10-Q/A 1 a2080923z10-qa.htm 10-Q/A
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A
(Amendment No. 2)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

Commission File Number
000-21277

IOS BRANDS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)

13-3711271
(I.R.S. Employer
Identification No.)

3113 WOODCREEK DRIVE
DOWNERS GROVE, IL 60515-5420
(Address of Principal Executive Offices) (Zip Code)

(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 and 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 o

As of September 30, 2001, there were 12,377,388 outstanding shares of the Registrant's Class A common stock, par value $.01 per share ("Class A Common Stock"), and 2,198,750 outstanding shares of the Registrant's Class B convertible common stock, par value $.0005 per share ("Class B Convertible Common Stock" and, together with Class A Common Stock, "Common Stock").

EXPLANATORY NOTE

This Amendment No. 2 on Form 10-Q/A of Form 10-Q of IOS BRANDS Corporation for the quarter ended September 30, 2001, originally filed on November 14, 2001, corrects certain information contained in the Condensed Consolidated Balance Sheets and Statements of Operations and Comprehensive Income and Cash Flows. The changes made in Amendment No. 1 were necessary due to a typographical error in Other income, net. The changes in Amendment No. 2 were necessary to reduce other income by $12 million and increase paid-in capital. This change relates to a litigation settlement whereby one of the Company's shareholders, and former warrantholder, returned 750,000 shares of Class B common stock. As a result of the settlement, the Company recorded $12.0 million of treasury stock and an increase to paid-in capital of $11.6 million (net of $0.4 million of income taxes). See Note 2 of Notes to Condensed Consolidated Financial Statements for further information regarding the restatement.

IOS BRANDS CORPORATION

INDEX

			PAGE
Part I. Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (Restated)	3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Restated)	4
		Condensed Consolidated Statements of Cash Flows (Restated)	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Part II. Other Information
	Item 1.	Legal Proceedings	18
	Item 6.	Exhibits and Reports on Form 8-K	18
Signatures			19
Exhibit Index			20

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

IOS BRANDS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)

				September 30, 2001 Restated			June 30, 2001 Restated
				(Unaudited)
*Assets*
Current assets:
	Cash and cash equivalents			$	34,016		$	30,890
	Restricted cash				1,400			1,400
	Accounts receivable, less allowance for doubtful accounts of $5,604 at September 30, 2001 and $4,984 at June 30, 2001				27,318			23,251
	Inventories, net				12,694			12,469
	Deferred income taxes				3,811			3,556
	Prepaid expenses and other				2,726			2,851

			Total current assets		81,965			74,417
Property and equipment, less accumulated depreciation of $27,214 at September 30, 2001 and $26,592 at June 30, 2001					15,485			15,657
Other assets:
	Deferred income taxes				2,968			5,942
	Other noncurrent assets				13,667			13,301
	Goodwill and other intangibles, less accumulated amortization of $20,014 at September 30, 2001 and $19,350 at June 30, 2001				65,370			66,034

			Total other assets		82,005			85,277
			Total assets	$	179,455		$	175,351

*Liabilities and Stockholders' Equity*
Current liabilities:
	Book overdrafts			$	3,817		$	8,013
	Accounts payable				26,467			32,974
	Customer deposits and accrued customer incentive programs				10,417			10,555
	Other accrued liabilities				6,849			9,139

			Total current liabilities		47,550			60,681
Long-term debt					67,000			54,875
Pension and other post-retirement benefits					5,897			5,957
Minority interest in subsidiary					3,374			2,699
Stockholders' equity:
	Common stock:
		Class A			126			126
		Class B			2			2
	Paid-in capital				93,802			93,856
	Accumulated deficit				(20,281	)		(24,390	)
	Accumulated other comprehensive loss				(630	)		(564	)
	Unamortized restricted stock				(3,272	)		(3,778	)
	Treasury stock				(14,113	)		(14,113	)

