WASHINGTON, D.C. 20549

 

FORM 10-Q

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                 to                

 

Commission File Number
333-113807

 

FTD, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE		13-3711271
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

3113 WOODCREEK DRIVE
DOWNERS GROVE, IL 60515-5420

(Address of Principal Executive Offices)

 

(630) 719-7800

 (Registrant’s Telephone Number, Including Area Code)

 

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  ý  No ¨

 

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

 

As of January 25, 2005, there were 100 outstanding shares of the Registrant’s common stock, par value $.01 per share.

 

 

FTD, INC.

 

INDEX TO FORM 10-Q

 

			PAGE
Part I.	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets	2
		Consolidated Statements of Operations and Comprehensive Income	3
		Consolidated Statements of Cash Flows	4
		Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
	Item 4.	Controls and Procedures	32
Part II.	Other Information
	Item 1.	Legal Proceedings	33
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 6.	Exhibits	34
Signatures			35
Index of Exhibits

 

1

 

PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

 

FTD, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

		December 31, 2004			June 30, 2004
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	19,482		$	2,491
Restricted cash		7,261			7,261
Accounts receivable, less allowance for doubtful accounts of $5,599 at December 31, 2004 and $5,067 at June 30, 2004		30,407			27,572
Inventories, net		11,344			9,392
Deferred income taxes		4,296			4,296
Prepaid expenses and other		7,383			10,312
Total current assets		80,173			61,324
Property and equipment:
Land and improvements		1,380			1,380
Building and improvements		14,286			14,196
Furniture and equipment		5,095			4,771
Total		20,761			20,347
Less accumulated depreciation		2,672			1,136
Property and equipment, net		18,089			19,211
Other assets:
Other noncurrent assets, net		28,583			28,907
Other intangible assets, less accumulated amortization of $2,093 at December 31, 2004 and $834 at June 30, 2004		18,680			11,673
Trademark		121,577			121,577
Goodwill		337,414			337,196
Total other assets		506,254			499,353
Total assets		$	604,516		$	579,888
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable		$	52,095		$	41,311
Customer deposits		5,268			5,441
Unearned income		2,459			2,059
Other accrued liabilities		28,722			23,217
Current maturities of long-term debt		850			850
Total current liabilities		89,394			72,878
Long-term debt		258,513			258,938
Post-retirement benefits and accrued pension obligations		2,591			2,717
Deferred income taxes		57,814			57,814
Stockholder’s equity:
Common stock: $0.01 par value, 1,000 shares authorized; 100 shares issued and outstanding		—			—
Paid-in capital		186,137			185,390
Retained earnings		9,924			2,192
Accumulated other comprehensive income (loss)		143			(41		)
Total stockholder’s equity		196,204			187,541
Total liabilities and stockholder’s equity		$	604,516		$	579,888

 

See accompanying Notes to Consolidated Financial Statements.

 

2

 

FTD, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2004				2003				2004			2003
						Predecessor							Predecessor
Revenues:
Products		$	62,848			$	64,730			$	111,972		$	111,140
Services		45,406				32,065				78,353			59,231
Total revenues		108,254				96,795				190,325			170,371
Costs of goods sold and services provided:
Products		54,621				49,074				95,009			83,901
Services		5,069				5,131				9,751			9,505
Total costs of goods sold and services provided		59,690				54,205				104,760			93,406
Gross profit:
Products		8,227				15,656				16,963			27,239
Services		40,337				26,934				68,602			49,726
Total gross profit		48,564				42,590				85,565			76,965
Operating expenses:
Advertising and selling		21,481				20,836				38,185			35,143
General and administrative		12,618				14,087				24,947			25,824
Total operating expenses		34,099				34,923				63,132			60,967
Income from operations		14,465				7,667				22,433			15,998
Other income and expenses:
Interest income		(91			)	(7			)	(167		)	(13		)
Interest expense		5,017				204				10,034			445
Other (income) expense, net		(274			)	(1,534			)	(321		)	(1,469		)
Total other expenses, net		4,652				(1,337			)	9,546			(1,037		)
Income before income tax		9,813				9,004				12,887			17,035
Income tax expense		3,925				3,463				5,155			6,686
Net income		$		5,888		$		5,541		$	7,732		$	10,349
Other comprehensive income:
Foreign currency translation adjustments		97				80				184			62
Comprehensive income		$		5,985		$		5,621		$	7,916		$	10,411

