Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
(Mark One)
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
Or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35901
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| |
(Mark One) |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the Fiscal Year Ended December 31, 2018
Or |
¨ | 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 001-35901 |
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization)
| | 32-0255852
(I.R.S. Employer Identification No.) |
Downers Grove, Illinois
(Address of principal executive office)
| | 60515
(Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
| Name of Exchange on Which Registered |
Common Stock, par value $0.0001 per share | | The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
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Securities registered pursuant to Section 12(g) of the Act: NoneNone
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨o |
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| | Smaller reporting company ¨o |
| | Emerging growth company ¨o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2018), based upon the closing sale price of the registrant’sregistrant’s common stock as reported on the NASDAQ Global Select Market was $80.9 million. At March 6, 2019, there were 28,322,610 shares of the Registrant’sRegistrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be used in conjunction with the registrantEXPLANATORY NOTE’s
On March 18, 2019, Annual Meeting of Stockholders are incorporated by reference into Part III (Item 10 through Item 14) of this report, unless this report is amended to provide such information.
FTD COMPANIES, INC.
INDEX TO FORM 10-K
For the Year Ended December 31, 2018
In this document, references to the “Company,” “FTD,” “we,” “us,” and “our” refer to FTD Companies, Inc. and its consolidated subsidiaries, unless the context otherwise requires.
Forward-Looking Statements
This Annual Report on Form 10-K (this “Form 10-K”) and the documents incorporated herein by reference contain certain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding the exploration of strategic alternatives; the strategic and financial evaluation of our business; our corporate restructuring and cost savings plan and other strategies; our future financial performance; our ability to continue as a going concern, repay or refinance indebtedness and invest in initiatives; expectations about future business plans, prospective performance and opportunities; future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; impairment charges; tax payments; foreign currency exchange rates; hedging arrangements; our products and services; pricing; marketing plans; competition; settlement of legal matters; and the impact of accounting changes and other pronouncements. Potential factors that could affect such forward-looking statements include, among others, uncertainties associated with being able to identify, evaluate or complete any strategic alternative or strategic transaction; the impact of the announcement of our review of strategic alternatives, as well as any strategic alternative or strategic transaction that may be pursued, on our business, including our financial and operating results and our employees, suppliers and customers; our ability to implement and realize anticipated benefits from our corporate restructuring and cost savings plan and other initiatives; our ability to repay, refinance or restructure our outstanding debt, and the other factors disclosed in the section entitled “Risk Factors” in this Form 10-K and additional factors that accompany the related forward-looking statements in this Form 10-K and in our other filings with the U.S. Securities and Exchange Commission (“SEC”), as updated from time to time in our subsequent filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
PARTI
ITEM 1. BUSINESS
Overview
FTD Companies, Inc., together with its subsidiaries (referred to herein as the(the “Company,” “FTD,” “we,” “us,” or “our”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Form 10-K”). This Amendment No. 1 (the “Amendment”) amends Part III, Items 10 through 14, of the 2018 Form 10-K to include information previously omitted from the 2018 Form 10-K in reliance on General Instruction G(3) to Form 10-K. General Instruction G(3) to Form 10-K provides that registrants may incorporate by reference certain information from a definitive proxy statement which involves the election of directors if such definitive proxy statement is filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the end of the fiscal year. The Company does not anticipate that it will file a premier floraldefinitive proxy statement that involves the election of directors by April 30, 2019 (i.e., within 120 days after the end of the Company’s 2018 fiscal year). Accordingly, Part III of the 2018 Form 10-K is hereby amended and giftingrestated to add the information set forth below.In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits to this Amendment under Item 15 of Part IV. The certifications are filed with this Amendment as Exhibits 31.1 and 31.2. Because no financial statements are included in this Amendment and this Amendment does not contain or amend any disclosures with respect to Items 307 or 308 of Regulation S-K, paragraphs 3, 4 and 5 of the certifications have been omitted. This Amendment does not include the certifications under Section 906 of the Sarbanes-Oxley Act of 2002 because no financial statements are being filed with this Amendment.
Except as described above, this Amendment does not reflect events occurring after the filing of the 2018 Form 10-K. No attempt has been made in this Amendment to modify or update in any way other disclosures presented in the 2018 Form 10-K, and we have not updated the disclosures contained herein to reflect any events which occurred subsequent to the filing of the 2018 Form 10-K or to modify the disclosures contained in the 2018 Form 10-K other than to reflect the changes described above.
This Amendment should be read in conjunction with the 2018 Form 10-K and with our filings with the SEC subsequent to the filing of the 2018 Form 10-K.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
The information provided below is biographical information about each of our directors, including other public company withboard memberships. Age and other information is as of April 24, 2019.
Name | | Age | | Director
Since | | Position(s) |
Mir Aamir | | 46 | | 2018 | | Director |
James T. Armstrong | | 53 | | 2013 | | Director; Nominating and Corporate Governance Committee Chairman; Member of the Audit Committee |
Tracey L. Belcourt | | 52 | | 2014 | | Director; Member of the Nominating and Corporate Governance Committee |
Robert Berglass* | | 81 | | 2013 | | Board of Directors Chairman; Compensation Committee Chairman; Member of the Audit Committee |
Candace H. Duncan | | 65 | | 2014 | | Director; Member of the Audit Committee |
Sue Ann R. Hamilton* | | 58 | | 2014 | | Director; Member of the Nominating and Corporate Governance Committee |
Joseph W. Harch | | 65 | | 2013 | | Director; Audit Committee Chairman; Member of the Compensation Committee |
Robin S. Hickenlooper | | 40 | | 2014 | | Director; Member of the Compensation Committee |
Scott D. Levin* | | 57 | | 2018 | | Director; President, Chief Executive Officer and Secretary |
Christopher W. Shean* | | 53 | | 2014 | | Director |
*This director will be up for election at our next annual meeting.
Mir Aamir has served as one of our directors since June 2018. Mr. Aamir is President and Chief Executive Officer of Quotient Technology Inc., which provides a visiondigital marketing platform to be the world’s floral innovatordeliver personalized and leader, creating products, brands,targeted promotions and technology-driven services our customers love. We provide floral, specialty foods, gift and related products and servicesmedia to consumers, retail florists, and other retail locationsa member of the company’s board of directors. He joined Quotient in 2013 and companieshelped lead their successful initial public offering in needMarch 2014. Mr. Aamir assumed the Chief Executive Officer role in 2017 after previously serving as President, Chief Operating Officer and Chief Financial Officer. From 2005 to 2013, Mr. Aamir worked for Safeway Inc. where he served as President, Customer Loyalty and Digital Technology from 2011 to 2013. He also served as a Senior Vice President, Marketing Strategy & FP&A from 2007 to 2011 and as Group Vice President, FP&A from 2005 to 2007. Prior to joining Safeway Inc., Mr. Aamir served as an Officer and Vice President at A.T. Kearney, Inc. Mr. Aamir received his B.B.A./M.B.A. in finance from the University of floralKarachi, Pakistan and gifting solutions. Our business useshis M.B.A. from the highly recognized FTD®University of Chicago. Mr. Aamir brings to the Board of Directors over 20 years of strategy, operational and Interflora® brands, both of which are supported by the iconic Mercury Man® logo. While we operatefinance experience, primarily in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”),retail and the Republic of Ireland, we have worldwide presenceconsumer packaged goods industries. He also brings digital and mobile marketing experience, having helped found Safeway’s industry-leading digital and mobile platform for loyalty and targeted marketing.
James T. Armstrong has served as our iconic Mercury Man logo is displayed in over 30,000 floral shops in more than 125 countries. Today, the “Mercury Man” is one of our directors since November 2013. Mr. Armstrong also served as a director of United Online, Inc. (“United Online”) from September 2001 to June 2016 and was a director of NetZero, Inc. (“NetZero”) from 1998 to September 2001. Mr. Armstrong has been a Managing Director of March Capital Partners since June 2014 and a Managing Director with Clearstone Venture Partners (formerly idealab! Capital Partners), an incubator and financier of early stage startup companies, since August 1998. From May 1995 to August 1998, Mr. Armstrong was an associate with Austin Ventures. From September 1989 to March 1992, Mr. Armstrong was a senior auditor with Ernst & Young. Mr. Armstrong serves on the most recognized logosboard of directors of several private companies. Mr. Armstrong received his B.A. in economics from the University of California at Los Angeles and his M.B.A. from the University of Texas. Serving as a Managing Director of a venture capital fund focused on growing technology companies in a variety of markets, Mr. Armstrong brings to our Board of Directors well-developed business and financial acumen critical to our Company.
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In addition, having served as a director of United Online when we were a wholly-owned subsidiary of United Online, Mr. Armstrong possesses a breadth of knowledge regarding our business.
Tracey L. Belcourt has served as one of our directors since February 2014. Ms. Belcourt has served as Senior Vice President of Global Growth and Development at Fortune Brands Home & Security, Inc. since December 2016, where she leads Strategy, Corporate Development and Consumer Insights. Before Fortune Brands, Ms. Belcourt served four years as the Executive Vice President of Strategy for Mondelēz International, Inc. (“Mondelēz”) where she led a group of individuals in executing the company’s strategy function and mergers and acquisition activities. She was also responsible for developing and implementing Mondelēz’s growth strategy. Before joining Mondelēz in 2012, Ms. Belcourt worked at Bain & Co. (“Bain”) in Toronto, where she was a partner for 13 years. At Bain, Ms. Belcourt specialized in the world,design and we are oneimplementation of growth strategies to improve business performance across a variety of consumer industries. Prior to Bain, Ms. Belcourt was an economic consultant to the U.S. Agency for International Development in Africa. Ms. Belcourt began her career in academia serving as an Assistant Professor of economics at Concordia University in Montreal for five years and at the University of Bonn in Germany. Ms. Belcourt holds both a Ph.D and a Master’s in economics from Queen’s University in Canada and a Bachelor’s degree in mathematics and economics from the University of Alberta. Through her extensive management and consulting roles, Ms. Belcourt brings to our Board of Directors significant leadership, oversight and operational management skills, as well as experience in strategy consulting and implementation. In addition, Ms. Belcourt has a deep knowledge of consumer industries and has significant international work experience.
Robert Berglass has served as the non-executive Chairman of our Board of Directors since November 2013. Mr. Berglass also served as a director of United Online from September 2001 to June 2016 and was a member of the largest e-commerce floralboard of directors of Classmates Media Corporation, a wholly-owned subsidiary of United Online, from September 2007 to January 2010. Mr. Berglass was a director of NetZero from November 2000 to September 2001. Mr. Berglass was United Online’s Lead Independent Director from February 2006 to November 2013. From February 2002 to August 2013, Mr. Berglass was a consultant to and gift retailersserved as the Chairman of DAVEXLABS LLC, an independent hair care company dedicated to salon professionals. From 1998 to April 2001, Mr. Berglass was the Chairman, Chief Executive Officer and President of Schwarzkopf & DEP, Inc. (formerly DEP Corporation), a division of Henkel KGAA. Mr. Berglass held those positions following Henkel KGAA’s acquisition of DEP Corporation in 1998. From 1969 to 1998, Mr. Berglass was the world. Our diversified portfolioChairman, Chief Executive Officer and President of brands also includes ProFlowers®DEP Corporation. Before joining DEP Corporation, Mr. Berglass held various positions at Faberge, Inc., Shari’s Berries®, Personal Creations®, Flying Flowers®, Gifts.com™,including Corporate Executive Vice President. Having served as Chairman, Chief Executive Officer and ProPlants®. While floral arrangements and plants are our primary offerings, we also market and sell gift items, including gourmet-dipped berries and other specialty foods, personalized gifts, gift baskets, wine and champagne, jewelry, and spa products.
References to “MD&A” refer to Management’s Discussion and Analysis included in Part II, Item 7President of this Form 10-K. References to “Footnote” refer to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
About FTD
In 1910, thirteen American retail florists, led by John Valentine, agreed to exchange orders for out-of-town deliveries. In telegraphing orders to each other from opposite sidesa large, global personal care products company with some of the country, they hoped to eliminate their reliance on trains to send flowers to far away recipients. At the time, lengthy transit times made sending flowers to friends and relatives in distant locations almost impossible. The flowers could not survive the long journey. Soon independent florists all over America were telegraphing and telephoning orders to each other using the FTD network. They found that, by working together, they were able to make the seemingly impossible, possible. For the first time, beautiful bouquets could be made and personally hand-delivered anywhere in the country within a day. The idea revolutionized the way flowers could be sent; customers could now mark special occasions with flowers from afar. Originally called “Florists’ Telegraph Delivery Association,” FTD was the world’s first flowers-by-wire service. In 1914, FTD adopted the Roman messenger god as its logo, and the Mercury Man has ever since been our iconic logo. In 1965, FTD expanded to include international transactions, and the company was renamed “Florists’ Transworld Delivery” to reflect its growing worldwide presence.
Not surprisingly, it was not long before florists outside of the U.S. wanted to provide the same delivery service to distant locations. In the U.K., a nursery owner from Essex and a florist in Glasgow brought the concept to the U.K., and in 1923, Florists’ Telegraph Delivery Association launched in the U.K. In the 1950s, the name Interflora was adopted, which is one of the most recognized brands,
Mr. Berglass is able to present valuable insight into organizational and operational management issues crucial to a public company, as well as valuable insight on various aspects of consumer marketing. In addition, having served as a director of United Online when we were a wholly-owned subsidiary of United Online, Mr. Berglass possesses a breadth of knowledge regarding our business.Candace H. Duncan has served as one of our directors since December 2014 in connection with the U.K. and the Republic of Ireland. FTD acquired Interflora British Unit (“Interflora”) in 2006. Our Interflora brand recognition within the U.K. flower delivery market has the highest prompted awareness when compared to our competitors based on a survey completed in January 2019 by Aurora Market Research. In 2012, Interflora acquired certain assetsclosing of the Gifts DivisionCompany’s acquisition of Flying Brands Limited,Provide Commerce, Inc. in 2014 (the “Acquisition”). Ms. Duncan retired from KPMG LLP in November 2013, where she was Managing Partner of the Washington, D.C. metropolitan area since 2009. Ms. Duncan also was on the KPMG LLP board of directors from 2009 to 2013 and served as Chairwoman of that board’s Nominating Committee as well as the Partnership and Employer of Choice Committee. Prior to her appointment to the KPMG LLP board of directors, Ms. Duncan served in various roles at the firm, including Managing Partner for Audit for the Flying Flowers business.
On December 31, 2014, we acquiredMid-Atlantic area and Audit Partner in Charge for the Virginia business unit. Ms. Duncan was admitted to the KPMG LLP partnership in 1987 and had more than 35 years of experience as a professional with the firm. Ms. Duncan currently serves on the board of directors of Discover Financial Services and Teleflex Incorporated, where she also serves as a member of their respective audit committees. Ms. Duncan received a B.S. in accounting from
Kansas State University. Ms. Duncan’s extensive experience in public company accounting, financial statements and corporate finance provides her with significant skills and knowledge to serve on our Board of Directors. Ms. Duncan is a
wholly owned subsidiarydesignee of Qurate Retail, Inc. (“Qurate”), formerly
known as Liberty Interactive Corporation
all(“Liberty”), and was appointed pursuant to the terms of the
issuedinvestor rights agreement entered into by FTD and
outstanding shares of common stock of Provide Commerce, Inc. (the “Acquisition”). Provide Commerce, Inc. (“Provide Commerce”) was founded in 1998 underLiberty concurrent with the
name ProFlowers, Inc. In 2003, ProFlowers, Inc. changed its name to Provide Commerce, Inc. Subsequent to its initial public offering in 2003 and prior to its acquisition by Qurate in 2006, Provide Commerce was an independent, publicly traded company. At December 31, 2018, Qurate holds 36.0%closing of the
outstanding sharesAcquisition (the “Investor Rights Agreement”), as described below under “Item 13—Certain Relationships and Related Transactions, and Director Independence—Related-Party Transactions—Qurate Investor Rights Agreement.”Sue Ann R. Hamilton has served as one of FTD common stock. For additional information and risks associated with the Acquisition and Qurate’s ownership interest in us, see “Risk Factors,” which appears in Part I, Item 1A of this Form 10-K.
FTD Companies, Inc. is a Delaware corporation headquartered in Downers Grove, Illinois that was formed in April 2008our directors since December 2014 in connection with
United Onlinethe closing of the Acquisition. As Principal of the consultancy Hamilton Media LLC, Ms. Hamilton advises and represents major media and technology companies. In this role, Ms. Hamilton serves as Executive Vice President—Distribution and Business3
Development for AXS TV LLC, a partnership between founder Mark Cuban, AEG, Ryan Seacrest Media, Creative Artists Agency (CAA) and CBS, and she represents The Mark Cuban Companies/Radical Ventures as board observer for Philo, Inc.’s, a privately held technology company. Ms. Hamilton also serves as Executive Vice President—Distribution and Business Development for HDNet LLC. Effective March 9, 2018, Ms. Hamilton was appointed to the board of a newly formed public company, GCI Liberty, Inc., in which Qurate had a controlling interest until March 2018. Prior to launching Hamilton Media, from 2003 until 2007, Ms. Hamilton served as Executive Vice President—Programming and Senior Vice President—Programming for Charter Communications, Inc. (“United Online”Charter”), a cable and internet service provider. Before her work at Charter, Ms. Hamilton held numerous management positions at AT&T Broadband, L.L.C. and its predecessor, Tele-Communications, Inc. dating back to 1993. Prior to her career in technology, media, and telecommunications, Ms. Hamilton was a partner at Chicago-based law firm Kirkland & Ellis, specializing in complex commercial transactions. Ms. Hamilton received her J.D. degree from Stanford Law School, where she was Associate Managing Editor of the Stanford Law Review and Editor of the Stanford Journal of International Law. She is a magna cum laude graduate of Carleton College in Northfield, Minnesota. As a result of her extensive management experience, Ms. Hamilton brings to our Board of Directors significant leadership, oversight and consulting skills, as well as experience in the media, technology and legal fields. Ms. Hamilton is a Qurate designee and was appointed pursuant to the terms of the Investor Rights Agreement.
Joseph W. Harch has served as one of our directors since November 2013. Mr. Harch has been the Managing Member of Harch Capital Management, LLC, a Registered Investment Advisor, since June 2011. Harch Capital Management, LLC is the successor-in-interest to Harch Investment Advisors Inc., which Mr. Harch founded in 1991. From 1991 until May 2011, Mr. Harch has held various leadership positions with Harch Capital Management, LLC and its predecessor organizations. From 1990 to 1991, Mr. Harch was a senior investment banker employed by Donaldson, Lufkin & Jenrette, Inc. From 1988 to 1990, Mr. Harch served as the national High Yield and Corporate Syndicate Manager for Drexel Burnham Lambert, Inc., where he also served as a Managing Director in the Corporate Finance Department from 1984 to 1988. Mr. Harch was a First Vice President in the Corporate Finance Department of Prudential Bache Securities from 1982 to 1984 and a First Vice President in the Corporate Finance Department of Batemen Eichler, Hill Richards from 1979 to 1982. From 1975 to 1979, Mr. Harch was a Certified Public Accountant with Arthur Young & Company. Mr. Harch brings to our Board of Directors experience conducting audits for public companies, preparing audited financial statements, working with ratings agencies and serving as an investment banker to public companies. Mr. Harch also has significant experience advising corporate issuers in capital markets and merger and acquisition transactions.
Robin S. Hickenlooper has served as one of FTDour directors since December 2014 in connection with the closing of the Acquisition. Ms. Hickenlooper has been Senior Vice President, Corporate Development of Qurate since January 2017. Ms. Hickenlooper served as Vice President, Corporate Development of Qurate from January 2013 to December 2016. Ms. Hickenlooper served as Director, Corporate Development of Qurate from January 2010 to December 2012, and as Manager, Corporate Development from July 2008 to December 2010. Ms. Hickenlooper also serves as the Senior Vice President, Corporate Development of Liberty Media Corporation. Prior to joining Qurate, Ms. Hickenlooper worked in the Strategic Planning and Business Development group at Del Monte Foods and in investment banking at Thomas Weisel Partners. Ms. Hickenlooper currently serves on the board of directors of Chipotle Grill, Inc. and served as a director of Sirius XM Radio Inc. from January 18, 2013 to September 9, 2013. Ms. Hickenlooper has an M.B.A. from Kellogg School of Management and a Bachelor’s degree in public policy from Duke University. Ms. Hickenlooper brings to our Board of Directors significant corporate development and financial experience. Ms. Hickenlooper is a Qurate designee and was appointed pursuant to the terms of the Investor Rights Agreement.