			Total stockholders' equity		55,634			51,139

		Total liabilities and stockholders' equity		$	179,455		$	175,351

See accompanying Notes to Condensed Consolidated Financial Statements

IOS BRANDS CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except per share amounts)

			Three Months Ended September 30,
			2001			2000 Restated
Revenues:
	Products		$	33,174		$	34,587
	Services			28,165			29,737

		Total revenues		61,339			64,324
Costs of goods sold and services provided:
	Products			24,866			25,188
	Services			4,476			6,352

		Total costs of goods sold and services provided		29,342			31,540
		Gross profit		31,997			32,784
Operating expenses:
	Advertising and selling			12,376			16,472
	General and administrative			10,837			13,338

		Total operating expenses		23,213			29,810
		Income from operations		8,784			2,974

Other income and expenses:
	Interest income			(286	)		(307	)
	Interest expense			1,014			1,563
	Other income, net			(196	)		(66	)

		Total other income and expenses		532			1,190

		Income before income tax and minority interest		8,252			1,784
Income tax expense				3,174			820
Minority interest				627			36

		Net income before extraordinary item		4,451			928

Extraordinary Item—
	write-off of deferred financing costs, net of income tax benefit of $209			342			—

		Net income	$	4,109		$	928

Other comprehensive loss—
	foreign currency translation adjustment			66			20

		Comprehensive income	$	4,043		$	908

Net Income Per Common Share—basic:
	Net income before extraordinary item		$	0.31		$	0.06
	Extraordinary item			0.03			—

	Net income per share		$	0.28		$	0.06

Net Income Per Common Share—diluted:
	Net income before extraordinary item		$	0.30		$	0.06
	Extraordinary item			0.02			—

	Net income per share		$	0.28		$	0.06

Weighted Average Common Shares Outstanding:
	Basic			14,490			15,200

	Diluted			14,741			15,445

See accompanying Notes to Condensed Consolidated Financial Statements.

IOS BRANDS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

					Three Months Ended September 30,
					2001			2000 Restated
Cash flows from operating activities:
	Net income				$	4,109		$	928
	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation and amortization				2,348			2,489
		Write-off of deferred financing costs				342			—
		Provision for doubtful accounts				620			663
		Deferred compensation expense				379			509
		Non-cash settlement of liabilities				(807	)		—
		Minority interest				627			36
		Increase (decrease) due to change in:
			Accounts receivable			(4,687	)		(9,181	)
			Deferred income taxes			3,049			1,125
			Inventories			(225	)		(1,010	)
			Other assets			102			(1,214	)
			Accounts payable			(6,507	)		(1,257	)
			Other			(1,684	)		(66	)

				Net cash used in operating activities		(2,334	)		(6,978	)
Cash flows from investing activities:
	Capital expenditures, net					(1,216	)		(981	)
	Officer notes receivable					(380	)		(103	)

				Net cash used in investing activities		(1,596	)		(1,084	)
Cash flows from financing activities:
	Proceeds of revolving credit borrowings					85,250			21,625
	Repayments of long-term debt					(73,125	)		(15,375	)
	Change in book overdrafts					(4,196	)		(1,206	)
	Deferred financing costs					(807	)		—

				Net cash provided by financing activities		7,122			5,044
	Effect of foreign exchange rate changes on cash					(66	)		(20	)
Net increase (decrease) in cash and cash equivalents						3,126			(3,038	)
	Cash and cash equivalents at beginning of period					30,890			20,825

	Cash and cash equivalents at end of period				$	34,016		$	17,787

Supplemental disclosures of cash flow information:
		Interest paid			$	927		$	1,381

		Income taxes paid			$	152		$	39

See accompanying Notes to Condensed Consolidated Financial Statements.

IOS BRANDS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements as of and for the three-month periods ended September 30, 2001 and 2000, include the accounts of IOS BRANDS Corporation, a Delaware 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"), (collectively, "the Company" or "IOS"). The operations of FTD, the principal operating subsidiary of the Company, include its indirect wholly owned subsidiaries, Renaissance Greeting Cards, Inc. 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 September 30, 2001, FTD owned approximately 85% of FTD.COM's outstanding common shares. Substantially all the operations of IOS are conducted through FTD and its subsidiaries.

