primarily attributable to increases in salesvolume in the consumer and florist business segments. As a percentage ofrevenue, gross margin decreased to 47.8% for the year ended June 30, 2001, from49.0% for the year ended June 30, 2000. This decrease was primarilyattributable to sales mix related to revenue increases for the consumer businesssegments, which has a lower gross margin than the florist business segment.

Costs of goods sold andservices provided associated with the florist business segment increased by$2.4 million, or 3.9%, to $65.9 million for the year ended June 30, 2001, comparedto $63.5 million for the year ended June 30, 2000. This increase was primarilydue to the costs of producing the Floral Selections Guide, offset by a decreasein credit card processing costs as a result of the decrease in revenues, aswell as the result of fewer unit sales of the Company’s multi-store computersystems and lower system support costs. As a percent of revenue, gross margin increased to 65.0% for the yearended June 30, 2001, from 64.2% for the year ended June 30, 2000.

Costs of goods sold andservices provided associated with the consumer business segment increased by$22.3 million, or 32.2%, to $91.7 million for the year ended June 30, 2001,compared to $69.4 million for the year ended June 30, 2000. This increase wasprimarily attributable to an increase in order volume. As a percent of revenue,gross margin increased to 22.0% for the year ended June 30, 2001, from 20.8%for the year ended June 30, 2000, primarily as a result of an increase inhigher margin specialty gift orders and reduction in order processing costs dueto a decrease in the total number of phone orders.

Costs of goods sold andservices provided associated with corporate activities remained relativelyconstant at $2.2 million for the years ended June 30, 2001 and June 30, 2000.

***Advertising and selling costs***
|                          |   | **Year ended June 30,** |   |     |   |
|-------------------------------|--------|-------------------------|--------|----------|--------|
|                          |   | **2001**                |   | **2000** |   | **% Change** |   |
|                          |   | **(in thousands)**      |   |     |   |
| Florist business              |   | $                       | 54,340 |     | $      | 56,644 |   | (4.1 | )% |
| Consumer business             |   | 13,471                  |   | 41,921   |   | (67.9 | ) |
|                          |   |                    |   |     |   |   |   |
| Advertising and selling costs |   | $                       | 67,811 |     | $      | 98,565 |   | (31.2 | ) |

 

Advertising and sellingcosts decreased by $30.8 million, or 31.2%, to $67.8 million for the year endedJune 30, 2001, compared to $98.6 million for the year ended June 30, 2000.

The advertising andselling costs associated with the florist business segment decreased by $2.3million, or 4.1%, to $54.3 million for the year ended June 30, 2001, comparedto $56.6 million for the year ended June 30, 2000.

 

15

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The advertising andselling costs associated with the consumer business segment decreased by $28.4million, or 67.9%, to $13.5 million for the year ended June 30, 2001, comparedto $41.9 million for the year ended June 30, 2000. This decrease was primarilydue to a reduction in offline marketing expense as a result of a shift from amarketing program primarily focused on customer acquisition to a more balancedprogram focused on both customer acquisition and retention. 

***General and administrative costs***
|                             |   | **Year ended June 30,** |   |     |   |
|----------------------------------|--------|-------------------------|--------|----------|--------|
|                             |   | **2001**                |   | **2000** |   | **% Change** |   |
|                             |   | **(in thousands)**      |   |     |   |
| Florist business                 |   | $                       | 15,939 |     | 11,412 |   | 39.7 | % |
| Consumer business                |   | 12,360                  |   | 17,893   |   | (30.9 | ) |
| Corporate                        |   | 24,716                  |   | 25,001   |   | (1.1 | ) |
|                             |   |                    |   |     |   |   |   |
| General and administrative costs |   | $                       | 53,015 |     | $      | 54,306 |   | (2.4 | ) |
|                                  |        |                         |        |          |        |  |  |  |  |

 

General and administrativecosts decreased by $1.3 million, or 2.4%, to $53.0 million for the year endedJune 30, 2001, compared to $54.3 million for the year ended June 30, 2000.

The general andadministrative costs associated with the florist business segment increased by$4.5 million, or 39.7%, to $15.9 million for the year ended June 30, 2001,compared to $11.4 million for the year ended June 30, 2000. This increase waspartially due to a $1.2 million increase in the allowance for doubtful accountsfrom $1.9 million in fiscal year 2000 to $3.2 million in fiscal year 2001.  In addition, the increase in general andadministrative costs is attributable to the installation, training and supportof Mercury Technology.

Excluding a $0.5 millionnon-recurring gain recorded in fiscal year 2001 attributable to the settlementof a third party cancellation fee for an amount less than originally accruedand a $4.4 million non-recurring charge in fiscal year 2000 associated with thewrite-off of development work related to an unlaunched version of FTD.COM’s Website, general and administrative costs associated with the consumer businesssegment decreased by $0.6 million, or 4.7%, to $12.9 million for the year endedJune 30, 2001, compared to $13.5 million for the year ended June 30, 2000. Thisdecrease was primarily due to a higher level of fiscal 2000 expenses associatedwith non-capitalizable costs related to the www.ftd.com Web site andlower per transaction costs in fiscal 2001 associated with the hosting of theWeb site, partially offset by an increase in stock-based compensation expensein fiscal 2001 related to restricted stock grants made to certain employees ofthe Company and FTD.COM.

The general andadministrative costs associated with corporate activities remained relativelyconsistent at $24.7 million for the year ended June 30, 2001, compared to $25.0million for the year ended June 30, 2000.

Interest income decreasedby $0.4 million, or 22.6%, to $1.5 million for the year ended June 30, 2001,compared to $1.9 million for the year ended June 30, 2000.  The decrease was primarily due to loweraverage short-term investments in fiscal year 2001 compared to fiscal year2000.  Interest expense decreased by$0.5 million, or 8.5%, to $5.2 million for the year ended June 30, 2001, comparedto $5.7 million for the year ended June 30, 2000.  The decrease was primarily attributable to a lower borrowing rateduring fiscal year 2001.

Other expense for theyear ended June 30, 2001 consisted primarily of $14.5 million in expensesrelated to the Termination Agreement.

The provision for incometaxes and the effective tax rates for the years ended June 30, 2001 and 2000,were an expense of $3.4 million and a rate of 51% and a benefit of $7.6 millionand a rate of 28%, respectively. The change in effective tax rates wasprimarily due to the effect of non-deductible goodwill amortization and achange in the valuation allowance in 2000, which increases the Company’seffective tax rate when operating in a pre-tax profit position and reduces itstax benefit rate when operating in a pre-tax loss position.

The minority interest inearnings of subsidiary was an expense of $1.9 million for the year ended June30, 2001, compared to a benefit of $4.4 million for the year ended June 30,2000 and fluctuated primarily as a result of an increase in the consumerbusiness segment net income. The minority’s interest in FTD.COM was 14.62% and13.49% at June 30, 2001 and 2000, respectively.

Net income increased by$16.4 million to $1.3 million for the year ended June 30, 2001, compared to anet loss of $15.1 million for the year ended June 30, 2000, for the reasonsdiscussed above. 

 

16

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**QuarterlyFinancial Information (Unaudited) (In Thousands, Except Per Share Data)**
|                            |   | **First**      |   | **Second**     |   | **Third**      |   | **Fourth**     |   | **Fiscal** |   |
|---------------------------------|--------|----------------|--------|----------------|--------|----------------|--------|----------------|--------|------------|--------|
| **Fiscal  Year 2002**           |   | **Quarter(1)** |   | **Quarter(2)** |   | **Quarter(3)** |   | **Quarter(4)** |   | **Year**   |   |
|                            |   |           |   |           |   |           |   |           |   |       |   |
| Total revenues                  |   | $              | 60,903 |           | $      | 76,325         |   | $              | 92,301 |       | $      | 95,737 |   | $ | 325,266 |   |
| Gross profit                    |   | 31,177         |   | 35,340         |   | 40,306         |   | 41,115         |   | 147,938    |   |
| Income (loss) from operations   |   | 8,784          |   | 5,521          |   | 7,193          |   | (840           | )      | 20,658     |   |
| Net income (loss)               |   | 4,109          |   | 2,178          |   | 3,213          |   | (1,485         | )      | 8,015      |   |
|                            |   |           |   |           |   |           |   |           |   |       |   |
| Basic income (loss) per share   |   | $              | 0.28   |           | $      | 0.15           |   | $              | 0.22   |       | $      | (0.10 | ) | $ | 0.55 |   |
| Diluted income (loss) per share |   | $              | 0.28   |           | $      | 0.15           |   | $              | 0.22   |       | $      | (0.10 | ) | $ | 0.54 |   |

 
|                            |   | **First**   |   | **Second**     |   | **Third**   |   | **Fourth**     |   | **Fiscal** |   |
|---------------------------------|--------|-------------|--------|----------------|--------|-------------|--------|----------------|--------|------------|--------|
| **Fiscal  Year 2001**           |   | **Quarter** |   | **Quarter(5)** |   | **Quarter** |   | **Quarter(6)** |   | **Year**   |   |
|                            |   |        |   |           |   |        |   |           |   |       |   |
| Total revenues                  |   | $           | 63,836 |           | $      | 76,400      |   | $              | 84,115 |       | $      | 81,644 |   | $ | 305,995 |   |
| Gross profit                    |   | 32,090      |   | 37,700         |   | 38,000      |   | 38,326         |   | 146,116    |   |
| Income from operations          |   | 2,974       |   | 5,498          |   | 6,399       |   | 10,419         |   | 25,290     |   |
| Net income (loss)               |   | 928         |   | 1,823          |   | 3,079       |   | (4,509         | )      | 1,321      |   |
|                            |   |        |   |           |   |        |   |           |   |       |   |
| Basic income (loss) per share   |   | $           | 0.06   |           | $      | 0.13        |   | $              | 0.21   |       | $      | (0.31 | ) | $ | 0.09 |   |
| Diluted income (loss) per share |   | $           | 0.06   |           | $      | 0.12        |   | $              | 0.21   |       | $      | (0.31 | ) | $ | 0.09 |   |
|                            |   |        |   |           |   |        |   |           |   |       |   |

 

Earnings per share arecomputed independently for each of the quarters presented. Therefore, the sumof the quarterly earnings per share in fiscal year 2001 does not equal thetotal computed for the year.

(1)          In the first quarter of fiscal year 2002,the Company and FTD entered into the 2001 Credit Agreement.  As a result of entering into the 2001 CreditAgreement, unamortized deferred financing costs associated with the thenexisting debt were expensed, resulting in a net loss on extinguishment of debtof $0.6 million. This expense is reflected in other expense, in accordance withSFAS No. 145.  Additionally, during thefirst quarter of fiscal year 2002, the Company recorded a gain of $2.6 millionattributable to the settlement of a claim against the developer of anunlaunched version of FTD.COM’s Web site as a component of selling, general andadministrative expenses.

(2)          During the second quarter of fiscal year2002, the Company recorded the following as a component of selling, general andadministrative expenses:

•                  Severance costs of $0.5 million for certain formeremployees.

 

•                  A $1.4 million gain attributable to the termination ofcertain future post-retirement health care benefits. The Company providescertain post-retirement health care benefits to qualifying retirees under theterms of its qualified retirement plan. This termination of benefits caused adecrease in the Company’s post-retirement health care obligation attributed toprior services rendered.

 

•                  An impairment loss for internal use software in theamount of $0.4 million that had been used to process clearinghouse and relatedtransactions for member services.

 

(3)          During the third quarter of fiscal year2002, the Company recorded merger expenses of $1.0 million incurred by FTD.COMrelated to the 2002 Merger as a component of selling, general andadministrative expenses.

(4)          During the fourth quarter of fiscal year2002, the Company recorded the following as a component of selling, general andadministrative expenses:

 

17

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•                  Compensation expense of $8.7 million related to bonuspayments paid to executive officers in connection with the 2002 Merger.

 

•                  Severance costs of $1.7 million for certain formeremployees.

 

•                  Merger expenses of $0.6 million incurred by FTD.COMrelated to the 2002 Merger.

 

•                  A gain of $1.1 million attributable to a singlebusiness tax refund related to prior years’ filings.

 

 

(5)          In the second quarter of fiscal year2001, the Company recorded a $0.5 million gain, reflected in selling, generaland administrative expenses, attributable to the settlement of a third partyvendor cancellation fee for less than the amount originally accrued in thefourth quarter of fiscal year 2000 by FTD.COM.

(6)          In the fourth quarter of fiscal year2001, FTD recorded a termination charge of $14.5 million, reflected in otherexpense, related to the dissolution of a contractual relationship between FTDand a member-owned trade association pursuant to the Termination Agreement.

**Liquidity and Capital Resources**

Cash and cash equivalentsincreased by $5.5 million to $36.4 million at June 30, 2002 from $30.9 millionat June 30, 2001. Cash provided by operating activities was $22.3 million forthe year ended June 30, 2002 compared to cash provided by operating activitiesof $12.5 million for the year ended June 30, 2001. The increase in cashprovided by operating activities is primarily attributable to the increase innet income in fiscal year 2002 compared to fiscal year 2001.

Cash used in investingactivities was $12.7 million for the year ended June 30, 2002 compared to cashused in investing activities of $5.9 million for the year ended June 30, 2001.The increase in cash used is primarily due to FTD.COM’s purchase of certainassets of National Flora for $9.1 million. Expenditures for depreciable fixedassets such as furniture and equipment were $1.7 million for the year ended June30, 2002 compared to $1.3 million for the year ended June 30, 2001.Expenditures for amortizable intangibles such as costs related to thedevelopment and implementation of internal use software and other informationtechnology costs were $2.8 million for the year ended June 30, 2002 compared to$2.7 million for the year ended June 30, 2001.

Cash used in financingactivities was $4.0 million for the year ended June 30, 2002 and was primarilyattributable to $30.0 million of long-term debt repayments, offset in part by$22.1 million of net proceeds from the revolving credit facility.  During fiscal year 2002, an increase in bookoverdrafts, which were related to checks issued but not presented to banks, asdiscussed in Note 1 of the Notes to Consolidated Financial Statements, alsoprovided cash flow of $3.5 million and the Company received $2.2 millionrelated to stock option exercises. Net cash provided by financing activitieswas $3.5 million for the year ended June 30, 2001, primarily attributable to anincrease in book overdrafts of $3.5 million and $8.8 million of net proceedsfrom the Company’s revolving credit borrowings offset by $8.9 million oflong-term debt repayments.

On September 27, 2001,the Company and FTD entered into the 2001 Credit Agreement. Borrowings underthe 2001 Credit Agreement are subject to a variable interest rate based on theprime commercial rate or as a function of the London Interbank Offered Rate(“LIBOR”).  As a result of entering intothe 2001 Credit Agreement, $0.6 million of unamortized deferred financing costsassociated with the previous credit facility were expensed in the year endedJune 30, 2002.  This expense isreflected in other (income) expense in the accompanying consolidated statementsof operations and comprehensive income for the year ended June 30, 2002, inaccordance with SFAS No. 145.

The Company’s principalsources of liquidity are cash from operations and funds available for borrowingunder the 2001 Credit Agreement. The 2001 Credit Agreement originally provideda maximum availability of $80 million. Borrowings under the 2001 CreditAgreement are used to finance working capital, acquisitions, certain expensesassociated with the bank credit facilities and letter of credit needs. At June30, 2002, the Company had $47.0 million outstanding under the revolving creditfacility and $2.2 million outstanding under various letters of credit.  The amount available under the revolvingcredit facility was reduced to $75 million at June 30, 2002, and will bereduced to $65 million at June 30, 2003 and $55 million at June 30, 2004, andwill mature on December 31, 2004.  The2001 Credit Agreement includes covenants which, among other things, requirethat FTD maintain a total funded debt to earnings before interest, taxes,depreciation and amortization (“EBITDA”) ratio at the end of any fiscal quarterof no greater than 2.75 to 1.0 until March 31, 2003 and 2.50 to 1.0 at alltimes thereafter and a fixed charge coverage ratio of not less than 1.75 to1.0.  In addition, FTD is required tomaintain a minimum level of consolidated net worth of $24.0 million plus 50% ofnet income for each fiscal quarter plus 100% of the net cash proceeds receivedfrom certain issuances of equity securities. At June 30, 2002, the Company was in compliance with the covenantscontained in the 2001 Credit Agreement, except the total funded debt to EBITDAratio, for which the Company received a waiver from the participating banks.

 

18

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On March 12, 2002, theCompany entered into an amendment and waiver related to the 2001 CreditAgreement in order to allow for the 2002 Merger and related transactions. Inthe amendment, the Company agreed to pledge all of FTD.COM’s stock upon theconsummation of the 2002 Merger. See Note 2 of the Notes to theConsolidated Financial Statements for discussion of the 2002 Merger.

The Company is in theprocess of seeking an amendment to the 2001 Credit Agreement to reflect thechange in the corporate structure resulting from the 2002 Merger.

The Company entered intointerest rate cap agreements on December 5, 2001 to reduce the impact ofpotential increases in interest rates on floating rate debt.  The interest rate caps had a notional amountof $20.0 million at a cap rate of 5.0% at June 30, 2002 and are effectivethrough December 31, 2003. The financing party agrees to pay the Company avariable rate (LIBOR) on the notional amount if the rate on the floating ratedebt exceeds the cap rate. The Company accounts for the interest rate cap as acash flow hedge whereby the fair value of the interest rate cap is reflected inother noncurrent assets in the accompanying Consolidated Balance Sheet and isbeing amortized to interest expense over its term. The carrying value of$22,500 approximates fair value and, therefore, no fair value adjustment wasrecorded in fiscal year 2002.  Theinterest rate cap cost was $0.1 million, which is being amortized using thestraight-line method through December 31, 2003.

In addition to its debtservice obligations, the Company’s other liquidity requirements are primarilyfor capital expenditures, software development costs and working capital needs.The Company believes, based on current circumstances, that its existing andfuture cash flows from operations, together with borrowings under the2001 Credit Agreement, will be sufficient to fund its working capitalneeds, capital expenditures, software development costs, potential acquisitionsand to make interest and principal payments as they become due under the termsof the 2001 Credit Agreement.

The Termination Agreemententered into by and between FTD and the Association contains limited two-yearnon-compete provisions and terminates Association Agreements, which wereentered into in connection with the Acquisition between the Association andFTD. Pursuant to the Association Agreements, among other things: (i) existingand future members of the Association had the exclusive right, subject toexecution of a Trademark Agreement with the Operating Company, to use the FTDlogo and other FTD trademarks in connection with the operation of a retailflorist shop; (ii) all members of the Association in good standing wereprovided access to FTD’s Clearinghouse, Mercury Network and certain other FTDservices and products; (iii) the Operating Company paid the Association anamount equal to a percentage of the value of every floral order cleared throughFTD’s Clearinghouse; and (iv) the Operating Company and the Associationwere able to designate up to 20% but not fewer than two individuals to beelected to the other’s board of directors. As consideration for the dissolution of the contractual relationshipbetween the Company and the Association pursuant to the Termination Agreement,FTD agreed to pay the Association $14.0 million, $12.6 million which was paidon June 29, 2001 and $1.4 million which was paid July 1, 2002.  The funds used to pay the $1.4 million onJuly 1, 2002 were placed in escrow, and as such are reflected as restrictedcash on the Company’s Consolidated Balance Sheet as of June 30, 2002 and 2001.In fiscal year 2001, the Company recorded $14.5 million of expenses related tothis transaction, including professional fees.

**SummaryDisclosures About Contractual Obligations and Commercial Commitments**

The following tablesreflect a summary of the Company’s contractual cash obligations and othercommercial commitments at June 30, 2002 (in thousands):

**Payments Due by Period**
|                               |   |      |   | **Less Than** |   | **1 to 3** |   | **4 to 5** |   | **After 5** |   |
|------------------------------------|--------|-----------|--------|---------------|--------|------------|--------|------------|--------|-------------|--------|
| **Contractual  Cash Obligations**  |   | **Total** |   | **1 Year**    |   | **Years**  |   | **Years**  |   | **Years**   |   |
| Long-term debt(1)                  |   | $         | 47,000 |          | $      | —     |   | $          | 47,000 |        | $      | — |   | $ | — |   |
| Internet distribution agreements   |   | 1,069     |   | 1,069         |   | —     |   | —     |   | —      |   |
| Payment to Association             |   | 1,400     |   | 1,400         |   |       |   |       |   |        |   |
| Operating leases                   |   | 2,164     |   | 961           |   | 625        |   | 354        |   | 224         |   |
| Total contractual cash obligations |   | $         | 51,633 |          | $      | 3,430      |   | $          | 47,625 |        | $      | 354 |   | $ | 224 |   |
|                               |   |      |   |          |   |       |   |       |   |        |   |

 

(1) Under the 2001 CreditAgreement, the maturity of outstanding debt could be accelerated if FTD doesnot maintain certain financial and operating covenants.  At June 30, 2002, the Company was incompliance with the covenants contained in the 2001 Credit Agreement, exceptthe total funded debt to EBITDA ratio, for which the Company received a waiverfrom the participating banks.  

 

19

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The revolving creditcommitments under the 2001 Credit Agreement, which were originally $80million, were reduced to $75 million at June 30, 2002, and will be reduced to$65 million at June 30, 2003 and to $55 million at June 30, 2004. The2001 Credit Agreement expires on December 31, 2004.

In addition to the cashobligations above, the Company has a Management Consulting Services Agreementwith parties related to Perry Acquisition Partners, Bain Capital Investors LLCand Fleet Growth Resources III, Inc. (the “Management Consulting ServicesAgreement”). Annual required payments under this agreement amount to $2.0million plus reimbursement of reasonable out-of-pocket expenses continuingthrough July 1, 2005. 
|                               |   |               |   | **Expiration  Per Period** |   |
|------------------------------------|--------|--------------------|--------|----------------------------|--------|
|                               |   | **Total  Amounts** |   | **Less Than**              |   | **1 to 3** |   | **4 to 5** |   | **After 5** |   |
| **Other  Commercial Commitments:** |   | **C****ommitted**  |   | **1 Year**                 |   | **Years** |   | **Years** |   | **Years** |   |
| Letters of credit                  |   | $                  | 2,174  |                       | $      | 2,174 |   | $ | — |   | $ | — |   | $ | — |   |
|                               |   |               |   |                       |   |   |   |   |   |   |   |
|                                    |        |                    |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |

 

**Critical Accounting Policies andEstimates**

 

The Company’sconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.

