**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE** **ACT OF1934**

 

**FOR THE QUARTERLY PERIOD ENDEDMARCH 31, 2005**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE****ACTOF 1934**

 

**FOR THE TRANSITION PERIOD FROM           to           **

 

**Commission File Number**

**001-32425**

 

**FTDGroup, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

 
| **DELAWARE**                                                     | ** ** | **87-0719190**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**3113 WOODCREEK DRIVE**

**DOWNERS GROVE, IL 60515-5420**

(Address of PrincipalExecutive Offices)

 

**(630) 719-7800**

 (Registrant’s Telephone Number, Including AreaCode)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ý  No  ̈

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes   ̈  No  ý

 

As of May 9, 2005, there were 29,451,791 outstandingshares of the Registrant’s common stock, par value $.01 per share.

 

 

----

 

FTD GROUP, INC.

 

INDEX TO FORM 10-Q

 
| Part I.           | Financial Information |                                                                                        |
|-------------------|-----------------------|---------------------------------------------------------------------------------------------|
|              |                  |                                                                                        |
|              | Item 1.               | Financial Statements                                                                        |   |
|              |                  |                                                                                        |   |
|              |                  | Consolidated Balance Sheets                                                                 |   |
|              |                  |                                                                                        |   |
|              |                  | Consolidated  Statements of Operations and Comprehensive Income (Loss)                      |   |
|              |                  |                                                                                        |   |
|              |                  | Consolidated  Statements of Cash Flows                                                      |   |
|              |                  |                                                                                        |   |
|              |                  | Notes to  Consolidated Financial Statements                                                 |   |
|              |                  |                                                                                        |   |
|              | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|              |                  |                                                                                        |   |
|              | Item  3.              | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|              |                  |                                                                                        |   |
|              | Item  4.              | Controls  and Procedures                                                                    |   |
|              |                  |                                                                                        |
| Part II.          | Other Information     |                                                                                        |
|              |                  |                                                                                        |
|              | Item 1.               | Legal Proceedings                                                                           |   |
|              | Item 6.               | Exhibits                                                                                    |   |
|              |                  |                                                                                        |
| Signatures        |                  |
|              |                  |                                                                                        |
| Index of Exhibits |                  |

 

1

----

 

**PART I.  FINANCIAL INFORMATION**

**Item 1.   Financial Statements**

 

**FTDGROUP, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except share amounts)**

 
| ** **                                                                                                                                                                  | ** ** | **March 31, 2005** | ** ** | **June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **(Unaudited)**    | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                                                                                  | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Current  assets:**                                                                                                                                                        |       |               |       |              |       |
| Cash and cash  equivalents                                                                                                                                                  |       | $                  | 6,428      |              | $          | 2,491 |   |
| Restricted cash                                                                                                                                                             |       | —             |       | 7,261             |       |
| Accounts  receivable, less allowance for doubtful accounts of $6,103 at March 31, 2005  and $5,067 at June 30, 2004                                                         |       | 32,014             |       | 27,572            |       |
| Inventories, net                                                                                                                                                            |       | 7,270              |       | 9,392             |       |
| Deferred income  taxes                                                                                                                                                      |       | 3,942              |       | 4,296             |       |
| Prepaid expenses  and other current assets                                                                                                                                  |       | 11,611             |       | 10,312            |       |
| **Total  current assets**                                                                                                                                                   |       | 61,265             |       | 61,324            |       |
|                                                                                                                                                                        |       |               |       |              |       |
| **Property  and equipment:**                                                                                                                                                |       |               |       |              |       |
| Land and  improvements                                                                                                                                                      |       | 1,380              |       | 1,380             |       |
| Building and  improvements                                                                                                                                                  |       | 14,286             |       | 14,196            |       |
| Furniture and  equipment                                                                                                                                                    |       | 5,263              |       | 4,771             |       |
| Total                                                                                                                                                                       |       | 20,929             |       | 20,347            |       |
| Less accumulated  depreciation                                                                                                                                              |       | 3,243              |       | 1,136             |       |
| Property and  equipment, net                                                                                                                                                |       | 17,686             |       | 19,211            |       |
|                                                                                                                                                                        |       |               |       |              |       |
| **Other  assets:**                                                                                                                                                          |       |               |       |              |       |
| Other noncurrent  assets, net                                                                                                                                               |       | 28,296             |       | 28,907            |       |
| Other intangible  assets, less accumulated amortization of $2,743 at March 31, 2005 and $834 at  June 30, 2004                                                              |       | 18,030             |       | 11,673            |       |
| Trademark                                                                                                                                                                   |       | 121,577            |       | 121,577           |       |
| Goodwill                                                                                                                                                                    |       | 337,414            |       | 337,196           |       |
| **Total  other assets**                                                                                                                                                     |       | 505,317            |       | 499,353           |       |
| **Total  assets**                                                                                                                                                           |       | $                  | 584,268    |              | $          | 579,888 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                               | ** ** | ** **         | ** ** | ** **        | ** ** |
|                                                                                                                                                                        |       |               |       |              |       |
| **Current  liabilities:**                                                                                                                                                   |       |               |       |              |       |
| Accounts payable                                                                                                                                                            |       | $                  | 43,427     |              | $          | 41,311 |   |
| Customer  deposits                                                                                                                                                          |       | 5,202              |       | 5,441             |       |
| Unearned income                                                                                                                                                             |       | 2,556              |       | 2,059             |       |
| Other accrued  liabilities                                                                                                                                                  |       | 13,015             |       | 23,217            |       |
| Current  maturities of long-term debt                                                                                                                                       |       | 5,733              |       | 850               |       |
| **Total  current liabilities**                                                                                                                                              |       | 69,933             |       | 72,878            |       |
|                                                                                                                                                                        |       |               |       |              |       |
| Senior secured  credit facility                                                                                                                                             |       | 80,300             |       | 83,938            |       |
| Senior  subordinated notes                                                                                                                                                  |       | 170,117            |       | 175,000           |       |
| Post-retirement  benefits and accrued pension obligations                                                                                                                   |       | 2,549              |       | 2,717             |       |
| Deferred income  taxes                                                                                                                                                      |       | 60,666             |       | 57,814            |       |
| Junior preferred  stock subject to mandatory redemption                                                                                                                     |       | —             |       | 75,780            |       |
| Senior preferred  stock subject to mandatory redemption                                                                                                                     |       | —             |       | 76,299            |       |
|                                                                                                                                                                        |       |               |       |              |       |
| **Stockholders’  equity:**                                                                                                                                             |       |               |       |              |       |
| Common stock:  $0.01 par value, 75,000,000 shares authorized; 29,451,791 and 13,333,339 shares  issued and outstanding as of March 31, 2005 and June 30, 2004, respectively |       | 295                |       | 133               |       |
| Paid-in capital                                                                                                                                                             |       | 232,738            |       | 39,867            |       |
| Accumulated  deficit                                                                                                                                                        |       | (32,473            | )          | (4,497            | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                              |       | 143                |       | (41               | )          |
| **Total  stockholders’ equity**                                                                                                                                        |       | 200,703            |       | 35,462            |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                        |       | $                  | 584,268    |              | $          | 579,888 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

2

----

 

**FTDGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**(Unaudited)**

**(inthousands, except per share amounts)**

 
| ** **                                                                      | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** |
| **Revenues:**                                                                   |       |                                    |       |                                                        |       |                                                         |       |
| Products                                                                        |       | $                                       | 78,425     |                                                        | $          | 21,087                                                       |       | $ | 53,372 |   |
| Services                                                                        |       | 46,467                                  |       | 9,893                                                       |       | 21,936                                                       |       |
| Total revenues                                                                  |       | 124,892                                 |       | 30,980                                                      |       | 75,308                                                       |       |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| **Costs  of goods sold and services provided:**                                 |       |                                    |       |                                                        |       |                                                         |       |
| Products                                                                        |       | 67,214                                  |       | 15,407                                                      |       | 41,315                                                       |       |
| Services                                                                        |       | 5,026                                   |       | 1,596                                                       |       | 3,336                                                        |       |
| Total costs of  goods sold and services provided                                |       | 72,240                                  |       | 17,003                                                      |       | 44,651                                                       |       |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| **Gross  profit:**                                                              |       |                                    |       |                                                        |       |                                                         |       |
| Products                                                                        |       | 11,211                                  |       | 5,680                                                       |       | 12,057                                                       |       |
| Services                                                                        |       | 41,441                                  |       | 8,297                                                       |       | 18,600                                                       |       |
| Total gross profit                                                              |       | 52,652                                  |       | 13,977                                                      |       | 30,657                                                       |       |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| **Operating  expenses:**                                                        |       |                                    |       |                                                        |       |                                                         |       |
| Advertising and  selling                                                        |       | 22,671                                  |       | 5,829                                                       |       | 15,098                                                       |       |
| General and  administrative                                                     |       | 26,488                                  |       | 5,372                                                       |       | 30,856                                                       |       |
| Total operating  expenses                                                       |       | 49,159                                  |       | 11,201                                                      |       | 45,954                                                       |       |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Income (loss)  from operations                                                  |       | 3,493                                   |       | 2,776                                                       |       | (15,297                                                      | )          |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| **Other  income and expenses:**                                                 |       |                                    |       |                                                        |       |                                                         |       |
| Interest income                                                                 |       | (299                                    | )          | (61                                                         | )          | (9                                                           | )          |
| Interest expense                                                                |       | 5,395                                   |       | 3,959                                                       |       | 87                                                           |       |
| Interest expense  and prepayment fees on shares subject to mandatory redemption |       | 24,684                                  |       | 1,901                                                       |       | —                                                       |       |
| Other (income)  expense, net                                                    |       | (100                                    | )          | 33                                                          |       | 364                                                          |       |
| Total other  expenses, net                                                      |       | 29,680                                  |       | 5,832                                                       |       | 442                                                          |       |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Loss before  income tax                                                         |       | (26,187                                 | )          | (3,056                                                      | )          | (15,739                                                      | )          |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Income tax  benefit                                                             |       | (602                                    | )          | (452                                                        | )          | (3,788                                                       | )          |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Net loss                                                                        |       | $                                       | (25,585    | )                                                           | $          | (2,604                                                       | )          | $ | (11,951 | ) |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| **Other  comprehensive income (loss):**                                         |       |                                    |       |                                                        |       |                                                         |       |
| Foreign currency  translation adjustments                                       |       | —                                  |       | 1                                                           |       | (24                                                          | )          |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Comprehensive  loss                                                             |       | $                                       | (25,585    | )                                                           | $          | (2,603                                                       | )          | $ | (11,975 | ) |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Net loss per common  share - basic                                              |       | $                                       | (1.14      | )                                                           | $          | (0.20                                                        | )          |   |   |
| Net loss per  common share - diluted                                            |       | $                                       | (1.14      | )                                                           | $          | (0.20                                                        | )          |   |   |
|                                                                            |       |                                    |       |                                                        |       |                                                         |       |
| Weighted average  shares of common stock outstanding - basic                    |       | 22,493                                  |       | 13,333                                                      |       |                                                         |       |
| Weighted average  shares of common stock outstanding - diluted                  |       | 22,493                                  |       | 13,333                                                      |       |                                                         |       |

 

See accompanyingNotes to Consolidated Financial Statements.

 

3

----

 

**FTDGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**(Unaudited)**

**(inthousands, except per share amounts)**

 
| ** **                                                                      | ** ** | **Nine Months  Ended  March 31, 2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                      | ** ** | ** **                             | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** |
| **Revenues:**                                                                   |       |                                   |       |                                                        |       |                                                      |       |
| Products                                                                        |       | $                                      | 190,397    |                                                        | $          | 21,087                                                    |       | $ | 164,512 |   |
| Services                                                                        |       | 124,820                                |       | 9,893                                                       |       | 81,167                                                    |       |
| Total revenues                                                                  |       | 315,217                                |       | 30,980                                                      |       | 245,679                                                   |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| **Costs  of goods sold and services provided:**                                 |       |                                   |       |                                                        |       |                                                      |       |
| Products                                                                        |       | 162,223                                |       | 15,407                                                      |       | 125,216                                                   |       |
| Services                                                                        |       | 14,777                                 |       | 1,596                                                       |       | 12,841                                                    |       |
| Total costs of  goods sold and services provided                                |       | 177,000                                |       | 17,003                                                      |       | 138,057                                                   |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| **Gross  profit:**                                                              |       |                                   |       |                                                        |       |                                                      |       |
| Products                                                                        |       | 28,174                                 |       | 5,680                                                       |       | 39,296                                                    |       |
| Services                                                                        |       | 110,043                                |       | 8,297                                                       |       | 68,326                                                    |       |
| Total gross  profit                                                             |       | 138,217                                |       | 13,977                                                      |       | 107,622                                                   |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| **Operating  expenses:**                                                        |       |                                   |       |                                                        |       |                                                      |       |
| Advertising and  selling                                                        |       | 60,856                                 |       | 5,829                                                       |       | 50,241                                                    |       |
| General and  administrative                                                     |       | 51,559                                 |       | 5,372                                                       |       | 56,680                                                    |       |
| Total operating  expenses                                                       |       | 112,415                                |       | 11,201                                                      |       | 106,921                                                   |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Income from  operations                                                         |       | 25,802                                 |       | 2,776                                                       |       | 701                                                       |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| **Other  income and expenses:**                                                 |       |                                   |       |                                                        |       |                                                      |       |
| Interest income                                                                 |       | (466                                   | )          | (61                                                         | )          | (22                                                       | )          |
| Interest expense                                                                |       | 15,429                                 |       | 3,959                                                       |       | 532                                                       |       |
| Interest expense  and prepayment fees on shares subject to mandatory redemption |       | 34,732                                 |       | 1,901                                                       |       | —                                                    |       |
| Other (income)  expense, net                                                    |       | (421                                   | )          | 33                                                          |       | (1,105                                                    | )          |
| Total other  expense (income), net                                              |       | 49,274                                 |       | 5,832                                                       |       | (595                                                      | )          |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Income (loss)  before income tax                                                |       | (23,472                                | )          | (3,056                                                      | )          | 1,296                                                     |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Income tax  expense (benefit)                                                   |       | 4,504                                  |       | (452                                                        | )          | 2,898                                                     |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Net loss                                                                        |       | $                                      | (27,976    | )                                                           | $          | (2,604                                                    | )          | $ | (1,602 | ) |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| **Other  comprehensive income (loss):**                                         |       |                                   |       |                                                        |       |                                                      |       |
| Foreign currency  translation adjustments                                       |       | 184                                    |       | 1                                                           |       | 38                                                        |       |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Comprehensive  loss                                                             |       | $                                      | (27,792    | )                                                           | $          | (2,603                                                    | )          | $ | (1,564 | ) |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Net loss per  common share - basic                                              |       | $                                      | (1.70      | )                                                           | $          | (0.20                                                     | )          |   |   |
| Net loss per  common share - diluted                                            |       | $                                      | (1.70      | )                                                           | $          | (0.20                                                     | )          |   |   |
|                                                                            |       |                                   |       |                                                        |       |                                                      |       |
| Weighted average  shares of common stock outstanding - basic                    |       | 16,479                                 |       | 13,333                                                      |       |                                                      |       |
| Weighted average  shares of common stock outstanding - diluted                  |       | 16,479                                 |       | 13,333                                                      |       |                                                      |       |

 

See accompanyingNotes to Consolidated Financial Statements.

 

4

----

 

**FTDGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                                            | ** ** | **Nine Months Ended  Ended  March 31, 2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | ** **                                   | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** |
| **Cash  flows from operating activities:**                                                            |       |                                         |       |                                                        |       |                                                      |       |
| Net loss                                                                                              |       | $                                            | (27,976    | )                                                           | $          | (2,604                                                    | )          | $ | (1,602 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:            |       |                                         |       |                                                        |       |                                                      |       |
| Depreciation and  amortization                                                                        |       | 8,088                                        |       | 957                                                         |       | 5,377                                                     |       |
| Interest expense  and prepayment fees on mandatorily redeemable shares                                |       | 34,732                                       |       | 1,901                                                       |       | —                                                    |       |
| Deferred  compensation expense                                                                        |       | —                                       |       | —                                                      |       | 51                                                        |       |
| Amortization and  write-off of deferred financing costs                                               |       | 1,170                                        |       | 101                                                         |       | 600                                                       |       |
| Provision for  doubtful accounts                                                                      |       | 3,179                                        |       | 268                                                         |       | 2,103                                                     |       |
| Deferred income  taxes                                                                                |       | 3,206                                        |       | —                                                      |       | (518                                                      | )          |
| Increase  (decrease) in cash due to changes in operating assets and liabilities, net of  acquisition: |       |                                         |       |                                                        |       |                                                      |       |
| Restricted cash                                                                                       |       | 7,261                                        |       | (7,261                                                      | )          | —                                                    |       |
| Accounts  receivable                                                                                  |       | (9,831                                       | )          | 129                                                         |       | (10,728                                                   | )          |
| Inventories                                                                                           |       | 2,122                                        |       | 1,941                                                       |       | (1,289                                                    | )          |
| Prepaid expenses  and other                                                                           |       | (939                                         | )          | (3,866                                                      | )          | (6,168                                                    | )          |
| Other noncurrent  assets                                                                              |       | (62                                          | )          | 26                                                          |       | 123                                                       |       |
| Accounts payable                                                                                      |       | 763                                          |       | (20,626                                                     | )          | 21,213                                                    |       |
| Other accrued  liabilities, unearned income and customer deposits                                     |       | (10,112                                      | )          | 3,331                                                       |       | (131                                                      | )          |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| Net cash  provided by (used in) operating activities                                                  |       | 11,601                                       |       | (25,703                                                     | )          | 9,031                                                     |       |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| **Cash  flows from investing activities:**                                                            |       |                                         |       |                                                        |       |                                                      |       |
| Capital  expenditures                                                                                 |       | (3,058                                       | )          | (446                                                        | )          | (4,169                                                    | )          |
| Acquisition                                                                                           |       | (8,458                                       | )          | —                                                      |       | —                                                    |       |
| Going private  transaction with Nectar Merger Corporation                                             |       | —                                       |       | (420,948                                                    | )          | —                                                    |       |
| Net cash used in  investing activities                                                                |       | (11,516                                      | )          | (421,394                                                    | )          | (4,169                                                    | )          |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| **Cash  flows from financing activities:**                                                            |       |                                         |       |                                                        |       |                                                      |       |
| Net proceeds  from the issuance of common stock                                                       |       | 193,533                                      |       | —                                                      |       | —                                                    |       |
| Redemption of  preferred stock and prepayment fee                                                     |       | (186,811                                     | )          | —                                                      |       | —                                                    |       |
| Repayments of  long-term debt                                                                         |       | (5,638                                       | )          | —                                                      |       | —                                                    |       |
| Net proceeds  from (repayments of) revolving credit facility                                          |       | 2,000                                        |       | 15,500                                                      |       | (6,500                                                    | )          |
| Capital  contribution - common stock                                                                  |       | 827                                          |       | 184,454                                                     |       | —                                                    |       |
| Deferred  financing costs                                                                             |       | (243                                         | )          | (10,282                                                     | )          | —                                                    |       |
| Proceeds from  the issuance of long-term debt                                                         |       | —                                       |       | 260,000                                                     |       | —                                                    |       |
| Issuance of  treasury stock                                                                           |       | —                                       |       | —                                                      |       | 32                                                        |       |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| Net cash  provided by (used in) financing activities                                                  |       | 3,668                                        |       | 449,672                                                     |       | (6,468                                                    | )          |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| Effect of  foreign exchange rate changes on cash                                                      |       | 184                                          |       | 1                                                           |       | 38                                                        |       |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| Net increase  (decrease) in cash and cash equivalents                                                 |       | 3,937                                        |       | 2,576                                                       |       | (1,568                                                    | )          |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| Cash and cash  equivalents at beginning of period                                                     |       | 2,491                                        |       | 353                                                         |       | 1,921                                                     |       |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| Cash and cash  equivalents at end of period                                                           |       | $                                            | 6,428      |                                                        | $          | 2,929                                                     |       | $ | 353 |   |
|                                                                                                  |       |                                         |       |                                                        |       |                                                      |       |
| **Supplemental  disclosures of cash flow information**                                                |       |                                         |       |                                                        |       |                                                      |       |
| Cash paid for:                                                                                        |       |                                         |       |                                                        |       |                                                      |       |
| Interest                                                                                              |       | $                                            | 16,902     |                                                        | $          | 2,408                                                     |       | $ | 360 |   |
| Income taxes                                                                                          |       | $                                            | 23         |                                                        | $          | 3,258                                                     |       | $ | 7,238 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

5

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**FTD Group, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

** **

**Note 1. Description of Business**

 

FTD Group, Inc.(the “Company”), formerly Mercury Man Holdings Corporation, is a Delawarecorporation that was formed in 2003 by Green Equity Investors IV, L.P. (“GreenEquity Investors”), a private investment fund affiliated with Leonard Green& Partners, L.P., solely for the purpose of acquiring majority ownership ofFTD, Inc.  As used in the Notes toConsolidated Financial Statements, the term the “Company” refers to FTD Group,Inc., including its wholly-owned subsidiary, FTD, Inc.