Scott D. Levin has been our President and Chief Executive Officer since November 2018 and Secretary since November 2013, and has served as one of our directors since December 2018. Mr. Levin was our Interim President and Chief Executive Officer from July 2018 to November 2018. Previously, Mr. Levin served as our Executive Vice President and General Counsel from September 2013 until November 2018. In addition, Mr. Levin was a member of the Office of the CEO from November 2016 to March 2017. Mr. Levin was the Chief Legal Officer and Secretary of Coskata, Inc., a renewable fuels and chemicals production company, from 2012 to September 2013. From 2007 to 2012, Mr. Levin was Senior Vice President, General Counsel and Secretary for Morton’s Restaurant Group, Inc. (“FTD Group”), which was a publicly held restaurant holding company during that time. Prior to that, Mr. Levin held General Counsel positions at Torex Retail Americas (a global technology solutions provider) and OurHouse, Inc. (the home improvement e-commerce business for Ace Hardware Corporation). FTD Group, a wholly owned subsidiary of FTD Companies, Inc., is a Delaware corporation that was formed in 2003 by a private investment fund affiliated with Leonard Green & Partners, L.P. solely for the purpose of acquiring majority ownershipFrom 1996 to 1999, Mr. Levin served as Vice President and General Counsel of FTD, Inc. FTD,Mr. Levin also worked at Schulte Roth & Zabel LLP in New York City where he practiced in the mergers and acquisitions, securities and finance areas. Mr. Levin earned a J.D. from The National Law Center at George Washington
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University and a Bachelor’s degree from Boston College. Mr. Levin brings to our Board of Directors more than five years of experience at the Company serving as the President, Chief Executive Officer and Secretary and in other senior executive positions, including General Counsel. He has a unique, in-depth knowledge of the Company’s history, including his deep understanding of the Company’s operations and strategy and the consumer products industry as a whole.
Christopher W. Shean has served as one of our directors since December 2014 in connection with the closing of the Acquisition. Mr. Shean was our Interim President and Chief Executive Officer from November 2016 to February 2017. Mr. Shean has also served as the Chief Executive Officer of Liberty Expedia Holdings, Inc. since November 2016. Mr. Shean was the Chief Financial Officer of Qurate until October 2016 and currently serves as its Senior Advisor. Prior to being named Qurate’s Chief Financial Officer in November 2011, Mr. Shean served as Qurate’s Controller for eleven years. Mr. Shean also served as the Chief Financial Officer of Liberty Media Corporation until October 2016 and currently serves as its Senior Advisor. Prior to joining Qurate, Mr. Shean was an audit partner with KPMG focusing mainly on clients operating in the media and entertainment industry. Mr. Shean serves on the board of directors of Expedia, Inc. and Liberty Expedia Holdings, Inc. From February 2013 to December 2015, Mr. Shean served on the board of directors of TripAdvisor, Inc. Mr. Shean also serves on the advisory committee for the Pamplin School of Business at Virginia Tech. Mr. Shean received a B.S. degree in accounting from Virginia Tech in 1987. Mr. Shean brings to our Board of Directors valuable business, financial and risk management advice and possesses a high level of financial literacy and expertise regarding mergers, acquisitions, investments and other strategic transactions. Mr. Shean is a Qurate designee and was appointed pursuant to the terms of the Investor Rights Agreement.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding all our executive officers as of April 24, 2019:
Name |
| Age |
| Title |
Scott D. Levin | | 57 | | Director, President, Chief Executive Officer and Secretary |
Steven D. Barnhart | | 57 | | Executive Vice President and Chief Financial Officer |
Rhys J. Hughes | | 49 | | President, Interflora British Unit |
Tom D. Moeller | | 55 | | Executive Vice President, Florist Division |
Joseph R. Topper, Jr. | | 58 | | Executive Vice President and Chief Digital Officer |
The following is a brief description of the capacities in which each of the executive officers has served during the past five or more years. The biography for Mr. Levin appears under the subheading “—Directors” above.
Steven D. Barnhart was appointed Executive Vice President and Chief Financial Officer in January 2018. Most recently, Mr. Barnhart served as Senior Vice President and Chief Financial Officer of Bankrate, Inc., a wholly owned subsidiaryleading publicly traded internet publisher, aggregator and distributor of FTD Group,personal finance content, from September 2014 until the sale of the company in November 2017. From August 2012 to June 2014, Mr. Barnhart served as Senior Vice President and Chief Financial Officer for Sears Hometown and Outlet Stores, a leading appliance retailer. From 2010 to 2012, he served as Senior Vice President and Chief Financial Officer for Bally Total Fitness, which was a leading operator of fitness centers across the United States. From 2003 to 2009, Mr. Barnhart served in several roles with Orbitz Worldwide, an online travel company, including President and Chief Executive Officer (from 2007 to 2009), board member, Chief Financial Officer and Vice President of Planning. Prior to joining Orbitz Worldwide, Mr. Barnhart spent over 13 years working in a variety of finance and strategy roles at PepsiCo. Mr. Barnhart holds an M.B.A. in International Business and Finance from the University of Chicago and a B.A. in Economics from the University of Chicago.
Rhys J. Hughes is the head of our International Division and was appointed President of Interflora British Unit (“Interflora”) in May 2008, having previously spent two years as its Chief Operating Officer. Mr. Hughes was also appointed head of Global Floral Strategy for the Company in October 2016. Prior to joining Interflora in 2001 as Finance Director, Mr. Hughes held senior financial roles with Boots Opticians and Vision Express. Mr. Hughes is a Delaware corporation that commenced operationsChartered Accountant, having qualified with KPMG in 1994 whenNottingham, where he spent most of his time in audit services. Mr. Hughes received a First Class Honours degree in industrial economics from Nottingham University.
Tom D. Moeller is the head of our Florist Division and has been with the Company since April 2010. Mr. Moeller joined FTD converted from a not-for-profit cooperative to a for-profit corporation. FTD, Inc.’s principal operating subsidiaries areas Executive Vice President, Florists’ Transworld Delivery, Inc. from the William Wrigley Jr. Company (“Wrigley”), FTD.COM Inc., Interflora,where he served as Global Chief Customer Officer since 2007 and Provide Commerce.
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On November 1,(“Schering-Plough”), responsible for their Wal-Mart and Alternative Trade Channel businesses. Before joining Schering-Plough, Mr. Moeller spent 12 years at Nabisco, Inc. in various sales and customer marketing roles. Mr. Moeller has over 25 years of experience in consumer packaged goods. He is a graduate of Wartburg College and continued his executive education at Northwestern University and Cornell University.
Joseph R. Topper, Jr. was promoted to Executive Vice President and Chief Digital Officer in July 2018. Mr. Topper joined the Company as Executive Vice President, Chief Information Officer in October 2016. Previously, he served as the Chief Information Officer, Chief Technology Officer and Customer Services for VitaCost.com, a subsidiary of the Kroger Company. Under Mr. Topper’s leadership, Vitacost.com was the top e-retailer among websites selling health and beauty products in 2013, FTD Companies,and earned the second place spot in customer satisfaction—second only to Amazon.com—according to the ForeSee Experience Index. Prior to Vitacost.com, Mr. Topper served as SVP, Customer Success and Chief Information Officer for Rosetta Stone, Inc. became an independent, publicly tradedDuring his tenure, the company earned back-to-back Stevie Awards in 2011 and 2012 for innovation in customer service. Earlier in his career, Mr. Topper held various progressive leadership roles in technology and operations, and was a Commissioned Officer in the U.S. Coast Guard. He earned a B.S. in Mathematics from the U.S. Coast Guard Academy and his M.S. in Telecommunications and Information Management from the Polytechnic Institute of New York University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires that our executive officers, our directors, and persons who own more than 10% of a registered class of our equity securities, file reports of ownership and changes in ownership (Forms 3, 4 and 5) with the SEC. Executive officers, directors and greater than 10% beneficial owners are required to furnish us with copies of all of the forms that they file.
Based solely on our review of these reports or written representations from certain reporting persons, we believe that during the fiscal year ended December 31, 2018, our executive officers, directors, greater than 10% beneficial owners and other persons subject to Section 16(a) of the Exchange Act filed on a timely basis all reports required of them under Section 16(a).
CODEOF ETHICS
Our Code of Ethics applies to all of our outside directors, officers and employees, including, but not limited to, our Chief Executive Officer and Chief Financial Officer. The Code of Ethics constitutes our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act and is our “code of conduct” within the meaning of the listing standards applicable to companies listed on the NASDAQ Global Select Market (“NASDAQ”).
Our Code of Ethics is available on our corporate website (www.ftdcompanies.com) under “Investor Relations.”
DIRECTOR NOMINATIONS PROCESS
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since the last time such procedures were disclosed.
INFORMATION ABOUT OUR AUDIT COMMITTEE
The Board of Directors has a separately designated standing Audit Committee. The Audit Committee consists of Messrs. Armstrong, Berglass and Harch and Ms. Duncan. Our Board of Directors has determined that all members of the Audit Committee are independent directors as defined in Rule 5605(a)(2) of the NASDAQ Marketplace Rules and also satisfy the additional criteria for independence for Audit Committee members set forth in Rule 10A-3(b)(1) under the symbol “FTD.Exchange Act. Each of Mr. Harch, who serves as Chairman of the Audit Committee, Mr. Armstrong and Ms. Duncan qualifies as an “audit committee financial expert” as that term is defined under applicable SEC rules.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview
This Compensation Discussion and Analysis (“CD&A”) section discusses the principles underlying our policies and decisions with respect to the compensation of our executive officers and the most important factors relevant to an analysis of these policies and decisions. This section also describes the material elements of compensation awarded to, earned by or paid to each of our named executive officers for 2018. In addition, this section provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers and is intended to place in perspective the data presented in the tables and narrative that follow.
2018 Named Executive Officers
The individuals in the table below were our named executive officers for 2018. In this CD&A, we refer to Messrs. Levin, Barnhart, Hughes, Moeller and Topper as our “Continuing NEOs.” Prior to
Name |
| Title |
Scott D. Levin(1) | | President, Chief Executive Officer and Secretary |
John C. Walden(2) | | Former President and Chief Executive Officer |
Steven D. Barnhart(3) | | Executive Vice President and Chief Financial Officer |
Brian S. Cooper(4) | | Former Interim Chief Financial Officer |
Rhys J. Hughes | | President, Interflora British Unit |
Tom D. Moeller | | Executive Vice President, Florist Division |
Joseph R. Topper, Jr. | | Executive Vice President and Chief Digital Officer |
Simha Kumar(5) | | Former Executive Vice President and Chief Operating Officer |
Jeffrey D. T. Severts(6) | | Former Executive Vice President and Chief Marketing Officer |
(1) Mr. Levin was appointed the Company’s President and Chief Executive Officer on November 2, 2018 after serving as Interim President and Chief Executive Officer since July 2018. Mr. Levin also serves as the principal executive officer and has served as the Company’s Secretary since his appointment on November 1, 2013, FTD2013.
(2) Mr. Walden stepped down from his positions as the Company’s President and Chief Executive Officer effective July 18, 2018.
(3) Mr. Barnhart joined the Company as Executive Vice President and Chief Financial Officer effective January 8, 2018.
(4) Mr. Cooper, of Randstad North America, Inc. (d/b/a Tatum) (“Tatum”), an executive consulting services firm, served in an interim role as the Company’s Chief Financial Officer, principal financial officer and principal accounting officer from September 5, 2017 until January 8, 2018.
(5) Effective July 18, 2018, Mr. Kumar was no longer employed by the Company.
(6) Effective August 30, 2018, Mr. Severts was no longer employed by the Company.
Recent Highlights
We have been undergoing a wholly owned subsidiarymulti-year strategic business transformation in an effort to rebuild our winning customer brands, recreate a network of United Online. On November 1, 2013, as a result of a spin-off, United Online separated into two independent, publicly traded companies: FTD Companies, Inc.strong florist partners, gain supply chain efficiencies and United Online, Inc. (the “Separation”). The Separation was consummated through a tax-free dividend involving the distribution of all shares of FTD common stock to United Online’s stockholders.
Recent Events
extend our business in complementary non-floral categories. In July 2018 we announced that our boardBoard of directorsDirectors initiated a review of strategic alternatives focused on maximizing stockholder value, including but not limited to, a sale or merger of the Company, pursuing value-enhancing initiatives as a standalone company, or the sale or other disposition of certain of our businesses or assets.
In addition, in July 2018, we announced a corporate restructuring and cost savings plan, under which we identified opportunities to optimize our operations, drive efficiency, and reduce costs. Under this plan, we currently expect to generate approximately $25.0 million to $28.0 million in annualized run-rate cost savings in 2019. In conjunction with the corporate restructuring and cost savings plan, we currently expect to incur restructuring and corporate reorganization costs ranging between approximately $28.0 million and approximately $32.0 million. During the second half of 2018, we incurred restructuring costs of $18.2 million, which included employee severance costs to be paid in cash of $12.7 million and non-cash stock-based compensation related to the acceleration of certain equity awards of $5.5 million. Other costs associated with the corporate reorganization and cost savings plan, such as consulting fees and costs to retain key employees, are currently expected to range from approximately $10.0 million to approximately $12.0 million, of which $7.0 million was incurred during the second half of 2018.
Also in July 2018, our board of directors appointed Scott D. Levin, our then-current Executive Vice President, General Counsel and Secretary, as interim President and Chief Executive Officer. Mr. Levin succeeded John C. Walden, who stepped down from these positions and from our board of directors. On November 2, 2018, our board of directors appointed Mr. Levin President and Chief Executive Officer. On December 7, 2018, our board of directors appointed Mr. Levin as a director.
As detailed in Footnote 6—“Financing Arrangements,” during the year ended 2018, we entered into several amendments to the Credit Agreement (as defined herein) with our lenders. These amendments, among other things, restricted combined usage of the credit facility portion of the Credit Agreement, modified measurement dates and the required ratios for the consolidated net leverage ratio and fixed charge coverage ratio covenant tests and updated fees.
On March 13, 2019, the Company entered into the Seventh Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Seventh Amendment, the “Amended Credit Agreement”) with our lenders. The Amended Credit Agreement includes, among other terms, a minimum Consolidated Adjusted EBITDA (as defined in the Amended Credit Agreement) covenant; further limitations on capital expenditures; a covenant requiring that, on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limits on our combined usage of the revolving credit facility portion of the Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods. For additional information regarding the Amended Credit Agreement see Footnote 6—“Financing Arrangements.”
Our Businesses
Provide Commerce. Our Provide Commerce business is a consumer business that includes our ProFlowers, Shari’s Berries, Personal Creations, Gifts.com, and ProPlants brands. Provide Commerce operates primarily through the www.proflowers.com, www.berries.com, www.personalcreations.com, www.gifts.com, and www.proplants.com websites, associated mobile sites and applications, and various telephone numbers. The business units within Provide Commerce include ProFlowers (including ProPlants), Gourmet Foods (including Shari’s Berries), and Personal Creations (including Gifts.com). Floral and gift offerings within these business units include fresh-cut flowers, plants, gourmet-dipped berries and other specialty foods, personalized gifts, and other gifting products. Consumer orders for this segment are fulfilled and shipped directly to the recipient primarily through our company-operated distribution network or by third-party suppliers. This business is included in our U.S. Consumer operating and reporting segment.
FTD.com. Our FTD.com business is a consumer business for our FTD brand and operates primarily in the U.S. through our www.ftd.com website, associated mobile sites and applications, and the 1-800-SEND-FTD telephone number. While floral arrangements and plants are our primary offerings, we also market and sell gift items, including gourmet-dipped berries and other specialty foods, gift baskets, and spa products. The majority of consumer orders for this segment are hand delivered by our floral network members, with same-day delivery available in most locations. The remaining consumer orders are fulfilled and shipped directly to the recipient in a special, elegant FTD gift box through our company-operated distribution network or by third parties via next-day and future-day delivery services. This business has a negative working capital model, as consumers generally pay us before payment is required to be made to floral network members or other third-party vendors. This business is included in our U.S. Consumer operating and reporting segment.
Florist. Our Florist business operates in the business-to-business market. Through our Florist business, together with Interflora, we are the world’s largest and longest-serving floral network, offering products and services to our floral network members, funeral directors, independent gift shops, other retailers, and to other companies in need of floral and gifting solutions. Floral network members include traditional retail florists and other non-florist retail locations offering floral and related products, that are located primarily in the U.S. and Canada. Our comprehensive suite of services includes, among other things, access to the FTD brand and the Mercury Man logo, which are supported by various FTD marketing campaigns; clearinghouse and order transmission services that enable our members to send, receive, and deliver floral and gift orders; access to the floral network; directory publication services; credit card processing services; e-commerce website services; online advertising tools; and system support services. Our large floral network provides an order fulfillment vehicle for our consumer businesses that generally allows us to offer same-day delivery capability to recipients throughout the U.S. and Canada.
Our Florist business also sells products to floral network members, including fresh-cut flowers, branded and non-branded containers, packaging, marketing products, and a wide variety of other floral-related supplies. Selling branded containers to our members helps to ensure that the consumer orders fulfilled by our floral network members are consistent with the product imagery displayed on our websites. We also provide point-of-sale systems and related technology services that enable our floral network members to transmit and receive orders and manage several back-office functions of a retailer’s business, including accounting, customer relationship management, direct marketing campaigns, delivery route management, and event planning. This business is included in our Florist operating and reporting segment.
Interflora. Our Interflora business is a premier floral and gifting company in the U.K., offering a wide range of products and delivery options while providing one of the highest service levels in the U.K. and the Republic of Ireland. Interflora operates primarily through its www.interflora.co.uk, www.flyingflowers.co.uk and www.interflora.ie websites, associated mobile sites and applications, and various telephone numbers. Our Interflora business offers our floral network members access to the Interflora brand and the Mercury Man logo; services that enable our members to send, receive, and deliver floral and gift orders; and e-commerce website services. Orders are transmitted to floral network members or third-party suppliers for processing and delivery. The majority of consumer orders are hand-delivered by our floral network members, who provide same-day delivery, including three-hour delivery. Members may also provide evening and Sunday delivery options as well as timed delivery services. The remaining consumer orders are fulfilled and shipped in an elegant gift box directly to the recipient by third parties, who provide next-day and future-day delivery services. Interflora’s floral and gift offerings include fresh-cut flower arrangements, occasion-specific gifts and plants, stuffed bears, chocolates, wine and champagne. This business has a negative working capital model, as consumers generally pay us before payment is required to be made to floral network members or other third-party vendors. In addition, Interflora sells fresh-cut flowers, certain associated gift products, and floral-related supplies to our floral network members and other companies in need of floral and gifting solutions, including funeral directors, independent gift shops, and other retailers. Our Interflora business is included in our International operating and reporting segment.
Industry Background
Our consumer brands operate within the gifting industry. The gifting market is estimated to be greater than $100 billion annually in the U.S. (excluding cash and gift cards) according to a Unity Marketing report from 2015.
Floral Industry
This market’s floral gifting segment, including self-purchase, accounts for roughly $12 billion annually within the gifting market, based on estimates from the Society of American Florists. In the U.K., floral industry retail purchases, including fresh-cut flowers and indoor plants, were over £2 billion in 2014, according to a study by Mintel, a market research company.
Both the U.S. and U.K. markets are highly fragmented, with thousands of floral industry participants that can be grouped into three broad channels:
Floral Mass Marketers: This channel, which includes our ProFlowers, FTD.com, and Interflora businesses, captures floral orders from consumers through websites, associated mobile sites and applications, and telephone. Floral mass marketers’ share of floral gifting has expanded due to shifting consumer preferences towards purchasing floral products online and through mobile sites and applications as well as the emergence of prominent brands with national or international reach. Increasing consumer interest in floral arrangements shipped directly to consumer recipients via common carrier has also benefited floral mass marketers.
Retail Florists: There were approximately 13,400 retail florists in the U.S. in 2018, the number of which has been declining in recent years, according to Dun & Bradstreet’s 2018 industry profile. Supermarkets, mass merchants, and other retailers have established or increased their presence in the floral gifting market by adding a variety of floral and related gift products to their merchandise assortments. The growth of supermarkets and mass merchants as important distribution channels within the floral gifting market has led many traditional retail florists to expand their merchandise offerings to include a larger selection of gift items, outdoor nursery stock, and seasonal decorations, among other items.
Supermarkets and Mass Merchants: Supermarkets, mass merchants, and other retailers continue to increase their presence in the floral gifting market by adding a variety of floral and related gift products to their product offerings.
Complementary to these channels, floral wire services are able to transmit orders to their specific network of retail florists for fulfillment. These orders include the aforementioned online and telephone orders made by end consumers as well as those placed by other florists. Floral wire services may offer a broad range of services to florists in their network, such as order transmission, clearinghouse services, marketing, and other business-to-business services, to promote these florists’ revenue growth and facilitate the efficient operation of their businesses. Order clearinghouse services ensure the flow of payment between a floral network member sending an order received from a consumer and the member receiving and fulfilling the order, thereby eliminating counterparty credit risk for the floral network members. Traditional retail florists often rely on floral network services to provide incoming order volume.
Specialty Food and Gift Industry
As described above, the total U.S. gifting market was estimated at greater than $100 billion annually in 2015 (Unity Marketing Gifting Report 2015) and is highly fragmented with consumers purchasing gifts for a broad array of occasions in both retail stores and online. In 2015, according to Unity Marketing, over 50% of consumers purchased gifts online, which increased from 39% in 2010.
Food gifting sales were projected to approach $20 billion in 2018, according to the “Food Gifting in the U.S.,” March 2018 study by Packaged Facts. Consumers view gourmet foods as relevant for a number of different gifting occasions including traditional holidays such as Valentine’s Day, winter holidays, and Mother’s Day as well as everyday gifting occasions such as “Thinking of You,” “Birthday,” and “Congratulations” events based on data from a consumer survey commissioned by us and conducted by a third-party in 2017. According to Packaged Facts’ research, of the food gifts purchased, boxed chocolates/candies remain the most prevalent gift for others totaling 28% of purchases during the twelve-month period tested. Other commonly purchased food gifts include sweet baked foods, coffee/tea/hot chocolate gifts, and nut/salty foods.