On an on-going basis,management evaluates its estimates and judgments, including those related torevenue recognition, distribution agreements, accounts receivable, inventory,long-lived assets and the valuation of deferred income taxes.  Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities.  Actual results may differ from theseestimates under different assumptions or conditions.  Management believes the following critical accounting policies,among others, affect its more significant judgments and estimates used inpreparation of its consolidated financial statements.

***Revenue Recognition***

Revenues generated by theflorist business segment of the Company for processing floral and gift ordersthrough the clearinghouse are recorded in the month the orders are filled.Revenues for other services related to the processing of such orders (includingequipment rentals and transmission charges) are recorded in the period theservice is provided. Sales of florist shop supplies are recorded when theproducts are shipped. Revenues relating to publications are recognized in theperiods in which the publications are issued. Revenue for FTD Florists On-lineWeb site hosting is recognized ratably over the one-year life of the agreement.Cash rebates which are earned by florists under a customer incentive program inconjunction with the credit card clearing service offered by the Company areclassified as contra-revenue, in accordance with EITF Issue No. 01-9.

In addition, the Companyalso sells computer equipment and software to member florists.  The Company follows the provisions of SOP97-2,**asamended by SOP 98-9.  SOP 97-2 requiresrevenue earned on software arrangements involving multiple elements (i.e.,software products, upgrades/enhancements, post-contract customer support,installation, training, etc.) to be allocated to each element based on therelative fair values of the elements. The Company recognizes revenue fromsoftware products (including specified upgrades/enhancements) at the time ofshipment for systems sold.  For systemsthat are being leased, the Company recognizes revenue ratably over the periodof the lease agreement.  Support revenueis recognized over the period of the support agreement. Installation andtraining revenues are recognized at the time of occurrence.

The Company’s consumerbusiness segment, consisting of FTD.COM, recognizes 100% of the order value asrevenue and recognizes the associated costs of good sold and services providedwhen the order is fulfilled.  FTD.COMrecognizes revenue on a gross basis, as opposed to a net basis similar to acommission arrangement, because it bears the risks and benefits associated withthe revenue-generating activities by: (1) acting as a principal in thetransaction; (2) establishing prices; (3) being responsible for fulfillment ofthe order; (4) taking the risk of loss for collection, delivery and returns;and (5) marketing its products, among other things.  If the relative amounts of risks and rewards borne by FTD.COMassociated with processing floral and gift orders were to change in the future,FTD.COM’s reporting policy related to revenue recognition and costs of goodssold and services provided could change.

 

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***Distribution Agreements***

FTD.COM has entered intoInternet distribution agreements pursuant to which FTD.COM receives variousservices, including advertising space on shopping and search-oriented Websites, portal links to FTD.COM’s Web site and marketing of FTD.COM’s productofferings through co-branded Web sites. Certain of these agreements contain terms that include both fixed andvariable payment elements, the variable portion of which is based upon thenumber of orders generated from these third party sites beyond a threshold asdefined in the related agreements. FTD.COM records expenses related to these agreements based on a perorder amount taking into consideration the most likely number of orders to betaken under each such agreement calculated in accordance with the processdescribed in Concepts Statement No. 7 issued by the Financial AccountingStandards Board.  The number of orderstaken is impacted by a variety of features, including but not limited to thevolume of traffic experienced, existence of other advertisements andadvertisement placements on the third party’s site.  Many of these features are outside of FTD.COM’s control.  If a change in estimate were to occur, thecumulative effect on reported expenses would be recognized in the period duringwhich the change occurs.

***Accounts Receivable***

The Company’s managementmust make estimates of accounts receivable that will not be collected. TheCompany performs ongoing credit evaluations of its customers and adjusts creditlimits based upon payment history and the customer’s credit worthiness, asdetermined by the Company’s review of their current credit information. TheCompany continuously monitors collections and payments from its customers andmaintains a provision for estimated losses based upon historical experience andspecific customer collection issues that it has identified. While such creditlosses have historically been within management’s expectations and theprovisions established, the Company cannot guarantee that it will continue toexperience the same credit loss rates as in the past. If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

***Inventory***

The Company’s inventoryconsists of finished goods and is stated at the lower of cost or market value.The Company’s management regularly reviews inventory quantities and records aprovision for excess and obsolete inventory based primarily on the age ofinventory and forecasts of product demand by aging category. A significantincrease in the demand for the Company’s products could result in a short-termincrease in the cost of inventory purchases while a significant decrease indemand could result in an increase in the amount of excess inventoryquantities. Additionally, the Company’s estimates of future product demand mayprove to be inaccurate, in which case it may have understated or overstated theprovision required for excess and obsolete inventory. Product demand isimpacted by promotional incentives offered by the Company and customerpreferences, among other things. In the future, if the Company’s inventory isdetermined to be overvalued, it would be required to recognize such costs incost of goods sold at the time of such determination. Therefore, although theCompany’s management makes every effort to ensure the accuracy of forecasts offuture product demand, any significant unanticipated changes in demand couldhave a significant impact on the value of inventory and the Company’s reportedoperating results.

***Long-lived Assets***

The Company assesses theimpairment of identifiable intangibles, long-lived assets and related goodwilland enterprise level goodwill whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors the Companyconsiders important which could trigger an impairment review includesignificant underperformance relative to expected historical or projectedfuture operating results, significant changes in the manner of use of theacquired assets or the strategy for the Company’s overall business andsignificant negative industry or economic trends.

When the Companydetermines that the carrying value of intangibles, long-lived assets andrelated goodwill and enterprise level goodwill may not be recoverable basedupon the existence of one or more of the above indicators of impairment, theCompany would use an estimate of undiscounted future cash flows to measurewhether the asset is recoverable over its estimated useful life. If estimatedundiscounted future cash flows are less than the carrying amount of the asset, theasset is considered impaired and an expense is recorded in an amount requiredto reduce the carrying amount of the asset to its then fair value. See Note 1of the Notes to the Consolidated Financial Statements for a discussion of theissuance of SFAS No. 142.

***Deferred Income Taxes***

The Company recognizesdeferred tax assets and liabilities based on the differences between thefinancial statement carrying amounts and the tax bases of assets andliabilities. The Company regularly reviews its deferred tax assets forrecoverability and 

 

21

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establishes avaluation allowance based on historical taxable income, projected futuretaxable income and the expected timing of the reversals of existing temporarydifferences to reduce its deferred tax assets to the amount that it believes ismore likely than not to be realized. While the Company has considered futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance, in the event the Company wereto determine that it would not be able to realize all or part of its netdeferred tax assets in the future, an adjustment to the net deferred tax assetswould be charged to income in the period such determination was made.  The Company has determined that it is morelikely than not that its deferred tax assets will be realized.  As such, the valuation allowance of $2.5million was reversed in fiscal year 2002. The recognition of $1.0 million of the related tax benefit was appliedto goodwill, as it was generated from the Acquisition.  The remaining $1.5 million was recorded as abenefit in the provision for income taxes in fiscal year 2002.

**RecentlyIssued Accounting Pronouncements**

In 2001, EITF Issue No.01-9 was issued.  During the thirdquarter of fiscal year 2002, the Company adopted the requirements of EITF IssueNo. 01-9.  In accordance with therequirements of EITF Issue No. 01-9, the Company has reclassified certainadvertising and selling expenses to contra-revenue that relate to cash rebateswhich are earned by florists under a customer incentive program in conjunctionwith the credit card clearing services offered by the Company.  In addition, in accordance with therequirements of EITF 01-9, the Company has reclassified advertising and sellingexpenses to costs of goods sold and services provided that relate to thegranting of mileage and reward points to customers in connection with an order.

In July 2001, SFASNo. 141, *Business Combinations* was issued. SFAS No. 141 requires thatall business combinations initiated after June 30, 2001, be accounted for usingthe purchase method of accounting, and prohibits the use of thepooling-of-interests method for such transactions. SFAS No. 141 also requiresidentified intangible assets acquired in a business combination to berecognized as an asset apart from goodwill if they meet certain criteria. TheCompany’s management has adopted SFAS No. 141, which has had no material impacton the Company’s consolidated financial statements.

In July 2001, SFAS No.142, *Goodwilland Other Intangible Assets* was issued.**SFAS No. 142 applies to allgoodwill and identified intangible assets acquired in a business combination.Under the new standard, all goodwill and other intangibles determined to haveindefinite lives, including those acquired before initial application of thestandard, should not be amortized but should be tested for impairment at leastannually. Other identified intangible assets should be amortized over their usefullives and reviewed for impairment in accordance with SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*. Within six months of initial application of the newstandard, a transitional impairment test must be performed on all goodwill. Anyimpairment loss recognized as a result of the transitional impairment testshould be reported as a change in accounting principle. In addition to thetransitional impairment test, the required annual impairment test should beperformed in the year of adoption of SFAS No. 142. SFAS No. 142 is effectivefor fiscal years beginning after December 15, 2001 (although early adoptionwould be permitted in certain circumstances) and must be adopted as of thebeginning of a fiscal year. Retroactive application is not permitted. TheCompany adopted SFAS No. 142 as of July 1, 2002.  The Company’s management does not believe that the adoption ofSFAS No. 142 will have a material effect on its consolidated financialstatements.

In October 2001, SFAS No.144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* was issued. SFASNo. 144 addresses financial accounting and reporting for the impairment ordisposal of long-lived assets.  WhileSFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamentalprovisions of that statement.  SFAS No.144 also supersedes the accounting and reporting provisions of AccountingPrinciples Board (“APB”) Opinion No. 30, *Reporting the Results of Operations-Reporting theEffects of a Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions* for the disposalof a segment of a business.  However, itretains the requirement in APB Opinion No. 30 to report separately discontinuedoperations and extends that reporting to a component of an entity that eitherhas been disposed of (by sale, abandonment, or in a distribution to owners) oris classified as held for sale.  SFASNo. 144 is effective for fiscal years beginning after December 15, 2001 andinterim periods within those fiscal years. The Company adopted SFAS No. 144 asof July 1, 2002.  The adoption ofSFAS No. 144 did not have a material effect on the Company’sconsolidated financial statements.

In April 2002, SFASNo. 145 was issued*.*SFAS No. 145 rescinds SFASNo. 4, which required all gains and losses from the extinguishment of debtto be aggregated and, if material, classified as an extraordinary item, net ofthe related income tax effect. SFAS No. 145 will be effective for fiscalyears beginning after May 15, 2002, with early adoption related to theprovisions of the rescission of SFAS No. 4 encouraged. The Company haselected to adopt SFAS No. 145 during the year ended June 30, 2002.Accordingly, the loss on extinguishment of debt in the amount of $0.6 millionrelating to the retirement of the 1997 Credit Agreement during the firstquarter of fiscal year 2002 has been reflected as a component of other (income)expense in the Company’s consolidated financial statements.

 

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In July 2002, SFAS No.146, *Accountingfor Costs Associated with an Exit or Disposal Activity*, whichsupercedes EITF Issue No. 94–3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*, was issued.  SFAS No. 146 is effective for exit ordisposal activities initiated after December 31, 2002.  SFAS No. 146 requires that a company recorda liability when that liability is incurred and can be measured at fairvalue.  Incurred is defined as when anevent obligates the entity to transfer or use assets.  The recognition of termination benefits to employees will dependon whether additional service is required of the employee.  If the employee must continue to provideservice for a period of at least a minimum of sixty days in order to beeligible for the benefits (called a “minimum retention period”), the fair valueof the benefits should be accrued over the time the employee renders theservice.  If future service beyond aminimum retention period is not required, the liability for the fair value ofthe benefits should be recognized at the time the company communicates the arrangementto the employees.  The Company willadopt SFAS No. 146 on January 1, 2003. The Company does not believe that theadoption of SFAS No. 146 will have a material effect on its consolidatedfinancial statements.

**Related Party Transactions**

The Company incurred expenses of $2.0 million, $2.1 millionand $2.0 million for the years ended June 30, 2002, 2001 and 2000,respectively, related to the payment for management, financial and othercorporate advisory services and related expenses to parties related to each ofPerry Acquisition Partners, L.P., Bain Capital Investors LLC and Fleet GrowthResources III, Inc. The Management Consulting Services Agreement requirespayments of $2.0 million each fiscal year plus reimbursement of reasonableout-of-pocket expenses continuing through July 1, 2005.

At June 30, 2002, theCompany had loans receivable from various current and former officers of theCompany of $0.3 million with terms of four years, with principal due atmaturity in 2005, including accrued interest ranging from 6.5% to 8.5% perannum. At June 30, 2001, the Company had loans receivable from various officersof the Company of $2.5 million, with terms of four years and with principal dueat maturity in 2003, 2004 and 2005, including accrued interest ranging from6.5% to 8.5% per annum.

A financial advisorreceived warrants for 750,000 shares of Class B Convertible Common Stock inpartial payment for its services related to the original acquisition of the OldAssociation. Subsequently, the warrants and cash representing the exerciseprice of the warrants were exchanged for 750,000 shares of Class B ConvertibleCommon Stock. The Company disputed the financial advisor’s claim forcompensation and filed suit for breach of fiduciary duty and other claims. OnJuly 26, 2000, the Company settled the lawsuit whereby the financial advisorreturned the 750,000 shares of Class B Convertible Common Stock. As a result ofthis settlement the Company recorded $12.0 million of treasury stock and anincrease to additional paid-in capital of $11.6 million (net of $0.4 million ofincome taxes) based on an independent third party valuation to determine thefair market value of the stock received in the settlement.

**Forward–LookingInformation**

This annual report onForm 10-K contains various “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995 regarding the Company’soutlook, including statements regarding anticipated revenue growth andincreased profitability, forecasts for increases in revenues and dilutedearnings per share and opportunities within both the consumer and floristbusiness segments, that are based on the Company’s current expectations,assumptions, estimates and projections about the Company and its industry.  Investors are cautioned that actual resultscould differ from those anticipated by the forward-looking statements as aresult of the following: the Company’s ability to acquire and retain FTD memberflorists and continued recognition by members of the value of the Company’sproducts and services; the Company’s ability to sell additional products andservices to member florists; the Company’s ability to expand existing marketingpartnerships and secure new marketing partners within the consumer businesssegment; the success of the Company’s marketing campaigns; the Company’sability to retain customers and increase average order value within theconsumer business segment; the existence of failures in the Mercury Network orthe Company’s consumer business segment systems; competition from existing andpotential new competitors; levels of discretionary consumer purchases offlowers and specialty gifts; the Company’s ability to manage or reduce itslevel of expenses within both the consumer and florist business segments;actual growth rates for the markets in which the Company competes compared withforecasted growth rates; the Company’s ability to increase capacity andintroduce enhancements to its Web sites, including the FTD.COM Web site; theCompany’s ability to integrate additional partners or acquisitions, if any areidentified; and pending or threatened litigation.  Additional risks, uncertainties and other factors are describedin the Company’s Registration Statement on Form S-4, as amended (File No.333-84736), under the caption “Risk Factors.” The Company makes no commitment to disclose any revisions to anyforward-looking statements to reflect events or circumstances after the date ofthis document that may bear upon the forward-looking statements.

 

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**Item7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The Company’s exposure tointerest rate risk is primarily the result of borrowings under its bank creditfacilities. In order to limit its exposure to interest rate fluctuations, theCompany entered into interest rate cap agreements with members of itsparticipating bank group for a notional amount totaling $20.0 million at a caprate of 5.0% expiring December 31, 2003, whereas the financing party agrees topay the Company a variable rate (LIBOR) if the rate on the floating rate debtexceeds the cap rate. During the fiscal year ended June 30, 2002, the variableinterest rate did not exceed the 5.0% cap rate. Accordingly, the Company didnot receive any payments under these agreements during the fiscal year endedJune 30, 2002.

At June 30, 2002, $47.0million of debt was outstanding under the 2001 Credit Agreement. A portion ofthe Company’s outstanding debt, which totaled $27.0 million at June 30, 2002,is not covered by interest rate cap agreements. An adverse change in interestrates would cause an increase in the amount of interest paid. If the Company’sborrowings were to remain outstanding for the remaining term of the 2001 CreditAgreement, a 100 basis point increase in LIBOR, up until the rate exceeds 5.0%,would result in an increase of $470,000 in the amount of annualized interestpaid and annualized interest expense recognized in the Company’s consolidatedfinancial statements. When the variable interest rate exceeds the 5.0% cap, a100 basis point increase on the portion of the debt not covered by the interestrate cap would result in a $270,000 increase in annualized interest paid andannualized interest expense recognized in the Company’s consolidated financialstatements.

The Company will continueto monitor changing economic conditions. Based on current circumstances, theCompany does not expect to incur a substantial increase in costs or a materialadverse effect on cash flows as a result of changing interest rates.

The Company is alsoexposed to foreign currency exchange rate risk with respect to the Canadiandollar. The resulting Canadian exchange adjustments are included in the othercomprehensive loss caption on the consolidated statements of operations andcomprehensive income and were not material for the years ended June 30, 2002,2001 and 2000. The Company does not expect to be materially affected by foreigncurrency exchange rate fluctuations in the future, as the transactionsdenominated in Canadian dollars are not material to the Company’s consolidatedfinancial statements. Therefore, the Company does not currently enter intoderivative financial instruments as hedges against foreign currencyfluctuations of the Canadian dollar.

**Item8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

The consolidatedfinancial statements of the Company required by this item are set forth onpages F-1 through F–28 of this Form 10–K and the relatedschedule is set forth on page F-30 of this Form 10–K.

**Item9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

Not applicable.

 

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**PART III**

**Item10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

Information regarding thedirectors of the Company will be set forth under the caption “Election ofDirectors” in the Proxy Statement related to the Company’s 2002 annual meetingof stockholders and is incorporated herein by reference.  Information regarding executive officers ofthe Company will be set forth under the caption "Executive Officers ofFTD, Inc." in the Proxy Statement and is incorporated herein byreference.  Information required by Item405 of Regulation S-K will be set forth under the caption “Section 16(a)Beneficial Ownership Reporting Compliance” in the Proxy Statement and isincorporated herein by reference.

**Item11. EXECUTIVE COMPENSATION**

Information required bythis item will be set forth under the caption “Executive Compensation” in theProxy Statement and, except for the information under the captions “ExecutiveCompensation—Compensation Committee Report on Executive Compensation” and“Stockholder Return Comparison,” is incorporated herein by reference.

**Item12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

Information required bythis item will be set forth under the captions “Security Ownership of CertainBeneficial Owners and Management” and “Equity Compensation Plan Information” inthe Proxy Statement and is incorporated herein by reference.

**Item13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

Information regarding anydisclosable relationships and related transactions will be set forth under thecaption “Certain Relationships and Related Transactions” in the Proxy Statementand is incorporated herein by reference.

 

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**PART IV**

**Item14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

**(a)Financial Statements, Schedules and Exhibits**

(1) & (2) Theconsolidated financial statements and schedule which are filed with this Form10-K are set forth in the Index to Consolidated Financial Statements andSchedule at Page F-1 which immediately precedes such documents.

(3) See accompanyingIndex to Exhibits.

**(b)Reports on Form 8-K**

The Company filed noreports on Form 8-K during the fourth quarter of fiscal year 2002.

**(c)Executive Compensation Plans and Arrangements**

See accompanying Index toExhibits.

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | FTD, Inc. |
|--------|-----------|
|   |      |   |
|   | By:       | /s/ ROBERT L. NORTON |   |
|   |      | Name: Robert L. Norton |
|   |      | Title: Chairman  of the Board of Directors, President and Chief Executive Officer |
|   |      | Date: September 12, 2002 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons in the capacities and on the datesindicated.

 
| **Signature**            |   | **Title**                                                                                                |   | **Date**           |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|--------------------|
|                     |   |                                                                                                     |   |               |
| /s/ ROBERT L. NORTON     |   | Chairman of the Board of Directors, President and  Chief Executive Officer (Principal Executive Officer) |   | September 12, 2002 |
| Robert L. Norton         |
|                     |   |                                                                                                     |   |               |
| *                        |   | Chief Financial Officer and Treasurer (Principal  Accounting and Financial Officer)                      |   | September 12, 2002 |
| Carrie A. Wolfe          |
|                     |   |                                                                                                     |   |               |
| *                        |   | Director                                                                                                 |   | September 12, 2002 |
| Christopher J.D. Ainsley |   |                                                                                                     |   |               |
|                     |   |                                                                                                     |   |               |
| *                        |   | Director                                                                                                 |   | September 12, 2002 |
| Habib Y. Gorgi           |   |                                                                                                     |   |               |
|                     |   |                                                                                                     |   |               |
| *                        |   | Director                                                                                                 |   | September 12, 2002 |
| Stephen G. Kasnet        |   |                                                                                                     |   |               |
|                     |   |                                                                                                     |   |               |
| *                        |   | Director                                                                                                 |   | September 12, 2002 |
| Steve G. Pagliuca        |   |                                                                                                     |   |               |
|                     |   |                                                                                                     |   |               |
| *                        |   | Director                                                                                                 |   | September 12, 2002 |
| Richard C. Perry         |   |                                                                                                     |   |               |

 

 

 

 

 
| *  By: | /s/ ROBERT L. NORTON |   |
|-------------|----------------------|--------|
|        | Robert L. Norton     |   |
|        | *Attorney-in-Fact*   |   |
|        | September 12, 2002   |   |

 

 

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**CERTIFICATIONS**

 

I, Robert L. Norton, certify that:

 

1.               I have reviewed this annual report on Form 10-K ofFTD, Inc.;

 

2.               Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report; and

 

3.               Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this annualreport.

 

 

Date: September 12, 2002

 
|   |   |   |   |   | /s/ ROBERT L. NORTON                                                       |   |   |
|--------|--------|--------|--------|--------|----------------------------------------------------------------------------|--------|--------|
|   |   |   |   |   | Robert L. Norton                                                           |   |   |
|   |   |   |   |   | Chairman of the Board of Directors, President and  Chief Executive Officer |   |   |

 

 

 

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I, Carrie A. Wolfe, certify that:

 

1.               I have reviewed this annual report on Form 10-K ofFTD, Inc.;

 

2.               Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report; and

 

3.               Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this annualreport.