 

FTD, Inc. is a Delaware corporation that commencedoperations in 1994 and includes the operations of its principal operatingsubsidiary, Florists’ Transworld Delivery, Inc., a Michigan corporation (“FTD”or the “Operating Company”).  Theoperations of FTD include those of its wholly-owned subsidiaries, FTD.COM INC.(“FTD.COM”) and FTD Canada, Inc. (formerly known as Florists’ TransworldDelivery Association of Canada, Ltd.), and its indirect wholly-owned subsidiary,Renaissance Greeting Cards, Inc. (“Renaissance”).  Substantially all of the Company’s operationsare conducted through FTD and its subsidiaries.

 

The capitalization of the Company and of FTD, Inc. atMarch 31, 2005 are the same in all material respects.  During the nine-month period ended March 31,2005 and the period from February 24, 2004 through March 31, 2004, consolidatedresults of operations and cash flows of the Company and FTD, Inc. differed dueto the interest expense and prepayment fees related to the Company’s preferredstock, the expenses related to the Company’s initial public offering and therepurchase of the Company’s preferred stock with the proceeds of the initialpublic offering.  Based on the Company’scurrent corporate structure and capitalization, the Company expects that theconsolidated results of operations and cash flows of the Company and of FTD,Inc. to be the same in future periods, in all material respects.

 

On February 24,2004, the Company completed a going private transaction, in which Nectar MergerCorporation, which was a wholly-owned subsidiary of the Company, merged withand into FTD, Inc. with FTD, Inc. continuing as the surviving corporation (the “2004Going Private Transaction”).  See Note 4for further detail.  The results ofoperations presented herein for all periods prior to the 2004 Going PrivateTransaction are referred to as the results of operations of the “Predecessor.”

 

On November 23,2004, the Company filed a registration statement with the Securities and ExchangeCommission, (the “SEC”) on Form S-1 (Registration No. 333-120723), relating toan initial public offering of the Company’s common stock.  The registration statement was declaredeffective by the SEC on February 8, 2005.**** See Note 3 for further detail.

 

On February 7, 2005, the stockholders approved an increase in the numberof authorized shares to 75,000,000, as well as a 1-for-3 reverse stocksplit.  All common share and per shareamounts have been restated to reflect this reverse stock split.

 

The Companyprovides floral-related products and services to consumers and retail floristsin the floral retail market.  The Companygenerates its revenue from two business segments, the florist business segmentand the consumer business segment.

 

Through itsflorist business, the Company provides products and services, such asclearinghouse services, technology products and services and floral shopsupplies, to approximately 20,000 member florists and other retail locationsoffering floral products in the U.S. and Canada, and connects approximately30,000 additional florists through affiliated or related organizations in 150countries outside of North America.

 

The consumerbusiness segment is comprised of FTD.COM, an Internet and telephone marketer offlowers and specialty gifts, which sells products directly to consumersprimarily through the www.ftd.com Web site and the 

 

6

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1-800-SEND-FTDtoll-free telephone number.

 

**Note2.  Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements of the Company have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and pursuant to the rulesand regulations of the SEC, and do not contain all information included in theaudited consolidated financial statements and notes thereto for the fiscal yearended June 30, 2004.  The interimunaudited consolidated financial statements should be read in conjunction withthe financial statements and notes thereto included in the Company’sconsolidated financial statements for the fiscal year ended June 30, 2004.  The accompanying consolidated financialstatements include the Predecessor’s operations prior to the 2004 Going PrivateTransaction.  In the opinion ofmanagement, the information furnished herein reflects all adjustments(consisting only of normal, recurring adjustments) necessary for a fairpresentation of the financial position, results of operations and cash flows forthe interim periods presented.

 

**Note3.  Initial Public Offering**

 

On February 14,2005, the Company completed an initial public offering of 15,407,693 shares ofcommon stock. The gross proceeds from the offering were $200.3 million.  The net proceeds were $186.9 million, afterdeducting the underwriting discount and offering expenses of $13.4 million, ofwhich $1.3 million is accrued at March 31, 2005.  The Company used the net proceeds of itsinitial public offering to repurchase in full all of the Company’s thenoutstanding shares of its 14% Senior Redeemable Exchangeable CumulativePreferred Stock and its 12% Junior Redeemable Exchangeable Cumulative PreferredStock.  In addition, in connection withthe initial public offering, the Company terminated its management servicesagreement.

 

On March 15, 2005,the Company received additional net proceeds of approximately $5.3 million fromthe sale of 435,200 additional shares of common stock pursuant to the exerciseof the underwriters’ over-allotment option. On April 15, 2005, the Company used the net proceeds from theover-allotment option to redeem $4.9 million of FTD, Inc.’s 7.75% SeniorSubordinated Notes due 2014 at a redemption price of 107.75% of principalamount, plus accrued and unpaid interest to the date of redemption.

 

**Note4.  2004 Going Private Transaction withNectar Merger Corporation**

 

On February 24,2004, the Company completed the 2004 Going Private Transaction for $422.0million, which excludes $23.4 million of fees that were expensed by thePredecessor as a component of corporate general and administrativeexpenses.  Upon consummation of the 2004Going Private Transaction, each issued and outstanding share of FTD, Inc.common stock, other than treasury shares and shares owned by the Company, whichwere retired, was cancelled and converted automatically into the right toreceive $24.85 per share in cash.

 

The transactionwas financed by a $145.4 million investment in the preferred stock of theCompany and a $40.0 million investment in the common stock of the Company byGreen Equity Investors and certain members of the Company’s senior managementat the time of the transaction, including $0.9 million in the form of anexchange of a portion of management’s ownership in the Predecessor’s common stock,the proceeds from the issuance of $175.0 million in senior subordinated notesdue 2014 (the “Notes”) and borrowings under a new $135.0 million senior securedcredit facility, comprised of an $85.0 million senior secured term loanfacility and a $50.0 million revolving credit facility.  The revolving credit facility was undrawn atthe closing of the 2004 Going Private Transaction.

 

The Companyaccounted for the 2004 Going Private Transaction using the purchase method ofaccounting.  The purchase price wasallocated to the assets acquired and the liabilities assumed as follows (inthousands):

 

7

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| **Assets:**                                               |   |    |    |
|-----------------------------------------------------------|--------|---------|---------|
| Cash                                                      |   | $       | 353     |   |
| Accounts  receivable                                      |   | 30,995  |    |
| Inventories                                               |   | 9,957   |    |
| Deferred income  taxes                                    |   | 3,827   |    |
| Prepaid expenses  and other current assets                |   | 10,916  |    |
| Property and  equipment                                   |   | 20,303  |    |
| Other noncurrent  assets                                  |   | 17,840  |    |
| Customer list                                             |   | 12,507  |    |
| Trademarks                                                |   | 121,577 |    |
| Goodwill                                                  |   | 337,196 |    |
| Total assets  acquired                                    |   | $       | 565,471 |   |
|                                                      |   |    |    |
| **Liabilities:**                                          |   |    |    |
| Accounts payable                                          |   | $       | 58,942  |   |
| Customer  deposits                                        |   | 5,677   |    |
| Unearned income                                           |   | 1,828   |    |
| Other accrued  liabilities                                |   | 16,685  |    |
| Post-retirement  benefits and accrued pension obligations |   | 2,721   |    |
| Deferred tax  liability                                   |   | 57,632  |    |
| Total  liabilities assumed                                |   | 143,485 |    |
| Net assets  acquired                                      |   | $       | 421,986 |   |

 

 

In addition,pursuant to the terms of the Settlement Agreement relating to the FTD.COMsecurities litigation (see Note 14), the Company was obligated to pay $7.3million in cash.  Pursuant to the termsof the new senior credit facility, $7.3 million was placed into an escrowaccount at the consummation of the 2004 Going Private Transaction to fund thisobligation and is not reflected in the allocation shown above.  Payment of the $7.3 million was made duringthe period ended March 31, 2005.

 

In accordance withthe provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets*,the $337.2 million in goodwill recorded as part of the 2004 Going PrivateTransaction is not amortized and is tested for impairment at leastannually.  The goodwill is not deductiblefor tax purposes.  The primary reasonsfor the 2004 Going Private Transaction and the primary factors that contributedto a purchase price that resulted in recognition of goodwill include:

 

•                  The Company’s brand and its prominentmarket position in both the consumer retail market and the floral serviceprovider market, which offer a competitive advantage in obtaining newcustomers;

 

•                  The Company’s participation andextensive membership base in the floral wire-service market, which hassignificant barriers to entry with respect to clearinghouse services, a largecomponent of revenues within the florist business segment; and

 

•                  The Company’s diverse customer base,which minimizes the potential impact of volatility from any one customer.

 

The unaudited pro formaresults of operations data for the three- and nine-month periods ended March31, 2004, as if the 2004 Going Private Transaction had occurred on July 1,2003, are as follows (in thousands):

 

8

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| ** **                                     | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **Nine Months  Ended  March 31,  2004** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | ** **                               | ** ** | ** **                              | ** ** |
| Total revenues                                 |       | $                                        | 106,288    |                                    | $          | 276,659 |   |
|                                           |       |                                     |       |                                    |       |
| Income from  operations                        |       | $                                        | 9,018      |                                    | $          | 24,792 |   |
|                                           |       |                                     |       |                                    |       |
| Pro forma net  loss                            |       | $                                        | (4,862     | )                                       | $          | (9,938 | ) |
|                                           |       |                                     |       |                                    |       |
| Pro forma net  loss per common share - basic   |       | $                                        | (0.36      | )                                       | $          | (0.75 | ) |
| Pro forma net  loss per common share - diluted |       | $                                        | (0.36      | )                                       | $          | (0.75 | ) |

 

The above results may not be representative of future periods.

 

**Note 5. Acquisition**

 

On December 19, 2004, FTD.COM completed theacquisition of certain assets of The Flower Concierge, Inc. (doing business asFlorist.com) (“Flower Concierge”), pursuant to an asset purchase agreement byand among FTD.COM, Flower Concierge and Aron and Celina Benon (the “FlowerConcierge Agreement”).  Flower Conciergewas a direct marketer of flowers and specialty gifts.

 

Pursuantto the terms of the Flower Concierge Agreement, the purchase price for theassets acquired was $8.5 million, including $0.2 million of acquisitioncosts.  The purchase price was fundedthrough a $5.3 million promissory note, which accrued interest at 6.0% and waspaid in full on January 3, 2005, with the remainder funded from existing cashbalances.  The assets acquired primarilyconsisted of Flower Concierge’s Web site, www.florist.com, valued at $7.8million, a customer list, non-compete agreements and $0.2 million of goodwill.

 

Theresults of operations associated with the purchase of certain assets of FlowerConcierge since the closing date are included in the consolidated financialstatements and were accounted for using the purchase method of accounting.  Accordingly, the financial statements reflectthe allocation of the total purchase price to the net intangible assetsacquired, based on their respective fair values.  Pro forma financial informationrelated to this acquisition has not been included herein as the operatingresults of Flower Concierge are not considered material to the Company’soperating results.

 

**Note 6. Revenues from the Sale of the FloralSelections Guide**

 

As part of FTDmembership, FTD members purchase a Floral Selections Guide and relatedworkbook.  Historically, the Companyrecognized revenue related to the sale of the Floral Selections Guide in themonth that it was shipped to the florist, which had been every two years orupon initial membership.  The purchase ofthe Floral Selections Guide entitles the FTD florist to a non-exclusive,non-transferable right for on-premise use of the Floral Selections Guide for aslong as the purchaser remains an FTD florist in good standing.  There are no refund provisions associatedwith the purchase of the Floral Selections Guide.  Historically, the Company has provided deminimis refunds in isolated cases. Beginning in fiscal year 2004, new FTD members were charged a monthlyfee, and beginning with the distribution of the Floral Selections Guide infiscal year 2005, all FTD members are charged a monthly fee for the use of theFloral Selections Guide while an active FTD member.  Revenue from the sales of the FloralSelections Guide during the three-month periods ended March 31, 2005 and 2004was $0.7 million and $60,000, respectively. For the nine-month periods ended March 31, 2005 and 2004, revenue fromthe sales of the Floral Selections Guide was $2.1 million and $111,000,respectively.

 

9

----

 

### **Note 7.  NetLoss per Common Share**

### ** **

The computations of basic and diluted net loss percommon share for the three- and nine-month periods ended March 31, 2005 and theperiod from February 24, 2004 through March 31, 2004 are as follows:

 

 
| ** **                                                             | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|
|                                                                   |       |                                     |       |                                    |       |                                                        |       |
| Net loss                                                               |       | $                                        | (25,585    | )                                       | $          | (27,976                                                     | )          | $ | (2,604 | ) |
|                                                                   |       |                                     |       |                                    |       |                                                        |       |
| Weighted average  basic and diluted shares of Common Stock outstanding |       | 22,493                                   |       | 16,479                                  |       | 13,333                                                      |       |
|                                                                   |       |                                     |       |                                    |       |                                                        |       |
| Net loss per  share of Common Stock - basic and diluted                |       | $                                        | (1.14      | )                                       | $          | (1.70                                                       | )          | $ | (0.20 | ) |

 

Shares associated with stock options that were notincluded in the computation of net loss per share because their effect wasanti-dilutive consisted of 2,718,612 shares for the three- and nine-monthperiods ended March 31, 2005.

 

### **Note 8. Financing Arrangements**

 
| ** **                       | ** ** | **As of  March 31,  2005** | ** ** | **As of  June 30,  2004** | ** ** |
|----------------------------------|------------|----------------------------|------------|---------------------------|------------|
| 7.75% senior  subordinated notes |       | $                          | 175,000    |                      | $          | 175,000 |   |
| Senior secured  credit facility: |       |                       |       |                      |       |
| Term loan                        |       | 79,150                     |       | 84,788                    |       |
| Revolving credit  facility       |       | 2,000                      |       | —                    |       |
| Total debt                       |       | 256,150                    |       | 259,788                   |       |
| Less: Current  portion           |       | (5,733                     | )          | (850                      | )          |
| Long-term debt                   |       | $                          | 250,417    |                      | $          | 258,938 |   |

 

Long-term debt consists of the following (inthousands):

 

***$135.0 million Senior Secured Credit Facility***

 

In connection withthe consummation of the 2004 Going Private Transaction, the Predecessorterminated its then existing senior secured credit facility and FTD, Inc.entered into a new senior secured credit facility (the “2004 Credit Agreement”)with a syndicate of financial institutions, including Credit Suisse First Boston,acting through its Cayman Islands Branch, as administrative agent, UBSSecurities LLC, as syndication agent, and Wells Fargo Bank, N.A., asdocumentation agent.  Borrowings underthe 2004 Credit Agreement are secured by first priority security interests in,and mortgages on, substantially all of FTD, Inc.’s tangible and intangibleassets.

 

All of the Company’sconsolidated net assets are owned, and all of the Company’s consolidated netsales are earned, by its direct and indirect subsidiaries.  As of March 31, 2005, the Company’ssubsidiaries had $584.2 million of restricted assets.

 

10

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The 2004 CreditAgreement provides for aggregate borrowings of up to $135.0 million andconsists of a five-year $50.0 million revolving credit facility and aseven-year $85.0 million term loan.  Aportion of the revolving credit facility is available as a letter of creditsub-facility and as a swing-line facility. Borrowings under the revolving credit facility are used to financeworking capital, capital expenditures, acquisitions, certain expensesassociated with the bank credit facilities and letter of credit needs.  At March 31, 2005, the revolving creditfacility included $1.1 million in letters of credit outstanding and hadavailability of $46.9 million.

 

Borrowings underthe 2004 Credit Agreement generally bear interest based on a margin over, atFTD, Inc.’s option, either the base rate (generally the applicable primelending rate of Credit Suisse First Boston, as announced from time to time) orthe London Interbank Offered Rate (“LIBOR”). The applicable margin for borrowings under the 2004 Credit Agreementvaries based upon the FTD, Inc.’s Consolidated Leverage Ratio, as defined inthe 2004 Credit Agreement, which was amended on November 15, 2004 to reduce themargins on the term loan.  The 2004Credit Agreement requires FTD, Inc. to pay commitment fees on the unusedportion of the revolving credit facility, which vary based on the utilizationof the revolving credit facility.

 

The 2004 CreditAgreement includes covenants that, among other things, require that, as ofMarch 31, 2005, FTD, Inc. maintain a ratio of consolidated earnings beforeinterest, taxes, depreciation and amortization (subject to certain adjustments)to consolidated interest expense of no less than 2.10 to 1.00, a fixed chargecoverage ratio of no less than 1.50 to 1.00 and a consolidated leverage rationot to exceed 5.75 to 1.00.  The Companywas in compliance with all debt covenants as of March 31, 2005, after givingeffect to a waiver received on January 20, 2005 related to the proceedsreceived from the initial public offering of the Company’s common stock.  Debt covenant targets are adjusted quarterlyin accordance with the terms of the 2004 Credit Agreement.

