Description

This investment opportunity arises out of the announced merger between FTD.com (NASDAQ: EFTD) and its parent company, IOS Brands Corporation.

IOS Brands Corporation is a holding company that is the parent company of Florists' Transworld Delivery, Inc., or FTD, and the ultimate parent company of FTD.com, through its indirect ownership of 83.2% thereof. IOS is a floral service provider through approximately 20,000 FTD-member retail florist shops located primarily in North America and, through affiliated or related organizations, approximately 28,000 non-member retail florist shops located in over 150 countries outside North America and, through its indirect ownership of FTD.com, is an Internet and telephone direct marketer of flowers and specialty gifts to consumers. Although there is no current public market for its common stock, IOS has been a public reporting company since 1995.

FTD.COM is an Internet and telephone marketer of flowers and specialty gifts, which began selling products directly to consumers through the 1-800-SEND-FTD toll-free number in 1993 and electronically to consumers through the www.ftd.com Web site in 1994. FTD.com has been a publicly-traded corporation since September 1999, and its Class A common stock is currently quoted on the Nasdaq National Market under the ticker symbol "EFTD." FTD.com's operations have been a part of IOS's consolidated financial statements since IOS formed FTD.com in 1999.

Under the merger agreement, each share of FTD.com will be exchanged at a fixed rate of 0.26 shares of IOS Brands Common A Stock for each share of FTD.com stock. Following the merger, there will be a stock dividend of 3 shares for each IOS share resulting in a FTD.com shareholder that owned 100 shares owning 104 shares of the IOS stock after the merger and stock dividend. After the merger and stock dividend, the public shareholders of FTD.com (excluding IOS) will own 12.7% of the outstanding stock of IOS, which will become a public company traded under the symbol FTD.

The 0.26 share exchange ratio was determined in part based upon the valuation analysis performed by the financial advisor and investment bank retained by IOS. Details of that analysis are set forth in the S-4 filed with the SEC on 3/22/02 and accessible at http://www.sec.gov/Archives/edgar under IOS Brands. At the time that analysis was made, the FTD.com share price was $8.33 per share.

The current FTD.com share price is $6.12. The FTD.com share price dropped dramatically when the merger was announced as FTD.com shareholders who were growth investors bailed out of their ownership. There has been no adverse change in the financial position or performance of FTD.com or IOS since the announcement of the merger. FTD.com just reported better numbers for the quarter ending March 31, 2002. Accordingly, if the 0.26 exchange rate was fair for a FTD.com shareholder when the FTD.com share price was $8.33, then it just became 25% better for such shareholder.
To determine whether that initial valuation was fair, it necessary to look at the numbers. At the current price of $6.12 per share for FTD.com and given that 16.8% of the currently outstanding FTD.com stock will own 12.8% of the combined IOS Brands/FTD.com entity, the combined company will have a post-merger valuation of approximately $393M. The company is expected to have cash of $31 million and long term debt of $48 million leading to a pro forma EV of $410 million.

According to the pro forma consolidated financials included in the S-4 filed by IOS Brands, for the 2001 fiscal year ending June 30, 2001 the combined entity had revenues of $308 million, net income of $13 million and free cash flow of $32 million. For the 6 month period ending 12/31/01, the combined entity has revenue of $138.2 million (down from $141.3 million during the same period the previous year), income from operations of $14.3 million (up from $8.3 million for that same period during the prior year) and free cash flow of $17.2 million (up from $10.5 million for that period during the prior year). The third and fourth quarters are typically the lowest revenue quarters in the florist business with Valentines Day and Mothers Day helping to boost the numbers in the January through June period. FTD.com reported good numbers for the quarter ending March 31, 2002, namely revenues of $48.9 million (compared to $36.1 million reported in the same quarter of the prior fiscal year), net income of $4.7 million (excluding $1.0 million of expenses related to the pending merger, compared to net income of $2.4 million the prior year). The numbers for IOS have not yet been reported for this quarter.

If the numbers for the July 1 through December 31, 2001 period are annualized, the EV/FCF is 12. That ratio will likely be lower when the estimated annual post-merger savings of $500,000 per year and the lower seasonality effect of those two quarters are factored in. When one factors in the likely continuation in revenue growth and profitability of the FTD.com business (which is occurring even if the current tough economic climate), the acquisition of 12.7% of the combined business through the purchase of the FTD.com shares at the current price appear to be a good value.

Catalyst

The announced non-contingent merger between FTD.com and IOS Brands and the dramatic drop in the FTD.com share price upon that announcement.