 

 

Date: September 12, 2002

 
|   |   |   |   |   |                                  |   |   |
|--------|--------|--------|--------|--------|---------------------------------------|--------|--------|
|   |   |   |   |   | /s/ CARRIE A. WOLFE                   |   |   |
|   |   |   |   |   | Carrie A. Wolfe                       |   |   |
|   |   |   |   |   | Chief Financial Officer and Treasurer |   |   |
|   |   |   |   |   |                                  |   |   |

 

** **

** **

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** **

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS AND SCHEDULE**
| Independent Auditors’  Report                                                                                | F-2  |
|-------------------------------------------------------------------------------------------------------------------|------|
| Consolidated Balance Sheets  at June 30, 2002 and 2001                                                            | F-3  |
| Consolidated  Statements of Operations and Comprehensive Income for the years ended June  30, 2002, 2001 and 2000 | F-4  |
| Consolidated  Statements of Stockholders’ Equity for the years ended June 30, 2002, 2001  and 2000           | F-5  |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000                           | F-6  |
| Notes to  Consolidated Financial Statements                                                                       | F-7  |
| Independent  Auditors’ Report on Financial Statement Schedule                                                | F-29 |
| Schedule  II — Valuation and Qualifying Accounts                                                             | F-30 |

 

 

 

F-1

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** **

**IndependentAuditors’ Report**

The Board ofDirectors and Stockholders

FTD, Inc.:

We have audited theaccompanying consolidated balance sheets of FTD, Inc. and subsidiaries at June30, 2002 and 2001, and the related consolidated statements of operations andcomprehensive income, stockholders’ equity, and cash flows for each of theyears in the three-year period ended June 30, 2002. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of FTD, Inc. and subsidiaries at June30, 2002 and 2001, and the results of their operations and their cash flows foreach of the years in the three-year period ended June 30, 2002, in conformitywith accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

 

Chicago, Illinois

July 29, 2002

 

 

F-2

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**FTD,INC.CONSOLIDATED BALANCE SHEETSAs of June 30, 2002 and 2001(In thousands, except share amounts)**

 
| **ASSETS**                                                                                                                                            |   | **2002** |       | **2001** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
| **Current  Assets:**                                                                                                                                  |   |     |       |     |       |
| Cash and cash  equivalents                                                                                                                            |   | $        | 36,410     |     | $          | 30,890 |   |
| Restricted cash                                                                                                                                       |   | 1,400    |       | 1,400    |       |
| Accounts  receivable, less allowance for doubtful accounts  of $6,093 at June 30, 2002 and  $4,984  at June 30, 2001                             |   | 26,203   |       | 23,251   |       |
| Inventories, net                                                                                                                                      |   | 9,741    |       | 12,469   |       |
| Deferred income  taxes                                                                                                                                |   | 5,026    |       | 3,556    |       |
| Prepaid expenses  and other                                                                                                                           |   | 4,343    |       | 2,851    |       |
| **Total  current assets**                                                                                                                             |   | 83,123   |       | 74,417   |       |
|                                                                                                                                                  |   |     |       |     |       |
| **Property  and equipment:**                                                                                                                          |   |     |       |     |       |
| Land and  improvements                                                                                                                                |   | 1,600    |       | 1,600    |       |
| Building and  improvements                                                                                                                            |   | 8,968    |       | 8,883    |       |
| Mercury consoles                                                                                                                                      |   | 8,275    |       | 8,331    |       |
| Furniture and  equipment                                                                                                                              |   | 23,675   |       | 23,435   |       |
| Total                                                                                                                                                 |   | 42,518   |       | 42,249   |       |
| Less accumulated  depreciation                                                                                                                        |   | 28,058   |       | 26,592   |       |
| Property and  equipment, net                                                                                                                          |   | 14,460   |       | 15,657   |       |
|                                                                                                                                                  |   |     |       |     |       |
| **Other  assets:**                                                                                                                                    |   |     |       |     |       |
| Deferred income  taxes                                                                                                                                |   | —   |       | 5,942    |       |
| Other noncurrent  assets                                                                                                                              |   | 10,760   |       | 13,301   |       |
| Goodwill and  other intangibles, less accumulated amortization of  $22,113 at June 30, 2002 and $19,350 at June 30, 2001                              |   | 123,558  |       | 66,034   |       |
| **Total  other assets**                                                                                                                               |   | 134,318  |       | 85,277   |       |
| **Total  assets**                                                                                                                                     |   | $        | 231,901    |     | $          | 175,351 |   |
|                                                                                                                                                  |   |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                        |   |     | ** ** |     | ** ** |
|                                                                                                                                                  |   |     |       |     |       |
| **Current  liabilities:**                                                                                                                             |   |     |       |     |       |
| Book overdrafts                                                                                                                                       |   | $        | 11,469     |     | $          | 8,013 |   |
| Accounts payable                                                                                                                                      |   | 30,489   |       | 32,974   |       |
| Customer  deposits                                                                                                                                    |   | 8,438    |       | 9,430    |       |
| Unearned income                                                                                                                                       |   | 954      |       | 1,356    |       |
| Other accrued  liabilities                                                                                                                            |   | 12,090   |       | 8,908    |       |
| **Total  current liabilities**                                                                                                                        |   | 63,440   |       | 60,681   |       |
|                                                                                                                                                  |   |     |       |     |       |
| Long-term debt                                                                                                                                        |   | 47,000   |       | 54,875   |       |
| Post-retirement  benefits and accrued pension obligations, less current portion                                                                       |   | 4,880    |       | 5,957    |       |
| Deferred income  taxes                                                                                                                                |   | 2,364    |       | —   |       |
|                                                                                                                                                  |   |     |       |     |       |
| Minority  interest in subsidiary                                                                                                                      |   | —   |       | 2,699    |       |
|                                                                                                                                                  |   |     |       |     |       |
| **Stockholders’  equity:**                                                                                                                       |   |     |       |     |       |
| Preferred  stock:  $0.01 par value, 1,000,000  shares authorized, no shares  issued and outstanding                                              |   | —   |       | —   |       |
| Common stock:                                                                                                                                         |   |     |       |     |       |
| Class A, $0.01  par value, 30,000,000 shares authorized; 14,629,316 and  12,598,227 shares issued at June 30, 2002 and  2001, respectively       |   | 146      |       | 126      |       |
| Class B  Convertible, $0.0005 par value, 3,000,000 shares authorized; 3,000,000  shares issued at June 30, 2002 and 2001, respectively                |   | 2        |       | 2        |       |
| Paid-in capital                                                                                                                                       |   | 148,708  |       | 93,856   |       |
| Accumulated  deficit                                                                                                                                  |   | (16,375  | )          | (24,390  | )          |
| Accumulated  other comprehensive loss                                                                                                                 |   | (849     | )          | (564     | )          |
| Unamortized  restricted stock                                                                                                                         |   | (1,639   | )          | (3,778   | )          |
| Treasury stock  at cost, 260,407 and 220,839 shares of Class A, respectively, and  801,250 shares of Class B convertible as of June 30, 2002 and 2001 |   | (15,776  | )          | (14,113  | )          |
| **Total  stockholders’ equity**                                                                                                                  |   | 114,217  |       | 51,139   |       |
| **Total  liabilities and stockholders’ equity**                                                                                                  |   | $        | 231,901    |     | $          | 175,351 |   |
|                                                                                                                                                  |   |     |       |     |       |

 

SEE ACCOMPANYING NOTES TOCONSOLIDATED FINANCIAL STATEMENTS.

 

F-3

----

 

 

**FTD, INC.CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOMEFor the years ended June 30, 2002, 2001 and 2000(In thousands, except per share amounts)**

 
|                                                                                                                                   |   | **2002** |    | **2001** |   | **2000** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **Revenues:**                                                                                                                          |   |     |    |     |   |     |   |
| Products                                                                                                                               |   | $        | 202,158 |     | $      | 177,364  |   | $ | 143,122 |   |
| Services                                                                                                                               |   | 123,108  |    | 128,631  |   | 121,712  |   |
| Total revenues                                                                                                                         |   | 325,266  |    | 305,995  |   | 264,834  |   |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Costs  of Goods Sold and Services Provided:**                                                                                        |   |     |    |     |   |     |   |
| Products                                                                                                                               |   | 156,872  |    | 137,434  |   | 110,074  |   |
| Services                                                                                                                               |   | 20,456   |    | 22,445   |   | 24,995   |   |
| Total costs of  goods sold and services provided                                                                                       |   | 177,328  |    | 159,879  |   | 135,069  |   |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Gross  profit:**                                                                                                                     |   |     |    |     |   |     |   |
| Products                                                                                                                               |   | 45,286   |    | 39,930   |   | 33,048   |   |
| Services                                                                                                                               |   | 102,652  |    | 106,186  |   | 96,717   |   |
| Total gross  profit                                                                                                                    |   | 147,938  |    | 146,116  |   | 129,765  |   |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Operating  Expenses:**                                                                                                               |   |     |    |     |   |     |   |
| Advertising and  selling                                                                                                               |   | 67,935   |    | 67,811   |   | 98,565   |   |
| General and  administrative                                                                                                            |   | 59,345   |    | 53,015   |   | 54,306   |   |
| Total operating  expenses                                                                                                              |   | 127,280  |    | 120,826  |   | 152,871  |   |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Income (loss)  from operations                                                                                                         |   | 20,658   |    | 25,290   |   | (23,106  | )      |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Other  Income and Expenses:**                                                                                                        |   |     |    |     |   |     |   |
| Interest income                                                                                                                        |   | (1,038   | )       | (1,474   | )      | (1,905   | )      |
| Interest expense                                                                                                                       |   | 3,342    |    | 5,195    |   | 5,677    |   |
| Foreign exchange  loss                                                                                                                 |   | 616      |    | 433      |   | 235      |   |
| Other (income)  expense                                                                                                                |   | 480      |    | 14,506   |   | (1       | )      |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Total other  income and expenses                                                                                                       |   | 3,400    |    | 18,660   |   | 4,006    |   |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Income (loss)  before income tax and minority interest                                                                                 |   | 17,258   |    | 6,630    |   | (27,112  | )      |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Income tax  expense (benefit)                                                                                                          |   | 6,718    |    | 3,401    |   | (7,586   | )      |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Minority  interest                                                                                                                     |   | 2,525    |    | 1,908    |   | (4,389   | )      |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Net income  (loss)                                                                                                                     |   | $        | 8,015   |     | $      | 1,321    |   | $ | (15,137 | ) |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Other  Comprehensive Loss:**                                                                                                         |   |     |    |     |   |     |   |
| Foreign currency  translation adjustments                                                                                              |   | $        | (48     | )        | $      | (29      | )      | $ | (10 | ) |
| Minimum pension  liability adjustment, net of income taxes  of $145 and $252 for the years ended  June 30, 2002 and 2001, respectively |   | (237     | )       | (429     | )      | —   |   |
|                                                                                                                                   |   |     |    |     |   |     |   |
| Comprehensive  income (loss)                                                                                                           |   | $        | 7,730   |     | $      | 863      |   | $ | (15,147 | ) |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Net  Income (Loss) Per Common Share — basic:**                                                                                  |   | $        | 0.55    |     | $      | 0.09     |   | $ | (0.99 | ) |
| **Net  Income (Loss) Per Common Share — diluted:**                                                                                |   | $        | 0.54    |     | $      | 0.09     |   | $ | (0.99 | ) |
|                                                                                                                                   |   |     |    |     |   |     |   |
| **Weighted  Average Common Shares Outstanding:**                                                                                       |   |     |    |     |   |     |   |
| Basic                                                                                                                                  |   | 14,530   |    | 14,655   |   | 15,328   |   |
| Diluted                                                                                                                                |   | 14,747   |    | 14,903   |   | 15,328   |   |

 

SEE ACCOMPANYING NOTES TOCONSOLIDATED FINANCIAL STATEMENTS.

 

 

 

F-4

----

 

 

**FTD, INC.CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITYFor the years ended June 30, 2002, 2001 and 2000(In thousands)**

 
|                                                         |   | **Class A  common stock** |   | **Class B  common stock** |   | **Paid-in** |   | **Accumulated** |   | **Accumulated  other  comprehensive** |   | **Unamorttized  restricted** |    | **Treasury  Stock** |   | **Total  stockholders’** |   |
|--------------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|-------------|--------|-----------------|--------|---------------------------------------|--------|------------------------------|---------|---------------------|--------|-------------------------------|--------|
|                                                         |   | **Shares**                |   | **Amount**                |   | **Shares**  |   | **Amount**      |   | **capital**                           |   | **deficit**                  |    | **loss**            |   | **stock**                     |   | **Shares** |   | **Amount** |   | **equity** |   |
|                                                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   |   |   |   |   |   |   |
| Balance at June 30, 1999                                     |   | 12,593                    |   | $                         | 123    |        | 3,000  |            | $      | 2                                     |   | $                            | 37,170  |                | $      | (10,648                       | )      | $ | (96 | ) | $ | (913 | ) | 264 |   | $ | (1,860 | ) | $ | 23,778 |   |
| Net loss                                                     |   |                      |   |                      |   |        |   |            |   |                                  |   | (15,137                      | )       |                |   |                          |   |   |   |   |   | (15,137 | ) |
| Foreign currency translation adjustment                      |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    | (10                 | )      |                          |   |   |   |   |   | (10 | ) |
|                                                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   |   |   |   |   |   |   |
| Deferred compensation expense                                |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   | 443                           |   |   |   |   |   | 443 |   |
| Issuance of subsidiary stock (See note 18)                   |   |                      |   |                      |   |        |   |            |   | 44,218                                |   |                         |    |                |   |                          |   |   |   |   |   | 44,218 |   |
| Dividends on Series A preferred stock of subsidiary          |   |                      |   |                      |   |        |   |            |   |                                  |   | 74                           |    |                |   |                          |   |   |   |   |   | 74 |   |
| Issuance of restricted stock                                 |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   | (5,432                        | )      |   |   |   |   | (5,432 | ) |
| Repurchase of common stock into treasury                     |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   | 8 |   | (85 | ) | (85 | ) |
| Balance at June 30, 2000                                     |   | 12,593                    |   | 123                       |   | 3,000       |   | 2               |   | 81,388                                |   | (25,711                      | )       | (106                | )      | (5,902                        | )      | 272 |   | (1,945 | ) | 47,849 |   |
|                                                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   |   |   |   |   |   |   |
| Net income                                                   |   |                      |   |                      |   |        |   |            |   |                                  |   | 1,321                        |    |                |   |                          |   |   |   |   |   | 1,321 |   |
| Foreign currency translation adjustment                      |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    | (29                 | )      |                          |   |   |   |   |   | (29 | ) |
| Deferred compensation expense                                |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   | 2,023                         |   |   |   |   |   | 2,023 |   |
| Adjustment made to Class A shares                            |   | 5                         |   | 3                         |   |        |   |            |   | (3                                    | )      |                         |    |                |   |                          |   |   |   |   |   | — |   |
| Tax benefit of restricted stock vesting                      |   |                      |   |                      |   |        |   |            |   | 799                                   |   |                         |    |                |   |                          |   |   |   |   |   | 799 |   |
| Minimum pension liability adjustment                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    | (429                | )      |                          |   |   |   |   |   | (429 | ) |
| Settlement of lawsuit                                        |   |                      |   |                      |   |        |   |            |   | 11,630                                |   |                         |    |                |   |                          |   | 750 |   | (12,000 | ) | (370 | ) |
| Cancellation of restricted stock                             |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   | 101                           |   |   |   |   |   | 101 |   |
| Issuance of stock previously held in treasury                |   |                      |   |                      |   |        |   |            |   | 42                                    |   |                         |    |                |   |                          |   | (13 | ) | 33 |   | 75 |   |
| Repurchase of common stock into treasury                     |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   | 13 |   | (201 | ) | (201 | ) |
| Balance at June 30, 2001                                     |   | 12,598                    |   | 126                       |   | 3,000       |   | 2               |   | 93,856                                |   | (24,390                      | )       | (564                | )      | (3,778                        | )      | 1,022 |   | (14,113 | ) | 51,139 |   |
|                                                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   |   |   |   |   |   |   |
| Net income                                                   |   |                      |   |                      |   |        |   |            |   |                                  |   | 8,015                        |    |                |   |                          |   |   |   |   |   | 8,015 |   |
| Foreign currency translation adjustment                      |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    | (48                 | )      |                          |   |   |   |   |   | (48 | ) |
|                                                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   |   |   |   |   |   |   |
| Deferred compensation expense                                |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   | 2,070                         |   |   |   |   |   | 2,070 |   |
| Gain on vesting of subsidiary stock                          |   |                      |   |                      |   |        |   |            |   | (435                                  | )      |                         |    |                |   |                          |   |   |   |   |   | (435 | ) |
| Reduction of tax benefit related to restricted stock vesting |   |                      |   |                      |   |        |   |            |   | (290                                  | )      |                         |    |                |   |                          |   |   |   |   |   | (290 | ) |
| Minimum pension liability adjustment                         |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    | (237                | )      |                          |   |   |   |   |   | (237 | ) |
| Issuance of stock related to merger (see Note 2)             |   | 2,044                     |   | 20                        |   |        |   |            |   | 55,336                                |   |                         |    |                |   |                          |   |   |   |   |   | 55,356 |   |
| Remeasurement of options and restricted stock at merger date |   |                      |   |                      |   |        |   |            |   | 613                                   |   |                         |    |                |   | (613                          | )      |   |   |   |   | — |   |
| Forfeiture of restricted stock                               |   | (13                       | )      | —                    |   |        |   |            |   | (682                                  | )      |                         |    |                |   | 682                           |   |   |   |   |   | — |   |
| Repurchase of treasury stock of subsidiary                   |   |                      |   |                      |   |        |   |            |   | (725                                  | )      |                         |    |                |   |                          |   |   |   |   |   | (725 | ) |
| Issuance of stock previously held in treasury                |   |                      |   |                      |   |        |   |            |   | 1,035                                 |   |                         |    |                |   |                          |   | (192 | ) | 1,139 |   | 2,174 |   |
| Repurchase of common stock into treasury                     |   |                      |   |                      |   |        |   |            |   |                                  |   |                         |    |                |   |                          |   | 232 |   | (2,802 | ) | (2,802 | ) |
| Balance at June 30, 2002                                     |   | 14,629                    |   | $                         | 146    |        | 3,000  |            | $      | 2                                     |   | $                            | 148,708 |                | $      | (16,375                       | )      | $ | (849 | ) | $ | (1,639 | ) | 1,062 |   | $ | (15,776 | ) | $ | 114,217 |   |
|                                                              |        |                           |        |                           |        |             |        |                 |        |                                       |        |                              |         |                     |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

SEE ACCOMPANYING NOTES TOCONSOLIDATED FINANCIAL STATEMENTS.

 

 

F-5

----

 

 

**FTD, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended June 30, 2002, 2001 and 2000(In thousands)**

 
|                                                                                        |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Cash  flows from operating activities:**                                                  |   |     |   |     |   |     |   |
| Net income  (loss)                                                                          |   | $        | 8,015  |     | $      | 1,321    |   | $ | (15,137 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:   |   |     |   |     |   |     |   |
| Depreciation and  amortization                                                              |   | 9,421    |   | 9,487    |   | 8,628    |   |
| Amortization and  write off of deferred financing costs and original issue discount         |   | 881      |   | 281      |   | 280      |   |
| Impairment loss                                                                             |   | 526      |   | —   |   | —   |   |
| Deferred  compensation expense                                                              |   | 2,070    |   | 2,064    |   | 443      |   |
| Gain on vesting  of subsidiary stock                                                        |   | (435     | )      | —   |   | —   |   |
| Non-cash  settlement of liabilities                                                         |   | (807     | )      | (524     | )      | —   |   |
| Web site  development charge                                                                |   | —   |   | —   |   | 4,403    |   |
| Post-retirement  settlement gain                                                            |   | (1,395   | )      | —   |   | —   |   |
| Provision for  doubtful accounts                                                            |   | 4,048    |   | 3,134    |   | 1,931    |   |
| Deferred income  taxes                                                                      |   | 6,718    |   | 3,401    |   | (7,586   | )      |
| Minority  interest in gain (loss) of subsidiary                                             |   | 2,525    |   | 1,908    |   | (4,389   | )      |
| Increase  (decrease) in cash due to change in assets and liabilities, net of  acquisitions: |   |     |   |     |   |     |   |
| Restricted cash                                                                             |   | —   |   | (1,400   | )      | —   |   |
| Accounts  receivable                                                                        |   | (6,964   | )      | (3,492   | )      | (2,010   | )      |
| Inventories                                                                                 |   | 1,071    |   | 1,732    |   | (560     | )      |
| Prepaid expenses  and other                                                                 |   | 768      |   | (691     | )      | 866      |   |
| Other noncurrent  assets                                                                    |   | 187      |   | 297      |   | 1,462    |   |
| Accounts payable                                                                            |   | (3,110   | )      | (3,726   | )      | 3,956    |   |
| Other accrued  liabilities, unearned income, and customer deposits                          |   | (1,191   | )      | (1,306   | )      | (1,067   | )      |
|                                                                                        |   |     |   |     |   |     |   |
| Net cash  provided by (used in) operating activities                                        |   | 22,328   |   | 12,486   |   | (8,780   | )      |
|                                                                                        |   |     |   |     |   |     |   |
| **Cash  flows from investing activities:**                                                  |   |     |   |     |   |     |   |
| Purchase of  certain assets of National Flora, Inc.                                         |   | (9,060   | )      | —   |   | —   |   |
| Merger related  expenditures                                                                |   | (1,062   | )      | —   |   | —   |   |
| Capital  expenditures                                                                       |   | (4,453   | )      | (3,952   | )      | (15,655  | )      |
| Decrease  (increase) in officer notes receivable                                            |   | 1,834    |   | (1,928   | )      | (149     | )      |
|                                                                                        |   |     |   |     |   |     |   |
| Net cash used in  investing activities                                                      |   | (12,741  | )      | (5,880   | )      | (15,804  | )      |
|                                                                                        |   |     |   |     |   |     |   |
| **Cash  flows from financing activities:**                                                  |   |     |   |     |   |     |   |
| Proceeds from  revolving credit facility, net of repayments                                 |   | 22,125   |   | 8,875    |   | 11,700   |   |
| Repayments of  long-term debt                                                               |   | (30,000  | )      | (8,750   | )      | (8,750   | )      |
| Deferred  financing costs                                                                   |   | (802     | )      | —   |   | —   |   |
| Purchase of  interest rate cap                                                              |   | (120     | )      | —   |   | —   |   |
| Book overdrafts                                                                             |   | 3,456    |   | 3,531    |   | 4,482    |   |
| Issuance of  common stock                                                                   |   | 2,174    |   | 33       |   | —   |   |
| Issuance of  subsidiary common stock                                                        |   | —   |   | —   |   | 35,604   |   |
| Repurchase of  common stock                                                                 |   | (852     | )      | (201     | )      | (85      | )      |
|                                                                                        |   |     |   |     |   |     |   |
| Net cash  provided by (used in) financing activities                                        |   | (4,019   | )      | 3,488    |   | 42,951   |   |
|                                                                                        |   |     |   |     |   |     |   |
| Effect of  foreign exchange rate changes on cash                                            |   | (48      | )      | (29      | )      | (10      | )      |
|                                                                                        |   |     |   |     |   |     |   |
| Net increase in  cash and cash equivalents                                                  |   | 5,520    |   | 10,065   |   | 18,357   |   |
|                                                                                        |   |     |   |     |   |     |   |
| Cash and cash  equivalents at beginning of period                                           |   | 30,890   |   | 20,825   |   | 2,468    |   |
|                                                                                        |   |     |   |     |   |     |   |
| Cash and cash  equivalents at end of period                                                 |   | $        | 36,410 |     | $      | 30,890   |   | $ | 20,825 |   |
|                                                                                        |   |     |   |     |   |     |   |
| **Supplemental  disclosures of cash flow information**                                      |   |     |   |     |   |     |   |
| Cash paid for:                                                                              |   |     |   |     |   |     |   |
| Interest                                                                                    |   | $        | 3,050  |     | $      | 4,989    |   | $ | 4,958 |   |
| Income taxes                                                                                |   | $        | 236    |     | $      | 259      |   | $ | 119 |   |

 

SEE ACCOMPANYING NOTES TOCONSOLIDATED FINANCIAL STATEMENTS.