 

The 2004 Credit Agreement imposes various restrictionson the Company, including restrictions that limit FTD, Inc.’s ability to incurliens or encumbrances, make investments or acquisitions, incur additional debt,enter into sale leaseback transactions, incur certain contingent liabilities,make certain restricted junior payments and other similar distributions, enterinto mergers, consolidations and similar combinations, sell assets or engage insimilar transfers, amend certain material agreements, including the indenturegoverning the Notes, make capital expenditures and engage in transactions withaffiliates.

 

There was $81.2million of outstanding debt at March 31, 2005 under the 2004 CreditAgreement.  FTD, Inc. is permitted tovoluntarily repay principal amounts outstanding or reduce commitments under the2004 Credit Agreement at any time, in whole or in part, without premium orpenalty, upon the giving of proper notice and subject to minimum amountrequirements.  In addition, subject tocertain exceptions, FTD, Inc. is required to prepay outstanding amounts underthe 2004 Credit Agreement with a portion of its excess cash flow, the netproceeds of certain asset dispositions, casualty insurance and condemnationrecovery events and upon the issuance of certain equity securities orindebtedness.  The term loan is due inannual installments of $850,000 per year with the remaining balance due atmaturity.

 

As a result of entering into the 2004 CreditAgreement, as amended, FTD, Inc. recorded $4.2 million of deferred financingcosts, which have been allocated, pro rata, to the five-year revolving creditfacility and the seven-year term loan and are being amortized in accordancewith the effective interest method, over the respective terms.  During the three- and nine-month periodsended March 31, 2005, the Company paid down the seven-year term loan by $5.2million and $5.6 million, respectively, which resulted in a write-off ofdeferred financing costs of $0.2 million.

 

***$175.0 million7.75% Senior Subordinated Notes due 2014***

 

On February 6, 2004, Nectar Merger Corporationcompleted the issuance and sale of $175.0 million in aggregate principal amountof the Notes.  Upon consummation of the2004 Going Private Transaction, FTD, Inc. assumed Nectar Merger Corporation’sobligations under the Notes.  The Notesmature on February 15, 2014, and interest is payable on February 15 and August15 of each year.  The proceeds from theissuance of the Notes were used to finance the 2004 Going Private Transaction.

 

The Notes are unsecured, senior subordinatedobligations, ranking junior in right of payment to all of FTD, Inc.’s existingand future senior indebtedness and equal in right of payment to all of FTD,Inc.’s existing and future senior subordinated indebtedness.  The Notes rank senior in right of payment toall of FTD, Inc.’s existing and future 

 

11

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subordinated indebtednessand are unconditionally guaranteed by FTD, Inc.’s subsidiary guarantors on asenior subordinated basis.

 

The indenture governing the Notes provides for certainlimitations on FTD, Inc.’s ability to incur additional indebtedness, issuedisqualified capital stock, make restricted payments, permit restrictions ondividends or other payment restrictions affecting subsidiaries, layerindebtedness, enter into liens securing indebtedness, enter into transactionswith affiliates, enter into certain merger, sale or consolidation transactionsand release guarantors.

 

As a result of issuing the Notes, FTD, Inc. recorded$6.7 million of deferred financing costs, which are being amortized using theeffective interest method, over the ten-year term of the Notes.

 

On March 15, 2005, the Company received additional netproceeds of approximately $5.3 million from the sale of 435,200 additionalshares of common stock pursuant to the exercise of the underwriters’over-allotment option.  On April 15,2005, the Company used the proceeds from the over-allotment option to redeem$4.9 million of FTD, Inc.’s 7.75% Senior Subordinated Notes due 2014 at aredemption price of 107.75% of principal amount, plus accrued and unpaidinterest to the date of redemption.  Thispayment will result in a write-off of deferred financing costs of $0.2 million.

 

## **Note 9. Preferred StockSubject to Mandatory Redemption**

## ** **

The Company has authorized200,000 shares of Preferred Stock, par value $0.01 per share.  The Company had issued 72,695 shares of 14%mandatorily redeemable Senior exchangeable cumulative preferred stock, parvalue $0.01 per share (the “Senior Preferred”), and 72,695 shares of 12%mandatorily redeemable Junior exchangeable cumulative preferred stock, parvalue $0.01 per share (the “Junior Preferred” and together with the SeniorPreferred, the “Preferred Stock”), in conjunction with the 2004 Going PrivateTransaction.  Each share of PreferredStock was non-voting, non-participating and has a liquidation value of $1,000per share as of the date of issue.  Theliquidation value, plus accrued and unpaid dividends, was payable on August 24,2024, the mandatory redemption date.  Becausethe shares were mandatorily redeemable at a fixed date, such shares wereclassified as a liability on the related consolidated balance sheet, pursuantto SFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity,*and the related dividends reflected as interest expense.  The Company may exchange all, but not lessthan all, of the then outstanding shares of Senior Preferred Stock into 14%Series A Junior Subordinated Debentures and all, but not less than all, of thethen outstanding shares of Junior Preferred Stock into 12% Series B JuniorSubordinated Debentures.

 

The Company used $186.8 million of the net proceeds of its initial public offering to redeem in full all of the Company’s outstanding shares of its Preferred Stock, including a prepayment premium of $21.5 million.

 

**Note 10. Pension and Other Post Retirement Benefit Plans**

 

***Components of Net Periodic Benefit Cost***

 
| ** **                 | ** ** | **Salaried Employees’ Pension Plan** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | **Three Months  Ended  March 31,  2005**  | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** |
| ** **                 | ** ** | ** **                                | ** ** | ** ** | ** ** | **Predecessor** | ** ** | ** ** | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
| ** **                 | ** ** | ** **                                | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest cost              |       | $                                         | 31         |   | $ | 11 |   | $ | — |   | $ | 94 |   | $ | 11 |   | $ | — |   |
| Expected return  on assets |       | (20                                       | )          | (8 | ) | — |   | (60 | ) | (8 | ) | — |   |
| Net periodic  benefit cost |       | $                                         | 11         |   | $ | 3 |   | $ | — |   | $ | 34 |   | $ | 3 |   | $ | — |   |

 

12

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| ** **                          | ** ** | **Retiree Medical Plan**                 | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** |
| ** **                          | ** ** | ** **                               | ** ** | ** ** | ** ** | **Predecessor** | ** ** | ** ** | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
| ** **                          | ** ** | ** **                               | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest cost                       |       | $                                        | 24         |   | $ | 7 |   | $ | — |   | $ | 71 |   | $ | 7 |   | $ | — |   |
| Amortization of  gain               |       | —                                   |       | — |   | (32 | ) | — |   | — |   | (128 | ) |
| Net periodic  benefit cost (income) |       | $                                        | 24         |   | $ | 7 |   | $ | (32 | ) | $ | 71 |   | $ | 7 |   | $ | (128 | ) |

 

**Note 11. Related Party Transactions**

 

For the period from January 1, 2004 through February 23, 2004 and the period from July 1, 2003 through February 23, 2004, the Predecessor incurred expenses of $0.3 million and $1.3 million, respectively, related to the payment for management, financial and other corporate advisory services and expenses to parties related to each of Perry Acquisition Partners, L.P., Bain Capital Investors LLC and Fleet Growth Resources III, Inc., which were stockholders or affiliates of the Predecessor.  The Predecessor’s management consulting services agreement with these parties required payments aggregating $2.0 million each fiscal year plus reimbursement of reasonable out-of-pocket expenses.  The management consulting services agreement with the above listed parties terminated upon the consummation of the 2004 Going Private Transaction.

 

In connection with the 2004 Going Private Transaction, FTD, Inc. entered into a management services agreement (the “MSA”) with Leonard Green & Partners, L.P.  Under the MSA, Leonard Green & Partners, L.P. provided management, consulting and financial planning services in exchange for an annual management fee of $2.0 million, payable in equal monthly installments commencing in March 2004.  This agreement was terminated in connection with the initial public offering in consideration of a lump sum payment of $12.5 million by FTD, Inc. to Leonard Green & Partners L.P., in accordance with the MSA.  For the period from February 24, 2004 through March 31, 2004, the Company incurred expenses of $0.2 million and for the three- and nine-month periods ended March 31, 2005, the Company incurred expenses, including the termination fees, of $12.8 million and $13.8 million, respectively, related to the MSA with Leonard Green & Partners, L.P.

 

In addition, the MSA provided for the payment to Leonard Green & Partners, L.P. of customary fees for services provided in connection with major transactions, reimbursement for reasonable out-of-pocket expenses and a closing fee of $7.0 million, which was paid upon consummation of the 2004 Going Private Transaction.

 

**Note 12. Capital Stock Transactions**

 

On September 30,2004, the Company sold 275,559 shares of common stock to certain members of theCompany’s management for cash consideration of $826,667, which represented fairmarket value on the date of purchase. The Company invested $0.7 million of the cash proceeds in FTD, Inc. andused the balance of the proceeds to repay an inter-company payable to FTD, Inc.

 

On February 7, 2005, the stockholders approved an increase in the numberof authorized shares to 75,000,000 as well as a 1-for-3 reverse stocksplit.  All common share and per shareamounts have been restated to reflect this reverse stock split.

 

On February 14, 2005, the Company completed an initial public offering of15,407,693 shares of common stock and on March 15, 2005, the underwriters exercisedtheir over-allotment option and purchased 435,200 shares of common stock.  See Note 3 for further detail.

 

### **Note 13. Stock Awards and Incentive Plans**

### ** **

The Company’s Stock Option Plan was adopted andapproved by the Board of Directors on September 30, 2004, and provides for theissuance of up to 2,192,778 shares of common stock of the Company in connectionwith 

 

13

----

 

the granting of incentiveor non-qualified stock options.

 

On September 30, 2004, the Company granted 2,099,457options to various employees of the Company. In addition, during the quarter ended March 31, 2005, the Companygranted 85,000 options to various employees and independent directors of the Company.Outstanding non-qualified stock options are exercisable during a ten-yearperiod beginning on the date of grant to seven years after the date of grant,dependent upon the individual agreements. All stock options were granted with an exercise price equal to the fairmarket value on the date of grant.

 

On February 7, 2005, the Company amended the StockOption Plan to allow for the issuance of 4,592,778 shares of common stock ofthe Company in connection with the 2005 Amended and Restated Equity IncentiveAward Plan.  During the nine-months endedMarch 31, 2005, 6,668 options were forfeited.

 

The Predecessor recognized expense of $16,000 and$51,000 of compensation expense related to its incentive plan in the periodfrom January 1, 2004 through February 23, 2004 and the period from July 1, 2003through February 23, 2004, respectively. The Predecessor’s incentive plan was terminated in connection with the2004 Going Private Transaction.

 

The Company would have recognized additionalcompensation expense, net of taxes, of $103,000 and $194,000 related to theCompany’s options in the three- and nine-month periods ended March 31, 2005,respectively, and nothing for the period from February 24, 2004 through March31, 2004, and the Predecessor would have recognized less compensation expense,net of taxes, of $5.0 million and $4.7 million related to the Predecessor’soptions for the period from January 1, 2004 through February 23, 2004 and theperiod from July 1, 2003 through February 23, 2004, respectively, if theestimated fair value, as determined in accordance with FAS 123, *Accounting for Stock-Based Compensation*,of the outstanding stock options of the Company and the Predecessor had beenrecorded in the Company’s and the Predecessor’s consolidated financialstatements.  As such, the Company’s and thePredecessor’s net income would have been impacted as shown in the pro formaamounts shown in the table below (the pro forma disclosures shown are notrepresentative of the future effects on net income (loss)):

 
| ** **                                                                                                                       | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | ** **                               | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** |
| ** **                                                                                                                       | ** ** | ** **                               | ** ** | **(in thousands)**                                          | ** ** | ** **                                                   | ** ** |
| Net loss, as  reported                                                                                                           |       | $                                        | (25,585    | )                                                           | $          | (2,604                                                       | )          | $ | (11,951 | ) |
|                                                                                                                             |       |                                     |       |                                                        |       |                                                         |       |
| Total  stock-based employee compensation expense  determined under fair value method for all awards,  net of related tax effects |       | (103                                     | )          | —                                                      |       | (1,400                                                       | )          |
|                                                                                                                             |       |                                     |       |                                                        |       |                                                         |       |
| Stock-based  employee compensation expense included  in net income, including Merger related payout, net  of related tax effects |       | —                                   |       | —                                                      |       | 6,430                                                        |       |
| Pro forma loss                                                                                                                   |       | $                                        | (25,688    | )                                                           | $          | (2,604                                                       | )          | $ | (6,921 | ) |
|                                                                                                                             |       |                                     |       |                                                        |       |                                                         |       |
| Net loss per  share of Common Stock - basic                                                                                      |       | $                                        | (1.14      | )                                                           | $          | (0.20                                                        | )          |   |   |
| Net loss per  share of Common Stock - diluted                                                                                    |       | $                                        | (1.14      | )                                                           | $          | (0.20                                                        | )          |   |   |

 

14

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| ** **                                                                                                                       | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** |
| ** **                                                                                                                       | ** ** | ** **                              | ** ** | **(in thousands)**                                          | ** ** | ** **                                                | ** ** |
| Net loss, as  reported                                                                                                           |       | $                                       | (27,976    | )                                                           | $          | (2,604                                                    | )          | $ | (1,602 | ) |
|                                                                                                                             |       |                                    |       |                                                        |       |                                                      |       |
| Total  stock-based employee compensation expense  determined under fair value method for all awards,  net of related tax effects |       | (194                                    | )          | —                                                      |       | (1,758                                                    | )          |
|                                                                                                                             |       |                                    |       |                                                        |       |                                                      |       |
| Stock-based  employee compensation expense included  in net income, including Merger related payout, net  of related tax effects |       | —                                  |       | —                                                      |       | 6,448                                                     |       |
| Pro forma net  income (loss)                                                                                                     |       | $                                       | (28,170    | )                                                           | $          | (2,604                                                    | )          | $ | 3,088 |   |
|                                                                                                                             |       |                                    |       |                                                        |       |                                                      |       |
| Net loss per  share of Common Stock - basic                                                                                      |       | $                                       | (1.71      | )                                                           | $          | (0.20                                                     | )          |   |   |
| Net loss per  share of Common Stock - diluted                                                                                    |       | $                                       | (1.71      | )                                                           | $          | (0.20                                                     | )          |   |   |

 

The Company’s options granted to employees during thecurrent fiscal year either vest equally each year over a five-year period orvest in full after a seven-year period unless certain performance accelerationtargets are met.  If the performancetargets are met, the options that vest in full after 7 years will accelerateand vest in one-third installments on June 30, 2005, June 30, 2006 and June 30,2007.  The Company’s options granted toindependent directors during the current fiscal year vest equally in thirds,one-third on the date of grant, one-third on the first anniversary of the dateof grant and the remaining one-third on the second anniversary of the date ofgrant.  The Predecessor’s options grantedduring fiscal year 2003 vested equally each year over a three-year period fromthe date of grant.  As a result, theestimated cost indicated above reflected only a partial vesting of suchoptions.  If full vesting were assumed,the estimated pro forma costs would have been higher than indicated above.

 

### **Note 14. Commitment and Contingencies**

### ** **

**In March2002, the Predecessor, FTD, FTD.COM and the directors of the Predecessor andFTD.COM were named as defendants in five class action lawsuits filed inWilmington, Delaware, which were consolidated under the name “In RE FTD.COMInc. Shareholders Litigation.”  The classaction lawsuits made several allegations, including that insufficient stock ofthe Predecessor was exchanged for FTD.COM stock and breach of fiduciary dutiesby the directors.**

** **

On behalf of alldefendants, the Predecessor settled the consolidated class actionlawsuits.  Such settlement was approvedby the court and included no finding of wrongdoing on the part of any of thedefendants, or any other finding that the claims alleged had merit.

 

Pursuant to the Settlement Agreement, the Predecessoragreed to issue shares of Class A common stock valued at $10.7 million in fulland final settlement of the case.  Inconnection with the settlement, the Predecessor recorded an $11.0 millioncharge in the fourth quarter of fiscal year 2003 with respect to the settlementwhich included costs related to issuing and distributing the settlementshares.  In November 2003, pursuant tothe court approved Settlement Agreement, the Predecessor, on behalf of alldefendants, distributed 139,493 shares of Class A common stock valued at $3.4million as payment for a portion of the $10.7 million settlementliability.  In March 2005, the Company,on behalf of all defendants and pursuant to the terms of the SettlementAgreement, paid the balance of $7.3 million of the settlement funds (which hadbeen placed into an escrow account at the consummation of the 2004 GoingPrivate Transaction to fund this obligation) to the court appointed classaction administrator for distribution to the qualified members of the Class.

 

The Predecessorpursued claims against two of its insurance carriers, one that providedcoverage to FTD and its directors and officers, and another that providedcoverage to FTD.COM and its directors and officers.  In the second 

 

15

----

 

quarter of fiscalyear 2004, the Predecessor recorded a gain of $1.5 million as a result of asettlement with the insurance carrier that maintained a policy covering FTD andits directors and officers.  Theinsurance carrier that maintained the policy covering FTD.COM and its directorsand officers initiated litigation seeking to deny coverage for the shareholderlawsuits, which were settled pursuant to the Settlement Agreement.  The U.S. District Court for the NorthernDistrict of Illinois, Eastern Division entered a judgment on March 25, 2005that the insurance carrier’s policy provides no coverage to FTD.COM for whatFTD.COM alleged were losses it incurred as a result of the Settlement.  Such order was a final appealable order.After reviewing the Court’s decision, FTD.COM has determined not to proceedwith an appeal of this decision.

 

In addition, the Company is involved in various claimsand lawsuits and other matters arising in the normal course of business.  In the opinion of management of the Company,although the outcome of these claims and suits are uncertain, they should nothave a material adverse effect on the Company’s financial condition, liquidityor results of operations.

 

## **Note 15.  Segment Information**

## ** **

Operating segmentsare components of the Company’s business for which separate financialinformation is available that is regularly reviewed by the chief operatingdecision maker to make decisions about resources to be allocated to eachsegment and to assess its performance.

 

For purposes ofmanaging the Company, management reviews segment financial performance to theoperating income level for each of its reportable business segments.  Accordingly, interest income, interestexpense and tax expense are recorded on a consolidated corporate basis.

 

The floristbusiness segment includes all products and services sold to FTD member floristsand other retail locations offering floral products, encompassing clearinghouseservices, publishing products and services, technology sales and leases andspecialty wholesaling product sales.  Theconsumer business segment encompasses floral and specialty gift items primarilysold to consumers through the *www.ftd.com*Website or its toll-free telephone number, 1-800-SEND-FTD.