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 

FTD, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		Six Months Ended
		December 31,
		2004			2003
					Predecessor
Cash flows from operating activities:
Net income		$	7,732		$	10,349
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,615			4,021
Deferred compensation expense		—			36
Amortization of deferred financing costs		669			121
Provision for doubtful accounts		1,971			1,562
Increase (decrease) in cash due to change in assets and liabilities, net of acquisition:
Accounts receivable		(6,574		)	(7,301		)
Inventories		(1,952		)	(420		)
Prepaid expenses and other		3,281			(3,158		)
Other noncurrent assets		(257		)	106
Accounts payable		10,696			12,616
Other accrued liabilities, unearned income, customer deposits and other		339			1,231
Net cash provided by operating activities		21,520			19,163
Cash flows from investing activities:
Capital expenditures		(1,906		)	(3,389		)
Acquisition (see Note 4)		(3,129		)	—
Net cash used in investing activities		(5,035		)	(3,389		)
Cash flows from financing activities:
Repayments of long-term debt		(425		)	—
Issuance of treasury stock		—			18
Capital contribution		747			—
Net repayments of revolving credit facility		—			(6,500		)
Net cash provided by (used in) financing activities		322			(6,482		)
Effect of foreign exchange rate changes on cash		184			62
Net increase in cash and cash equivalents		16,991			9,354
Cash and cash equivalents at beginning of period		2,491			1,921
Cash and cash equivalents at end of period		$	19,482		$	11,275
Supplemental disclosures of cash flow information
Cash paid for:
Interest		$	9,075		$	316
Income taxes		$	21		$	7,324

 

See accompanying Notes to Consolidated Financial Statements.

 

4

 

FTD, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.  Description of Business

 

FTD, Inc. (the “Company”) is a Delaware corporation that commenced operations in 1994.  As used in the Notes to Consolidated Financial Statements, the term the “Company” refers to FTD, Inc., including its wholly-owned subsidiary, 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 wholly-owned subsidiaries, FTD.COM INC. (“FTD.COM”) and Florists’ Transworld Delivery Association of Canada, Ltd., and its indirect wholly-owned subsidiary, Renaissance Greeting Cards, Inc. (“Renaissance”).  Substantially all of the Company’s operations are conducted through FTD and its subsidiaries.

 

On February 24, 2004, the Company completed a going private transaction with an affiliate of Leonard Green & Partners, L.P.  In the transaction, Nectar Merger Corporation, which was a wholly-owned subsidiary of FTD Group, Inc., formerly known as Mercury Man Holdings Corporation, merged with and into FTD, Inc. with FTD, Inc. continuing as the surviving corporation (the “2004 Going Private Transaction”).  As a result of the 2004 Going Private Transaction, the Company ceased to have its equity publicly traded and became a wholly-owned subsidiary of FTD Group, Inc. (the “Parent”), an affiliate of Green Equity Investors IV, L.P., a private investment fund affiliated with Leonard Green & Partners, L.P.  See Note 3 for further details.  The results of operations presented herein for all periods prior to the 2004 Going Private Transaction are referred to as the results of operations of the “Predecessor.”

 

On November 23, 2004, the Parent filed a registration statement with the Securities and Exchange Commission, (the “SEC”) on Form S-1 (Registration No. 333-120723), which was amended on January 7, 2005, January 21, 2005 and January 27, 2005, relating to an initial public offering of the Parent’s common stock.  The registration statement has not yet been declared effective by the SEC.  See Note 13 for further details.

 

Note 2.  Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, and do not contain all information included in the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2004.  The interim unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.  The accompanying consolidated financial statements include the Predecessor’s operations prior to the 2004 Going Private Transaction. In the opinion of management, the information furnished herein reflects all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.