 

F-6

----

 

**FTD,INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**(1)Summary of Significant Accounting Policies**

**Descriptionof the Business**

FTD, Inc., formerly knownas IOS Brands Corporation, (the “Registrant” or the “Company”) is a Delawarecorporation that was formed in 1994. As used in the Notes to the ConsolidatedFinancial Statements, the terms the “Registrant” or the “Company” refer to FTD,Inc., including its wholly-owned subsidiary, Florists’ Transworld Delivery,Inc., a Michigan corporation (“FTD” or the “Operating Company”). The operationsof FTD, the Company’s principal operating subsidiary, include those of itsindirect wholly-owned subsidiaries FTD.COM INC. (“FTD.COM”), RenaissanceGreeting Cards, Inc. (“Renaissance”) and FTD Canada, Inc. Substantially all theCompany’s operations are conducted through FTD and its subsidiaries.

**Principlesof Consolidation**

The consolidatedfinancial statements of the Company include the accounts of the Company and itswholly-owned subsidiaries, including its primary operating subsidiary FTD.  The accounts of FTD include its wholly-ownedsubsidiaries, Renaissance, FTD Canada, Inc. and FTD.COM.  All intercompany accounts and transactionshave been eliminated in consolidation.

**Cashand Cash Equivalents**

Cash and cash equivalentsconsist of deposits with banks and short-term investments with originalmaturities of three months or less.

**FairValue of Financial Instruments**

Financial instrumentsconsist primarily of accounts receivable, accounts payable, customer deposits,unearned income, other accrued liabilities and long-term debt. At June 30,2002, because of the short maturity of those instruments other than long-termdebt, the fair value of these financial instruments approximates their carryingamount. The fair value of long-term debt is disclosed in Note 5.

**BookOverdrafts**

Under the Company’s cashmanagement system, checks issued but not presented to banks frequently resultin overdraft balances for accounting purposes and are classified as “bookoverdrafts” in the accompanying Consolidated Balance Sheets.

**Inventories**

Inventory consists offinished goods and is stated at the lower of cost or market value.  Cost is determined using the weightedaverage method.

**Propertyand Equipment**

Property and equipmentare recorded at cost and are depreciated over their estimated useful livesusing the straight-line method. The useful lives are ten to 31.5 years forbuilding and improvements, five years for Mercury computer equipment andsoftware and five to ten years for furniture and equipment.

Upon sale or retirementof property and equipment, the cost and related accumulated depreciation areeliminated from the respective accounts, and any gain or loss incurred in theordinary course of business is included as a component of non-operating incomeor expense in the accompanying Consolidated Statements of Operations andComprehensive Income. Maintenance and repairs are charged to expense asincurred. Expenditures that improve or extend the life of existing property andequipment are capitalized.

 

F-7

----

 

**Softwareto be Sold, Leased, or Marketed**

The Company follows theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 86, *Accountingfor the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed*.  SFAS No. 86 requires that all costs relatingto the purchase or internal development and production of a computer softwareproduct to be sold, leased or otherwise marketed be expensed in the periodincurred unless the requirements for technological feasibility have beenestablished. The Company capitalizes all eligible computer software costsincurred once technological feasibility is established.  The Company amortizes these costs using thegreater of the straight-line method over a period of three to five years or therevenue method prescribed by SFAS No. 86.

**InternalUse Software**

The Company has adoptedthe provisions of AICPA Statement of Position (“SOP”) 98-1, *Accountingfor the Costs of Software Developed or Obtained for Internal Use*andEmerging Issues Task Force (“EITF”) Consensus No. 00-02, *Accounting for Web Site DevelopmentCosts. *Accordingly, certaincosts incurred in the planning and development stage of internal-use computersoftware, including Web site development costs, are expensed as incurred.  Costs incurred during the applicationdevelopment stage are capitalized.  Thesecosts are amortized using the straight-line method over a period of three to sevenyears.

**Intangibles**

In July 2001, SFAS No.141, *BusinessCombinations* was issued. SFAS No. 141 requires that all businesscombinations initiated after June 30, 2001, be accounted for using the purchasemethod of accounting, and prohibits the use of the pooling-of-interests methodfor such transactions. SFAS No. 141 also requires identified intangible assetsacquired in a business combination to be recognized as an asset apart fromgoodwill if they meet certain criteria. The Company’s management has adoptedSFAS No. 141, which has had no material impact on its consolidated financialstatements.

In July 2001, SFAS No.142, *Goodwilland Other Intangible Assets* was issued.**SFAS No. 142 applies to allgoodwill and identified intangible assets acquired in a business combination.Under the new standard, all goodwill and other intangibles determined to haveindefinite lives, including those acquired before initial application of thestandard, should not be amortized but should be tested for impairment at least annually.Other identified intangible assets should be amortized over their useful livesand reviewed for impairment in accordance with SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and For Long-Lived Assets to beDisposed Of*. Within six months of initial application of the newstandard, a transitional impairment test must be performed on all goodwill. Anyimpairment loss recognized as a result of the transitional impairment testshould be reported as a change in accounting principle. In addition to thetransitional impairment test, the required annual impairment test should beperformed in the year of adoption of SFAS No. 142. SFAS No. 142 is effectivefor fiscal years beginning after December 15, 2001 (although early adoptionwould be permitted in certain circumstances) and must be adopted as of thebeginning of a fiscal year. Retroactive application is not permitted. TheCompany adopted SFAS No. 142 as of July 1, 2002.  The Company’s management does not believe that the adoption ofSFAS No. 142 will have a material effect on the consolidated financialstatements.

Goodwill associated withpurchases prior to June 30, 2001 is stated at cost and is amortized using thestraight-line method over 30 years. Goodwill and trademarks acquired in purchase business combinationscompleted after June 30, 2001, in accordance with SFAS No. 142, are notamortized.  Other intangibles consist ofacquired software and are being amortized over 5 years, using the straight-linemethod.

The Company periodicallyevaluates whether events and circumstances that have occurred indicate that theremaining balance of goodwill and other intangibles may not be recoverable orthat the remaining estimated useful lives may warrant revision. When suchfactors indicate that goodwill and other intangibles should have been evaluatedfor possible impairment, the Company uses an estimate of undiscounted futurecash flows to measure whether the goodwill and other intangibles arerecoverable, and over what period.  Ifestimated undiscounted future cash flows are less than the carrying amount ofthe asset, the asset is considered impaired and an expense is recorded in anamount required to reduce the carrying amount of the asset to its then fairvalue.

**Income Taxes**

The Company follows theprovisions of SFAS No. 109,*Accounting for Income Taxes*. SFAS No. 109requires that the asset and liability method of accounting be used for incometaxes in which deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. 

 

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Under SFAS No.109, the effect on deferred tax assets and liabilities of a change in tax ratesis recognized in income in the period that includes the enactment date.

**ForeignCurrency Translation**

In accordance with SFASNo. 52, *ForeignCurrency Translation*, balance sheet accounts of the Company’sforeign operations are translated from Canadian currency into U.S. dollars atthe year-end rate of exchange. Translation gains or losses related to netassets located outside the United States are included in stockholders’ equity.Income and expenses of the Company’s foreign operations are translated at theweighted average rates of exchange for the year. Gains and losses resultingfrom foreign currency transactions are included in net income (loss).

**Earningsper Share**

The Company computes netincome (loss) per share in accordance with the provisions of SFAS No. 128, *Earnings perShare*.  Under the provisionsof SFAS No. 128, the computation of basic and diluted net income (loss) pershare for the fiscal years ended June 30, 2002, 2001 and 2000 is as follows:
|                                                            |   | **Year ended June 30,** |   |
|-----------------------------------------------------------------|--------|-------------------------|--------|
|                                                            |   | **2002**                |   | **2001** |   | **2000** |   |
|                                                            |   |                    |   |   |   |   |   |
| Net income (loss) available to common shareholders              |   | $                       | 8,015  |   | $ | 1,321 |   | $ | (15,137 | ) |
|                                                            |   |                    |   |   |   |   |   |
| Weighted average basic shares of common stock  outstanding      |   | 14,530                  |   | 14,655 |   | 15,328 |   |
|                                                            |   |                    |   |   |   |   |   |
| Effect of dilutive securities:                                  |   |                    |   |   |   |   |   |
| Unvested restricted shares of Class A Common Stock              |   | 154                     |   | 90 |   | — |   |
| Options to purchase shares of Class A Common Stock  outstanding |   | 63                      |   | 158 |   | — |   |
| Weighted average diluted shares of common stock  outstanding    |   | 14,747                  |   | 14,903 |   | 15,328 |   |
|                                                            |   |                    |   |   |   |   |   |
| Basic net income (loss) per share of Common Stock               |   | $                       | 0.55   |   | $ | 0.09 |   | $ | (0.99 | ) |
| Diluted net income (loss) per share of Common Stock             |   | $                       | 0.54   |   | $ | 0.09 |   | $ | (0.99 | ) |

 

Shares associated withstock options that were not included in the computation of earnings per sharebecause their effect was anti-dilutive consisted of 88,400 shares, 47,000shares and 355,000 shares at June 30, 2002, 2001 and 2000, respectively.

**Revenues**

The Company generates itsrevenue from two business segments, the florist business segment and theconsumer business segment.

*Florist business.* The floristbusiness segment includes revenue associated with the services and productsprovided to member florists, primarily comprised of services and products asdescribed below.

Clearinghouse services. Clearinghouse services primarilyconsist of the provision of billing and collection services to both the sendingand receiving florists in flowers-by-wire transactions. Revenues from theclearinghouse are generated by retaining a percentage of the sales price oforders sent through the clearinghouse and are recorded in the month the ordersare filled.  Revenue is also generatedfrom the monthly access fee charged to member florists and credit cardprocessing services provided to member florists. Cash rebates, which are earnedby florists under a customer incentive program in conjunction with the creditcard processing service offered by the Company, are classified ascontra-revenue, in accordance with EITF Issue No. 01-9, *Accounting for Consideration Given by aVendor to a Customer (Including a Reseller of the Vendor’s Products)*.

Publications products andservices.  Publications products and services primarilyconsist of a telephone directory of FTD member florists that is published on aquarterly basis in both CD-ROM and paper book form. Revenues relating topublications are recognized in the periods in which the publications areissued.  Additionally, the Companyprovides services related to the set up and maintenance of florists’ Web sitesfor FTD Florists’ Online hosted through FTD.COM’s www.ftd.com Web sitepursuant to a Web site hosting 

 

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agreement withFTD.COM.  Revenue for FTD FloristsOn-line Web site hosting is recognized ratably over the one-year life of theagreement.

Mercury network services. The Company’s Mercury Network is a proprietary telecommunicationsnetwork linking together the Company and approximately 50% of the Company’smember florists.  Florists who arelinked by the Mercury Network are able to transmit orders cleared through theCompany or through competing clearinghouses and to send each other messagesbased on a per order or per message fee. Revenues for the services related to the processing of orders (includingtransmission charges) are recorded in the period the service is provided.

Mercury computerequipment products and services.  Mercurycomputer equipment and software sales include both the sales and leasing ofhardware and software designed for the floral industry.  The software provides a variety of optionsas it offers access to the Company’s Mercury Network to allow for sending andreceiving orders, billing capabilities, order-entry capabilities, an interfaceto various accounting software packages and a comprehensive range of payrolland accounting functions.  The Companyfollows the provisions of SOP 97-2, *Software Revenue Recognition*,**asamended by SOP 98-9*, Software Revenue Recognition with Respect toCertain Arrangements*.  SOP97-2 requires revenue earned on software arrangements involving multipleelements (i.e., software products, upgrades/enhancements, post-contractcustomer support, installation, training, etc.) to be allocated to each elementbased on the relative fair values of the elements. The Company recognizesrevenue from software products (including specified upgrades/enhancements) atthe time of shipment for systems sold. For systems that are being leased, the Company recognizes revenueratably over the period of the lease agreement.  Support revenue is recognized over the period of the supportagreement. Installation and training revenues are recognized at the time ofoccurrence.

Specialty wholesalingproducts.  The Company sells both FTD-branded andnon-branded holiday and everyday floral arrangement containers and products, aswell as packaging, promotional products and a wide variety of otherfloral-related supplies, including greeting cards and the Floral SelectionsGuide, a counter display catalog published by FTD featuring FTD products forall occasions. By capitalizing on the Company’s sourcing expertise and volumepurchases, the Company is able to provide florists with a broad selection ofproducts at competitive prices.   Salesof florist shop supplies are recorded when the products are shipped.

*Consumer business.*  FTD.COM is anInternet and telephone marketer of flowers and specialty gifts, which beganselling products directly to consumers through the 1-800-SEND-FTD toll-freetelephone number in 1993 and electronically to consumers through the www.ftd.comWeb site in 1994.  FTD.COM offerssame-day delivery of floral orders to nearly 100% of the U.S. population.  The majority of orders are fulfilled by agroup of independent FTD florists who adhere to FTD.COM’s quality and servicestandards.  FTD.COM offers over 400floral arrangements and over 800 specialty gift items, including gourmet giftbaskets, holiday gift sets, bath and beauty products, garden products andstuffed animals.

Orders placed throughFTD.COM’s Web site or 1-800-SEND-FTD typically are paid for using a creditcard.  When a customer makes a purchasethat will be fulfilled by an FTD florist, FTD.COM processes the order, chargesthe customer’s credit card and transmits the order to the Mercury Network.  The Mercury Network then transmits the orderto the fulfilling florist.  FTD.COMcharges the customer a service fee of $8.99 for floral orders placed throughits Web site and $9.99 for floral orders placed through the toll-free telephonenumber, 1–800–SEND–FTD, prior to any promotional discounts.

Orders from FTD.COM’sspecialty gift selection are fulfilled by a manufacturer or a third partydistributor based on a pre-negotiated price. FTD.COM charges the customer shipping and handling fees for thesespecialty gift product orders.  Amountscharged to the customer for the product and shipping and handling are recordedas revenue while the pre-negotiated price of the product and the costs incurredfor shipping and handling are recorded as costs of goods sold and servicesprovided.

Order revenue and servicefees are reported net of discounts. FTD.COM recognizes 100% of the order value as revenue and the associatedcosts of goods sold and services provided when the order is fulfilled.

**Revenuesfrom the Sale of the Floral Selections Guide**

As a condition of FTDaffiliation, all FTD florists must purchase a Floral Selections Guide andrelated workbook every two years or upon initial membership. The Companyrecognizes revenue related to the Floral Selections Guide when it is purchasedby the florist. The purchase of such Floral Selections Guide entitles the FTDflorist to a non-exclusive, non-transferable right for on-premise use of theFloral Selections Guide for as long as the purchaser remains an FTD florist ingood standing. There are no refund provisions associated with the purchase ofthe Floral Selections Guide. Historically, the Company has provided de minimisrefunds in isolated cases. Revenue from sales of the Floral Selections Guideduring fiscal years 2002, 2001 and 2000, was $0.3 million, $3.9 million and$0.1 million, respectively.

 

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**ConsiderationGiven to Customers**

During the third quarterof fiscal year 2002, the Company adopted the requirements of EITF Issue No.01-9.  In accordance with therequirements of EITF Issue No. 01-9, the Company has reclassified certainadvertising and selling expenses to contra-revenue that relate to cash rebateswhich are earned by florists under a customer incentive program in conjunctionwith the credit card clearing services offered by the Company. The financialdata for all periods presented has been reclassified to conform with EITF IssueNo. 01-9.  The amounts related to thecash rebates for fiscal years 2002, 2001 and 2000 were $2.3 million, $2.3million and $2.9 million, respectively.

Also, in accordance withthe requirements of EITF Issue No. 01-9, the Company has reclassifiedadvertising and selling expenses related to its consumer business segment tocosts of goods sold and services provided that relate to the granting ofmileage and reward points to customers in connection with an order. The amountsrelated to the granting of mileage and reward points for fiscal years 2002,2001 and 2000 were $3.3 million, $1.7 million and $1.0 million, respectively.

**Advertisingand Sales Promotion Costs**

The Company expensesproduction, advertising time and space costs and related residual rights andcontracts at the time the advertising is first broadcast or displayed.Promotion costs, including costs associated with affinity programs in theconsumer business segment, are charged to expense when incurred.

In the years ended June30, 2002, 2001 and 2000, advertising and sales promotion expense was $52.8million, $51.6 million, and $81.6 million, respectively.

**Stock-BasedCompensation**

The Company follows theprovisions of SFAS No. 123,*Accounting for Stock-Based Compensation.*SFAS No. 123 allows entities to continue to apply the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees,*and provide pro forma net income and pro forma earnings per share disclosuresfor employee stock option grants as if the fair value-based method defined inSFAS No. 123 had been applied. The Company has elected to continue to apply theintrinsic value method prescribed by APB Opinion No. 25.

**Useof Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Actual results maydiffer from those estimates.

**Reclassifications**

Certain amounts in theCompany’s fiscal years 2001 and 2000 financial statements have beenreclassified to conform to the current year presentation. Composition of theCompany’s reportable segments for fiscal years 2001 and 2000 have beenreclassified to conform to the current year presentation.

**(2)2002 Merger Agreement**

Effective June 28, 2002,the Company, FTD and FTD.COM completed a merger transaction (the “2002 Merger”)pursuant to which FTD.COM became an indirect wholly-owned subsidiary of theCompany and the former public stockholders of FTD.COM became stockholders ofthe Company.  Prior to the 2002 Merger,the financial statements of FTD.COM were fully consolidated in the Company’sconsolidated financial statements.  Thepurpose and reasons for the 2002 Merger include, along with other factors, thefollowing:

•                  the ability of the Company to more easilyaccess the public markets to raise additional debt or equity,

•                  the ability of the Company to attract a largerinvestor base due to the Company’s anticipated greater market float after the2002 Merger as compared to FTD.COM,

•                  the ability of the Company and FTD.COM tomore effectively pursue future acquisitions,

 

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•                  the ability of the Company and FTD.COM tomore efficiently allocate resources within the organization, and

•                  the ability of FTD.COM stockholders todiversify their investment in FTD.COM and participate in the future growth andearnings, if any, of all of the FTD businesses owned by the Company.

The Company accounted forthe 2002 Merger using the purchase method of accounting. As a result, inaccordance with SFAS No. 141, the Company allocated the aggregate purchaseprice of $58.2 million to the estimated fair values of assets acquired andliabilities assumed as follows (in thousands):
| Goodwill                                          |   | $      | 50,650 |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Other intangible  assets (amortized over 5 years) |   | 3,293  |   |
| Other assets (amortized  over 3 years)            |   | 491    |   |
| Minority  interest at June 28, 2002               |   | 5,285  |   |
| Deferred income  taxes                            |   | (1,476 | )      |
|                                              |   | $      | 58,243 |   |

 

The goodwill recorded aspart of the 2002 Merger is attributable to the consumer business segment and isnot deductible for tax purposes.  Theunaudited consolidated condensed pro forma results of operations data for theyears ended June 30, 2002 and 2001 as if the 2002 Merger had occurred on July1, 2000 appear below (in thousands, except per share information):
|                                         |   | **June 30, 2002** |    | **June 30, 2001** |   |
|----------------------------------------------|--------|-------------------|---------|-------------------|--------|
|                                         |   | **(unaudited)**   |    | **(unaudited)**   |   |
| Total revenues                               |   | $                 | 325,266 |              | $      | 305,995 |   |
| Income from  operations                      |   | $                 | 17,433  |              | $      | 22,065 |   |
| Net income                                   |   | $                 | 8,573   |              | $      | 1,262 |   |
|                                         |   |              |    |              |   |
| Net income per  common share — basic:   |   | $                 | 0.59    |              | $      | 0.08 |   |
| Net income per common  share — diluted: |   | $                 | 0.58    |              | $      | 0.07 |   |
|                                         |   |              |    |              |   |

 

Pursuant to the 2002 Merger,each stockholder of FTD.COM, other than the Company or its other direct orindirect wholly-owned subsidiaries, received 0.26 shares of the Company’s ClassA common stock, par value $0.01 per share (“Class A Common Stock”), for eachshare of FTD.COM common stock owned at the time of the 2002 Merger.  As such, 7,863,161 shares of FTD.COM commonstock, including outstanding restricted shares, were converted to 2,044,421shares of Class A Common Stock. Additionally, 220,000 options to purchase shares of FTD.COM common stockwere converted into 57,200 options to purchase shares of Class A Common Stockand all restricted shares of FTD.COM common stock were converted intorestricted shares of Class A Common Stock in accordance with the same exchangeratio and continue to be subject to the same restrictions and vesting scheduleas existed prior to the 2002 Merger.

