** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2005**

 

**OR**

 

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

 

**For thetransition period from              to              **

 

**Commissionfile number 001-32425**

 

**FTD Group, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                     | ** ** | **87-0719190**       |
|----------------------------------|------------|----------------------|
| (State or  other jurisdiction of |       | (I.R.S.  Employer    |
| Incorporation  or organization)  |       | Identification  No.) |

 

**3113Woodcreek DriveDowners Grove, IL 60515**(Address of principal executive offices)

 

**(630) 719-7800**

(Registrant’s telephone number,including area code**)**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. YES ýNO o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934). YES o NO ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).  YES oNO ý

 

As of November 9,2005, there were 29,482,182 outstanding shares of the issuer’s Common Stock,par value $0.01 per share.

 

 

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**FTDGROUP, INC.**

** **

**INDEXTO FORM 10-Q**

 
| **Part I. Financial Information** | ** **                                                                                      |
|----------------------------------------|-------------------------------------------------------------------------------------------------|
| ** **                             | ** **                                                                                      | ** ** |
| **Item 1.**                            | **Financial Statements**                                                                        | ** ** |
| ** **                             | ** **                                                                                      | ** ** |
| ** **                             | **Consolidated Balance Sheets**                                                                 | ** ** |
| ** **                             | ** **                                                                                      | ** ** |
| ** **                             | **Consolidated Statement 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**                 | ** **                                                                                      | ** ** |

 

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.   FinancialStatements**

 

**FTD GROUP,INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share amounts)**

 
| ** **                                                                                                                                                                                 | ** ** | **September 30, 2005** | ** ** | **June 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(Unaudited)**             | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                 | ** ** | ** **                  | ** ** | ** **             | ** ** |
| **Current Assets:**                                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **             | ** ** |
| Cash and  cash equivalents                                                                                                                                                                 |       | $                           | 2,480      |                   | $          | 8,890 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,184 at September 30,  2005 and $2,521 at June 30, 2005                                                          |       | 29,022                      |       | 23,419                 |       |
| Inventories,  net                                                                                                                                                                          |       | 6,451                       |       | 6,495                  |       |
| Deferred  income taxes                                                                                                                                                                     |       | 2,587                       |       | 2,550                  |       |
| Prepaid  expenses and other current assets                                                                                                                                                 |       | 5,564                       |       | 7,782                  |       |
| **Total  current assets**                                                                                                                                                                  |       | 46,104                      |       | 49,136                 |       |
|                                                                                                                                                                                       |       |                        |       |                   |       |
| **Property and equipment:**                                                                                                                                                                |       |                        |       |                   |       |
| Land and  improvements                                                                                                                                                                     |       | 1,380                       |       | 1,380                  |       |
| Building and  improvements                                                                                                                                                                 |       | 14,291                      |       | 14,291                 |       |
| Computer  equipment                                                                                                                                                                        |       | 3,368                       |       | 3,345                  |       |
| Furniture  and equipment                                                                                                                                                                   |       | 4,766                       |       | 2,814                  |       |
| Total                                                                                                                                                                                      |       | 23,805                      |       | 21,830                 |       |
| Less  accumulated depreciation                                                                                                                                                             |       | 4,336                       |       | 3,790                  |       |
| **Property  and equipment, net**                                                                                                                                                           |       | 19,469                      |       | 18,040                 |       |
|                                                                                                                                                                                       |       |                        |       |                   |       |
| **Other assets:**                                                                                                                                                                          |       |                        |       |                   |       |
| Deferred  financing fees, net                                                                                                                                                              |       | 8,206                       |       | 8,527                  |       |
| Computer  software, net                                                                                                                                                                    |       | 11,074                      |       | 11,010                 |       |
| Other noncurrent  assets                                                                                                                                                                   |       | 9,938                       |       | 8,985                  |       |
| Other  intangible assets, less accumulated amortization of  $4,043 at September 30, 2005 and  $3,393 at June 30, 2005                                                       |       | 16,730                      |       | 17,380                 |       |
| Trademark                                                                                                                                                                                  |       | 121,577                     |       | 121,577                |       |
| Goodwill                                                                                                                                                                                   |       | 336,659                     |       | 336,659                |       |
| **Total  other assets**                                                                                                                                                                    |       | 504,184                     |       | 504,138                |       |
| **Total  assets**                                                                                                                                                                          |       | $                           | 569,757    |                   | $          | 571,314 |   |
|                                                                                                                                                                                       |       |                        |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                             | ** ** | ** **                  | ** ** | ** **             | ** ** |
|                                                                                                                                                                                       |       |                        |       |                   |       |
| **Current liabilities:**                                                                                                                                                                   |       |                        |       |                   |       |
| Accounts  payable                                                                                                                                                                          |       | $                           | 35,801     |                   | $          | 41,498 |   |
| Customer  deposits                                                                                                                                                                         |       | 5,095                       |       | 5,143                  |       |
| Unearned  income                                                                                                                                                                           |       | 2,331                       |       | 2,522                  |       |
| Accrued  interest                                                                                                                                                                          |       | 1,724                       |       | 4,993                  |       |
| Accrued  compensation                                                                                                                                                                      |       | 2,696                       |       | 4,128                  |       |
| Other  accrued liabilities                                                                                                                                                                 |       | 5,644                       |       | 5,058                  |       |
| Current  maturities of long-term debt                                                                                                                                                      |       | 1,286                       |       | 1,633                  |       |
| **Total  current liabilities**                                                                                                                                                             |       | 54,577                      |       | 64,975                 |       |
|                                                                                                                                                                                       |       |                        |       |                   |       |
| Senior secured credit facility                                                                                                                                                             |       | 72,503                      |       | 67,330                 |       |
| Senior subordinated notes                                                                                                                                                                  |       | 170,117                     |       | 170,117                |       |
| Post-retirement benefits and accrued  pension obligations                                                                                                                                  |       | 2,775                       |       | 2,856                  |       |
| Deferred income taxes                                                                                                                                                                      |       | 60,354                      |       | 60,289                 |       |
|                                                                                                                                                                                       |       |                        |       |                   |       |
| **Stockholders’ equity:**                                                                                                                                                             |       |                        |       |                   |       |
| Common  stock: $0.01 par value, 75,000,000 shares authorized; 29,456,626 and  29,451,791 shares issued and outstanding as of September 30, 2005 and June 30,  2005, Respectively |       | 295                         |       | 295                    |       |
| Additional  paid-in capital                                                                                                                                                                |       | 232,916                     |       | 232,759                |       |
| Accumulated  deficit                                                                                                                                                                       |       | (23,670                     | )          | (27,097                | )          |
| Accumulated  other comprehensive loss                                                                                                                                                      |       | (110                        | )          | (210                   | )          |
| **Total  stockholders’ equity**                                                                                                                                                       |       | 209,431                     |       | 205,747                |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                       |       | $                           | 569,757    |                   | $          | 571,314 |   |

 

SEE ACCOMPANYING NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS.

 

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**FTD GROUP,INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME  (LOSS)**