Personalized gifts are also important to consumers as they look to purchase a special, memorable gift for others. Personalized gifting in the U.S. in 2017 approximated $5.6 billion and is forecasted to be one of the faster growing markets, growing to $7.4 billion in 2020 based on the “Global Personalized Gifts Market for 2017-2021” report by Technavio.com. Consumers may purchase personalized gifts for a variety of reasons, but primarily for the winter holidays, new baby, and weddings and anniversaries, based on data from a consumer survey commissioned by us and conducted by a third-party in 2017.
Our Business Strategy
Our vision is to be the world’s floral innovator and leader, creating products, brands, and technology-driven services our customers love. In 2018, we launched our long-term strategic growth plan to attain these goals through the following key components:
Strong Disruptive Brand that Earns the Trust and Wins the Hearts of Consumers: Our extensive range of fresh-cut flowers, floral arrangements, and plants provides our customers with innovative offerings in expressing life’s most important sentiments. We offer exclusive products by FTD, Interflora, ProFlowers, Shari’s Berries, and Personal Creations, and other exclusive products designed with our strategic partners. Our premium and branded floral gift products include FTD Luxe Collection, FTD Color Confection Collection, USO® Collection, and DaySpring®, among others. Any third party trademarks are the property of their respective owners.
We also seek to provide higher value offerings to our customers, which may, for example, include bundled floral and gift product offerings. In addition, we believe our ability to acquire and retain customers effectively is critical to our success. We continue to seek expansion of our business by, among other things, marketing to our current and potential consumer and floral network customers. Our marketing efforts are primarily focused on generating orders from new and existing customers; increasing the value of our offerings to our customers thereby increasing average order value; increasing the penetration of sales of our services and products to our floral network members; attracting new members to our floral networks; and marketing our products and services to alternative channels such as supermarkets, mass merchants, and other retail locations.
We believe that building greater awareness of our brands and communicating brand differentiation, both within and beyond the existing customer base, are important for growth. We promote our brands through a variety of traditional and digital marketing and promotional techniques, including online, social, print, radio, email, direct mail, public relations, and television.
In an effort to acquire and retain consumers, we engage in multi-channel, integrated marketing efforts, which include online advertising and marketing, including search engine marketing and optimization; social media and group-buying programs; co-marketing and affiliate partnerships and loyalty programs such as airlines and other corporate and travel companies; email promotions to existing consumer customers; direct mail and other forms of print advertising; an email-based reminder service that provides consumers with personalized reminders of occasions such as birthdays, anniversaries, and key gift-giving holidays; and radio, public relations, television, and other offline advertising.
As consumer shopping continues to migrate from computers to mobile devices, we are committed to providing the best shopping experience from all types of devices. We have reignited an enterprise-wide focus on this, launching new mobile-first, customer-centric websites and supporting the ongoing optimization with a strong, cross-functional team.
We believe that by continuing to offer innovative product and service offerings and delivering high-quality, consistent products to consumers, we can improve end-to-end customer experience and, in turn, increase customer loyalty, thereby enabling growth. We offer our customers a satisfaction guarantee for fresh, beautiful floral arrangements, plants, and gifts. We seek to offer a compelling customer experience through mobile, web or voice interactions. We also strive to deliver a high-caliber customer service to our consumer customers, floral network members, and other customers. We operate customer service centers at our headquarters in Downers Grove, Illinois; in San Diego, California; in other locations in the U.S. and U.K.; and in outsourced locations. High-quality products, superior customer experiences, and excellent customer service are critical to our brand strength and brand loyalty.
As part of our business strategy, we intend to continue to expand the breadth of our brands through organic growth and, where appropriate, through the acquisition of complementary businesses. We will explore opportunities to differentiate our floral and gift branded product offerings with a mind to providing customers greater options in expressing life’s most important sentiments.
Network of Strong Partnerships with the World’s Best Florists: Maintaining strong relationships with our floral network members is key to our success. We have both customer and supplier relationships with our florist network members. To maintain high standards among our floral network members, we have member training programs and a quality assurance program to review and test the quality offered by our floral network members. We believe that our florist network members have the blend of skills, creativity, and attention to detail needed to create unique and special handmade arrangements. Further, our floral network members have important roles in supporting our brands. We believe that the partnership between FTD and our member florists is and should be based on a mutually beneficial value proposition. Just as we seek to partner with the highest quality florists, we also strive to provide them with high quality products and services, including local websites, order processing, hard goods, order flow, and marketing services as examples, to help their business thrive.
Broader engagement efforts related to our floral network members include member appreciation and training events, sponsorship and participation in floral and retail industry trade shows, and offline media campaigns. In addition, many of our consumer marketing efforts are also designed to integrate with and enhance the businesses of our floral network members. By enhancing the FTD and Interflora brands, we increase the possibility that a consumer will place an order directly with one of our floral network members since floral retailers frequently highlight their association with our floral networks in their own marketing efforts. We also employ dedicated sales forces to market our products and services to our floral network members and to encourage other floral retailers to buy floral and gift products and services from us.
High-Quality, Low Cost, Market Leading Fulfillment Capabilities: We believe a key differentiator for our brands is delivering high-quality, consistent products and services to our customers. Having strong relationships with quality suppliers is crucial to the success of our platforms. To maintain high standards, we have established quality assurance programs to review and test our suppliers on an ongoing basis. We continue to work with suppliers to explore new methods to preserve quality and freshness, ensure a diverse product offering, maintain efficient technology, and reduce costs. In addition, we regularly seek out new suppliers to provide the broadest available selection of quality products for the benefit of our customers. Our extensive flower selection is largely sourced from Colombia, the U.S., Kenya, Holland, Ecuador, Thailand, and Costa Rica. In addition, our strawberries are largely sourced from the U.S. and Mexico. Further, we offer a variety of delivery options, including same-day delivery to the U.S. and the U.K., next-day and future-day delivery service throughout the world (subject to certain limitations), and three-hour, as well as morning and afternoon delivery options in the U.K.
Our fulfillment model includes independent retail florists, company-operated distribution facilities that ship product directly to our customers, and third-party suppliers who also ship directly to our customers. Further, we are part of an international network with over 30,000 floral shops displaying our iconic Mercury Man logo, enabling consumers to purchase products for delivery in more than 125 countries. We continue to optimize our distribution network, enabling us to deliver our products to customers in a high-quality manner while improving the efficiency of our fulfillment and logistics operations.
Complementary Non-Floral Categories: In addition to our floral and floral-related products, we also offer additional items, including gourmet-dipped berries and other specialty foods, personalized gifts, wine and champagne, jewelry, and spa products. These items provide innovative offerings for expressions of sentiment to help best deliver on a customer’s gifting needs, and they are shipped directly to a recipient in a gift box. We assemble or personalize many of our products in our company-operated facilities, with the remainder processed by third-party suppliers.
Reportable Segments
We report our business operations in three operating and reportable segments: U.S. Consumer, Florist, and International. Prior to January 1, 2018, the Company reported its business in four reportable segments. As a result of a change in the information provided to and utilized by the Company’s then-current Chief Executive Officer (who was also the Company’s Chief Operating Decision Maker (“CODM”)) to assess the performance of the business, the Company combined the previous Provide Commerce and Consumer segments into one reportable segment, our U.S. Consumer segment. Our Florist segment includes the Florist business. Our International segment includes the Interflora business. Our current CODM, Mr. Scott D. Levin, continues to receive and utilize information provided for these three segments to assess the performance of the business. For additional information about our reportable segments refer to the MD&A and Footnote 2—“Segment Information.”
Segment revenues from external customers, as a percentage of total revenues, for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| U.S. Consumer | 70 | % | | 71 | % | | 71 | % |
| Florist | 15 | % | | 15 | % | | 15 | % |
| International | 15 | % | | 14 | % | | 14 | % |
| Total revenues | 100 | % | | 100 | % | | 100 | % |
Competition
Consumer market. The consumer market for flowers and gifts is highly competitive and fragmented, as consumers can purchase the products we offer from numerous sources, including traditional local retail florists, supermarkets, mass merchants, gift retailers, floral and gift mass marketers, specialty markets, and other online retailers. We believe the primary competitive factors in the consumer market are strength of brand, price, quality of products, selection, fulfillment capabilities, customer service, website performance, and ordering convenience. In the U.S., our key competitors include online floral and gift retailers, including such companies as 1-800-FLOWERS.COM, Inc., and certain mass merchants. In addition, the specialty foods category is also highly competitive and fragmented, with competition from online retailers, specialty companies, and certain mass merchants. Further, we compete with personalized gift retailers as well as mass merchants and other general gift companies which also offer personalized products.
Floral network services market. The floral network services market is also highly competitive, and retail florists and supermarkets may choose from a variety of providers that offer similar products and services. In addition, the number of retail florists has been declining over a number of years. As the number of retail florists declines, competition for the business of the remaining retail florists may intensify. We believe the primary competitive factors in this market are price, order volume, customer service, services offered, strength of brand, and fulfillment capabilities. Our key competitors in the U.S. floral network services market include providers of online or e-commerce services, retailers and wholesalers of floral-related products, and other floral network services providers, such as Teleflora and BloomNet Wire Service, a subsidiary of 1-800-FLOWERS.COM, Inc. However, other non-florist retail locations and other companies may continue to expand their floral and gifting offerings.
International market. We face strong competition in the consumer markets in the U.K. and the Republic of Ireland, with similar trends and competitive factors as those seen in the U.S. The markets in the U.K. and the Republic of Ireland are also large and highly fragmented. Key competitors in the international consumer market include mass market retailers, grocery chains, online retailers, and specialty gift retailers. We also face competition in the business-to-business market for floral network services.
Although we believe that we can compete favorably with respect to many competitive factors, in both the consumer and the floral network services markets, some of our competitors may have an advantage over us with respect to certain factors. Some of our competitors may engage in more aggressive pricing, may devote significantly greater resources to marketing campaigns or other aspects of their business, or may respond more quickly and effectively than we can to new or changing opportunities or customer requirements.
Seasonality and Cyclicality
Our revenues, operating results, and cash flows across our businesses typically exhibit seasonality. Revenues, operating results, and cash flows tend to be lower for the third quarter because none of the most popular floral and gift-giving holidays, which include Mother’s Day, Valentine’s Day, Christmas, Easter, and Thanksgiving, fall within that quarter. In addition, depending on the year, Easter and the U.K. Mother’s Day sometimes fall within the first quarter and sometimes fall within the second quarter. Furthermore, depending on the year, certain of the most popular floral and gift-giving holidays, such as Valentine’s Day, may occur on a weekend or government holiday, which historically has negatively impacted orders. Our
ProFlowers and Gourmet Foods businesses experience a greater level of seasonality and have historically generated an operating loss and used cash for operations during the third quarter. Historically, a significant portion of the revenues and operating profit of these businesses have been generated in the first half of the year. Our Personal Creations business is also highly seasonal with approximately half of its revenues and substantially all of its operating profits generated in the fourth quarter during the winter holiday season. As a result of these variations, we believe that comparisons of our revenues and operating results for any period with those of the immediately preceding period, or in some instances, the same period of the preceding fiscal year, may be of limited relevance in evaluating our historical performance and predicting our future financial performance. Our working capital and any short-term borrowings may also fluctuate during the year as a result of the factors described above.
Revenue Sources
We generate revenues primarily from the sale of products and services, as further described below:
Products revenues. Products revenues are derived primarily from selling floral, gourmet-dipped berries and other specialty foods, personalized gifts, and other gift items to consumers and include the related shipping and service fees. Products revenues also include revenues generated from sales of fresh flowers, branded and non-branded containers, packaging and promotional products, and a wide variety of other floral-related supplies to floral network members. Products revenues are recognized upon delivery of the product to the customer.
Services revenues. Services revenues related to orders sent through the floral network are variable based on the number of orders and/or on the value of orders and are recognized in the period in which the orders are delivered. Services revenues also include monthly membership and other subscription-based fees from floral network members that are recognized as earned, on a month-to-month basis.
International Operations
We have international operations primarily in the U.K. through which we provide floral, gift, and related products and services to consumers and to floral network members and other companies in need of floral and gifting solutions in the U.K. and the Republic of Ireland.
We also have a wholly owned subsidiary in the Republic of India, FTD India Private Limited. Our operations in India are primarily responsible for technology development and support. We do not generate revenues directly from our operations in India. For information regarding risks associated with our international operations, see “Risk Factors,” which appears in Part I, Item 1A of this Form 10-K. For information regarding international long-lived assets, see Footnote 2—“Segment Information.”
Geographic revenues from sales to external customers were as follows for the periods presented (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| U.S. | $ | 863,099 |
| | $ | 938,062 |
| | $ | 969,299 |
|
| U.K. | 151,145 |
| | 145,966 |
| | 152,700 |
|
| Consolidated revenues | $ | 1,014,244 |
| | $ | 1,084,028 |
| | $ | 1,121,999 |
|
Technology
Our floral network services use internally-developed order processing, order transmission, message processing, and customer service systems which provide communication to our floral network members and third-party suppliers. We also have developed reliable and secure e-commerce, supply chain, customer relationship, and transaction processing systems utilizing custom-built and third-party technologies, and have developed software to enhance the functionality of certain components of our services, including billing, email, customer support, logistics, and fulfillment for floral and gift products. We have multiple systems and platforms currently in place related to many of these technologies.
For all systems, we maintain data centers in multiple locations in the U.S. and the U.K. In most cases, we have redundant systems to provide high levels of service availability and connectivity. We host some of our data center services in third-party co-location facilities.
In addition to our proprietary technology, we license from third parties a number of our software applications and components, including applications for our customer support, as well as some of our client and server applications. These licenses generally have terms ranging from several years to perpetual.
Government Regulations
We are subject to a number of international, federal, state, and local laws and regulations, including, without limitation, those relating to taxation, bulk email or “spam” advertising, user privacy and data protection, food production, safety, storage, marketing and distribution, consumer protection, supply chain operations, anti-bribery, labor, antitrust, and unclaimed property. In addition, proposed laws and regulations relating to some or all of the foregoing, as well as to other areas affecting our businesses, are continuously debated and considered for adoption in the U.S. and other countries, and such laws and regulations could be adopted in the future. For additional information regarding risks related to international, federal, state, and local laws and regulations, see “Risk Factors” which appears in Part I, Item 1A of this Form 10-K.
Proprietary Rights
Our trade names, trademarks, service marks, patents, copyrights, domain names, trade secrets, and other intellectual property are important to the success of our business. We consider our trade names and trademarks, including the Mercury Man logo, FTD, Interflora, ProFlowers, Shari’s Berries, Personal Creations, Flying Flowers, Gifts.com, and ProPlants to be very valuable assets. Most of these trademarks have been registered in the U.S., the U.K. and/or, in certain cases, in other countries. We principally rely upon patent, trademark, copyright, trade secret, domain name laws, and contract laws to protect our intellectual property and proprietary rights. We also license rights to use some of our intellectual property, including the Mercury Man logo, to third parties. We continuously assess whether to seek patent and other intellectual property protections for those aspects of our business and technologies that we believe constitute innovations providing competitive advantages. We generally enter into confidentiality or license agreements with our employees, consultants, and corporate partners, and generally seek to control access to, and distribution of, our technologies, documentation, and other proprietary information. Additionally, we hold a patent relating to certain manufacturing techniques. We also have pending patent applications relating to certain products and manufacturing techniques. Patents are generally valid for 14-20 years as long as their registrations are properly maintained. If the patents for which applications have been pending for numerous years are issued, the length of their validity may be shortened.
Employees
As of December 31, 2018, we had 1,333 employees, of which 975 were located in North America, 239 were located in the U.K., and 119 were located in India. In addition, we utilize part-time and temporary employees to respond to fluctuating seasonal demand around holidays and peak periods. None of our employees are subject to collective bargaining agreements, and we consider our relationship with our employees to be good.
Available Information
FTD’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, changes in the stock ownership of our directors and executive officers, our code of ethics, and any other documents filed with, or furnished to, the SEC are available free of charge at FTD’s investor relations website at www.ftdcompanies.com. You can access our filings at our website as soon as reasonably practicable after such reports have been electronically filed with or furnished to the SEC. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC. The information on our website is not, and shall not be deemed to be, a part of this Form 10-K or incorporated into any other filings we make with the SEC. Throughout this Form 10-K, we incorporate by reference information from other documents filed with the SEC.
By referring to our websites, including, without limitation, www.ftdcompanies.com, www.ftd.com, www.ftd.ca, www.interflora.co.uk, www.interflora.ie, www.flyingflowers.co.uk,www.proflowers.com, www.berries.com, www.personal creations.com, www.gifts.com, and www.proplants.com, we do not incorporate these websites or their contents into this Form 10-K.
ITEM 1A. RISK FACTORS
Our business and our common stock are subject to a number of risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Form 10-K. Based on information currently known, we believe that the following information identifies the most significant risk factors relating to our business and our common stock.
If any of the following events occur, our business, financial condition, results of operations, and cash flows could be materially and adversely affected, and the trading price of our common stock could materially decline.
Risks Relating to Our Business
Our management has concluded, and our independent registered public accounting firm has emphasized in their report on our financial statements as of and for the fiscal year ended December 31, 2018, that, due to uncertainties surrounding our ability to amend or refinance our current credit facility, our potential failure to satisfy covenant requirements during the remaining term of our credit facility and the uncertainty as to whether we will have sufficient liquidity to fund our business activities, substantial doubt exists as to our ability to continue as a going concern. Our plans to alleviate the substantial doubt about our ability to continue as a going concern may not be successful and we may be forced to limit our business activities or be unable to continue as a going concern, which would have a material adverse effect on our results of operations and financial condition.
The consolidated financial statements included in this Form 10-K have been prepared assuming the Company will continue as a going concern. Our ability to continue as a going concern is dependent on our generating profitable operating results; having sufficient liquidity; maintaining compliance with the revised covenants and other requirements under the Amended Credit Agreement; and refinancing or repaying the indebtedness outstanding under the Amended Credit Agreement, including in connection with a sale or merger of the Company or other strategic transaction. We will need to refinance or repay the outstanding indebtedness under the Amended Credit Agreement no later than its September 2019 maturity. In the financial statements for the year ended December 31, 2017 as well as every quarter since, management’s assessment has been that there is substantial doubt about the Company’s ability to continue as a going concern.
As part of our efforts to address these issues, as previously announced during the third quarter of 2018, our board of directors has initiated a review of strategic alternatives. The strategic alternatives under consideration include, but are not limited to, a sale or merger of the Company, our continuing to pursue value-enhancing initiatives as a standalone company, and potential financings or equity transactions.value. We also announced a corporate restructuring and cost savings plan, under which opportunities to optimize operations, drive efficiency, and reduce costs have been identified.
On March 13, 2019, we entered into the Amended Credit Agreement, which includes, among other terms, a minimum Consolidated Adjusted EBITDA covenant; further limitations on capital expenditures; a covenant requiring that, on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limits on our combined usage of the revolving credit facility portion of the Amended Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods, as was the requirement that the auditor’s report on the Company’s financial statements for the year ended December 31, 2018 not contain a going concern explanatory paragraph.
Based on our 2019 year-to-date results of operations and outlook for the remainder of the term of the Amended Credit Agreement, we currently anticipate that we will be in compliance with the Consolidated Adjusted EBITDA covenant and will have sufficient liquidity to fund our operations into July 2019 but may not have sufficient liquidity to fund our operations beyond then. In addition, there can be no assurances that we will be able to complete one or more transactions that will enable us to repay all or a portion of the outstanding indebtedness under our Amended Credit Agreement by June 1, 2019, or at all. If we are unable to meet the revised covenants of the Amended Credit Agreement and we are unable to obtain waivers or further amendments from our lenders, the lenders could exercise remedies under the Amended Credit Agreement and repayment of the indebtedness outstanding under the Amended Credit Agreement could be accelerated. We may not have sufficient capital to repay the obligations due under the Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement.
As noted above, we will need to refinance or repay the indebtedness outstanding under the Amended Credit Agreement no later than its September 2019 maturity date or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement. There can be no assurance that we will be able to affect a financing on acceptable terms or repay this outstanding indebtedness, when required or if at all, including as a result of our strategic alternatives review. In this regard, there can be no assurance that the strategic alternatives review will result in any particular strategic alternative or strategic transaction. If we are not successful in our initiatives or do not have sufficient liquidity to fund our business activities, we may be forced to limit our business activities or be unable to continue as a going concern, which would have a material adverse effect on our results of operations and financial condition. These conditions raise substantial doubt about our ability to continue as a going concern. Our financial statements included in this Form 10-K do not include any adjustments that might result from the outcome of our efforts to address these issues.
We have a substantial amount of indebtedness. This level of indebtedness could adversely affect our ability to raise additional capital to fund operations, our flexibility in operating our business, and our ability to react to changes in the economy or our industry, including implementation of our strategic plan.
At December 31, 2018, we had $217.7 million of principal indebtedness outstanding with a maturity date of September 19, 2019. Such indebtedness includes $118.7 million outstanding under a term loan and $99.0 million outstanding under revolving loans. In addition, deferred financing fees of $6.2 million are accrued and included in interest payable on the consolidated balance sheet at December 31, 2018. Such fees are payable at the time our outstanding debt is either repaid, refinanced, or accelerated. We will need to refinance or repay the outstanding indebtedness no later than its September 2019 maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement. Our substantial indebtedness could have significant consequences for our business and financial condition. For example:
Our failure to comply with the terms of the Amended Credit Agreement, including failure to meet payment obligations or as a result of events beyond our control, could result in an event of default on our debt. Upon an event of default, our lenders could elect to cause all amounts outstanding with respect to that debt to become immediately due and payable, and we would be unable to access our revolving credit facility. An event of default could materially and adversely affect our operating results, financial condition, and liquidity.