These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information 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, 2001. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K/A. In the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows have been included herein.

Certain amounts in the condensed consolidated balance sheets, statements of operations and comprehensive income and cash flows as of and for the three-month period ended September 30, 2000 have been reclassified to conform to the current period presentation.

Note 2. Restatement

The Company has restated its consolidated balance sheets as of September 30, 2001 and June 30, 2001 and its consolidated statements of operations and comprehensive income and cash flows for the three-month period ended September 30, 2000. The Company restated $12.0 million from other income to paid-in capital, net of the related taxes, related to the settlement of 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 recorded as an equity transaction (see Note 8).

The following table sets forth balances as originally reported and as restated (in thousands, except per share amounts):

	September 30, 2001						June 30, 2001
	As Reported			As Restated			As Reported			As Restated
Paid-in capital	$	82,172		$	93,802		$	82,226		$	93,856
Accumulated deficit	$	(8,651	)	$	(20,281	)	$	(12,760	)	$	(24,390	)

		Three Months Ended September 30, 2000
		As Reported			As Restated
Total other income and expenses		$	(10,810	)	$	1,190
Income tax expense		$	3,162		$	820
Net income		$	10,586		$	928
Net income per share:
	Basic	$	0.70		$	0.06
	Diluted	$	0.69		$	0.06

Note 3. Recently Issued Accounting Pronouncements

In July 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations and SFAS No. 142, Goodwill and Intangible Assets were issued. In October 2001, SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets was issued. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting, and prohibits the use of the pooling-of-interests method for such transactions. SFAS No. 141 also requires identified intangible assets acquired in a business combination to be recognized as an asset apart from goodwill if they meet certain criteria. Management has adopted SFAS 141, which has had no material impact on its condensed consolidated financial statements.

SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill and other intangibles determined to have indefinite lives, including those acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually. Other identified intangible assets should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. Within six months of initial application of the new standard, a transitional impairment test must be performed on all goodwill. Any impairment loss recognized as a result of the transitional impairment test should be reported as a change in accounting principle. In addition to the transitional impairment test, the required annual impairment test should be performed in the year of adoption of SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, (although early adoption would be permitted in certain circumstances) and must be adopted as of the beginning of a fiscal year. Retroactive application is not permitted. The Company is in the process of evaluating the impact that adoption of SFAS No. 142 may have on the financial statements; however, such impact, if any, is not known or reasonably estimable at this time.

SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report

separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is in the process of evaluating the impact that adoption of SFAS No. 144 may have on the financial statements; however, such impact, if any, is not known or reasonably estimable at this time.

Note 4. Revenues from Sale of the Floral Selections Guide ("FSG")

As a condition of FTD affiliation, all FTD florists must purchase an FSG and related workbook. The Company recognizes revenue related to the FSG at the time of shipment to 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. There are no refund provisions associated with the purchase of the FSG. Historically, the Company has provided de minimis refunds in isolated cases. This FSG is currently published on a two-year cycle. In the three-month period ended September 30, 2000, revenue from such FSG sales was $3.9 million.

Note 5. Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of shares of Common Stock outstanding. Dilutive earnings per share includes the effect of the assumed exercise of dilutive stock options under the treasury stock method and unvested restricted shares of Class A Common Stock to the extent that they are dilutive. The following table presents information necessary to calculate basic and diluted earnings per share of Common Stock for the three-month periods ended September 30, 2001 and 2000:

		Three-Months Ended September 30,
		2001		2000 Restated
		(in thousands, except per share data)
Net income		$	4,109	$	928

Weighted average basic shares of Common Stock outstanding			14,490		15,200
Effect of dilutive securities:
	Unvested restricted shares of Class A Common Stock		99		85
	Options to purchase shares of Class A Common Stock		152		160

Weighted average diluted shares of Common Stock outstanding			14,741		15,445

Basic net income per share of Common Stock		$	0.28	$	0.06

Diluted net income per share of Common Stock		$	0.28	$	0.06

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 and 74,000 shares for the three-month periods ended September 30, 2001 and 2000, respectively.