**(Unaudited)**

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

 
| ** **                                                  | ** ** | **Three Months Ended   September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
|                                                        |       |                                        |       |   |   |
| **Revenues:**                                               |       |                                        |       |   |   |
| Products                                                    |       | $                                           | 50,023     |   | $ | 49,124 |   |
| Services                                                    |       | 35,846                                      |       | 32,947 |   |
| Total  revenues                                             |       | 85,869                                      |       | 82,071 |   |
|                                                        |       |                                        |       |   |   |
| **Costs of Goods Sold and Services Provided:**              |       |                                        |       |   |   |
| Products                                                    |       | 40,632                                      |       | 40,388 |   |
| Services                                                    |       | 5,226                                       |       | 4,682 |   |
| Total costs  of goods sold and services provided            |       | 45,858                                      |       | 45,070 |   |
|                                                        |       |                                        |       |   |   |
| **Gross Profit:**                                           |       |                                        |       |   |   |
| Products                                                    |       | 9,391                                       |       | 8,736 |   |
| Services                                                    |       | 30,620                                      |       | 28,265 |   |
| Total gross  profit                                         |       | 40,011                                      |       | 37,001 |   |
|                                                        |       |                                        |       |   |   |
| **Operating Expenses:**                                     |       |                                        |       |   |   |
| Advertising  and selling                                    |       | 17,651                                      |       | 16,704 |   |
| General and  administrative                                 |       | 11,929                                      |       | 12,377 |   |
| Total  operating expenses                                   |       | 29,580                                      |       | 29,081 |   |
|                                                        |       |                                        |       |   |   |
| Income from  operations                                     |       | 10,431                                      |       | 7,920 |   |
|                                                        |       |                                        |       |   |   |
| **Other Income and Expenses:**                              |       |                                        |       |   |   |
| Interest  income                                            |       | (166                                        | )          | (76 | ) |
| Interest  expense                                           |       | 4,781                                       |       | 5,017 |   |
| Interest  expense on shares subject to mandatory redemption |       | —                                      |       | 4,944 |   |
| Other  expense (income), net                                |       | (44                                         | )          | (48 | ) |
|                                                        |       |                                        |       |   |   |
| Total other  income and expenses                            |       | 4,571                                       |       | 9,837 |   |
|                                                        |       |                                        |       |   |   |
| Income  (loss) before income tax                            |       | 5,860                                       |       | (1,917 | ) |
|                                                        |       |                                        |       |   |   |
| Income tax expense                                          |       | 2,433                                       |       | 1,230 |   |
|                                                        |       |                                        |       |   |   |
| Net income  (loss)                                          |       | $                                           | 3,427      |   | $ | (3,147 | ) |
|                                                        |       |                                        |       |   |   |
| **Other Comprehensive Income (Loss):**                      |       |                                        |       |   |   |
| Foreign  currency translation adjustments                   |       | (101                                        | )          | 87 |   |
|                                                        |       |                                        |       |   |   |
| Comprehensive  income (loss)                                |       | $                                           | 3,326      |   | $ | (3,060 | ) |
|                                                        |       |                                        |       |   |   |
| Net income per Common Share - basic                         |       | $                                           | 0.12       |   | $ | (0.24 | ) |
| Net income per Common Share - diluted                       |       | $                                           | 0.11       |   | $ | (0.24 | ) |
|                                                        |       |                                        |       |   |   |
| **Weighted Average Common Shares Outstanding:**             |       |                                        |       |   |   |
| Basic                                                       |       | 29,454                                      |       | 13,336 |   |
| Diluted                                                     |       | 30,542                                      |       | 13,336 |   |

 

SEE ACCOMPANYING NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS.

 

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**FTD GROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(In thousands)**

 
| ** **                                                                            | ** ** | **Three Months Ended   September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
|                                                                                  |       |                                        |       |   |   |
| **Cash flows from operating activities:**                                             |       |                                        |       |   |   |
| Net income  (loss)                                                                    |       | $                                           | 3,427      |   | $ | (3,147 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities: |       |                                        |       |   |   |
| Depreciation                                                                          |       | 1,042                                       |       | 1,579 |   |
| Amortization                                                                          |       | 1,407                                       |       | 1,376 |   |
| Interest  expense on mandatorily redeemable shares                                    |       | —                                      |       | 4,944 |   |
| Stock-based  compensation                                                             |       | 165                                         |       | — |   |
| Amortization  and write off of deferred financing costs                               |       | 316                                         |       | 332 |   |
| Provision  for doubtful accounts                                                      |       | 771                                         |       | 972 |   |
| Provision  for obsolete inventory                                                     |       | 402                                         |       | 195 |   |
| Deferred  income taxes                                                                |       | 28                                          |       | — |   |
| Increase  (decrease) in cash due to changes in operating assets and liabilities:      |       |                                        |       |   |   |
| Accounts  receivable                                                                  |       | (7,327                                      | )          | (7,627 | ) |
| Inventories                                                                           |       | (358                                        | )          | (246 | ) |
| Prepaid  expenses and other                                                           |       | 2,218                                       |       | 1,480 |   |
| Other  noncurrent assets                                                              |       | 5                                           |       | (47 | ) |
| Accounts  payable                                                                     |       | (5,697                                      | )          | (7,634 | ) |
| Other  accrued liabilities, unearned income, customer deposits and other              |       | (4,443                                      | )          | (5,415 | ) |
|                                                                                  |       |                                        |       |   |   |
| Net cash  used in operating activities                                                |       | (8,044                                      | )          | (13,238 | ) |
|                                                                                  |       |                                        |       |   |   |
| **Cash flows from investing activities:**                                             |       |                                        |       |   |   |
| Capital  expenditures                                                                 |       | (3,292                                      | )          | (735 | ) |
|                                                                                  |       |                                        |       |   |   |
| Net cash  used in investing activities                                                |       | (3,292                                      | )          | (735 | ) |
|                                                                                  |       |                                        |       |   |   |
| **Cash flows from financing activities:**                                             |       |                                        |       |   |   |
| Repayments  of long-term debt                                                         |       | (174                                        | )          | (213 | ) |
| Proceeds  from the issuance of capital stock                                          |       | —                                      |       | 827 |   |
| Net proceeds  from revolving credit facility                                          |       | 5,000                                       |       | 12,000 |   |
|                                                                                  |       |                                        |       |   |   |
| Net cash  provided by financing activities                                            |       | 4,826                                       |       | 12,614 |   |
|                                                                                  |       |                                        |       |   |   |
| Effect of  foreign exchange rate changes on cash                                      |       | 100                                         |       | 87 |   |
|                                                                                  |       |                                        |       |   |   |
| Net decrease in cash and cash equivalents                                             |       | (6,410                                      | )          | (1,272 | ) |
|                                                                                  |       |                                        |       |   |   |
| Cash and cash equivalents at beginning of  period                                     |       | 8,890                                       |       | 2,491 |   |
|                                                                                  |       |                                        |       |   |   |
| Cash and cash equivalents at end of period                                            |       | $                                           | 2,480      |   | $ | 1,219 |   |
|                                                                                  |       |                                        |       |   |   |
| **Supplemental disclosures of cash flow  information**                                |       |                                        |       |   |   |
| Cash paid  for:                                                                       |       |                                        |       |   |   |
| Interest                                                                              |       | $                                           | 7,728      |   | $ | 8,108 |   |
| Income taxes                                                                          |       | $                                           | 46         |   | $ | 10 |   |

 

SEE ACCOMPANYING NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS.

 

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** **FTDGroup, Inc.

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**Note1.  Description of the Business**

 

FTD Group, Inc.,formerly Mercury Man Holdings Corporation, is a Delaware corporation that wasformed in 2003 by Green Equity Investors IV, L.P. (“Green Equity Investors”), aprivate investment fund affiliated with Leonard Green & Partners,L.P., solely for the purpose of acquiring majority ownership of FTD, Inc. As used in this Form 10-Q, the term the “Company” refers to FTD Group, Inc.,including its wholly-owned subsidiary, FTD, Inc.

 

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

 

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 survivingcorporation (the “2004 Going Private Transaction”).

 

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 “IPO”). The registration statement was declared effective by the SEC on February 8,2005.  The Company issued an aggregate of15,842,893 shares in connection with the IPO.**** See Note 3 for further detail.

 

On February 7, 2005,the stockholders approved an increase in the number of authorized shares to75,000,000, as well as a 1-for-3 reverse stock split.  All common shareand per share amounts reflect this reverse stock split.

 

The Company providesfloral-related products and services to consumers and retail florists, as wellas other retail locations offering floral products, in the floral retailmarket.  The Company generates its revenue from two segments, the floristsegment and the consumer segment.

 

Through its floristsegment, the Company provides products and services, such as clearinghouseservices, publishing products and services, technology products and servicesand floral shop supplies, to approximately 20,000 FTD members in the U.S. andCanada, and connects approximately 30,000 additional florists throughaffiliated or related organizations in 150 countries outside of North America.

 

The consumer segment iscomprised of FTD.COM, an Internet and telephone marketer of flowers andspecialty gifts, which sells products directly to consumers primarily throughthe *www.ftd.com* Web site and the 1-800-SEND-FTDtoll-free telephone number.

 

*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 and operatingresults tend to be lower for the quarter ending September 30 because noneof the most popular floral and gift holidays, which include Valentine’s Day,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) and sometimes falls withinthe quarter ending June 30 (as it did in fiscal year 2004).

 

5

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**Note 2.  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 rules andregulations of the SEC, and do not contain all information included in theaudited consolidated financial statements and notes thereto for the fiscal yearended June 30, 2005.  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 30,2005.  In the opinion of management, theinformation furnished herein reflects all adjustments (consisting only ofnormal, recurring adjustments) necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiods presented.