We may be required to dedicate a greater percentage of our cash flows to payments on our debt, thereby reducing the availability of cash flows to fund our strategic initiatives, make capital expenditures, investments in new technologies, and fund other general corporate requirements.
Our ability to obtain additional financing to fund future working capital needs, strategic initiatives, capital expenditures, and other general corporate requirements could be limited. If we are unable to raise additional capital when required, it could affect our liquidity, business, financial condition, results of operations, and cash flows. In addition, our ability to borrow additional amounts under our revolving credit facility, which is a significant source of liquidity, is subject to restrictions on our usage of the revolving credit facility and an obligation to make regularly scheduled payments, and in some circumstances prepayments, of the term loan portion of the Amended Credit Agreement. Failure to meet our borrowing conditions under our revolving credit facility could materially and adversely impact our liquidity.
Our debt imposes operating and financial covenants and restrictions on us, including limitations on our ability to use cash flows for the benefit of our subsidiaries. Compliance with such covenants and restrictions may adversely affect our ability to adequately finance our operations or capital needs, pursue attractive business opportunities that may arise, sell assets, and make capital expenditures.
We may continue to experience increased vulnerability to and limited flexibility in planning for or reacting to changes in or challenges relating to our business and industry, thus creating competitive disadvantages compared to other competitors with lower debt levels and borrowing costs.
We may continue to experience increased vulnerability to general adverse economic conditions, including the increases in interest rates under the Amended Credit Agreement, and if our borrowings bear interest at variable rates or if such indebtedness is refinanced at a time when interest rates are higher.
We cannot assure you that our cash flows, combined with additional borrowings under the current and any future credit agreements, will be available in an amount sufficient to enable us to repay our indebtedness by its maturity date, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement, or to fund other liquidity needs. Based on our 2019 year-to-date results of operations and outlook for the remainder of the term of the Amended Credit Agreement, we currently anticipate that we will be in compliance with the Consolidated Adjusted EBITDA covenant and will have sufficient liquidity to fund our operations into July 2019 but may not have sufficient liquidity to fund our operations beyond then. In addition, there can be no assurances that we will be able to complete one or more transactions that will enable us to repay all or a portion of the outstanding indebtedness by June 1, 2019 or at all. If we are unable to meet the revised covenants of the Amended Credit Agreement and we are unable to obtain waivers or further amendments from our lenders, the lenders could exercise remedies under the Amended Credit Agreement and repayment of the indebtedness outstanding under the Amended Credit Agreement could be accelerated. We may not have sufficient capital to repay the obligations due under the Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement. These conditions raise substantial doubt about our ability to continue as a going concern. For additional information regarding our Amended Credit Agreement see Footnote 6—“Financing Arrangements” and the MD&A.
Depending on the results of our strategic alternatives review process, we may need to refinance all or a portion of our indebtedness on or before the September 2019 maturity date of the Amended Credit Agreement. There can be no assurance that we will be able to affect a refinancing on acceptable terms or repay this outstanding indebtedness, when required or if at all, including as a result of the strategic alternatives review noted above. In this regard, there can be no assurance that the strategic alternatives review will result in any particular strategic alternative or strategic transaction. The terms of any alternative debt may give the holders rights, preferences, and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of any new debt may also impose additional and more stringent restrictions on our operations than are currently in place. If we are unable to refinance our debt, we may default under the terms of our indebtedness, which could lead to an acceleration of the debt. We may not have sufficient capital to repay the obligations due under the Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement.
If we are unable to successfully implement our strategic alternatives review or our corporate restructuring and cost savings plan, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.
During the third quarter of 2018, our board of directors initiated a review of strategic alternatives focused on maximizing stockholder value. The strategic alternatives expected to be considered include, but are not limited to, a sale or merger of the Company, continuing to pursue value-enhancing initiatives as a standalone company, a capital structure optimization that may involve potential financings, or the sale or other disposition of certain of our businesses or assets. At that same time, we also announced a corporate restructuring and cost savings plan, under which we identified and implemented opportunities to optimize our operations, drive efficiency, and reduce costs.
The results of our efforts will not be known until sometime in the future. Successful execution of any particular strategic alternative or strategic transaction or our corporate restructuring and cost savings plan requires sustained management focus, organization, and coordination over time, as well as success in building relationships with third parties. If we are unable to execute our strategy or our corporate restructuring and cost savings plan successfully, our business, financial position, results of operations, and cash flows could be adversely affected. In addition, our Amended Credit Agreement includes a covenant requiring that, on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement. There can be no assurance that we will be able to complete such a transaction by June 1, 2019, or at all. We may not have sufficient capital to repay the obligations due under the Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement.
Competition could materially and adversely affect our business, financial condition, results of operations, and cash flows.
The consumer market for flowers and gifts is highly competitive and fragmented, as consumers can purchase the products we offer from numerous sources, including traditional local retail florists, supermarkets, mass merchants, gift retailers, floral and gift mass marketers, specialty markets, and other online retailers. We believe the primary competitive factors in the consumer market are strength of brand, price, quality of products, selection, fulfillment capabilities, customer service, website performance, and ordering convenience. In both the U.S. and the U.K., our key competitors include online floral and gift retailers, including such companies as 1-800-FLOWERS.COM, Inc., and certain mass merchants. In addition, the specialty foods category is also highly fragmented, with competition from online retailers, specialty companies, and mass merchants. Further, we compete with personalized gift retailers as well as mass merchants and other general gift companies which also offer personalized products.
We face intense competition in the consumer market. We expect that the sales volumes at supermarkets and mass merchants will continue to increase, and that other online floral mass marketers will continue to increase their competition with us. Some of our competitors may have significant competitive advantages over us, may engage in more significant discounting, may devote significantly greater resources to marketing campaigns or other aspects of their business, or may respond more quickly and effectively than we can to new or changing opportunities or customer requirements.
The floral network services market is highly competitive as well, and retail florists and supermarkets may choose from a variety of providers that offer similar products and services. In addition, the number of retail florists has been declining over a number of years. As the number of retail florists decline, competition for the business of the remaining retail florists may intensify. We believe the primary competitive factors in this market are price, order volume, customer service, services offered, strength of brand, and fulfillment capabilities. Our key competitors in the U.S. floral network services market include providers of online or e-commerce services, retailers and wholesalers of floral-related products, and other floral network services. In the international market, our key competitors include other floral network service providers.
Increased competition in the consumer market or the floral network services market may result in lower revenues, reduced gross margins, loss of market share, and increased marketing expenditures. We cannot provide assurances that we will be able to compete successfully or that competitive pressures will not materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our operations could be adversely affected if we fail to integrate and retain our executive leadership team or face difficulties attracting and retaining qualified personnel.
Since early 2016, we have undergone significant transitions in our chief executive officer, chief financial officer, and other key executive positions. Our success depends, in part, upon the performance of our executive leadership team. If we are unable to integrate new senior executives, if they fail to perform effectively, if we are unable to retain them, or if we are unable to attract additional qualified senior executives as needed, our strategic and other initiatives could be adversely impacted and our business, financial condition, results of operations and cash flows could be materially and adversely affected. Further, if we are unable to recruit, retain, and motivate key personnel to maintain the current business of the Company and support our strategic and other initiatives, our business, financial conditions, results of operations and cash flows similarly could be materially and adversely affected.
Our business is subject to online security risks, and a security breach or inappropriate access to, or use of, our networks, computer systems, or services or those of third-party vendors could expose us to liability, claims, and a loss of revenue.
The success of our business depends on the security of our networks and, in part, on the security of the network infrastructures of our third-party vendors. In connection with conducting our business in the ordinary course, we store and transmit customer and member information, including personally identifiable information. Unauthorized or inappropriate access to, or use of, our networks, computer systems, or services, whether intentional, unintentional or as a result of criminal activity, could potentially jeopardize the security of confidential information, including credit card information, of our customers and of third parties. A number of other websites have publicly disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose members, customers, or vendors. A party that is able to circumvent our security measures could misappropriate our proprietary information or the information of our members or customers, cause interruption in our operations, or damage our computers or those of our members or customers.
A significant number of our members and customers authorize us to bill their payment card accounts (credit or debit) directly for all amounts charged by us. These members and customers provide payment card information and other personally identifiable information which, depending on the particular payment plan, may be maintained to facilitate future payment card transactions. We rely on third-party and internally-developed encryption and authentication technology to provide the security and authentication to effectively secure transmission of confidential information, including payment card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in the technology used by us to protect transaction data being breached or compromised. Non-technical means, for example, actions by an employee, can also result in a data breach. Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the banks that issue the payment cards for their related expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give our members and customers the option of using payment cards. If we were unable to accept payment cards or are limited in our acceptance of payment cards, our businesses could be materially and adversely affected.
We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach related to us or the parties with which we have commercial relationships, could damage our reputation and expose us to a risk of loss, litigation, and possible liability. We cannot assure you that the security measures we take will be effective in preventing these types of activities. We also cannot assure you that the security measures of our third-party vendors, including network providers, providers of customer and billing support services, and other vendors, will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation or our revenues and may interfere with our ability to provide our products and services, all of which could materially and adversely affect our business. In addition, the coverage and limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches.
Significant problems with our key systems or those of our third-party vendors could materially and adversely affect our business, financial condition, results of operations, and cash flows.
The systems underlying the operations of our business are complex and diverse and must efficiently integrate with third-party systems, such as credit card processors. Key systems include, without limitation, order transmission, distribution, fulfillment and processing, including the systems for transmitting orders through our floral networks and to third-party suppliers; billing; website and database management; customer support; telecommunications network management; and internal financial systems. Some of these systems are outsourced to third parties, and others, such as certain of our customer service telephone systems, are not redundant. All information technology and communication systems are subject to reliability issues, denial of service attacks, integration and compatibility concerns, and security threatening intrusions. The continued and uninterrupted performance of our key systems is critical to our success. Unanticipated problems affecting these systems could cause interruptions in our services. In addition, if our third-party vendors face financial or other difficulties, our business could be adversely impacted. Any significant errors, damage, failures, interruptions, delays, or other problems with our systems or those of our third-party vendors could adversely impact our ability to satisfy our customers and could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our revenues, operating results, and cash flows fluctuate on a seasonal basis and may suffer if revenues during peak seasons do not meet our expectations, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our business is seasonal, and our quarterly revenues and operating results typically exhibit seasonality. Revenues, operating results, and cash flows tend to be lower for the third quarter because none of the most popular floral and gift-giving holidays, which include Mother’s Day, Valentine’s Day, Christmas, Easter, and Thanksgiving, fall within that quarter. In addition, depending on the year, Easter and the U.K. Mother’s Day sometimes fall within the first quarter and sometimes fall within the second quarter. Furthermore, depending on the year, certain of the most popular floral and gift-giving holidays, such as Valentine’s Day, may occur on a weekend or government holiday, which historically has negatively impacted orders.
Our ProFlowers and Gourmet Foods businesses experience a greater level of seasonality than our other businesses and have historically generated an operating loss and used cash for operations during the third quarter. Historically, a significant portion of the revenues and operating profit of these businesses have been generated in the first half of the year. Our Personal Creations business is also highly seasonal with approximately half of its revenues and substantially all of its operating profit generated in the fourth quarter during the winter holiday season.
Our operating results may suffer if revenues during our peak seasons do not meet expectations, as we may not generate sufficient revenues to offset increased costs incurred in preparation for peak seasons. Our working capital and level of indebtedness may also fluctuate during the year as a result of the factors set forth above. Moreover, the operational risks described elsewhere in these risk factors may be significantly exacerbated if those risks were to occur during a peak season. For example, severe weather prior to or on Valentine’s Day, Mother’s Day, or other popular floral or gift-giving holidays could materially and adversely affect our business, financial condition, results of operations, and cash flows. Similarly, we could be materially and adversely affected if we do not accurately estimate customer demand and appropriately manage inventory levels within our businesses.
We are dependent on third parties who fulfill orders and deliver goods and services to our customers, and their failure to provide our customers with high-quality products within the required timeframe and maintain a high level of customer service may harm our brands and could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We believe that our success in promoting and enhancing our brands depends on our ability to provide our customers high-quality products within the required timeframe and maintain a high level of customer service. Our business depends, in part, on the ability of our floral network members and third-party suppliers that fulfill our orders to do so at high-quality levels. We work with our floral network members and third-party suppliers to develop best practices for quality assurance; however, we generally do not directly control or continuously monitor any floral network member or third-party supplier. A failure to maintain our relationships with key floral network members and third-party suppliers or the failure of our floral network members and third-party suppliers to fulfill orders to our customers’ satisfaction, at an acceptable level of quality, and within the required timeframe, could adversely impact our brands and cause us to lose customers, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Additionally, because we depend upon third parties for the delivery of our products, strikes or other service interruptions affecting these shippers could have an adverse effect on our ability to deliver our products on a timely basis. If any of our shippers are unable or unwilling to deliver our products, we would have to engage alternative shippers, which could increase our costs. A disruption in any of our shippers’ delivery of our products could cause us to lose customers or could increase our costs, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
If the supply of flowers and/or strawberries becomes limited, the price of our floral and/or strawberry products could rise or our products may become unavailable, which could result in our not being able to meet consumer demand and could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Many factors, such as weather conditions, agricultural limitations, restrictions relating to the management of pests and disease, and fair trade and other social or environmental issues, affect the supply of flowers and strawberries and the price of our floral and strawberry products. If the supply of high-quality flowers and/or strawberries available for sale is limited, the wholesale prices of flowers and strawberries could rise, which would cause us to increase our prices or could result in a reduction in our profits. An increase in our prices could result in a decline in consumer demand for our floral and strawberry products, which would decrease our revenues. Alternatively, we may not be able to obtain high-quality flowers and/or strawberries in an amount sufficient to meet consumer demand. Even if available, flowers and strawberries from alternative sources may be of lesser quality or be more expensive than those we currently offer. A large portion of our supply of flowers is sourced from Colombia, the U.S., Kenya, Holland, Ecuador, Thailand, and Costa Rica. In addition, a large portion of our supply of strawberries is sourced from the U.S. and Mexico.
The availability and price of our products could be affected by a number of other factors affecting suppliers, including:
severe weather;
agricultural limitations;
disease, infestation, and other biological problems;
import duties and quotas;
time-consuming import regulations or controls at ports, including adequate staffing of inspection and custom agents at ports of entry;
changes in trading status;
economic uncertainties and currency fluctuations;
foreign government laws and regulations;
political, social, and economic instability, terrorist attacks, and security concerns in general;
nationalization;
availability of adequate labor resources for our suppliers;
fair trade and other social or environmental certifications, requirements, or practices;
governmental bans or quarantines;
disruption in transportation and delivery;
trade restrictions, including U.S. retaliation against foreign trade practices or withdrawal from, or renegotiation of international trade agreements; and
transportation availability and costs.
Our consumer businesses rely heavily on email and social media marketing campaigns, and any disruptions or restrictions on these campaigns or an increase in the associated costs could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We generate a significant portion of our consumer orders from the emails we send to customers who have previously ordered products from us. We also engage in a number of third-party email marketing campaigns in which such third parties include our marketing offers in the emails they send.
An increase in the number of customers to whom we are not able to send emails, or who elect to not receive or are unable to receive our emails could adversely affect our business, financial condition, results of operations, and cash flows. From time to time, internet service providers block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails to our customers. Third parties may also block, impose restrictions on, or start to charge for the delivery of emails through their email systems. Due to the importance of email to our businesses, any disruption or restriction on the distribution of emails or increase in the associated costs could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We also utilize a number of social media platforms to generate consumer traffic to our websites. If we are unable to effectively use or maintain a presence using these platforms or if our competitors increase their spending on these types of platforms, our marketing spend could increase or our consumer traffic could decrease thus adversely affecting our business, financial condition, results of operations, and cash flows.
Use of social media may adversely impact our reputation and our business, financial condition, results of operations, and cash flows.
There has been a substantial increase in the use of social media platforms, including blogs, social media websites and other forms of internet-based communications, which allows access to a broad audience of consumers and other interested persons. Negative commentary regarding us or the products we sell may be posted on social media platforms or other electronic means at any time and may be adverse to our reputation or business. Customers value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without allowing us an opportunity for redress or correction. We maintain Facebook, Twitter, and Instagram accounts. In addition, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations.
We rely on our company-operated distribution facilities and third-party distributors to fulfill certain of our customers’ orders and to distribute our products into the carrier delivery system. A disruption in service at one or more of these distribution facilities, delivery failures, or delays could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our consumer businesses fulfill many customer orders through company-operated distribution facilities. We may be unable to fulfill our customers’ orders through one or more of our various distribution facilities in a timely manner, or at all, due to a number of factors that may affect one or more of such distribution facilities, including:
a failure to maintain or renew one or more of our existing lease agreements for any of our company-operated distribution facilities;
a prolonged power or equipment failure;
a lack of availability of labor resources;
an employee strike or other labor stoppage;
a disruption in the transportation infrastructure;
weather issues at our distribution facilities or along the delivery routes;
a refrigeration failure; or
a fire, flood, hurricane, tornado, or other natural disaster.
In the event we are unable to fulfill our customers’ orders through one or more of our distribution facilities, we will attempt to fulfill the orders via another source to ensure timely delivery. However, we cannot guarantee that our other distribution facilities or third-party suppliers will have the capacity or the variety of flowers, strawberries, or gifts to fulfill all affected orders in a timely manner. In addition, if operations from one or more of our distribution facilities become permanently disrupted due to any of the factors noted above or other factors, we may not be able to secure a replacement distribution facility in a location on terms acceptable to us or at all. Our business, financial condition, results of operations, and cash flows could be materially and adversely affected if we experience temporary or permanent disruptions at one or more of our distribution facilities.
The success of our business is dependent on our floral network members and on the financial performance of the retail floral industry.
A significant portion of our profitability is dependent on our floral network members. Certain relationships with floral network members are non-exclusive and subject to their discretion in terms of network participation. The amount of revenues and profits we generate from individual floral network members can vary significantly. We have lost, and may continue to lose, floral network members as a result of declines in the number of local retail florists as a result of economic factors and competition, as well as our members choosing not to do business with us. There can be no assurance that the decline in the number of floral network members will not increase in the future or that we will not lose floral network members that generate significant revenues for our business, either of which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
In addition, the operating and financial success of our business has been, and is expected to continue to be, dependent on the financial performance of the retail floral industry. There can be no assurance that the retail floral industry will not decline, that consumer preferences for and purchases of floral products will not decline, or that retail florist revenues or inter-city floral delivery transactions will not decline in absolute terms. A sustained decline in the sales volume of the retail floral industry could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We are exposed to the credit risk of our floral network members.
When an FTD or Interflora floral network member fulfills an order from an originating member, we become liable to the fulfilling member for payment on the order, even if we do not receive payment from the originating member. Accordingly, we are exposed to the credit risk of our floral network members. We cannot provide assurances that the exposure will not be greater than the amounts we have reserved for this exposure. An increase in this exposure, coupled with material instances of defaults, could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our business could suffer as a result of significant credit card or debit card fraud.
Orders placed through our consumer websites, mobile sites and applications, or various telephone numbers typically are paid for using a credit or debit card. Our revenues and gross margins could decrease if we experience significant credit or debit card fraud. Failure to adequately detect and avoid fraudulent credit or debit card transactions could cause us to lose our ability to accept credit or debit cards as forms of payment and result in charge-backs of the fraudulently charged amounts. Furthermore, widespread credit or debit card fraud may lessen our customers’ willingness to purchase products on our consumer websites, through our mobile sites and applications, or through our various telephone numbers. As a result, such failure could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We are dependent on our strategic relationships to help promote our consumer websites. Failure to establish, maintain, or enhance such relationships could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We believe that our strategic relationships with leading online retailers, direct marketers, and other strategic partners are critical to attract customers, facilitate broad market acceptance of our products and brands, and enhance our sales and marketing capabilities. A failure to maintain existing strategic relationships or to establish additional relationships that generate a significant amount of traffic from other websites could limit the growth of our business. Establishing and maintaining relationships with leading online retailers and direct marketers is competitive and expensive. We may not successfully enter into additional strategic relationships. We may not be able to renew existing strategic relationships beyond their current terms or may be required to pay significant fees to maintain and expand these strategic relationships. In addition, our business may be impacted by changes that our strategic partners make to their marketing practices. Further, many online retailers, direct marketers, and other strategic partners that we may approach to establish an advertising presence or with whom we already have an existing relationship may also provide advertising services for our competitors. As a result, these companies may be reluctant to enter into, maintain, or expand a strategic relationship with us. Our business, financial condition, results of operations, and cash flows may suffer if we fail to enter into new strategic relationships, maintain or expand existing strategic relationships, or if these strategic relationships do not result in traffic on our websites sufficient to justify costs.
In addition, we are subject to many risks beyond our control that influence the success or failure of our strategic relationships. For example, if any of the online retailers or direct marketers with which we have strategic relationships experience financial or operational difficulties that materially and adversely affect their ability to satisfy their obligations under their agreements with us, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.
Our marketing efforts may not be successful or may become more expensive, either of which could increase our costs and materially and adversely affect our business, financial condition, results of operations, and cash flows.