Note 6. Financing Arrangements

On September 27, 2001 IOS entered into a new credit agreement with Harris Trust and Savings Bank, as Administrative Agent, who arranged an $80 million financing package (the "Credit Agreement") among a syndicate of Lenders maturing in no event later than December 31, 2004. The Revolving Credit Commitments will be reduced to $75 million at June 30, 2002, to $65 million at June 30, 2003 and to $55 million at June 30, 2004. Borrowings are subject to a variable interest rate

based on the prime commercial rate or on a function of the London Interbank Offered Rate ("LIBOR").

As a result of entering into the Credit Agreement, $0.6 million of unamortized deferred financing costs, associated with the Company's Bank Credit Agreement with Bank One, NA dated November 20, 1997, were expensed in the quarter ended September 30, 2001. The related income tax benefit attributable to the extinguishment of the then existing debt was $0.2 million, resulting in a tax effected loss on extinguishment of debt of $0.3 million which is reflected as an extraordinary item in the accompanying condensed consolidated statement of operations and comprehensive income for the quarter ended September 30, 2001.

The Company's Credit Agreement includes 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 September 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. The Credit Agreement excludes FTD.COM from terms and its restrictions although the Company pledged its shares in FTD.COM as security.

Note 7. Segment Information

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 the Company's 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. Of the Company's assets totaling approximately $179.5 million as of September 30, 2001, the assets of FTD.COM totaled $29.7 million, of which $27.8 million was cash and cash equivalents. The assets of the Company's other three operating business segments comprise the majority of the remaining assets of $149.8 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, Summary of Significant Accounting Policies, of the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2001. 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.

The following tables detail the Company's operating results by reportable business segment for the three-month periods ended September 30, 2001 and 2000.

		Three-month period ended September 30,
		2001							2000
		Gross Segment		Eliminations			Consolidated		Gross Segment		Eliminations			Consolidated
Revenues:
Member Services		$	22,033	$	(169	)	$	21,864	$	23,378	$	(199	)	$	23,179
Technology Products			8,047		(73	)		7,974		7,877		(60	)		7,817
Specialty Wholesaling			11,912		—			11,912		17,086		—			17,086
Direct to Consumer			21,878		(2,289	)		19,589		18,244		(2,002	)		16,242

	Total revenues		63,870		(2,531	)		61,339		66,585		(2,261	)		64,324

Costs of goods sold and services provided:
Member Services			3,591		(537	)		3,054		3,660		(504	)		3,156
Technology Products			2,945		—			2,945		2,614		—			2,614
Specialty Wholesaling			8,545		—			8,545		13,284		—			13,284
Direct to Consumer			15,040		(242	)		14,798		12,745		(259	)		12,486

	Total costs of goods sold and services provided		30,121		(779	)		29,342		32,303		(763	)		31,540

Gross margin by segment:
Member Services		$	18,442	$	368		$	18,810	$	19,718	$	305		$	20,023
Technology Products			5,102		(73	)		5,029		5,263		(60	)		5,203
Specialty Wholesaling			3,367		—			3,367		3,802		—			3,802
Direct to Consumer			6,838		(2,047	)		4,791		5,499		(1,743	)		3,756

	Total	$	33,749	$	(1,752	)	$	31,997	$	34,282	$	(1,498	)	$	32,784

Operating expenses:
Member Services, Technology Products, and Specialty Wholesaling			22,146		(833	)		21,313		25,783		(746	)		25,037
Direct to Consumer			2,819		(919	)		1,900		5,525		(752	)		4,773

	Total operating expenses		24,965		(1,752	)		23,213		31,308		(1,498	)		29,810

Operating income		$	8,784	$	—		$	8,784	$	2,974	$	—		$	2,974

Note 8. Litigation Settlements

A financial advisor received warrants for 750,000 shares of Class B Common Stock in partial payment for its services related to the original acquisition of Florists' Transworld Delivery Association ("FTDA"), a Michigan non-profit corporation, which was converted following that acquisition into Florists' Transworld Delivery Inc., a Michigan for-profit corporation. Subsequently, the warrants and cash representing the exercise price of the warrants were exchanged for 750,000 shares of Class B Common Stock of the Company.

