IOS BRANDS CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
COMMISSION FILE NUMBER 000-21277

IOS BRANDS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

3113 WOODCREEK DRIVE
DOWNERS GROVE, IL 60515-5420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 719-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Because no established public trading market exists for shares of the
Registrant's voting stock, the aggregate market value of voting stock held by
non-affiliates of the Registrant cannot be determined.

As of June 30, 2001, there were 12,377,388 outstanding shares of the
Registrant's Class A common stock, par value $0.01 per share ("Class A Common
Stock"), and 2,198,750 outstanding shares of the Registrant's Class B
convertible common stock, par value $0.0005 per share ("Class B Convertible
Common Stock" and, together with Class A Common Stock, "Common Stock").

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the Registrant's definitive information statement (to be filed
pursuant to Regulation 14C) for the 2001 Annual Meeting of Stockholders (the
"Information Statement") are incorporated by reference in Items 10, 11, 12 and
13 of Part III hereof.
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PART I

ITEM 1. BUSINESS

OVERVIEW

IOS BRANDS Corporation (the "Registrant" or the "Company") is a Delaware
corporation that was formed in 1994. As used in this Form 10-K, the terms the
"Company" or "IOS" refer to IOS BRANDS Corporation and its wholly owned
subsidiaries, including Value Network Services, an Illinois corporation ("VNS"),
and Florists' Transworld Delivery, Inc., a Michigan corporation ("FTD" or "the
Operating Company"). The operations of FTD, the Company's principal operating
subsidiary, include those of its indirect wholly owned subsidiaries Renaissance
Greeting Cards, Inc. ("Renaissance") and FTD Canada, Inc., as well as its
majority-owned subsidiary FTD.COM INC. ("FTD.COM"). FTD.COM's Class A common
stock, par value $.01 per share, is quoted on the NASDAQ National Market under
the symbol "EFTD." As of June 30, 2001, FTD owned approximately 83% of FTD.COM's
Class B outstanding shares. Substantially all the operations of IOS are
conducted through FTD and its subsidiaries.

The Company is a direct marketer of flowers and specialty gifts to
consumers and a floral services provider through approximately 14,000 FTD- and
10,000 VNS-member retail florist shops located primarily in North America and
through affiliated or related organizations, approximately 28,000 non-member
retail florist shops located in over 150 countries outside of North America.
Through FTD, consumers are able to purchase high quality FTD-branded products,
FTD-licensed products, traditional non-branded floral arrangements and specialty
gifts. Membership in FTD, the Company's premium floral service provider,
declined from approximately 17,000 to 14,000 members, as of June 30 2000 and
2001, respectively. The Company believes that this decline in membership is
primarily attributable to the increase in monthly access fees charged to FTD
florists. However, since its launch in January 2000, membership in VNS, the
Company's economy floral service provider, numbered over 10,000 members as of
June 30, 2001. By the end of fiscal 2002, the Company expects to increase
membership in both VNS and FTD, offering services to meet the needs of florists
at each end of the pricing spectrum.

FTD promotes a worldwide brand utilizing the FTD Mercury Man logo. See
"Marketing and Advertising." A significant portion of the Company's revenues and
operating income are derived from the Company's Member Services and Technology
Products business segments. The Member Services segment includes Clearinghouse,
Flowers After Hours, Publications, Credit Card processing and its investment in
Interflora, Inc. The Technology Products segment includes Mercury equipment,
Mercury Advantage, Mercury Direct, and Mercury Wings systems, and the Mercury
Network. In addition to the aforementioned, the Company's operations include
Specialty Wholesaling (products supporting the retail floral and specialty gift
industries) and the Direct to Consumer (Internet and telephone marketing of
flowers and specialty gifts through FTD.COM) business segments.

THE FORMATION AND TERMINATION OF RELATIONSHIP WITH FTD ASSOCIATION

The Operating Company is the successor to a non-profit cooperative
association founded by a group of retail florists in the United States in 1910.
The Operating Company was the surviving corporation following the acquisition
(the "Acquisition") on December 19, 1994 by IOS of all of the outstanding equity
of Florists' Transworld Delivery Association, a Michigan non-profit cooperative
association (the "Old Association"), pursuant to an Agreement and Plan of Merger
dated August 2, 1994 (the "Merger Agreement"), among IOS, FTD Acquisition
Corporation, a Delaware corporation, and the Old Association. Upon consummation
of the Acquisition, the Operating Company became a wholly owned subsidiary of
IOS. Immediately following the Acquisition, the Old Association was converted
from a non-profit corporation to a for-profit corporation and renamed "Florists'
Transworld Delivery, Inc." IOS, through the Operating Company, operates all of
the businesses conducted by the Old Association prior to the Acquisition except
for certain trade association activities which are being conducted by FTD
Association, an Ohio non-profit corporation organized in connection with the
Acquisition and structured as a member-owned trade association (the
"Association"). Neither IOS nor the Operating Company has any ownership interest
in the Association.

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On April 30, 2001, FTD entered into a Termination Agreement with the
Association, which became effective as of June 29, 2001. The Termination
Agreement, which contains limited two-year non-compete provisions, terminates
both the Mutual Support Agreement, dated December 18, 1994 (the "Mutual Support
Agreement"), and the Trademark License Agreement, dated December 18, 1994 (the
"Trademark Agreement" and together with the Mutual Support Agreement, the
"Association Agreements"), which were entered into in connection with the
Acquisition between the Association and FTD. Pursuant to the Association
Agreements, among other things: (i) existing and future members of the
Association had the exclusive right, subject to execution of a Trademark
Agreement with the Operating Company, to use the FTD logo and other FTD
trademarks in connection with the operation of a retail florist shop; (ii) all
members of the Association in good standing were provided access to FTD's
Clearinghouse, Mercury Network and certain other FTD services and products;
(iii) the Operating Company paid the Association an amount equal to a percentage
of the value of every floral order cleared through FTD's Clearinghouse; and (iv)
the Operating Company and the Association were able to designate up to 20% but
not fewer than two individuals to be elected to the other's board of directors.

As consideration for the dissolution of the contractual relationship
between the Company and the Association pursuant to the Termination Agreement,
FTD agreed to pay the Association $14.0 million, $12.6 million which was paid on
June 29, 2001 and $1.4 million of which is subject to a one-year escrow
holdback. In fiscal 2001, the Company recorded $14.5 million of expenses related
to this transaction, including professional fees. The $1.4 million escrow
holdback is reflected on the Company's balance sheet as restricted cash.

OPERATIONS

For each transaction cleared by its flowers-by-wire services, the Company's
Clearinghouse operations collects the billing information from either the
Mercury Network or the florist that fills the order locally (the "Receiving
Florist") if the Company's Mercury Network has not been used, and allocates
funds among the Company, the florist with whom a customer places the delivery
order (the "Sending Florist") and the Receiving Florist. Generally, the Company
provides same-day delivery of flowers to customers in the United States if the
order is received by 1:00 p.m. in the recipients' time zone. Floral orders
between florists are transmitted primarily by FTD's Mercury Network. For
non-floral orders received by FTD.COM through 1-800-SEND-FTD and FTD.COM'S Web
site, www.ftd.com, that are not filled by a florist, such as holiday gift
baskets, the manufacturer or third party distributor of the specialty gift order
sends the specialty gift order to the recipient through an express delivery
service. These items typically arrive in one to five days depending on the
delivery method chosen.

FTD was initially formed to encourage flowers-by-wire transactions between
member florists. Over time FTD has developed a number of additional services and
products that support and enhance the retail floral operations of professional
florists and FTD's direct marketing business. In January 2000, the Company
launched VNS, a low cost, alternative wire service, which offers separate
clearinghouse, credit cards and publications services.

Currently, the Company's primary operations include its Member Services,
Technology Products, Specialty Wholesaling and Direct to Consumer business
segments.

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The following table illustrates the percentage of the Company's total
revenue generated by the Company's segments as a percentage of total revenue for
the three fiscal years ended June 30, 2001, 2000 and 1999:

MEMBER SERVICES. The Member Services segment includes revenue associated
with the Company's Clearinghouse, Flowers After Hours, Publications and Credit
Card processing operations and those attributable to its interest in Interflora,
Inc.

The Clearinghouse provides billing and collection services to both the
sending and receiving florists in flowers-by-wire transactions. In fiscal 2001,
the Company cleared floral orders aggregating approximately $445 million in
retail sales. Revenue from the Clearinghouse is generated by retaining a
percentage of the sales price of orders sent through the Clearinghouse (7% for
FTD orders or 9% for VNS orders). The remainder is allocated as follows: 20% to
the Sending Florist and 73% for FTD orders or 71% for VNS orders to the
Receiving Florist. Revenue is also generated from the monthly access fee charged
to member florists. In addition, through June 30, 2001, FTD paid the Association
an amount equal to one-eighth of one percent (.125%) of the value of every
floral order that was cleared or otherwise processed through FTD's
Clearinghouse. Pursuant to the Termination Agreement, the Company will no longer
pay the Association any fees for such orders.

Flowers After Hours is a call forwarding service whereby the Company
receives orders for participating florists when that florists' shop is closed or
otherwise unavailable. The Company receives a fee for each transaction
processed.

The Publications business consists of Directory & Toll Free Listings (the
"Directory"), which is a directory of all current florists, their locations,
product ordering information and minimum order amounts. In a typical
transaction, the Sending Florist is responsible for selecting the Receiving
Florist within the desired locale. Unless the Sending Florist has already
established a relationship with a particular florist in that locale, the Sending
Florist typically consults the Directory to identify a Receiving Florist. The
Directory is published quarterly on CD-ROM as well as in a paper book format.
Publications also include revenues attributable to the set up and maintenance of
florists' Web sites for FTD Florists' Online through FTD.COM's Web site
www.ftd.com.

Credit card processing is a service offered to participating florists
whereby the Company pools the credit card transactions of such florists to
secure more favorable terms on credit card transactions than each florist could
secure on its own.

Interflora, Inc. is a joint venture between FTD, Fleurop-Interflora and the
Interflora British Unit. The joint venture provides a floral services
organization with non-FTD member florists that enables florists to transmit and
receive orders outside North America.

TECHNOLOGY PRODUCTS. The Technology Products segment includes revenue
associated with the Company's Mercury equipment, Mercury Advantage systems,
Mercury Direct systems, Mercury Wings systems and Mercury Network.

Mercury equipment, Mercury Advantage systems and Mercury Wings systems
sales include both the sales and leasing of hardware and software designed for
the floral industry. Mercury equipment includes Mercury 2000 and Mercury 3000
terminals as well as the Mercury Interface Box. Mercury Advantage systems
include the Advantage computer software, which operates on the Mercury Network,
and is designed to fit

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virtually every aspect of successful floral shop management. The Advantage
software package provides florists with a comprehensive range of payroll and
accounting functions for the retail florist. Mercury Wings is a Windows-based
system developed for florists to access the Mercury Network and has automated
features for easy order processing, greater productivity and quick access to
important business information. Mercury Wings also provides optional software
for billing, order-entry, and an interface to various accounting software
packages. The Mercury Network can also be accessed by Mercury Direct, a new
Internet-based system of sending and receiving orders over the Mercury Network.

The Mercury Network is a proprietary telecommunications network linking
together the Company and approximately 55% of the Company's member florists.
Florists who are linked by the Mercury Network are able to transmit orders
cleared through the Company or through competing clearinghouses and to send each
other messages.

SPECIALTY WHOLESALING. Specialty Wholesaling products include both
FTD-branded and non-branded holiday and everyday floral arrangement containers
and products, as well as packaging, promotional products and a wide variety of
other floral-related supplies, including greeting cards and the FSG as well as
other miscellaneous items. By capitalizing on the Company's sourcing expertise
and volume purchases, Specialty Wholesaling is able to provide florists with a
broad selection of products at attractive prices.

Specialty Wholesaling also enters into promotional arrangements to design,
promote and sell FTD-branded products. Some of the everyday-branded products
include the FTD Big Hug Bouquet, Anniversary Bouquet, Sweet Dreams Bouquet, and
Birthday Party Bouquet. In addition, FTD has participated in relationships with
companies such as The Walt Disney Company, M&M/Mars, Inc. and Mattel, Inc. FTD
has also entered into an arrangement with the Diana, Princess of Wales Memorial
Fund.

Revenue derived from Renaissance is included as part of Specialty
Wholesaling. Renaissance produces greeting cards for special occasions and
holidays for sale to florists and general merchants.