 

Of the Company’sconsolidated assets totaling $584.3 million at March 31, 2005, the assets ofthe Company’s consumer business totaled approximately $269.6 million.  The Company’s florist business segment andcorporate headquarters constitute the remaining assets of approximately $314.7million.

 

The Company’saccounting policies for segments are the same as those on a consolidated basisdescribed in Note 1, Summary of Significant Accounting Policies, of the Company’saudited consolidated financial statements and notes thereto for the fiscal yearended June 30, 2004.

 

Certain amounts inthe Predecessor’s operating results by reportable business segment for theperiod from January 1, 2004 through February 23, 2004 and the period from July1, 2003 through February 23, 2004 have been reclassified to conform to thecurrent year presentation.

 

The following tables detail the Company’s and thePredecessor’s operating results by reportable business segment for the three-and nine-month periods ended March 31, 2005, the period from January 1, 2004through February 23, 2004, the period from July 1, 2003 through February 23,2004 and the period from February 24, 2004 through March 31, 2004:

 

16

----

 

 
| ** **                                                 | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **Gross Segment**                      | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                 | ** ** | ** **                             | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| **Revenues:**                                              |       |                                   |       |   |   |   |   |
| Florist business                                           |       | $                                      | 54,320     |   | $ | (39 | ) | $ | 54,281 |   |
| Consumer  business                                         |       | 76,147                                 |       | (5,536 | ) | 70,611 |   |
| Total                                                      |       | 130,467                                |       | (5,575 | ) | 124,892 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Costs  of Goods Sold and Services Provided:**            |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 19,846                                 |       | (820 | ) | 19,026 |   |
| Consumer  business                                         |       | 53,372                                 |       | (743 | ) | 52,629 |   |
| Corporate                                                  |       | 585                                    |       | — |   | 585 |   |
| Total                                                      |       | 73,803                                 |       | (1,563 | ) | 72,240 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Gross  Profit:**                                         |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 34,474                                 |       | 781 |   | 35,255 |   |
| Consumer  business                                         |       | 22,775                                 |       | (4,793 | ) | 17,982 |   |
| Corporate                                                  |       | (585                                   | )          | — |   | (585 | ) |
| Total                                                      |       | 56,664                                 |       | (4,012 | ) | 52,652 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Advertising  and Selling:**                              |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 18,271                                 |       | (4,012 | ) | 14,259 |   |
| Consumer  business                                         |       | 8,412                                  |       | — |   | 8,412 |   |
| Total                                                      |       | 26,683                                 |       | (4,012 | ) | 22,671 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **General  and Administrative:**                           |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 2,612                                  |       | — |   | 2,612 |   |
| Consumer  business                                         |       | 5,639                                  |       | (700 | ) | 4,939 |   |
| Corporate                                                  |       | 18,237                                 |       | 700 |   | 18,937 |   |
| Total                                                      |       | 26,488                                 |       | — |   | 26,488 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Operating  Income (Loss) before Corporate Allocations:** |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 13,591                                 |       | 4,793 |   | 18,384 |   |
| Consumer  business                                         |       | 8,724                                  |       | (4,093 | ) | 4,631 |   |
| Corporate                                                  |       | (18,822                                | )          | (700 | ) | (19,522 | ) |
| Total                                                      |       | 3,493                                  |       | — |   | 3,493 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Corporate  Allocations:**                                |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 3,117                                  |       | — |   | 3,117 |   |
| Consumer  business                                         |       | 693                                    |       | — |   | 693 |   |
| Corporate                                                  |       | (3,810                                 | )          | — |   | (3,810 | ) |
| Total                                                      |       | —                                 |       | — |   | — |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Operating  Income (Loss):**                              |       |                                   |       |   |   |   |   |
| Florist business                                           |       | 10,474                                 |       | 4,793 |   | 15,267 |   |
| Consumer  business                                         |       | 8,031                                  |       | (4,093 | ) | 3,938 |   |
| Corporate                                                  |       | (15,012                                | )          | (700 | ) | (15,712 | ) |
| Total                                                      |       | $                                      | 3,493      |   | $ | — |   | $ | 3,493 |   |
|                                                       |       |                                   |       |   |   |   |   |
| **Depreciation  and Amortization:**                        |       |                                   |       |   |   |   |   |
| Florist business                                           |       | $                                      | 919        |   | $ | — |   | $ | 919 |   |
| Consumer business                                          |       | 593                                    |       | — |   | 593 |   |
| Corporate                                                  |       | 961                                    |       | — |   | 961 |   |
| Total                                                      |       | $                                      | 2,473      |   | $ | — |   | $ | 2,473 |   |

 

17

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| ** **                                                  | ** ** | **Period from February 24, 2004 through March 31, 2004** | ** ** | **Period from January 1, 2004 through February 23, 2004** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Gross Segment**                                        | ** ** | **Eliminations**                                          | ** ** | **Consolidated** | ** ** | **Gross Segment** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                  | ** ** | ** **                                               | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | **Predecessor** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** **                                               | ** ** | ** **                                                | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                               |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | $                                                        | 17,181     |                                                      | $          | 31 |   | $ | 17,212 |   | $ | 31,806 |   | $ | 119 |   | $ | 31,925 |   |
| Consumer  business                                          |       | 15,015                                                   |       | (1,247                                                    | )          | 13,768 |   | 46,709 |   | (3,326 | ) | 43,383 |   |
| Total                                                       |       | 32,196                                                   |       | (1,216                                                    | )          | 30,980 |   | 78,515 |   | (3,207 | ) | 75,308 |   |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Costs  of Goods Sold and  Services Provided:**            |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 6,628                                                    |       | (218                                                      | )          | 6,410 |   | 11,948 |   | (442 | ) | 11,506 |   |
| Consumer  business                                          |       | 10,507                                                   |       | (117                                                      | )          | 10,390 |   | 33,096 |   | (333 | ) | 32,763 |   |
| Corporate                                                   |       | 203                                                      |       | —                                                    |       | 203 |   | 382 |   | — |   | 382 |   |
| Total                                                       |       | 17,338                                                   |       | (335                                                      | )          | 17,003 |   | 45,426 |   | (775 | ) | 44,651 |   |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Gross  Profit:**                                          |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 10,553                                                   |       | 249                                                       |       | 10,802 |   | 19,858 |   | 561 |   | 20,419 |   |
| Consumer  business                                          |       | 4,508                                                    |       | (1,130                                                    | )          | 3,378 |   | 13,613 |   | (2,993 | ) | 10,620 |   |
| Corporate                                                   |       | (203                                                     | )          | —                                                    |       | (203 | ) | (382 | ) | — |   | (382 | ) |
| Total                                                       |       | 14,858                                                   |       | (881                                                      | )          | 13,977 |   | 33,089 |   | (2,432 | ) | 30,657 |   |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Advertising  and Selling:**                               |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 5,602                                                    |       | (879                                                      | )          | 4,723 |   | 12,518 |   | (2,430 | ) | 10,088 |   |
| Consumer  business                                          |       | 1,106                                                    |       | —                                                    |       | 1,106 |   | 5,010 |   | — |   | 5,010 |   |
| Total                                                       |       | 6,708                                                    |       | (879                                                      | )          | 5,829 |   | 17,528 |   | (2,430 | ) | 15,098 |   |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **General  and Administrative:**                            |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 836                                                      |       | —                                                    |       | 836 |   | 1,757 |   | — |   | 1,757 |   |
| Consumer  business                                          |       | 1,404                                                    |       | (142                                                      | )          | 1,262 |   | 3,422 |   | (447 | ) | 2,975 |   |
| Corporate                                                   |       | 3,134                                                    |       | 140                                                       |       | 3,274 |   | 25,679 |   | 445 |   | 26,124 |   |
| Total                                                       |       | 5,374                                                    |       | (2                                                        | )          | 5,372 |   | 30,858 |   | (2 | ) | 30,856 |   |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Operating  Income (Loss)  before Corporate Allocations:** |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 4,115                                                    |       | 1,128                                                     |       | 5,243 |   | 5,583 |   | 2,991 |   | 8,574 |   |
| Consumer  business                                          |       | 1,998                                                    |       | (988                                                      | )          | 1,010 |   | 5,181 |   | (2,546 | ) | 2,635 |   |
| Corporate                                                   |       | (3,337                                                   | )          | (140                                                      | )          | (3,477 | ) | (26,061 | ) | (445 | ) | (26,506 | ) |
| Total                                                       |       | 2,776                                                    |       | —                                                    |       | 2,776 |   | (15,297 | ) | — |   | (15,297 | ) |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Corporate  Allocations:**                                 |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 999                                                      |       | —                                                    |       | 999 |   | 1,957 |   | — |   | 1,957 |   |
| Consumer business                                           |       | 242                                                      |       | —                                                    |       | 242 |   | 437 |   | — |   | 437 |   |
| Corporate                                                   |       | (1,241                                                   | )          | —                                                    |       | (1,241 | ) | (2,394 | ) | — |   | (2,394 | ) |
| Total                                                       |       | —                                                   |       | —                                                    |       | — |   | — |   | — |   | — |   |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Operating  Income (Loss):**                               |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | 3,116                                                    |       | 1,128                                                     |       | 4,244 |   | 3,626 |   | 2,991 |   | 6,617 |   |
| Consumer  business                                          |       | 1,756                                                    |       | (988                                                      | )          | 768 |   | 4,744 |   | (2,546 | ) | 2,198 |   |
| Corporate                                                   |       | (2,096                                                   | )          | (140                                                      | )          | (2,236 | ) | (23,667 | ) | (445 | ) | (24,112 | ) |
| Total                                                       |       | $                                                        | 2,776      |                                                      | $          | — |   | $ | 2,776 |   | $ | (15,297 | ) | $ | — |   | $ | (15,297 | ) |
|                                                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Depreciation  and  Amortization:**                        |       |                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Florist business                                            |       | $                                                        | 435        |                                                      | $          | — |   | $ | 435 |   | $ | 839 |   | $ | — |   | $ | 839 |   |
| Consumer  business                                          |       | 205                                                      |       | —                                                    |       | 205 |   | 380 |   | — |   | 380 |   |
| Corporate                                                   |       | 317                                                      |       | —                                                    |       | 317 |   | 137 |   | — |   | 137 |   |
| Total                                                       |       | $                                                        | 957        |                                                      | $          | — |   | $ | 957 |   | $ | 1,356 |   | $ | — |   | $ | 1,356 |   |

 

18

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| ** **                                                 | ** ** | **Nine Months Ended March 31,  2005** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **Gross Segment**                     | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                 | ** ** | ** **                            | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| **Revenues:**                                              |       |                                  |       |   |   |   |   |
| Florist business                                           |       | $                                     | 146,190    |   | $ | (99 | ) | $ | 146,091 |   |
| Consumer  business                                         |       | 182,964                               |       | (13,838 | ) | 169,126 |   |
| Total                                                      |       | 329,154                               |       | (13,937 | ) | 315,217 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Costs  of Goods Sold and Services Provided:**            |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 51,499                                |       | (2,338 | ) | 49,161 |   |
| Consumer  business                                         |       | 127,829                               |       | (1,769 | ) | 126,060 |   |
| Corporate                                                  |       | 1,779                                 |       | — |   | 1,779 |   |
| Total                                                      |       | 181,107                               |       | (4,107 | ) | 177,000 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Gross  Profit:**                                         |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 94,691                                |       | 2,239 |   | 96,930 |   |
| Consumer  business                                         |       | 55,135                                |       | (12,069 | ) | 43,066 |   |
| Corporate                                                  |       | (1,779                                | )          | — |   | (1,779 | ) |
| Total                                                      |       | 148,047                               |       | (9,830 | ) | 138,217 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Advertising  and Selling:**                              |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 51,381                                |       | (9,828 | ) | 41,553 |   |
| Consumer  business                                         |       | 19,303                                |       | — |   | 19,303 |   |
| Total                                                      |       | 70,684                                |       | (9,828 | ) | 60,856 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **General  and Administrative:**                           |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 7,729                                 |       | — |   | 7,729 |   |
| Consumer  business                                         |       | 14,107                                |       | (1,684 | ) | 12,423 |   |
| Corporate                                                  |       | 29,725                                |       | 1,682 |   | 31,407 |   |
| Total                                                      |       | 51,561                                |       | (2 | ) | 51,559 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Operating  Income (Loss) before Corporate Allocations:** |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 35,581                                |       | 12,067 |   | 47,648 |   |
| Consumer  business                                         |       | 21,725                                |       | (10,385 | ) | 11,340 |   |
| Corporate                                                  |       | (31,504                               | )          | (1,682 | ) | (33,186 | ) |
| Total                                                      |       | 25,802                                |       | — |   | 25,802 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Corporate  Allocations:**                                |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 9,126                                 |       | — |   | 9,126 |   |
| Consumer  business                                         |       | 2,187                                 |       | — |   | 2,187 |   |
| Corporate                                                  |       | (11,313                               | )          | — |   | (11,313 | ) |
| Total                                                      |       | —                                |       | — |   | — |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Operating  Income (Loss):**                              |       |                                  |       |   |   |   |   |
| Florist business                                           |       | 26,455                                |       | 12,067 |   | 38,522 |   |
| Consumer  business                                         |       | 19,538                                |       | (10,385 | ) | 9,153 |   |
| Corporate                                                  |       | (20,191                               | )          | (1,682 | ) | (21,873 | ) |
| Total                                                      |       | $                                     | 25,802     |   | $ | — |   | $ | 25,802 |   |
|                                                       |       |                                  |       |   |   |   |   |
| **Depreciation  and Amortization:**                        |       |                                  |       |   |   |   |   |
| Florist business                                           |       | $                                     | 3,354      |   | $ | — |   | $ | 3,354 |   |
| Consumer  business                                         |       | 1,842                                 |       | — |   | 1,842 |   |
| Corporate                                                  |       | 2,892                                 |       | — |   | 2,892 |   |
| Total                                                      |       | $                                     | 8,088      |   | $ | — |   | $ | 8,088 |   |

 

19

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| ** **                                                 | ** ** | **Period from February 24, 2004 through March 31,  2004** | ** ** | **Period from July 1, 2003 through February 23,  2004** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Gross Segment**                                         | ** ** | **Eliminations**                                        | ** ** | **Consolidated** | ** ** | **Gross Segment** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                 | ** ** | ** **                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | **Predecessor** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                                | ** ** | ** **                                              | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                              |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | $                                                         | 17,181     |                                                    | $          | 31 |   | $ | 17,212 |   | $ | 116,878 |   | $ | 294 |   | $ | 117,172 |   |
| Consumer  business                                         |       | 15,015                                                    |       | (1,247                                                  | )          | 13,768 |   | 138,965 |   | (10,458 | ) | 128,507 |   |
| Total                                                      |       | 32,196                                                    |       | (1,216                                                  | )          | 30,980 |   | 255,843 |   | (10,164 | ) | 245,679 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Costs  of Goods Sold and Services Provided:**            |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| ** **                                                 |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 6,628                                                     |       | (218                                                    | )          | 6,410 |   | 41,477 |   | (1,703 | ) | 39,774 |   |
| Consumer  business                                         |       | 10,507                                                    |       | (117                                                    | )          | 10,390 |   | 97,639 |   | (1,030 | ) | 96,609 |   |
| Corporate                                                  |       | 203                                                       |       | —                                                  |       | 203 |   | 1,674 |   | — |   | 1,674 |   |
| Total                                                      |       | 17,338                                                    |       | (335                                                    | )          | 17,003 |   | 140,790 |   | (2,733 | ) | 138,057 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Gross  Profit:**                                         |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 10,553                                                    |       | 249                                                     |       | 10,802 |   | 75,401 |   | 1,997 |   | 77,398 |   |
| Consumer  business                                         |       | 4,508                                                     |       | (1,130                                                  | )          | 3,378 |   | 41,326 |   | (9,428 | ) | 31,898 |   |
| Corporate                                                  |       | (203                                                      | )          | —                                                  |       | (203 | ) | (1,674 | ) | — |   | (1,674 | ) |
| Total                                                      |       | 14,858                                                    |       | (881                                                    | )          | 13,977 |   | 115,053 |   | (7,431 | ) | 107,622 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Advertising  and Selling:**                              |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 5,602                                                     |       | (879                                                    | )          | 4,723 |   | 43,841 |   | (7,415 | ) | 36,426 |   |
| Consumer  business                                         |       | 1,106                                                     |       | —                                                  |       | 1,106 |   | 13,815 |   | — |   | 13,815 |   |
| Total                                                      |       | 6,708                                                     |       | (879                                                    | )          | 5,829 |   | 57,656 |   | (7,415 | ) | 50,241 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **General  and Administrative:**                           |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 836                                                       |       | —                                                  |       | 836 |   | 7,108 |   | — |   | 7,108 |   |
| Consumer  business                                         |       | 1,404                                                     |       | (142                                                    | )          | 1,262 |   | 11,242 |   | (1,324 | ) | 9,918 |   |
| Corporate                                                  |       | 3,134                                                     |       | 140                                                     |       | 3,274 |   | 38,346 |   | 1,308 |   | 39,654 |   |
| Total                                                      |       | 5,374                                                     |       | (2                                                      | )          | 5,372 |   | 56,696 |   | (16 | ) | 56,680 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Operating  Income (Loss) before Corporate Allocations:** |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 4,115                                                     |       | 1,128                                                   |       | 5,243 |   | 24,452 |   | 9,412 |   | 33,864 |   |
| Consumer  business                                         |       | 1,998                                                     |       | (988                                                    | )          | 1,010 |   | 16,269 |   | (8,104 | ) | 8,165 |   |
| Corporate                                                  |       | (3,337                                                    | )          | (140                                                    | )          | (3,477 | ) | (40,020 | ) | (1,308 | ) | (41,328 | ) |
| Total                                                      |       | 2,776                                                     |       | —                                                  |       | 2,776 |   | 701 |   | — |   | 701 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Corporate  Allocations:**                                |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 999                                                       |       | —                                                  |       | 999 |   | 8,028 |   | — |   | 8,028 |   |
| Consumer  business                                         |       | 242                                                       |       | —                                                  |       | 242 |   | 1,880 |   | — |   | 1,880 |   |
| Corporate                                                  |       | (1,241                                                    | )          | —                                                  |       | (1,241 | ) | (9,908 | ) | — |   | (9,908 | ) |
| Total                                                      |       | —                                                    |       | —                                                  |       | — |   | — |   | — |   | — |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Operating  Income (Loss):**                              |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | 3,116                                                     |       | 1,128                                                   |       | 4,244 |   | 16,424 |   | 9,412 |   | 25,836 |   |
| Consumer  business                                         |       | 1,756                                                     |       | (988                                                    | )          | 768 |   | 14,389 |   | (8,104 | ) | 6,285 |   |
| Corporate                                                  |       | (2,096                                                    | )          | (140                                                    | )          | (2,236 | ) | (30,112 | ) | (1,308 | ) | (31,420 | ) |
| Total                                                      |       | $                                                         | 2,776      |                                                    | $          | — |   | $ | 2,776 |   | $ | 701 |   | $ | — |   | $ | 701 |   |
|                                                       |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Depreciation  and Amortization:**                        |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Florist business                                           |       | $                                                         | 435        |                                                    | $          | — |   | $ | 435 |   | $ | 3,340 |   | $ | — |   | $ | 3,340 |   |
| Consumer  business                                         |       | 205                                                       |       | —                                                  |       | 205 |   | 1,489 |   | — |   | 1,489 |   |
| Corporate                                                  |       | 317                                                       |       | —                                                  |       | 317 |   | 548 |   | — |   | 548 |   |
| Total                                                      |       | $                                                         | 957        |                                                    | $          | — |   | $ | 957 |   | $ | 5,377 |   | $ | — |   | $ | 5,377 |   |

 

20

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## **Note 16. FinancialStatements of Guarantors**

## ** **

The accompanying consolidated balance sheets,statements of operations and statements of cash flows presented hereinrepresent the accounts of the Company and its Guarantor and non-Guarantorsubsidiaries, as defined in the indenture governing the Notes.  The Notes are unconditionally guaranteed, ona joint and several basis, by the Guarantor subsidiaries, including alldomestic subsidiaries of FTD, Inc. Non-Guarantor subsidiaries include FTD Canada, Inc. (formerly known asFlorists’ Transworld Delivery Association of Canada, Ltd.) and Florists’Transworld Delivery de Mexico, both of which are insignificant and aretherefore not separately presented.  AsFTD, Inc., either directly or indirectly, owns 100% of each of the Guarantorsubsidiaries and, as FTD, Inc. does not have any significant independent assetsor operations apart from the Guarantor subsidiaries, separate subsidiaryfinancial information has not been presented.