In connection with the2002 Merger, the controlling stockholders of the Company entered into agovernance agreement with the Company that requires the Company to nominatedesignated representatives of the controlling stockholders to the Company’sBoard of Directors (the “Board”) for so long as the controlling stockholderscontinue to own certain specified percentages of the Class A Common Stock and theCompany’s Class B convertible common stock, par value $0.0005 per share (“ClassB Convertible Common Stock”, and together with Class A Common Stock, the“Common Stock”).  The controllingstockholders also entered into a registration agreement with the Company at thetime of the 2002 Merger that may require the Company to register their sharesof Common Stock on June 28, 2003, or sooner in the case of offerings initiatedby the Company following the 2002 Merger. Under the terms of the registration agreement, the controllingstockholders have agreed not to sell or distribute any of their shares ofCommon Stock prior to December 28, 2002. These shares will also continue to be subject to further limitationsunder the Securities Act of 1933, as amended, and the registration agreement.

In addition, inconnection with the 2002 Merger, the Company awarded one-time bonuses of$5,321,174 and $3,237,467 to the chief executive officers of the Company andFTD.COM, respectively, and recorded the bonuses as general and administrativeexpenses.

 

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Based on the consensus views reached in EITF No. 00-23, *Issues Related to the Accounting for StockCompensation Under APB Opinion No. 25 and FASB Interpretation No. 44*,and the Financial Accounting Standards Board Interpretation No. 44,*Accounting for Certain Transactions Involving StockCompensation (an Interpretation of APB Opinion No. 25)*, issued inMarch 2000, the exchange of FTD.COM awards for awards of the Company as describedin the preceding paragraph is considered a modification of a stock-basedcompensation arrangement. Accordingly, a new measurement of compensation costwas required at the date of the exchange. For unvested restricted stock and option awards, the difference betweenthe original intrinsic value of the awards and the value of the awards at thenew measurement date will be recognized over the remaining life of the awards.The vested portion of restricted stock awards was considered part of thepurchase price of the acquisition of the minority interest, except for sharesthat had not been unrestricted for more than six months (“immature” shares).Immature shares are shares outstanding related to restricted stock for whichthe restrictions have lapsed within six months prior to the exchange date. Tothe extent the exchanged options are fully vested or exchanged shares areimmature, any additional compensation expense resulting from the newmeasurement date was recognized immediately. As such, at the time of the 2002Merger, the Company increased deferred compensation by $152,000 related to thedifference between the original intrinsic value of the unvested option awardsand the value of the unvested option awards at the new measurement date andrecorded compensation expense of $58,000 for fully vested stock options thatwere outstanding at June 28, 2002. Additionally, the Company increased deferred compensation by $201,000related to the difference between the original intrinsic value of the unvestedrestricted stock awards and the value of the unvested restricted stock awardsat the new measurement date and recorded compensation expense of $202,000related to the immature restricted shares outstanding at June 28, 2002.

 

**(3)Acquisition of Certain Assets of National Flora, Inc.**

On November 9, 2001, theCompany’s majority-owned subsidiary FTD.COM completed the acquisition ofcertain assets of National Flora, Inc. (“National Flora”) pursuant to an assetpurchase agreement dated as of November 7, 2001, by and among Gerald Stevens,Inc., National Flora and FTD.COM (the “Asset Purchase Agreement”). NationalFlora is a direct marketer of flowers and specialty gifts.

Pursuant to the terms ofthe Asset Purchase Agreement, the purchase price of the acquisition was approximately$9.0 million, which was funded from FTD.COM’s existing cash balances.  Additionally, FTD.COM incurred $0.1 millionof other acquisition costs.  The assetsacquired primarily consisted of $1.7 million in prepaid advertising expenses,National Flora’s rights under or in respect of certain contracts andagreements, National Flora’s customer base and goodwill.  The amount of the consideration was based ona variety of factors, including the value of comparable assets and thepotential benefit to the stockholders of FTD.COM.  The results of operations since the date of FTD.COM’s acquisitionof certain assets of National Flora are included in the Company’s financialstatements.

The Company accounted forthe acquisition of certain assets of National Flora using the purchase methodof accounting.  Accordingly, theCompany’s financial statements reflect the allocation of the total purchaseprice to the net tangible and intangible assets acquired, based on theirrespective fair values.  This allocationincluded $0.9 million allocated to a customer list, which will be amortizedover five years. At June 30, 2002, accumulated amortization associated withthis intangible asset was $108,000.

Of the remaining portionof the purchase price, $6.5 million was allocated to goodwill.  In accordance with SFAS No. 142, the $6.5million of goodwill acquired in the acquisition of certain assets of NationalFlora will not be amortized and will be tested for impairment at leastannually.  For tax purposes, 100% of the$6.5 million of goodwill is expected to be deductible.  The pro forma impact of the acquisition onthe Company’s Consolidated Financial Statements is immaterial.

**(4)Intangibles**

On December 19, 1994, theCompany completed an acquisition (the “Acquisition”) of all of the outstandingequity of Florists’ Transworld Delivery Association, a Michigan non-profitcooperative association (the “Old Association”), pursuant to the terms of anAgreement and Plan of Merger dated August 2, 1994 (the “1994 Merger Agreement”)among the Company, FTD Acquisition Corporation, a Delaware corporation, and theOld Association.  Immediately followingthe Acquisition, the Old Association was converted from a non-profitcooperative association to a for-profit corporation and renamed “Florists’ TransworldDelivery, Inc.” The Company accounted for the Acquisition using the purchasemethod of accounting.  Accordingly, theCompany’s financial statements reflect the allocation of the total purchaseprice to the net tangible and intangible assets acquired, based on theirrespective fair values.  As a result ofthe Acquisition, the Company recorded goodwill of $68.4 million, a trademarkintangible asset of $15.0 million and software intangible assets of $2.0 million.In fiscal year 2002, the Company reduced a deferred tax valuation allowance of$1.0 million which was originally established as part of the purchaseaccounting in 1994, thus reducing goodwill by $1.0 million.  As of June 30, 

 

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2002 and 2001, theCompany had recorded goodwill amortization of $17.3 million and $15.0 million,trademark amortization of $2.7 million and $2.3 million and softwareamortization of $2.0 million and $2.0 million, respectively.

On November 9, 2001,FTD.COM completed the acquisition of certain assets of National Flora. TheCompany accounted for the acquisition using the purchase method of accounting.In accordance with SFAS No. 141, the Company recorded $0.9 million relatedto a customer list, which will be amortized over five years, and $6.5 millionof goodwill, which is not amortized. As of June 30, 2002, the Company hadrecorded amortization of $0.1 million related to their customer list.

Pursuant to the 2002Merger, FTD.COM became an indirect wholly-owned subsidiary of the Company andthe former public stockholders of FTD.COM became stockholders of theCompany.  The Company accounted for the2002 Merger using the purchase method of accounting.  In accordance with SFAS No. 141, the Company recorded acustomer list of $3.3 million, which will be amortized over 5 years, andgoodwill of $50.6 million.

At June 30, 2002 and2001, goodwill and other intangible assets consisted of the following (inthousands):
|                           |   | **2002** |    | **2001** |   |
|--------------------------------|--------|----------|---------|----------|--------|
|                           |   |     |    |     |   |
| Goodwill                       |   | $        | 124,516 |     | $      | 68,384 |   |
| Trademarks                     |   | 15,000   |    | 15,000   |   |
| Software                       |   | 2,000    |    | 2,000    |   |
| Customer list                  |   | 4,155    |    | —   |   |
| Total  intangibles             |   | 145,671  |    | 85,384   |   |
| Less accumulated  amortization |   | 22,113   |    | 19,350   |   |
| Net intangibles                |   | $        | 123,558 |     | $      | 66,034 |   |

 

**(5)Long-Term Debt**

At June 30, 2002 and 2001long-term debt consisted of the following (in thousands):
|                              |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
|                              |   |     |   |     |   |
| Multiple Draw  Term Loan Facility |   | $        | — |     | $      | 30,000 |   |
| Revolving Credit  Facility        |   | 47,000   |   | 24,875   |   |
| Total long-term  debt             |   | $        | 47,000 |     | $      | 54,875 |   |

 

The Company estimated thefair value of long-term debt based on interest rates that are currentlyavailable to the Company for issuance of debt with similar terms and remainingmaturity dates.  The fair valueapproximates the carrying value of long-term debt at June 30, 2002 and 2001.

The outstanding debtbalance of $47.0 million at June 30, 2002 was classified as long-termdebt.  As of June 30, 2002, norepayments of the debt outstanding under the 2001 Credit Agreement are requiredprior to December 31, 2004, at which time the outstanding balance is due infull.

At June 30, 2002, theweighted average interest rate was 4.07%, compared to 5.76% at June 30,2001.  During fiscal year 2002, 2001 and2000, the Company recorded commitment fees of $53,000, $65,000 and $92,000 asinterest expense related to the unused portion of the revolving creditfacilities.

On September 27, 2001,the Company and FTD entered into a credit agreement with Harris Trust andSavings Bank, as administrative agent, and a syndicate of lenders, maturing inno event later than December 31, 2004 (the “2001 Credit Agreement”). Therevolving credit commitment under the 2001 Credit Agreement was originally $80million and was reduced to $75 million at June 30, 2002, and will be reduced to$65 million at June 30, 2003 and to $55 million at June 30, 2004. Borrowingsare subject to a variable interest rate based on the prime commercial rate oras a function of the London Interbank Offered Rate (“LIBOR”).

As a result of enteringinto the 2001 Credit Agreement, the Company recorded $0.8 million of deferredfinancing costs, which will be amortized straight-line over the term of the2001 Credit Facility. Additionally, $0.6 million of unamortized deferredfinancing costs associated with the previous credit agreement were expensed inthe year ended June 30, 2002.  Thisexpense is reflected in other 

 

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(income) expensein the accompanying Consolidated Statements of Operations and ComprehensiveIncome for the year ended June 30, 2002, in accordance with SFAS No. 145, *Recission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13, and Technical Corrections,*whichthe Company elected to early adopt during fiscal year 2002.

The 2001 Credit Agreementincludes covenants which, among other things, require that the Company maintaina total funded debt to earnings before interest, taxes, depreciation andamortization (“EBITDA”) ratio at the end of any fiscal quarter of no greaterthan 2.75 to 1.0 until March 31, 2003 and 2.50 to 1.0 at all times thereafterand a fixed charge coverage ratio of not less than 1.75 to 1.0.  In addition, the Company is required tomaintain a minimum level of consolidated net worth of $24.0 million plus 50% ofnet income for each fiscal quarter, plus 100% of the net cash proceeds receivedfrom certain issuances of equity securities. At June 30, 2002, the Company wasin compliance with the covenants contained in the 2001 Credit Agreement, exceptthe total funded debt to EBITDA ratio, for which the Company received a waiverfrom the participating banks.

The 2001 Credit Agreementimposes various restrictions on the Company, including restrictions that limitthe Company’s and its subsidiaries’ ability to incur additional debt, makecertain payments or investments, consummate asset sales, incur liens, merge,consolidate, or dispose of substantial assets, among other restrictions. The2001 Credit Agreement also includes restrictions that limit the Company’ssubsidiaries’ ability to pay dividends. In addition, substantially all of theassets of the Company are pledged as security under the 2001 Credit Agreement;however, the 2001 Credit Agreement excludes FTD.COM from its terms andrestrictions.

On March 12, 2002, theCompany entered into an amendment and waiver to the 2001 Credit Agreement inorder to allow for the 2002 Merger and related transactions. In the amendment,the Company agreed to pledge all of FTD.COM’s stock as security under the 2001Credit Agreement upon the consummation of the 2002 Merger. See Note 2 fordiscussion of the 2002 Merger Agreement.

The Company is in theprocess of seeking an amendment to the 2001 Credit Agreement to reflect thechange in the corporate structure resulting from the 2002 Merger.

The Company is exposed tovarious market risks, which primarily consist of interest rate risk. TheCompany’s policy is to enter into certain derivative instruments in an effortto hedge its underlying economic exposure and to manage these instruments inorder to reduce its exposure to changes in interest rates. The Companycurrently does not use derivative instruments for trading purposes.

The Company entered intointerest rate cap agreements on December 5, 2001 to reduce the impact ofpotential increases in interest rates on floating rate debt.  The interest rate caps had a notional amountof $20.0 million at a cap rate of 5.0% at June 30, 2002 and are effectivethrough December 31, 2003. The financing party agrees to pay the Company avariable rate (LIBOR) on the notional amount if the rate on the floating ratedebt exceeds the cap rate. The Company accounts for the interest rate cap as acash flow hedge whereby the fair value of the interest rate cap is reflected inother noncurrent assets in the accompanying Consolidated Balance Sheets and isbeing amortized to interest expense over its term. The carrying value of$22,500 approximates fair value and, therefore, no fair value adjustment wasrecorded in the period.  The interestrate cap cost was $0.1 million, which is being amortized using straight-linemethod through December 31, 2003.

**(6)Leases**

**AsLessor**

The Company leasesMercury computer equipment and software to customers through leases classifiedas operating leases for accounting purposes. During fiscal year 2001, a portionof the Mercury computer equipment held in storage was disposed of and writtenoff primarily due to the introduction of new versions of Mercury products.  The Company did not recognize a loss on thedisposal of the equipment.  As of June30, 2002 and 2001, capitalized equipment leased to customers under operatingleases, including equipment used for maintenance purposes, was $10.3 million.As of June 30, 2002 and 2001, the Company had recorded accumulated equipmentdepreciation of $9.4 million and $8.9 million, respectively.

The total minimum futurerentals on non-cancelable leases of Mercury computer equipment and software areas follows (in thousands):
| **Year** |   | **Amount** |   |
|----------|--------|------------|--------|
|     |   |       |   |
| 2003     |   | $          | 1,127  |   |
| 2004     |   | 248        |   |
| 2005     |   | 81         |   |
| Total    |   | $          | 1,456  |   |

 

F-15

----

 

**AsLessee**

The Company has enteredinto operating leases for certain hardware components of the Mercury computerequipment, corporate facilities and equipment. Rental expense relating to these leases totaled $1.9 million, $1.7million and $1.7 million for fiscal years 2002, 2001 and 2000,respectively.  The minimum aggregateannual operating lease obligations are as follows (in thousands):

 
| **Year**   |   | **A****mount** |   |
|------------|--------|----------------|--------|
| 2003       |   | $              | 961    |   |
| 2004       |   | 418            |   |
| 2005       |   | 207            |   |
| 2006       |   | 186            |   |
| 2007       |   | 168            |   |
| Thereafter |   | 224            |   |
| Total      |   | $              | 2,164  |   |

 

The total minimum leasepayments have not been reduced by minimum sublease rentals of $1.5 million duein the future under non-cancelable subleases of Mercury computer equipment andcorporate facilities.

**(7)Income Taxes**

The Company’s net operatingloss carryforward at June 30, 2002 was $9.4 million and is available to offsetfuture taxable income.  The netoperating loss carryforward expires in 2019.

The provision for incometaxes consists of the following components (in thousands):
|                               |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current  — Federal            |   | $        | — |     | $      | —   |   | $ | — |   |
| Current  — State              |   | 240      |   | —   |   | —   |   |
| Current  — Foreign            |   | —   |   | —   |   | 211      |   |
| Deferred  — Federal (benefit) |   | 4,979    |   | 2,968    |   | (6,839   | )      |
| Deferred  — State (benefit)   |   | 1,499    |   | 433      |   | (958     | )      |
| Income  tax expense (benefit)      |   | $        | 6,718  |     | $      | 3,401    |   | $ | (7,586 | ) |

 

The provision forincome taxes for the years ended June 30, 2002, 2001 and 2000, differs from theamount computed by applying the U.S. federal income tax rate of 35%, 34% and34% for fiscal years 2002, 2001 and 2000, respectively, to pretax incomebecause of the effect of the following items (in thousands):
|                                                            |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Tax expense  (benefit) at U.S. federal income tax rate          |   | $        | 6,040  |     | $      | 2,254    |   | $ | (9,218 | ) |
| State income  taxes (benefit), net of federal income tax effect |   | 1,214    |   | 276      |   | (632     | )      |
| Change in valuation  allowance                                  |   | (1,500   | )      | —   |   | 1,000    |   |
| Amortization of  non-deductible goodwill                        |   | 798      |   | 775      |   | 775      |   |
| Foreign income taxes                                            |   | —   |   | —   |   | 16       |   |
| Other items, net                                                |   | 166      |   | 96       |   | 473      |   |
| Income tax  expense (benefit)                                   |   | $        | 6,718  |     | $      | 3,401    |   | $ | (7,586 | ) |

 

 

 

F-16

----

 

 

At June 30, 2002 and2001, the Company’s deferred tax assets and liabilities consisted of thefollowing (in thousands):

 
|                                                                                            |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Current deferred  tax assets:                                                                   |   |     |   |     |   |
| Allowance for  doubtful accounts                                                                |   | $        | 2,437  |     | $      | 1,844 |   |
| Restricted stock  vesting                                                                       |   | 754      |   | 32       |   |
| Severance costs                                                                                 |   | 698      |   | 56       |   |
| Unearned income                                                                                 |   | 382      |   | 501      |   |
| Inventory                                                                                       |   | 298      |   | 701      |   |
| Accrued vacation                                                                                |   | 347      |   | 221      |   |
| Other                                                                                           |   | 110      |   | 201      |   |
| Current deferred  tax assets                                                                    |   | 5,026    |   | 3,556    |   |
|                                                                                            |   |     |   |     |   |
| Noncurrent  deferred tax assets:                                                                |   |     |   |     |   |
| Net operating  loss carryforwards                                                               |   | 3,763    |   | 11,479   |   |
| Postretirement  benefit obligations                                                             |   | 1,415    |   | 1,800    |   |
| Accrued pension                                                                                 |   | 537      |   | 404      |   |
| Other                                                                                           |   | 171      |   | 175      |   |
| Noncurrent  deferred tax assets                                                                 |   | 5,886    |   | 13,858   |   |
|                                                                                            |   |     |   |     |   |
| Noncurrent  deferred tax liabilities — tax over book  depreciation and difference in basis |   | 8,250    |   | 5,416    |   |
| Noncurrent  deferred tax assets (liabilities) before  valuation allowance                       |   | (2,364   | )      | 8,442    |   |
| Deferred tax  assets — valuation allowance                                                 |   | —   |   | (2,500   | )      |
| Net noncurrent  deferred tax assets (liabilities)                                               |   | (2,364   | )      | 5,942    |   |
| Net deferred tax  assets                                                                        |   | $        | 2,662  |     | $      | 9,498 |   |

 

In assessing therealization of deferred tax assets, the Company considers whether it is morelikely than not that some portion or the entire deferred tax asset will berealized.  The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which these temporary differences are deductible.  This assessment was performed consideringexpected taxable income in future years and tax planning strategies availableto the Company.  The Company hasdetermined that it is more likely than not that its deferred tax assets will berealized.  As such, the valuationallowance of $2.5 million was reversed in fiscal year 2002.  The recognition of $1.0 million of therelated tax benefit was applied to goodwill, as it was generated from theAcquisition.  The remaining $1.5 millionwas recorded as a benefit in the provision for income taxes in fiscal year2002.

**(8)Software to be Sold, Leased, or Marketed**

The costs associated withthe development of the Mercury computer software are capitalized in accordancewith SFAS No. 86 and are recorded in other noncurrent assets on theConsolidated Balance Sheets at June 30, 2002 and 2001.  At June 30, 2002 and 2001, capitalizedcomputer software costs were $5.5 million and $4.4 million, respectively, withaccumulated amortization of $3.0 million and $1.7 million, respectively.  During the years ended June 30, 2002, 2001and 2000, $1.3 million, $1.0 million and $0.7 million, respectively, wascharged to expense related to the amortization of these capitalized computersoftware costs. In accordance with SFAS No. 86, at June 30, 2002, theunamortized capitalized cost of the computer software was compared to the netrealizable value of the product to determine whether any necessary write-downsshould be made. The net realizable value is the estimated future gross revenuesreduced by the estimated future cost of completing and disposing of theproduct.  At June 30, 2002, nowrite-down was necessary.

**(9)Internal Use Software**

Certain costs incurred in the planning and developmentstage of internal-use computer software, including Web site development costs,are expensed as incurred. Costs incurred during the development stage arecapitalized.  During fiscal year 2002,the Company recorded an impairment loss for internal use software, in theamount of $0.4 million, that had been used to process clearinghouse and relatedtransactions for member services in addition to $0.1 million related to othersoftware.  During fiscal year 2000, theCompany capitalized $3.7 million of Web site development costs andsubsequently, in the same fiscal year, wrote-off $3.5 million of the previouslycapitalized Web site development costs as part of the $4.4 millionnon-recurring charge associated with the development work related to anunlaunched version of FTD.COM’s Web site, recorded as general andadministrative expenses.

 

Capitalized internal usesoftware costs are amortized over the expected economic life of five yearsusing the straight-line method.  At June30, 2002 and 2001, capitalized internal use software costs of $10.8 million and$10.5 million, respectively, with accumulated amortization of  $5.8 million and $3.9 million, respectively,were included in other noncurrent assets on the Company’s Consolidated 

 

F-17

----

 

BalanceSheets.  During the years ended June 30,2002, 2001 and 2000, amortization expense was $1.8 million, $2.1 million and$1.4 million, respectively.

**(10)Post-retirement Benefits Other Than Pensions**

The Company previouslyprovided post-retirement health care benefits to qualifying retirees under theterms of the Company’s qualified retirement plan.  Under the terms of the plan, retirees are required to share inthe cost of these benefits.  Duringfiscal year 1997, the Company terminated such benefits to employees.  As a result of eliminating active employeesfrom the plan, the Company created an unrecognized net gain that is beingamortized over the average retiree life expectancy of 15.6 years.