DIRECT TO CONSUMER. Direct to Consumer represents revenue derived from
FTD's direct marketing business conducted through FTD.COM. FTD.COM is an
Internet and telephone marketer of flowers and specialty gifts. This business
segment includes consumer orders generated by the 1-800-SEND-FTD toll-free
telephone number and the www.ftd.com Web site. FTD.COM's revenue includes the
sales price of flowers and specialty gifts as well as a service fee charged to
the consumer.

MARKETING AND ADVERTISING

The Company provides extensive marketing and advertising programs on both
national and local levels. FTD's national advertising (through television,
radio, magazines, newspaper supplements and Web sites) promotes FTD florists,
FTD-Branded products and FTD.COM's Web site, www.ftd.com and toll-free telephone
number, 1-800-SEND-FTD. FTD.COM's direct marketing campaign includes
relationships with many companies such as United Airlines, American Airlines,
and American Express, which have large consumer databases. Through these
relationships, FTD.COM is able to market to the consumers in their databases
using statement inserts that often offer discounts or frequent flyer mileage
awards for purchases made through FTD.COM. In fiscal year 2000, FTD.COM had
deployed an integrated marketing campaign focused on customer acquisition,
utilizing a mix of offline, online, and direct marketing strategies. In fiscal
year 2001, FTD.COM shifted to a more balanced program focused on both customer
acquisition and retention, resulting in a reduction of its marketing and
promotions expenditures due to a decrease in offline advertising.

Sponsorships are also a major part of the Company's marketing efforts. This
includes a major sponsorship relationship with the Tournament of Roses(R)
Association, which generates significant exposure for FTD during the annual Rose
Parade. In fiscal 2001, the Company partnered with the Academy of Television
Arts and Sciences as the Official Floral Partner of the 52nd Annual Primetime
Emmy Awards. The Company provided all of the flowers for the event and ran the
popular "Be A Hero" ads during the telecast that reached 21.6 million viewers
around the country.

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The Company also supplies advertising and marketing tools on a local basis
for FTD florists. FTD florists are provided with advertising tools such as ad
slicks for newspaper print advertising; point-of-sale items, such as window
posters; radio scripts; and television tapes to be tagged with individual shop
information. In addition, FTD florists can purchase customizable direct mail
pieces through FTD, as well as the FTD Floral Selections Guide (the "FSG"), a
counter display catalog published by FTD featuring FTD products for all
occasions.

The Company also offers Internet-related programs to its member florists.
FTD(R) Florists' Online ("FOL") provides FTD florists with the opportunity to
have their own Internet home page located within FTD's Web site. Florist
Internet Sites are introductory Web sites that allow florists to compete in
today's growing e-commerce marketplace. These sites are fully functional (secure
ordering, e-mail, etc.) and can be modified to suit an individual florist's
needs.

FTD's marketing and advertising programs are designed to: (i) increase
consumer demand for FTD-Branded floral arrangements and specialty gifts that FTD
florists or FTD's direct marketing business clear through FTD's Clearinghouse,
including Specialty Wholesaling's FTD Branded hard goods; (ii) feature the FTD
Mercury Man logo; and (iii) support FTD florists by encouraging consumers to
associate professional FTD florists with high-quality floral goods and
outstanding customer service.

SEASONALITY

The Company generated 20.9%, 25.0%, 27.5% and 26.6% of its total revenue in
the quarters ended September 30, December 31, March 31 and June 30 of fiscal
2001, respectively. The Company's revenue typically exhibits a modest degree of
seasonality as demonstrated in fiscal 2001. In addition, the Company's operating
income also fluctuates over the course of the fiscal year. For example, revenues
and operating results tend to be lower for the quarter ending September 30
because none of the most popular floral holidays, which include Valentine's Day,
Easter, Mother's Day, Thanksgiving and Christmas, fall within that quarter. In
addition, depending on the year, the popular floral holiday of Easter sometimes
falls within the quarter ending March 31 and sometimes falls within the quarter
ending June 30. Also, this seasonality is attributable to increased revenues in
the quarter ended March 31 relating to the increased floral orders and shipments
of Mother's Day holiday products. As a result, comparisons of results of
operations from one quarter to the immediately preceding quarter or the same
quarter of the proceeding year may not be relevant when evaluating the Company's
historical financial performance and predicting the Company's future
performance. The Company's working capital, cash and short-term borrowings also
fluctuate during the year as a result of the factors set forth above.

TRADEMARKS

The FTD Mercury Man logo, which appears on the shop window or door of each
FTD florist, is a registered U.S. trademark, which distinguishes FTD's services
and products from those offered by others. FTD also owns the rights to a number
of other trademarks, including "FTD," "FTDA," "Florists' Transworld Delivery,"
"Mercury," "Mercury Wings," "Mercury Advantage" (pending), "Mercury Network,"
"VNS," "Value Network Services," "Renaissance," "Renaissance Greeting Cards,"
and trademarks for certain floral products, including the "Chicken Soup
Bouquet," "Thanks a Bunch Bouquet," "Birthday Party Bouquet," "Anniversary
Bouquet", "Sweet Dreams Bouquet" and "Sweet Expressions Bouquet". FTD has
exclusive license of "INTERFLORA" in North America and South America. FTD has
licensed certain of its trademarks, including the FTD Mercury Man logo, to the
FTD florists and FTD.COM.

COMPETITION

The Company competes in the extremely fragmented floral services industry
with a large number of wholesalers, service providers and direct marketers of
flowers and gifts. Teleflora LLC ("Teleflora"), FTD and VNS are the largest
floral service providers in the nation based on membership, after giving effect
to Teleflora's November 2000 acquisition of American Floral Services, Inc.
Teleflora offers some products and services that are comparable to those offered
by the Company, and most florists subscribe to one or more of

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these competing services. The Company believes that it has a competitive
advantage in this segment due to its multi-faceted relationship with retail
florists, its depth of product line and its ability to offer discounted pricing
as a result of substantial volume purchases. The principal competitor of FTD's
direct marketing business, FTD.COM, is 1-800-FLOWERS.COM, Inc.

The Operating Company is subject to certain operating restrictions pursuant
to the Modified Final Judgment, dated November 13, 1990, of the United States
District Court for the Eastern District of Michigan in United States of America
v. Florists' Telegraph Delivery Association, Civ. No. 56-15748, and United
States of America v. Florists' Transworld Delivery Association, Civ. No.
66-28784 (collectively referred to as the "Consent Order"). Among its terms, the
Consent Order prohibits FTD from restricting membership to florists who are not
subscribers of a competing clearinghouse. The Consent Order expires on August 1,
2005.

EMPLOYEES

As of June 30, 2001, the Company employed approximately 638 full-time
employees. The Company considers its relations with its employees to be good.
None of the Company's employees is currently covered by any collective
bargaining agreement.

ITEM 2. PROPERTIES

The Company's principal executive offices, consisting of approximately
120,000 square feet of office space, are owned by the Company and are located in
Downers Grove, Illinois. Renaissance leases office space in Sanford, Maine. In
addition, the Company uses an independent warehouse and distribution facility in
Cincinnati, Ohio for product distribution.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various lawsuits and matters arising in the
normal course of business. In the opinion of the management of the Company,
although the outcomes of these claims and suits are uncertain, they should not
have a material adverse effect on the Company's financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 2001.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The information below is included in this Form 10-K pursuant to instruction
3 to Item 401(b) of Regulation S-K:

Mr. Norton is the Chairman of the Board of Directors, Chief Executive
Officer and President of the Company. Mr. Norton has served as Chairman of the
Board of the Company since June 2000, as Chief Executive Officer since October
2000 and as President and a director of the Company since January 1997. Mr.
Norton also serves as the Chairman of the Board, Chief Executive Officer and
President of the Operating

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Company. Mr. Norton joined the Operating Company in October 1996 as General
Manager. From March 1993 until May 1996, Mr. Norton was Vice Chairman and Chief
Financial Officer of JoAnn Stores, Inc., a retail chain of fabric and craft
stores. Mr. Norton received a B.S. from Cleveland State University in 1973.

Mr. Piccirillo has served as Chief Administrative Officer since March 2001.
He previously served as Division President and General Manager since July 2000.
Mr. Piccirillo joined the Company as Treasurer in August 1997. From August 1997
to June 2000, Mr. Piccirillo served as Vice President and Chief Financial
Officer for the Operating Company. Prior to joining FTD in August 1997, Mr.
Piccirillo was Vice President/ Treasurer of JoAnn Stores, Inc. for more than
five years. Mr. Piccirillo received a B.S. in Industrial Management in 1971 and
a M.B.A. in 1973 from Gannon University.

Mr. Rasmussen has served as Executive Vice President of Specialty
Wholesaling since June 2001. He previously served as Division President and
General Manager since July 2000. Mr. Rasmussen joined the Operating Company in
October 1998 as Vice President of Sales. Prior to joining the Operating Company
in October 1998, Mr. Rasmussen was Vice President Sales for American Floral
Services, Inc., a floral services provider, from October 1995 until October
1998. Prior to that time, Mr. Rasmussen was a regional sales manager for Scott
Paper Company for more than five years. Mr. Rasmussen received a B.S. from
Northeastern University in 1983.

Michael J. Soenen is the President and Chief Executive Officer and a
director of FTD.COM. He was Vice President-Marketing of the Operating Company
prior to joining FTD.COM in May 1999. From January 1997 until August 1998, he
was Director of Sales Promotion for the Operating Company. Mr. Soenen was an
associate at Perry Corp. from August 1996 to December 1996. From July 1993 to
July 1996, Mr. Soenen worked for Salomon Brothers Inc., an investment banking
firm. Mr. Soenen received a B.A. from Kalamazoo College in 1992.

Mr. Twyman has served as the Vice President of Finance and Treasurer since
October 2000. From July 2000 to October 2000 he was the Vice President of
Finance of the Company. From November 1999 to July 2000 he served as the
Controller of the Company. Prior to joining the Company in November 1999, he was
the Assistant Controller, and served in various other capacities, at JoAnn
Stores, Inc. for more than five years. Prior to that time, Mr. Twyman worked in
the corporate audit group at Arthur Andersen LLP for four years. Mr. Twyman
received his B.S. in Accounting in 1987 from Kent State University and is a
Certified Public Accountant.

Mr. Burney has served as Vice President, General Counsel and Secretary for
the Company and Assistant Secretary of FTD.COM since October 2000. From April
2000 to October 2000 he was the Vice President and General Counsel of the
Company. Prior to joining the Company, Mr. Burney was a member of the Ohio State
Bar since 1968, and practiced law with the firm of Burney and Herthneck in
Cleveland, Ohio for 18 years. Prior to that he was Vice President and General
Counsel for Apcoa Inc. and counsel for Apcoa division of ITT. Mr. Burney
received a B.A. from Denison University in 1964 and a J.D. from Ohio State
University College of Law in 1967.

Executive officers are selected by and serve at the discretion of the Board
of Directors.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

No established public trading market exists for the Company's Common Stock.
As of June 30, 2001 there were approximately 2,000 holders of record of IOS
Class A Common Stock, par value $0.01 per share, and three holders of record of
IOS Class B Common Stock, par value $0.0005 per share.

IOS has not paid any cash dividends on its Common Stock since its
inception. Any future determination as to the payment of dividends will be at
the discretion of the Board of Directors of IOS, and will depend on

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the Company's financial condition, results of operations, capital requirements,
compliance with charter and contractual restrictions and such other factors as
the Board of Directors deems relevant.

In addition, under the terms of its credit facility, the Company may not
declare or pay any dividend or make any distribution (other than dividends or
distributions payable solely in capital stock of the Company) on shares of its
Common Stock to holders of such Common Stock if at the time of such proposed
dividend, or immediately after giving effect thereto, certain financial
conditions are not satisfied. Notwithstanding the foregoing, the following,
among other things, are permitted: (1) payments by the Operating Company to IOS
to pay management fees in an amount not to exceed $2.0 million in any one fiscal
year pursuant to the Management Consulting Services Agreement (as hereinafter
defined); (2) payments by the Operating Company to IOS for the reimbursement of
reasonable out-of-pocket expenses permitted pursuant to the Management
Consulting Services Agreement; and (3) payments by the Operating Company to IOS
to repurchase shares of IOS Common Stock (subject to restrictions).

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical data for the 1997
through 2001 fiscal years for the Company. The selected historical statement of
operating data for the 1997 through 2001 fiscal years was derived from the
audited consolidated financial statements of IOS. The financial data is
qualified by reference to, and should be read in conjunction with the Company's
consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K.