 

Note 3.  2004 Going Private Transaction

 

On February 24, 2004, the Company completed the 2004 Going Private Transaction with an affiliate of Leonard Green & Partners, L.P. for $422.0 million, which excludes $23.4 million of fees that were expensed by the Predecessor as a component of corporate general and administrative expenses.  Upon consummation of the 2004 Going Private Transaction, each issued and outstanding share of FTD, Inc. common stock, other than treasury shares and shares owned by the Parent, which were retired, was cancelled and converted automatically into the right to receive $24.85 per share in cash.

 

The transaction was financed by a $145.4 million investment in the preferred stock of the Parent and a $40.0 million investment in the common stock of the Parent by Green Equity Investors IV, L.P., an affiliate of Leonard Green & Partners, L.P., and certain members of the Company’s senior management at the time of the transaction, including $0.9 million in the form of an exchange of a portion of management’s ownership in the Predecessor’s common stock, the proceeds from the issuance of $175.0 million in senior subordinated notes due 2014 (the “Notes”) and borrowings under a new $135.0 million senior secured credit facility, comprised of an $85.0 million

 

5

 

senior secured term loan facility and a $50.0 million revolving credit facility.  The revolving credit facility was undrawn at the closing of the 2004 Going Private Transaction.

 

The Company accounted for the 2004 Going Private Transaction using the purchase method of accounting.  The purchase price was allocated to the assets acquired and the liabilities assumed as follows (in thousands):

 

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

 

In addition, pursuant to the terms of the Settlement Agreement relating to the FTD.COM securities litigation (see Note 10), the Company is obligated to pay $7.3 million in cash, which payment is anticipated to be made later in fiscal year 2005.  Pursuant to the terms of the new senior credit facility, $7.3 million was placed into an escrow account at the consummation of the 2004 Going Private Transaction to fund this obligation and is not reflected in the allocation shown above.

 

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, the $337.2 million in goodwill recorded as part of the 2004 Going Private Transaction will not be amortized and will be tested for impairment at least annually.  The goodwill is not deductible for tax purposes.  The primary reasons for the 2004 Going Private Transaction and the primary factors that contributed to a purchase price that resulted in recognition of goodwill include:

 

•      The Company’s brand and its prominent market position in both the consumer retail market and the floral service provider market, which offer a competitive advantage in obtaining new customers;

 

•      The Company’s participation and extensive membership base in the floral wire-service market, which has significant barriers to entry with respect to clearinghouse services, the largest component of Member Services revenues within the florist business segment; and

 

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

 

The unaudited pro forma results of operations data for the three- and six-month periods ended December 31, 2003, as if the 2004 Going Private Transaction had occurred on July 1, 2003, are as follows (in thousands):

 

6

 

		Three Months			Six Months
		Ended			Ended
		December 31,			December 31,
		2003			2003
Total revenues		$	96,795		$	170,371
Income from operations		$	8,215		$	15,774
Net income		$	3,653		$	5,340

 

The above results may not be representative of future periods.

 

Note 4. Acquisition

 

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

 

Pursuant to the terms of the Flower Concierge Agreement, the purchase price for the assets acquired was $8.5 million, including $0.2 million of acquisition costs, $5.3 million of which was funded through a promissory note, which accrued interest at 6.0% and was paid in full on January 3, 2005, with the remainder funded from existing cash balances.  The assets acquired primarily consisted of Flower Concierge’s Web site, www.florist.com, valued at $7.8 million, a customer list, non-compete agreements and $0.2 million of goodwill.

 

The results of operations associated with the purchase of certain assets of Flower Concierge since the closing date are included in the consolidated financial statements and were accounted for using the purchase method of accounting.  Accordingly, the financial statements reflect the allocation of the total purchase price to the net intangible assets acquired, based on their respective fair values.  Pro forma financial information related to this acquisition has not been included herein as the operating results of Flower Concierge are not considered material to the Company’s operating results.