 

**Note 3.  Initial Public Offering**

 

On February 14,2005, the Company closed the sale of 13,100,000 shares of Common Stock at aprice of $13.00 per share in a firm commitment underwritten initial publicoffering.  In addition, on that date, 2,307,693 shares of Common Stockwere sold at the public offering price to Green Equity Investors IV, L.P., theCompany’s principal stockholder and an affiliate.  On March 15, 2005,the Company closed the sale of 435,200 shares of Common Stock at the publicoffering price to satisfy the underwriter’s over-allotment option.  Theoffering was effected pursuant to a Registration Statement on Form S-1(File No. 333-120723), which the Securities and Exchange Commissiondeclared effective on February 8, 2005.  Goldman, Sachs &Co. and Citigroup were the managing underwriters for the offering.

 

Of the approximately$206.0 million in gross proceeds raised by the Company in the offering and theunderwriter’s overallotment option, approximately $12.3 million was paid to theunderwriters in connection with the underwriting discount.

 

Of the $193.6 millionbalance of proceeds to the Company:

 

•                  $186.8million was used to repurchase all outstanding shares of the Company’s 14%Senior Redeemable Exchangeable Cumulative Preferred Stock and all outstandingshares of the Company’s 12% Junior Redeemable Exchangeable Cumulative PreferredStock, including a prepayment premium of $21.5 million;

 

•                  $5.3 millionwas used to redeem a portion of FTD, Inc.’s 7.75% Senior SubordinatedNotes due 2014 (the “Notes”);

 

•                  $1.4 millionwas used to pay for fees and expenses of the offering; and

 

•                  the balancewas used for general corporate purposes.

 

**Note4.  Acquisition**

 

On December 19,2004, FTD.COM completed the acquisition of certain assets of The FlowerConcierge, Inc. (doing business as Florist.com) (“Flower Concierge”),pursuant to an asset purchase agreement by and among FTD.COM, Flower Conciergeand Aron and Celina Benon (the “Flower Concierge Agreement”).  Flower Concierge was acquired to gain newcustomers and increase order volume, among other reasons.  Flower Concierge was a direct marketer offlowers and specialty gifts and was an FTD member prior to this acquisition.

 

Pursuant to the terms ofthe Flower Concierge Agreement, the purchase price for the assets acquired was$8.5 million, including $0.2 million of acquisition costs.  The purchase price was funded through a $5.3million promissory note, which accrued interest at 6.0% annually and was paidin 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 $7.8 million, a customer list, non-compete agreements and $0.2million of goodwill.

 

The results of operationsassociated with the purchase of certain assets of Flower Concierge since theclosing date are included in the consolidated financial statements and wereaccounted 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 information related tothis 

 

6

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acquisition hasnot been included herein as the operating results of Flower Concierge are notconsidered material to the Company’s operating results.

 

** Note 5. Net Income (Loss) Per Common Share**

 

The computations of basicand diluted net income (loss) per common share for the three-month periodsended September 30, 2005 and 2004 are as follows (in thousands, except pershare amounts):

 
| ** **                                                                  | ** ** | **Three Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
|                                                                        |       |                                        |       |   |   |
| Net income (loss)                                                           |       | $                                           | 3,427      |   | $ | (3,147 | ) |
|                                                                        |       |                                        |       |   |   |
| Weighted average basic shares of Common  Stock outstanding                  |       | 29,454                                      |       | 13,336 |   |
| Effect of dilutive securities - options to  purchase shares of common stock |       | 1,088                                       |       | — |   |
| Weighted average diluted shares of Common  Stock outstanding                |       | 30,542                                      |       | 13,336 |   |
|                                                                        |       |                                        |       |   |   |
| Net income (loss) per share of Common Stock  - basic                        |       | $                                           | 0.12       |   | $ | (0.24 | ) |
|                                                                        |       |                                        |       |   |   |
| Net income (loss) per share of Common Stock  - diluted                      |       | $                                           | 0.11       |   | $ | (0.24 | ) |

 

Shares associated withstock options that were not included in the computation of net income (loss)per share because their effect was anti-dilutive consisted of 90,000 shares and2,099,457 shares for the three-month periods ended September 30, 2005 and2004, respectively.

 

**Note6.  Financing Arrangements**

 

Long-term debt consisted of the following (in thousands):

 
| ** **                      | ** ** | **As of   September 30,  2005** | ** ** | **As of   June 30,  2005** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| 7.75% senior subordinated notes |       | $                                    | 170,117    |                            | $          | 170,117 |   |
| Senior secured credit facility: |       |                                 |       |                            |       |
| Term loan                       |       | 68,789                               |       | 68,963                          |       |
| Revolving  credit facility      |       | 5,000                                |       | —                          |       |
| Total debt                      |       | 243,906                              |       | 239,080                         |       |
| Less: current portion           |       | (1,286                               | )          | (1,633                          | )          |
| Long-term debt                  |       | $                                    | 242,620    |                            | $          | 237,447 |   |

 

*$135.0 million Senior Secured CreditFacility*

 

In connection with the consummation of the 2004 Going PrivateTransaction, FTD, Inc. entered into the 2004 Credit Agreement with asyndicate 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, including the assets of FTD Group, Inc.

 

All of the Company’s consolidated net assets are owned, and all of theCompany’s consolidated net sales are earned, by its direct and indirectsubsidiaries.  As of September 30,2005, restricted assets totaled $569.8 million.

 

7

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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.  As the Company makes principal repayments onthe term loan, the balance of the term loan is permanently reduced. A portionof 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.  The revolving credit facility included $1.6million in letters of credit outstanding and had availability of $43.4 millionat September 30, 2005.

 

Borrowings under the 2004 Credit Agreement generally bear interestbased on a margin over, at FTD, Inc.’s option, either the base rate(generally the applicable prime lending rate of Credit Suisse First Boston, asannounced from time to time) or the London Interbank Offered Rate (“LIBOR”).  The applicable margin for borrowings underthe 2004 Credit Agreement varies based upon FTD, Inc.’s ConsolidatedLeverage Ratio, as defined in the 2004 Credit Agreement, which was amended on November 15,2004 to reduce the margins on the term loan. The 2004 Credit Agreement requires FTD, Inc. to pay commitment feeson the unused portion of the revolving credit facility, which vary based on theutilization of the revolving credit facility.

 

The 2004 Credit Agreement includes covenants that, among other things,require that as of September 30, 2005, FTD, Inc. maintain a ratio ofconsolidated earnings before interest, taxes, depreciation and amortization(subject to certain adjustments) to consolidated interest expense of no lessthan 2.2 to 1.0, a fixed charge coverage ratio of no less than 1.5 to 1.0 and aleverage ratio not to exceed 5.5 to 1.0. The Company was in compliance with all debt covenants as of September 30,2005.  Debt covenant targets are adjustedquarterly in accordance with the terms of the 2004 Credit Agreement.

 

The 2004 Credit Agreement imposes variousrestrictions on the Company, including restrictions that limit FTD, Inc.’sability to incur liens or encumbrances, make investments or acquisitions, incuradditional debt, enter into sale leaseback transactions, incur certaincontingent liabilities, make certain restricted junior payments and othersimilar distributions, enter into mergers, consolidations and similarcombinations, sell assets or engage in similar transfers, amend certainmaterial agreements, including the indenture governing the Notes, make capitalexpenditures and engage in transactions with affiliates.

 

There was $73.8 million in outstanding debt at September 30, 2005under the 2004 Credit Agreement.  FTD, Inc.is permitted to voluntarily repay principal amounts outstanding or reducecommitments under the 2004 Credit Agreement at any time, in whole or in part,without premium or penalty, upon the giving of proper notice and subject tominimum amount requirements.  Inaddition, subject to certain exceptions, FTD, Inc. is required to prepayoutstanding amounts under the 2004 Credit Agreement with a portion of itsexcess cash flow, the net proceeds of certain asset dispositions, casualtyinsurance and condemnation recovery events and upon the issuance of certainsecurities or debt.  The term loan is duein annual installments of $0.7 million per year with the remaining balance dueat maturity, on February 28, 2011. As a result of the excess cash flow payment requirements, as defined inthe 2004 Credit Agreement, the current portion of the total outstanding debt asof September 30, 2005 is $1.3 million.