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CONSOLIDATED IOS BRANDS CORPORATION

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(1) In fiscal years 2001 and 2000, represents the minority's interest in
FTD.COM. In fiscal years 1998 and 1997 represents the minority's interest in
Renaissance, which was purchased for cash by FTD in fiscal year 1998.

(2) In November 1997, FTD entered into a new credit agreement with a group of
banks led by Bank One Capital Markets, Inc. As a result of entering into the
new credit agreement, unamortized deferred financing costs associated with
the then existing debt were expensed, resulting in a net loss on
extinguishment of debt of $0.8 million after the related income tax benefit
of $0.5 million. In December 1998, the Company repurchased the $60.0 million
aggregate principal amount of 14% Senior Subordinated Notes due December 15,
2001 (the "Notes"). The aggregate repurchase price totaled $64.2 million and
consisted of the $60.0 million principal on the Notes and a $4.2 million
pre-payment penalty. As a result of the repurchase of the Notes, $1.7
million of unamortized discount and $1.2 million of deferred financing costs
associated with the Notes were expensed in December 1998. Accordingly, the
loss on the repurchase of the Notes totaled $7.1 million. The related income
tax benefit attributable to the loss on the repurchase of the Notes was $3.4
million, for a tax-effected loss on reacquisition of the Notes of $3.7
million. See Note 3 to the consolidated financial statements.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Except for the historical information contained in this report, certain
statements made herein are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that reflect the Company's
expectations, assumptions, estimates and projections regarding its results of
operations, cash flow, performance, revenue and business prospects and
opportunities. Words such as "anticipates," "believes," "plans," "expects,"
"estimates" and similar expressions have been used to identify these forward-
looking statements, but are not the exclusive means of identifying these
statements. These forward-looking statements reflect the Company's current
beliefs and expectations and are based on information currently available to the
Company. Accordingly, these statements are subject to known and unknown risks,
uncertainties and other factors that could cause the Company's results of
operations and performance to differ from those expressed in, or implied by,
these forward-looking statements. These risks, uncertainties and other factors
include the Company's ability to develop and market existing and new products,
the Company's ability to maintain its advertising presence, the Company's
ability to adjust to changes in technology, customer preferences, enhanced
competition and new competitors in the floral services industry, current
exchange rate and interest rate fluctuations, collection of receivables and
risks associated with general economic and business conditions, which may reduce
or delay customers' purchases of the Company's products and services. The
Company makes no commitment to disclose any revisions to any forward looking
statements to reflect new events or circumstances after the date of this
document that may bear upon any forward looking statements made herein.

RESULTS OF OPERATIONS

The following table illustrates the total revenue generated by IOS's
operations and summarizes IOS's historical results of operations for the fiscal
years ended June 30, 2001, 2000 and 1999:

The Company generates its revenue from four principal segments. These
segments have been classified as Member Services, Technology Products, Specialty
Wholesaling and Direct to Consumer.

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Member Services consists of floral services provided by both FTD and VNS
consisting primarily of:

- Clearinghouse, which provides order billing and collection services to
both the sending and receiving florists. The Company receives a
percentage of the order value for these services.

- Flowers After Hours, which is the Company's call-forwarding service
whereby the Company takes orders for participating florists when that
florist's shop is closed or otherwise unavailable. The Company charges a
fee for each transaction processed by Flowers After Hours.

- Publications, which consists of sales of the Directory that is published
on a quarterly basis in both CD-ROM and paper book form. Publications
also include revenues attributable to the set up and maintenance of
florists' Web sites for FTD Florists' Online hosted through FTD.COM's
www.ftd.com Web site pursuant to a Web site hosting agreement with
FTD.COM.

- Credit Card processing, which is a service offered to participating
florists whereby the Company pools the participating florists credit card
transactions to secure more favorable terms on such transactions than the
florists could secure individually.

- Interflora, Inc., which is a joint venture between the Company,
Fleurop-Interflora, and the Interflora British Unit. The joint venture
gives FTD members access to a floral service organization with non-FTD
member florists, enabling FTD florists to transmit and receive orders
outside North America.

Technology Products consists primarily of:

- Mercury equipment, Mercury Advantage systems, Mercury Direct, and Mercury
Wings systems sales, which includes both sales and leasing of hardware
and software to florists.

- Mercury Network, which is FTD's proprietary telecommunications network
used by florists to transmit orders through the Company's Clearinghouse
or competing clearinghouses.

The Specialty Wholesaling business segment consists primarily of FTD's
wholesale distribution of floral-related products to florists. This segment
includes the wholesale distribution of both FTD-branded and non-branded holiday
and everyday floral arrangement containers and products, as well as packaging,
promotional products and a wide variety of other floral-related supplies. It
also includes greeting cards, specialty gifts and the FSG in addition to other
miscellaneous items.

The Direct to Consumer business segment consists of FTD's majority owned
subsidiary, FTD.COM. FTD.COM is an Internet and telephone marketer of flowers
and specialty gifts. This business segment includes consumer orders generated by
the www.ftd.com Web site and the 1-800-SEND-FTD toll-free telephone number.
FTD.COM records order revenue and costs for fulfillment and processing services
when an order is filled. In addition, FTD.COM charges the customer a service fee
for all floral orders.

In view of the rapidly changing nature of the Company's Direct to Consumer
business and seasonal variations in the revenues and operating results of all of
the Company's business segments, the Company believes that comparisons of its
revenues and operating results for any period with those of the immediately
preceding period or the same period of the preceding fiscal year may be of
limited relevance in evaluating the Company's historic financial performance and
predicting the Company's future financial performance. For example, revenues and
operating results tend to be lower for the quarter ending September 30 because
none of the most popular floral holidays, which include Valentine's Day, Easter,
Mother's Day, Thanksgiving and Christmas, fall within that quarter. In addition,
depending on the year, the popular floral holiday of Easter sometimes falls
within the quarter ending March 31 and sometimes falls within the quarter ending
June 30. Also, this seasonality is attributable to increased revenues in the
quarter ended March 31 relating to the increased floral orders and shipments of
Mother's Day holiday products. As a result, comparisons of results of operations
from one quarter to the immediately preceding quarter or the same quarter of the
preceding year may not be relevant when evaluating the Company's historical
financial performance and predicting the Company's future performance. The
Company's working capital, cash and short-term borrowings also fluctuate during
the year as a result of the factors set forth above.

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Year ended June 30, 2001, compared to year ended June 30, 2000

Total revenue increased by $40.6 million, or 15.1%, to $308.3 million for
the year ended June 30, 2001, compared to $267.7 million for the year ended June
30, 2000, for the reasons discussed below.

Member Services segment revenue increased by $6.7 million, or 7.1%, to
$101.3 million for the year ended June 30, 2001, compared to $94.6 million for
the year ended June 30, 2000. This increase was primarily due to an increase in
the monthly access fees charged to florists and increased VNS member services
revenue offset partially by decreased credit card processing revenue. Membership
in FTD, the Company's premium floral service provider, declined from
approximately 17,000 to 14,000 members, as of June 30, 2000 and 2001,
respectively. The Company believes that this decline in membership is primarily
attributable to the increase in monthly access fees charged to FTD florists.
However, since its launch in January 2000, membership in VNS, the Company's
economy floral service provider, numbered over 10,000 members as of June 30,
2001. By the end of fiscal 2002, the Company expects to increase membership in
both VNS and FTD, offering services to meet the needs of florists at each end of
the pricing spectrum.

Technology Products segment revenue increased by $0.8 million, or 2.2%, to
$36.9 million for the year ended June 30, 2001, compared to $36.1 million for
the year ended June 30, 2000. This increase was primarily due to an increase in
Wings System sales and an increase in Mercury equipment support fees charged to
Mercury equipment customers, partially offset by a decrease in Advantage System
sales. The Company expects to continue to encourage florists to upgrade from
older Mercury equipment to Mercury Direct, Mercury Wings and Mercury Advantage
systems, which will tend to lower related revenues without significantly
impacting earnings due to the elimination of related costs to support the older
technology. The Company has agreements with certain floral service providers
that provide a guaranteed minimum order fee for orders processed over the
Mercury Network. These agreements contain renewal options and begin to expire in
the second half of fiscal 2002.

Specialty Wholesaling segment revenue increased by $3.2 million, or 6.3%,
to $52.6 million for the year ended June 30, 2001, compared to $49.4 million for
the year ended June 30, 2000. This increase was primarily the result of the
increase in the revenue attributable to the FSG, as described in Note 16 of the
Notes to Consolidated Financial Statements, partially offset by a decrease in
holiday and branded product sales. In fiscal 2002, the Company expects to reduce
the number of inventoried items offered to florists, which is expected to lead
to lower sales and reductions in inventory without significantly impacting
earnings as a result of improved gross margin because of a more attractive mix
of products and lower carrying costs associated with inventory.

Direct to Consumer segment revenue increased by $29.9 million, or 34.2%, to
$117.5 million for the year ended June 30, 2001, compared to $87.6 million for
the year ended June 30, 2000. This increase was primarily due to increases in
the order volume and average order value placed by consumers through the
www.ftd.com Web site and the 1-800-SEND-FTD toll-free telephone number.

Total cost of goods sold and services provided increased by $24.1 million,
or 18.0%, to $158.2 million for the year ended June 30, 2001, compared to $134.1
million for the year ended June 30, 2000. This increase was primarily
attributable to increases in sales volume in the Direct to Consumer and
Specialty Wholesaling segments. As a percentage of revenue, total costs of goods
sold and services provided increased to 51.3% for the year ended June 30, 2001,
from 50.1% for the year ended June 30, 2000. This increase was primarily
attributable to sales mix related to revenue increases for the Direct to
Consumer and Specialty Wholesaling segments, which have higher cost ratios.

Costs of goods sold and services provided associated with the Member
Services segment decreased by $1.6 million, or 11.0%, to $13.1 million for the
year ended June 30, 2001, compared to $14.7 million for the year ended June 30,
2000. This decrease was primarily the result of a decrease in credit card
processing revenue. As a percent of revenue, costs of goods sold and services
provided decreased to 12.9% for the year ended June 30, 2001, from 15.6% for the
year ended June 30, 2000, primarily due to an increase in the monthly access
fees charged to florists.

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14

Costs of goods sold and services provided associated with the Technology
Products segment decreased by $1.7 million, or 12.0%, to $13.0 million for the
year ended June 30, 2001, compared to $14.7 million for the year ended June 30,
2000. This decrease was primarily the result of fewer unit sales of Advantage
Systems and lower system support costs partially offset by increased Wings
System costs. As a percent of revenue, costs of goods sold and services provided
decreased to 35.1% for the year ended June 30, 2001, from 40.7% for the year
ended June 30, 2000, primarily as a result of sales mix on relatively higher
margin Mercury Wings compared to Advantage Systems, and an increase in Mercury
equipment support fees charged to Mercury equipment customers.

Costs of goods sold and services provided associated with the Specialty
Wholesaling segment increased by $5.8 million, or 16.2%, to $42.1 million for
the year ended June 30, 2001, compared to $36.3 million for the year ended June
30, 2000. This increase was primarily due to the costs of producing the FSG. As
a percent of revenue, costs of goods sold and services provided increased to
80.2% for the year ended June 30, 2001 from 73.4% for the year ended June 30,
2000, primarily as a result of sales of the lower margin FSG to affiliated
florists and lower margins on Specialty Wholesaling products resulting from
discounting related to inventory reduction efforts.

Costs of goods sold and services provided associated with the Direct to
Consumer segment increased by $21.6 million, or 31.6%, to $90.0 million for the
year ended June 30, 2001, compared to $68.4 million for the year ended June 30,
2000. This increase was primarily attributable to costs associated with
processing and filling more consumer orders. As a percent of revenue, costs of
goods sold and services provided decreased to 76.6% for the year ended June 30,
2001, from 78.1% for the year ended June 30, 2000, primarily as a result of an
increase in higher margin specialty gift orders and reduction in order
processing costs due to a decrease in the total number of phone orders.

Advertising and selling costs decreased by $28.7 million, or 27.9%, to
$74.2 million for the year ended June 30, 2001, compared to $102.9 million for
the year ended June 30, 2000. This decrease was primarily due to a reduction of
marketing and promotions related to the Direct to Consumer business segment,
with a shift from a marketing program primarily focused on customer acquisition
to a more balanced program focused on both customer acquisition and retention.
FTD.COM's marketing and promotion costs were $15.1 million and $42.9 million,
respectively, for fiscal years 2001 and 2000.