 

21

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**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussion should be read in conjunctionwith the consolidated financial statements and notes to those statements thatappear elsewhere in this Form 10-Q.  Thefollowing discussion contains forward-looking statements that reflect theCompany’s plans, estimates and beliefs. The Company’s actual results could differ from those discussed in theforward-looking statements.  Factors thatcould cause or contribute to any differences include, but are not limited to,those discussed under the caption “Forward-Looking Information” and elsewherein this Form 10-Q.

 

### **Overview**

### ** **

FTD Group, Inc.(the “Company”), formerly Mercury Man Holdings Corporation, is a Delawarecorporation that was formed in 2003 by Green Equity Investors IV, L.P. (“GreenEquity Investors”), a private investment fund affiliated with Leonard Green& Partners, L.P., solely for the purpose of acquiring majority ownership ofFTD, Inc.

 

FTD, Inc. is aDelaware corporation that commenced operations in 1994 and includes theoperations of its principal operating subsidiary, Florists’ TransworldDelivery, Inc., a Michigan corporation (“FTD” or the “Operating Company”).  The operations of FTD include those of itswholly-owned subsidiaries, FTD.COM INC. (“FTD.COM”) and FTD Canada, Inc.(formerly known as Florists’ Transworld Delivery Association of Canada, Ltd.),and its indirect wholly-owned subsidiary, Renaissance Greeting Cards, Inc. (“Renaissance”).  Substantially all of the Company’s operationsare conducted through FTD and its subsidiaries.

 

The capitalization of the Company and of FTD, Inc. atMarch 31, 2005 are the same in all material respects.  During the nine-month period ended March 31,2005 and the period from February 24, 2004 through March 31, 2004, consolidatedresults of operations and cash flows of the Company and FTD, Inc. differed dueto the interest expense and prepayment fees related to the Company’s preferredstock, the expenses related to the Company’s initial public offering and therepurchase of the Company’s preferred stock with the proceeds of the initialpublic offering.  Based on the Company’scurrent corporate structure and capitalization, the Company expects that theconsolidated results of operations and cash flows of the Company and of FTD,Inc. to be the same in future periods, in all material respects.

 

On February 24,2004, the Company completed a going private transaction, in which Nectar MergerCorporation, which was a wholly-owned subsidiary of the Company, merged withand into FTD, Inc. with FTD, Inc. continuing as the surviving corporation (the “2004Going Private Transaction”).  Theaggregate consideration for the 2004 Going Private Transaction wasapproximately $422.0 million, with each public FTD, Inc. stockholder receivingcash for each share of FTD, Inc. common stock owned.  See Note 4 of the Consolidated FinancialStatements included herein for further detail. The results of operations presented herein for all periods prior to the2004 Going Private Transaction are referred to as the results of operations ofthe “Predecessor.”

 

On November 23,2004, the Company filed a registration statement with the Securities andExchange Commission, (the “SEC”) on Form S-1 (Registration No. 333-120723),relating to an initial public offering of the Company’s common stock.  The registration statement was declaredeffective by the SEC on February 8, 2005.**** See Note 3 for further detail.

 

On February 7, 2005, the stockholders approved an increase in the numberof authorized shares to 75,000,000, as well as a 1-for-3 reverse stocksplit.  All common share and per shareamounts have been restated to reflect this reverse stock split.

 

The Company is aleading provider of floral-related products and services to consumers andretail florists in the approximately $14 billion U.S. floral retailmarket.  The Company’s business issupported by the highly recognized FTD brand, which was established in 1910 andenjoys 96% brand recognition among the Company’s principal target market ofU.S. consumers between the ages of 25 and 64, as well as by the Mercury Manlogo, which is displayed in approximately 50,000 floral shops globally.  The Company generates its revenue from twobusiness segments, the florist business segment and the consumer businesssegment.

 

Through itsflorist business, the Company provides products and services, such asclearinghouse services, 

 

22

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technologyproducts and services and floral shop supplies, to approximately 20,000 memberflorists and other retail locations offering floral products in the U.S. andCanada, and connects approximately 30,000 additional florists throughaffiliated or related organizations in 150 countries outside of North America.

 

The consumerbusiness segment is comprised of FTD.COM, an Internet and telephone marketer offlowers and specialty gifts, which sells products directly to consumersprimarily through the www.ftd.com Web site and the 1-800-SEND-FTD toll-freetelephone number.

 

*KeyIndustry Trends*.  TheCompany believes key trends in the floral retail market include the increasingrole of floral direct marketers, particularly those marketing floral productsover the Internet, which has resulted in increased orders for delivery to beplaced through floral direct marketers versus traditional retail florists, theadvent of retail consumer companies that deliver unarranged boxed flowers viacommon courier with no involvement of retail florists and the increasedpresence of supermarkets and mass merchants, which has reduced the cash andcarry floral business for the traditional retail florist.  The Company is addressing each of thesetrends through the business strategies of the florist business segment and theconsumer business segment.

 

*BusinessStrategy*.  The Companyplans to expand the product and service offerings of its florist businesssegment, while simplifying its pricing strategies and improving its sales andservice capabilities, with the objective of improving its productpenetration.  Additionally, the Companyis currently pursuing opportunities to expand its presence in a number ofchannels that have not historically represented a meaningful portion of itsrevenues, such as the supermarket channel and other mass market channels.

 

The Company plansto continue to direct consumers to the Internet for their floral and specialtygift purchasing needs, as processing orders over the Internet is a profitableorder generating vehicle and an efficient and convenient ordering method forthe consumer.  This strategy will besupported in part by the continued diversification of the marketing programswhich attract consumers and their resulting floral or specialty giftorders.  The Company also plans to pursuegrowth in additional specialty gift categories, as the Company believes itsdirect marketing expertise and brand strength allows it to attract a wide rangeof quality specialty gift manufacturers. Additionally, the Company plans to expand its lower-priced floralofferings.  The Company believes this isa growing segment of the market and is expanding its marketing efforts andproduct offerings targeting this segment. The network of FTD-member florists enables the Company to offer same daydelivery of these products, which it believes is a competitive advantage overits competitors in the low-priced floral market who primarily offer unarrangedboxed flowers delivered on a next day basis through common courier.

 

### **Operations**

### ** **

*Floristbusiness.* The floristbusiness segment includes revenue associated with the services and productsprovided to FTD member florists and other retail locations offering floralproducts and is primarily comprised of the services and products as describedbelow.  Membership as of March 31, 2005and 2004 was approximately 20,300 and 20,500 members, respectively.  Average membership for both the three- andnine-months ended March 31, 2005 was 20,000 members for both periods, whileaverage membership for the three- and nine-months ended March 31, 2004 was20,100 and 19,700 members, respectively. The following tables sets forth the percentage of revenue in eachcategory of the florist business segment:

 

23

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| ** **                                                                                      | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Clearinghouse  services, publications and other member services products and services  revenues |       | 55                                       | %          | 47                                                          | %          | 56                                                           | %          |
| Mercury Network  services and Mercury computer equipment products and services revenues         |       | 15                                       | %          | 13                                                          | %          | 13                                                           | %          |
| Specialty  wholesaling product revenue                                                          |       | 30                                       | %          | 40                                                          | %          | 31                                                           | %          |
|                                                                                            |       |                                     |       |                                                        |       |                                                         |       |
| Total florist  business segment revenue                                                         |       | 100                                      | %          | 100                                                         | %          | 100                                                          | %          |

 
| ** **                                                                                      | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2004  through  February 23, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Clearinghouse  services, publications and other member services products and services  revenues |       | 59                                      | %          | 47                                                          | %          | 59                                                        | %          |
| Mercury Network  services and Mercury computer equipment products and services revenues         |       | 15                                      | %          | 13                                                          | %          | 14                                                        | %          |
| Specialty  wholesaling product revenue                                                          |       | 26                                      | %          | 40                                                          | %          | 27                                                        | %          |
|                                                                                            |       |                                    |       |                                                        |       |                                                      |       |
| Total florist  business segment revenue                                                         |       | 100                                     | %          | 100                                                         | %          | 100                                                       | %          |

 

Clearinghouseservices. Clearinghouse services primarily consist of billing and collectionservices provided to both the sending and receiving florists in flowers-by-wiretransactions.  Revenues from theclearinghouse are generated by charging 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 membership fee charged to member florists and from the creditcard processing services provided to member florists.  Cash rebates, which are earned by floristsunder a customer incentive program, in conjunction with the credit cardprocessing service offered by the Company, are classified as contra-revenue, inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, *Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products)*.

 

Publications andother member services products and services.  Publications products and other memberservices products and services primarily consist of a telephone directory ofFTD member florists that is published on a quarterly basis in both paper bookand CD-ROM formats.  Revenues and costsrelating to these publications are recognized ratably over the period in whichthe publications are issued.  The Companyalso provides services related to the set-up and maintenance of FTD Florists’Online Web sites, which are accessible directly through FTD.COM’s www.ftd.comWeb site.  In addition, the Companyprovides a 24-hour telephone answering and floral order-taking service (“FlowersAll Hours”).  Revenues associated withFTD Florists’ Online Web sites and Flowers All Hours are recorded in the periodthe service is provided.  Revenue is alsogenerated from the monthly Floral Selections Guide fee charged to memberflorists for use of the Floral Selections Guide, a counter display published byFTD featuring FTD products for all occasions.

 

Mercury Networkservices.  The Company’sMercury Network is a proprietary telecommunications network linking the Companyto FTD member florists.  Florists who arelinked by the Mercury Network are able to transmit orders and send each othermessages for a per order or per message fee. Revenues related to transmitting orders and messages are recorded in theperiod the transmission occurs.

 

Mercury computerequipment products and services.  Mercury Technology computer equipment andsoftware sales include both the sales and leasing of hardware and softwaredesigned for the floral industry.  Thesoftware provides 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 payroll

 

24

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and accountingfunctions.  The Company follows theprovisions 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 (e.g.,software products, upgrades/enhancements, post-contract customer support,installation and training) to be allocated to each element based on therelative fair values of the elements. The Company recognizes revenue related to hardware products that aresold, including specified upgrades/enhancements, at the time of shipment.  The Company recognizes revenue related tosoftware products that are sold ratably over the estimated useful life of thesoftware.  For systems that are beingleased, the Company recognizes hardware and software revenue ratably over theperiod of the lease agreement.  Supportrevenue is recognized over the period of the support agreement.  Installation and training revenues arerecognized at the time the service is provided.

 

Specialtywholesaling products. The Company sells both FTD-branded and non-branded holiday and everydayfloral arrangement containers and products. The Company also sells packaging, promotional products and a widevariety of other floral-related supplies, including greeting cards.  Sales of specialty wholesaling products arerecorded when the products are shipped and title is transferred.  Amounts charged to the customer for the productand for shipping and handling are recorded as revenue and the costs of theproduct and the shipping and handling are recorded as costs of goods sold andservices provided.

 

*Consumerbusiness.*  The consumerbusiness segment is comprised of FTD.COM, an Internet and telephone marketer offlowers and specialty gifts, which sells products directly to consumersprimarily through the www.ftd.com Web site and the 1-800-SEND-FTD toll-freetelephone number.  FTD.COM offers sameday delivery of over 400 floral arrangements to nearly 100% of the U.S. andCanadian populations, which are fulfilled by FTD-member florists.  FTD.COM also offers over 800 specialty giftitems, which are delivered via common courier, including fresh cuts, plants,gourmet food gifts, holiday gifts, bath and beauty products, jewelry, wine andgift baskets, dried flowers and stuffed animals.

 

Orders placedthrough FTD.COM’s**Web site or1-800-SEND-FTD typically are paid for using a credit card.  When a customer makes a purchase that will befulfilled by an FTD florist, FTD.COM processes the order, transmits the order tothe Mercury Network and charges the customer’s credit card.  The Mercury Network then transmits the orderto the fulfilling florist.  FTD.COMtypically charges the customer a service fee for floral orders and certainspecialty gift orders.

 

Generally, ordersfrom FTD.COM’s specialty gift selection are fulfilled by a manufacturer or athird party distributor and are based on a pre-negotiated price.  FTD.COM typically charges the customershipping and handling fees for these specialty gift product orders.  Amounts charged to the customer for theproduct and shipping and handling are recorded as revenue and thepre-negotiated price of the product and the costs incurred for shipping andhandling are recorded as costs of goods sold and services provided.

 

Order revenue andservice fees are reported net of discounts. Generally, FTD.COM recognizes 100% of the order value as revenue and theassociated costs of goods sold and services provided when the order isfulfilled.

 

*Operatingexpenses. *Sellingexpenses primarily include expenses related to the Company’s florist businesssales force and rebates offered to florists as incentive to increase ordervolumes processed through the FTD clearinghouse.  Advertising expenses are primarily related tothe Company’s marketing and advertising programs on both national and locallevels.  FTD’s advertising promotes FTDmember florists, FTD-branded products, the www.ftd.com Web site and thetoll-free telephone number, 1-800-SEND-FTD.

 

The floristbusiness segment promotes the FTD brand and its products and services primarilythrough network and cable television advertisements, magazine advertisements,newspaper supplements and radio. Sponsorships are also a part of the florist business segment’s marketingefforts.  Additionally, the floristbusiness segment offers advertising opportunities and supplies advertising andmarketing tools, such as advertisements for newspaper print, point-of-saleitems, radio scripts and television tapes to be customized with individual shopinformation, on a local basis for FTD florists to support the Company’sco-branding strategy.  FTD florists canalso purchase customizable direct mail pieces through FTD.

 

The consumerbusiness segment’s marketing program utilizes a mix of online advertising, directmarketing, 

 

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customer loyaltymarketing strategies and offline advertising, representing a balanced marketingprogram focused on both customer acquisition and retention.  Online advertising consists primarily ofonline advertisements and links on shopping and search-oriented Web sites.  The direct marketing campaign focuses on thedevelopment of relationships with companies that have large consumer databases.  Statement inserts, e-mails, online placements,discount offers and mileage and point award programs are utilized to market tothese consumers.  The cost associatedwith mileage and point award programs are classified as cost of goods sold, inaccordance with EITF Issue No. 01-9. Customer loyalty marketing strategies focus on the utilization of theCompany’s extensive database of customer information to enhance customerretention efforts.  Offline advertisingconsists primarily of yellow pages advertising.

 

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

 

*Seasonality.*  In view of seasonal variations in therevenues and operating results of the Company’s florist and consumer businesssegments, the Company believes that comparisons of its revenues and operatingresults for any period with those of the immediately preceding period or thesame period of the preceding fiscal year may be of limited relevance inevaluating the Company’s historical performance and predicting the Company’sfuture financial performance.  TheCompany’s working capital, cash and short-term borrowings also fluctuate duringthe year as a result of the factors set forth below.

 

Revenues andoperating results tend to be lower for the quarter ending September 30 becausenone of the most popular floral and gift holidays, which include Valentine’sDay, Easter, Mother’s Day, Thanksgiving and Christmas, fall within thatquarter.  In addition, depending on theyear, the popular floral holiday of Easter sometimes falls within the quarterending March 31 (as it did in fiscal year 2005, the current fiscal year) andsometimes falls within the quarter ending June 30 (as it did in fiscal year2004, the prior fiscal year).  Inaddition, historical revenues and operating results for fiscal years prior tofiscal year 2005 fluctuated in the first quarter of each fiscal year as aresult of revenue generated from the Floral Selections Guide, which has beenpublished bi-annually, and had historically been charged to florists in themonth shipped.

 

**Three months ended March 31, 2005 compared to thethree months ended March 31, 2004 (combined)**

 

** **The amounts for the periods from January 1, 2004 through February 23,2004 and February 24, 2004 through March 31, 2004 have been combined fordiscussion purposes and presented as the three months ended March 31, 2004.

 
| **Revenues**       | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|--------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|
| ** **         | ** ** | ** **                               | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** | **Combined**                             | ** ** | ** **   | ** ** |
| ** **         | ** ** | ** **                               | ** ** | **(in thousands)**                                          | ** ** | ** **                                                   | ** ** | ** **                               | ** ** |
| Florist business   |       | $                                        | 54,281     |                                                        | $          | 17,212                                                       |       | $                                        | 31,925     |         | $          | 49,137 |   | 10.5 | % |
| Consumer  business |       | 70,611                                   |       | 13,768                                                      |       | 43,383                                                       |       | 57,151                                   |       | 23.6         | %          |
| Total revenues     |       | $                                        | 124,892    |                                                        | $          | 30,980                                                       |       | $                                        | 75,308     |         | $          | 106,288 |   | 17.5 | % |

 

Total revenuesincreased by $18.6 million, or 17.5%, to $124.9 million for the three-monthperiod ended March 31, 2005, compared to combined revenues of $106.3 millionfor the three-month period ended March 31, 2004.  Revenues for the period from February 24,2004 through March 31, 2004 and for the period from January 1, 2004 throughFebruary 23, 2004 were $31.0 million and $75.3 million, respectively.  There were no revenues related to corporateactivities.