The Company disputed the financial advisor's claim for compensation and filed suit for breach of fiduciary duty and other claims. On July 26, 2000, the Company settled the lawsuit whereby the financial advisor returned the 750,000 shares of Class B Common Stock. As a result of this settlement, the Company recorded $12.0 million of treasury stock and an increase in paid-in capital of $11.6 million (net of $0.4 million of income taxes) based on an independent third party valuation to determine the fair market value of the stock received in the settlement.

FTD.COM recorded a $2.6 million gain in the quarter ending September 30, 2001 for the settlement of a claim against the developer of an unlaunched version of its Web site, which includes the reversal of $0.8 million in accruals related to the gain.

Item 2. 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 increase membership in Member Services, 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 statement made herein.

The Company has restated the previously issued financial statements. See Note 2 to the condensed consolidated financial statements for information regarding the restatement. Accordingly, certain amounts and explanations included in Management's Discussion and Analysis of Financial Condition and Results of Operations have been amended.

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

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 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 and gift holidays, which include Valentine's Day, Easter, Mother's Day, Thanksgiving and Christmas, falls within that quarter. In addition, depending on the year, the popular floral and gift holiday of Easter either falls within the quarter ending March 31 or within the quarter ending June 30. 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 be of limited relevance in evaluating the Company's historical 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.

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000.

Total revenues decreased by $3.0 million, or 4.6%, to $61.3 million for the three-month period ended September 30, 2001, compared to $64.3 million for the three-month period ended September 30, 2000, for the reasons discussed below.

Member Services segment revenue decreased by $1.3 million, or 5.7%, to $21.9 million for the three-month period ended September 30, 2001, compared to $23.2 million for the three-month period ended September 30, 2000. This decrease was primarily due to decreased Clearinghouse revenue partially offset by increased VNS member services revenue. Membership in FTD, the Company's premium floral service provider, declined from approximately 17,000 to 14,000 members, as of September 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, VNS the Company's economy floral service provider increased membership to 10,000 as of September 30, 2001 from 6,500 as of September 30, 2000. Through its membership drive the Company expects to increase membership by the end of fiscal year 2002.

Technology Services segment revenue increased by $0.2 million, or 2.0%, to $8.0 million for the three-month period ended September 30, 2001, compared to $7.8 million for the three-month period ended September 30, 2000. This increase was primarily due to an increase in Mercury equipment support fees charged to Mercury equipment customers. 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 decreased by $5.2 million, or 30.3%, to $11.9 million for the three-month period ended September 30, 2001, compared to $17.1 million for the three-month period ended September 30, 2000. This decrease was primarily the result of the $3.9 million decrease in the revenue attributable to the FSG, which is published on a two-year cycle, as well as a decrease in holiday and branded product sales. In fiscal year 2002, the Company reduced the number of inventoried items offered to florists. This reduction is expected to lead to lower sales and reductions in inventory without significantly impacting earnings because lower sales will be offset by improved gross margins resulting from a more attractive mix of products and lower carrying costs associated with inventory.

Direct to Consumer segment revenue increased by $3.4 million, or 20.6%, to $19.6 million for the three-month period ended September 30, 2001, compared to $16.2 million for the three-month period ended September 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 decreased by $2.2 million, or 7.0%, to $29.3 million for the three-month period ended September 30, 2001, compared to $31.5 million for the three-month period ended September 30, 2000. This decrease was primarily attributable to decreased costs in the Specialty Wholesaling segment. As a percent of revenue, total costs of goods sold and services provided decreased to 47.8% for the three-month period ended September 30, 2001 from 49.0% for the three-month period ended September 30, 2000, primarily attributable to the sale of higher margin products in the Specialty Wholesaling and Direct to Consumer segments.