During the year endedJune 30, 2002, the Company terminated certain future post-retirement healthcare benefits. This termination in benefits caused a decrease in the Company’spost-retirement health care obligation attributed to prior services renderedand generated a pretax settlement gain of $1.4 million, which was recorded as areduction of general and administrative expenses in the year ended June 30,2002.

In accordance with thedisclosure requirements of SFAS No. 132, *Employers Disclosures about Pensions and OtherPostretirement Benefits,* the following tables provide areconciliation of the benefit obligation and funded status at June 30, 2002 and2001, as well as the components of net periodic post-retirement benefit costsfor the years ended June 30, 2002, 2001 and 2000 (in thousands):

 
|                                     |   | **2002** |   | **2001** |   |
|------------------------------------------|--------|----------|--------|----------|--------|
|                                     |   |     |   |     |   |
| Benefit  obligation at beginning of year |   | $        | 2,069  |     | $      | 2,019 |   |
| Interest cost                            |   | 128      |   | 154      |   |
| Benefits paid                            |   | (145     | )      | (194     | )      |
| Actuarial (gain)  loss                   |   | (547     | )      | 90       |   |
| Benefit  obligation at end of year       |   | $        | 1,505  |     | $      | 2,069 |   |
|                                     |   |     |   |     |   |
| Funded status                            |   | $        | (1,505 | )        | $      | (2,069 | ) |
| Unrecognized net  (gain) loss            |   | (2,033   | )      | (3,053   | )      |
| Accrued benefit  cost                    |   | $        | (3,538 | )        | $      | (5,122 | ) |
|                                     |   |     |   |     |   |

 
|                                             |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                             |   |     |   |     |   |     |   |
| Service cost                                     |   | $        | — |     | $      | —   |   | $ | — |   |
| Interest cost                                    |   | 128      |   | 154      |   | 166      |   |
| Recognized net  actuarial gain                   |   | (172     | )      | (201     | )      | (180     | )      |
| Total net  periodic postretirement  benefit cost |   | $        | (44    | )        | $      | (47      | )      | $ | (14 | ) |

 

The discount rates usedin determining the accumulated post-retirement benefit obligation (the “APBO”)were 7.25% at and for the year ended June 30, 2002, 7.5% at and for the yearended June 30, 2001 and 8.0% at and for the year ended June 30, 2000. Formeasurement purposes an 8.23% annual rate of increase in the per capita cost ofcovered health care benefits was assumed for 2002.  The rate is assumed to decrease to 5.75% in 2008 and remain at thatlevel thereafter.  Assumed health carecost trend rates have a significant effect on the amounts reported for thehealth care plans. If the current health care cost trend rate assumption wasincreased by one percent, the APBO at June 30, 2002 would have increasedapproximately $152,000 or 10.1%, while the net periodic cost for the fiscalyear ended June 30, 2002 would have increased approximately $10,000, or8.1%.  If the current health care costtrend rate assumptions were decreased by one percent, the APBO at June 30, 2002would have decreased approximately $133,000, or 8.9%, while the periodic costfor the fiscal year ended June 30, 2002, would have decreased $9,000, or 7.1%.

 

F-18

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**(11)Pension Plans**

Approximately 150employees and former employees participate under the Company’s defined benefitplan. Benefits under the Company’s pension plan, which has been frozen sinceJanuary 1, 1997, were based on the employee’s age, years of service and thehighest consecutive five-year average compensation.

In accordance with thedisclosure requirements of SFAS No. 132, the following tables provide areconciliation of the benefit obligation and plan assets, as well as the fundedstatus of the pension plan at June 30, 2002 and 2001:
|                                               |   | **2002** |   | **2001** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
|                                               |   |     |   |     |   |
| Projected  benefit obligation at beginning of year |   | $        | 1,963  |     | $      | 1,632 |   |
| Interest cost                                      |   | 147      |   | 147      |   |
| Benefits paid                                      |   | (318     | )      | (248     | )      |
| Actuarial (gain)  loss                             |   | 94       |   | 432      |   |
| Projected  benefit obligation at end of year       |   | $        | 1,886  |     | $      | 1,963 |   |
|                                               |   |     |   |     |   |
| Fair value of plan  assets at beginning of year    |   | $        | 831    |     | $      | 1,241 |   |
| Actual return on  plan assets                      |   | (139     | )      | (162     | )      |
| Employer  contributions                            |   | 170      |   | —   |   |
| Benefits paid                                      |   | (318     | )      | (248     | )      |
| Fair value of  plan assets at end of year          |   | $        | 544    |     | $      | 831 |   |
|                                               |   |     |   |     |   |
| Funded status                                      |   | $        | (1,342 | )        | $      | (1,132 | ) |
| Unrecognized net  (gain) loss                      |   | 734      |   | 570      |   |
| Accrued pension  cost                              |   | $        | (608   | )        | $      | (563 | ) |
|                                               |   |     |   |     |   |

Plan assets for thedefined benefit plan consist of investments in common stock, real estateproperties, fixed income securities and short-term investments.

During the fiscal yearsended June 30, 2002, 2001 and 2000, pension expense of $216,000, $86,000 and$2,000, respectively, was recognized in relation to the pension plan.  During the fiscal years ended June 30, 2002and 2001, the Company recorded $237,000 and $429,000, respectively, withinother comprehensive income related to a change in the minimum pensionliability.  The table below provides thenecessary disclosures in accordance with SFAS No. 132 of the components ofpension expense for the defined benefit plan for the years ended June 30, 2002,2001 and 2000:
|                           |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                           |   |     |   |     |   |     |   |
| Interest cost                  |   | $        | 147    |     | $      | 147      |   | $ | 132 |   |
| Expected return  on assets     |   | (75      | )      | (107     | )      | (130     | )      |
| Recognized net  actuarial loss |   | 51       |   | —   |   | —   |   |
| Net periodic  pension cost     |   | 123      |   | 40       |   | 2        |   |
| Settlement loss                |   | 93       |   | 45       |   | —   |   |
| Total pension  cost            |   | $        | 216    |     | $      | 85       |   | $ | 2 |   |
|                           |   |     |   |     |   |     |   |

The discount rate used tocalculate the projected benefit obligation was 7.25%, 7.5%, and 8.0% at June30, 2002, 2001, and 2000 respectively. For fiscal years 2002, 2001 and 2000, the rate of increase in futurecompensation levels was 5.0% and the expected long-term rate of return onassets was 9.0%.

The Company sponsors a401(k) savings plan for all of its eligible employees. All eligible employeesmay contribute between 1% and 15% of their gross annual salary on a pre-taxbasis.  The Company matches an amountequal to 50% of each participant’s pre-tax 

 

F-19

----

 

contribution up to6% of the participant’s compensation. Company contributions to the 401(k) plan for fiscal years 2002 and 2001were $436,000 and $444,000, respectively.

**(12)Related Party Transactions**

The Company incurredexpenses of $2.0 million, $2.1 million and $2.0 million for each of the yearsended June 30, 2002, 2001 and 2000, respectively, related to the payment formanagement consulting services to certain investors of the Company.

At June 30, 2002, theCompany had loans receivable from various current and former officers of theCompany of $0.2 million with terms of four years, with principal due atmaturity in 2005, including accrued interest ranging from 6.5% to 8.5% perannum. At June 30, 2001, the Company had loans receivable from various officersof the Company of $2.5 million, with terms of four years, with principal due atmaturity in 2003, 2004 and 2005, including accrued interest ranging from 6.5%to 8.5% per annum.

A financial advisorreceived warrants for 750,000 shares of Class B convertible common stock inpartial payment for its services related to the original acquisition of the OldAssociation which subsequently became FTD. Subsequently, the warrants and cash representing the exercise price ofthe warrants were exchanged for 750,000 shares of the Company’s Class Bconvertible common stock par $0.0005 per share (the “Class B ConvertibleCommon Stock”). The Company disputed the financial advisor’s claim forcompensation and filed suit for breach of fiduciary duty and other claims. OnJuly 26, 2000, the Company settled the lawsuit whereby the financial advisorreturned the 750,000 shares of Class B Convertible Common Stock. As a result ofthis settlement the Company recorded $12.0 million of treasury stock and anincrease to additional paid-in capital of $11.6 million (net of $0.4 million ofincome taxes) based on an independent third party valuation to determine thefair market value of the stock received in the settlement.

**(13)Stock Awards and Incentive Plans**

The Company’s 2002Long-Term Equity Incentive Plan (the “2002 Equity Incentive Plan”), was adoptedby the Board and approved by the Company’s stockholders on June 27, 2002.  The 2002 Equity Incentive Plan provides forthe issuance of up to 1,250,000 shares of Class A Common Stock in connectionwith the granting of incentive or non-qualified stock options, stockappreciation rights (“SARs”), either alone or in tandem with options,restricted stock, performance awards, or any combination of the foregoing.  In addition, the 2002 Equity Incentive Planprovides that:

•                  The aggregate fair market value (determined as of thegrant date) of shares for which an incentive stock option is exercisable forthe first time during any calendar year under all equity incentive plans of theCompany and its subsidiaries may not exceed $100,000; and

•                  No 2002 Equity Incentive Plan participant shall begranted options or SARs to purchase a number of shares of Class A Common Stockin excess of 50% of the total number of shares authorized under the 2002 EquityIncentive Plan during any period of one year.

The Company’s 1994 StockAward and Incentive Plan, as amended (the “1994 Plan”), was adopted by theBoard and approved by the Company’s stockholders in 1994.  The maximum number of shares of Common Stockauthorized for issuance under the 1994 Plan is equal to 15% of the initialequity capital of the Company upon the consummation of the Acquisition.

The 1994 Plan providesfor the granting of incentive stock options (“ISOs”); options which do notqualify as ISO’s, nonqualified stock options (“NSOs”); or a combination of bothISOs and NSOs (“Options”); provided, however, that ISOs may only be granted toemployees of the Company and its subsidiaries. Options granted under the 1994Plan may be accompanied by SARs or limited SARs or both.  The 1994 Plan also provides for the grantingof restricted stock, deferred stock and performance shares (together,“Restricted Awards”). The 1994 Plan is not subject to any provisions of theEmployee Retirement Income Security Act of 1974, as amended, nor is the 1994Plan a qualified plan within the meaning of section 401(a) of the InternalRevenue Code of 1986, as amended (the “Code”).

During fiscal year 1999,the Board approved changes to the vesting schedules of stock option agreementsentered into prior to fiscal year 1999. Stock option agreements with an original vesting schedule for theoptions to become exercisable in four 25% installments commencing after twoyears will now commence after only one year, still at a rate of 25% peryear.  This 1994 Plan modification did notresult in any change from the intrinsic value of the options granted asmeasured pursuant to the requirements of APB No. 25.  As such, no compensation expense wasrequired to be recognized.

To date, the Company hasnot granted any SARs, limited stock appreciation rights, deferred shares, orperformance awards under either the 1994 Plan or the 2002 Equity IncentivePlan.

 

F-20

----

 

The FTD.COM 1999Equity Incentive Plan provides for the issuance of up to 4,500,000 shares ofFTD.COM Class A common stock in connection with the granting of option rights,SARs, restricted shares, deferred shares, performance awards or any combinationof the foregoing.  As of June 27, 2002,the FTD.COM 1999 Equity Incentive Plan was superseded by the 2002 EquityIncentive Plan.  See Note 2 formore information on the 2002 Merger.

**(14)FTD, Inc. Stock Options and Restricted Shares**

Outstanding nonqualifiedstock options are exercisable during a ten-year period beginning one to fiveyears after the date of grant.  Allcurrently outstanding options were granted with an exercise price equal toeither the fair market value on the date of grant or the optionee’s first dateof employment with the Company.  Changesin the options outstanding are summarized as follows:

 
|                          |   | **Summary of  Stock Option Activity** |       |
|-------------------------------|--------|---------------------------------------|------------|
|                          |   | **Class A  Common Stock  Options**    |       | **Range of  Exercise Prices** |   | **Weighted  Average  Exercise Price** |   |
| **Balance, June 30, 1999**    |   | **580,700**                           | ** ** | **$3.75 - $15.00** | ** ** | **$** | **9.38** | ** ** |
| **Granted**                   |   | **88,400**                            | ** ** | **$25.00** | ** ** | **$** | **25.00** | ** ** |
| **Exercised**                 |   | **—**                            | ** ** | **—** | ** ** | **—** | ** ** |
| **Recaptured or terminated**  |   | **(55,800**                           | **)**      | **$3.75 - $25.00** | ** ** | **$** | **13.31** | ** ** |
| **Balance, June 30, 2000**    |   | **613,300**                           | ** ** | **$3.75 - $25.00** | ** ** | **$** | **11.28** | ** ** |
| **Granted**                   |   | **102,300**                           | ** ** | **$16.00** | ** ** | **$** | **16.00** | ** ** |
| **Exercised**                 |   | **(12,550**                           | **)**      | **$3.75 - $10.50** | ** ** | **$** | **6.03** | ** ** |
| **Recaptured or terminated**  |   | **(61,950**                           | **)**      | **$7.75 - $25.00** | ** ** | **$** | **19.08** | ** ** |
| **Balance, June 30, 2001**    |   | **641,100**                           | ** ** | **$3.75 - $25.00** | ** ** | **$** | **11.38** | ** ** |
| **Granted**                   |   | **—**                            | ** ** | **—** | ** ** | **—** | ** ** |
| **Exercised**                 |   | **(192,000**                          | **)**      | **$7.75 - $15.00** | ** ** | **$** | **11.32** | ** ** |
| **Recaptured or terminated**  |   | **(68,500**                           | **)**      | **$10.50 - $25.00** | ** ** | **$** | **17.47** | ** ** |
| **FTD.COM options converted** |   | **57,200**                            | ** ** | **$7.45 - $30.77** | ** ** | **$** | **12.79** | ** ** |
| **Balance, June 30, 2002**    |   | **437,800**                           | ** ** | **$3.75 - $30.77** | ** ** | **$** | **10.64** | ** ** |

 

 

As of June 30, 2002, 2001and 2000 options covering 437,800, 641,100 and 613,300 shares, respectively, ofClass A Common Stock were outstanding, of which 322,540, 413,070 and 298,030shares were vested, respectively.  Thefollowing table summarizes the information regarding the stock optionsoutstanding and exercisable at June 30, 2002. 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                                       |   |
|-------------------------------|--------|--------------------------|--------|----------------------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  of Shares**    |   | **Weighted  Average  Remaining  Contractual Life  (in years)** |   | **Weighted  Average  Exercise Price** |   | **N****umber  of Shares** |   | **Weighted  Average  Exercise Price** |   |
| $ 3.75                        |   | 128,000                  |   | 4.92                                                           |   | $ | 3.75 |   | 128,000 |   | $ | 3.75 |   |
| $ 7.45 - $7.75                |   | 46,100                   |   | 7.77                                                           |   | $ | 7.52 |   | 19,775 |   | $ | 7.62 |   |
| $ 10.50 - $12.50              |   | 175,300                  |   | 5.42                                                           |   | $ | 11.67 |   | 146,350 |   | $ | 11.89 |   |
| $ 16.00                       |   | 50,000                   |   | 8.26                                                           |   | $ | 16.00 |   | 10,000 |   | $ | 16.00 |   |
| $ 22.08 - $30.77              |   | 38,400                   |   | 6.08                                                           |   | $ | 25.68 |   | 18,415 |   | $ | 26.98 |   |
| Total                         |   | 437,800                  |   | 5.90                                                           |   | $ | 10.64 |   | 322,540 |   | $ | 8.89 |   |

 

Using the Black-Scholessingle option pricing model and the following assumptions, the averageestimated fair value, at the dates of grant of the Company’s options in fiscalyears 2001 and 2000, was $5.08 and $7.96 per option of Class A Common Stock,respectively.   There were no grants ofthe Company’s options in fiscal year 2002.
|                                      |   | **2001** |       | **2000** |       |
|-------------------------------------------|--------|----------|------------|----------|------------|
| **Risk-free interest rate**               |   | **6.0**  | **%**      | **6.0**  | **%**      |
| **Expected dividend yield**               |   | **0**    | **%**      | **0**    | **%**      |
| **Expected volatility**                   |   | **50**   | **%**      | **50**   | **%**      |
| **Estimated lives of options (in years)** |   | **3.74** | ** ** | **3.75** | ** ** |

 

 

F-21

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Using the Black-Scholessingle option pricing model and the following assumptions, the averageestimated fair value, at the dates of grant of FTD.COM options in fiscal year2001 and 2000 was $1.21 and $0.98, respectively, per option of FTD.COM Class Acommon stock, which would be equivalent to $4.65 and $3.77, respectively, peroption of Class A Common Stock pursuant to the 2002 Merger.   There were no grants of FTD.COM options infiscal year 2002.

 
|                                      |   | **2001** |       | **2000** |       |
|-------------------------------------------|--------|----------|------------|----------|------------|
| **Risk-free interest rate**               |   | **4.8**  | **%**      | **6.2**  | **%**      |
| **Expected dividend yield**               |   | **0**    | **%**      | **0**    | **%**      |
| **Expected volatility**                   |   | **75**   | **%**      | **75**   | **%**      |
| **Estimated lives of options (in years)** |   | **4.0**  | ** ** | **4.0**  | ** ** |

 

The Company’s andFTD.COM’s options granted in fiscal years 2001 and 2000 vest equally each yearover a four-year period from the date of grant.  As a result, the estimated cost indicated above reflects only apartial vesting of such options.  Iffull vesting were assumed, the estimated pro forma costs for the year wouldhave been higher than indicated below.

Based on the aboveassumptions, the Company would have recognized an additional compensationexpense, net of taxes, of $187,000, $265,000 and $232,000 related to theCompany’s options in fiscal years 2002, 2001 and 2000, respectively, and$38,000 and $8,000 related to FTD.COM’s options in fiscal years 2001 and 2000,respectively, if the estimated costs of the outstanding granted stock optionsof the Company and FTD.COM had been recorded in the Company’s consolidatedfinancial statements.  As such, theCompany’s net income (loss) and earnings (loss) per share would have beenreduced to the pro forma amounts shown in the table below (the pro formadisclosures shown are not representative of the future effects on net incomeand earnings per share):

** **
|                                                               |   | **2002  As Reported** |   | **2002  Pro Forma** |   | **2001  As Reported** |   | **2001  Pro Forma** |   | **2000  As Reported** |   | **2000  Pro Forma** |   |
|--------------------------------------------------------------------|--------|-----------------------|--------|---------------------|--------|-----------------------|--------|---------------------|--------|-----------------------|--------|---------------------|--------|
|                                                               |   |                  |   |                |   |                  |   |                |   |                  |   |                |   |
| Net income  (loss) available to common stockholders (in thousands) |   | $                     | 8,015  |                | $      | 7,828                 |   | $                   | 1,321  |                  | $      | 1,018               |   | $ | (15,137 | ) | $ | (15,377 | ) |
| Earnings (loss)  per share:                                        |   |                  |   |                |   |                  |   |                |   |                  |   |                |   |
| Basic                                                              |   | $                     | 0.55   |                | $      | 0.54                  |   | $                   | 0.09   |                  | $      | 0.07                |   | $ | (0.99 | ) | $ | (1.00 | ) |
| Diluted                                                            |   | $                     | 0.54   |                | $      | 0.53                  |   | $                   | 0.09   |                  | $      | 0.07                |   | $ | (0.99 | ) | $ | (1.00 | ) |

 

Pursuant to the 2002Merger, each stockholder of FTD.COM, other than the Company or its other director indirect wholly-owned subsidiaries, received 0.26 shares of Class A CommonStock for each share of FTD.COM common stock owned at the time of the 2002Merger.  Additionally, all outstandingoptions to purchase shares of FTD.COM common stock were converted into optionsto purchase shares of Class A Common Stock and all restricted shares of FTD.COMcommon stock were converted into restricted shares of Class A Common Stock inaccordance with the same exchange ratio and continue to be subject to the samerestrictions and vesting schedule as existed prior to the 2002 Merger.  As such, 220,000 FTD.COM options wereconverted into 57,200 options of the Company at the time of the 2002Merger.  The new awards have the samevesting provisions, option periods, aggregate intrinsic value, ratio ofexercise price per option to the market value per share and other terms as theFTD.COM awards exchanged.

Based on the consensusviews reached in EITF No. 00-23 and the Financial Accounting Standards BoardInterpretation No. 44 issued in March 2000, the exchange of FTD.COM awards forawards of the Company as described in the preceding paragraph is considered amodification of a stock-based compensation arrangement. Accordingly, a new measurementof compensation cost was required at the date of the exchange.  For unvested restricted stock and optionawards, the difference between the original intrinsic value of the awards andthe value of the awards at the new measurement date will be recognized over theremaining life of the awards. The vested portion of restricted stock awards wasconsidered part of the purchase price of the acquisition of the minorityinterest, except for shares that have not been unrestricted for more than sixmonths (“immature” shares). Immature shares are shares outstanding related torestricted stock for which the restrictions have lapsed within six months priorto the exchange date. To the extent the exchanged options are fully vested orexchanged shares are immature, any additional compensation expense resultingfrom the new measurement date was recognized immediately. As such, at the timeof the 2002 Merger, the Company increased deferred compensation by $152,000related to the difference between the original intrinsic value of the unvestedoption awards and the value of

 

 

F-22

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the unvestedoption awards at the new measurement date and recorded compensation expense of$58,000 for fully vested stock options that were outstanding at June 28,2002.  Additionally, the Companyincreased deferred compensation by $201,000 related to the difference betweenthe original intrinsic value of the unvested restricted awards and the value ofthe unvested restricted awards at the new measurement date and recordedcompensation expense of $202,000 related to the immature restricted sharesoutstanding at June 28, 2002.

 

The Company did not grantany FTD, Inc. restricted stock for fiscal years 2002, 2001 or 2000. The Companyrecognized compensation expense in general and administrative expenses of $0.2million in each of the fiscal years ended 2002, 2001 and 2000, related togrants of the Company’s restricted stock prior to fiscal year 2000.