 

Managementbelieves a key metric in driving revenues for the florist business segment isthe number of members that use or purchase services and products provided bythe florist business segment, which is partially driven by membership.  Membership as of March 31, 2005 and 2004 wasapproximately 20,300 and 20,500 members, respectively.  Average membership for the three-monthperiods ended March 31, 2005 and 2004 was approximately 20,000 and 20,100members, respectively.  Revenues for theflorist business segment increased by $5.2 million, or 10.5%, to $54.3 millionfor the three-month period ended March 31, 2005 compared to combined

 

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revenue of $49.1 million for the three-month periodended March 31, 2004.  Revenues for theflorist business segment for the period from February 24, 2004 through March31, 2004 and for the period from January 1, 2004 through February 23, 2004 were$17.2 million and $31.9 million, respectively. This increase was primarily related to increased revenues from directorypublications, an increase in clearinghouse revenue and transmission revenueprimarily related to an increase in orders sent through the clearinghouse andan increase in revenue related to the monthly billing for the Floral SelectionsGuide, which shipped during the current year and for which members are nowcharged a monthly fee.

 

Management believes a key metric in driving revenuesin the consumer business segment is order volume.  The growth in order volume primarily relatedto Valentine’s Day orders was the main factor for the increase in revenue forthe consumer business segment of $13.4 million, or 23.6%, to $70.6 million forthe three-month period ended March 31, 2005 compared to combined revenue of $57.2million for the three-month period ended March 31, 2004.  Revenues for the consumer business segmentfor the period from February 24, 2004 through March 31, 2004 and for the periodfrom January 1, 2004 through February 23, 2004 were $13.8 million and $43.4million, respectively.  Order volumeincreased 24.4% to 1.1 million orders for the three-month period ended March31, 2005, from 0.9 million orders for the three-month period ended March 31,2004.  Partially contributing to theincrease in order volume were sales of specialty gift products, which comprised27.6% of total order volume for the three-month period ended March 31, 2005,compared to 25.8% for the three-month period ended March 31, 2004.  Internet orders were 88.2% of total ordersfor the three-month period ended March 31, 2005, compared to 84.5% for thethree-month period ended March 31, 2004. Average order value decreased slightly to $62.84 in the current quarterfrom $63.27 in the prior year’s quarter, primarily as a result of the expansionof the Company’s “Value Priced” flower program. The consumer business segment had 2.5 million active customers (which isdefined as customers that have purchased from the consumer business within thelast twelve months) at March 31, 2005 and an average repeat purchase rate of1.6 (which is defined as the number of times a customer purchased from theconsumer business during the last twelve months) for the twelve-month periodended March 31, 2005.  The consumer businesssegment had 2.1 million active customers at March 31, 2004 and an averagerepeat purchase rate of 1.6 for the twelve-month period ended March 31, 2004.

 
| **Costs of goods sold and services provided**    | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|
| ** **                                       | ** ** | ** **                               | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** | **Combined**                             | ** ** | ** **   | ** ** |
| ** **                                       | ** ** | ** **                               | ** ** | **(in thousands)**                                          | ** ** | ** **                                                   | ** ** | ** **                               | ** ** |
| Florist business                                 |       | $                                        | 19,026     |                                                        | $          | 6,410                                                        |       | $                                        | 11,506     |         | $          | 17,916 |   | 6.2 | % |
| Consumer  business                               |       | 52,629                                   |       | 10,390                                                      |       | 32,763                                                       |       | 43,153                                   |       | 22.0         | %          |
| Corporate                                        |       | 585                                      |       | 203                                                         |       | 382                                                          |       | 585                                      |       | 0.0          | %          |
| Total costs of  goods sold and services provided |       | $                                        | 72,240     |                                                        | $          | 17,003                                                       |       | $                                        | 44,651     |         | $          | 61,654 |   | 17.2 | % |

 

Total costs of goods sold and services providedincreased by $10.5 million, or 17.2%, to $72.2 million for the three-monthperiod ended March 31, 2005 compared to combined costs of goods sold andservices provided of $61.7 million for the three-month period ended March 31,2004.  Costs of goods sold for the periodfrom February 24, 2004 through March 31, 2004 and for the period from January1, 2004 through February 23, 2004 were $17.0 million and $44.7 million,respectively.  Total gross marginincreased to 42.2% for the three-month period ended March 31, 2005 from 42.0%for the three-month period ended March 31, 2004.

 

Costs of goods sold and services provided associatedwith the florist business segment increased by $1.1 million, or 6.2%, to $19.0million for the three-month period ended March 31, 2005, compared to combinedcosts of goods sold for the florist business segment of $17.9 million for thethree-month period ended March 31, 2004. Costs of goods sold for the period from February 24, 2004 through March31, 2004 and for the period from January 1, 2004 through February 23, 2004 were$6.4 million and $11.5 million, respectively. Gross margin for the florist business increased to 64.9% for thethree-month period ended March 31, 2005, from 63.5% for the three-month periodended March 31, 2004.  The increase incosts of goods sold is related to the increase in revenues discussed above inthe revenues section and the increase in gross margin is primarily due to ashift in sales mix related to an increase in current year revenue from theCompany’s higher margin product lines such as directory publications,clearinghouse services and Mercury Network services, partially offset by a $1.3million increase in the inventory reserve.

 

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Costs of goods sold and services provided associatedwith the consumer business segment increased by $9.4 million, or 22.0%, to$52.6 million for the three-month period ended March 31, 2005, compared tocombined costs of goods sold of $43.2 million for the three-month period endedMarch 31, 2004, primarily due to an increase in revenues.  Costs of goods sold for the period fromFebruary 24, 2004 through March 31, 2004 and for the period from January 1,2004 through February 23, 2004 were $10.4 million and $32.8 million, respectively.  Gross margin for the consumer businessincreased to 25.5% for the three-month period ended March 31, 2005, from 24.5%for the three-month period ended March 31, 2004, primarily due to an increasein revenue related to service fees.

 

Costs of goods sold and services provided related tocorporate activities remained constant at $0.6 million for the three-monthperiod ended March 31, 2005 and the combined three-month period ended March 31,2004.  Costs of goods sold for the periodfrom February 24, 2004 through March 31, 2004 and for the period from January1, 2004 through February 23, 2004 were $0.2 million and $0.4 million,respectively.

 
| **Advertising and selling costs**    | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|
| ** **                           | ** ** | ** **                               | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** | **Combined**                             | ** ** | ** **   | ** ** |
| ** **                           | ** ** | ** **                               | ** ** | **(in thousands)**                                          | ** ** | ** **                                                   | ** ** | ** **                               | ** ** |
| Florist business                     |       | $                                        | 14,259     |                                                        | $          | 4,723                                                        |       | $                                        | 10,088     |         | $          | 14,811 |   | (3.7 | )% |
| Consumer  business                   |       | 8,412                                    |       | 1,106                                                       |       | 5,010                                                        |       | 6,116                                    |       | 37.5         | %          |
| Total  advertising and selling costs |       | $                                        | 22,671     |                                                        | $          | 5,829                                                        |       | $                                        | 15,098     |         | $          | 20,927 |   | 8.3 | % |

 

Total advertising and selling costs increased by $1.8million, or 8.3%, to $22.7 million for the three-month period ended March 31,2005 compared to combined advertising and selling costs of $20.9 million forthe three-month period ended March 31, 2004. Advertising and selling costs for the period from February 24, 2004through March 31, 2004 and for the period from January 1, 2004 through February23, 2004 were $5.8 million and $15.1 million, respectively.  There were no advertising and selling costsrelated to corporate activities.

 

Advertising and selling costs associated with theflorist business decreased by $0.5 million, or 3.7%, to $14.3 million for thethree-month period ended March 31, 2005 compared to combined advertising andselling costs of $14.8 million for the three-month period ended March 31,2004.  Advertising and selling costs forthe florist business for the period from February 24, 2004 through March 31, 2004and for the period from January 1, 2004 through February 23, 2004 were $4.7million and $10.1 million, respectively. This decrease was primarily due to more efficient national advertising,cost savings strategies implemented during the current fiscal year, such as areduction in headcount in the specialty wholesaling selling area, as well asthe timing of member events that occurred in the fourth quarter of the currentfiscal year versus the third quarter of the prior fiscal year.  This decrease was partially offset by anincrease in volume-based rebates associated with orders sent through the FTDclearinghouse.

 

Advertising and selling costs associated with theconsumer business increased by $2.3 million, or 37.5%, to $8.4 million for thethree-month period ended March 31, 2005 compared to combined advertising andselling costs of $6.1 million for the three-month period ended March 31,2004.  Advertising and selling costs forthe consumer business for the period from February 24, 2004 through March 31, 2004and for the period from January 1, 2004 through February 23, 2004 were $1.1million and $5.0 million, respectively. The increase was primarily due to an increase in online advertisingexpenses resulting from an increase in order volume associated with onlineadvertising placements.  Certain of theseonline agreements contain terms that include both fixed and variable paymentelements, the variable portion of which is based upon the number of ordersgenerated from these third party Web sites in excess of a threshold as definedin the related agreements.  The Companyrecords expenses related to these agreements based on an estimated per ordercost, taking into consideration the most likely number of orders to be generatedunder each such agreement.  Also contributingto the increase in advertising and selling costs was an increase in directmarketing expenses, which is primarily related to the Easter catalog, the costsof which were incurred in the period ended March 31 in the current fiscal yearand in the quarter ended June 30 in the prior fiscal year, due to the timing ofthe Easter holiday.

 

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| **General and administrative costs**    | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|
| ** **                              | ** ** | ** **                               | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** | **Combined**                             | ** ** | ** **   | ** ** |
| ** **                              | ** ** | ** **                               | ** ** | **(in thousands)**                                          | ** ** | ** **                                                   | ** ** | ** **                               | ** ** |
| Florist business                        |       | $                                        | 2,612      |                                                        | $          | 836                                                          |       | $                                        | 1,757      |         | $          | 2,593 |   | 0.7 | % |
| Consumer  business                      |       | 4,939                                    |       | 1,262                                                       |       | 2,975                                                        |       | 4,237                                    |       | 16.6         | %          |
| Corporate                               |       | 18,937                                   |       | 3,274                                                       |       | 26,124                                                       |       | 29,398                                   |       | (35.6        | )%         |
| Total general  and administrative costs |       | $                                        | 26,488     |                                                        | $          | 5,372                                                        |       | $                                        | 30,856     |         | $          | 36,228 |   | (26.9 | )% |

 

Total general and administrative costs decreased $9.7million or 26.9% to $26.5 million for the three-month period ended March 31,2005 compared to $36.2 million for the combined three-month period ended March31, 2004.  Total general andadministrative costs for the period from February 24, 2004 through March 31,2004 and for the period from January 1, 2004 through February 23, 2004 were$5.4 million and $30.9 million, respectively.

 

General and administrative costs for the floristbusiness remained constant at $2.6 million for the three-month period endedMarch 31, 2005 and the combined three-month period ended March 31, 2004.  General and administrative costs for theflorist business for the period from February 24, 2004 through March 31, 2004and for the period from January 1, 2004 through February 23, 2004 were $0.8million and $1.8 million, respectively.

 

General and administrative costs for the consumerbusiness increased by $0.7 million, or 16.6%, to $4.9 million for thethree-month period ended March 31, 2005 compared to $4.2 million for thecombined three-month period ended March 31, 2004.  General and administrative costs for theconsumer business for the period from February 24, 2004 through March 31, 2004and for the period from January 1, 2004 through February 23, 2004 were $1.3million and $3.0 million, respectively. This increase in combined general and administrative costs in theconsumer business is primarily due to increased customer service costs relatedprimarily to an increase in order volume and an increase in technology costsrelated to increased consulting costs and an increase in headcount related tothe expansion of the technology department.

 

Corporate general and administrative costs decreased$10.5 million, to $18.9 million for the three-month period ended March 31, 2005compared to $29.4 million for the combined three-month period ended March 31,2004.  Corporate general andadministrative costs for the period from February 24, 2004 through March 31,2004 and for the period from January 1, 2004 through February 23, 2004 were$3.3 million and $26.1 million, respectively.  This decrease in combined corporate general and administrative costs wasprimarily due to $22.1 million of costs incurred in the prior year periodrelated to the 2004 Going Private Transaction and $0.7 million of severanceincurred in the prior year, partially offset by the $12.5 million fee paid toLeonard Green & Partners, L.P. in connection with the termination of theManagement Services Agreement (“MSA”), which was terminated in connection withthe initial public offering.

 
| **Other income and expenses**                                                            | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  January 1, 2004  through  February 23, 2004** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|
| ** **                                                                               | ** ** | ** **                               | ** ** | ** **                                                  | ** ** | **Predecessor**                                              | ** ** | **Combined**                             | ** ** | ** **   | ** ** |
| ** **                                                                               | ** ** | ** **                               | ** ** | **(in thousands)**                                          | ** ** | ** **                                                   | ** ** | ** **                               | ** ** |
| Interest income                                                                          |       | $                                        | (299       | )                                                           | $          | (61                                                          | )          | $                                        | (9         | )            | $          | (70 | ) | 327.1 | % |
| Interest expense                                                                         |       | 5,395                                    |       | 3,959                                                       |       | 87                                                           |       | 4,046                                    |       | 33.3         | %          |
| Interest expense  and prepayment fees on preferred stock subject to mandatory redemption |       | 24,684                                   |       | 1,901                                                       |       | —                                                       |       | 1,901                                    |       | 1,198.5      | %          |
| Other (income)  expense, net                                                             |       | (100                                     | )          | 33                                                          |       | 364                                                          |       | 397                                      |       | (125.2       | )%         |
| Total other  income and expenses                                                         |       | $                                        | 29,680     |                                                        | $          | 5,832                                                        |       | $                                        | 442        |         | $          | 6,274 |   | 373.1 | % |

 

Interest income increased $0.2 million to $0.3 millionfor the three-month period ended March 31, 2005 compared to $0.1 million forthe combined three-month period ended March 31, 2004.  Interest income for the period from February24, 2004 through March 31, 2004 and for the period from January 1, 2004 throughFebruary 23, 2004 was $61,000 and $9,000, respectively.  This increase was primarily due to interestearned on a portion of 

 

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the proceeds from theinitial public offering, which were held for a period of time prior to therepurchase of the Preferred Stock.

 

Combined interest expense increased $1.4 million to$5.4 million for the three-month period ended March 31, 2005 compared to $4.0million for the combined three-month period ended March 31, 2004.  Interest expense for the period from February24, 2004 through March 31, 2004 and for the period from January 1, 2004 throughFebruary 23, 2004 was $4.0 million and $87,000, respectively.  The increase in combined interest expense isdue to interest expense related to the indebtedness incurred to finance the2004 Going Private Transaction, which was outstanding for the entire period ofthe current year.

 

Interest expense and prepayment fees related to thepreferred stock, which was issued in connection with the 2004 Going PrivateTransaction and was subject to mandatory redemption, increased $22.8 million to$24.7 million for the three-month period ended March 31, 2005, from $1.9million for the period from February 24, 2004 through March 31, 2004.  The increase is primarily related to $21.5million in prepayment fees incurred in connection with the redemption of thepreferred stock, which was redeemed in full using the proceeds from the initialpublic offering.  Also contributing tothe increase was the increased period of time the preferred stock wasoutstanding during the current year period, as well as the cumulative effect ofthe accrued dividends.

 

Other (income) expense was $0.1 million of income for the three-monthperiod ended March 31, 2005 compared to $0.4 million of expense for thecombined three-month period ended March 31, 2004.  Other expense for the period from February24, 2004 through March 31, 2004 and for the period from January 1, 2004 throughFebruary 23, 2004 was $33,000 and $0.4 million, respectively.  The combined expense in the prior year periodis primarily related to the write-off of unamortized deferred financing costsassociated with the then existing debt, which resulted in a net loss onextinguishment of debt.

 

**Nine months ended March 31, 2005 compared to thenine months ended March 31, 2004 (combined)**

 

The amounts for the periodsfrom July 1, 2004 through February 23, 2004 and February 24, 2004 through March31, 2004 have been combined for discussion purposes and presented as the ninemonths ended March 31, 2004.

 
| **Revenues**       | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|--------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **         | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** | **Combined**                            | ** ** | ** **   | ** ** |
| ** **         | ** ** | ** **                              | ** ** | **(in thousands)**                                          | ** ** | ** **                                                | ** ** | ** **                              | ** ** |
| Florist business   |       | $                                       | 146,091    |                                                        | $          | 17,212                                                    |       | $                                       | 117,172    |         | $          | 134,384 |   | 8.7 | % |
| Consumer  business |       | 169,126                                 |       | 13,768                                                      |       | 128,507                                                   |       | 142,275                                 |       | 18.9         | %          |
| Total revenues     |       | $                                       | 315,217    |                                                        | $          | 30,980                                                    |       | $                                       | 245,679    |         | $          | 276,659 |   | 13.9 | % |

 

Total revenuesincreased by $38.5 million, or 13.9%, to $315.2 million for the nine-monthperiod ended March 31, 2005, compared to $276.7 million for the combinednine-month period ended March 31, 2004. Total revenues for the period from February 24, 2004 through March 31,2004 and for the period from July 1, 2003 through February 23, 2004 were $31.0million and $245.7 million, respectively. There were no revenues associated with corporate activities.

 

Managementbelieves a key metric in driving revenues for the florist business segment isthe number of members that use or purchase services and products provided bythe florist business segment, which is partially driven by membership.  Average membership for the nine-month periodended March 31, 2005 and 2004 was approximately 20,000 and 19,700 members,respectively.  Revenue for the floristbusiness segment increased by $11.7 million, or 8.7%, to $146.1 million for thenine-month period ended March 31, 2005 compared to $134.4 million for thecombined nine-month period ended March 31, 2004.  Revenues for the florist business for theperiod from February 24, 2004 through March 31, 2004 and for the period fromJuly 1, 2003 through February 23, 2004 were $17.2 million and $117.2 million,respectively.  This combined increase wasprimarily related to increased 

 

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revenues from directory publications, an increase inrevenues related to orders sent through the FTD clearinghouse, revenues fromthe Floral Selections Guide, which shipped during the current year period andfor which members are now charged a monthly fee, and an increase in sales ofmid-tier technology platforms.