 

Note 5. Revenues from Sale of Floral Selections Guide

 

As a condition of FTD membership, all FTD florists must purchase a Floral Selections Guide and related workbook.  Historically, the Company recognized revenue related to the sale of the Floral Selections Guide in the month that it was shipped to the florist, which had been every two years or upon initial membership.  The purchase of the Floral Selections Guide entitles the FTD florist to a non-exclusive, non-transferable right for on-premise use of the Floral Selections Guide for as long as the purchaser remains an FTD florist in good standing.  There are no refund provisions associated with the purchase of the Floral Selections Guide.  Historically, the Company has provided de minimis refunds in isolated cases.  Beginning in fiscal year 2004, new FTD members were charged a monthly fee, and beginning with the distribution of the Floral Selections Guide in fiscal year 2005, all FTD members are charged a monthly fee for the use of the Floral Selections Guide while an active FTD member.  Revenue from the sales of the Floral Selections Guide during the three-month periods ended December 31, 2004 and 2003 was $0.8 million and $31,000, respectively.  For the six-month periods ended December 31, 2004 and 2003, revenue from the sales of the Floral Selections Guide was $1.3 million and $51,000, respectively.

 

7

 

Note 6.  Financing Arrangements

 

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

 

		As of			As of
		December 31,			June 30,
		2004			2004
7.75% senior subordinated notes		$	175,000		$	175,000
Senior secured credit facility:
Term loan		84,363			84,788
Revolving credit facility		—			—
Total debt		259,363			259,788
Less: current portion		(850		)	(850		)
Long-term debt		$	258,513		$	258,938

 

$135.0 million Senior Secured Credit Facility

 

In connection with the consummation of the 2004 Going Private Transaction, the Company terminated its then existing senior secured credit facility and entered into a new senior secured credit facility (the “2004 Credit Agreement”) with a syndicate of financial institutions, including Credit Suisse First Boston, acting through its Cayman Islands Branch, as administrative agent, UBS Securities LLC, as syndication agent, and Wells Fargo Bank, N.A., as documentation agent.  Borrowings under the 2004 Credit Agreement are secured by first priority security interest in, and mortgages on, substantially all of the Company’s tangible and intangible assets.

 

The 2004 Credit Agreement provides for aggregate borrowings of up to $135.0 million and consists of a five-year $50.0 million revolving credit facility and a seven-year $85.0 million term loan.  A portion of the revolving credit facility is available as a letter of credit sub-facility and as a swing-line facility.  Borrowings under the revolving credit facility are used to finance working capital, capital expenditures, acquisitions, certain expenses associated with the bank credit facilities and letter of credit needs.  At December 31, 2004, the revolving credit facility included $1.8 million in letters of credit outstanding and had availability of $48.2 million.

 

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

 

The 2004 Credit Agreement includes covenants that, among other things, require that, as of December 31, 2004, the Company maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (subject to certain adjustments) to consolidated interest expense of no less than 2.10 to 1.00, a fixed charge coverage ratio of no less than 1.45 to 1.00 and a consolidated leverage ratio not to exceed 5.75 to 1.00.  The Company was in compliance with all debt covenants as of December 31, 2004, after giving effect to a waiver received on January 20, 2005 related to the promissory note issued in connection with the acquisition of certain assets of The Flower Concierge, Inc.  Debt covenant targets are adjusted quarterly in accordance with the terms of the 2004 Credit Agreement.

 

The 2004 Credit Agreement imposes various restrictions on the Company, including restrictions that limit the Company’s ability to incur liens or encumbrances, make investments or acquisitions, incur additional debt, enter into sale leaseback transactions, incur certain contingent liabilities, make certain restricted junior payments and other similar distributions, enter into mergers, consolidations and similar combinations, sell assets or engage in similar transfers, amend certain material agreements, including the indenture governing the Notes, make capital expenditures and engage in transactions with affiliates.

 

8

 

There was $84.4 million of outstanding debt at December 31, 2004 under the 2004 Credit Agreement.  The Company is permitted to voluntarily repay principal amounts outstanding or reduce commitments under the 2004 Credit Agreement at any time, in whole or in part, without premium or penalty, upon the giving of proper notice and subject to minimum amount requirements.  In addition, subject to certain exceptions, the Company is required to prepay outstanding amounts under the 2004 Credit Agreement with a portion of its excess cash flow, the net proceeds of certain asset dispositions, casualty insurance and condemnation recovery events and upon the issuance of certain equity securities or indebtedness.  The term loan is due in annual installments of $850,000 per year with the remaining balance due at maturity.