During June 2000, theCompany granted 525,000 restricted shares of FTD.COM Class B common stock toemployees of the Company in the form of restricted shares, which automaticallyconverted into shares of FTD.COM Class A common stock, at a weighted averagefair value of $2.94 at the date of grant. The employees will earn the restricted shares in exchange for futureservices to be provided to the Company over a three-year period.  The Company recorded deferred compensationin the amount of $1.5 million, equal to the market value of the restrictedshares of FTD.COM at the date of grant. During fiscal year 2002, 83,333 sharesof unvested restricted stock that were previously granted were canceled.  The FTD.COM restricted shares have beenconverted to the FTD, Inc. restricted shares pursuant to the 2002 Merger.  The Company recognized compensation expensein general and administrative expenses of $0.5 million, $0.5 million and$26,000 in fiscal years 2002, 2001 and 2000, respectively, related to thesegrants of restricted stock.

FTD.COM granted 1,355,000restricted shares of its Class A common stock at a weighted-average fair valueof $2.87 at the dates of grant in fiscal year 2000 to key members of FTD.COM’smanagement.  No other FTD.COM restrictedshares have been granted. The restricted stock vests equally each year over athree-year period from the date of grant. During fiscal years 2002 and 2001, 116,667 and 35,000 shares,respectively, of unvested restricted stock that were previously granted werecanceled.  The FTD.COM restricted shareshave been converted to FTD, Inc. restricted shares pursuant to the 2002 Merger.FTD.COM recognized compensation expense in general and administrative expensesof $1.4, $1.3 million and $0.2 million in fiscal years 2002, 2001 and 2000,respectively, related to the grants of restricted stock.

**(15)FTD.COM Stock Options**

Outstanding nonqualifiedFTD.COM stock options are exercisable during a ten-year period beginning one tofour years after the date of grant.  AllFTD.COM options were granted with an exercise price equal to either the fairmarket value on (a) the date of grant or (b) the optionee’s first date ofemployment with FTD.COM.  Changes inoptions outstanding are summarized as follows:

 
|                          |   | **Summary of  Stock Option Activity** |       |
|-------------------------------|--------|---------------------------------------|------------|
|                          |   | **Options**                           |       | **Range  of  Exercise Prices** |   | **Weighted  Average  Exercise Price** |   |
| **Balance, June 30, 1999**    |   | **—**                            | ** ** |   | **—** | ** ** | **—** | ** ** |
| **Granted**                   |   | **2,499,300**                         | ** ** | **$2.88 -** | ** $16.00** | ** ** | **$** | **10.04** | ** ** |
| **Exercised**                 |   | **—**                            | ** ** |   | **—** | ** ** | **—** | ** ** |
| **Recaptured or terminated**  |   | **(2,351,300**                        | **)**      | **$4.72 -** | ** $16.00** | ** ** | **$** | **10.34** | ** ** |
| **Balance, June 30, 2000**    |   | **148,000**                           | ** ** | **$2.88 -** | ** $8.00** | ** ** | **$** | **5.20** | ** ** |
| **Granted**                   |   | **185,000**                           | ** ** | **$1.94 -** | ** $5.74** | ** ** | **$** | **2.05** | ** ** |
| **Exercised**                 |   | **—**                            | ** ** |   | **—** | ** ** | **—** | ** ** |
| **Recaptured or terminated**  |   | **(48,000**                           | **)**      | **$2.88 -** | ** $7.75** | ** ** | **$** | **4.17** | ** ** |
| **Balance, June 30, 2001**    |   | **285,000**                           | ** ** | **$1.94 -** | ** $8.00** | ** ** | **$** | **3.46** | ** ** |
| **Granted**                   |   | **—**                            | ** ** |   | **—** | ** ** | **—** | ** ** |
| **Exercised**                 |   | **—**                            | ** ** |   | **—** | ** ** | **—** | ** ** |
| **Recaptured or terminated**  |   | **(65,000**                           | **)**      | **$2.69 -** | ** $8.00** | ** ** | **$** | **4.78** | ** ** |
| **Shares transferred to FTD** |   | **(220,000**                          | **)**      | **$1.94 -** | ** $8.00** | ** ** | **$** | **3.33** | ** ** |
| **Balance, June 30, 2002**    |   | **—**                            | ** ** |   | **—** | ** ** | **—** | ** ** |

** **

** **

**F-23**

----

** **

** **

Pursuant to the 2002 Merger,each stockholder of FTD.COM, other than the Company or its other direct orindirect wholly-owned subsidiaries, received 0.26 shares of Class A CommonStock for each share of FTD.COM common stock owned at the time of the 2002Merger.  Additionally, all outstandingoptions to purchase shares of FTD.COM common stock were converted into optionsto purchase shares of Class A Common Stock in accordance with the same exchangeratio and continue to be subject to the same restrictions and vesting scheduleas existed prior to the 2002 Merger.

**(16)Commitments and Contingencies**

The Company, FTD, FTD.COMand the directors of the Company have been named as defendants in five classaction lawsuits filed in the Court of Chancery for New Castle County inWilmington, Delaware by individual stockholders of FTD.COM on behalf of allformer public stockholders of FTD.COM:  *FrancesHowland v. FTD.COM et al.*, Civil Action No. 19458 NC; *JohnathonAnderson v. Richard Perry et al.*, Civil Action No. 19459 NC; *StephenGluck v. Richard C. Perry,* Civil Action No. 19461 NC; *Geoff Mottv. IOS Brands Corp.*, Civil Action No. 19468 NC; and *HighwoodPartners, L.P. v. IOS Brands Corp.*, Civil Action No. 19556 NC.  These lawsuits were filed beginning on March5, 2002, after the press release announcing the merger was issued.  The complaints generally make essentiallythe same allegations, namely that:

•                  the offer by the Company to exchange 0.26 shares ofClass A Common Stock for each share of FTD.COM common stock is inadequate,

•                  the individual defendants breached the fiduciaryduties they owed in their capacity as directors by, among other things, failingto conduct an auction or otherwise check the market value of FTD.COM beforevoting to accept the merger proposal,

•                  The Company and its board of directors prevented theFTD.COM board of directors from conducting a meaningful review of thetransaction, and

•                  The Company, FTD.COM and certain individual defendantstimed the merger to deny public stockholders the full potential increase inFTD.COM’s stock price following the 2002 Merger.

The lawsuits seek, amongother things, to recover unspecified damages and costs and to enjoin or rescindthe 2002 Merger.  The Company and theother defendants intend to defend themselves vigorously against them.

In addition, the Companyis involved in various lawsuits and other matters arising in the normal courseof business. In the opinion of the management of the Company, although theoutcomes of these claims and suits are uncertain, they should not have a materialadverse effect on the Company’s financial condition, liquidity or results ofoperations.

**(17)Capital Stock Transactions**

The Class A Common Stockand Class B Convertible Common Stock rank equally and, except with respect tovoting power, are substantially identical in all material respects. Class BConvertible Common Stock is convertible into Class A Common Stock on aone-for-one basis at the option of the holder. The Company is authorized toestablish and designate one or more series of preferred stock.

The Company repurchasedinto treasury 231,568, 12,550 and 7,882 shares of Class A Common Stock at anapproximate cost of $2,802,000, $201,000 and $85,000 during fiscal years 2002,2001 and 2000, respectively.  Of the$2,802,000 treasury stock repurchased during 2002, approximately $1,950,000 waspayable as of June 30, 2002.

A financial advisorreceived warrants for 750,000 shares of Class B Convertible Common Stock inpartial payment for its services related to the original acquisition of the OldAssociation. Subsequently, the warrants and cash representing the exerciseprice of the warrants were exchanged for 750,000 shares of Class B ConvertibleCommon Stock. The Company disputed the financial advisor’s claim forcompensation and filed suit for breach of fiduciary duty and other claims. OnJuly 26, 2000, the Company settled the lawsuit whereby the financial advisorreturned the 750,000 shares of Class B Convertible Common Stock. As a result ofthis settlement the Company recorded $12.0 million of treasury stock and anincrease to additional paid-in capital of $11.6 million (net of $0.4 million ofincome taxes) based on an independent third party valuation to determine thefair market value of the stock received in the settlement.

Effective June 28, 2002,the Company, FTD and FTD.COM completed the 2002 Merger.  Pursuant to the 2002 Merger, eachstockholder of FTD.COM, other than the Company or its other direct or indirectwholly-owned subsidiaries, received 0.26 shares of Class A Common Stock foreach share of FTD.COM common stock owned at the time of the 2002 Merger.  Additionally, all outstanding options topurchase shares of FTD.COM common stock were converted into options to purchaseshares of Class A 

 

F-24

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Common Stock andall restricted shares of FTD.COM common stock were converted into restrictedshares of Class A Common Stock in accordance with the same exchange ratio andcontinue to be subject to the same restrictions and vesting schedule as existedprior to the 2002 Merger.

**(18)Subsidiary Capital Stock Transactions**

On May 19, 1999, theOperating Company incorporated a new subsidiary, FTD.COM, as a Delawarecorporation in connection with the filing of a registration statement andamendments thereto with the Securities and Exchange Commission covering thesale of shares of FTD.COM Class A common stock to the public.  FTD.COM was capitalized through theauthorization of 250,000,000 shares of Class A common stock and 100,000,000shares of Class B convertible common stock and the issuance of 40,920,000shares of Class B convertible common stock, retroactively adjusted by a12-for-1 stock split to the Operating Company. In consideration for the receipt of 40,920,000 shares of Class Bconvertible common stock, the Operating Company contributed to FTD.COM theassets and liabilities relating to the consumer floral order and specialty giftproduct business. In addition, in connection with the incorporation of FTD.COM,5,000,000 shares of preferred stock were authorized**.**

On May 19, 1999, FTD.COMdesignated 90,000 shares of its preferred stock as Series A 8% cumulativeredeemable convertible preferred stock (“Series A preferred stock”).  On May 20, 1999, 30,000 shares of the SeriesA preferred stock were issued and sold to an investor for consideration of $3.0million.  On May 25, 1999, 60,000 sharesof the Series A preferred stock were issued and sold to an investor forconsideration of $6.0 million.

These shares of Series Apreferred stock had a liquidation preference of $100 per share and accrueddividends at an annual rate of 8% of the liquidation preference.  Accrued dividends were payable at thediscretion of the Board of Directors of FTD.COM and were mandatorily payable uponliquidation or redemption.

On September 28, 1999,FTD.COM agreed to issue and sell 4,500,000 shares of its Class A common stockto the public in an initial public offering (“IPO”) transaction at a price of$8.00 per share, resulting in gross proceeds from the offering of $36.0million. The IPO closed on October 4, 1999, at which time FTD.COM collected thegross proceeds of $36.0 million less underwriting discounts of $2.5 million. Inaddition, the $33.5 million net cash received from the underwriters was reducedby other offering expenses of $2.0 million. The net proceeds of $31.5 millionwere recorded as paid-in capital.  Priorto the IPO, FTD owned 100% of the outstanding common stock of FTD.COM. Therewas no gain recorded by the Company upon the sale of FTD.COM’s stock. TheCompany’s accounting policy is to account for a subsidiary direct sale ofunissued shares as a capital transaction.

Upon the closing of theIPO, the 90,000 shares of FTD.COM’s Series A preferred stock were automaticallyconverted into 1,384,614 shares of FTD.COM Class A common stock.  Upon conversion, the Company reclassifiedthe preferred stockholders’ equity in a subsidiary of $9.0 million to paid-incapital and the accrued dividends of $74,301 were offset against the retainedearnings of FTD.COM.

On October 6, 1999, the underwritersof the IPO exercised their one-time option to purchase 495,000 additionalshares 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 underwritersin connection with the IPO. The net proceeds to FTD.COM from this issuance andsale of 495,000 shares of Class A common stock were $3.7 million, afterdeducting underwriting discounts and commissions, and were recorded as paid-incapital.

During May 2000, FTD.COMgranted 1,355,000 shares of FTD.COM Class A common stock to employees ofFTD.COM in the form of restricted shares. During June 2000, the Company granted 525,000 shares of FTD.COM Class Bconvertible common stock to employees of the Company in the form of restrictedshares.  There were no restricted sharesgranted by FTD.COM or the Company in fiscal year 2001.  Upon completion of the above events, FTDowned approximately 87% of the outstanding common stock of FTD.COM through itsownership of 40,395,000 shares of Class B convertible common stock.

During fiscal year 2002,FTD.COM repurchased into treasury 143,583 shares of FTD.COM Class A commonstock at a cost of $853,000 of which 85%, representing the Company’s ownershipin FTD.COM at the date of each repurchase, is reflected in the Company’sConsolidated Statements of Stockholders’ Equity.

Pursuant to the 2002Merger, FTD.COM became an indirect wholly-owned subsidiary of the Company andthe former public stockholders of FTD.COM became stockholders of the Company.  As such, all outstanding shares of FTD.COMare held by FTD as of June 30, 2002.

 

F-25

----

 

**(19)Minority Interest in Subsidiary**

As a result of the 2002Merger, the Company’s minority interest in FTD.COM was eliminated.  For the year ended June 30, 2001, theConsolidated Balance Sheet reflected the cumulative results of the minorityinterest in FTD.COM.  At the date of the2002 Merger and at June 30, 2001, the minority interest in FTD.COM wasapproximately 15%.  The minorityinterest in FTD.COM’s income was $2.5 million for fiscal year 2002, through thedate of the 2002 Merger, and $1.9 million for fiscal year 2001.  The minority interest in FTD.COM’s loss was$4.4 million for fiscal year 2000.

**(20)Litigation Settlements**

A financial advisorreceived warrants for 750,000 shares of Class B Convertible Common Stock inpartial payment for its services related to the original acquisition of the OldAssociation. Subsequently, the warrants and cash representing the exerciseprice of the warrants were exchanged for 750,000 shares of Class B ConvertibleCommon Stock. The Company disputed the financial advisor’s claim forcompensation and filed suit for breach of fiduciary duty and other claims. OnJuly 26, 2000, the Company settled the lawsuit whereby the financial advisorreturned the 750,000 shares of Class B Convertible Common Stock. As a result ofthis settlement, the Company recorded $12.0 million of treasury stock and anincrease to paid-in capital of $11.6 million (net of $0.4 million of incometaxes) based on an independent third party valuation to determine the fairmarket value of the stock received in the settlement.

The Company recorded a$2.6 million gain in fiscal year 2002 for the settlement of a claim against thedeveloper of an unlaunched version of FTD.COM’s Web site, which includes thereversal of $0.8 million in accruals related to the gain. The gain was recordedin general and administrative expenses.

**(21)FTD Association Agreements**

Pursuant the 1994 MergerAgreement, the Company acquired all of the outstanding equity of the OldAssociation on December 19, 1994.  TheOperating Company was the surviving corporation following the Acquisition andupon consummation of the Acquisition, the Operating Company became awholly-owned subsidiary of the Company. Immediately following the Acquisition,the Old Association was converted from a non-profit corporation to a for-profitcorporation and renamed “Florists’ Transworld Delivery, Inc.”  The Company, through the Operating Company,operates all of the businesses conducted by the Old Association prior to theAcquisition except for certain trade association activities which were beingconducted by FTD Association, an Ohio non-profit corporation organized inconnection with the Acquisition and structured as a member-owned tradeassociation (the “Association”). Neither the Company nor the Operating Companyhad any ownership interest in the Association.

In connection with theAcquisition, the Association and FTD entered into a Mutual Support Agreement,dated December 18, 1994 (the “Mutual Support Agreement”), and a TrademarkLicense Agreement, dated December 18, 1994 (the “Trademark Agreement” andtogether with the Mutual Support Agreement, the “Association Agreements”). TheAssociation Agreements, among other things, provided for: (i) existing andfuture members of the Association to have the exclusive right, subject toexecution of a Trademark Agreement with the Operating Company, to use the FTDlogo and other FTD trademarks in connection with the operation of a retailflorist shop; (ii) all members of the Association in good standing to beprovided access to FTD’s Clearinghouse, Mercury Network and certain other FTDservices and products; (iii) the Operating Company to pay the Association anamount equal to a percentage of the value of every floral order cleared throughFTD’s Clearinghouse; and (iv) the Operating Company and the Association were tobe able to designate up to 20% but not fewer than two individuals to be electedto the other’s board of directors.

On April 30, 2001, FTDentered into a Termination Agreement with the Association, which becameeffective as of June 29, 2001 (the “Termination Agreement”). The TerminationAgreement, which contains limited two-year non-compete provisions, terminatesthe Association Agreements.  Asconsideration for the dissolution of the contractual relationship between theCompany and the Association pursuant to the Termination Agreement, FTD agreedto pay the Association $14.0 million, $12.6 million which was paid on June 29,2001 and $1.4 million which was paid July 1, 2002.  The funds used to pay the $1.4 million on July 1, 2002 wereplaced in escrow, and as such are reflected as restricted cash on theConsolidated Balance Sheets as of June 30, 2002 and 2001.  In fiscal 2001, the Company recorded $14.5million of expenses related to this transaction, including professional fees,reflected as other expense.

**(22)Segment Information**

In February 1998, SFASNo. 131,*Disclosures about Segments of an Enterprise and Related Information,*was issued.  SFAS No. 131 establishesstandards for the way that public business enterprises report information aboutoperating segments in annual financial statements.

 

F-26

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Following the 2002 Mergerand the resulting changes in the Company’s corporate structure, the Company hasreorganized the manner in which its resources are allocated and, as a result,now reviews results based on the consumer business and florist businesssegments. The discrete operating results for both the consumer business andflorist business segments are regularly reviewed by the enterprise’s chiefoperating decision maker to make decisions about resources to be allocated toeach segment and to assess its performance. Composition of the Company’sreportable segments for fiscal years 2001 and 2000 has been reclassified toconform to the current year presentation.

For purposes of managingthe Company, management reviews segment financial performance to the operatingincome level for each of its reportable business segments.  As such, interest income, interest expenseand tax expense is recorded on a consolidated corporate basis.

The florist businesssegment includes all products and services sold to FTD member florists,encompassing clearinghouse services, publishing products and services,technology sales and leases and specialty wholesale product sales. The consumerbusiness segment encompasses floral and specialty gift sales sold to consumersthrough FTD.COM’s Web site, www.ftd.com, or its toll-free telephonenumber, 1-800-SEND-FTD.

Of the Company’s assetstotaling approximately $231.5 million at June 30, 2002, the assets of theCompany’s consumer business totaled $42.0 million, of which $32.8 million wascash and cash equivalents.  The assetsof the Company’s florist business segment and corporate headquarters constitutethe remaining assets of $189.5 million.

The Company’s accountingpolicies for segments are the same as those on a consolidated basis asdescribed in Note 1 of Notes to Consolidated Financial Statements. TheOperating Company and FTD.COM had entered into certain intercompany agreementsgoverning various interim and ongoing relationships, including a commissionagreement, an indemnification agreement, a trademark license agreement, aregistration rights agreement, a tax sharing agreement, an intercompanyservices agreement and a Florists’ Online hosting agreement. Upon consummationof the 2002 Merger, the intercompany services, the intercompanyindemnification, and the FTD registration rights agreements were terminated.