 

As a result of entering into the 2004 CreditAgreement, FTD, Inc. originally recorded $4.2 million of deferredfinancing costs, which were allocated, pro rata, to the five-year revolvingcredit facility and the seven-year term loan and are being amortized using theeffective interest method over the respective terms.  During fiscal year 2005, the Company paiddown the term loan by $15.8 million, which resulted in a write-off of deferredfinancing costs of $0.5 million.

 

*$175.0million 7.75% Senior Subordinated Notes due 2014*

* *

On February 6, 2004, Nectar MergerCorporation completed the issuance and sale of $175.0 million in aggregateprincipal amount of the $175.0 million 7.75% Senior Subordinated Notes due2014.  Upon consummation of the 2004Going Private Transaction, FTD, Inc. assumed Nectar Merger Corporation’sobligations under the Notes.  The Noteswill mature on February 15, 2014 and interest is payable on February 15and August 15 of each year.  Theproceeds from the issuance of the Notes were used to finance the 2004 GoingPrivate Transaction.

 

8

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The Notes are unsecured, senior subordinatedobligations, ranking junior in right of payment to all of FTD, Inc.’sexisting and future senior indebtedness and equal in right of payment to all ofthe Company’s existing and future senior subordinated indebtedness.  The Notes rank senior in right of payment toall of FTD, Inc.’s existing and future subordinated indebtedness and areunconditionally guaranteed by the Company and FTD, Inc.’s subsidiaryguarantors on a senior subordinated basis.

 

The indenture governing the Notes providesfor certain limitations on FTD, Inc.’s ability to incur additionalindebtedness, issue disqualified capital stock, make restricted payments,permit restrictions on dividends or other payment restrictions affectingsubsidiaries, layer indebtedness, enter into liens securing indebtedness, enterinto transactions with affiliates or guarantors, enter into certain merger,sale or consolidation transactions and release guarantors.

 

As a result of issuing the Notes, the Companyrecorded $6.7 million of deferred financing costs, which are being amortizedusing the effective interest method. During fiscal year 2005 the Company redeemed $4.9 million of the Notes,which resulted in a write-off of deferred financing costs of $0.2 million.

 

## **Note 7.  Preferred Stock Subject to MandatoryRedemption**

## ** **

The Company hasauthorized 200,000 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 had 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. Because the shares were mandatorily redeemable at a fixed date, suchshares were classified as a liability on the related consolidated balancesheet, pursuant to SFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*,and the related dividends reflected as interest expense.

 

The Company used $186.8million of the net proceeds of its IPO to redeem in full all of the Company’soutstanding shares of its Preferred Stock, including a prepayment premium of$21.5 million which was incurred during the third quarter of fiscal year 2005.

 

**Note 8.Pension and Other Post Retirement Benefit Plans**

 
| ** **                | ** ** | **Salaried Employees’  Pension Plan**  | ** ** | **Retiree   Medical Plan**                  | ** ** |
|---------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **Three Months Ended   September 30,** | ** ** | **Three Months Ended   September 30,** | ** ** |
| ** **                | ** ** | **2005**                                    | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(in thousands)**                          | ** ** |
| Service cost              |       | $                                           | 14         |                                        | $          | — |   | $ | — |   | $ | — |   |
| Interest cost             |       | 28                                          |       | 32                                          |       | 20 |   | 24 |   |
| Expected return on assets |       | (23                                         | )          | (20                                         | )          | — |   | — |   |
| Amortization of loss      |       | 9                                           |       | —                                      |       | — |   | — |   |
| Net periodic benefit cost |       | $                                           | 28         |                                        | $          | 12 |   | $ | 20 |   | $ | 24 |   |

 

**Note9.  Related Party Transactions**

 

In connection with the2004 Going Private Transaction, FTD, Inc. entered into a managementservices agreement with Leonard Green & Partners, L.P.  Under themanagement services agreement, Leonard Green & Partners, L.P. providedmanagement, consulting and financial planning services in exchange for anannual management fee of $2.0 million, payable in equal monthly installmentscommencing in March 2004.  This agreement was terminated in February 2005,in connection with the IPO in consideration of a lump sum payment of 

 

9

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$12.5 million by FTD, Inc. to Leonard Green &Partners L.P., in accordance with the management services agreement.  Forthe three-month period ended September 30, 2004, the Company incurred expensesof $0.5 million, related to the management services agreement.

 

**Note10.  Capital Stock Transactions**

 

During the three-monthperiod ended September 30, 2005 the Company issued 4,835 shares of CommonStock in connection with the exercise of vested stock options.

 

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 the proceeds in FTD, Inc.

 

OnFebruary 7, 2005, the stockholders approved an increase in the number ofauthorized shares to 75,000,000 as well as a 1-for-3 reverse stock split.  All common share and per share amountsreflect this reverse stock split.

 

OnFebruary 14, 2005, the Company completed an initial public offering of15,407,693 shares of Common Stock and on March 15, 2005, the underwritersexercised their over-allotment option and purchased 435,200 shares of CommonStock.  See Note 3 for further detail.

 

**Note11.  Stock Awards and Incentive Plans**

 

The Company’s StockOption Plan was adopted and approved by the Board of Directors on September 30,2004, and provided for the issuance of up to 2,192,778 shares of Common Stockof the Company in connection with the granting of incentive or non-qualifiedstock options.

 

On February 7, 2005,the Company amended the Stock Option Plan to allow for the issuance of a totalof 4,592,778 shares of Common Stock of the Company in connection with the 2005Amended and Restated Equity Incentive Award Plan (the “2005 Plan”).  The principal purpose of the 2005 Plan is toattract, retain and motivate selected employees, consultants and directorsthrough the granting of stock-based compensation awards.  The 2005 Plan provides for a variety of suchawards, including non-qualified stock options, incentive stock options (withinthe meaning of the Internal Revenue Code of 1986, as amended), stockappreciation rights, restricted stock awards, restricted stock unit awards,deferred stock awards, dividend equivalents, performance share awards,performance stock unit awards, stock payment awards, performance-based awardsand other stock-based awards.

 

During the three-monthperiods ended September 30, 2005 and 2004, the Company granted 55,000options and 2,099,457 options, respectively, to various employees of theCompany.  Outstanding non-qualified stockoptions have an expiration date ten years from the date of grant and beginvesting as early as the date of grant, dependent upon the individualagreements.  All stock options weregranted with an exercise price equal to the fair market value on the date ofgrant.

 

During the three-month periods ended September 30,2005 and 2004, no options were forfeited and during the three-month period endedSeptember 30, 2005, 4,835 options were exercised.

 

Prior to July 1,2005, the Company accounted for stock-based compensation programs according tothe provisions of Accounting Principles Board Opinion (“ABP”) No. 25, *Accounting for Stock Issued to*Employees, as permitted byStatement of Financial Accounting Standards (“SFAS”) No. 123, *Accounting for Stock-Based*Compensation.  Effective July 1, 2005, the Companyadopted the fair value recognition provisions of FAS 123 (R), *Share-Based Payments*, using the modified prospectivetransition method and Black-Scholes as the option valuation model.  Under that transition method, compensationcost recognized in the three months ended September 30, 2005 included (i) compensationcost for all share-based payments granted prior to, but not yet vested as of July 1,2005, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, and (ii) compensation cost forall share-based payments granted subsequent to July 1, 2005, based on thegrant date fair value estimated in accordance with the provisions of SFAS No. 123(R).  Results for prior periods have notbeen restated.

 

As a result of adoptingFAS 123(R) on July 1, 2005, income before income taxes and net income forthe three month period ended September 30, 2005 are $165,000 and $99,000lower, respectively, than if the Company had 

 

10

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continued to account for share-based compensation under APB No. 25.  Basic and diluted earnings per share for thethree month period ended September 30, 2005 would have been $0.12 if SFAS No. 123(R)had not been adopted, compared to $0.12 basic earnings per share and $0.11diluted earnings per share as reported.