Costs of goods sold and services provided associated with the Member Services segment remained relatively constant at $3.1 million for the three-month period ended September 30, 2001, compared to $3.2 million for the three-month period ended September 30, 2000. As a percent of revenue, costs of goods sold and services provided increased to 14.0% for the three-month period ended September 30, 2001 from 13.6% for the three-month period ended September 30, 2000, primarily as a result of a decrease in revenues from monthly access fees charged to florists.

Costs of goods sold and services provided associated with the Technology Services segment increased by $0.3 million, or 12.7%, to $2.9 million for the three-month period ended September 30, 2001, compared to $2.6 million for the three-month period ended September 30, 2000. As a percent of revenue, costs of goods sold and services provided increased to 36.9% for the three-month period ended September 30, 2001 from 33.4% for the three-month period ended September 30, 2000. The dollar and percentage increases primarily are the result of increased costs associated with selling technology products.

Costs of goods sold and services provided associated with the Specialty Wholesaling segment decreased by $4.8 million, or 35.7%, to $8.5 million for the three-month period ended September 30, 2001, compared to $13.3 million for the three-month period ended September 30, 2000. This decrease was primarily due to the costs of producing the FSG. As a percent of revenue, costs of goods sold and services provided decreased to 71.7% for the three-month period ended September 30, 2001 from 77.7% for the three-month period ended September 30, 2000, primarily as a result of the change in sales mix related to the FSG.

Costs of goods sold and services provided associated with the Direct to Consumer segment increased by $2.3 million, or 18.5%, to $14.8 million for the three-month period ended September 30,

2001, compared to $12.5 million for the three-month period ended September 30, 2000. This increase was primarily attributable to increases in order volume and average order value. As a percent of revenue, costs of goods sold and services provided decreased to 75.5% for the three-month period ended September 30, 2001 from 76.9% for the three-month period ended September 30, 2000, primarily as a result of a reduction in order processing expenses due both to a decrease in total number of phone orders and increased efficiencies in order processing, as well as an increase in specialty gift orders, which typically have higher gross margins.

Advertising and selling costs decreased by $4.1 million, or 24.9%, to $12.4 million for the three-month period ended September 30, 2001, compared to $16.5 million for the three-month period ended September 30, 2000. This decrease was primarily due to a reduction of marketing and promotion expenditures with a shift from a marketing program focused on year-round advertising to a floral holiday-centric plan focused on Christmas, Valentine's Day, Easter and Mother's Day.

General and administrative costs decreased by $2.5 million, or 18.8%, to $10.8 million for the three-month period ended September 30, 2001, compared to $13.3 million for the three-month period ended September 30, 2000. This decrease was primarily due to a $2.6 million gain attributable to the settlement of a claim against the developer of an unlaunched version of FTD.COM's Web site.

The provision for income taxes and the effective tax rates for the three-month periods ended September 30, 2001 and 2000 were an expense of $3.2 million and a rate of 38% and an expense of $0.8 million and a rate of 46%, respectively.

Net income improved by $3.2 million to $4.1 million for the three-month period ended September 30, 2001, compared to $0.9 million for the three-month period ended September 30, 2000. This increase was partially due to a $2.6 million gain recorded in the quarter ended September 30, 2001 related to the settlement of claim against the developer of an unlaunched version of the Company's Direct to Consumer Segment's Web site and improved operating results associated with the Direct to Consumer segment. Net income for the three-month period ended September 30, 2001 includes an after-tax extraordinary loss of $0.3 million for the write-off of deferred financing costs.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $3.1 million to $34.0 million as of September 30, 2001 from $30.9 million as of June 30, 2001. Cash and cash equivalents decreased by $3.0 million to $17.8 million as September 30, 2000 from $20.8 million as of June 30, 2000.