 

Management believes a key metric in driving revenuesin the consumer business segment is order volume.  The growth in order volume was the primaryfactor for the increase in combined revenues for the consumer business segmentof $26.8 million, or 18.9%, to $169.1 million for the nine-month period endedMarch 31, 2005 compared to $142.3 million for the combined nine-month periodended March 31, 2004.  Revenues for theconsumer business for the period from February 24, 2004 through March 31, 2004and for the period from July 1, 2003 through February 23, 2004 were $13.8million and $128.5 million, respectively. Order volume increased 20.0% to 2.7 million orders for the nine-monthperiod ended March 31, 2005, from 2.3 million orders for the nine-month periodended March 31, 2004.  Partiallycontributing to the increase in order volume were sales of specialty giftproducts, which comprised 27.8% of total order volume for the nine-month periodended March 31, 2005, compared to 26.3% for the nine-month period ended March31, 2004.  Internet orders were 86.2% oftotal orders for the nine-month period ended March 31, 2005, compared to 82.0% forthe nine-month period ended March 31, 2004. Average order value decreased slightly to $61.58 in the currentnine-month period from $62.16 in the prior year’s nine-month period, primarilyas a result of the expansion of the Company’s “Value Priced” flower program.

 
| **Costs of goods sold and services provided**    | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                       | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** | **Combined**                            | ** ** | ** **   | ** ** |
| ** **                                       | ** ** | ** **                              | ** ** | **(in thousands)**                                          | ** ** | ** **                                                | ** ** | ** **                              | ** ** |
| Florist business                                 |       | $                                       | 49,161     |                                                        | $          | 6,410                                                     |       | $                                       | 39,774     |         | $          | 46,184 |   | 6.4 | % |
| Consumer  business                               |       | 126,060                                 |       | 10,390                                                      |       | 96,609                                                    |       | 106,999                                 |       | 17.8         | %          |
| Corporate                                        |       | 1,779                                   |       | 203                                                         |       | 1,674                                                     |       | 1,877                                   |       | (5.2         | )%         |
| Total costs of  goods sold and services provided |       | $                                       | 177,000    |                                                        | $          | 17,003                                                    |       | $                                       | 138,057    |         | $          | 155,060 |   | 14.1 | % |

 

Total costs of goods sold and services providedincreased by $21.9 million, or 14.1%, to $177.0 million for the nine-monthperiod ended March 31, 2005, compared to $155.1 million for the combinednine-month period ended March 31, 2004. Costs of goods sold and services provided for the period from February24, 2004 through March 31, 2004 and for the period from July 1, 2003 throughFebruary 23, 2004 were $17.0 million and $138.1 million, respectively.  Total gross margin decreased to 43.8% for thenine-month period ended March 31, 2005 from 44.0% for the combined nine-monthperiod ended March 31, 2004, primarily attributable to the higher percentage ofsales in the Company’s lower margin consumer business segment.

 

Costs of goods sold and services provided associatedwith the florist business segment increased by $3.0 million, or 6.4%, to $49.2million for the nine-month period ended March 31, 2005, compared to $46.2million for the combined nine-month period ended March 31, 2004, primarily dueto an increase in revenues.  Costs ofgoods sold and services provided for the florist business for the period fromFebruary 24, 2004 through March 31, 2004 and for the period from July 1, 2003 throughFebruary 23, 2004 were $6.4 million and $39.8 million, respectively.  Gross margin for the florist businessincreased to 66.3% for the nine-month period ended March 31, 2005, from 65.6%for the nine-month period ended March 31, 2004, which is primarily related toan increase in sales in the Company’s higher margin product lines such asdirectory publications and clearinghouse services partially offset by a $1.3million increase in the inventory reserve.

 

Costs of goods sold and services provided associatedwith the consumer business segment increased by $19.1 million, or 17.8%, to$126.1 million for the nine-month period ended March 31, 2005, compared to$107.0 million for the combined nine-month period ended March 31, 2004,primarily due to an increase in revenues. Costs of goods sold and services provided for the consumer business forthe period from February 24, 2004 through March 31, 2004 and for the periodfrom July 1, 2003 through February 23, 2004 were $10.4 million and $96.6million, respectively.  Gross margin forthe consumer business increased to 25.5% for the nine-month period ended March31, 2005, from 24.8% for the nine-month period ended March 31, 2004, primarilydue to an increase in revenue related to service fees.

 

31

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Costs of goods sold and services provided related tocorporate activities decreased by $0.1 million, or 5.2% to $1.8 million for thenine-month period ended March 31, 2005, compared to $1.9 million for thecombined nine-month period ended March 31, 2004.  Costs of goods sold and services providedrelated to corporate activities for the period from February 24, 2004 throughMarch 31, 2004 and for the period from July 1, 2003 through February 23, 2004were $0.2 million and $1.7 million, respectively.

 
| **Advertising and selling costs**    | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                           | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** | **Combined**                            | ** ** | ** **   | ** ** |
| ** **                           | ** ** | ** **                              | ** ** | **(in thousands)**                                          | ** ** | ** **                                                | ** ** | ** **                              | ** ** |
| Florist business                     |       | $                                       | 41,553     |                                                        | $          | 4,723                                                     |       | $                                       | 36,426     |         | $          | 41,149 |   | 1.0 | % |
| Consumer  business                   |       | 19,303                                  |       | 1,106                                                       |       | 13,815                                                    |       | 14,921                                  |       | 29.4         | %          |
| Total  advertising and selling costs |       | $                                       | 60,856     |                                                        | $          | 5,829                                                     |       | $                                       | 50,241     |         | $          | 56,070 |   | 8.5 | % |

 

Total advertising and selling costs increased by $4.8million, or 8.5%, to $60.9 million for the nine-month period ended March 31,2005 compared to $56.1 million for the combined nine-month period ended March31, 2004.  Total advertising and sellingcosts for the period from February 24, 2004 through March 31, 2004 and for theperiod from July 1, 2003 through February 23, 2004 were $5.8 million and $50.2million, respectively.  There were noadvertising and selling costs related to corporate activities.

 

Advertising and selling costs associated with theflorist business increased by $0.5 million, or 1.0%, to $41.6 million for thenine-month period ended March 31, 2005 compared to $41.1 million for thecombined nine-month period ended March 31, 2004.  Advertising and selling costs for the floristbusiness for the period from February 24, 2004 through March 31, 2004 and forthe period from July 1, 2003 through February 23, 2004 were $4.7 million and$36.4 million, respectively.  Thisincrease in advertising and selling costs was primarily due to an increase involume-based rebates associated with orders sent through the FTD clearinghouse,partially offset by more efficient national advertising and a decrease inexpenses related to member activities due to the timing of member events thatoccurred in the fourth quarter of the current fiscal year versus the thirdquarter of the prior fiscal year.

 

Advertising and selling costs associated with theconsumer business increased by $4.4 million, or 29.4%, to $19.3 million for thenine-month period ended March 31, 2005 compared to $14.9 million for thecombined nine-month period ended March 31, 2004.  Advertising and selling costs for theconsumer business for the period from February 24, 2004 through March 31, 2004 andfor the period from July 1, 2003 through February 23, 2004 were $1.1 millionand $13.8 million, respectively.  Thisincrease in advertising and selling costs was primarily due to an increase inonline advertising expenses resulting from an increase in order volumeassociated with online advertising placements. Certain of these online agreements contain terms that include both fixedand variable payment elements, the variable portion of which is based upon thenumber of orders generated from these third party Web sites in excess of athreshold as defined in the related agreements. The Company records expenses related to these agreements based on anestimated per order cost, taking into consideration the most likely number oforders to be generated under each such agreement.

 
| **General and administrative costs**    | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                              | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** | **Combined**                            | ** ** | ** **   | ** ** |
| ** **                              | ** ** | ** **                              | ** ** | **(in thousands)**                                          | ** ** | ** **                                                | ** ** | ** **                              | ** ** |
| Florist business                        |       | $                                       | 7,729      |                                                        | $          | 836                                                       |       | $                                       | 7,108      |         | $          | 7,944 |   | (2.7 | )% |
| Consumer  business                      |       | 12,423                                  |       | 1,262                                                       |       | 9,918                                                     |       | 11,180                                  |       | 11.1         | %          |
| Corporate                               |       | 31,407                                  |       | 3,274                                                       |       | 39,654                                                    |       | 42,928                                  |       | (26.8        | )%         |
| Total general  and administrative costs |       | $                                       | 51,559     |                                                        | $          | 5,372                                                     |       | $                                       | 56,680     |         | $          | 62,052 |   | (16.9 | )% |

 

Total general and administrative costs decreased $10.5million, or 16.9%, to $51.6 million for the nine-month period ended March 31,2005, compared to $62.1 million for the combined nine-month period ended March31, 2004.

 

32

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Total general andadministrative costs for the period from February 24, 2004 through March 31,2004 and for the period from July 1, 2003 through February 23, 2004 were $5.4million and $56.7 million, respectively.

 

General and administrative costs for the floristbusiness decreased by $0.2 million, or 2.7%, to $7.7 million for the nine-monthperiod ended March 31, 2005 compared to $7.9 million for the combinednine-month period ended March 31, 2004. General and administrative costs for the florist business for the periodfrom February 24, 2004 through March 31, 2004 and for the period from July 1,2003 through February 23, 2004 were $0.8 million and $7.1 million,respectively.  This decrease in generaland administrative costs for the florist business is primarily due to areduction in depreciation expense as certain assets of the florist businesshave become fully depreciated.

 

General and administrative costs for the consumerbusiness increased by $1.2 million, or 11.1%, to $12.4 million for thenine-month period ended March 31, 2005 compared to $11.2 million for thecombined nine-month period ended March 31, 2004.  General and administrative costs for theconsumer business for the period from February 24, 2004 through March 31, 2004and for the period from July 1, 2003 through February 23, 2004 were $1.3million and $9.9 million, respectively. This increase in general and administrative costs for the consumerbusiness was primarily due to increased customer service costs primarilyrelated to an increase in order volume and an increase in technology costsrelated to consulting costs and an increase in headcount related to theexpansion of the technology department.

 

Corporate general and administrative costs decreased$11.5 million, to $31.4 million for the nine-month period ended March 31, 2005compared to $42.9 million for the combined nine-month period ended March 31,2004.  Corporate general andadministrative costs for the period from February 24, 2004 through March 31,2004 and for the period from July 1, 2003 through February 23, 2004 were $3.3million and $39.7 million, respectively. This decrease in corporate general and administrative costs wasprimarily due to $23.4 million of costs incurred during the prior year relatedto the 2004 Going Private Transaction and $0.7 million of severance relatedcosts incurred in the prior year, partially offset by the $12.5 million feepaid to Leonard Green & Partners, L.P. in the current year period relatedto the termination of the MSA.

 

 
| **Other income and expenses**                                                            | ** ** | **Nine Months  Ended  March 31,  2005** | ** ** | **Period from  February 24, 2004  through  March 31, 2004** | ** ** | **Period from  July 1, 2003  through  February 23, 2004** | ** ** | **Nine Months  Ended  March 31,  2004** | ** ** | **% Change** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                                               | ** ** | ** **                              | ** ** | ** **                                                  | ** ** | **Predecessor**                                           | ** ** | **Combined**                            | ** ** | ** **   | ** ** |
| ** **                                                                               | ** ** | ** **                              | ** ** | **(in thousands)**                                          | ** ** | ** **                                                | ** ** | ** **                              | ** ** |
| Interest income                                                                          |       | $                                       | (466       | )                                                           | $          | (61                                                       | )          | $                                       | (22        | )            | $          | (83 | ) | 461.4 | % |
| Interest expense                                                                         |       | 15,429                                  |       | 3,959                                                       |       | 532                                                       |       | 4,491                                   |       | 243.6        | %          |
| Interest expense  and prepayment fees on preferred stock subject to mandatory redemption |       | 34,732                                  |       | 1,901                                                       |       | —                                                    |       | 1,901                                   |       | 1,727.0      | %          |
| Other (income)  expense, net                                                             |       | (421                                    | )          | 33                                                          |       | (1,105                                                    | )          | (1,072                                  | )          | (60.7        | )%         |
| Total other  income and expenses                                                         |       | $                                       | 49,274     |                                                        | $          | 5,832                                                     |       | $                                       | (595       | )            | $          | 5,237 |   | 840.9 | % |

 

Interest income increased to $0.5 million for thenine-month period ended March 31, 2005 compared to $0.1 million for thecombined nine-month period ended March 31, 2004.  Interest income for the period from February24, 2004 through March 31, 2004 and for the period from July 1, 2003 throughFebruary 23, 2004 was $61,000 and $22,000, respectively.  This increase was primarily due to interestearned on a portion of the proceeds from the initial public offering, whichwere held for a period of time prior to the repurchase of the Preferred Stock.

 

Interest expense increased $10.9 million to $15.4million for the nine-month period ended March 31, 2005 compared to $4.5 millionfor the combined nine-month period ended March 31, 2004.  Interest expense for the period from February24, 2004 through March 31, 2004 and for the period from July 1, 2003 throughFebruary 23, 2004 was $4.0 million and $0.5 million, respectively.  The increase in combined interest expense isdue to interest expense related to the indebtedness incurred to finance the2004 Going Private Transaction, which was outstanding for the entire period ofthe current year.

 

Interest expense and prepayment fees related to thepreferred stock, which was issued in connection with the 

 

33

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2004 Going PrivateTransaction and was subject to mandatory redemption, increased $32.8 million to$34.7 million for the nine-month period ended March 31, 2005, from $1.9 millionfor the period from February 24, 2004 through March 31, 2004.  The increase is primarily related to $21.5million in prepayment fees incurred in connection with the redemption of thepreferred stock, which was redeemed in full using the proceeds from the initialpublic offering.  Also contributing tothe increase was the increased period of time the preferred stock wasoutstanding during the periods presented, as well as the cumulative effect ofthe accrued dividends.

 

Other (income) expense was $0.4 million of income forthe nine-month period ended March 31, 2005 compared to $1.1 million of incomefor the combined nine-month period ended March 31, 2004.  Other (income) expense for the period fromFebruary 24, 2004 through March 31, 2004 and for the period from July 1, 2003through February 23, 2004 was $33,000 of expense and $1.1 million of income,respectively.  The combined income in theprior year period is primarily related to the $1.5 million gain related to thereceipt of insurance proceeds related to the consolidated shareholder classaction litigation associated with the Company’s 2002 merger with FTD.COMpartially offset by the $0.4 million write-off of unamortized deferredfinancing costs associated with the then existing debt.

 

**Liquidity and Capital Resources**

 

Cash and cash equivalents increased to $6.4 million atMarch 31, 2005, from $2.5 million at June 30, 2004.

 

Cash provided byoperating activities was $11.6 million for the nine-month period ended March31, 2005, which primarily consisted of net loss, after adding back non-cashitems such as depreciation, amortization, the provision for doubtful accountsand deferred income taxes, in addition to the addback of financing relatedexpenses such as the interest expense and prepayment fees on the mandatorilyredeemable preferred shares, which are reflected as financing activities in thestatement of cash flows, partially offset by an increase in current accountsreceivable primarily related to higher order volumes and revenues in the monthof March compared to the month of June.

 

Cash used inoperating activities for the period from February 24, 2004 through March 31,2004 was $25.7 million and cash provided by operating activities for the periodfrom July 1, 2003 through February 23, 2004 was $9.0 million.  Cash used in operating activities was $16.7million for the combined nine-month period ended March 31, 2004, which primarilyconsisted of net loss, after adding back non-cash items such as accumulateddividends reflected as interest expense on mandatorily redeemable shares,depreciation, amortization and the provision for doubtful accounts, partiallyoffset by an increase in current accounts receivable primarily related tohigher order volumes and revenues in the month of March compared to the monthof June and an increase in prepaid expenses primarily related to an increase inprepaid income taxes.

 

Cash used in investing activities was $11.5 millionfor the nine-month period ended March 31, 2005, which consisted of $8.5 millionrelated to the acquisition of certain assets of The Flower Concierge, Inc. andcapital expenditures of $3.1 million, which were primarily related totechnology improvements.

 

Cash used in investing activities for the period fromFebruary 24, 2004 through March 31, 2004 was $421.4 million of which $420.9million was related to the 2004 Going Private Transaction and the remainingamount was related to capital expenditures for technology.  Cash used in investing activities for theperiod from July 1, 2003 through February 23, 2004 was $4.2 million, which wasrelated to capital expenditures primarily for technology improvements.

 

Cash provided by financing activities was $3.7 millionfor the nine-month period ended March 31, 2005, which primarily consisted of$193.5 million in net proceeds from the issuance of common stock related to theinitial public offering, partially offset by the $186.8 million redemption ofpreferred stock, which was paid in full using the proceeds from theoffering.  Net proceeds of $5.3 millionfrom the underwriters’ overallotment option were used to redeem a portion ofFTD, Inc.’s 7.75% Senior Subordinated Notes on April 15, 2005, due to therequirement that the holders of the Notes are given no less than 30 days’ priornotice.  In addition, the Company repaid$5.6 million in long-term debt during the period, consisting of $0.6 million inscheduled principal repayments and a voluntary repayment of $5.0 million.

 

Cash provided by financing activities for the periodfrom February 24, 2004 through March 31, 2004 was 

 

34

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$449.7 million and wasprimarily related to $260.0 million in proceeds from the issuance of long-termdebt and $184.5 million of proceeds from the issuance of common and preferredstock, related to the 2004 Going Private Transaction.  Cash used in investing activities for theperiod from July 1, 2003 through February 23, 2004 was $6.5 million, which wasrelated to net repayments of the revolving credit facility.

 

The Company’sprincipal sources of liquidity are cash from operations and funds available forborrowing under the 2004 Credit Agreement. The 2004 Credit Agreement provides for aggregate borrowings of up to$135.0 million and consists of a five-year $50.0 million revolving creditfacility and a seven-year $85.0 million term loan, which was used in financingthe 2004 Going Private Transaction.  Aportion of the revolving credit facility is available as a letter of creditsub-facility and as a swing-line facility. Borrowings under the revolving credit facility are used to financeworking capital, capital expenditures, acquisitions, certain expensesassociated with the 2004 Credit Agreement and letter of credit needs.  The revolving credit facility included $1.1million in letters of credit outstanding and had availability of $46.9 millionat March 31, 2005.

 

FTD, Inc. obtaineda waiver to the 2004 Credit Agreement, which waived the requirement that theCompany use 50% of the net proceeds from the initial public offering to paydown outstanding amounts under the 2004 Credit Agreement.  In addition, in conjunction with the initialpublic offering, the MSA with Leonard Green & Partners, L.P. was terminatedin consideration of a lump sum payment by the Company to Leonard Green &Partners, L.P. of $12.5 million in accordance with the MSA.

 

FTD, Inc.’s 2004Credit Agreement includes covenants, that, among other things, required that asof March 31, 2005, that FTD, Inc. maintain a specific ratio of consolidatedearnings before interest, taxes, depreciation and amortization (subject tocertain adjustments) to consolidated interest expense, a fixed charge coverageratio and a leverage ratio.  The Companywas in compliance with all debt covenants as of March 31, 2005, after givingeffect to the waiver discussed above. The debt covenant ratios are detailed below:

 
| ** **                 | ** ** | **Actual Ratio** | ** ** | **Required Ratio** | ** ** |
|----------------------------|------------|------------------|------------|--------------------|------------|
| Interest Expense  Coverage |       | 3.13             |       | 2.10 minimum       |       |
| Fixed Charge  Coverage     |       | 3.22             |       | 1.50 minimum       |       |
| Leverage                   |       | 3.94             |       | 5.75 maximum       |       |

 

Debt covenanttargets are adjusted quarterly in accordance with the terms of the 2004 CreditAgreement.