 

The Company would have recognized additionalcompensation expense, net of tax, of $1,000 related to the Company’s stockoptions in the three-month period ended September 30, 2004 if theestimated fair value, as determined in accordance with SFAS No. 123, ofthe outstanding stock options of the Company had been recorded in theconsolidated financial statements.  Assuch, the Company’s net loss would have been impacted as shown by the pro formaamount displayed in the table below (the pro forma disclosures shown are notrepresentative of the future effects on net income (loss)):

 
| ** **                          | ** **                                                                                                                            | **Three Months Ended** | ** ** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|------------------------|------------|
| ** **                          | ** **                                                                                                                            | **September 30,** | ** ** |
| ** **                          | ** **                                                                                                                            | **2004**               | ** ** |
| ** **                          | ** **                                                                                                                            | ** **             | ** ** |
| Net loss, as reported               |                                                                                                                                  | $                      | (3,147     | ) |
| Less:                               | Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |                   | (1         | ) |
| Pro forma net loss                  |                                                                                                                                  | $                      | (3,148     | ) |
|                                |                                                                                                                                  |                   |       |
| Net loss per share of Common Stock: |                                                                                                                                  |                   |       |
|                                | Basic - as reported                                                                                                                   |                   | $          | (0.24 | ) |
|                                | Basic - pro forma                                                                                                                     |                   | $          | (0.24 | ) |
|                                |                                                                                                                                  |                   |       |   |
|                                | Diluted - as reported                                                                                                                 |                   | $          | (0.24 | ) |
|                                | Diluted - pro forma                                                                                                                   |                   | $          | (0.24 | ) |

 

The Company’s options granted to employeeseither vest equally each year over an approximate five-year period or vest infull after an approximate seven-year period unless certain performanceacceleration targets are met.  If theperformance targets are met, the vesting of the options will accelerate.  The first performance target was met so thefirst installment vested on June 30, 2005. If certain additional performance targets are met, the remaining twoinstallments will vest on June 30, 2006 and 2007.

 

The Company’s options granted to independentdirectors vest equally in thirds, one-third on the date of grant, one-third onthe first anniversary of the date of grant and the remaining one-third on thesecond anniversary of the date of grant.

 

As a result, the cost recognized during thethree-month period ended September 30, 2005 and the estimated costindicated in the table above for the three-month period ended September 30,2004, reflected only a partial vesting of such options.  If full vesting were assumed, the costs recognizedand the estimated pro forma costs would have been higher than indicated above.

 

**Note12.  Commitments and Contingencies**

 

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

 

The Company also has acommitment with a distribution center facility in Cincinnati, Ohio, where itstores and distributes product through June 30, 2008.

 

11

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**Note13.  Segment Information**

 

Operating segments arecomponents of the business for which separate financial information isavailable that is regularly reviewed by the enterprise’s chief operatingdecision maker to make decisions about resources to be allocated to eachsegment and to assess its performance. Revenue and expenses earned and charged between segments are recorded atfair value and eliminated in consolidation.

 

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

 

The florist segmentincludes all products and services sold to FTD members, encompassingclearinghouse services, publishing products and services, technology productsand services and floral shop supplies. The consumer segment encompasses sales of floral and specialty giftproducts, which are sold primarily to consumers through FTD.COM’s Web site*, www.ftd.com*, or its toll-free telephone number, 1-800-SEND-FTD.

 

The following tablereports the Company’s operating results by reportable segment for thethree-month periods ended September 30, 2005 and 2004:

 

12

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| ** **                                                         | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **Gross Segment**                         | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Gross Segment** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**                        | ** ** |
| **Revenues:**                                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | $                                         | 44,355     |   | $ | (45 | ) | $ | 44,310 |   | $ | 45,713 |   | $ | (12 | ) | $ | 45,701 |   |
| Consumer  segment                                                  |       | 44,950                                    |       | (3,391 | ) | 41,559 |   | 39,720 |   | (3,350 | ) | 36,370 |   |
| Total                                                              |       | 89,305                                    |       | (3,436 | ) | 85,869 |   | 85,433 |   | (3,362 | ) | 82,071 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Costs of  Goods Sold and Services Provided:**                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 15,683                                    |       | (845 | ) | 14,838 |   | 17,842 |   | (714 | ) | 17,128 |   |
| Consumer  segment                                                  |       | 30,877                                    |       | (419 | ) | 30,458 |   | 27,721 |   | (391 | ) | 27,330 |   |
| Corporate                                                          |       | 562                                       |       | — |   | 562 |   | 612 |   | — |   | 612 |   |
| Total                                                              |       | 47,122                                    |       | (1,264 | ) | 45,858 |   | 46,175 |   | (1,105 | ) | 45,070 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Gross  Margin:**                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 28,672                                    |       | 800 |   | 29,472 |   | 27,871 |   | 702 |   | 28,573 |   |
| Consumer  segment                                                  |       | 14,073                                    |       | (2,972 | ) | 11,101 |   | 11,999 |   | (2,959 | ) | 9,040 |   |
| Corporate                                                          |       | (562                                      | )          | — |   | (562 | ) | (612 | ) | — |   | (612 | ) |
| Total                                                              |       | 42,183                                    |       | (2,172 | ) | 40,011 |   | 39,258 |   | (2,257 | ) | 37,001 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Advertising  and Selling:**                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 15,291                                    |       | (2,172 | ) | 13,119 |   | 15,510 |   | (2,256 | ) | 13,254 |   |
| Consumer  segment                                                  |       | 4,532                                     |       | — |   | 4,532 |   | 3,450 |   | — |   | 3,450 |   |
| Total                                                              |       | 19,823                                    |       | (2,172 | ) | 17,651 |   | 18,960 |   | (2,256 | ) | 16,704 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **General  and Administrative  (includes  Management Fees):** |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 2,284                                     |       | — |   | 2,284 |   | 2,574 |   | — |   | 2,574 |   |
| Consumer  segment                                                  |       | 3,655                                     |       | (427 | ) | 3,228 |   | 3,726 |   | (369 | ) | 3,357 |   |
| Corporate                                                          |       | 5,990                                     |       | 427 |   | 6,417 |   | 6,078 |   | 368 |   | 6,446 |   |
| Total                                                              |       | 11,929                                    |       | — |   | 11,929 |   | 12,378 |   | (1 | ) | 12,377 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Operating  Income (Loss) before Corporate Allocations:**         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 11,097                                    |       | 2,972 |   | 14,069 |   | 9,787 |   | 2,958 |   | 12,745 |   |
| Consumer  segment                                                  |       | 5,886                                     |       | (2,545 | ) | 3,341 |   | 4,823 |   | (2,590 | ) | 2,233 |   |
| Corporate                                                          |       | (6,552                                    | )          | (427 | ) | (6,979 | ) | (6,690 | ) | (368 | ) | (7,058 | ) |
| Total                                                              |       | 10,431                                    |       | — |   | 10,431 |   | 7,920 |   | — |   | 7,920 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Corporate  Allocations:**                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 2,813                                     |       | — |   | 2,813 |   | 3,025 |   | — |   | 3,025 |   |
| Consumer  segment                                                  |       | 735                                       |       | — |   | 735 |   | 777 |   | — |   | 777 |   |
| Corporate                                                          |       | (3,548                                    | )          | — |   | (3,548 | ) | (3,802 | ) | — |   | (3,802 | ) |
| Total                                                              |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Operating  Income (Loss):**                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | 8,284                                     |       | 2,972 |   | 11,256 |   | 6,762 |   | 2,958 |   | 9,720 |   |
| Consumer  segment                                                  |       | 5,151                                     |       | (2,545 | ) | 2,606 |   | 4,046 |   | (2,590 | ) | 1,456 |   |
| Corporate                                                          |       | (3,004                                    | )          | (427 | ) | (3,431 | ) | (2,888 | ) | (368 | ) | (3,256 | ) |
| Total                                                              |       | $                                         | 10,431     |   | $ | — |   | $ | 10,431 |   | $ | 7,920 |   | $ | — |   | $ | 7,920 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Depreciation  and Amortization:**                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Florist  segment                                                   |       | $                                         | 868        |   | $ | — |   | $ | 868 |   | $ | 1,333 |   | $ | — |   | $ | 1,333 |   |
| Consumer  segment                                                  |       | 617                                       |       | — |   | 617 |   | 651 |   | — |   | 651 |   |
| Corporate                                                          |       | 964                                       |       | — |   | 964 |   | 971 |   | — |   | 971 |   |
| Total                                                              |       | $                                         | 2,449      |   | $ | — |   | $ | 2,449 |   | $ | 2,955 |   | $ | — |   | $ | 2,955 |   |

 

13

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## **Note 14.  Financial Statements 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 to the Notes issued in February 2004.  The Notes are unconditionally guaranteed, ona joint and several basis, by the Guarantor subsidiaries including FTD Group, Inc.and all domestic subsidiaries of FTD, Inc. Non-Guarantor subsidiaries include Florists’ Transworld DeliveryAssociation of Canada, Ltd. and Florists’ Transworld Delivery de Mexico, bothof which are insignificant and are therefore not separately presented.  As FTD, Inc., either directly orindirectly, owns 100% of each of the Guarantor subsidiaries (other than FTDGroup, Inc.) and, as FTD, Inc. does not have any independent assetsor operations apart from the Guarantor subsidiaries or FTD Group, Inc.,separate subsidiary financial information has not been presented.