 

As a result of entering into the 2004 Credit Agreement, as amended, the Company recorded $4.2 million of deferred financing costs, which have been allocated, pro rata, to the five-year revolving credit facility and the seven-year term loan and are being amortized straight-line, which approximates the effective interest method, over the respective terms.

 

$175.0 million 7.75% Senior Subordinated Notes due 2014

 

On February 6, 2004, Nectar Merger Corporation completed the issuance and sale of $175.0 million in aggregate principal amount of 7.75% senior subordinated notes.  Upon consummation of the 2004 Going Private Transaction, the Company assumed Nectar Merger Corporation’s obligations under the Notes.  The Notes mature on February 15, 2014, and interest is payable on February 15 and August 15 of each year.  The proceeds from the issuance of the Notes were used to finance the 2004 Going Private Transaction.

 

The Notes are unsecured, senior subordinated obligations, ranking junior in right of payment to all of the Company’s existing and future senior indebtedness and equal in right of payment to all of the Company’s existing and future senior subordinated indebtedness.  The Notes rank senior in right of payment to all of the Company’s existing and future senior subordinated indebtedness and are unconditionally guaranteed by the Company’s subsidiary guarantors on a senior subordinated basis.

 

The indenture governing the Notes provides for certain limitations on the Company’s ability to incur additional indebtedness, issue disqualified capital stock, make restricted payments, permit restrictions on dividends or other payment restrictions affecting subsidiaries, layer indebtedness, enter into liens securing indebtedness, enter into transactions with affiliates, enter into certain merger, sale or consolidation transactions and release guarantors.

 

As a result of issuing the Notes, the Company recorded $6.7 million of deferred financing costs, which are being amortized straight-line, which approximates the effective interest method, over the ten-year term of the Notes.

 

Note 7. Pension and Other Post Retirement Benefit Plans

 

Components of Net Periodic Benefit Cost

 

		Salaried Employees’ Pension Plan
		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2004			2003			2004			2003
					Predecessor						Predecessor
					(in thousands)
Interest cost		$	31		$	32		$	63		$	64
Expected return on assets		(20		)	(23		)	(40		)	(46		)
Net periodic benefit cost		$	11		$	9		$	23		$	18

 

9

 

		Retiree Medical Plan
		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2004			2003			2004			2003
					Predecessor						Predecessor
					(in thousands)
Interest cost		$	23		$	—		$	47		$	—
Amortization of gain		—			(48		)	—			(96		)
Net periodic benefit cost (income)		$	23		$	(48	)	$	47		$	(96	)

 

Note 8. Related Party Transactions

 

For the three- and six-month periods ended December 31, 2003, the Predecessor incurred expenses of $0.5 million and $1.0 million related to the payment for management, financial and other corporate advisory services and expenses to parties related to each of Perry Acquisition Partners, L.P., Bain Capital Investors LLC and Fleet Growth Resources III, Inc., which were stockholders or affiliates of the Predecessor.  The Predecessor’s management consulting services agreement with these parties r equired payments aggregating $2.0 million each fiscal year plus reimbursement of reasonable out-of-pocket expenses.  The management consulting services agreement with the above listed parties terminated upon the consummation of the 2004 Going Private Transaction.

 

In connection with the 2004 Going Private Transaction, the Company entered into a management services agreement (the “MSA”) with Leonard Green & Partners, L.P.  Under the MSA, Leonard Green & Partners, L.P. provides management, consulting and financial planning services in exchange for an annual management fee of $2.0 million, payable in equal monthly installments commencing in March 2004.  Payment of the management fees on any monthly payment date is contingen t upon the Company achieving Consolidated EBITDA, as defined in the indenture governing the Notes, equal to or greater than $46.8 million for the last consecutive twelve-month period ended immediately prior to that payment date.  In the event any portion of the management fee is not so paid, such amount will accrue and become due and payable in the next month when the targeted Consolidated EBITDA is obtained.  The MSA has a ten-year term, which extends automatically on each anniversary of the agreement for one additional year unless either party gives prior notice that the term will not be extended.  For the three- and six-month periods ended December 31, 2004, the Company incurred expenses of $0.5 million and $1.0 million related to the MSA with Leonard Green & Partners, L.P.