General and administrative costs decreased by $3.3 million, or 6.0%, to
$50.6 million for the year ended June 30, 2001, compared to $53.9 million for
the year ended June 30, 2000. This was primarily due to FTD.COM's $4.4 million
one-time charge in fiscal year 2000 associated with the write-off of development
work related to an unlaunched version of its Web site partially offset by an
increase in stock-based compensation expense related to restricted stock grants
made to certain employees of the Company and FTD.COM in prior years.

Interest income remained relatively constant at $1.5 million for the year
ended June 30, 2001, compared to $1.9 million for the year ended June 30, 2000.
Interest expense decreased by $0.5 million, or 8.5%, to $5.2 million for the
year ended June 30, 2001, compared to $5.7 million for the year ended June 30,
2000. The decrease was primarily attributable to a lower borrowing rate during
fiscal year 2001.

Other income consists primarily of a $12.0 million lawsuit settlement gain
for the year ended June 30, 2001. Other expense consists primarily of $14.5
million in expenses related to the Termination Agreement for the year ended June
30, 2001.

The provision for income taxes and the effective tax rates for the years
ended June 30, 2001 and 2000, were an expense of $3.8 million and a rate of 20%
and a benefit of $7.6 million and a rate of 28%, respectively. This change in
effective tax rates was primarily due to the tax-free portion of the settlement
gain recorded in the year ended June 30, 2001.

The minority interest in earnings of subsidiary was an expense of $1.9
million for the year ended June 30, 2001, compared to a benefit of $4.4 million
for the year ended June 30, 2000 and fluctuated primarily as a result of an
increase in the Direct to Consumer segment net income. The minority's interest
was 17% at June 30, 2001.
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15

Net income increased by $28.1 million to $13.0 million for the year ended
June 30, 2001, compared to a net loss of $15.1 million for the year ended June
30, 2000. This increase was primarily the result of increased revenue coupled
with decreased advertising and selling expenses associated with FTD.COM's
advertising campaign.

Year ended June 30, 2000, compared to year ended June 30, 1999

Total revenue increased $54.3 million, or 25.4%, to $267.7 million for the
year ended June 30, 2000, compared to $213.4 million for the year ended June 30,
1999. This increase was primarily the result of an increase in revenue in the
Direct to Consumer and Member Services business segments, offset in part by a
decrease in revenue in the Specialty Wholesaling business segment.

Member Services segment revenue increased $13.4 million, or 16.5%, to $94.6
million for the year ended June 30, 2000, compared to $81.2 million for the year
ended June 30, 1999. This increase is primarily due to increases in
Clearinghouse, Publications and Credit Cards revenue. The increase relating to
Clearinghouse revenue is primarily attributable to the increase in the monthly
access fee charged to florists. The increase in Publications revenue is
primarily attributable to an increase in listings and extra advertisements in
the Directory in comparison to the year ended June 30, 1999. The increase in
revenue related to credit card processing is due to the increase in the
commissions fee for bankcard processing and an increase in credit card volume.

Technology Products segment revenue increased $1.1 million, or 3.4%, to
$36.1 million for the year ended June 30, 2000, compared to $35.0 million for
the year ended June 30, 1999. This increase is primarily due to increases in
Mercury Advantage and Mercury Wings systems sales. These increases were
partially offset by decreases in Mercury equipment rental revenue and Mercury
network transmissions. The increase in revenue relating to Mercury Advantage and
Mercury Wings is due to an increase in the number of systems sold over the year
ended June 30, 1999.

Specialty Wholesaling segment revenue decreased $2.4 million, or 4.7%, to
$49.4 million for the year ended June 30, 2000, from $51.8 million for the year
ended June 30, 1999. The decrease was primarily the result of $2.8 million in
revenue for the FSG (see Note 16 of Notes to Consolidated Financial Statements),
recorded in fiscal year 1999 versus no FSG revenue recorded in the year ended
June 30, 2000.

Direct to Consumer segment revenue increased $42.1 million, or 92.6%, to
$87.6 million for the year ended June 30, 2000, compared to $45.5 million for
the year ended June 30, 1999. The increase over the year ended June 30, 1999 was
primarily due to an increase in the number of orders placed by consumers through
the www.ftd.com Web site as well as an increase in the average order value.

Total cost of goods sold and services provided increased $38.7 million, or
40.6%, to $134.1 million for the year ended June 30, 2000, compared to $95.4
million for the year ended June 30, 1999. This increase was primarily
attributable to the costs associated with increases in revenue in the Direct to
Consumer business segment. As a percent of revenue, total cost of goods sold and
services provided increased to 50.1% for the year ended June 30, 2000, from
44.7% for the year ended June 30, 1999. This was primarily due to the
significant increase in sales volume in the Direct to Consumer business segment,
which has a higher relative cost of sales percentage compared to other business
segments.

Cost of goods sold and services provided associated with Member Services
increased $3.4 million, or 30.0%, to $14.7 million for the year ended June 30,
2000, compared to $11.3 million for the year ended June 30, 1999. This increase
was primarily due to increased costs associated with publications and an
increase in credit card volume. As a percent of revenue, costs of goods sold and
services provided increased to 15.6% for the year ended June 30, 2000, from
14.0% for the year ended June 30, 1999, primarily as a result of costs
associated with increased credit card revenue.

Cost of goods sold and services provided associated with Technology
Products increased $3.0 million, or 25.8%, to $14.7 million for the year ended
June 30, 2000, compared to $11.7 million for the year ended June 30, 1999. This
increase was primarily due to higher equipment and support costs associated with
increased sales of Mercury Advantage and Mercury Wings systems. As a percent of
revenue, costs of goods
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16

sold and services provided increased to 40.7% for the year ended June 30, 2000,
from 33.5% for the year ended June 30, 1999, primarily as a result of costs
associated with increased sales of Mercury Advantage and Mercury Wings systems.

Cost of goods sold and services provided associated with Specialty
Wholesaling decreased by $0.6 million, or 1.8%, to $36.3 million for the year
ended June 30, 2000, compared to $36.9 million for the year ended June 30, 1999.
This decrease was due primarily to lower costs related to the FSG. Cost of goods
sold in the year ended June 30, 1999 included costs related to the FSG versus no
FSG costs in the year ended June 30, 2000. As a percent of revenue, costs of
goods sold and services provided increased to 73.4% for the year ended June 30,
2000, from 71.3% for the year ended June 30, 1999, primarily as a result of
selling lower margin branded products.

Cost of goods sold and services provided associated with Direct to Consumer
increased $33.0 million, or 93.1%, to $68.4 million for the year ended June 30,
2000 compared to $35.4 million for the year ended June 30, 1999. The increase
was primarily attributable to costs associated with processing and filling more
consumer orders. As a percentage of revenue, costs of goods sold and services
provided increased to 78.1% for the year ended June 30, 2000, from 77.9% for the
year ended June 30, 1999, primarily as a result of increased other revenue,
which have no directly associated costs, and a change in the amount paid per
order to filling florists.

Advertising and selling costs increased $37.9 million, or 58.3%, to $102.9
million for the year ended June 30, 2000, compared to $65.0 million for the year
ended June 30, 1999. This was primarily due to increased costs associated with
Internet marketing and national advertising related to FTD.COM's marketing
efforts. FTD.COM's marketing and promotion costs were $42.9 million and $12.0
million, respectively, for fiscal years 2000 and 1999.

General and administrative costs increased $11.6 million, or 27.4%, to
$53.9 million for the year ended June 30, 2000, from $42.3 million for the year
ended June 30, 1999. This was primarily due to the increased payroll and
administrative costs to support the growth of the Company as well as FTD.COM's
$4.4 million one-time charge associated with the write-off of development work
related to an unlaunched version of their Web site.

Interest income increased $1.3 million over the year ended June 30, 1999 to
$1.9 million for the year ended June 30, 2000. This increase was primarily due
to interest earned on unused proceeds from the initial public offering ("IPO")
of FTD.COM. Interest expense decreased by $1.2 million from the year ended June
30, 1999 to $5.7 million for the year ended June 30, 2000. The decrease was
primarily attributable to a lower borrowing rate during the current year as a
result of the repurchase of $60.0 million of the Notes on December 15, 1998, and
utilizing existing bank credit facilities which have a lower average borrowing
rate.

The provision for income taxes and the effective tax rates for the years
ended June 30, 2000 and 1999, were a benefit of $7.6 million and 28% and a
provision of $3.2 million and 79%, respectively. The change in effective tax
rates was primarily due to the effect of non-deductible goodwill amortization
and other items, which reduces the Company's tax benefit rate when operating in
a pre-tax loss position and increases its effective tax rate when operating in a
pre-tax profit position.

The minority interest in loss of subsidiary of $4.4 million for the year
ended June 30, 2000, reflected on the consolidated statements of operations and
comprehensive income, represents the net loss attributable to the minority
shareholders for the period. The minority's interest was 17% as of June 30,
2000.

The net income/loss before extraordinary item was a loss of $15.1 million
for the year ended June 30, 2000, compared to income of $0.9 million for the
year ended June 30, 1999, a decrease of $16.0 million from the year ended June
30, 1999. The decrease was primarily the result of increased advertising,
selling, and marketing expenses associated with FTD.COM's national advertising
campaign in fiscal year 2000. The net loss for the year ended June 30, 1999
includes an after-tax extraordinary loss of $3.7 million as a result of the
extinguishment of debt as noted above.

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17

Quarterly Financial Information (Unaudited) (in thousands, except for per
share data):

- ---------------
(1) In the first quarter of fiscal 2001, the Company recognized a settlement
gain of $12.0 million, on a pretax basis (see Note 17 of Notes to
Consolidated Financial Statements). In the fourth quarter of fiscal 2001,
the Company recorded $14.5 million of expenses related to the Termination
Agreement (see Note 18 of Notes to Consolidated Financial Statements).

(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in fiscal
year 2001 does not equal the total computed for the year.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $10.1 million to $30.9 million as of
June 30, 2001 from $20.8 million as of June 30, 2000. Cash provided by operating
activities was $13.0 million for the year ended June 30, 2001 compared to cash
used in operating activities of $8.8 million for the year ended June 30, 2000.
The increase in cash provided by operating activities is primarily attributable
to the increase in net income and non-cash expenses related to depreciation and
amortization and minority interest, offset in part by a $12 million non-cash
settlement gain and a decrease in accounts payable.

Cash used in investing activities was $5.9 million for the year ended June
30, 2001 compared to cash used in investing activities of $15.8 million for the
year ended June 30, 2000. Expenditures for depreciable fixed assets such as
furniture and equipment were $1.3 million for the year ended June 30, 2001
compared to $5.0 million for the year ended June 30, 2000. Expenditures for
amortizable intangibles such as costs relating to the development and
implementation of internal use software and other information technology costs
were $2.7 million for the year ended June 30, 2001 compared to $10.7 million for
the year ended June 30, 2000. For the year ended June 30, 2000, $3.5 million of
capitalized assets were written off as part of a $4.4 million one-time charge
associated with the development work related to an unlaunched version of
FTD.COM's Web site. The Company's anticipated capital expenditures for fiscal
2002 are estimated to be $5.0 to $7.0 million and will primarily be used for
developing new software and information technology purchases.

Cash provided by financing activities was $3.4 million for the year ended
June 30, 2001, primarily attributable to book overdrafts of $3.5 million,
related to checks issued but not presented to banks, as discussed in Note 1 of
the Notes to Consolidated Financial Statements. Net cash provided by financing
activities was $43.0 million for the year ended June 30, 2000, which included
the net proceeds of $35.6 million generated from FTD.COM's Initial Public
Offering in fiscal year 2000 and book overdrafts of $4.5 million.

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18

The Company's principal sources of liquidity are cash from operations and
funds available for borrowing under the Company's Bank Credit Agreement, dated
November 20, 1997 (the "Bank Credit Facilities"). The Bank Credit Facilities
consist of a $30.0 million Multiple Draw Term Loan Facility and a $50.0 million
Revolving Credit Facility and are used to finance working capital, acquisitions,
capital expenditures, certain expenses associated with the Bank Credit
Facilities and letter of credit needs. As of June 30, 2001, the Company had
$30.0 million outstanding under the Multiple Draw Term Loan Facility, $24.9
million outstanding under the Revolving Credit Facility and $1.9 million
outstanding under various letters of credit. The amount outstanding under the
Multiple Draw Term Loan Facility is scheduled to be permanently reduced over a
period of ten consecutive quarterly installments continuing until the Bank
Credit Facilities' termination date of December 31, 2003, through the use of
cash flow from operations and borrowings under the Revolving Credit Facility.
The amounts outstanding under the Revolving Credit Facility will mature on
December 31, 2003. The Company's Bank Credit Facilities include covenants,
which, among other things require the Company to maintain certain financial
ratios and a minimum level of consolidated net worth. As of June 30, 2001, the
Company was in compliance with the covenants contained in the Bank Credit
Facilities, as amended.