 

14

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion should be read inconjunction with the consolidated financial statements and notes to thosestatements that appear elsewhere in this Form 10-Q.  The following discussion containsforward-looking statements that reflect the Company’s plans, estimates andbeliefs.  The Company’s actual resultscould differ from those discussed in the forward-looking statements.  Factors that could cause or contribute to anydifferences include, but are not limited to, those discussed under the captions“Forward-Looking Information” and elsewhere in this Form 10-Q.

 

**Overview**

 

FTD Group, Inc. isa leading provider of floral-related products and services to consumers andretail florists, as well as other retail locations offering floral products, inthe U.S. floral retail market.  Thebusiness is supported by the highly recognized FTD brand, which was establishedin 1910 and enjoys 96% brand recognition among the Company’s 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 revenue from twobusiness segments, the florist segment and the consumer segment.

 

*FloristSegment.*  The floristsegment includes revenue associated with the services and products provided toFTD members and other retailers offering floral products. The following tablesets forth the percentage of revenue in each category of the florist segment:

 
| ** **                    | ** ** | **Three Months Ended   September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
|                          |       |                                        |       |   |   |
| Member Services               |       | 57                                          | %          | 56 | % |
| Mercury Technology            |       | 17                                          | %          | 15 | % |
| Specialty Wholesaling         |       | 26                                          | %          | 29 | % |
|                          |       |                                        |       |   |   |
| Total Florist Segment revenue |       | 100                                         | %          | 100 | % |

 

*ConsumerSegment.*  The consumer segmentis comprised of FTD.COM, an Internet and telephone marketer of flowers andspecialty gifts, which sells products directly to consumers primarily through the*www.ftd.com* Web site and the 1-800-SEND-FTDtoll-free telephone number.  FTD.COMoffers same day delivery of floral orders to nearly 100% of the U.S. andCanadian populations.  The majority oforders are fulfilled by the Company’s network of approximately 20,000 FTDmembers who adhere to FTD.COM’s quality and service standards.  FTD.COM typically offers over 400 floralarrangements and over 800 specialty gift items, which are delivered via commoncourier, including unarranged boxed flowers, plants, gourmet food gifts,holiday gifts, bath and beauty products, jewelry, wine and gift baskets, driedflowers and stuffed animals.

 

*KeyIndustry Trends.* The Company believes key trends in the floral retail market include theincreasing role of floral direct marketers, particularly those marketing floralproducts over the Internet, which has resulted in increased orders for deliveryto be placed through floral direct marketers versus traditional retailflorists, the advent of retail consumer companies that deliver unarranged boxedflowers via common courier with no involvement of retail florists and theincreased presence of supermarkets and mass merchants, which has reduced thecash and carry floral business for the traditional retail florist.  Each of these trends are addressed throughthe florist segment and consumer segment business strategies.

 

*BusinessStrategy.*  The Company plans tocontinue to expand the product and service offerings of the florist segment,while simplifying pricing strategies and improving sales and servicecapabilities, with the objective of improving product penetration andmaintaining or growing the number of FTD members.  The Company is currently pursuingopportunities to expand its presence in a number of channels that have nothistorically represented a meaningful portion of the Company’s revenues, suchas the supermarket channel and other mass market channels.

 

15

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The Company plans tocontinue 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.  The Company also plans topursue growth in additional specialty gift categories as management believesthe Company’s direct marketing expertise and brand strength allows the businessto attract a wide range of quality specialty gift manufacturers.  Additionally, the Company plans to continueexpanding the lower-priced floral offerings to meet consumer demand.  Management believes this is a growing segmentof the market and the Company is expanding its marketing efforts and productofferings targeting this segment.  Thenetwork of FTD members enables the Company to offer same day delivery for manyof these products, which management believes is a competitive advantage overthe Company’s competitors who offer delivery on a next day basis through commoncourier.

 

The Company plans tocontinue to reduce its indebtedness and repurchase shares of its Common Stockwith available cash generated from operations.

 

*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 and operatingresults tend to be lower for the quarter ending September 30 because noneof the most popular floral and gift holidays, which include Valentine’s Day,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) and sometimes falls withinthe quarter ending June 30 (as it did in fiscal year 2004).

 

### **Three Months ended September 30, 2005 compared tothe three months ended September 30, 2004**

 

***Total revenues***

 
| ** **       | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **(in thousands)**                          | ** ** | ** ** | ** ** |
| Florist segment  |       | $                                           | 44,310     |       | $          | 45,701 |   | (3.0 | )% |
| Consumer segment |       | 41,559                                      |       | 36,370     |       | 14.3 | % |
| Total revenues   |       | $                                           | 85,869     |       | $          | 82,071 |   | 4.6 | % |

 

Revenues increased by$3.8 million, or 4.6%, to $85.9 million for the three-month period ended September 30,2005, compared to revenues for the three-month period ended September 30,2004 of $82.1 million.  There were norevenues associated with corporate activities.

 

Management believes a key metric in drivingrevenues for the florist segment is the number of FTD members that use orpurchase services and products provided by the florist segment, which ispartially driven by membership. Membership as of September 30, 2005 and 2004 was approximately19,700 and 19,800 FTD members, respectively. Average membership for the three-month period ended September 30,2005 and 2004 was approximately 19,700 and 20,100 FTD members,respectively.  Revenues for the floristsegment decreased by $1.4 million, or 3.0% to $44.3 million for the three-monthperiod ended September 30, 2005, compared to revenues for the three-monthperiod ended September 30, 2004 of $45.7 million.  This decrease in revenues is primarilyrelated to the strategic elimination of certain specialty wholesaling productlines which were not running profitably or were inventory intensive and notcore to the business.  Revenues relatedto all of the specialty wholesaling product lines were $11.5 million in thefirst quarter of fiscal year 2006 compared to $13.4 million in the same periodof the prior fiscal year.  The floristsegment, excluding the specialty wholesaling product lines, experiencedrevenues of $32.8 million in the first quarter of fiscal year 2006 compared to$32.3 million in the same period of the prior fiscal year.

 

16

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Management believes a keymetric in driving revenues in the consumer segment is order volume.  The growth in order volume was the primaryfactor for the increase in revenues for the consumer segment of $5.2 million,or 14.3%, to $41.6 million for the three-month period ended September 30,2005 compared to $36.4 million for the three-month period ended September 30,2004.  Order volume increased 16.3% to689,000 orders for the three-month period ended September 30, 2005, from592,000 orders for the three-month period ended September 30, 2004.  Partially contributing to the increase inorder volume were sales of specialty gifts, which include all orders deliveredvia common courier and comprised 36.4% of total order volume for thethree-month period ended September 30, 2005, compared to 24.0% for thethree-month period ended September 30, 2004.  Internet orders were 88.0% of total ordersfor the three-month period ended September 30, 2005, compared to 84.6% forthe three-month period ended September 30, 2004.  Average order value for the three-monthperiod ended September 30, 2005 was $60.31, which was slightly lower thanaverage order value of $61.41 during the three-month period ended September 30,2004.  This decrease in average ordervalue is primarily related to an increase in demand for the lower pricedproduct offerings.

 

***Total costs of goods sold and servicesprovided***

 
| ** **                                       | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                          | ** ** | ** ** | ** ** |
| Florist segment                                  |       | $                                           | 14,838     |       | $          | 17,128 |   | (13.4 | )% |
| Consumer segment                                 |       | 30,458                                      |       | 27,330     |       | 11.4 | % |
| Corporate                                        |       | 562                                         |       | 612        |       | (8.2 | )% |
| Total costs of goods sold and services  provided |       | $                                           | 45,858     |       | $          | 45,070 |   | 1.7 | % |

 

Costs of goods sold andservices provided increased by $0.8 million, or 1.7%, to $45.9 million for thethree-month period ended September 30, 2005, compared to costs of goodssold and services provided for the three-month period ended September 30, 2004of $45.1 million.  Total gross marginincreased to 46.6% for the three-month period ended September 30, 2005from 45.1% for three-month period ended September 30, 2004, primarilyattributable to the elimination of certain specialty wholesaling product lineswithin the florist segment which were unprofitable or inventory intensive andnot core to the business.