The following tablereports the Company’s operating results by reportable business segment forfiscal years 2002, 2001 and 2000:

 

F-27

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|                                                       |   | **2002**          |    | **2001**  |   | **2000**          |   |
|------------------------------------------------------------|--------|-------------------|---------|-----------|--------|-------------------|--------|
|                                                       |   | **Gross Segment** |    | **Elims** |   | **Con-solidated** |   | **Gross Segment** |   | **Elims** |   | **Con-solidated** |   | **Gross Segment** |   | **Elims** |   | **Con-solidated** |   |
| **Revenues:**                                              |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist  business                                          |   | $                 | 171,308 |      | $      | (111              | )      | $ | 171,197 |   | $ | 188,526 |   | $ | (48 | ) | $ | 188,478 |   | $ | 177,694 |   | $ | (446 | ) | $ | 177,248 |   |
| Consumer  business                                         |   | 168,653           |    | (14,584   | )      | 154,069           |   | 130,294 |   | (12,777 | ) | 117,517 |   | 98,205 |   | (10,619 | ) | 87,586 |   |
| Total                                                      |   | 339,961           |    | (14,695   | )      | 325,266           |   | 318,820 |   | (12,825 | ) | 305,995 |   | 275,899 |   | (11,065 | ) | 264,834 |   |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Costs  of Goods Sold and Services Provided:**            |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist  business                                          |   | 58,463            |    | (1,891    | )      | 56,572            |   | 68,045 |   | (2,097 | ) | 65,948 |   | 65,765 |   | (2,267 | ) | 63,498 |   |
| Consumer  business                                         |   | 120,202           |    | (2,022    | )      | 118,180           |   | 93,476 |   | (1,787 | ) | 91,689 |   | 70,905 |   | (1,553 | ) | 69,352 |   |
| Corporate                                                  |   | 2,576             |    | —    |   | 2,576             |   | 2,242 |   | — |   | 2,242 |   | 2,219 |   | — |   | 2,219 |   |
| Total                                                      |   | 181,241           |    | (3,913    | )      | 177,328           |   | 163,763 |   | (3,884 | ) | 159,879 |   | 138,889 |   | (3,820 | ) | 135,069 |   |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross  Margin:**                                         |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist  business                                          |   | 112,845           |    | 1,780     |   | 114,625           |   | 120,481 |   | 2,049 |   | 122,530 |   | 111,929 |   | 1,821 |   | 113,750 |   |
| Consumer  business                                         |   | 48,451            |    | (12,562   | )      | 35,889            |   | 36,818 |   | (10,990 | ) | 25,828 |   | 27,300 |   | (9,066 | ) | 18,234 |   |
| Corporate                                                  |   | (2,576            | )       | —    |   | (2,576            | )      | (2,242 | ) | — |   | (2,242 | ) | (2,219 | ) | — |   | (2,219 | ) |
| Total                                                      |   | 158,720           |    | (10,782   | )      | 147,938           |   | 155,057 |   | (8,941 | ) | 146,116 |   | 137,010 |   | (7,245 | ) | 129,765 |   |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                    |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist business                                           |   | 76,758            |    | (10,694   | )      | 66,064            |   | 79,220 |   | (8,941 | ) | 70,279 |   | 75,301 |   | (7,245 | ) | 68,056 |   |
| Consumer  business                                         |   | 29,021            |    | (1,677    | )      | 27,344            |   | 27,048 |   | (1,217 | ) | 25,831 |   | 60,707 |   | (893 | ) | 59,814 |   |
| Corporate                                                  |   | 32,283            |    | 1,589     |   | 33,872            |   | 23,499 |   | 1,217 |   | 24,716 |   | 24,108 |   | 893 |   | 25,001 |   |
| Total                                                      |   | 138,062           |    | (10,782   | )      | 127,280           |   | 129,767 |   | (8,941 | ) | 120,826 |   | 160,116 |   | (7,245 | ) | 152,871 |   |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Income (Loss) before  Corporate Allocations:** |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist business                                           |   | 36,087            |    | 12,474    |   | 48,561            |   | 41,261 |   | 10,990 |   | 52,251 |   | 36,628 |   | 9,066 |   | 45,694 |   |
| Consumer  business                                         |   | 19,430            |    | (10,885   | )      | 8,545             |   | 9,770 |   | (9,773 | ) | (3 | ) | (33,407 | ) | (8,173 | ) | (41,580 | ) |
| Corporate                                                  |   | (34,859           | )       | (1,589    | )      | (36,448           | )      | (25,741 | ) | (1,217 | ) | (26,958 | ) | (26,327 | ) | (893 | ) | (27,220 | ) |
| Total                                                      |   | 20,658            |    | —    |   | 20,658            |   | 25,290 |   | — |   | 25,290 |   | (23,106 | ) | — |   | (23,106 | ) |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Corporate Allocations:**                                 |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist business                                           |   | 11,881            |    | —    |   | 11,881            |   | 10,653 |   | — |   | 10,653 |   | 11,522 |   | — |   | 11,522 |   |
| Consumer  business                                         |   | 3,003             |    | —    |   | 3,003             |   | 2,514 |   | — |   | 2,514 |   | 2,805 |   | — |   | 2,805 |   |
| Corporate                                                  |   | (14,884           | )       | —    |   | (14,884           | )      | (13,167 | ) | — |   | (13,167 | ) | (14,327 | ) | — |   | (14,327 | ) |
| Total                                                      |   | —            |    | —    |   | —            |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Income (Loss):**                               |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist business                                           |   | 24,206            |    | 12,474    |   | 36,680            |   | 30,608 |   | 10,990 |   | 41,598 |   | 25,106 |   | 9,066 |   | 34,172 |   |
| Consumer  business                                         |   | 16,427            |    | (10,885   | )      | 5,542             |   | 7,256 |   | (9,773 | ) | (2,517 | ) | (36,212 | ) | (8,173 | ) | (44,385 | ) |
| Corporate                                                  |   | (19,975           | )       | (1,589    | )      | (21,564           | )      | (12,574 | ) | (1,217 | ) | (13,791 | ) | (12,000 | ) | (893 | ) | (12,893 | ) |
| Total                                                      |   | 20,658            |    | —    |   | 20,658            |   | 25,290 |   | — |   | (25,290 | ) | (23,106 | ) | — |   | (23,106 | ) |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Depreciation and Amortization:**                         |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Florist business                                           |   | 3,042             |    | —    |   | 3,042             |   | 3,054 |   | — |   | 3,054 |   | 2,842 |   | — |   | 2,842 |   |
| Consumer  business                                         |   | 182               |    | —    |   | 182               |   | 404 |   | — |   | 404 |   | 199 |   | — |   | 199 |   |
| Corporate                                                  |   | 6,197             |    | —    |   | 6,197             |   | 6,029 |   | — |   | 6,029 |   | 5,587 |   | — |   | 5,587 |   |
| Total                                                      |   | 9,421             |    | —    |   | 9,421             |   | 9,487 |   | — |   | 9,487 |   | 8,628 |   | — |   | 8,628 |   |
|                                                       |   |              |    |      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |        |                   |         |           |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-28

----

 

 

**IndependentAuditors’ Report on Financial Statement Schedule**

The Board ofDirectors and StockholdersFTD, Inc.:

 

Under date of July 29,2002, we reported on the consolidated balance sheets of FTD, Inc. andsubsidiaries at June 30, 2002 and 2001, and the related consolidated statementsof operations and comprehensive income, stockholders’ equity, and cash flowsfor each of the years in the three-year period ended June 30, 2002. Inconnection with our audits of the aforementioned consolidated financialstatements, we also audited the related consolidated financial statementschedule of valuation and qualifying accounts. This consolidated financial statementschedule is the responsibility of the Company’s management. Our responsibilityis to express an opinion on this consolidated financial statement schedulebased on our audits.

In our opinion, suchconsolidated financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, inall material respects, the information set forth therein.

/s/ KPMG LLP

 

Chicago, IllinoisJuly 29, 2002

 

F-29

----

 

**FTD, INC.**

**SCHEDULE II —VALUATION AND QUALIFYING ACCOUNTS**

** **
|                                                                                                              |   | **Balance  beginning of  period** |       | **Charged to  cost and  expenses** |       | **Uncollectible  accounts and  inventory write offs,  net of collection of  accounts previously  written off** |       | **Balance at  end of Period** |       |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
|                                                                                                              |   | **(in  thousands)**               |       |
| **Year 2002**                                                                                                     |   |                              | ** ** |                               | ** ** |                                                                                                           | ** ** |                          | ** ** |
| Allowance for  doubtful accounts (shown as deduction from Accounts Receivable in the  consolidated balance sheet) |   | $                                 | 4,984      |                               | $          | 4,048                                                                                                          |       | $                             | 2,939      |   | $ | 6,093 |   |
|                                                                                                              |   |                              |       |                               |       |                                                                                                           |       |                          |       |
| Inventory  valuation reserve (included in Inventories, net in the consolidated balance  sheet)                    |   | $                                 | 1,021      |                               | $          | 140                                                                                                            |       | $                             | 813        |   | $ | 348 |   |
|                                                                                                              |   |                              |       |                               |       |                                                                                                           |       |                          |       |
| **Year 2001**                                                                                                     |   |                              | ** ** |                               | ** ** |                                                                                                           | ** ** |                          | ** ** |
| Allowance for  doubtful accounts (shown as deduction from Accounts Receivable in the  consolidated balance sheet) |   | $                                 | 3,596      |                               | $          | 3,134                                                                                                          |       | $                             | 1,746      |   | $ | 4,984 |   |
|                                                                                                              |   |                              |       |                               |       |                                                                                                           |       |                          |       |
| Inventory  valuation reserve (included in Inventories, net in the consolidated balance  sheet)                    |   | $                                 | 1,017      |                               | $          | 513                                                                                                            |       | $                             | 509        |   | $ | 1,021 |   |
|                                                                                                              |   |                              |       |                               |       |                                                                                                           |       |                          |       |
| **Year 2000**                                                                                                     |   |                              |       |                               |       |                                                                                                           |       |                          |       |
| Allowance for  doubtful accounts (shown as deduction from Accounts Receivable in the  consolidated balance sheet) |   | $                                 | 1,681      |                               | $          | 1,931                                                                                                          |       | $                             | 16         |   | $ | 3,596 |   |
|                                                                                                              |   |                              |       |                               |       |                                                                                                           |       |                          |       |
| Inventory  valuation reserve (included in Inventories, net in the consolidated balance  sheet)                    |   | $                                 | 1,188      |                               | $          | —                                                                                                         |       | $                             | 171        |   | $ | 1,017 |   |

 

 

 

F-30

----

 

 

 

**INDEX TO EXHIBITS**

 
| **Exhibit Number** |   | **Description  of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **2.1**            |   | **Agreement  and Plan of Merger, dated as of March 3, 2002, among IOS Brands Corporation  (“IOS”), Florists Transworld Delivery, Inc. (“FTDI”), Aroma Acquisition Corp.  and FTD.COM INC. (“FTD.COM”) (incorporated by reference to Exhibit 2.1 to  IOS’ Current Report on Form 8-K filed on March 5, 2002).**                                                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                |   | Restated Certificate of Incorporation of FTD, Inc.  (incorporated by reference to Annex D to IOS’ Registration Statement on Form  S-4, as amended (File No. 333-84734) (the “2002 FTD S-4”)).                                                                                                                                                                                                                                                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2                |   | Amended and Restated By-laws of FTD, Inc.  (incorporated by reference to Annex E to the 2002 FTD S-4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1                |   | Form of Subscription Agreement among FTD Corporation  and Participating Members (incorporated by reference to Exhibit 4.4 to FTD  Corporation’s Registration Statement on Form S-1, as amended (File No.  333-37303) (the “1997 FTD S-1”)).                                                                                                                                                                                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2                |   | Stockholders Support Agreement, dated as of March 3,  2002, by and among FTD.COM, Perry Acquisition Partners, L.P., Perry Partners,  L.P., Perry Partners International, Inc., Perry Principals Holdings, LLC,  Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., Information  Partners Capital Fund, L.P., BCIP Associates, BCIP Trust Associates, L.P.,  Chisholm Partners II L.P., Fleet Equity Partners VII, L.P., Fleet Growth  Resources III, Inc. and Randolph Street Partners (incorporated by reference  to Exhibit 10.1 of IOS’ Current Report on Form 8-K filed on March 5, 2002). |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3                |   | Form of Registration Agreement by and among FTD,  Inc., Perry Acquisition Partners, L.P., Perry Partners, L.P., Perry Partners  International, Inc., Perry Principals Holdings, LLC, Bain Capital Fund IV,  L.P., Bain Capital Fund IV-B, L.P., Information Partners Capital Fund, L.P.,  BCIP Associates, BCIP Trust Associates, L.P., Chisholm Partners II L.P.,  Fleet Equity Partners VII, L.P., Fleet Growth Resources III, Inc. and  Randolph Street Partners (incorporated by reference to Exhibit 10.2 of IOS’  Current Report on Form 8-K filed on March 5, 2002).                           |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4                |   | Form of Governance Agreement by and among FTD, Inc.,  Perry Acquisition Partners, L.P., Perry Partners, L.P., Perry Partners  International, Inc., Perry Principals Holdings, LLC, Bain Capital Fund IV,  L.P., Bain Capital Fund IV-B, L.P., Information Partners Capital Fund, L.P.,  BCIP Associates and BCIP Trust Associates, L.P., Randolph Street Partners,  Chisholm Partners II L.P., Fleet Equity Partners VII, L.P., and Fleet Growth  Resources III, Inc. (incorporated by reference to Exhibit 10.3 to IOS’  Current Report on Form 8-K filed on March 5, 2002).                         |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1               |   | Credit Agreement, dated as of November 20, 1997 (the  “1997 Credit Agreement”) among FTD Corporation, FTDI, the various lending  institutions party thereto (the “Lenders”) and The First National Bank of  Chicago, as Agent (the “Agent”) (incorporated by reference to Exhibit 10.1 to  the 1997 FTD S-1).                                                                                                                                                                                                                                                                |

 

----

 
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2   |   | Amendment No. 1 to 1997 Credit Agreement, dated as  of December 19, 1997, among FTD Corporation, FTDI, the Lenders and the Agent  (incorporated by reference to Exhibit 10.2 to FTD Corporation’s Annual Report  on Form 10-K for the fiscal year ended June 30, 1999 (the “1999 Form 10-K”)).                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Amendment No. 2 to 1997 Credit Agreement, dated as  of May 24, 1999, among FTD Corporation, FTDI, the Lenders and the Agent  (incorporated by reference to Exhibit 10.3 to the 1999 Form 10-K).                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Amendment No. 3 to 1997 Credit Agreement, dated as  of July 7, 2000, among FTD Corporation, FTDI, the Lenders and Bank One, N.A.  (as successor to the First National Bank of Chicago), as Agent (incorporated  by reference to Exhibit 10.20 to FTD Corporation’s Quarterly Report on Form  10-Q for the quarter ended December 31, 2000 (the “December 31, 2000 10-Q”).                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5   |   | Amendment No. 4, Waiver, Consent and Release to 1997  Credit Agreement, dated as of December 21, 2000, among FTD Corporation, FTDI,  the Lenders and the Agent (incorporated by reference to Exhibit 10.21 to the  December 31, 2000 10-Q).                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Credit Agreement, dated as of September 27, 2001  (the “2001 Credit Agreement”), by and among FTDI, IOS and each of the  Subsidiaries from time to time becoming a party to the Agreement, as  Guarantors, the several financial institutions from time to time party to the  Agreement, as Lenders, and Harris Trust and Savings Bank, as Administrative  Agent (incorporated by reference to Exhibit 10.34 to IOS’ Quarterly Report on  Form 10-Q for the quarter ended September 30, 2001 (the “September 30, 2001  10-Q”)). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | First Amendment and Waiver to the 2001 Credit  Agreement, dated as of March 12, 2002, by and among IOS, FTDI, the  subsidiaries listed on the signature pages thereof, as Guarantors, the  several financial institutions listed on the signature pages thereof, as Lenders,  and Harris Trust and Savings Bank, as Administrative Agent for the Lenders  (incorporated by reference to Exhibit 10.34 of the 2002 FTD S-4).                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8+  |   | Waiver to the 2001 Credit Agreement, dated as of  August 15, 2002, by and among FTD, Inc., FTDI, the subsidiaries listed on the  signature pages thereof, as Guarantors, the several financial institutions  listed on the signature pages thereof, as Lenders, and Harris Trust and  Savings Bank, as Administrative Agent for the Lenders.                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Pledge Agreement, dated May 24, 1999, by and among  FTD Corporation, FTDI and the Agent (incorporated by reference to Exhibit  10.4 to the 1999 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | Security Agreement, dated November 20, 1997, by and  among FTD Corporation, FTDI and the Agent (incorporated by reference to  Exhibit 10.3 of the 1997 FTD S-1).                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11  |   | Mortgage and Security Agreement with Assignment of  Rents dated as of September 27, 2001 from FTDI to Harris Trust and Savings  Bank, as administrative agent (incorporated by reference to Exhibit 10.35 to  the September 30, 2001 10-Q).                                                                                                                                                                                                                                                                                                              |

 

----

 
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12   |   | Pledge Agreement dated as of September 27, 2001, by  and among IOS, FTDI, and the other parties executing the Agreement under the  heading “Pledgors” and Harris Trust and Savings Bank, acting as administrative  agent (incorporated by reference to Exhibit 10.36 to the September 30, 2001  10-Q).                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.13   |   | Security Agreement dated as of September 27, 2001,  by and among IOS, FTDI, and the other parties executing this Agreement under  the heading “Debtors” and Harris Trust and Savings Bank, acting as  administrative agent (incorporated by reference to Exhibit 10.37 to the  September 30, 2001 10-Q).                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.14   |   | Securityholders’ and Registration Rights Agreement,  dated as of December 19, 1994, among FTD Corporation, FTDI, BT Securities  Corporation and Montgomery Securities (incorporated by reference to Exhibit  10.11 of FTD Corporation’s Registration Statement on Form S-1, as amended  (File No. 033-91582) (the “1995 FTD S-1”)). |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.15   |   | Tax Sharing Agreement, dated as of December 19,  1994, between FTD Corporation and FTDI (incorporated by reference to Exhibit  10.12 of the 1995 FTD S-1).                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.16   |   | First Amendment to Tax Sharing Agreement, dated as  of May 19, 1999 among FTD Corporation, FTDI and FTD.COM (incorporated by  reference to Exhibit 10.6 to FTD.COM’s Registration Statement on Form S-1, as  amended (the “FTD.COM S-1”)).                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.17   |   | Stockholders’ Agreement, dated as of December 19,  1994, among FTD Corporation and certain stockholders of FTD Corporation (incorporated  by reference to Exhibit 10.13 to the 1995 FTD S-1).                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.18*  |   | FTD Corporation Stock Award and Incentive Plan  (incorporated by reference to Exhibit 10.14 to the 1995 FTD S-1).                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.19*  |   | FTD, Inc. 2002 Long-Term Equity Incentive Plan  (incorporated by reference to Annex F to the 2002 FTD S-4).                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.20*  |   | Letter dated April 12, 2001 regarding Robert L.  Norton employment arrangements (incorporated by reference to Exhibit 10.27 to  the IOS Form 10-K for the fiscal year ended June 30, 2001 (the “IOS 2001  10-K”)).                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.21*  |   | Letter dated June 14, 2001 regarding Michael J.  Soenen employment arrangements (incorporated by reference to Exhibit 10.11 to  the FTD.COM Form 10-K for the fiscal year ended June 30, 2001 (the “FTD.COM  2001 10-K”)).                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.22*+ |   | Letter dated June 28, 2002 regarding Carrie A. Wolfe  employment arrangements.                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.23*+ |   | Letter dated June 28, 2002 regarding William J. Van  Cleave employment arrangements.                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.24*+ |   | Letter dated June 28, 2002 regarding Ann M.  Hofferberth employment arrangements.                                                                                                                                                                                                                                                                       |

 

----

 
| 10.25*+ |   | Letter dated June 28, 2002 regarding Michael J.  Soenen employment arrangements.                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.26*  |   | Restricted Shares Agreement, dated as of June 12,  2000, between FTDI and Robert L. Norton (incorporated by reference to Exhibit  10.17 to IOS’ Annual Report on Form 10-K for the fiscal year ended June 30,  2000 (the “2000 Form 10-K”)).                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.27   |   | Termination Agreement, dated as of April 30, 2001,  among FTDI and FTD Association (incorporated by reference to Exhibit 10.25 to  IOS’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (the  “March 31, 2001 10-Q”)).                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.28*  |   | Secured Promissory Note between FTDI and Timothy R.  Rasmussen dated as of June 12, 2001 (incorporated by reference to Exhibit  10.25 to the IOS 2001 10-K).                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.29*  |   | Form of Secured Promissory Note, dated as of May 17,  2001, between FTD.COM and each of Michael Soenen, Frederick Johnson, Bill Van  Cleave and Carrie Wolfe (incorporated by reference to Exhibit 10.26 to the  FTD.COM 2001 10-K).                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.30*  |   | Secured Promissory Note between FTD.COM and Carrie  Wolfe, dated as of June 11, 2001 (incorporated by reference to Exhibit 10.27  to the FTD.COM 2001 10-K).                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.31*  |   | Restricted Shares Agreement, dated as of May 17,  2000, between FTD.COM and Michael J. Soenen (incorporated by reference to  Exhibit 4.6 to FTD.COM’s Registration Statement on Form S-8 (Commission File  No. 333-39846) (the “FTD.COM S-8”)).                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.32*  |   | Form of Restricted Shares Agreement dated as of May  17, 2000, between  FTD.COM and each of  William J. Van Cleave for 125,000 restricted shares that become  non-forfeitable as to one-third of such restricted shares on each anniversary  of May 17, 2000 and Carrie A. Wolfe for 25,000 restricted shares that become  non-forfeitable as to one-third of such restricted shares on each anniversary  of May 17, 2000 (incorporated by reference to Exhibit 4.7 to the FTD.COM  S-8). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.33*  |   | Form of Restricted Shares Agreement, dated as of  June 9, 2000, between FTD.COM and Carrie A. Wolfe for 25,000 restricted  shares that become non-forfeitable as to one-third of such restricted shares  on each anniversary of June 9, 2000 (incorporated by reference to Exhibit 4.7  to the FTD.COM S-8).                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.34*  |   | Form of Confidentiality and Non-Competition  Agreement between FTD.COM and each of Frederick K. Johnson and William J. Van  Cleave (incorporated by reference to Exhibit 10.15 to the FTD.COM Form 10-K  for the fiscal year ended June 30, 2000 (Commission File No. 0-26779) (the  “FTD.COM 2000 10-K”)).                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.35*  |   | Form of Confidentiality and Non-Competition  Agreement, dated as of January 8, 2001, between FTD.COM and Ann Hofferberth  (incorporated by reference to Exhibit 10.15 to the FTD.COM 2000 10-K).                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.36*  |   | Form of Confidentiality and Non-Competition  Agreement, dated as of June 14, 2001, between FTD.COM and each of Michael J.  Soenen and Carrie A. Wolfe (incorporated by reference to Exhibit 10.15 to the  FTD.COM 2000 10-K).                                                                                                                                                                                                                                                                  |

 

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|   |   |                                                                                                                                                                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37* |   | Form of Director Non-Qualified Stock Option  Agreement, dated as of December 22, 1999, between FTD.COM and each of Samuel  I. Hill for 25,000 shares and Richard M. Owen for 25,000 shares (incorporated  by reference to Exhibit 4.6 to the FTD.COM S-8). |
|   |   |                                                                                                                                                                                                                                                       |
| 10.38* |   | Form of Director Non-Qualified Stock Option  Agreement, dated as of June 13, 2000, between FTD.COM and each of Samuel I.  Hill for 15,000 shares and Richard M. Owen for 15,000 shares (incorporated by  reference to Exhibit 4.6 to the FTD.COM S-8).     |
|   |   |                                                                                                                                                                                                                                                       |
| 10.39* |   | Form of Non-Qualified Stock Option Agreement, dated  as of January 8, 2001, between FTD.COM and Ann Hofferberth for 125,000 shares  at a price of $1.94 per share (incorporated by reference to Exhibit 4.5 to  the FTD.COM S-8).                          |
|   |   |                                                                                                                                                                                                                                                       |
| 10.40  |   | Escrow Agreement, dated as of June 29, 2001, among  FTDI, the Association, and Bank One Trust Company, National Association  (incorporated by reference to Exhibit 10.26 to the IOS 2001 10-K).                                                            |
|   |   |                                                                                                                                                                                                                                                       |
| 10.41  |   | Form of Trademark License Agreement between FTDI and  FTD.COM (incorporated by reference to Exhibit 10.3 to the FTD.COM S-1).                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                       |
| 10.42  |   | Form of Florists’ Online Hosting Agreement between  FTDI and FTD.COM (incorporated by reference to Exhibit 10.7 to the FTD.COM  S-1).                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                       |
| 10.43  |   | Form of Commission Agreement between FTDI and  FTD.COM (incorporated by reference to Exhibit 10.8 to the FTD.COM S-1).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 21.1+  |   | Subsidiaries of FTD, Inc.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                       |
| 23.1+  |   | Consent of KPMG LLP.                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                       |
| 24.1+  |   | Powers of Attorney.                                                                                                                                                                                                                                        |

 

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*      Managementcontract or compensatory arrangement.+      Filed as an exhibit to this Form10-K.

 

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