In addition to its debt service obligations, the Company's remaining
liquidity requirements are primarily for capital expenditures, software
development costs and working capital needs. The Company believes, based on
current circumstances, that its existing and future cash flows from operations,
together with borrowings under the Revolving Credit Facility, will be sufficient
to fund its working capital needs, capital expenditures, software development
costs, potential acquisitions and to make interest and principal payments as
they become due under the terms of the Bank Credit Facilities. The Company's
Direct to Consumer business segment, FTD.COM, may also have long-term liquidity
needs that may require it to raise additional capital. If FTD.COM needed to
raise additional capital and was not able to do so, FTD.COM could be required to
significantly alter its operating plan, which could have a material adverse
effect on the results of operations and financial condition of FTD.COM and the
Company.

On July 26, 2000, the Company settled an ongoing lawsuit whereby one of the
Company's shareholders, and former warrantholder, returned 750,000 shares of
Class B Convertible Common Stock, which the Company subsequently recorded as
treasury stock. The shareholder received these shares upon exercise of the
Company's common stock warrants, which were originally issued to the shareholder
in conjunction with the acquisition of Florist Transworld Delivery Association
by the Company in 1994. As a result of this settlement, the Company recognized a
settlement gain of $12.0 million, on a pretax basis, in the year ended June 30,
2001.

On April 30, 2001, FTD entered into a Termination Agreement with the
Association, which became effective as of June 29, 2001. The Termination
Agreement, which contains limited two-year non-compete provisions, terminates
both the Mutual Support Agreement, dated December 18, 1994 (the "Mutual Support
Agreement"), and the Trademark License Agreement, dated December 18, 1994 (the
"Trademark Agreement" and together with the Mutual Support Agreement, the
"Association Agreements"), which were entered into in connection with the
Acquisition between the Association and FTD. Pursuant to the Association
Agreements, among other things: (i) existing and future members of the
Association had the exclusive right, subject to execution of a Trademark
Agreement with the Operating Company, to use the FTD logo and other FTD
trademarks in connection with the operation of a retail florist shop; (ii) all
members of the Association in good standing were provided access to FTD's
Clearinghouse, Mercury Network and certain other FTD services and products;
(iii) the Operating Company paid the Association an amount equal to a percentage
of the value of every floral order cleared through FTD's Clearinghouse; and (iv)
the Operating Company and the Association were able to designate up to 20% but
not fewer than two individuals to be elected to the other's board of directors.

As consideration for the dissolution of the contractual relationship
between the Company and the Association pursuant to the Termination Agreement,
FTD agreed to pay the Association $14.0 million, $12.6 million which was paid on
June 29, 2001 and $1.4 million of which is subject to a one-year escrow
holdback. In fiscal 2001, the Company recorded $14.5 million of expenses related
to this transaction, including professional fees. The $1.4 million escrow
holdback is reflected on the Company's balance sheet as restricted cash.
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19

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
Accounting for Certain Sales Incentives. EITF 00-14 addresses the recognition,
measurement and income statement classification of sales incentives offered by a
vendor that can be used in a single exchange transaction. This EITF is effective
for annual and interim financial periods beginning after December 15, 2001. The
Company does not expect the adoption of EITF 00-14 will have a significant
impact on the Company's financial position or results of operations.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("SFAS 141") which supersedes APB Opinion No.
16, "Business Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". SFAS 141 addresses financial accounting
and reporting for business combinations and requires that all business
combinations within scope of SFAS 141 be accounted for using only the purchase
method. SFAS 141 is required to be adopted for all business combinations
initiated after June 30, 2001. Management has assessed the impact of the
adoption of SFAS 141 on its consolidated financial statements and believes the
impact will not be material.

Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") which supercedes APB Opinion No. 17, "Intangible
Assets". SFAS 142 addresses how intangible assets that are acquired individually
or with a group of other assets (but not those acquired in a business
combination) should be accounted for in financial statements upon their
acquisition. SFAS 142 also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. SFAS 142 is
required to be applied at the beginning of an entity's fiscal year and to be
applied to all goodwill and other intangible assets recognized in its financial
statements at that date. Management is currently evaluating the impact that
adoption of SFAS 142 will have on its consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to various market risks, which primarily consist of
interest rate risk. The Company currently does not use derivative instruments
for trading purposes or to reduce its exposure to changes in interest rates. The
Company's exposure to interest rate risk is primarily the result of borrowings
under the Bank Credit Facilities, which were subject to interest rates ranging
from 4.9375% to 7.0% at June 30, 2001. The Company believes that its exposure to
interest rate fluctuations will be limited due to the Company's philosophy of
maintaining minimal cash balances, excluding the cash of FTD.COM, in an effort
to effectively use any excess cash flows to reduce outstanding debt.

All of the Company's outstanding debt, which totaled $54.9 million as of
June 30, 2001, is subject to variable rates. An adverse change in interest rates
during the time that this portion of the debt is outstanding would cause an
increase in the amount of interest paid. The Company may pay down the loan prior
to expiration in December 2003. However, if the Company's borrowings remain
outstanding for the remaining term of the borrowing agreement, a 100 basis point
increase in LIBOR would result in an increase of approximately $550,000 in the
amount of annualized interest paid on this portion of the debt and annualized
interest expense recognized in the consolidated financial statements.

The Company will continue to monitor changing economic conditions, and
based on current circumstances, does not expect to incur a substantial loss in
future earnings or cash flows as a result of changing interest rates.

The Company is also exposed to foreign currency exchange rate risk with
respect to the Canadian dollar. The resulting Canadian exchange adjustments are
included in the accumulated other comprehensive income component on the
Consolidated Statements of Operations and Comprehensive Income and did not have
a material effect on other comprehensive income for the years ended June 30,
2001, 2000 and 1999. The Company does not expect to be materially affected by
foreign currency exchange rate fluctuations in the

18
20

future, as the transactions denominated in Canadian dollars are not material to
the consolidated financial statements. The Company therefore does not currently
enter into derivative financial instruments as hedges against foreign currency
fluctuations of the Canadian dollar.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Registrant required by this
item are set forth on pages F-1 through F-27 of this form 10-K and the related
schedule is set forth on page F-29 of this form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors of the Company will be set forth under
the caption "Election of Directors" in the Company's information statement
related to the Company's 2001 annual meeting of stockholders (the "Information
Statement") and is incorporated herein by reference. Information regarding
executive officers of the Company is included as Item 4A of Part 1 as permitted
by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item
405 of Regulation S-K will be set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Information Statement and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item will be set forth under the caption
"Executive Compensation" in the Information Statement and, except for the
information under the captions "Executive Compensation -- Compensation Committee
Report on Executive Compensation" and "Stockholder Return Comparison," is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item will be set forth under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Principal
Stockholders" in the Information Statement and is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding any disclosable relationships and related
transactions will be set forth under the caption "Relationship with Affiliates"
in the Information Statement and is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

(1) & (2) The consolidated financial statements and schedule which are
filed with this Form 10-K are set forth in the Index to Consolidated Financial
Statements and Schedule at Page F-1 which immediately precedes such documents.

(3) See accompanying Index to Exhibits. The Company will furnish to any
stockholder, upon written request, any exhibit listed in the accompanying Index
to Exhibits upon payment by such stockholders of the Company's reasonable
expenses in furnishing any such exhibits. Such exhibits, as indicated in the
index, either

19
21

are filed herewith or have heretofore been filed with the Securities and
Exchange Commission under the Securities Act and are referred to and
incorporated herein by reference to such filings.

(b) REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 2001.

(c) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

See accompanying Index to Exhibits.

20
22

SIGNATURES

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

IOS BRANDS Corporation

By: /s/ ROBERT L. NORTON
------------------------------------
Name: Robert L. Norton
Title: Chairman of the Board of
Directors and President
Date: August 3, 2001

Each person whose signature appears below hereby constitutes and appoints
Robert L. Norton and Randall L. Twyman, and each of them, as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001 and any and all amendments thereto, and to file
the same, with all exhibits and schedules thereto, and other documents
therewith, with the Securities and Exchange Commission, and hereby grants unto
such attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing necessary or desirable to be done, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his or her
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.

21
23

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 2001 and 2000.... F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 2001, 2000 and 1999... F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2001, 2000 and 1999.................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000 and 1999.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
Independent Auditors' Report on Financial Statement
Schedule.................................................. F-28
Schedule II -- Valuation and Qualifying Accounts............ F-29

F-1
24

INDEPENDENT AUDITORS' REPORT

The Board of Directors
IOS BRANDS Corporation:

We have audited the accompanying consolidated balance sheets of IOS BRANDS
Corporation and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IOS BRANDS
Corporation and subsidiaries as of June 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.

/s/ KPMG LLP

Chicago, Illinois
July 23, 2001

F-2
25

IOS BRANDS CORPORATION

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND 2000

See Accompanying Notes to Consolidated Financial Statements.
F-3
26

IOS BRANDS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

See Accompanying Notes to Consolidated Financial Statements.
F-4
27

IOS BRANDS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

See Accompanying Notes to Consolidated Financial Statements.
F-5
28

IOS BRANDS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

See Accompanying Notes to Consolidated Financial Statements
F-6
29

IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Business

IOS BRANDS Corporation (the "Registrant" or the "Company") is a Delaware
corporation that was formed in 1994. As used in this Form 10-K, the terms the
"Company" or "IOS" refer to IOS BRANDS Corporation and its wholly owned
subsidiaries, including Value Network Services, an Illinois corporation ("VNS"),
and Florists' Transworld Delivery, Inc., a Michigan corporation ("FTD" or "the
Operating Company"). The operations of FTD, the Company's principal operating
subsidiary, include those of its indirect wholly owned subsidiaries Renaissance
Greeting Cards, Inc. ("Renaissance") and FTD Canada, Inc., as well as its
majority-owned subsidiary FTD.COM INC. ("FTD.COM"). FTD.COM's Class A common
stock, par value $.01 per share, is quoted on the NASDAQ National Market under
the symbol "EFTD." As of June 30, 2001, FTD owned approximately 83% of FTD.COM's
Class B outstanding shares. Substantially all the operations of IOS are
conducted through FTD and its subsidiaries.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts
of IOS and its wholly-owned subsidiaries, including its primary operating
subsidiaries FTD and Value Network Services, Inc. ("VNS"). The accounts of FTD
include its wholly owned subsidiaries, Renaissance Greeting Cards, Inc. and FTD
Canada, Inc., as well as its majority-owned subsidiary FTD.COM Inc. ("FTD.COM").
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Cash and Cash Equivalents

The Company considers all investments purchased with maturities of three
months or less at the date of purchase to be cash equivalents.

Fair Value of Financial Instruments

Financial instruments consist primarily of accounts receivable, accounts
payable, customer deposits, unearned income, other accrued liabilities and
long-term debt. At June 30, 2001, because of the short maturity of those
instruments other than long-term debt, the fair value of these financial
instruments approximates the carrying amount. The fair value of long-term debt
is disclosed in Note 3.

Book overdrafts

Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes and are
classified as "book overdrafts" on the balance sheet.

Inventories

Inventory consists of finished goods and is stated at the lower of cost or
market value. Prior to July 1, 1998, cost was determined on a First-In,
First-Out (FIFO) basis. On April 1, 1999, the Company began to determine cost on
a weighted average basis given management's determination that this method
provides a better matching of revenues and expenses associated with its
inventory, which is mainly comprised of seasonal purchases. The change in
costing methods had no material effect on the consolidated statements of
operations and comprehensive income for fiscal year 1999.

F-7
30
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment

Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. The useful lives are ten
to 31.5 years for building and improvements, five years for Mercury consoles and
five to ten years for furniture and equipment.

Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts, and any
gain or loss incurred in the ordinary course of business is included as a
non-operating expense in the accompanying consolidated statements of operations
and comprehensive income. Maintenance and repairs are charged to expense as
incurred. Expenditures that improve or extend the life of existing property and
equipment are capitalized.