 

Costs of goods sold andservices provided associated with the florist segment decreased by $2.3million, or 13.4%, to $14.8 million for three-month period ended September 30,2005, compared to $17.1 million for the three-month period ended September 30,2004.  Gross margin for the floristsegment increased to 66.5% for the three-month period ended September 30,2005, compared to 62.5% for the three-month period ended September 30,2004, primarily due to the elimination of certain specialty wholesaling productlines which were unprofitable or inventory intensive and not core the business.

 

  Costs of goods sold and services providedassociated with the consumer segment increased by $3.2 million, or 11.4%, to$30.5 million for the three-month period ended September 30, 2005,compared to $27.3 million for the three-month period ended September 30,2004.  Gross margin for the consumersegment increased to 26.7% for the three-month period ended September 30,2005, compared to 24.9% for the three-month period ended September 30,2004, primarily due to product mix related to increased volume in the highermargin specialty gift orders in addition to lower order entry costs.

 

Costs of goods sold andservices provided related to corporate activities remained consistent at $0.6million for the three-month period ended September 30, 2005, compared tothe three-month period ended September 30, 2004.  These costs are related to the developmentand support of the internal corporate technology platforms.

 

17

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***Advertising and selling costs***

 
| ** **                          | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                          | ** ** | ** ** | ** ** |
| Florist segment                     |       | $                                           | 13,119     |       | $          | 13,254 |   | (1.0 | )% |
| Consumer segment                    |       | 4,532                                       |       | 3,450      |       | 31.4 | % |
| Total advertising and selling costs |       | $                                           | 17,651     |       | $          | 16,704 |   | 5.7 | % |

 

Advertising and sellingcosts increased by $1.0 million, or 5.7%, to $17.7 million for the three-monthperiod ended September 30, 2005, compared to advertising and selling costsfor the three-month period ended September 30, 2004 of $16.7 million.  There were no advertising and selling costsrelated to corporate activities.

 

Advertising and selling costsassociated with the florist segment decreased by $0.2 million, or 1.0%, to$13.1 million for the three-month period ended September 30, 2005,compared to $13.3 million for the three-month period ended September 30,2004.  This decrease is primarily due toa reduction in headcount and marketing in the specialty wholesaling sellingarea and a reduction in expenses related to member meetings.

 

Advertising and selling costs associated withthe consumer segment increased by $1.0 million, or 31.4%, to $4.5 million forthe three-month period ended September 30, 2005, compared to $3.5 millionfor the three-month period ended September 30, 2004.  This increase in advertising and sellingcosts was primarily due to an increase in online advertising expenses, relatedto increased volume primarily on search-oriented Web sites.

 

***General and administrative costs andmanagement fees***

 
| ** **                                                  | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                          | ** ** | ** ** | ** ** |
| Florist segment                                             |       | $                                           | 2,284      |       | $          | 2,574 |   | (11.3 | )% |
| Consumer segment                                            |       | 3,228                                       |       | 3,357      |       | (3.8 | )% |
| Corporate                                                   |       | 6,417                                       |       | 6,446      |       | (0.4 | )% |
| Total general and administrative costs and  management fees |       | $                                           | 11,929     |       | $          | 12,377 |   | (3.6 | )% |

 

General andadministrative costs and management fees decreased by $0.5 million, or 3.6%, to$11.9 million for the three-month period ended September 30, 2005,compared to $12.4 million for the three-month period ended September 30,2004.

 

General andadministrative costs associated with the florist segment decreased by $0.3million, or 11.3%, to $2.3 million for the three-month period ended September 30,2005, compared to $2.6 million for the three-month period ended September 30,2004.  The decrease in general andadministrative costs for the florist segment is primarily due to a reduction indepreciation expense as certain assets of the florist business became fullydepreciated.

 

General and administrative costs associated with theconsumer segment decreased by $0.2 million, or 3.8%, to $3.2 million for thethree-month period ended September 30, 2005, compared to $3.4 million forthe three-month period ended September 30, 2004.  The decrease in general and administrativecosts for the consumer segment is primarily due to lower technology expensesrelated to an increase in capitalizable projects.

 

Corporate general and administrative costs andmanagement fees remained consistent at $6.4 million for the three-month periodsended September 30, 2005 and 2004. The termination of the Management Services Agreement with Leonard Green &Partners, L.P. resulted in a $0.5 million decrease in corporate general andadministrative costs in the period ended September 30, 2005 and was offsetby an increase in public company costs and an increase in compensation expenserelated to the implementation of FAS 123(R).

 

18

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***Other income andexpenses***

 
| ** **                                                  | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                          | ** ** | ** ** | ** ** |
| Interest income                                             |       | $                                           | (166       | )          | $          | (76 | ) | 118.4 | % |
| Interest expense                                            |       | 4,781                                       |       | 5,017      |       | (4.7 | )% |
| Interest expense on shares subject to  mandatory redemption |       | —                                      |       | 4,944      |       | (100.0 | )% |
| Other (income) expense, net                                 |       | (44                                         | )          | (48        | )          | (8.3 | )% |
| Total other (income) and expenses                           |       | $                                           | 4,571      |       | $          | 9,837 |   | (53.5 | )% |

 

Interest income increased$0.1 million, to $0.2 million for the three-month period ended September 30,2005, compared to $0.1 million for the three-month period ended September 30,2004.  The increase is primarily due tobetter interest rates obtained.

 

Interest expensedecreased $0.2 million, to $4.8 million for the three-month period ended September 30,2005, compared to $5.0 million for the three-month period ended September 30,2004.  The decrease is due to a reductionin the amount of outstanding indebtedness during the period, partially offsetby higher interest rates.

 

The Company’s preferredstock was redeemed in full using the proceeds from its IPO and as such, thereis no interest expense on shares subject to mandatory redemption for thethree-month period ended September 30, 2005.

 

Other income was consistentat $44,000 for the three-month period ended September 30, 2005 compared to$48,000 for the three-month period ended September 30, 2004.

 

## **Liquidity andCapital Resources**

 

Cash and cash equivalentsdecreased by $6.4 million to $2.5 million at September 30, 2005 from $8.9million at June 30, 2005.

 

The following tablesummarizes key cash flow information for the three-month periods ended September 30,2005 and 2004:

 
| ** **                                 | ** ** | **Three Months Ended   September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                          | ** ** |
|                                       |       |                                        |       |   |   |
| Net cash used in operating activities      |       | $                                           | (8,044     | ) | $ | (13,238 | ) |
|                                       |       |                                        |       |   |   |
| Net cash  used in investing activities     |       | $                                           | (3,292     | ) | $ | (735 | ) |
|                                       |       |                                        |       |   |   |
| Net cash  provided by financing activities |       | $                                           | 4,826      |   | $ | 12,614 |   |

 

Cash used in operatingactivities was $8.0 million and $13.2 million for the three-month periods endedSeptember 30, 2005 and 2004, respectively, which primarily consisted of anincrease of  $7.3 million and $7.6million, respectively in accounts receivable, partially related to the shipmentof specialty wholesaling products for the fall and winter holidays andincreases in sales of technology platforms, a decrease in accounts payable of$5.7 million and $7.6 million, respectively, primarily related to theseasonality of invoices outstanding (the Company has more accounts payable inthe month following a holiday) and a decrease in accrued liabilities primarilyrelated to the interest payment on the senior subordinated notes that was madeduring the three-month periods ended September 30, 2005 and 2004.  These uses of cash were partially offset bynet income, after adding back non-cash items such as depreciation, amortizationand the provisions for doubtful accounts and obsolete inventory and a decreasein prepaid 

 

19

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expenses primarilyrelated to a decrease in prepaid taxes for the three-month periods ended September 30,2005 and 2004 and interest expense on the preferred stock for the three-monthperiod ended September 30, 2004.

 

Cash used in investingactivities was $3.3 million for the three-month period ended September 30,2005, which related to capital expenditures primarily related to a new callcenter which was opened in October 2005 and other technology developmentsand improvements.

 

Cash used in investing activitieswas $0.7 million for the three-month period ended September 30, 2004,which was related to capital expenditures primarily for technology developmentsand improvements.

 

Cash provided byfinancing activities was $4.8 million for the three-month period ended September 30,2005, which consisted of net proceeds from the revolving credit facility, whichwas drawn to fund working capital, partially offset by scheduled principalrepayments under the 2004 Credit Agreement.