Cash used in operating activities was $2.3 million for the three-month period ended September 30, 2001 compared to cash used in operating activities of $7.0 million for the three-month period ended September 30, 2000. The decrease in cash used in operating activities is primarily attributable to the $5.8 million increase in operating income in the current quarter in comparison to the quarter ended September 30, 2000. The Company's Direct to Consumer segment recorded a $2.6 million gain in the quarter ended September 30, 2001 for the settlement of a claim against the developer of an unlaunched version of its Web site, of which $0.8 million was a non-cash gain.

Cash used in investing activities was $1.6 million for the three-month period ended September 30, 2001 compared to cash used in investing activities of $1.1 million for the three-month period ended September 30, 2000. Capital expenditures were $0.5 million for the three-month period ended September 30, 2001, compared to $0.6 million for the three-month period ended September 30, 2000. Expenditures for amortizable intangibles, such as costs relating to the development and implementation of internal use software and other capitalized information technology costs, were $0.7 million and $0.4 million, respectively, for the three-month periods ended September 30, 2001 and September 30, 2000. The Company's anticipated capital expenditures for fiscal year 2002 are estimated to range from $4.0 to $5.0 million and will primarily be used for developing new software and information technology purchases.

Cash provided by financing activities was $7.1 million for the three-month period ended September 30, 2001, compared to cash provided by financing activities of $5.0 million for the three-month period ended September 30, 2000 due to increased borrowings under the revolving credit facility.

As consideration for terminating the contractual relationship between the Company and FTD Association, FTD paid $14.0 million to FTD Association, $12.6 million paid on June 29, 2001 and $1.4 million of which is subject to a one-year escrow holdback reflected in the Company's condensed consolidated balance sheets as restricted cash. These payments were financed through the revolving credit facility, and are reflected in the Company's long-term debt as of June 30 and September 30, 2001.

The Company's principal sources of liquidity are cash from operations and funds available for borrowing under the Company's Credit Agreement, dated September 27, 2001. The bank credit facilities consist of a $80 million revolving credit facility and are used to finance working capital, acquisitions, certain expenses associated with the bank credit facilities and letter of credit needs. As of September 30, 2001, the Company had $67 million outstanding under the revolving credit facility and $3.2 million outstanding under various letters of credit. The amounts available under the revolving credit facility will be reduced to $55 million as of June 30, 2004, and will mature on December 31, 2004. The Company's Credit Agreement includes covenants, which, among other things require the Company to maintain certain financial ratios and a minimum level of consolidated net worth. As of September 30, 2001, the Company was in compliance with the covenants contained in the Credit Agreement.

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 Credit Agreement, 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 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.

DEFERRED TAX ASSET

As of September 30, 2001, the current and long-term deferred tax assets were $3.8 million and $3.0 million, respectively. The long-term deferred tax asset includes a $2.5 million valuation allowance. Management believes that based on their estimation of taxable income in future years, coupled with tax planning strategies, the valuation allowance is appropriate as of September 30, 2001.

Item 3. 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 its credit facilities, which were subject to interest rates ranging from 4.625% to 6.500% at September 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 $67 million as of September 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. If the Company's borrowings were to remain outstanding for the remaining term of the borrowing agreement, a 100 basis point increase in LIBOR during the three-month period ended September 30, 2001 would result in an increase of $670,000 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 other comprehensive loss caption on the Condensed Consolidated Statements of Operations and Comprehensive Income and was not material for the three-month periods ended September 30, 2001 and 2000. The Company does not expect to be materially affected by foreign currency exchange rate fluctuations in the 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits

Exhibit No.		Description
10.34		Credit Agreement, dated as of September 27, 2001, by and among Florists' Transworld Delivery, Inc., a Michigan corporation, IOS Brands Corporation, a Delaware corporation, and each of the Subsidiaries from time to time becoming a party to this Agreement, as Guarantors, the several financial institutions from time to time party to this Agreement, as Lenders, and Harris Trust and Savings Bank, as Administrative Agent.
10.35		Mortgage and Security Agreement with Assignment of Rents dated as of September 27, 2001 from FLORISTS' TRANSWORLD DELIVERY, INC., a Michigan corporation, formerly known as FLORISTS' TRANSWORLD DELIVERY ASSOCIATION, a Michigan not-for-profit corporation to Harris Trust and Savings Bank, an Illinois banking corporation, as administrative agent.
10.36		Pledge Agreement is dated as of September 27, 2001, by and among IOS BRANDS CORPORATION, a Delaware corporation, FLORISTS' TRANSWORLD DELIVERY, INC., a Michigan corporation, and the other parties executing this Agreement under the heading "Pledgors" and Harris Trust and Savings Bank, an Illinois banking corporation acting as administrative agent.
10.37		Security Agreement is dated as of September 27, 2001, by and among IOS BRANDS CORPORATION, a Delaware corporation, FLORISTS' TRANSWORLD DELIVERY, INC., a Michigan corporation, and the other parties executing this Agreement under the heading "Debtors" and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation acting as administrative agent.
10.38	*	Secured Promissory Note between FTDI and Robert L. Norton dated as of September 29, 2001.
10.39	*	Secured Promissory Note between FTDI and Robert L. Norton dated as of September 29, 2001.
10.40	*	Secured Promissory Note between FTDI and Michael J. Soenen dated as of September 29, 2001.

*: Management contract or compensatory arrangement.
(b): Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three-month period ended September 30, 2001.

SIGNATURES

Pursuant to the requirements 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 on the 28th day of May 2002.

		IOS BRANDS CORPORATION
		By:		/s/ Carrie A. Wolfe Chief Financial Officer and Treasurer (Principal Financial Officer and officer duly authorized to sign on behalf of registrant)

EXHIBIT INDEX

Exhibit No.		Description
10.34		Credit Agreement, dated as of September 27, 2001, by and among Florists' Transworld Delivery, Inc., a Michigan corporation, IOS Brands Corporation, a Delaware corporation, and each of the Subsidiaries from time to time becoming a party to this Agreement, as Guarantors, the several financial institutions from time to time party to this Agreement, as Lenders, and Harris Trust and Savings Bank, as Administrative Agent.
10.35		Mortgage and Security Agreement with Assignment of Rents dated as of September 27, 2001 from FLORISTS' TRANSWORLD DELIVERY, INC., a Michigan corporation, formerly known as FLORISTS' TRANSWORLD DELIVERY ASSOCIATION, a Michigan not-for-profit corporation to Harris Trust and Savings Bank, an Illinois banking corporation, as administrative agent.
10.36		Pledge Agreement is dated as of September 27, 2001, by and among IOS BRANDS CORPORATION, a Delaware corporation, FLORISTS' TRANSWORLD DELIVERY, INC., a Michigan corporation, and the other parties executing this Agreement under the heading "Pledgors" and Harris Trust and Savings Bank, an Illinois banking corporation acting as administrative agent.
10.37		Security Agreement is dated as of September 27, 2001, by and among IOS BRANDS CORPORATION, a Delaware corporation, FLORISTS' TRANSWORLD DELIVERY, INC., a Michigan corporation, and the other parties executing this Agreement under the heading "Debtors" and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation acting as administrative agent.
10.38	*	Secured Promissory Note between FTDI and Robert L. Norton dated as of September 29, 2001.
10.39	*	Secured Promissory Note between FTDI and Robert L. Norton dated as of September 29, 2001.
10.40	*	Secured Promissory Note between FTDI and Michael J. Soenen dated as of September 29, 2001.

*: Management contract or compensatory arrangement.

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IOS BRANDS CORPORATION INDEX

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

IOS BRANDS CORPORATION Condensed Consolidated Balance Sheets (In thousands)
IOS BRANDS CORPORATION Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (In thousands, except per share amounts)
IOS BRANDS CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
IOS BRANDS CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES
EXHIBIT INDEX