We spend significant resources marketing our brands, products, and services. We rely on relationships with a wide variety of third parties, including internet search providers such as Google, internet advertising networks, retailers, and direct marketers, to source new customers and to promote our products and services. From time to time, we may spend additional amounts on television and radio advertising. Our business, financial condition, results of operations, or cash flows could be materially and adversely affected if:
our marketing activities are inefficient or unsuccessful;
important third-party relationships or marketing strategies, such as internet search engine marketing and search engine optimization, become more expensive or unavailable, or are suspended or terminated, for any reason;
there is an increase in the proportion of consumers visiting our websites or purchasing our products and services by way of marketing channels with higher marketing costs as compared to channels that have lower or no associated marketing costs; or
if our marketing efforts do not result in our products and services being prominently ranked in internet search listings.
Foreign, state, and local governments may attempt to impose additional sales and use taxes, value added taxes, or other taxes on our business activities, including our past sales, which could decrease our ability to compete, reduce our sales, and could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We are subject to income and various other taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our provision for income and other taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income and other taxes against us. The final determination of tax audits and any related litigation could be materially different from our historical income and other tax provisions. The results of an audit or litigation could materially and adversely affect our business, financial condition, results of operations, and cash flows.
In accordance with current industry practice by domestic floral and gift order gatherers and our interpretation of applicable law, our consumer businesses now collect and remit sales and use taxes on consumer orders based upon the economic nexus standards established by the 2018 U.S. Supreme Court ruling for all states that have sales taxes. If states successfully challenge our previous practice of not collecting sales and use taxes where we did not have a physical presence or any other form of jurisdictional nexus, we could incur substantial tax liabilities for past sales.
Additionally, in accordance with current industry practice by international floral and gift direct marketers and our consultation with subject matter experts regarding our interpretation of applicable laws, we collect and remit value-added and other taxes on certain consumer orders. Future changes in legislation, application of current legislation, or the operation of our business could result in the imposition of additional tax obligations. Moreover, if a foreign taxing authority successfully challenges our current practice or implements new legislative initiatives, we could incur substantial tax liabilities for past sales and lose future sales as a result of the increased tax that may be borne by the customer. The imposition of additional tax liabilities for past or future sales could decrease our ability to compete with other retailers and reduce our sales, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Adverse economic conditions could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our products and services are discretionary and dependent upon levels of consumer spending. Consumer spending patterns are difficult to predict and are sensitive to, among other factors, the general economic climate, consumer levels of disposable income, consumer debt, and overall consumer confidence. Periods of challenging economic conditions have adversely impacted certain aspects of our businesses in a number of ways, including reduced demand, more aggressive pricing for similar products and services by our competitors, increased credit risks, increased credit card failures, a loss of customers, and increased use of discounted pricing for certain of our products and services. Periods of challenging economic conditions also may adversely impact our key vendors and customers. Such economic conditions and periods of decline in consumer spending have, in certain cases, resulted in, and may in the future result in, a variety of negative effects such as a reduction in revenues, increased costs, lower gross margin and operating margin percentages, increased allowances for doubtful accounts and write-offs of accounts receivable, increased provisions for excess and obsolete inventories, and recognition of impairments of assets, including goodwill and other intangible and long-lived assets. Any of these negative effects could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Shifts in the mix of products versus services sold and types of products and services sold could materially and adversely affect our financial results.
The cost of revenues associated with our products revenues is generally higher than that associated with our services revenues. In addition, the cost of revenues associated with certain products and services may be higher than that associated with other products and services. As a result, changes in the proportion of revenues that is represented by products revenues versus services revenues, and certain types of products and services versus others, could materially and adversely affect our revenues, cost of revenues, cost of revenues as a percentage of revenues, and operating income.
Shifts in the mix of products and services sold at standard pricing as compared to discounted pricing or the failure to maintain our standard pricing for products and services could materially and adversely affect our financial results.
We have been offering broader and greater discounts to the consumer, both on a promotional basis to consumers generally, as well as through strategic arrangements with third parties that have a fixed, and in certain cases greater, discount or other associated costs. We also offer discounts on our floral network service fees from time to time on a promotional basis. Shifts in the mix of products and services sold that have resulted in increases in the proportion of products and services sold at a discount, and at times at greater discounts, including through such strategic arrangements, have resulted, and may in the future result, in reduced revenues, an increase in cost of revenues as a percentage of revenues, and a decrease in operating income. We currently intend to continue selling a portion of our products and services at a discount, including through such strategic arrangements, and there are no assurances that the portion of products and services sold at a discount will not continue to increase. The continued use of discounts, including through such strategic arrangements, for our products and services may result in our becoming more reliant upon offering discounts in order to sell our products and services, which could result in our having to reduce our standard pricing, and could materially and adversely affect our financial results.
Our business and stock price may be adversely affected if we have material weaknesses or significant deficiencies in our internal control over financial reporting.
We previously identified a material weakness in our internal control over financial reporting related to our accounting for certain cross-border indirect taxes, which required an immaterial restatement of our previously issued consolidated financial statements for the years ended December 31, 2015 and 2014 and for the quarters within the years ended December 31, 2016 and 2015. In addition, we did not adequately design the control over the review of inputs used in the determination of the reporting unit carrying values for the testing of goodwill for impairment that allowed a material error to occur that was not detected in a timely manner and required restatement of our consolidated financial statements for the three and nine months ended September 30, 2017. We have enhanced our controls and fully remediated both of these material weaknesses. The existence of one or more other material weaknesses could result in material errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing as needed, and our business and financial condition could be materially and adversely affected.
The United Kingdom vote to leave the European Union could adversely impact our business, financial condition, results of operations, and cash flows.
On June 23, 2016, the U.K. held a referendum in which a majority of voters voted to leave the European Union (“E.U.”), commonly referred to as “Brexit.” On March 29, 2017, the Prime Minister of the U.K. submitted formal notice to the E.U. in order to trigger Article 50 of the Treaty on European Union. This is the formal mechanism which began the two-year process of negotiating the U.K.’s exit from the E.U. and the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the E.U. and potentially other countries. Subsequently, the U.K. and the E.U. have agreed to a transition period extending to December 31, 2020 during which existing laws will continue to apply. This transition period only applies in the event a withdrawal agreement on the terms of the U.K.’s exit is reached by March 29, 2019 between the U.K. and the E.U. Such an agreement has not yet been reached, and both the U.K. and the E.U. continue to work toward an agreement. If an agreement is not reached by such date, the U.K. would leave the E.U. without an agreement, unless an extension to the withdrawal period is agreed.
A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key geographic areas, disrupt the markets we serve, and significantly disrupt trade between the U.K. and the E.U. or other nations as the U.K. pursues independent trade relations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the E.U. or other markets either during a transitional period or more permanently. Compliance with new laws or regulations regarding trade, delivery and other cross-border activities between the U.K. and the E.U. could be costly, negatively impacting our business, financial condition, operating results and cash flows. A withdrawal agreement between the U.K. and the E.U. would specify details of future arrangements between the U.K. and E.U. If the U.K. leaves the E.U. without an agreement, these arrangements would be less certain, thereby increasing the risk of disruption. Our International segment operates principally in the U.K. For the year ended December 31, 2018, our International segment contributed approximately 15% of our consolidated revenues.
In addition, the announcement of the referendum results was followed by significant volatility in global stock markets and currency exchange rates, including in particular a decline in the value of the British Pound (“GBP”) in comparison to both the U.S. Dollar (“USD”) and the Euro (“EUR”). Uncertainty during and after the period of negotiation could have a negative economic impact and result in further market and exchange rate volatility for several years. Any of these effects, and others that the Company cannot anticipate, could materially and adversely impact the Company’s business, financial condition, results of operations, and cash flows.
We have sought to manage the risks and potential impact of Brexit on our U.K. business. We have established the capability of our supply chain to continue to provide the goods and services required to continue our operations, particularly the supply of labor and goods, including cut flowers. We have established a series of contingent measures should the price and/or availability of cut flowers be adversely affected in the immediate period post Brexit, whether or not a withdrawal agreement has been reached. Longer term impacts on consumer demand and long term exchange rates and tariffs are being monitored and appropriate plans will be further developed as the situation becomes clearer. We cannot, however, be certain that our measures will adequately address the risks and the potential impact of Brexit on our U.K. business. If our measures are not adequate, our business, financial condition, results of operations, and cash flows may be materially and adversely affected.
Fluctuations in foreign currency exchange rates could materially and adversely affect comparisons of our operating results.
We transact business in different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, primarily GBP and EUR. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in USD as the USD weakens or strengthens against such other currencies. Substantially all of the revenues of our international businesses are received, and substantially all expenses are incurred, in currencies other than the USD, which increases or decreases the related USD-reported revenues and expenses depending on the fluctuations in foreign currency exchange rates. Certain of our key business metrics, such as average order value, are similarly affected by such foreign currency exchange rate fluctuations. Changes in global economic conditions, market factors, and governmental actions, among other factors, can affect the value of these currencies in relation to the USD. A strengthening of the USD compared to these currencies and, in particular, to the British Pound and the Euro, has had, as noted since the Brexit announcement, and in future periods could have, an adverse effect on the comparisons of our revenues and operating income against prior periods. We cannot accurately predict the impact of future foreign currency exchange rate fluctuations on our operating results, and such fluctuations could materially and adversely affect the comparisons of such results against prior periods.
We face risks relating to operating and doing business internationally that could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our businesses operate in a number of countries outside the U.S., principally the U.K. and the Republic of Ireland for our Interflora subsidiary and India for our technology development and support operations. Conducting international operations involves risks and uncertainties, including:
adverse fluctuations in foreign currency exchange rates;
difficulties in managing and staffing international operations;
potentially adverse tax consequences, including the complexities of foreign value added taxes and restrictions on the repatriation of earnings;
increased financial accounting, tax, and reporting burdens and complexities;
compliance with U.S. laws affecting operations outside the U.S., such as the Foreign Corrupt Practices Act;
lack of familiarity with and unexpected changes in foreign regulatory requirements;
the burdens of complying with a wide variety of foreign laws, regulations, and legal and regulatory standards;
political, social, and economic instability abroad, terrorist attacks, and security concerns in general; and
reduced or varied protection for intellectual property and proprietary rights.
The occurrence of any one of these risks could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our success is dependent on the intellectual property that we use, and any infringement or misappropriation of our intellectual property could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We regard our FTD®, Interflora®, ProFlowers®, Shari’s Berries®, Personal Creations®, Flying Flowers®, Gifts.com™, and ProPlants® trademarks; the Mercury Man® logo; the www.ftd.com, www.proflowers.com, www.berries.com, www.personalcreations.com, www.gifts.com, www.proplants.com, www.Interflora.co.uk, and other internet domain names; and the other service marks, trademarks, and other intellectual property that we use in our business as being critical to our success. Our company and our subsidiaries have applied for the registration of and have been issued trademark registrations for trademarks and service marks used in our business in the U.S., the U.K., and various other foreign countries; however, in some other countries, there are certain pre-existing and potentially conflicting trademark registrations held by third parties. We rely on a combination of copyright, trademark, and trade secret laws, confidentiality procedures, contractual provisions, and license and other agreements with employees, customers, and others to protect our intellectual property rights. In addition, we may also rely on the third-party owners of the intellectual property rights we license to protect those rights. We license some of our intellectual property rights, including the Mercury Man logo, to third parties. The steps taken by us and those third parties to protect our intellectual property rights may not be adequate, and other third parties may infringe or misappropriate our intellectual property rights. This could materially and adversely affect our business, financial condition, results of operations, and cash flows. Furthermore, the validity, enforceability, and scope of protection of intellectual property in internet-related industries are uncertain and still evolving.
We are also subject to the risk of claims alleging that our business practices infringe on the intellectual property rights of others. These claims could result in lengthy and costly litigation. Moreover, resolution of any such claim against us may require our company or one of our subsidiaries to obtain a license to use the intellectual property rights at issue or possibly to cease using those rights altogether. Any of those events could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Incidents involving or allegations of food-borne illnesses, food tampering, food contamination, or mislabeling relating to our products, whether or not accurate, could harm our business.
Our product offerings include food products, which may expose us to risks posed by food spoilage and contamination, misbranding, product tampering or other adulteration, allergens, product recall, and consumer product liability claims. Issues related to quality and safety of our products, ingredients, or packaging could jeopardize our image and reputation. Instances or reports, whether true or not, of food-safety issues, such as food-borne illnesses, food tampering, food contamination or mislabeling, either during manufacturing, packaging, storing, or preparation, have in the past severely injured the reputations of companies in the food processing, grocery, and quick-service restaurant sectors and could affect us as well. Any report linking us to food-borne illnesses or food tampering, contamination, mislabeling, or other food-safety issues could damage our brand value and severely hurt sales of our food products and possibly lead to product liability claims, litigation (including class actions), or damages. If customers become ill from food-borne illnesses, tampering, contamination, mislabeling, or other food-safety issues, we could be forced to temporarily close some supply chain facilities, as well as recall products. In addition, instances of food-safety issues, even those involving solely the products or stores of competitors or of suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), could, by resulting in negative publicity about us or the foodservice industry in general, adversely affect our sales. A decrease in customer orders as a result of food-safety concerns or negative publicity, the payment of fines or damages relating to product recalls or food-safety claims, or litigation or government actions, could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Product recall or liability claims could harm our business.
Products that we sell, including glass, ceramic, and other personalized gift products, could contain defects and/or may expose us to product liability claims in the event the use of these products results in personal injury or property damage. We have been in the past, and may be in the future, subject to product liability claims and we may incur significant costs related to such claims. Even if a product liability claim is not successful, or if we conduct a voluntary recall, we may incur substantial costs in defending the claim or conducting the recall. The insurance we maintain against product liability claims may be inadequate to cover any liabilities we may incur, which could materially and adversely affect our business, financial condition, results of operation, and cash flows. In addition, product liability claims often create negative publicity, which could materially damage our reputation and our brands.
We may be unable to increase capacity or introduce enhancements to our consumer websites, mobile sites and applications, or various telephone numbers in a timely manner or without service interruptions, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
A key element of our business strategy is to generate a high volume of traffic on our consumer websites, through our mobile sites and applications, and through our various telephone numbers. However, we may not be able to accommodate all of the growth in user demand through our consumer websites, mobile sites and applications, or through various telephone numbers. Our inability to add additional hardware and software to upgrade our existing technology or network infrastructure to accommodate, in a timely manner, increased traffic through our consumer websites, our mobile sites and applications, or our various telephone numbers, may cause decreased levels of customer service and satisfaction. Failure to implement new systems effectively or within a reasonable period of time could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We also regularly introduce additional or enhanced features and services to retain current customers and attract new customers to our consumer websites, mobile sites and applications. If we introduce a feature or a service that is not favorably received, our current customers may not use our consumer websites or mobile sites and applications as frequently or we may not be successful in attracting new customers. We may also experience difficulties that could delay or prevent us from introducing new services and features. Furthermore, these new services or features may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If customers encounter difficulty with or do not accept new services or features, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.
We utilize outsourced staff and temporary employees, who may not be as well-trained or committed to our customers as our permanent employees, and their failure to provide our customers with high-quality customer service may cause our customers not to return, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We utilize and rely on a significant number of outsourced staff and temporary employees, in addition to our permanent employees, to take orders, respond to customer inquiries, and work in our distribution facilities to process and fulfill orders. These outsourced staff and temporary employees may not have the same level of commitment to our customers or be as well-trained as our permanent employees. In addition, we may not hire enough outsourced staff or temporary employees to adequately handle the increased volume of telephone calls we receive and orders we fulfill and ship during peak periods. We maintain only a limited number of permanent customer support and distribution center employees and rely on third-party vendors for outsourced customer support. Our permanent employees may not be able to provide the necessary range or level of customer support services in the event that one or more of our third-party vendors unexpectedly become unable or unwilling to provide some or all of these services to us. In addition, we may not be able to adequately staff our distribution centers during peak periods to enable us to fulfill and ship orders on a timely basis. If our customers are dissatisfied with the quality of the customer service they receive, they may not place orders with us again, which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Our business could be shut down or materially and adversely affected by a catastrophic event.
A disaster such as a fire, earthquake, flood, power loss, terrorism, or other similar event, affecting any of our facilities, data centers, or computer systems, or those of our third-party vendors, or a system interruption or delay that slows down the internet or makes the internet or our websites temporarily unavailable, could result in a significant and extended disruption of our operations and services. Any prolonged disruption of our services due to these or other events would severely adversely impact our business. We do not carry flood insurance for our facilities, and the property, business interruption, and other insurance we do carry may not be sufficient to cover all losses, if any, that may occur as a result of any events which cause interruptions in our operations and services.
Legal actions or investigations could subject us to substantial liability, require us to change our business practices, and materially and adversely affect our business, financial condition, results of operations, and cash flows.
We are currently, and have been in the past, party to various legal actions and investigations. These actions may include, without limitation, claims by private parties in connection with consumer protection and other laws; claims that we infringe on third-party patents, trademarks, copyrights, or other intellectual property or proprietary rights; securities laws claims; claims involving marketing practices or unfair competition; claims in connection with employment practices; breach of contract claims; and other business-related claims. The nature of our business could subject us to additional claims for similar matters, as well as a wide variety of other claims, including, without limitation, for privacy and security matters. The failure to successfully defend against these and other types of claims, including claims relating to our business practices, could result in our incurring significant liabilities related to judgments or settlements or require us to change our business practices. Infringement claims may also result in our being required to obtain licenses from third parties, which licenses may not be available on acceptable terms, if at all. Both the cost of defending claims, as well as the effect of settlements and judgments, could cause our results of operations to fluctuate significantly from period to period and could materially and adversely affect our business, financial condition, results of operations, and cash flows. In addition, we also file actions against third parties from time to time for various reasons, including, without limitation, to protect our intellectual property rights, enforce our contractual rights, or make other business-related claims. The legal fees, costs, and expenses associated with these actions may be significant, and if we were to lose these actions, we may be required to pay the other party’s legal fees, costs, and expenses, which also may be significant and could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Various governmental agencies have in the past asserted claims, instituted legal actions, inquiries or investigations, or imposed obligations relating to our business practices, such as our marketing, billing, customer retention, renewal, cancellation, refund, and disclosure practices, and they may continue to do so in the future. We may not prevail in existing or future claims, and any judgment against us, settlement, or resolution of such claims may involve the payment of significant sums, including damages, fines, penalties, or assessments, or changes to our business practices. Defending against lawsuits, inquiries, and investigations also involves significant expense and diversion of management’s attention and resources from other matters.
Additional governmental investigations or other legal actions may be instituted in connection with prior sales practices or other current or former business practices. Enforcement actions or changes in enforcement policies and procedures could result in changes to our business practices, as well as significant damages, fines, penalties, or assessments, which could decrease our revenues or increase the costs of operating our business. To the extent that our services and business practices change as a result of claims or actions by governmental agencies or private parties, or we are required to pay significant sums, including damages, fines, penalties, or assessments, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.
We may be unsuccessful at acquiring future additional businesses, services, or technologies. Even if we make acquisitions in the future, it may not improve our results of operations and could also materially and adversely affect our business, financial condition, results of operations, and cash flows.
Acquisitions of businesses, services, or technologies may provide us with an opportunity to diversify the products and services we offer, leverage our assets and core competencies, complement our existing business, or expand our geographic reach. We may evaluate a wide variety of potential strategic transactions that we believe may complement our existing business. However, we may not realize the anticipated benefits and synergies of an acquisition, and our attempts at integrating an acquired business may not be successful. Acquiring businesses, services, or technologies involves many operational and financial risks, including risks relating to:
disruption of our ongoing business and significant diversion of resources and management time from day-to-day responsibilities;
acquisition financings that involve the issuance of potentially dilutive equity or the incurrence of debt;
reduction of cash and other resources available for operations and other uses;
exposure to risks specific to the acquired businesses, services, or technologies to which we are not currently exposed;
risks of entering markets in which we have little or no direct prior experience;
unforeseen obligations or liabilities;
difficulty assimilating the acquired customer bases, technologies, and operations;
difficulty assimilating and retaining management and employees of the acquired businesses;
potential impairment of relationships with customers or vendors as a result of changes in management of the acquired businesses or other factors;
large write-offs, either at the time of the acquisition or in the future, the incurrence of restructuring and other exit costs, the amortization of identifiable intangible assets, and the impairment of amounts capitalized as goodwill, intangible assets, and other long-lived assets; and
lack of, or inadequate, controls, policies, and procedures appropriate for a public company, and the time, cost, and difficulties related to the implementation of such controls, policies, and procedures or the remediation of any deficiencies.
In addition to the risks set forth above, an acquisition of a foreign business involves risks associated with foreign currency exchange rates, potentially unfamiliar economic, political, and regulatory environments, and integration difficulties due to language, cultural, and geographic differences. Any of these risks, whether the acquired business is domestic or foreign, could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Certain members of our board of directors are employees of either Qurate or Liberty Media Corporation, which has overlapping directors and officers with Qurate, which may lead to conflicting interests.
Our board of directors includes Christopher W. Shean, our former Interim President and Chief Executive Officer from November 1, 2016 to February 28, 2017, who is an employee of Qurate, and Robin Hickenlooper, who is an employee of Liberty Media Corporation. These individuals may have actual or apparent conflicts of interest with respect to matters involving or affecting each company.
Governmental regulation of the collection and use of personal information or our failure to comply with these regulations could materially and adversely affect our business.