 

In addition, the MSA provides for the payment to Leonard Green & Partners, L.P. of customary fees for services provided in connection with major transactions, reimbursement for reasonable out-of-pocket expenses and a closing fee of $7.0 million, which was paid upon consummation of the 2004 Going Private Transaction. On November 23, 2004, the Parent filed a registration statement with the SEC, relating to the initial public offering of the Parent’s common stock.  In the event of a public offering, the MSA will be terminated in consideration of a lump sum payment by the Company to Leonard Green & Partners, L.P. of $12.5 million in accordance with the MSA.

 

On September 30, 2004, the Parent sold 826,667 shares of class A common stock of the Parent to certain members of the Company’s management for cash consideration of $826,667, which represented fair market value on the date of purchase.  The Parent contributed $0.7 million of the cash proceeds to the Company and used the balance of the proceeds to repay an inter-company payable to the Company.

 

Note 9. Stock Awards and Incentive Plans

 

The Parent’s Stock Option Plan was adopted and approved by the Board of Directors on September 30, 2004, and provides for the issuance of up to 6,578,333 shares of common stock of the Parent in connection with the granting of incentive or non-qualified stock options.

 

On September 30, 2004, the Parent granted 6,298,333 options to various employees of the Company.  Outstanding non-qualified stock options are exercisable during a ten-year period beginning one to seven years after the date of grant.  All stock options were granted with an exercise price equal to the fair market value on the date of grant.

 

The Predecessor’s 2002 Long-Term Equity Incentive Plan (the “2002 Equity Incentive Plan”) provided for the issuance of up to 1,250,000 shares of Class A common stock, par value $0.01 per share, in connection with the

 

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granting of incentive or non-qualified stock options, stock appreciation rights (“SARs”), either alone or in tandem with options, restricted stock, performance awards, or any combination of the foregoing.  The Predecessor did not grant any SARs, limited stock appreciation rights, deferred shares, or performance awards under the 2002 Equity Incentive Plan.  The Predecessor recognized a net gain of $21,000, which related to the forfeiture of restricted stock, and $36,000 of compensation expense related to restricted stock and stock options in the three- and six-month periods ended December 31, 2003, respectively.  The 2002 Equity Incentive Plan was terminated in connection with the 2004 Going Private Transaction.

 

Outstanding nonqualified stock options issued by the Predecessor were exercisable during a ten-year period beginning one to five years after the date of grant.  All options were granted with an exercise price equal to either the fair market value on the date of grant or the fair market value on the optionee’s first date of employment.

 

The Company and the Predecessor would have recognized additional compensation expense, net of taxes, of $94,000 and $151,000 related to the Company’s and the Predecessor’s options in the three-month periods ended December 31, 2004 and 2003, respectively, and $95,000 and $340,000 for the six-month periods ended December 31, 2004 and 2003, respectively, if the estimated fair value, as determined in accordance with FAS 123, Accounting for Stock-Based Compensation, of the outstanding stock options of the Company and the Predecessor had been recorded in the Company’s and the Predecessor’s consolidated financial statements.  As such, the Company’s and the Predecessor’s net income would have been reduced to the pro forma amounts shown in the table below (the pro forma disclosures shown are not representative of the future effects on net income):

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2004			2003			2004			2003
					Predecessor						Predecessor
		(in thousands)						(in thousands)
Net income, as reported		$	5,888		$	5,541		$	7,732		$	10,349
Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(94		)	(160		)	(95		)	(358		)
Stock-based employee compensation expense included in net income, as reported, net of related tax effects		—			9			—			18
Pro forma net income		$	5,794		$	5,390		$	7,637		$	10,009

 

The Parent’s options granted during the current fiscal year either vest equally each year over a five-year period or vest in full after a seven-year period unless certain performance acceleration targets are met.  If the performance targets are met, the options that vest in full after 7 years, will accelerate and vest in one-third installments on June 30, 2005, June 30, 2006 and June 30, 2007.  The Predecessor’s options granted during fiscal year 2003 vested equally each year over a three-year period from the date of grant.  As a result, the estimated cost indicated above reflected only a partial vesting of such options.  If full vesting were assumed, the estimated pro forma costs would have been higher than indicated above.