 

Cash provided byfinancing activities was $12.6 million for the three-month period ended September 30,2004, which consisted of net proceeds from the revolving credit facility, whichwas drawn to fund working capital, as well as proceeds from the sale of capitalstock, partially offset by scheduled principal repayments under the 2004 CreditAgreement.

 

The Company’s principal sources of liquidity are cash from operationsand funds available for borrowing under the 2004 Credit Agreement.  The 2004 Credit Agreement originally providedfor aggregate borrowings of up to $135.0 million and consisted of a five-year$50.0 million revolving credit facility and a seven-year $85.0 million termloan, which was used in connection with the 2004 Going Private Transaction.  As the Company makes principal repayments onthe term loan, the balance of the term loan is permanently reduced.  A portion of the revolving credit facility isavailable as a letter of credit sub-facility and as a swing-line facility.  Borrowings under the revolving creditfacility are used to finance working capital, capital expenditures,acquisitions, certain expenses associated with the bank credit facilities andletter of credit needs.  The revolvingcredit facility included $1.6 million in letters of credit outstanding and hadavailability of $43.4 million at September 30, 2005.

 

On October 25, 2005 the Board ofDirectors authorized a share repurchase program totaling $30 million, effectivethrough September 30, 2007.  Thesepurchases may be made from time to time in both open market and privatetransactions, dependent upon market and other conditions.  This repurchase program is expected to remainin effect through September 30, 2007, unless terminated earlier by theBoard of Directors, or completed.  TheCompany intends to repurchase shares pursuant to a 10b5-1 plan, which wouldgenerally permit the Company to repurchase shares at times when it might otherwisebe prevented from doing so under certain securities laws.  Repurchased shares will be held in treasurypending use for general corporate purposes, including issuances under variousemployee and director stock plans.  FTD, Inc.amended the 2004 Credit Agreement, effective November 7, 2005, to allowfor the repurchases of Common Stock of the Company, subject to a maximumleverage ratio and minimum liquidity requirements.

 

The 2004 Credit Agreement includes covenantsthat, among other things, required that as of September 30, 2005, FTD, Inc.maintain a ratio of consolidated earnings before interest, taxes, depreciationand amortization (subject to certain adjustments) to consolidated interestexpense, a fixed charge coverage ratio and a leverage ratio.  FTD, Inc. was in compliance with alldebt covenants as of September 30, 2005. The debt covenant ratios are detailed below:

 
| ** **                | ** ** | **Actual Ratio**                  | ** ** | **Required Ratio**                | ** ** |
|---------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **as of September 30, 2005** | ** ** | **as of September 30, 2005** | ** ** |
| Interest Expense Coverage |       | 3.36                              |       | 2.20 minimum                      |       |
| Fixed Charge Coverage     |       | 3.55                              |       | 1.50 minimum                      |       |
| Leverage                  |       | 3.61                              |       | 5.50 maximum                      |       |

 

Debt covenant targets are adjusted quarterlyin accordance with the terms of the 2004 Credit Agreement.

 

In addition to its debtservice obligations, the Company’s remaining liquidity requirements areprimarily for working capital needs and capital expenditures.  The Company believes, based on currentcircumstances, that its existing and future cash flows from operations,together with borrowings under the 2004 Credit Agreement, will be 

 

20

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sufficient to fundits working capital needs, capital expenditures and to make interest andprincipal payments as they become due under the terms of the 2004 CreditAgreement for the foreseeable future.

 

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

### ** **

The Company’s consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues 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 differentassumptions or conditions.

 

See the information concerning the Company’s criticalaccounting policies included under Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in the Company’s Annual Report onForm 10-K for the fiscal year ended June 30, 2005 as filed with theSEC.

 

## **Recently IssuedAccounting Pronouncements**

## ** **

From time to time, thestaff of the SEC communicates its interpretations of accounting rules andregulations.  The manner by which theseviews are communicated varies by topic.  Whilethese communications represent the views of the staff, they do not carry theauthority of law or regulation. Nonetheless, the practical effect of these communications is thatchanges in the staff’s views from time to time can impact the accounting andreporting policies of public companies.

 

### **RelatedParty Transactions**

### ** **

In connection with the2004 Going Private Transaction, FTD, Inc. entered into the managementservices agreement with Leonard Green & Partners, L.P., wherebyLeonard Green & Partners, L.P. provided management, consulting andfinancial planning services in exchange for an annual management fee of $2.0million, payable in equal monthly installments commencing in March 2004. This agreement was terminated in February 2005**,**in connection with the initial public offering in consideration of a lump sumpayment of $12.5 million by FTD, Inc. to Leonard Green & PartnersL.P., in accordance with the management services agreement.  For the three-month period ended September 30,2004, the Company incurred expenses of $0.5 million related to the managementservices agreement.

 

### **Forward-Looking Information**

### ** **

This quarterly report on Form 10-Qcontains various “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 regarding the Company’s outlook,anticipated revenue growth and profitability; the anticipated benefits ofinvestments in new products, programs and offerings; and opportunities andtrends within both the consumer and florist segments, including opportunitiesto expand these businesses and capitalize on growth opportunities or increasepenetration of service offerings.  Theseforward-looking statements are based on management’s current expectations,assumptions, estimates and projections about the Company and its industry.  Investors are cautioned that actual resultscould differ from those anticipated by the forward-looking statements as aresult of: the Company’s ability to acquire and retain FTD members andcontinued recognition by members of the value of the Company’s products andservices; the acceptance by members of the new or modified service offeringsrecently introduced; the Company’s ability to sell additional products andservices to members; the Company’s ability to expand existing marketingprograms and secure new marketing programs within the consumer segment; thesuccess of the Company’s marketing campaigns; the ability to retain customersand maintain average order value within the consumer segment; the existence offailures in the Mercury Network or the Company’s 

 

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consumer segmentsystems; competition from existing and potential new competitors; levels ofdiscretionary consumer purchases of flowers and specialty gifts; the Company’sability to manage or reduce its level of expenses within both the consumer andflorist segments; actual growth rates for the markets in which the Companycompetes compared with forecasted growth rates; the Company’s ability toincrease capacity and introduce enhancements to its Web sites; and the Company’sability to integrate additional partners or acquisitions, if any areidentified.  These factors, along withother potential risks and uncertainties, are discussed in the Company’s reportsand other documents filed with the Securities and Exchange Commission.

 

## **Item3.  Quantitative and QualitativeDisclosures about Market Risk**

## ** **

The Company’s exposure tointerest rate risk is primarily the result of borrowings under its bank creditfacilities.  At September 30, 2005,$73.8 million of debt 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 $738,000.

 

The Company will continueto monitor changing economic conditions. Based on current circumstances, the Company does not expect asubstantial increase in costs or a material adverse effect on cash flows as aresult of changing interest rates.

 

The Company is alsoexposed to foreign currency exchange rate risk with respect to the Canadiandollar and the Euro.  The resultingforeign currency translation exchange adjustments are included in the othercomprehensive income (loss) caption and foreign currency transaction exchangeadjustments are included in other income and expense on the consolidatedstatements of operations and comprehensive income (loss) and were not materialfor the three-month periods ended September 30, 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 derivative financialinstruments as hedges against foreign currency fluctuations of the Canadiandollar or Euro.

 

**Item 4.CONTROLS AND PROCEDURES**

 

TheCompany maintains a set of disclosure controls and procedures designed toensure that information required to be disclosed by the Company in reports thatit files or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms and 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 September 30, 2005, an evaluationwas carried 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.

 

Therehave been no significant changes in the Company’s internal controls overfinancial reporting during the Company’s most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal controls over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

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

### ** **

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

 

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

 
| 10.1   |   | Second Amendment to the Credit  Agreement dated as of November 7, 2005, by and among FTD, Inc., the  Guarantors, as set forth on the signature pages thereto, and Credit  Suisse, Cayman Islands Branch. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |
| 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 theSecurities Exchange Act of 1933, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                         |   | FTD Group, Inc.                                                                     |
|------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                         |   |                                                                                          |
| Date: November 10, 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**                                                                                                                                                                                            |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                    |
| 10.1                    |       | Second Amendment to the Credit  Agreement dated as of November 7, 2005, by and among FTD, Inc., the  Guarantors, as set forth on the signature pages thereto, and Credit  Suisse, Cayman Islands Branch. |
|                    |       |                                                                                                                                                                                                                    |
| 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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