The FTC regulates the collection and use of personal information obtained from individuals when accessing websites, with particular emphasis on access by minors. In addition, other governmental authorities have regulations to govern the collection and use of personal information that may be obtained from customers or visitors to websites. These regulations include requirements that procedures be established to disclose and notify users of our websites of our privacy and security policies, obtain consent from users for collection and use of personal information, and provide users with the ability to access, correct, or delete personal information stored by us. In addition, the FTC and other governmental authorities have made inquiries and investigations of companies’ practices with respect to their users’ personal information collection and dissemination practices to confirm these are consistent with stated privacy policies and to determine whether precautions are taken to secure consumers’ personal information. The FTC and certain state agencies also have made inquiries, and in a number of situations, brought actions against companies to enforce the privacy policies of these companies, including policies relating to security of consumers’ personal information.
Becoming subject to the regulatory and enforcement efforts of the FTC, a state agency, or other governmental authority could have a material adverse effect on our ability to collect demographic and personal information from users, which, in turn, could have a material adverse effect on our marketing efforts, business, financial condition, results of operations, and cash flows. In addition, the negative publicity regarding the existence or results of an investigation could have an adverse impact on customers’ willingness to use our websites and services and thus could adversely impact our future revenues.
Certain of our businesses, such as our international consumer and floral network businesses, must comply with international data protection and privacy laws, including the U.K. Data Protection Act 2018 and the General Data Protection Regulation. If we or any of the third-party service providers on which we rely fail to transmit customer information and payment details in a secure manner, or if they otherwise fail to protect customer privacy in online transactions, or if they transfer personal information outside the European Economic Area without complying with certain required conditions, then we risk being exposed to civil and criminal liability in the U.K. or elsewhere in the European Union, usually in the form of fines, as well as claims from individuals alleging damages as a result of the alleged non-compliance. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Changes in laws and regulations and new laws and regulations could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We are subject to a variety of international, federal, state, and local laws and regulations, including, without limitation, those relating to taxation; marketing and advertising; privacy and data protection; food production, including safety, storage, marketing and distribution; consumer protection; supply chain operations; anti-bribery; labor; antitrust; and unclaimed property. Compliance with the various laws and regulations, which in many instances are either unclear or unsettled, is complex. New laws and regulations, such as those being considered or recently enacted by certain states or the federal government related to automatic renewal practices, user privacy, targeted or behavioral advertising, floral related fees and advertising, and taxation, could impact our revenues or certain of our business practices or those of our advertisers. Any changes in the laws and regulations applicable to us, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcement activity of, such laws and regulations, could significantly impact our products and services, our costs, or the manner in which we or our advertisers conduct business, all of which could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Future changes in tax laws, including the rate of taxation, could adversely affect our financial condition, results of operations, and cash flows.
Future legislation, regulatory reform, or policy changes could have a material effect on our business and results of operations. Changes such as lower or higher corporate tax rates, repatriation allowances, removal of the interest expense deduction, increases on tariffs on imported goods, or the introduction of a border adjustment tax could impact the Company as a U.S. taxpayer, as well as the demand for our products and services.
On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act (“TCJA”) was enacted in the United States. Among other things, the TCJA reduces the U.S. corporate income tax rate to 21% and implements a new system of taxation for non-U.S. earnings, including by imposing a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries. The TCJA has had a favorable impact on our financial results in 2017, due primarily to the re-measurement of our deferred tax assets and liabilities. The TCJA had a favorable impact on our financial results beginning in 2018 due to the reduction in the U.S. federal tax rate. In the absence of guidance on various uncertainties and ambiguities in the application of certain provisions of the TCJA, we have recorded estimates based on what we believe are reasonable interpretations and assumptions in applying the TCJA. However, it is possible that the IRS could issue subsequent guidance or take positions on audit that differ from our prior interpretations and assumptions, which could have a material adverse effect on our cash tax liabilities, results of operations, and financial condition.
Risks Relating to Our Common Stock
The market price of our common stock may fluctuate significantly.
We cannot predict the prices at which our common stock may trade in the future. The market price of our common stock may fluctuate significantly, depending upon many factors, some of which may be beyond our control, including, but not limited to:
our ability to continue as a going concern;
our ability to maintain the NASDAQ listing of our common stock;
our limited public float as discussed below;
a shift in our investor base;
our quarterly or annual earnings or those of other companies in our industry;
actual or anticipated fluctuations in our operating results;
success or failure of our business strategy;
our ability to obtain financing as needed;
our ability to maintain compliance with our debt covenants;
changes in accounting standards, policies, guidance, interpretations, or principles;
changes in laws and regulations affecting our business, including tax legislation;
announcements by us or our competitors of significant acquisitions or dispositions;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts or our ability to meet our earnings guidance;
the operating and stock price performance of other comparable companies;
investor perception of us and the floral and gift retail industry;
overall market fluctuations; and
general economic conditions and other external factors.
Stock markets in general have also experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could materially and adversely affect the trading price of our common stock.
If we fail to meet the continued listing requirements of the NASDAQ, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.
Our common stock is listed on the NASDAQ. We must continue to satisfy the NASDAQ’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. If a company trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, the NASDAQ will send a deficiency notice to the company, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements. Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance period may be available. Failure to meet the minimum price per share requirement or other listing requirements for this stock exchange could result in delisting from the NASDAQ which could adversely affect the market price for our common stock and your ability to sell your shares at a profit, or at all. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors and employees.
The limited public float and trading volume for FTD common stock may have an adverse impact and cause significant fluctuation of market price.
Our common stock is held by a relatively small number of stockholders. Qurate holds 36.0% of our outstanding shares and two institutional stockholders each hold significant blocks of 7.8% to 13.1%. Our officers, directors, and members of management acquire stock or have the potential to own stock through previously granted equity awards. Consequently, our common stock has a relatively small float and low average daily trading volume, which could affect a stockholder’s ability to sell our stock or the price at which it can be sold. In addition, future sales of substantial amounts of our common stock in the public market by those larger stockholders, or the perception that these sales could occur, may adversely impact the market price of the stock and our stock could be difficult for a stockholder to liquidate.
There can be no assurance that an active trading market for our common stock will be sustained in the future. The lack of an active trading market may make it more difficult for you to sell our shares and could lead to our share price being depressed or more volatile.
As a significant stockholder of us, Qurate has significant influence over us, its presence may affect the ability of a third party to acquire control of us, and its interests may not coincide with yours.
As of December 31, 2018, Qurate beneficially owned 36.0% of the outstanding shares of FTD common stock. In connection with the acquisition of Provide Commerce, Qurate selected four new directors for appointment to the FTD board, increasing the board from seven to eleven directors, which was reduced to ten directors in April 2017. In addition, in conjunction with the acquisition of Provide Commerce, FTD and Qurate entered into an investor rights agreement (the “Investor Rights Agreement”) that contains certain rights in favor of Qurate with regard to the appointment and election of Qurate nominees to the FTD board. Although the Qurate directors do not constitute a majority of the FTD board, they may exercise influence over the decisions of the FTD board. This composition of the FTD board may affect our business strategy and operating decisions, as Qurate has significant influence over our affairs, policies, and operations, such as the appointment of management, and the strategic direction of the company, including decisions as to whether to enter into or otherwise pursue strategic transactions. Qurate’s interests may not in all cases be aligned with the interests of other FTD stockholders.
Furthermore, having Qurate as a significant stockholder may have the effect of making it more difficult for a third-party to acquire, or of discouraging a third-party from seeking to acquire, a majority of the outstanding shares of FTD common stock or control of the FTD board of directors through a proxy solicitation. In that regard, the Investor Rights Agreement contains certain provisions that may magnify these risks, including Qurate’s right, in certain circumstances in response to a third-party tender offer for shares of FTD common stock, to commence its own tender offer, restrictions on Qurate’s ability to transfer shares of FTD common stock, the waiver of Section 203 of the General Corporation Law of the State of Delaware (“DGCL”) with respect to Qurate and its affiliates and the prohibition upon FTD from implementing a stockholder rights plan, unless the plan exempts certain actions by Qurate in accordance with the terms of the Investor Rights Agreement.
Your percentage ownership in our company may be diluted in the future.
If we issue additional equity, either through public or private offerings or rights offerings, your percentage ownership in our company would decline if you do not participate on a ratable basis. In addition, we have established equity incentive plans that provide for the grant of common stock-based equity awards to our directors, officers, and employees. Your percentage ownership in our company may be diluted in the future because of equity awards that we expect to grant under these plans.
We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, privileges, preferences, including preferences over our common stock with respect to dividends and distributions, terms of redemption and relative participation, or other rights, if any, of the shares of each such series of preferred stock and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.
Provisions in our charter documents and the DGCL could discourage potential acquisition proposals, could delay, deter, or prevent a change in control, and could limit the price certain investors might be willing to pay for our common stock.
Certain provisions of the DGCL and our certificate of incorporation and bylaws may inhibit a change of control not approved by our board of directors or changes in the composition of our board of directors, which could result in the entrenchment of current management. These provisions include:
advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted on by stockholders at annual meetings of stockholders;
limitations on who may call special meetings of stockholders;
limitations on the ability of stockholders to amend, alter, or repeal our bylaws;
the division of our board of directors into three classes with staggered terms;
limitations on the removal of directors;
the inability of the stockholders to act by written consent; and
the authority of our board of directors to issue, without stockholder approval, “blank check” preferred stock with such terms as the board of directors may determine to increase the number of outstanding shares and thwart a takeover attempt.
We believe these provisions protect our stockholders from coercive or harmful takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with adequate time to assess any acquisition proposal and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our stockholders.
Future sales of FTD common stock by Qurate, or the perception that such sales could occur, could cause our stock price to
decline.
The Investor Rights Agreement imposes certain restrictions on Qurate’s ability to transfer its shares of FTD common stock. However, the Investor Rights Agreement does grant Qurate certain registration rights that, if exercised, would permit Qurate to sell a large number of shares of our common stock in a short period of time. The sale of a substantial number of shares of our common stock by Qurate or our other stockholders within a short period of time, or the perception that such sales could occur, could cause our stock price to decline or make it more difficult for us to raise funds through future offerings of our common stock.
Risks Relating to Our Relationship with Our Former Parent
We are bound by a Tax Sharing Agreement that we entered into with United Online in connection with the Separation.
In connection with the Separation, we entered into a Tax Sharing Agreement that governs the rights, responsibilities, and obligations of United Online and our company with regard to various tax matters, including the payment of taxes, the preparation of tax returns, and the administration of tax audits and disputes. There are certain significant areas where the tax liabilities of our former parent may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the United Online consolidated tax reporting group during any full or partial taxable period ending on or before the effective time of the distribution is jointly and severally liable for the U.S. federal income tax liability of the entire United Online consolidated tax reporting group for such taxable period. The Tax Sharing Agreement allocates the responsibility for prior period taxes of the United Online consolidated tax reporting group between us and United Online. If however, United Online were unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes, and such amounts could be significant. Other provisions of federal, state, local, or foreign law may establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The table below lists the Company’s properties at December 31, 2018:
|
| | | |
Location | Type | Principal Use | Ownership |
Downers Grove, IL | Corporate, Florist, U.S. Consumer | Headquarters, call center, data center | Owned |
Chicago, IL | Corporate | Office | Leased |
San Diego, CA (2 properties) | U.S. Consumer | Office, call center, data center | Leased |
Phoenix, AZ | U.S. Consumer | Data center | Leased |
Woodridge, IL | U.S. Consumer | Office, warehouse | Leased |
Centerbrook, CT | U.S. Consumer | Call center | Leased |
Hyderabad, India | Corporate | Technology development and support | Leased |
Sleaford, England | International | Office | Owned |
Sleaford, England (3 properties) | International | Office, meeting rooms, storage | Leased |
Our U.S. Consumer segment also leases the following distribution centers: |
| | | |
Phoenix, AZ | Lincoln, CA | Rancho Cucamonga, CA | Aurora, CO |
Doral, FL | Woodridge, IL | Richmond, IN | Charlotte, NC |
Cranbury, NJ | Memphis, TN | Garland, TX | |
We believe that our existing facilities are in good condition and adequate to meet our current requirements, and that suitable additional or substitute space will be available, as needed, to accommodate any physical expansion of our corporate and operations facilities.
The Amended Credit Agreement includes a security interest in substantially all of our assets, including a mortgage on the owned real property at our Downers Grove, Illinois location. For additional information regarding our obligations under leases, see Footnote 14—“Commitments and Contingencies.”
ITEM 3. LEGAL PROCEEDINGS
Commencing on August 19, 2009, the first of a series of putative consumer class action lawsuits was brought against Provide Commerce, Inc. and co-defendant Regent Group, Inc. d/b/a Encore Marketing International (“EMI”). These cases were ultimately consolidated during the next three years into Case No. 09 CV 2094 in the United States District Court for the Southern District of California under the title In re EasySaver Rewards Litigation. Plaintiffs’ claims arise from their online enrollment in subscription based membership programs known as EasySaver Rewards, RedEnvelope Rewards, and Preferred Buyers Pass (collectively the “Membership Programs”). Plaintiffs claim that after they ordered items from certain of Provide Commerce’s websites, they were presented with an offer to enroll in one of the Membership Programs, each of which is offered and administered by EMI. Plaintiffs purport to represent a nationwide class of consumers allegedly damaged by Provide Commerce’s purported unauthorized or otherwise allegedly improper transferring of billing information to EMI, who then posted allegedly unauthorized charges to their credit or debit card accounts for membership fees for the Membership Programs. In the operative fourth amended complaint, plaintiffs asserted ten claims against Provide Commerce and EMI: (1) breach of contract (against Provide Commerce only); (2) breach of contract (against EMI only); (3) breach of implied covenant of good faith and fair dealing; (4) fraud; (5) violations of the California Consumers Legal Remedies Act; (6) unjust enrichment; (7) violation of the Electronic Funds Transfer Act (against EMI only); (8) invasion of privacy; (9) negligence; and (10) violations of the Unfair Competition Law. Plaintiffs seek damages, attorneys’ fees, and costs. After motion practice regarding the claims asserted and numerous settlement conferences and mediations in an effort to informally resolve the matter the parties reached an agreement on the high level terms of a settlement on April 9, 2012, conditioned on the parties negotiating and executing a complete written agreement. In the weeks following April 9, 2012, the parties negotiated a formal written settlement agreement (the “Settlement”), which the court preliminarily approved on June 13, 2012. After notice to the purported class and briefing by the parties, the court conducted a final approval hearing (also known as a fairness hearing) on January 28, 2013, but did not rule. On February 4, 2013, the court entered its final order approving the Settlement, granting plaintiffs’ motion for attorneys’ fees, costs, and incentive awards, and overruling objections filed by a single objector. The court entered judgment on the Settlement on February 21, 2013. The objector filed a notice of appeal with the Ninth Circuit Court of Appeals on March 4, 2013. After the completion of briefing, the Ninth Circuit set oral argument for February 2, 2015. But on January 29, 2015, the Ninth Circuit entered an order deferring argument and resolution of the appeal pending the Ninth Circuit’s decision in a matter
captioned Frank v. Netflix, No. 12 15705+. On March 19, 2015, the Ninth Circuit entered an order vacating the judgment in this matter and remanding it to the district court for further proceedings consistent with its opinion in Frank v. Netflix issued on February 27, 2015. The district court ordered supplemental briefing on the issue of final Settlement approval May 21, 2015. After briefing, the district court conducted a hearing on July 27, 2016 and took the matter under submission. On August 9, 2016, the district court entered an order reapproving the Settlement without any changes, and accordingly entered judgment and dismissed the case with prejudice. On September 6, 2016, the objector filed a notice of appeal. On November 22, 2016, plaintiffs filed a motion for summary affirmance of the district court’s judgment, to which the objector responded and filed a cross-motion for sanctions. Plaintiffs’ motion for summary affirmance temporarily stayed briefing on the appeal. On March 2, 2017, the Ninth Circuit denied plaintiffs’ motion for summary affirmance and objector’s cross-motion for sanctions, and reset the briefing schedule. The objector filed his opening brief on May 1, 2017. Thirteen state Attorneys General filed an amicus brief in support of the objector on May 8, 2017. The parties filed their answering briefs on June 30, 2017. Various legal aid organizations filed an amicus brief in support of no party regarding cy pres relief also on June 30, 2017. The objector’s optional reply brief was filed on August 14, 2017. The Ninth Circuit heard oral arguments on May 17, 2018. On October 3, 2018, the Ninth Circuit issued an opinion vacating the district court’s award of attorney’s fees, but otherwise affirmed the district court’s approval of the class action settlement. On October 10, 2018, the objector filed a motion to stay the issuance of mandate, which would return jurisdiction to the district court, and for an extension of time to file a petition for panel rehearing. The Ninth Circuit denied the objector’s motion on November 21, 2018, and issued the mandate on November 29, 2018. In March 2019, the parties completed submission of supplemental briefings to the district court regarding the amount of Plaintiffs’ counsel’s attorneys’ fees and costs award. As of the date of this filing, the district court has not issued a decision on the matter. On February 13, 2019, the objector filed a petition seeking Supreme Court review of the Ninth Circuit’s decision. As of the date of this filing, the Supreme Court has not reviewed the objector’s petition. The negotiated settlement amount has been fully reserved.
There can be no assurances that other legal actions or governmental investigations will not be instituted in connection with the Company’s current or former business practices. The Company cannot predict the outcome of governmental investigations or other legal actions or their potential implications for its business.
The Company records a liability when it believes that it is both probable that a loss has been incurred, and the amount of loss can be reasonably estimated. The Company evaluates at least quarterly, developments in its legal matters that could affect the assessment of the probability of loss or the amount of liability and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate, (ii) if the proceedings are in early stages, (iii) if there is uncertainty as to the outcome of pending appeals, motions or settlements, (iv) if there are significant factual issues to be determined or resolved, and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. Legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market
Our common stock is listed on the NASDAQ Global Select Market under the symbol “FTD.”
Shareholders
In connection with the acquisition of Provide Commerce, Inc. (the “Acquisition”), we issued 10.2 million shares of FTD common stock to Qurate. Concurrent with the closing of the Acquisition, FTD and Qurate entered into the Investor Rights Agreement governing certain rights of and restrictions on Qurate in connection with the shares of FTD common stock that Qurate owns as a result of the Acquisition. At December 31, 2018, Qurate holds 36.0% of FTD’s outstanding shares of common stock.
As of March 6, 2019, there were approximately 344 shareholders of record of FTD common stock.
Dividends
We have not paid any cash dividends on our common stock since the Separation on November 1, 2013. We do not anticipate paying any future cash dividends.
Issuer Purchases of Equity Securities
The FTD board of directors had previously authorized common stock repurchase programs that allowed us to repurchase FTD common stock from time to time in both open market and privately negotiated transactions. All previously authorized repurchase programs have expired. Repurchased shares are held in treasury pending use for general corporate purposes, including issuances under various employee and director stock plans.
Upon vesting of restricted stock units (“RSUs”), performance stock units (“PSUs”), or exercise of stock options, we do not collect the minimum statutory withholding taxes in cash from employees. Instead, we automatically withhold, from the RSUs or PSUs that vest or stock options exercised, the portion of those shares with a fair market value equal to the amount of the minimum statutory withholding taxes due. The withheld shares are accounted for as repurchases of common stock but are not considered repurchases under our previous common stock repurchase programs. We then pay the minimum statutory withholding taxes in cash.
Stock Performance Graph
The following graph compares the relative performance of our common stock, the Russell 2000 Index and the S&P SmallCap 600 Consumer Discretionary Index, our Peer Group Index. This graph covers the period from December 31, 2013 through December 31, 2018. The graph assumes that $100 was invested on December 31, 2013 in the common stock of FTD, the Russell 2000 Index, and our Peer Group Index, and also assumes the reinvestment of dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 |
| FTD Companies, Inc | $ | 100.00 |
| | $ | 106.88 |
| | $ | 80.33 |
| | $ | 73.17 |
| | $ | 22.07 |
| | $ | 4.54 |
|
| Russell 2000 Index | $ | 100.00 |
| | $ | 104.89 |
| | $ | 100.26 |
| | $ | 121.63 |
| | $ | 139.44 |
| | $ | 124.09 |
|
| S&P SmallCap 600 Consumer Discretionary Index | $ | 100.00 |
| | $ | 97.60 |
| | $ | 82.48 |
| | $ | 86.95 |
| | $ | 92.78 |
| | $ | 83.18 |
|
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data, which should be read in conjunction with our consolidated financial statements and related notes and the MD&A. The table presents the consolidated statements of operations and cash flow data for the three years ended December 31, 2018 and the consolidated balance sheet data at December 31, 2018 and 2017 derived from our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K. The table also presents the consolidated statements of operations and cash flow data for the years ended December 31, 2016, 2015, and 2014, and the consolidated balance sheet data at December 31, 2016, 2015, and 2014, which were derived from our audited consolidated financial statements that are not included in this Form 10-K.
As the Acquisition was completed on December 31, 2014, the Company’s consolidated balance sheet included Provide Commerce at December 31, 2014, but no results of operations of Provide Commerce were included in the Company’s consolidated statements of operations and cash flow data for the year ended December 31, 2014.