Software to be Sold, Leased, or Marketed

The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. SFAS No. 86 requires that all costs
relating to the purchase or internal development and production of a computer
software product to be sold, leased or otherwise marketed be expensed in the
period incurred unless the requirements for technological feasibility have been
established. The Company capitalizes all eligible computer software costs
incurred once technological feasibility is established. The Company amortizes
these costs using the greater of the straight-line method over a period of three
to five years or the revenue method prescribed by SFAS No. 86.

Internal Use Software

The Company has adopted the provisions of AICPA Statement of Position
("SOP") 98-1, Accounting for the Costs of Software Developed or Obtained for
Internal Use and Emerging Issues Task Force Consensus No. 00-02, Accounting for
Web Site Development Costs. Accordingly, certain costs incurred in the planning
and development stage of internal-use computer software, including Web site
development costs, are expensed as incurred. Costs incurred during the
application development stage are capitalized.

Intangibles

Goodwill is being amortized using the straight-line method over 30 years.
Other intangibles consist of trademarks and acquired software and are being
amortized over 40 and five years, respectively, using the straight-line method.

The Company periodically evaluates whether events and circumstances that
have occurred indicate that the remaining balance of goodwill and other
intangibles may not be recoverable or that the remaining estimated useful lives
may warrant revision. When such factors indicate that goodwill and other
intangibles should be evaluated for possible impairment, the Company would use
an estimate of undiscounted future cash flows to measure whether the goodwill
and other intangibles is recoverable, and over what period. If estimated
undiscounted future cash flows are less than the carrying amount of the asset,
the asset is considered impaired and an expense is recorded in an amount
required to reduce the carrying amount of the asset to its then fair value.

Income Taxes

The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires that the asset and liability method of accounting
be used for income taxes in which deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected
F-8
31
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.

Foreign Currency Translation

In accordance with SFAS No. 52, Foreign Currency Translation, balance sheet
accounts of the Company's foreign operations are translated from Canadian
currency into U.S. dollars at the year-end rate of exchange, while income and
expenses are translated at the weighted average rates of exchange for the year.
Translation gains or losses related to net assets located outside the United
States are included in stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in net income (loss).

Earnings per Share

The Company computes net income (loss) per share in accordance with the
provisions of SFAS No. 128, Earnings per Share. Under the provisions of SFAS No.
128, the computation of basic and diluted net income (loss) per share for the
fiscal years ended June 30, 2001, 2000 and 1999 is as follows:

Shares associated with stock options that were not included in the
calculation of diluted earnings per share because their effect was anti-dilutive
consisted of approximately 47,000 shares, 355,000 shares and 137,000 shares for
the years ended June 30, 2001, 2000 and 1999, respectively.

Revenues

Revenues earned by the Company for processing floral and gift orders are
recorded in the month the orders are filled. Revenues for other services related
to the processing of such orders (including equipment rentals and transmission
charges) are recorded in the period the service is provided. Sales of products
are recorded when the products are shipped. Revenues relating to publications
are recognized in the periods in which the publications are issued. Unearned
revenue for Florists On-line Web site hosting is recognized ratably over the
one-year life of the agreement.

Revenues earned by FTD.COM are recorded when the order is fulfilled.
Generally, when a customer makes a purchase that will be fulfilled by a florist,
FTD.COM receives the order, charges the customers' credit

F-9
32
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

card, and transmits the order to Mercury Network, which is owned by FTD. The
Mercury Network then transmits the order to the filling florist. FTD.COM
recognizes 100% of the order value as revenue. In addition, FTD.COM receives
service fees for processing floral orders. The service fee for orders placed
over the Internet is $7.99 and the service fee for orders placed over the
telephone is $9.99. Orders that are not fulfilled by a florist, such as holiday
gift baskets, are fulfilled by a manufacturer or third party distributor. From
time to time, discounts are offered in connection with product promotions or
holiday promotions to selected customer groups. Order revenues and service fees
are reported net of discounts.

The Company follows the provisions of SOP 97-2, Software Revenue
Recognition as amended by SOP 98-9, Software Revenue Recognition with Respect to
Certain Arrangements. SOP 97-2 requires revenue earned on software arrangements
involving multiple elements (i.e., software products, upgrades/enhancements,
postcontract customer support, installation, training, etc.) to be allocated to
each element based on the relative fair values of the elements. The Company
recognizes revenue from software products (including specified
upgrades/enhancements) at the time of shipment for systems sold. For systems
that are being leased, the Company recognizes revenue ratably over the period of
the lease agreement. Support revenue is recognized over the period of the
support agreement. Installation and training are recognized at the time of
occurrence. The Company currently records revenue in accordance with Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). The adoption of SAB101 did not have an effect on the Company's
consolidated financial position or results of operations.

Stock-Based Compensation

The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants as if the fair
value-based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25.

Advertising and Sales Promotion Costs

The Company expenses production, advertising time and space costs and
related residual rights and contracts at the time the advertising is first
broadcast or displayed. Promotion costs are charged to expense when incurred.
Cash rebates earned by florists under the Company's customer incentive program
are charged to expense when earned.

In the years ended June 30, 2001, 2000 and 1999, advertising and sales
promotion expense was $52 million, $82 million, and $52 million, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.

Reclassifications

Certain amounts in the Company's fiscal 2000 and 1999 financial statements
have been reclassified to conform to the current year presentation.

F-10
33
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounting Standards not yet Adopted

In June 2001, the Financial Accounting Standards Board ("FASB" issued SFAS
No. 141, "Business Combinations" ("SFAS 141") which supersedes APB Opinion No.
16, "Business Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". SFAS 141 addresses financial accounting
and reporting for business combinations and requires that all business
combinations within scope of SFAS 141 be accounted for using only the purchase
method. SFAS 141 is required to be adopted for all business combinations
initiated after June 30, 2001. Management has assessed the impact of the
adoption of SFAS 141 on its consolidated financial statements and believes the
impact will not be material.

Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") which supercedes APB Opinion No. 17, "Intangible
Assets". SFAS 142 addresses how intangible assets that are acquired individually
or with a group of other assets (but not those acquired in a business
combination) should be accounted for in financial statements upon their
acquisition. SFAS 142 also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. SFAS 142 is
required to be applied at the beginning of an entity's fiscal year and to be
applied to all goodwill and other intangible assets recognized in its financial
statements at that date. Management is currently evaluating the impact that
adoption of SFAS 142 will have on its consolidated financial statements.

(2) INTANGIBLES

On December 19, 1994, IOS completed an acquisition of all of the
outstanding equity of Florists' Transworld Delivery Association, a Michigan
nonprofit cooperative association (the "Acquired Company"), pursuant to the
terms of an Agreement and Plan of Merger dated August 2, 1994. Pursuant to this
transaction, the Acquired Company was converted from a nonprofit cooperative
association to a for-profit corporation.

The Company accounted for the merger under the purchase method of
accounting, and accordingly, the Company's consolidated financial statements
reflect the allocation of the total purchase price to the tangible and
intangible assets acquired and liabilities assumed of the Acquired Company as of
December 19, 1994, based on their respective estimated fair values. At June 30,
2001, the $2.0 million of purchase price allocated to software was fully
amortized.

At June 30, 2001 and 2000, goodwill and other intangible assets relating to
the merger consisted of the following:

(3) FINANCING ARRANGEMENTS

In November 1997 IOS entered into a credit agreement with Bank One Capital
Markets, Inc. who arranged a financing package (the "Bank Credit Facilities")
with Bank One, NA acting as Administrative

F-11
34
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agent. The Bank Credit Facilities consist of a $30.0 million Multiple Draw Term
Loan Facility and a $50 million Revolving Credit Facility, both maturing on
December 31, 2003. Borrowings under both the Multiple Draw Term Loan Facility
and the Revolving Credit Facility are subject to variable interest rates based
on the London Interbank Offered Rate ("LIBOR"). The original proceeds of the
Revolving Credit Facility were used to provide funds for the refinancing of the
then existing debt totaling $24.6 million.

On December 15, 1998, the Company repaid the $60.0 million aggregate
principal amount of 14% Senior Subordinated Notes due December 15, 2001 (the
"Notes"), which were registered under the Securities Act of 1933. The
reacquisition price totaled $64.2 million and consisted of the $60.0 million
principal on the Notes and a $4.2 million pre-payment penalty premium. The funds
for the reacquisition of the Notes consisted of $50.0 million from the Multiple
Draw Term Loan Facility, $12.0 million from the Revolving Credit Facility and
$2.2 million from cash on hand. As a result of the reacquisition of the Notes,
$1.7 million of unamortized original issuance discount and $1.2 million of
unamortized deferred financing costs associated with the Notes were expensed in
December, 1998. Accordingly, the loss on the reacquisition of the Notes totaled
$7.1 million. The related income tax benefit attributable to the reacquisition
of the Notes was $3.4 million, for a tax-effected loss on reacquisition of the
Notes of $3.7 million which is reflected as an extraordinary item in the
accompanying consolidated statements of operations and comprehensive income for
the year ended June 30, 1999.

The Company's credit agreements include covenants which, among other
things, require that the Company maintain certain financial ratios and a minimum
level of consolidated net worth. The Company is in compliance with all debt
covenants at June 30, 2001. The Company's debt agreements also include
restrictions on the declaration and payment of dividends.

The Company's credit agreement imposes various restrictions on the Company,
including restrictions that limit the Company's ability to incur additional
debt, pay dividends or make other payments or investments, consummate asset
sales, incur liens, merge, consolidate, or dispose of substantial assets, among
other restrictions. In addition, substantially all of the assets of the Company,
are pledged as security under the credit agreement. In connection with the
capitalization of FTD.COM, the credit agreement was amended to exclude FTD.COM
from these terms and restrictions in exchange for the Operating Company's pledge
of its shares in FTD.COM and other monetary consideration.

Interest on borrowings made under the Bank Credit Facilities is calculated
using LIBOR (5.25% at June 30, 2001 for the Multiple Draw Term Loan and 6.36%
for the Revolving Credit Facility). The Bank Credit Facilities provide a maximum
commitment for letters of credit of $15 million. In addition, a quarterly
commitment fee is required on the unused portion of the Revolving Credit
Facility at the then applicable commitment fee percentage. The applicable
commitment fee percentage shall be determined by the Company's leverage ratio on
the last day of each fiscal quarter. As of June 30, 2001, the Company has unused
trade letters of credit of approximately $13.1 million outstanding under the
terms of the Revolving Credit Facility.

As of June 30, 2001, $30.0 million is outstanding under the Multiple Draw
Term Loan Facility and is scheduled to be permanently reduced, over a period of
10 consecutive unequal quarterly installments continuing until the termination
date of December 31, 2003 through the use of the Revolving Credit Facility. The
borrowings outstanding under the Revolving Credit Facility will mature on
December 31, 2003.

F-12
35
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Long-Term Debt

At June 30, 2001 and 2000 long-term debt consisted of the following:

The Company estimated the fair value of long-term debt based on interest
rates that are currently available to the Company for issuance of debt with
similar terms and remaining maturity dates. The fair value approximates the
carrying value of long-term debt as of June 30, 2001 and June 30, 2000.

Aggregate maturities of debt at June 30, 2001 were as follows:

The outstanding debt balance of $54,875 was classified as long-term debt at
June 30, 2001 as the Company intends to refinance the current portion of the
Multiple Draw Term Loan Facility with borrowings under its Revolving Credit
Facility, which is due on December 31, 2003.

(4) LEASES

As Lessor

The Company leases Mercury consoles and Mercury Wings systems to customers
through leases classified as operating leases for accounting purposes. During
fiscal year 2001, a portion of the Mercury consoles held in storage were
disposed of and written off primarily due to the introduction of Mercury Wings,
Advantage and Direct Systems. The Company did not recognize a loss on the
disposal of the equipment. The net investment in equipment leased to customers
under operating leases, including equipment used for maintenance purposes, was
as follows at June 30, 2001 and 2000:

F-13
36
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total minimum future rentals on non-cancelable leases of Mercury Wings
systems are as follows:

As Lessee

The Company has entered into operating leases for certain hardware
components of the Mercury Wings systems and corporate facilities and equipment.
Rental expense relating to these leases totaled $1.7 million, $1.7 million and
$1.0 million for fiscal 2001, 2000 and 1999, respectively. The minimum aggregate
annual operating lease obligations are as follows:

The total minimum lease payments have not been reduced by minimum sublease
rentals of $4.2 million due in the future under non-cancelable subleases of
Mercury Wings systems and corporate facilities.

(5) INCOME TAXES

The Company's net operating loss carryforwards at June 30, 2001 were $31.0
million and are available to offset future taxable income. The net operating
loss carryforwards expire in varying amounts as follows: $4.7 million in 2019
and $26.3 million in 2020.