 

Note 10.  Commitment and Contingencies

 

In March 2002, the Predecessor, FTD, FTD.COM and the directors of the Predecessor and FTD.COM were named as defendants in five class action lawsuits filed in Wilmington, Delaware, which were consolidated under the name “In RE FTD.COM Inc. Shareholders Litigation.”  The class action lawsuits made several allegations, including that insufficient stock of the Predecessor was exchanged for FTD.COM stock and breach of fiduciary duties by the directors.

 

On behalf of all defendants, the Predecessor settled the consolidated class action lawsuits.  Such settlement was approved by the court and included no finding of wrongdoing on the part of any of the defendants, or any other finding that the claims alleged had merit.

 

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Pursuant to the Settlement Agreement, the Predecessor agreed to issue shares of Class A common stock valued at $10.7 million in full and final settlement of the case.  In connection with the settlement, the Predecessor recorded an $11.0 million charge in the fourth quarter of fiscal year 2003 with respect to the settlement which included costs related to issuing and distributing the settlement shares.  In November 2003, pursuant to the court approved Settlement Agreement, the Predecessor, on behalf of all defendants, distributed 139,493 shares of Class A common stock valued at $3.4 million as payment for a portion of the $10.7 million settlement liability.  Pursuant to the terms of the Settlement Agreement, the Company is obligated to pay the remaining $7.3 million in cash, which payment is anticipated to be made later in fiscal year 2005.  Pursuant to the terms of the 2004 Credit Agreement, the Company placed $7.3 million into an escrow account at the consummation of the 2004 Going Private Transaction to fund this obligation.

 

The Predecessor pursued claims against two of its insurance carriers, one that provided coverage to FTD and its directors and officers, and another that provided coverage to FTD.COM and its directors and officers.  In the second quarter of fiscal year 2004, the Predecessor recorded a gain of $1.5 million as a result of a settlement with the insurance carrier that maintained a policy covering FTD and its directors and officers.  The insurance carrier that maintained the policy covering FTD.COM and its directors and officers initiated litigation seeking to deny coverage for the shareholder lawsuits, which were settled pursuant to the Settlement Agreement.  The Company believes that FTD.COM and the individual defendants are entitled to coverage and has filed responsive pleadings to that effect.  Both parties have filed their respective motions for summary judgment, which have been fully briefed and are before the court for a ruling.  Any further recoveries relating to the settlement will be recorded as Other Income in the period realized.

 

On December 30, 2003, Teleflora LLC (“Teleflora”) filed a complaint against FTD in the U.S. District Court for the Northern District of California in San Jose.  The complaint included principal allegations of misappropriation of trade secrets, copyright infringement, unfair competition, intentional interference with contracts and various counts of fraud through unauthorized access to Teleflora software by FTD.  Teleflora sought compensatory damages as well as punitive damages and injunctive relief.  FTD answered the complaint, asserted affirmative defenses and brought counterclaims against Teleflora, including antitrust claims for attempting to monopolize the wire service market.

 

Pursuant to a settlement agreement and mutual release, Teleflora and FTD dismissed their respective claims with prejudice on January 12, 2005.  Under the agreement, FTD can continue to use its existing wire service interface (which obtains information from Teleflora’s Dove Foreign System Interface module) with its existing wire service interface customers.

 

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

 

The Company also has a one-year commitment with a distribution center facility in Cincinnati, Ohio where it stores and distributes products for its florist business segment.

 

Note 11.  Segment Information

 

Operating segments are components of the Company’s business for which separate financial information is available that is regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to each segment and to assess its performance.