The following amounts are in thousands, except per share and share data:
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Consolidated Statements of Operations and Cash Flow Data: | | | | | | | | | |
| Revenues | $ | 1,014,244 |
| | $ | 1,084,028 |
| | $ | 1,121,999 |
| | $ | 1,218,333 |
| | $ | 639,005 |
|
Impairment of goodwill, intangible assets, and other long-lived assets(a) | $ | (206,704 | ) | | $ | (300,342 | ) | | $ | (84,000 | ) | | $ | (85,000 | ) | | $ | — |
|
Operating income/(loss)(a)(b)(c) | $ | (224,631 | ) | | $ | (268,729 | ) | | $ | (80,740 | ) | | $ | (72,703 | ) | | $ | 36,160 |
|
| Net income/(loss) | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) | | $ | (80,142 | ) | | $ | 21,528 |
|
Earnings/(loss) per common share(a)(b)(c)(d): | | | | | | | | | |
| Basic | $ | (8.03 | ) | | $ | (8.52 | ) | | $ | (3.03 | ) | | $ | (2.79 | ) | | $ | 1.11 |
|
| Diluted | $ | (8.03 | ) | | $ | (8.52 | ) | | $ | (3.03 | ) | | $ | (2.79 | ) | | $ | 1.11 |
|
Net cash provided by/(used for) operating activities | $ | (11,239 | ) | | $ | 52,817 |
| | $ | 76,244 |
| | $ | 82,594 |
| | $ | 47,852 |
|
| Capital expenditures | $ | 33,756 |
| | $ | 15,103 |
| | $ | 18,503 |
| | $ | 18,255 |
| | $ | 7,486 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents(e) | $ | 16,227 |
| | $ | 29,496 |
| | $ | 81,002 |
| | $ | 57,892 |
| | $ | 95,595 |
|
Total assets(e) | $ | 386,980 |
| | $ | 610,325 |
| | $ | 962,314 |
| | $ | 1,121,728 |
| | $ | 1,328,967 |
|
Current portion of long-term debt(f) | $ | 208,076 |
| | $ | 189,666 |
| | $ | 20,000 |
| | $ | 20,000 |
| | $ | 20,000 |
|
Long-term debt(f) | $ | — |
| | $ | — |
| | $ | 256,306 |
| | $ | 274,946 |
| | $ | 313,587 |
|
Common shares outstanding(d) | 30,756 |
| | 30,073 |
| | 29,731 |
| | 29,427 |
| | 29,193 |
|
| Treasury shares | 2,431 |
| | 2,431 |
| | 2,431 |
| | 1,831 |
| | — |
|
| |
(a) | During the years ended December 31, 2018, 2017, 2016, and 2015, the Company recorded impairment charges related to goodwill, intangible assets, and other long-lived assets. For additional information regarding goodwill, see “Critical Accounting Policies, Estimates, and Assumptions—Goodwill, Intangible Assets, and Other Long-Lived Assets” which appears in Part II, Item 7 of this Form 10-K. |
| |
(b) | During the year ended December 31, 2018, the Company incurred costs associated with its previously announced corporate restructuring and reorganization plan that negatively impacted operating income by $18.2 million for restructuring costs and $7.0 million for reorganization costs. During the years ended December 31, 2017 and 2016, the Company incurred transaction and integration and restructuring and other exit costs, primarily associated with executive management changes and the Acquisition, that negatively impacted operating income by $3.3 million and $15.4 million, respectively. During the years ended December 31, 2015 and 2014, the Company incurred transaction and integration and restructuring and other exit costs associated with the Acquisition that negatively impacted operating income by $12.7 million and $12.4 million, respectively. |
| |
(c) | During the years ended December 31, 2018, 2017, 2016 and 2015, the Company recorded $3.5 million, $13.4 million, $60.9 million, and $61.2 million respectively, in amortization expense related to the intangibles recorded with the Acquisition. The Company incurred amortization expense of $11.8 million in 2014 related to intangibles recorded by the Company as a result of United Online’s acquisition of the Company. |
| |
(d) | In connection with the Acquisition, the Company issued 10.2 million shares of its common stock to Qurate. |
| |
(e) | As the Acquisition closed on December 31, 2014, the Company’s consolidated balance sheet included Provide Commerce at December 31, 2014, including acquired cash of $38.1 million. |
| |
(f) | All outstanding amounts under the Company’s term loan and revolving credit facility were classified as current at December 31, 2018 as the maturity date of the credit facility is September 19, 2019. In addition, the amounts outstanding under the credit facility were classified as current at December 31, 2017 as the Company anticipated it may not comply with certain requirements of the Credit Agreement at March 31, 2018 and, at that time, the inclusion of a going concern explanatory paragraph on the Company’s financial statements constituted an event of default under the Credit Agreement. During 2018, the Company entered into several amendments to its Credit Agreement. For further information, see “Liquidity and Capital Resources” within the MD&A and Footnote 6—“Financing Arrangements.” |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows, and results of operations. This MD&A should be read in conjunction with the consolidated financial statements and related notes included in Part II, Item 8 of this Form 10-K, and the other sections of this Form 10-K. References to “Footnote” refer to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
OVERVIEW
FTD Companies, Inc. (together with its subsidiaries may be referred to herein as the “Company,” “FTD,” “we,” “us,” or “our”) is a premier floral and gifting company with a vision to be the world’s floral innovator and leader, creating products, brands, and technology-driven services our customers love. We provide floral, specialty foods, gift, and related products and services to consumers, retail florists, and other retail locations and companies in need of floral and gifting solutions. Our business uses the highly recognized FTD® and Interflora® brands, both supported by the iconic Mercury Man® logo. While we operate primarily in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), and the Republic of Ireland, we have worldwide presence as our Mercury Man® logo is displayed in over 30,000 floral shops in more than 125 countries. Today, the “Mercury Man” is one of the most recognized logos in the world, and we are one of the largest e-commerce floral and gift retailers in the world. Our diversified portfolio of brands also includes ProFlowers®, Shari’s Berries®, Personal Creations®, Flying Flowers®, Gifts.com™, and ProPlants®. While floral arrangements and plants are our primary offerings, we also market and sell gift items, including gourmet-dipped berries and other specialty foods, personalized gifts, gift baskets, wine and champagne, jewelry, and spa products.
Reportable Segments
We report our business operations in three reportable segments: U.S. Consumer, Florist, and International. Prior to January 1, 2018, we reported our business operations in four reportable segments. As a result of a change in the information provided to and utilized by the Company’s then-current Chief Executive Officer, who was also the Company’s Chief Operating Decision Maker (“CODM”), to assess the performance of the business, the Company combined the previous Provide Commerce and Consumer segments into one reportable segment, U.S. Consumer. Our Florist segment includes the Florist business. Our International segment includes the Interflora business. Our current CODM continues to receive and utilize information provided for these three segments to assess the performance of the business.
Through our U.S. Consumer segment, we are a leading direct marketer of floral and gift products for consumers, including food gifts, personalized gifts, and other gifting products, primarily in the U.S. Our U.S. Consumer segment operates primarily through our www.ftd.com, www.proflowers.com, www.berries.com, www.personalcreations.com, www.gifts.com, and www.proplants.com websites, associated mobile sites and applications, and the 1-800-SEND-FTD and various other telephone numbers. Through our Florist segment, we are a leading provider of products and services to our floral network members, including services that enable our floral network members to send, receive, and deliver floral orders. Floral network members include traditional retail florists, as well as other non-florist retail locations, primarily in the U.S. and Canada. Our Florist segment also provides products and services to other companies in need of floral and gifting solutions. Our International segment consists of our Interflora business, which operates primarily in the U.K. and the Republic of Ireland. Interflora is a leading direct marketer of floral and gift products, and operates primarily through the www.interflora.co.uk, www.flyingflowers.co.uk, and www.interflora.ie websites, associated mobile sites and applications, and various telephone numbers. Interflora also provides products and services to floral network members, funeral directors, independent gift shops, other retailers, and other companies in need of floral and gifting solutions.
For additional information about our reportable segments refer to Footnote 2—“Segment Information.”
Recent Events
In July 2018, we announced that our board of directors initiated a review of strategic alternatives focused on maximizing stockholder value, including but not limited to, a sale or merger of the Company, pursuing value-enhancing initiatives as a standalone company, or the sale or other disposition of certain of our businesses or assets.
In addition, in July 2018, we announced a corporate restructuring and cost savings plan, under which we identified opportunities to optimize our operations, drive efficiency and reduce costs.
UnderOur 2018 compensation program described below generally reflects the different compensation arrangements approved in order to rebuild the Company’s leadership and its business in connection with our strategic business transformation plan.7
Many of our 2018 compensation decisions were driven by our need to attract new executive leadership and retain select key personnel in the context of our overall strategic transformation plan and therefore varied from the compensation cycle we have used in previous years. In 2018, as in years past, awards in the annual cycle and to retain executives consisted of time-vested options and restricted stock units (“RSUs”). Additionally, in 2018, the Company began granting performance-based equity awards, specifically performance-based restricted stock units (“PSUs”), which vest, if at all, based on achieving revenue and Adjusted EBITDA (as defined below) goals over a three-year period.
Chief Executive Officer Transition
On July 18, 2018, Mr. Levin was appointed as Interim President and Chief Executive Officer. On November 2, 2018, Mr. Levin was appointed as the Company’s President and Chief Executive Officer and on December 7, 2018, Mr. Levin was appointed to our Board of Directors. Mr. Levin also serves as the Company’s Secretary. Mr. Levin succeeded Mr. Walden, who had served as President and Chief Executive Officer since March 1, 2017. Mr. Walden succeeded Mr. Shean, a member of our Board of Directors, who had served as our Interim President and Chief Executive Officer since November 3, 2016. For more information about Mr. Levin’s compensation arrangements, see “Executive Compensation and Other Information—Employment Agreements and Potential Payments Upon Termination or Change in Control—Employment Agreements” below.
In accordance with his employment agreement, Mr. Walden was entitled to certain severance benefits in connection with his departure from the Company, including (i) a cash severance payment equal to the sum of (A) two times his then-current annual salary and (B) two times his target bonus for 2018, (ii) a cash payment in lieu of certain service-based RSUs, (iii) reimbursement for 12 months of COBRA coverage for Mr. Walden, his spouse and his dependents, and (iv) accelerated vesting of certain of his outstanding equity awards, subject in each case to his compliance with certain covenants in the employment agreement. For more information about Mr. Walden’s severance benefits, see “Executive Compensation and Other Information—Summary Compensation Table” below.
Chief Financial Officer Transition
On January 4, 2018, we announced the appointment of Mr. Barnhart as Executive Vice President and Chief Financial Officer, effective January 8, 2018. Mr. Barnhart is our principal financial officer and principal accounting officer. In connection with Mr. Barnhart’s appointment as our Executive Vice President and Chief Financial Officer, Mr. Cooper stepped down from the position of Interim Chief Financial Officer, effective January 8, 2018. Mr. Cooper did not receive any separation payments in connection with his departure from the Company. Mr. Cooper had served in this interim role since September 5, 2017, during which time a search for a permanent Chief Financial Officer was ongoing. While holding this position, Mr. Cooper did not participate in any Company employee benefit plans or receive any salary, bonus, equity awards or other compensation or benefits directly from the Company in connection with his service as Interim Chief Financial Officer.
Compensation Practices and Governance Highlights
Pay for Performance | | We work to link the compensation of our named executive officers to the success of our business objectives. |
Stockholder Alignment | | We align the interests of our named executive officers with those of our stockholders through the use of long-term equity incentives, including performance-based equity awards granted initially in January 2018 tied to multi-year revenue and Adjusted EBITDA goals. |
Compensation Governance | | We have 100% independent directors on the Compensation Committee. |
| | The Compensation Committee meets regularly in executive session without management present. |
| | Our independent compensation consultant, FW Cook, reports directly to the Compensation Committee. |
Change in Control Provisions | | We provide “double-trigger” change in control benefits. |
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| | We do not allow tax gross-ups on severance or change in control benefits. |
Post-termination/Retirement Benefits | | We do not provide post-termination retirement or pension benefits. |
Hedging, Pledging and Margin Loans | | We prohibit holding shares of our common stock in a margin account or otherwise pledging shares of our common stock as collateral for a loan unless that individual can clearly demonstrate the financial capacity to repay the loan without resorting to the pledged securities. |
| | We prohibit entering into hedging, monetization or similar transactions involving our common stock that are intended to realize the value of, or limit the risks and rewards of owning, our common stock, unless the individual receives pre-clearance from our General Counsel. |
Stock Ownership Guidelines | | We maintain non-employee director stock ownership guidelines to promote executive stock ownership. |
Compensation Philosophy and Objectives
The primary objectives of the Compensation Committee with respect to executive compensation are to:
· attract, retain and motivate experienced and talented executives;
· ensure executive compensation is aligned with our corporate strategies, programs and business goals;
· recognize the individual contributions of executives, but foster a shared commitment among executives by aligning their individual goals with our corporate goals;
· promote the achievement of key strategic and operational performance measures by linking compensation to the achievement of measurable corporate and departmental performance goals; and
· align the interests of our executives with our stockholders by rewarding performance that leads to the creation of stockholder value.
To achieve these objectives, the Compensation Committee evaluates our executive compensation program with the goal of setting compensation at levels that are justifiable based on each executive’s level of experience, performance and responsibility and that the Compensation Committee believes are broadly competitive with those of other internet and catalog retail and specialty retail companies that compete with us for executive talent. In addition, our executive compensation program ties a portion of each executive’s overall compensation to the achievement of key corporate and individual goals. In 2018, we provided a portion of our executive compensation in the form of (1) time/service based awards, specifically RSUs and/or stock options that vest over time, which we believe helps to retain our executives and aligns their interests with those of our stockholders by allowing them to participate in our longer term success as reflected in the appreciation of our stock price, and (2) PSUs that vest over a three-year period based on the achievement of revenue and Adjusted EBITDA targets, which we believe align our executives’ interests with those of our stockholders by tying vesting to performance under our multi-year strategic transformation plan.
We review peer group data from time to time and do not benchmark our executive compensation to target total direct compensation at a specific level relative to our comparative group of peer companies. For 2018, the named executive officers had target and actual total direct compensation, which includes base salary, cash bonus incentive, and the grant date fair value of equity awards made in 2018, that was generally consistent with or below the median of our compensation peer group, with a below-median salary and bonus opportunity.
Compensation Setting Practice
The Compensation Committee consists of three directors, Messrs. Berglass and Harch and Ms. Hickenlooper, each of whom is an independent director as defined in Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The
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Compensation Committee administers our executive compensation programs and is responsible for reviewing the compensation of our executive officers and determining the nature and amount of the various components of such compensation, including adjustments to annual base salary and the establishment of the applicable performance goals under our annual management incentive bonus plan and the specific bonus amount for each potential level of goal attainment. The Compensation Committee also administers our equity incentive plan and has the exclusive authority to make awards under such plan to our executive officers and determine the appropriate mix of equity awards, including the establishment of performance goals applicable to PSUs granted under the equity incentive plan. The Compensation Committee also approves all employment agreements, severance or termination arrangements, and other compensatory contracts or arrangements made with our executive officers. The Compensation Committee will also perform other functions or duties as may be assigned to it under the terms of any executive compensation or equity-based benefit plan or as otherwise deemed appropriate by our Board of Directors. The Compensation Committee held five meetings during 2018. The Compensation Committee operates under a written charter adopted by our Board of Directors, which is reviewed annually and revised as appropriate.
The Compensation Committee makes all decisions regarding the cash and equity compensation of our Chief Executive Officer, although the Compensation Committee may, in its discretion, request the concurrence or approval of such decisions by a majority of the independent members of our Board of Directors. With respect to all other executive officers, the Compensation Committee determines their compensation, taking into account the recommendations of our Chief Executive Officer, who annually reviews the performance of the other executive officers and then presents to the Compensation Committee the conclusions reached and his recommendations for their compensation based on those reviews. The Compensation Committee can, and often does, exercise its discretion in determining whether to approve or modify any recommended compensation adjustments or equity awards. Decisions regarding any other forms of compensation provided to our executive officers that are not provided to all senior level employees (for example, any executive level health and welfare benefits, deferral plans and perquisites) are made by the Compensation Committee after taking into consideration the recommendations made by our Chief Executive Officer. The Compensation Committee reviews peer data from time to time, but does not target any specific percentile.
The Compensation Committee has the authority to retain the services of an independent compensation consulting firm in connection with its responsibilities in setting the compensation for our executive officers. Pursuant to that authority, the Compensation Committee has engaged FW Cook, a nationally recognized, independent compensation consulting firm, to review the executive compensation programs and individual compensation arrangements for our executive officers. All executive compensation services provided by the independent consultant are conducted under the direction or authority of the Compensation Committee. During 2018, FW Cook served solely as a consultant to the Compensation Committee and did not provide any services to management. Based on the six factors for assessing independence and identifying potential conflicts of interest that are set forth in Rule 10C-1(b)(4) of the Exchange Act, and such other factors as were deemed relevant under the circumstances, the Compensation Committee determined that its relationship with FW Cook, and the work of FW Cook on behalf of the Compensation Committee, did not raise any conflict of interest.
FW Cook provides the Compensation Committee with relevant market data and alternatives to consider when making compensation decisions regarding our executive officers and considering the recommendations of our Chief Executive Officer regarding the compensation of other executive officers. In designing our executive compensation program, our Compensation Committee periodically considers publicly available compensation data for a group of peer companies to help guide its executive compensation decisions at the time of hiring and for subsequent adjustments in compensation. Although the Compensation Committee considers FW Cook’s advice and recommendations about our executive compensation program, the Compensation Committee ultimately makes its own decisions about executive compensation matters.
In 2016, FW Cook provided our Compensation Committee with updated comparative peer group data showing where our total compensation and each element of our compensation ranked among a group of 19 publicly-traded U.S.-based internet and catalog retail and specialty retail companies. The peer group companies included were 1-800-FLOWERS.COM, American Eagle Outfitters, Blue Nile, Cabela’s, Caleres, Groupon, Grubhub, HSN, Lands’ End, Libbey, Monster Worldwide, Overstock.com, Pier 1 Imports, Restoration Hardware, Shutterfly, Tiffany & Co., Vitamin Shoppe, WebMD and Williams-Sonoma. The 2016 peer group companies reflected the removal of three previous peer companies due to acquisition (Ann Taylor, Conversant and Orbitz) and the addition of three new peer companies with similar revenues and/or market capitalizations (Blue Nile, Grubhub and Lands’ End). Our peer group is subject to change.
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While we expect that our Compensation Committee will continue to generate approximately $25.0 millionperiodically review and update the list, the 2016 study was not updated for purposes of our 2018 compensation decisions.
The peer group was chosen to $28.0 millionreflect a cross-section of similar retail and internet retail companies with revenue size between about 0.2x and 5x our size. This reflects the Company’s executive labor market, and companies that might attract similar investors.
Compensation Elements
The primary elements of our executive compensation program are:
· base salary;
· annual management incentive bonuses;
· equity incentive awards, both short-term and long-term;
· benefits and other compensation; and
· severance and change in annualized run-rate cost savingscontrol benefits.
We do not have a formal or informal policy for allocating between long-term and short-term compensation, between cash and non-cash compensation or among different forms of non-cash compensation. Instead, our Compensation Committee, after periodically reviewing information provided by our compensation consultant and other relevant data, determines subjectively what it believes to be the appropriate level and mix of the various compensation components. We generally strive to provide our named executive officers with a balance of short-term and long-term incentives to encourage consistently strong performance. Ultimately, the objective in 2019.allocating between long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for FTD and our stockholders. Therefore, we provide cash compensation in the form of base salary to meet competitive salary norms and reward good performance on an annual basis and in the form of bonus compensation to incent and reward superior performance based on specific annual and longer-term goals. To further focus our executives on longer-term performance and the creation of stockholder value, we make equity-based awards that vest over a meaningful period of time. Beginning in 2018, we granted certain performance-based awards, specifically PSUs, that vest, if at all, based on the achievement of revenue and Adjusted EBITDA goals over a three-year period. In conjunctionaddition, we provide our executives with benefits that are generally available to our salaried employees and severance benefits to incentivize them to continue to strive to achieve stockholder value in connection with change in control situations.
Base Salary
We use base salaries to recognize the experience, skills, knowledge and responsibilities of our employees, including our executive officers. Base salaries for our named executive officers typically are established through arm’s length negotiation at the time the executive is hired, taking into account the position for which the executive is being considered and the executive’s qualifications, prior experience and prior salary. None of our executive officers is currently party to an employment agreement that provides for automatic or scheduled increases in base salary. However, on an annual basis, our Compensation Committee reviews and evaluates, with input from our President and Chief Executive Officer, the need for adjustment of the base salaries of our executives based on changes and expected changes in the scope of an executive’s responsibilities, including promotions, the individual contributions made by and performance of the executive during the prior fiscal year, the executive’s performance over a period of years, overall labor market conditions, the relative ease or difficulty of replacing the executive with a well-qualified person, our overall growth and development as a company and general salary trends in our industry and among our peer group and where the executive’s salary falls in the salary range presented by that data. In making decisions regarding salary increases, we may also draw upon the experience of members of our Board of Directors with other companies. No formulaic base salary increases are provided to our named executive officers, and we do not target the base salaries of our named executive officers at a specified compensation level within our peer group or other market benchmark. In mid-2018, in connection with the announcement of the review of strategic alternatives and the corporate restructuring and cost savings plan, we expectthe Company entered into retention letter agreements with certain of the named executive officers, among others, which in some cases included a salary increase through July 2019. For more information on the retention letter agreements, see “—2018 Compensation
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Actions—Retention Letter Agreements.” Please refer to incur restructuring“Executive Compensation and Other Information—Summary Compensation Table” for a listing of the base salaries of each of our named executive officers for 2018.