The provision for income taxes on income before extraordinary item consists
of the following components:

F-14
37
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes for the years ended June 30, 2001, 2000 and
1999, differs from the amount computed by applying the U.S. federal income tax
rate (34%) to pretax income because of the effect of the following items:

At June 30, 2001 and 2000, the Company's deferred tax assets and
liabilities consisted of the following:

In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or the entire
deferred tax asset will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which these temporary differences are deductible. This assessment was
performed considering expected taxable income in future years and tax planning
strategies available to the Company. The Company has determined that it is more
likely than not that $9.5 million of deferred tax assets will be realized. The
valuation allowance of $2.5 million is provided against deferred tax assets that
the Company has determined to be more likely than not, not realizable as of June
30, 2001. The subsequent recognition of $1.0 million of this tax benefit will be
applied to

F-15
38
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

goodwill, as it was generated from the August 2, 1994 merger between IOS and the
Florists' Transworld Delivery Association.

(6) SOFTWARE TO BE SOLD, LEASED, OR MARKETED

The costs associated with the development of the Mercury Wings and other
computer software are capitalized in accordance with SFAS No. 86 and are
recorded in other noncurrent assets on the Consolidated Balance Sheet at June
30, 2001 and 2000. As of June 30, 2001, 2000 and 1999, capitalized computer
software costs were $4.4 million, $2.7 million and $1.4 million, respectively.
During the years ended June 30, 2001, 2000 and 1999, $1.0 million, $0.7 million
and $0.2 million, respectively, were charged to expense for amortization of
capitalized computer software costs. In accordance with SFAS No. 86, at June 30,
2001, the unamortized capitalized cost of the computer software was compared to
the net realizable value of the product to determine whether any necessary
write-downs should be made. The net realizable value is the estimated future
gross revenues reduced by the estimated future cost of completing and disposing
of the product. As of June 30, 2001 no write-down was necessary.

(7) INTERNAL USE SOFTWARE

Certain costs incurred in the planning and development stage of
internal-use computer software, including Web site development costs, are
expensed as incurred. During fiscal year 2000, the Company capitalized $3.7
million of Web site development costs. During fiscal year 2000, the Company
wrote-off $3.5 million of the previously capitalized Web site development costs
as part of the $4.4 million one-time charge associated with the development work
related to an unlaunched version of FTD.COM's Web site.

Capitalized software costs are amortized over the expected economic life of
five years using the straight-line method. At June 30, 2001, 2000 and 1999, the
capitalized software costs were $10.5 million, $9.6 million and $4.1 million,
respectively, and are included in other noncurrent assets on the Consolidated
Balance Sheet at June 30, 2001 and 2000. During the years ended June 30, 2001,
2000 and 1999, amortization expense was $2.1 million, $1.4 million and $0.2
million, respectively.

(8) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company previously provided postretirement health care benefits to
qualifying retirees under the terms of the Company's qualified retirement plan.
The plan retirees are required to share in the cost of these benefits. The
Company no longer provides such benefits to employees. As a result of
eliminating active employees from the plan, the Company created an unrecognized
net gain that is being amortized over the average retiree life expectancy of
15.6 years.

In accordance with the disclosure requirements of SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits, the following
tables provide a reconciliation of the benefit obligation and

F-16
39
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

funded status as of June 30, 2001 and 2000, as well as the components of net
periodic postretirement benefit costs for the years ended June 30, 2001, 2000
and 1999:

The discount rates used in determining the accumulated postretirement
benefit obligation (the "APBO") were 7.5% at and for the year ended June 30,
2001, 8.0% at and for the year ended June 30, 2000 and 7.00% at and for the year
ended June 30, 1999. For measurement purposes an 8.23% annual rate of increase
in the per capita cost of covered health care benefits was assumed for 2001. The
rate was assumed to decrease to 5.75% in 2007 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. If the current health care cost
trend rate assumption was increased by one percent, the APBO as of June 30,
2001, would have increased approximately $220,000, or 10.6%, while the net
periodic cost for the fiscal year ended June 30, 2001, would have increased
approximately $17,000, or 11.2%. If the current health care cost trend rate
assumptions were decreased by one percent, the APBO as of June 30, 2001, would
have decreased approximately $191,000, or 9.2%, while the periodic cost for the
fiscal year ended June 30, 2001, would have decreased $15,000, or 9.7%.

(9) PENSION PLANS

Approximately 150 employees and former employees participate under the
defined benefit plan, including 8 currently retired employees. Benefits under
the pension plan, which has been frozen since January 1, 1997, were based on the
employee's age, years of service and the highest consecutive five-year average
compensation.

F-17
40
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In accordance with the disclosure requirements of SFAS No. 132, the
following tables provide a reconciliation of the benefit obligation and plan
assets, as well as the funded status, of the pension plan as of June 30, 2001
and 2000:

During the fiscal years ending June 30, 2001, 2000 and 1999 pension expense
of $85,000, $2,000 and $86,000, respectively, were recognized in relation to the
pension plan.

Plan assets for the defined benefit plan consist of investments in common
stock, real estate properties, fixed income securities and short-term
investments. The table below provides the necessary disclosures in accordance
with SFAS No. 132 of the components of pension expense for the defined benefit
plan for the years ended June 30, 2001, 2000 and 1999:

The discount rate used to calculate the projected benefit obligation was
7.5%, 8.0%, and 7.0% at June 30, 2001, 2000, and 1999 respectively. For fiscal
2001, 2000 and 1999, the rate of increase in future compensation levels was 5.0%
and the expected long-term rate of return on assets was 9.0%.

The Company sponsors a 401(k) savings plan for all of its eligible
employees. All eligible employees may contribute between 1% and 15% of their
gross annual salary on a pre-tax basis. The Company matches an amount equal to
50% of each participant's pre-tax contribution up to 6% of the participant's
compensation. Company contributions to the 401(k) plan for fiscal 2001 and 2000
were $135,786 and $279,358, respectively.

(10) RELATED PARTY TRANSACTIONS

The Company incurred expenses of $2.0 million for each of the years ended
June 30, 2001, 2000 and 1999 related to the payment for management consulting
services to certain investors of the Company.

F-18
41
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company loaned various officers of the Company, cumulatively $2.3
million, with terms ranging from four to five years, due dates ranging from 2002
to 2005, accrued interest ranging from 6.5% to 8.5% per annum and principal due
at maturity.

(11) STOCK AWARDS AND INCENTIVE PLANS

The Company's 1994 Stock Award and Incentive Plan, as amended (the "Plan"),
was adopted by the Board of Directors of the Company and approved by the
Company's stockholders. The maximum number of shares of Common Stock authorized
for issuance under the Plan is equal to 15% of the initial equity capital of the
Company upon the consummation of the Merger.

The Plan provides for the granting of incentive stock options ("ISOs");
options which do not qualify as ISO's, nonqualified stock options ("NSOs"); or a
combination of both ISOs and NSOs ("Options"); provided, however, that ISOs may
only be granted to employees of the Company and its subsidiaries. Options
granted under the Plan may be accompanied by stock appreciation rights or
limited stock appreciation rights or both. The Plan also provides for the
granting of restricted stock, deferred stock and performance shares (together,
"Restricted Awards"). The Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974, as amended, nor is the Plan a qualified
plan within the meaning of section 401 (a) of the Internal Revenue Code of 1986,
as amended. To date the Company has not issued stock appreciation rights,
limited stock appreciation rights, deferred stock or performance shares.

During fiscal 1999, the Board of Directors approved changes to the vesting
schedules of Stock Option Agreements granted prior to fiscal 1999. Stock Option
Agreements with an original vesting schedule for the options to become
exercisable in four 25% installments commencing after two years will now
commence after only one year, still at a rate of 25% per year. This plan
modification did not result in any change from the intrinsic value of the
options granted as measured pursuant to the requirement of APB 25. As such, no
compensation expense was required to be recognized.

During the year ended June 30, 2001, employees were granted options to
purchase 102,300 shares of the Company's Common Stock at an exercise price of
$16.00 per share. These options vest and become exercisable in five equal
installments.

During the year ended June 30, 2000, employees were granted options to
purchase 88,400 shares of the Company's Common Stock at an exercise price of
$25.00 per share. These options vest and become exercisable in five equal
installments.

During the year ended June 30, 1999, employees were granted options to
purchase 162,100 shares of the Company's Common Stock at an exercise price of
$10.50 per share. These options vest and become exercisable in five equal
installments.

As of June 30, 2001, 2000 and 1999 options covering 641,100, 613,300 and
580,700 shares, respectively, of Class A Common Stock were outstanding, of which
413,070, 298,030 and 174,000 shares were vested, respectively. There were 12,550
and 19,000 options exercised during fiscal year 2001 and 1999, respectively, and
no options were exercised during fiscal 2000. In addition, 61,950, 55,800 and
81,400 options were canceled during the years ended June 30, 2001, 2000 and
1999, respectively.

During June 2000, the Company granted 525,000 restricted shares of FTD.COM
Class B Common Stock to employees of the Company in the form of restricted
shares, which automatically converted into shares of FTD.COM Class A Common
Stock. The employees will earn the restricted shares in exchange for future
services to be provided to the Company over a three-year period. The Company
recorded deferred compensation in the amount of $5.4 million, equal to the
market value of the restricted shares at the date of grant. During the year
ended June 30, 1999, employees were granted 70,000 shares of restricted stock
with a weighted average fair value of $10.50 per share and a vesting period of
five unequal annual installments. Also,

F-19
42
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during year ended June 30, 1999, 10,000 restricted shares previously granted
were canceled. No restricted stock was granted in fiscal year 2001. The Company
recognized compensation expense in general and administrative expenses of $0.5
million and $26,000 in fiscal years 2001 and 2000, respectively, related to
grants of FTD.COM restricted stock.

The Company did not grant any IOS restricted stock for fiscal years 2001
and 2000. The Company granted 70,000 shares of restricted stock in fiscal year
1999 and cancelled 10,000 restricted shares previously granted. The Company
recognized compensation expense in general and administrative expenses of $0.2
million, in each of the fiscal years ended 2001, 2000 and 1999, related to
grants of IOS restricted stock.

The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan and accordingly, no compensation cost has been
recognized for options granted under the Plan since the option price was equal
to or greater than the market price at the date of the grant. Had compensation
cost for the Plan been determined based on the fair value at the grant dates for
options under the Plan consistent with SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts shown in the table below:

Pro Forma Results

The pro forma disclosures shown are not representative of the future
effects on net income and earnings per share.

The fair values of the options granted under the Plan during fiscal 2001,
2000 and 1999 were determined at the grant date using the Black-Scholes single
option reduced term pricing model. The significant assumptions used to calculate
the fair value of option grants were: risk-free interest rates ranging from
4.27% to 6.00%, expected volatility ranging from 0% to 50%, expected lives of
3.5 to 3.83 years, price per share ranging from $10.50 to $25.00 and no expected
dividends for the shares.

F-20
43
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summary Stock Option Activity

Stock Options Outstanding

The FTD.COM INC. 1999 Equity Incentive Plan (the "Plan") provides for the
issuance of up to 4,500,000 shares of Class A common stock in connection with
the granting of option rights, stock appreciation rights (SARs), restricted
shares, deferred shares, performance awards or any combination of the foregoing
pursuant to the Plan. In addition, the plan provides that the aggregate number
of shares of Class A common stock actually issued or transferred by FTD.COM upon
the exercise of incentive stock options shall not exceed 1,000,000 shares of
Class A common stock; no plan participant shall be granted option rights and
appreciation rights, in the aggregate, for more than 1,000,000 shares of Class A
common stock during any period of one year; the number of shares issued as
restricted shares shall not in the aggregate exceed 2,500,000 shares of Class A
common stock; and no non-employee director shall be granted option rights,
appreciation rights and restricted shares, in the aggregate, for more than
100,000 shares of Class A common stock during any fiscal year of FTD.COM.

To date, FTD.COM has not granted any SARs, deferred shares or performance
awards.

F-21
44
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Outstanding nonqualified stock options are exercisable during a ten-year
period beginning one to four years after the date of grant. All currently
outstanding options were granted with an exercise price equal to either the fair
market value on (a) the date of grant or (b) the optionee's first date of
employment with FTD.COM. Changes in options outstanding are summarized as
follows:

There were 25,000 stock options exercisable, with a weighted average
exercise price of $5.70, at June 30, 2001. There were no options exercisable at
June 30, 2000. The following table summarizes information regarding stock
options outstanding at June 30, 2001.