 

In addition to its debt service obligations, theCompany’s remaining liquidity requirements are primarily for working capitalneeds and capital expenditures.  TheCompany believes, based on current circumstances, that its existing and futurecash flows from operations, together with borrowings under the 2004 CreditAgreement, will be sufficient to fund its working capital needs, capitalexpenditures and to make interest and principal payments as they become dueunder the terms of the 2004 Credit Agreement and to make interest payments onthe 7.75% Senior Subordinated Notes for the foreseeable future.

 

**Income Taxes**

 

The provision for income taxes for the nine-monthperiod ended March 31, 2005 was $4.5 million on a net loss before income taxesof $23.5 million.  This is primarilyrelated to the non-deductible interest expense on preferred shares subject tomandatory redemption.  Excluding thisnon-deductible interest expense, income before taxes was $11.3 million and the$4.5 million provision for income taxes then reflects an effective rate of40.0%.

 

At March 31, 2005,the net current deferred tax asset was $3.9 million and the net long-termdeferred tax liability was $60.7 million. Management believes that based on its estimation of taxable income infuture years, including the reversal of deferred tax liabilities, that novaluation allowance is necessary for the deferred tax assets.

 

### **Critical Accounting Policies and Estimates**

### ** **

The Company’s consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, the

 

35

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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 itsestimates and judgments, including those related to revenue recognition,distribution agreements and the valuation of accounts receivable, inventory,long-lived assets and deferred income taxes. Management bases its estimates and judgments on historical experienceand on various other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptionsor conditions.  Management believes thefollowing critical accounting policies, among others, affect its moresignificant judgments and estimates used in preparation of its consolidatedfinancial statements.

 

***Revenue Recognition***

 

Revenues generated by the florist business segment of theCompany for processing orders through the clearinghouse are recorded in themonth the orders are delivered.  Revenuesfor other services related to the processing of such orders are recorded in theperiod the service is provided.  Sales offlorist shop supplies are recorded when the products are shipped.  Revenues relating to publications arerecognized ratably over the period for which the publications are issued.  Revenues associated with FTD Florists’ OnlineWeb site hosting and Flowers All Hours are recorded in the period the serviceis provided.  Cash rebates which areearned by florists under a customer incentive program in conjunction with acredit card clearing service offered by the Company are classified ascontra-revenue, in accordance with EITF Issue No. 01-9.

 

In addition, theCompany sells computer equipment and software to member florists.  The Company follows the provisions of SOP97-2,**as amended by SOP 98-9.  SOP 97-2 requires revenue earned on softwarearrangements involving multiple elements (e.g., software products,upgrades/enhancements, post-contract customer support, installation andtraining) to be allocated to each element based on the relative fair values ofthe elements.  The Company recognizesrevenue from hardware products (including specified upgrades/enhancements) atthe time of shipment for systems that are sold. The Company recognizes revenue from software products which are soldratably over the estimated useful life of the software.  For systems that are being leased, theCompany recognizes hardware and software revenue ratably over the period of thelease agreement.  Support revenue isrecognized over the period of the support agreement.  Installation and training revenues arerecognized at the time of occurrence.

 

The Company’sconsumer business segment recognizes 100% of the order value as revenue andrecognizes the associated costs of good sold and services provided when theorder is fulfilled.  FTD.COM recognizesrevenue on a gross basis, as opposed to a net basis similar to a commissionarrangement, because it bears the risks and benefits associated with therevenue-generating activities by:  (1)acting as a principal in the transaction; (2) establishing prices; (3) beingresponsible for fulfillment of the order; (4) taking the risk of loss forcollection, delivery and returns; and (5) marketing its products, among otherthings.  If the relative amounts of risksand rewards borne by FTD.COM associated with processing floral and specialtygift orders were to change in the future, FTD.COM’s reporting policy related torevenue recognition and costs of goods sold and services provided could change.

 

***Distribution Agreements***

 

FTD.COM has entered into Internet distributionagreements pursuant to which FTD.COM receives various services, includingadvertising space on shopping and search-oriented Web sites, portal links toFTD.COM’s**Web site and marketingof FTD.COM’s product offerings through co-branded Web sites.  Certain of these agreements contain termsthat include both fixed and variable payment elements, the variable portion ofwhich is based upon the number of orders generated from these third party Websites in excess of a threshold as defined in the related agreements.  FTD.COM records expenses related to theseagreements based on an estimated per order cost, taking into consideration theanticipated number of orders to be generated under each such agreementcalculated in accordance with the process described in Concepts Statement No. 7issued by the Financial Accounting Standards Board.  The number of orders generated is impacted bya variety of factors, including but not limited to, the volume of trafficexperienced on the third party’s Web sites, existence of other advertisementson the third party’s Web site and advertisement placement on the third party’sWeb site.  Many of these factors areoutside of FTD.COM’s control.  The ordervolume estimates used to record expense on a monthly basis are adjusted toactual order volumes by the end of the term of the contract.  If a change in estimate were to occur, thecumulative effect on reported 

 

36

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expenses would berecognized in the period during which the change occurs.

 

***AccountsReceivable***

*** ***

Accounts receivable consist primarily of amounts dueto the Company from normal business activities. The Company’s management must make estimates of accounts receivable thatwill not be collected.  The Companyperforms ongoing credit evaluations of its customers and adjusts credit limits basedupon payment history and the customer’s credit-worthiness, as determined by theCompany’s review of their current credit information.  The Company continuously monitors collectionsand payments from its customers and maintains a provision for estimated lossesbased upon historical experience and specific customer collection issues thatit has identified.  Trade receivables arewritten off when all reasonable collection efforts have been exhausted,including, but not limited to, external third party collection efforts andlitigation.  While such credit losseshave historically been within management’s expectations and the provisionsestablished, there can be no assurance that the Company will continue toexperience the same credit loss rates as in the past.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances for doubtful accounts may be required.

 

***Inventory***

*** ***

The Company’s inventory consists of finished goods andis stated at the lower of cost or market value. The Company’s management regularly reviews inventory quantities on handand records a provision for excess and obsolete inventory based primarily onrecent selling prices, the age of inventory and forecasts of productdemand.  A significant decrease in demandcould result in an increase in the amount of excess inventory quantities onhand.  In addition, the Company’sestimates of future product demand may prove to be inaccurate, in which case itmay have understated or overstated the provision required for excess andobsolete inventory.  Product demand isimpacted by promotional incentives offered by the Company and customerpreferences, among other things.  In thefuture, if the Company’s inventory is determined to be overvalued, it would berequired to recognize such costs in cost of goods sold at the time of suchdetermination.  Therefore, although theCompany’s management seeks to ensure the accuracy of forecasts of futureproduct demand, any significant unanticipated changes in demand could have asignificant impact on the value of inventory and the Company’s reportedoperating results.

 

The Company refined its method of estimating theinventory reserve to improve the overall analysis of the reserve, whichresulted in a $1.3 million charge in the current year period ended March 31,2005.

 

***Long-lived Assets***

*** ***

The Company recognizes intangible assets at fairvalue, whether acquired individually or as a part of a group of assets wherethe entire cost of the group of assets is allocated to the individual assetsbased on their relative fair values.  Thesubsequent accounting for intangible assets depends on whether its useful lifeis indefinite or finite.

 

An intangible asset with a determinable finite usefullife is amortized evenly over that useful life, however, the Companyre-evaluates whether an intangible asset has an indefinite or finite usefullife during each reporting period.  Inaddition, the Company assesses these assets for impairment if events or changesin circumstances indicate that the carrying value may not be recoverable.

 

An intangibleasset with an indefinite useful life is not amortized and is reviewed annuallyfor impairment or more frequently if events or circumstances indicate that theasset may be impaired.  The Companydetermines if an impairment exists by comparing the fair value of theintangible asset with its carrying value. For goodwill, the Company compares the fair value of the reporting unitwith its carrying value.  Any excess ofcarrying value of goodwill over its fair value is recognized as an impairmentloss in continuing operations.  Inaddition, if an indefinite lived intangible asset is subsequently determined tohave a finite useful life, the intangible asset is written down to the lower ofits fair value or carrying amount and then amortized prospectively, based onthe remaining useful life.

 

***Deferred Income Taxes***

 

The Companyrecognizes deferred tax assets and liabilities based on the differences betweenthe financial 

 

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statement carryingamounts and the tax bases of assets and liabilities.  The Company regularly reviews its deferredtax assets for recoverability and establishes a valuation allowance based on historicaltaxable income, projected future taxable income and the expected timing of thereversals of existing temporary differences to reduce its deferred tax assetsto the amount that it believes is more 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 was todetermine that it would not be able to realize all or part of its deferred taxassets in the future, an adjustment to the deferred tax assets would be chargedto 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.

 

**Recently Issued Accounting Pronouncements**

 

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), *Share-Based Payments* (“SFAS 123(R)”). SFAS 123(R) replaces FASB Statement No. 123, *Accounting for Stock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  The FASB has concluded that companies could adopt the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method.

 

Using the modified prospective transition method, a company would recognize share-based employee compensation cost from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date.

 

Using the modified retrospective method, a company would recognize employee compensation cost for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123.  A company would not be permitted to make any changes to those amounts upon adoption of the standard unless those changes represent a correction of an error (and are disclosed accordingly).

 

For periods after the date of adoption of the standard, the modified prospective transition method described above would be applied.  The Company will adopt SFAS No. 123(R) effective July 1, 2005, which will result in an increase in general and administrative expense.  The Company is still evaluating the impact of the adoption of this standard.

 

**Related Party Transactions**

 

For the period from January 1, 2004 through February 23, 2004 and the period from July 1, 2003 through February 23, 2004, the Predecessor incurred expenses of $0.3 million and $1.3 million, respectively, related to the payment for management, financial and other corporate advisory services and expenses to parties related to each of Perry Acquisition Partners, L.P., Bain Capital Investors LLC and Fleet Growth Resources III, Inc., which were stockholders or affiliates of the Predecessor.  The Predecessor’s management consulting services agreement with these parties required payments aggregating $2.0 million each fiscal year plus reimbursement of reasonable out-of-pocket expenses.  The management consulting services agreement with the above listed parties terminated upon the consummation of the 2004 Going Private Transaction.

 

In connection with the 2004 Going Private Transaction, FTD, Inc. entered into the MSA with Leonard Green & Partners, L.P.  Under the MSA, Leonard Green & Partners, L.P. provided management, consulting and financial planning services in exchange for an annual management fee of $2.0 million, payable in equal monthly installments commencing in March 2004.  Payment of the management fees on any monthly payment date is contingent upon FTD, Inc. achieving Consolidated EBITDA, as defined in the indenture governing the Notes, equal to or greater than $46.8 million for the last consecutive twelve-month period ended immediately prior to that payment date.  This agreement was terminated in connection with the initial public offering in consideration of a lump sum payment of $12.5 million by FTD, Inc. to Leonard Green & Partners L.P., in accordance with the MSA.  For the period from February 24, 2004 through March 31, 2004, the Company incurred expenses of $0.2 million and for the three- and 

 

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nine-month periods ended March 31, 2005, the Company incurred expenses of $12.8 million and $13.8 million, respectively, related to the MSA with Leonard Green & Partners, L.P.

 

In addition, the MSA provided for the payment to Leonard Green & Partners, L.P. of customary fees for services provided in connection with major transactions, reimbursement for reasonable out-of-pocket expenses and a closing fee of $7.0 million, which was paid upon consummation of the 2004 Going Private Transaction.

 

**Forward-Looking Information**

 

This quarterlyreport on Form 10-Q contains various “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995 regarding theCompany’s outlook, anticipated revenue growth and profitability; theanticipated benefits of investments in new products, programs and offerings;and opportunities and trends within both the consumer and florist businesssegments, including opportunities to expand these businesses and capitalize ongrowth opportunities or increase penetration of service offerings.  These forward-looking statements are based onmanagement’s current expectations, assumptions, estimates and projections aboutthe Company and its industry.  Investorsare cautioned that actual results could differ from those anticipated by theforward-looking statements as a result of: the Company’s ability to acquire andretain FTD member florists and continued recognition by members of the value ofthe Company’s products and services; the acceptance by members of the new ormodified service offerings recently introduced; the Company’s ability to selladditional products and services to member florists; the Company’s ability toexpand existing marketing programs and secure new marketing programs within theconsumer business segment; the success of the Company’s marketing campaigns;the ability to retain customers and maintain 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; and the Company’s ability to integrateadditional partners or acquisitions, if any are identified.  These factors, along with other potentialrisks and uncertainties, are discussed in the Company’s reports and otherdocuments filed with the Securities and Exchange Commission.

 

### **Item 3**.  Quantitative and Qualitative Disclosuresabout Market Risk

### ** **

The Company’s exposure to interest rate risk isprimarily the result of borrowings under its existing bank creditfacilities.  At March 31, 2005, $81.2million was outstanding under the 2004 Credit Agreement.  Borrowings under the 2004 Credit Agreementare secured by first priority security interests in, and mortgages on,substantially all of the Company’s tangible and intangible assets.  The Company’s results of operations areaffected by changes in market interest rates on these borrowings.  A 1% increase in the interest rate wouldresult in additional annual interest expense of $0.8 million.

 

The Company will continue to monitor changing economicconditions.  Based on currentcircumstances, the Company does not expect to incur a substantial increase incosts or a material adverse effect on cash flows as a result of changinginterest rates.

 

The Company is also exposed to foreign currencyexchange rate risk with respect to the Canadian dollar and the Euro.  The resulting foreign currency exchangeadjustments are included in the other comprehensive (income) loss caption onthe consolidated statements of operations and were not material for thenine-month periods ended March 31, 2005 and 2004.  The Company does not expect to be materiallyaffected by foreign currency exchange rate fluctuations in the future, as thetransactions denominated in Canadian dollars and Euros are not material to theCompany’s consolidated financial statements. Therefore, the Company does not currently enter into derivativefinancial instruments as hedges against foreign currency fluctuations of theCanadian dollar or Euro.

 

### **Item 4**.  Controls and Procedures

### ** **

The Company maintains a set of disclosure controls andprocedures designed to ensure that information required to be disclosed by theCompany in reports that it files or submits under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange 

 

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Commission rules and formsand that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), as appropriate, to allow for timely decisions regardingrequired disclosure.  In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management is required to apply judgment in evaluating the cost-benefitrelationship of possible controls and procedures.  As of March 31, 2005, an evaluation wascarried out under the supervision and with the participation of the Company’smanagement, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that theCompany’s disclosure controls and procedures were effective at the reasonableassurance level.

 

There have been no significant changes in the Company’sinternal controls over financial reporting during the Company’s most recentfiscal quarter that have materially affected, or is reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

### **Item 1.  Legal Proceedings**

### ** **

**In March2002, the Predecessor, FTD, FTD.COM and the directors of the Predecessor andFTD.COM were named as defendants in five class action lawsuits filed inWilmington, Delaware, which were consolidated under the name “In RE FTD.COMInc. Shareholders Litigation.”  The classaction lawsuits made several allegations, including that insufficient stock ofthe Predecessor was exchanged for FTD.COM stock and breach of fiduciary dutiesby the directors.**

** **

On behalf of alldefendants, the Predecessor settled the consolidated class actionlawsuits.  Such settlement was approvedby the court and included no finding of wrongdoing on the part of any of thedefendants, or any other finding that the claims alleged had merit.

 

Pursuant to the Settlement Agreement, the Predecessoragreed to issue shares of Class A common stock valued at $10.7 million in fulland final settlement of the case.  Inconnection with the settlement, the Predecessor recorded an $11.0 millioncharge in the fourth quarter of fiscal year 2003 with respect to the settlementwhich included costs related to issuing and distributing the settlementshares.  In November 2003, pursuant tothe court approved Settlement Agreement, the Predecessor, on behalf of alldefendants, distributed 139,493 shares of Class A common stock valued at $3.4million as payment for a portion of the $10.7 million settlementliability.  In March 2005, the Company,on behalf of all defendants and pursuant to the terms of the SettlementAgreement, paid the balance of the settlement funds (which had been placed intoan escrow account at the consummation of the 2004 Going Private Transaction tofund this obligation) to the court appointed class action administrator fordistribution to the qualified members of the Class.

 

The Predecessorpursued claims against two of its insurance carriers, one that providedcoverage to FTD and its directors and officers, and another that providedcoverage to FTD.COM and its directors and officers.  In the second quarter of fiscal year 2004,the Predecessor recorded a gain of $1.5 million as a result of a settlementwith the insurance carrier that maintained a policy covering FTD and itsdirectors and officers.  The insurancecarrier that maintained the policy covering FTD.COM and its directors andofficers initiated litigation seeking to deny coverage for the shareholderlawsuits, which were settled pursuant to the Settlement Agreement.  The U.S. District Court for the NorthernDistrict of Illinois, Eastern Division entered a judgment on March 25, 2005that the insurance carrier’s policy provides no coverage to FTD.COM for whatFTD.COM alleged were losses it incurred as a result of the Settlement.  Such order was a final appealable order.After reviewing the Court’s decision, FTD.COM has determined not to proceedwith an appeal of this decision.

 

In addition, the Company is involved in various claimsand lawsuits and other matters arising in the normal course of business.  In the opinion of management of the Company,although the outcome of these claims and suits are uncertain, they should nothave a material adverse effect on the Company’s financial condition, liquidityor results of operations.

 

**Item 6.****    Exhibits**

 

3.1                                 Second Amended and Restated Certificate ofIncorporation of FTD Group, Inc.

 

3.2                                 Amended and Restated Bylaws of FTD Group, Inc.

 

31.1                           Rule 13(a) – 14(a)/15(d) – 14(a) Certification(Principal Executive Officer).

 

31.2                           Rule 13(a) – 14(a)/15(d) – 14(a) Certification(Principal Financial Officer).

 

32                                    Section 1350 Certifications.

 

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**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1933, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|               |   | FTD Group, Inc.                                                                               |
|--------------------|--------|-----------------------------------------------------------------------------------------------|
|               |   |                                                                                          |
| Date: May 13, 2005 | By:    |   /S/ CARRIE A. WOLFE                                                               |   |
|               |   |   Chief Financial Officer    (Principal Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit Number** | ** ** | **Description of Document**                                                              |
|--------------------|------------|------------------------------------------------------------------------------------------|
|               |       |                                                                                     |
| 3.1                |       | Second Amended and Restated  Certificate of Incorporation of FTD Group, Inc.             |
|               |       |                                                                                     |
| 3.2                |       | Amended and Restated Bylaws of FTD  Group, Inc.                                          |
|               |       |                                                                                     |
| 31.1               |       | Rule 13(a) – 14(a)/15(d) – 14(a)  Certification (Principal Executive Officer). |
|               |       |                                                                                     |
| 31.2               |       | Rule 13(a) – 14(a)/15(d) – 14(a)  Certification (Principal Financial Officer). |
|               |       |                                                                                     |
| 32                 |       | Section 1350 Certifications.                                                             |

 

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