 

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

 

The florist business segment includes all products and services sold to FTD member florists and other retail locations offering floral products, encompassing clearinghouse services, publishing products and services, technology sales and leases and specialty wholesaling product sales.  The consumer business segment encompasses floral and specialty gift items primarily sold to consumers through the www.ftd.com Web site or its toll-free

 

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telephone number, 1-800-SEND-FTD.

 

Of the Company’s consolidated assets totaling $604.5 million at December 31, 2004, the assets of the Company’s consumer business totaled approximately $269.4 million.  The Company’s florist business segment and corporate headquarters constitute the remaining assets of approximately $335.1 million.

 

The Company’s accounting policies for segments are the same as those on a consolidated basis described in Note 1, Summary of Significant Accounting Policies, of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

 

Certain amounts in the Predecessor’s operating results by reportable business segment for the three- and six-month periods ended December 31, 2003 have been reclassified to conform to the current year presentation.

 

The following tables detail the Company’s and the Predecessor’s operating results by reportable business segment for the three- and six-month periods ended December 31, 2004 and 2003:

 

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		Three Months Ended December 31,
		2004									2003
		Gross Segment			Eliminations			Consolidated			Gross Segment			Eliminations			Consolidated
														Predecessor
								(in thousands)
Revenues:
Florist business		$	46,157		$	(48	)	$	46,109		$	43,455		$	100		$	43,555
Consumer business		67,097			(4,952		)	62,145			57,450			(4,210		)	53,240
Total		113,254			(5,000		)	108,254			100,905			(4,110		)	96,795
Costs of Goods Sold and Services Provided:
Florist business		13,811			(804		)	13,007			14,400			(653		)	13,747
Consumer business		46,736			(635		)	46,101			40,218			(422		)	39,796
Corporate		582			—			582			662			—			662
Total		61,129			(1,439		)	59,690			55,280			(1,075		)	54,205
Gross Profit:
Florist business		32,346			756			33,102			29,055			753			29,808
Consumer business		20,361			(4,317		)	16,044			17,232			(3,788		)	13,444
Corporate		(582		)	—			(582		)	(662		)	—			(662		)
Total		52,125			(3,561		)	48,564			45,625			(3,035		)	42,590
Advertising and Selling:
Florist business		17,600			(3,560		)	14,040			17,587			(3,030		)	14,557
Consumer business		7,441			—			7,441			6,279			—			6,279
Total		25,041			(3,560		)	21,481			23,866			(3,030		)	20,836
General and Administrative:
Florist business		2,543			—			2,543			2,634			—			2,634
Consumer business		4,742			(615		)	4,127			4,489			(541		)	3,948
Corporate		5,334			614			5,948			6,969			536			7,505
Total		12,619			(1		)	12,618			14,092			(5		)	14,087
Operating Income before Corporate Allocations:
Florist business		12,203			4,316			16,519			8,834			3,783			12,617
Consumer business		8,178			(3,702		)	4,476			6,464			(3,247		)	3,217
Corporate		(5,916		)	(614		)	(6,530		)	(7,631		)	(536		)	(8,167		)
Total		14,465			—			14,465			7,667			—			7,667
Corporate Allocations:
Florist business		2,984			—			2,984			2,974			—			2,974
Consumer business		717			—			717			704			—			704
Corporate		(3,701		)	—			(3,701		)	(3,678		)	—			(3,678		)
Total		—			—			—			—			—			—
Operating Income:
Florist business		9,219			4,316			13,535			5,860			3,783			9,643
Consumer business		7,461			(3,702		)	3,759			5,760			(3,247		)	2,513
Corporate		(2,215		)	(614		)	(2,829		)	(3,953		)	(536		)	(4,489		)
Total		$	14,465		$	—		$	14,465		$	7,667		$	—		$	7,667
Depreciation and Amortization:
Florist business		$	1,102		$	—		$	1,102		$	1,248		$	—		$	1,248
Consumer business		598			—			598			560			—			560
Corporate		960			—			960			205			—			205
Total		$	2,660		$	—		$	2,660		$	2,013		$	—		$	2,013

 

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