Using the Black-Scholes single option pricing model and the following
assumptions, the average estimated fair value, at the dates of grant of options
in fiscal year 2001 and 2000, was $1.21 and $0.98 per option, respectively.

Based on the above assumptions, FTD.COM would have recognized an additional
$45,000 and $9,000 of compensation expense in fiscal years 2001 and 2000,
respectively, if the estimated costs of the outstanding granted stock options
had been recorded in the financial statements.

Options granted throughout fiscal years 2001 and 2000 vest equally each
year over a four-year period from the date of grant. As a result, the estimated
cost indicated above reflects only a partial vesting of such options. If full
vesting were assumed, the estimated pro forma costs for the year would have been
higher than indicated above.

FTD.COM granted 1,355,000 restricted shares of stock at a weighted-average
fair value, at the dates of grant, of $2.87 in fiscal year 2000 to key members
of FTD.COM's management. No restricted shares were

F-22
45
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

granted in fiscal year 2001 or prior to fiscal year 2000. FTD.COM recognized
compensation -- related general and administrative expenses of $1.3 million and
$0.2 million in fiscal year 2001 and 2000, respectively, related to the grants
of restricted stock. The restricted stock vests equally each year over a three
year period from the date of grant.

(12) COMMITMENTS AND CONTINGENCIES

The Company is involved in various lawsuits and other matters arising in
the normal course of business. In the opinion of the management of the Company,
although the outcomes of these claims and suits are uncertain, they should not
have a material adverse effect on the Company's financial condition, liquidity,
or results of operations.

(13) CAPITAL STOCK TRANSACTIONS

The Company's Class A and non-voting Class B Common Stock rank equally and,
except with respect to voting power, are substantially identical in all material
respects. Class B Common Stock is convertible into Class A Common Stock on a
one-for-one basis at the option of the holder. The Company is authorized to
establish and designate one or more series of preferred stock.

The Company repurchased into treasury 12,550, 7,882 and 66,183 shares of
Class A Common Stock at an approximate cost of $201,000, $85,000 and $844,000
during fiscal 2001, 2000 and 1999, respectively. During fiscal 2001, the Company
settled an ongoing lawsuit whereby one of the Company shareholders, and former
warrantholder, agreed to return 750,000 of the Company's Class B Common Stock,
which the Company treated as treasury stock. During fiscal 1999, the Company
repurchased 51,250 shares of Class B Common Stock at a cost of approximately
$538,000.

F-23
46
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SUBSIDIARY CAPITAL STOCK TRANSACTIONS

On May 19, 1999, the Operating Company incorporated a new subsidiary,
FTD.COM, as a Delaware corporation in connection with the filing of a
registration statement and amendments thereto with the Securities and Exchange
Commission covering the sale of shares of FTD.COM Class A common stock to the
public. FTD.COM was capitalized through the authorization of 250,000,000 shares
of Class A common stock and 100,000,000 shares of Class B common stock and the
issuance of 40,920,000 shares of Class B common stock, retroactively adjusted by
a 12 for 1 stock split to the Operating Company. In consideration for the
receipt of 40,920,000 shares of Class B common stock, the Operating Company
contributed to FTD.COM the assets and liabilities relating to the consumer
floral order and specialty gift product business. In addition, in connection
with the incorporation of FTD.COM, 5,000,000 shares of preferred stock were
authorized.

On May 19, 1999, FTD.COM designated 90,000 shares of its preferred stock as
Series A preferred stock ("Series A preferred stock"). On May 20, 1999, 30,000
shares of the Series A preferred stock were issued and sold to an investor for
consideration of $3.0 million. On May 25, 1999, 60,000 shares of the Series A
preferred stock were issued and sold to an investor for consideration of $6.0
million.

These shares of Series A preferred stock had a liquidation preference of
$100 per share and accrued dividends at an annual rate of 8% of the liquidation
preference. Accrued dividends were payable at the discretion of the Board of
Directors of FTD.COM and were mandatorily payable upon liquidation or
redemption.

On September 28, 1999, FTD.COM agreed to issue and sell 4,500,000 shares of
its Class A common stock to the public in an IPO transaction at a price of $8.00
per share, resulting in gross proceeds from the offering of $36.0 million. The
IPO closed on October 4, 1999, at which time FTD.COM collected the gross
proceeds of $36.0 million less underwriting discounts of $2.5 million. In
addition, the $33.5 million net cash received from the underwriters was reduced
by other offering expenses of $2.0 million. The net proceeds of $31.5 million
were recorded as minority interest in subsidiary. Prior to the IPO, FTD owned
100% of the outstanding common stock of FTD.COM. There was no gain recorded by
the Company upon the sale of FTD.COM's stock. The Company's accounting policy is
to account for a subsidiary direct sale of unissued shares as a capital
transaction.

Upon the closing of the IPO of FTD.COM on October 4, 1999, the 90,000
shares of FTD.COM's Series A 8% Cumulative Redeemable Convertible Preferred
Stock were automatically converted into 1,384,614 shares of FTD.COM Class A
common stock. Upon conversion, the Company reclassified the preferred
stockholders' equity in a subsidiary of $9.0 million to minority interest in
subsidiary and the accrued dividends of $74,301 were offset against the retained
earnings of FTD.COM.

On October 6, 1999, the underwriters of the IPO exercised their one time
option to purchase 495,000 additional shares of FTD.COM Class A common stock at
the IPO price of $8.00 per share, representing a portion of the over-allotment
option granted to the underwriters in connection with the IPO. The net proceeds
to FTD.COM from this issuance and sale of 495,000 shares of Class A common stock
were $3.7 million after deducting underwriting discounts and commissions and
were recorded as minority interest in subsidiary.

During May 2000, FTD.COM granted 1,355,000 shares of FTD.COM Class A common
stock to employees of FTD.COM in the form of restricted shares. During June
2000, the Company granted 525,000 shares of FTD.COM Class B common stock to
employees of the Company in the form of restricted shares. There were no
restricted shares granted by FTD.COM or the Company in fiscal year 2001. Upon
completion of the above events, FTD owned approximately 83% of the outstanding
common stock of FTD.COM through its ownership of 40,395,000 shares of Class B
common stock.

F-24
47
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) MINORITY INTEREST IN SUBSIDIARY

The Company's consolidated financial statements for the years ended June
30, 2001 and 2000 reflect the minority interest in FTD's subsidiary, FTD.COM.
The minority interest in such subsidiary was 17% as of June 30, 2001 and 2000.
The minority interest in FTD.COM's income was $1.9 million and in FTD.COM's loss
was $4.4 for the years ended June 30, 2001 and 2000 respectively. The minority
interest in FTD.COM's income, in fiscal year 2001, includes $0.5 million in tax
benefit allocated to the minority interest pursuant to the tax sharing agreement
among FTD, IOS, and FTD.COM, which provides that FTD.COM will pay its tax
liability computed as if it were filing a separate return.

(16) REVENUES FROM THE SALE OF THE FLORAL SELECTIONS GUIDE ("FSG")

As a condition of FTD affiliation, all FTD florists must purchase a FSG and
related workbook every two years. The Company recognizes revenue related to the
FSG when it is purchased by the florist. The purchase of such FSG entitles the
FTD florist to a non-exclusive, non-transferable right for on premise use of the
FSG for as long as the purchaser remains an FTD florist in good standing. For
the year ended June 30, 2000, FTD did not recognize any FSG revenue. Revenue
from sales of the FSG during the years ended June 30, 2001 and 1999 was $3.9
million and $2.8 million, respectively.

(17) SETTLEMENT GAIN

On July 26, 2000, the Company settled an ongoing lawsuit whereby one of the
Company's shareholders, and former warrantholder, returned 750,000 shares of
Class B Common Stock, which the Company subsequently recorded as treasury stock.
The shareholder received these shares upon exercise of the Company's common
stock warrants, which were originally issued to the shareholder in conjunction
with the acquisition of Florist Transworld Delivery Association by the Company
in 1994. As a result of this settlement, the Company recognized a settlement
gain of $12.0 million, on a pretax basis, in the year ended June 30, 2001.

(18) FTD ASSOCIATION TERMINATION AGREEMENT

On April 30, 2001, FTD entered into a Termination Agreement with the
Association, which became effective as of June 29, 2001. The Termination
Agreement, which contains limited two-year non-compete provisions, terminates
both the Mutual Support Agreement, dated December 18, 1994 (the "Mutual Support
Agreement"), and the Trademark License Agreement, dated December 18, 1994 (the
"Trademark Agreement" and together with the Mutual Support Agreement, the
"Association Agreements"), which were entered into in connection with the
Acquisition between the Association and FTD. Pursuant to the Association
Agreements, among other things: (i) existing and future members of the
Association had the exclusive right, subject to execution of a Trademark
Agreement with the Operating Company, to use the FTD logo and other FTD
trademarks in connection with the operation of a retail florist shop; (ii) all
members of the Association in good standing were provided access to FTD's
Clearinghouse, Mercury Network and certain other FTD services and products;
(iii) the Operating Company paid the Association an amount equal to a percentage
of the value of every floral order cleared through FTD's Clearinghouse; and (iv)
the Operating Company and the Association were able to designate up to 20% but
not fewer than two individuals to be elected to the other's board of directors.

As consideration for the dissolution of the contractual relationship
between the Company and the Association pursuant to the Termination Agreement,
FTD agreed to pay the Association $14.0 million, $12.6 million which was paid on
June 29, 2001 and $1.4 million of which is subject to a one-year escrow
holdback. In fiscal 2001, the Company recorded $14.5 million of expenses related
to this transaction, including professional fees. The $1.4 million escrow
holdback is reflected on the Company's balance sheet as restricted cash.

F-25
48
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(19) SEGMENT INFORMATION

The FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, in February 1998. SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements.

As a result of adopting SFAS No. 131, the Company has identified four
reportable business segments based on the nature of its products and services
and financial reports which are evaluated regularly by management in deciding
how to allocate resources and assess performance. For purposes of managing the
Company, management reviews segment financial performance to the operating
income level for the Direct to Consumer business segment, which consists solely
of FTD.COM's operations, and to the gross margin level for the Company's
remaining business segments.

These business segments include Member Services, Technology Products,
Specialty Wholesaling and Direct to Consumer. The Member Services segment
includes Clearinghouse, Flowers After Hours, Publications, Credit Card
processing and its investment in Interflora, Inc. The Technology Products
segment includes Mercury equipment, Mercury Advantage, Mercury Direct, and
Mercury Wings systems, and the Mercury Network. In addition to the
aforementioned, the Company's operations include Specialty Wholesaling (products
supporting the retail floral and specialty gift industries) and the Direct to
Consumer (Internet and telephone marketing of flowers and specialty gifts
through FTD.COM) business segments.

These segments are evaluated regularly by management in deciding how to
allocate resources and assess performance. For purposes of managing the Company,
management reviews segment financial performance to the operating income level
for the Direct to Consumer business segment, which consists solely of FTD.COM's
operations, and to the gross margin level for the Company's remaining business
segments. Of the Company's assets totaling approximately $175 million as of June
30, 2001, the assets of FTD.COM totaled $27 million, of which $26 million was
cash and cash equivalents. The assets of the Company's other three operating
business segments share the majority of the remaining assets of $148 million.
The Company does not measure total assets by reportable business segment for
purposes of assessing performance and making operating decisions, except for the
Direct to Consumer segment, which has funded its operations since June 1999.

The Company's accounting policies for segments are the same as those on a
consolidated basis described in Note 1 of Notes to Consolidated Financial
Statements. The Operating Company and FTD.COM have entered into certain
intercompany agreements governing various interim and ongoing relationships,
including a commission agreement, an indemnification agreement, a trademark
license agreement, a registration rights agreement, a tax sharing agreement, an
intercompany services agreement and a Florists Online hosting agreement.

F-26
49
IOS BRANDS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table details the Company's operating results by reportable
business segment for the years ended June 30, 2001, 2000 and June 30, 1999.

F-27
50

INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors
IOS BRANDS Corporation:

Under date of July 23, 2001, we reported on the consolidated balance sheets
of IOS BRANDS Corporation and subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 2001. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule of valuation of qualifying accounts. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.

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

/s/ KPMG LLP

Chicago, Illinois
July 23, 2001

F-28
51

IOS BRANDS CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

F-29
52

INDEX TO EXHIBITS

- ---------------
* Management contract or compensatory plan required to be filed as an Exhibit
to the Form 10-K.

+ Filed as an Exhibit to this Form 10-K.