Base salaries for our Continuing NEOs for 2018 were generally at or near the median of the peer group data reviewed by the Compensation Committee for all such named executive officers.
Annual Management Incentive Cash Bonuses
We designed our 2018 Management Bonus Plan to emphasize pay-for-performance and to reward our named executive officers for the achievement of specified corporate reorganization costs ranging between approximately $28.0 millionobjectives. For each participant, bonus awards are tied to various corporate performance goals. Those goals are based on company-wide financial metrics, including revenue and approximately $32.0 million. DuringAdjusted EBITDA. For certain participants, the second halfperformance objectives may include specified Company key operating metrics or individual goals. For additional information about the annual performance-based cash bonus program for 2018, see “—2018 Compensation Actions—2018 Management Bonus Plan” below.
Long-Term Incentive Compensation
Grants of stock-based awards may result in limited rewards if the price of our common stock does not appreciate significantly, but may provide substantial rewards to executives as our stockholders in general benefit from stock price appreciation. Grants of stock-based awards are also intended to align compensation with the price performance of our common stock. Stock-based awards are also a useful vehicle for attracting and retaining executive talent in a competitive market. Our stock-based awards may consist of service-based or performance-based stock options, restricted stock units, restricted stock awards, performance stock units or a combination thereof.
Our Compensation Committee develops its stock-based award determinations based on its judgment as to whether the total compensation packages provided to our executive officers, including prior stock-based awards and the level of vested and unvested stock-based awards then held by each participating officer, are sufficient to retain, motivate, and adequately reward the executive officers. In addition, our Compensation Committee considers the potential dilution associated with the stock-based awards and the cost of awards relative to budget and to market capitalization.
Long-term incentive compensation grants for named executive officers in 2018 we incurred restructuring costsincluded grants of $18.2 million,options, RSUs and PSUs. For additional information about these grants, see “—2018 Compensation Actions—2018 Long-Term Equity Awards: RSU, Stock Option and PSU Awards.”
Stock Options
We believe that stock options, when granted with exercise prices equal to the fair market value of our common stock on the date of grant, provide an appropriate long-term incentive for our executive officers because they are rewarded only to the extent that, following the grant date of the options, our stock price grows and our stockholders see the value of their investment also grow.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards and restricted stock units reflect both increases and decreases in stock prices from the grant-date market prices and thus tie compensation more closely to changes in stockholder value at all levels compared to stock options, whose intrinsic value changes only when the market price of shares is above the exercise price. Restricted stock awards and restricted stock units also have retention value even during periods in which included employee severance costsour trading price does not appreciate, which supports continuity in the senior management team. In addition, restricted stock awards and restricted stock units allow our Compensation Committee to deliver equivalent value with use of fewer authorized shares.
Performance Stock Units
A performance stock unit represents either (1) a unit with a dollar value tied to the level at which pre-established corporate performance objectives based on one or more performance goals are attained or (2) a participating interest in a special bonus pool tied to the attainment of pre-established corporate performance objectives based on one or more performance goals. The amount of the bonus pool may vary with the level at which the applicable performance objectives are attained, and the value of each performance unit which becomes due and payable upon the attained level of
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performance will be determined by dividing the amount of the resulting bonus pool (if any) by the total number of performance units issued and outstanding at the completion of the applicable performance period. Performance stock units which become due and payable following the attainment of the applicable performance objectives and the satisfaction of any applicable service-vesting requirement may be paid in cash or shares of $12.7 millionour common stock valued at fair market value on the payment date, or a combination of shares of common stock and non-cashcash, as set forth in the applicable award agreement.
Equity Award Mix
Our Compensation Committee may in the future adjust the mix of equity award types or approve different awards as part of the overall long-term incentive award. Awards made in connection with a new, extended, or expanded employment relationship may involve a different mix of service-based and performance-based stock options, RSUs, restricted stock awards, performance stock units or other stock-based awards depending on our Compensation Committee’s assessment of the total compensation relatedpackage being offered.
Benefits and other compensation
We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. We maintain broad-based benefits that are provided to all employees, including medical insurance, dental insurance, vision insurance, group life insurance, accidental death and dismemberment insurance, long and short term disability insurance, medical and dependent care flexible spending accounts and matching contributions in our 401(k) plan. All of our executive officers are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees. Under our 401(k) plan, we are permitted to make discretionary contributions and matching contributions, subject to established limits and a vesting schedule. Our named executive officers may also participate in the FTD Companies, Inc. 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which provides a means for our employees, and the employees of certain of our subsidiaries, to purchase shares of the Company’s common stock. Consistent with our compensation philosophy, we intend to continue to maintain our current benefits for our named executive officers. The Compensation Committee in its discretion may revise, amend or add to the accelerationnamed executive officer’s benefits and perquisites if it deems it advisable.
Severance and change in control benefits
Pursuant to employment agreements we have entered into with our executive officers, certain of our executive officers are entitled to specified double trigger benefits in the event of the termination of their employment under specified circumstances, including termination following a change in control of FTD. In addition, pursuant to retention letter agreements we have entered into with certain of our executive officers, certain of our executives are entitled to cash awards in the event of certain equity awardstransaction events (including a change in control) or certain involuntary terminations. Please refer to “Executive Compensation and Other Information—Employment Agreements and Potential Payments Upon Termination or Change in Control” and “—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of $5.5 million.these benefits. We have provided estimates of the value of the severance payments and other benefits that would have been made or provided to executive officers under various termination circumstances under the caption “Executive Compensation and Other costs associatedInformation—Employment Agreements and Potential Payments Upon Termination or Change in Control” below.
Relevant Prior-Year Compensation Actions
Advisory Votes Related to Named Executive Officer Compensation
At our annual meeting of stockholders held in June 2016, the compensation of our named executive officers set forth in the proxy statement for that meeting was approved, on an advisory basis, by approximately 84% of the votes cast by our stockholders. At the same meeting, the recommendation of the Board of Directors to hold an advisory vote regarding the compensation of our named executive officers every three years received the support of a majority of the votes cast by our stockholders. Taking into consideration that support, the Board of Directors determined to hold future stockholder advisory votes regarding the compensation of our named executive officers every three years until the next required vote regarding that frequency in 2022. After taking into account the substantial stockholder support of the compensation described in the proxy statement for our 2016 annual meeting, the Compensation Committee did not implement changes to our executive compensation program as a result of the stockholder advisory vote held in 2016.
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2018 Compensation Actions
Appointment of Steven D. Barnhart and Related Hiring Grant
In connection with Mr. Barnhart’s appointment as our Executive Vice President and Chief Financial Officer, he received a grant of (i) 25,000 RSUs, (ii) 40,000 PSUs and (iii) 125,000 options to purchase shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the grant date. The RSU and option grants vest in four equal annual installments beginning January 22, 2019. The PSUs vest on the third anniversary of the date of grant, subject to achievement of certain performance goals. For additional information about the RSUs, PSUs and options, see “—2018 Long-Term Equity Awards: RSU, Stock Option and PSU Awards.”
Additionally, his employment agreement provided that to the extent the bonus paid to Mr. Barnhart under the 2018 Management Bonus Plan with respect to the Company’s 2018 fiscal year was less than 50% of his annual earned base salary for the fiscal year (prorated for the period of time employed during such year), the Company was required to make, and did so make, a payment to Mr. Barnhart so that the amount of bonus paid to Mr. Barnhart for the 2018 fiscal year equaled 50% of his prorated base salary for 2018. For additional information about Mr. Barnhart’s employment agreement, see “Executive Compensation and Other Information—Employment Agreements and Potential Payments Upon Termination or Change in Control—Employment Agreements—Steven D. Barnhart.”
Retention Letter Agreements
In connection with his appointment as Interim President and Chief Executive Officer and in connection with the announcement of the review of strategic alternatives and the corporate reorganizationrestructuring and cost savings plan, Mr. Levin entered into a retention letter agreement with the Company, under which he was awarded a monthly salary rate increase of $40,000, effective through the first anniversary of July 18, 2018. This monthly salary rate increase was subsequently removed from Mr. Levin’s retention letter agreement and incorporated into Mr. Levin’s base salary under his amended employment agreement upon his appointment as President and Chief Executive Officer in November 2018. Pursuant to Mr. Levin’s retention letter agreement, in the event Mr. Levin remains continuously employed by the Company until the first of the following to occur (if any): (a) first anniversary of the effective date of his appointment to Interim President and Chief Executive Officer, (b) consummation of a Transaction (as defined below) or (c) Mr. Levin’s Involuntary Termination (as defined in Mr. Levin’s retention letter agreement), Mr. Levin will receive a retention bonus of $250,000. In addition, in the event Mr. Levin remains continuously employed by the Company until the consummation of a Transaction, provided that such Transaction meets certain requirements, Mr. Levin will be entitled to receive a transaction cash bonus of $500,000. This cash bonus would also be payable to Mr. Levin in the event he experiences an Involuntary Termination under certain specified circumstances as outlined in his retention letter agreement.
In connection with the announcement of the review of strategic alternatives and the corporate restructuring and cost savings plan, on July 18, 2018, the Company entered into the following additional retention letter agreements, among others:
1.Mr. Barnhart: Under Mr. Barnhart’s retention letter agreement, he was awarded a monthly salary rate increase of $10,000, effective through the first anniversary of July 18, 2018. In the event of an Involuntary Termination (as defined in Mr. Barnhart’s retention letter agreement) prior to the first anniversary of July 18, 2018, the Company will pay Mr. Barnhart a lump sum cash payment equal to the amount Mr. Barnhart would have received in connection with such monthly salary increase had he remained continuously employed with the Company through the first anniversary of July 18, 2018. In addition, this monthly salary increase will be disregarded for purposes of calculating any severance payments that are calculated on the basis of base salary and will be disregarded for purposes of calculating Mr. Barnhart’s annual bonus opportunity and annual bonus (if any) for calendar years 2018 and 2019. In the event Mr. Barnhart remains continuously employed by the Company until the first of the following to occur (if any): (a) first anniversary of July 18, 2018, (b) consummation of a Transaction or (c) Mr. Barnhart’s Involuntary Termination, Mr. Barnhart will receive a retention bonus of $200,000. In the event Mr. Barnhart remains continuously employed by the Company until the consummation of a Transaction, provided that such Transaction meets certain requirements, Mr. Barnhart will be entitled to receive a transaction cash bonus of $400,000. This cash bonus would also be payable to Mr. Barnhart in the event he experiences an Involuntary Termination under certain specified circumstances as outlined in his retention letter agreement.
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2.Mr. Hughes: Under Mr. Hughes’ retention letter agreement, in the event Mr. Hughes remains continuously employed by the Company until the first of the following to occur (if any): (a) first anniversary of July 18, 2018, (b) consummation of a Transaction or (c) Mr. Hughes’ Involuntary Termination (as defined in Mr. Hughes’ retention letter agreement), Mr. Hughes will receive a retention bonus of $200,000. In the event Mr. Hughes remains continuously employed by the Company until the consummation of a Transaction, provided that such Transaction meets certain requirements, Mr. Hughes will be entitled to receive a transaction cash bonus of $200,000. This cash bonus would also be payable to Mr. Hughes in the event he experiences an Involuntary Termination under certain specified circumstances as outlined in his retention letter agreement.
3.Mr. Moeller: Under Mr. Moeller’s retention letter agreement, in the event Mr. Moeller remains continuously employed by the Company until the first of the following to occur (if any): (a) first anniversary of July 18, 2018, (b) consummation of a Transaction or (c) Mr. Moeller’s Involuntary Termination (as defined in Mr. Moeller’s retention letter agreement), Mr. Moeller will receive a retention bonus of $200,000. In the event Mr. Moeller remains continuously employed by the Company until the consummation of a Transaction, provided that such Transaction meets certain requirements, Mr. Moeller will be entitled to receive a transaction cash bonus of $200,000. This cash bonus would also be payable to Mr. Moeller in the event he experiences an Involuntary Termination under certain specified circumstances as outlined in his retention letter agreement.
4.Mr. Topper: Under Mr. Topper’s retention letter agreement, he was awarded a monthly salary increase of $10,000, effective through the first anniversary of July 18, 2018. In the event of an Involuntary Termination (as defined in Mr. Topper’s retention letter agreement) prior to the first anniversary of July 18, 2018, the Company will pay Mr. Topper a lump sum cash payment equal to the amount Mr. Topper would have received in connection with such monthly salary increase had he remained continuously employed with the Company through the first anniversary of July 18, 2018. In addition, this monthly salary increase will be disregarded for purposes of calculating any severance payments that are calculated on the basis of base salary and will be disregarded for purposes of calculating Mr. Topper’s annual bonus opportunity and annual bonus (if any) for calendar years 2018 and 2019. In the event Mr. Topper remains continuously employed by the Company until the first of the following to occur (if any): (a) first anniversary of July 18, 2018, (b) consummation of a Transaction or (c) Mr. Topper’s Involuntary Termination (as defined in Mr. Topper’s retention letter agreement), Mr. Topper will receive a retention bonus of $200,000. In the event Mr. Topper remains continuously employed by the Company until the consummation of a Transaction, provided that such Transaction meets certain requirements, Mr. Topper will be entitled to receive a transaction cash bonus of $400,000. This cash bonus would also be payable to Mr. Topper in the event he experiences an Involuntary Termination under certain specified circumstances as outlined in his retention letter agreement.
For purposes of the retention letter agreements described above, a “Transaction” means, collectively: (i) a public offering or private placement of debt or equity securities of the Company, provided that the gross proceeds thereof exceed $75,000,000; (ii) the repayment or permanent refinancing of the outstanding debt under the Company’s existing credit agreement; (iii) the occurrence of any Change in Control (as defined in the FTD Companies, Inc. Third Amended and Restated 2013 Incentive Compensation Plan); or (iv) any other transaction that the Board of Directors of the Company may hereafter determine should be treated as a Transaction for purposes of such retention letter agreement.
President and Chief Executive Officer Appointment
In connection with Mr. Levin’s appointment as President and Chief Executive Officer, Mr. Levin’s employment agreement was amended to adjust his annual base salary to $897,000. Relatedly, the temporary monthly salary rate increase awarded in connection with Mr. Levin’s appointment as Interim President and Chief Executive Officer was removed from his retention letter agreement.
2018 Management Bonus Plan
On February 26, 2018, our Compensation Committee adopted our 2018 Management Bonus Plan. The 2018 Management Bonus Plan was an annual incentive program which could pay out in cash, stock or a combination of both,
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depending on level and performance of each eligible employee. These short-term incentives were designed to reward achievement against specific, pre-set financial goals and operating performance objectives, including in certain cases individual performance goals, measured over the fiscal year for which the award is paid. Under the 2018 Management Bonus Plan, the financial goals upon which the awards were based related to the Company’s consolidated revenue and Adjusted EBITDA (as defined below) (the “2018 consolidated financial targets”). The operating performance criteria was based on achievement of specific corporate objectives relating to Company initiatives as discussed below. Individual goals, where applicable to a named executive officer’s bonus potential, were approved by our CEO.
2018 Bonus Potential
The 2018 bonus potential for our Continuing NEOs, as well as Messrs. Kumar and Severts (prior to their departure from the Company mid-2018), was based 40% upon the Company’s performance relative to the 2018 consolidated financial targets, 40% upon the Company’s performance relative to the key operating metrics (specifically, customer satisfaction, order volume, customer population, order shipments, florist retention, pilot program implementation and website and mobile enhancements, each with equal weighting), and 20% upon each named executive officer’s respective individual goals, scaling up to a maximum payout of 120% of salary.
Mr. Walden, our former President and Chief Executive Officer, had a 2018 bonus potential based 662/3% upon the Company’s performance relative to the 2018 consolidated financial targets and 331/3% upon other performance criteria (specifically holiday performance, supply chain efficiency, the FTD florist network and shareholder engagement, each with specified weighting), scaling up to a maximum payout of 150% of salary.
2018 Consolidated Financial Targets
For 2018, up to eleven potential levels of goal attainment from threshold to maximum were established for the applicable revenue and Adjusted EBITDA goals. Level six of eleven represents the “target” level earned for achieving the 2018 consolidated financial targets. The amount of the bonus award was based on the actual levels at which the applicable goals were in fact attained. Absent at least threshold attainment of each applicable goal, no bonus award would be earned with respect to that particular performance metric. In addition, if consolidated Adjusted EBITDA for the 2018 fiscal year was more than 10% below target, no payouts could be earned under the 2018 Management Bonus Plan regardless of performance as to any other performance metric. In order to receive their bonuses, participants generally were required to continue in the Company’s employ through December 31, 2018. The 2018 Management Bonus Plan imposed a limit of $2.0 million on the maximum bonus amount payable to any participant for the 2018 fiscal year.
For the purposes of the 2018 Management Bonus Plan, we define Adjusted EBITDA as net income/loss before net interest expense, provision for/benefit from income taxes, depreciation, amortization, stock-based compensation, litigation and dispute settlement charges and gains (including, without limitation, damages and settlement costs related to litigation, arbitration, investigations, disputes or similar matters), transaction related costs (including, without limitation, expenses resulting from actual or potential transactions such as consultingbusiness combinations, mergers, acquisitions, and financing transactions, and including compensation expense and expense for advisors and representatives related to such transactions such as investment bankers, consultants, attorneys and accounting firms), restructuring and other exit costs (including, without limitation, severance expenses, facility closure expenses and other restructuring charges) and impairment of goodwill, intangible assets and long-lived assets. Adjusted EBITDA is also calculated before, and expenses for the purposes of calculating Adjusted EBITDA exclude, (1) any bonus amounts which accrue under the 2018 Management Bonus Plan; (2) any adjustments to Adjusted EBITDA attributable to a change in accounting principles that occurred after January 1, 2018 (such that the actual Adjusted EBITDA is calculated consistently with the Adjusted EBITDA target as it relates to accounting principles); (3) all items of gain, loss or expense determined to be extraordinary, unusual or non-recurring (except that Item 10(e) of Regulation S-K under the Securities Act does not constitute a limitation on any such determination); (4) losses, fees, charges or expenses with respect to litigation, investigations or other legal matters; and costs(5) all items of gain, loss or expense related to retain key employees,the sale or divestiture of a business; provided, however, that in determining the actual level at which the Adjusted EBITDA has been attained, the associated amount under clause (1), clause (3) or clause (4) shall be excluded from the calculation of Adjusted EBITDA only to the extent the actual aggregate amount under clause (1), clause (3) or clause (4) exceeds the aggregate budgeted amount therefor that was included in the Adjusted EBITDA targets set forth in the applicable performance goals.
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The following two tables highlight the payout percentages under the 2018 Management Bonus Plan for our Continuing NEOs and Mr. Walden, respectively:
| | Scott D. Levin/
Steven D. Barnhart/
Rhys J. Hughes
Tom D. Moeller/
Joseph R. Topper, Jr.(1)
Consolidated | |
| | Revenue
Payout % | | Adj. EBITDA
Payout % | |
1 | | 10.0 | % | 10.0 | % |
2 | | 12.0 | % | 12.0 | % |
3 | | 14.0 | % | 14.0 | % |
4 | | 16.0 | % | 16.0 | % |
5 | | 18.0 | % | 18.0 | % |
6 (Target) | | 20.0 | % | 20.0 | % |
7 | | 20.8 | % | 20.8 | % |
8 | | 21.6 | % | 21.6 | % |
9 | | 22.4 | % | 22.4 | % |
10 | | 23.2 | % | 23.2 | % |
11 | | 24.0 | % | 24.0 | % |
(1) Messrs. Severts and Kumar were subject to the same payout percentages under the 2018 consolidated financial targets during their employment at the Company.
| | John C. Walden
Consolidated | |
| | Revenue
Payout % | | Adj. EBITDA
Payout % | |
1 | | 25.0 | % | 25.0 | % |
2 | | 30.0 | % | 30.0 | % |
3 | | 35.0 | % | 35.0 | % |
4 | | 40.0 | % | 40.0 | % |
5 | | 45.0 | % | 45.0 | % |
6 (Target) | | 50.0 | % | 50.0 | % |
7 | | 50.0 | % | 50.0 | % |
8 | | 50.0 | % | 50.0 | % |
9 | | 50.0 | % | 50.0 | % |
10 | | 50.0 | % | 50.0 | % |
11 | | 50.0 | % | 50.0 | % |
2018 Results
For purposes of the 2018 Management Bonus Plan, the Company achieved consolidated corporate revenue and Adjusted EBITDA for 2018, as determined in accordance with the terms and provisions of the plan, of $1,014 million and $33.4 million, respectively. The results achieved for the revenue portion of the plan were 9.4% below the target established at the start of the year while the results achieved for the Adjusted EBITDA portion of the plan were 45.0% below the corresponding target. Under the 2018 Management Bonus Plan, if consolidated Adjusted EBITDA for the 2018 fiscal year was more than 10% below target, no payouts could be earned under the 2018 Management Bonus Plan regardless of performance as to any other performance metric. After comparing the achieved results to the 2018 consolidated financial targets, the Compensation Committee determined that regardless of the achievement related to both the operating performance metrics and individual goals, the required threshold was not met for the Adjusted EBITDA portion of the 2018 Management Bonus Plan and therefore no payments under the 2018 Management Bonus Plan were warranted for the Continuing NEOs.
Pursuant to Mr. Barnhart’s employment agreement, to the extent the bonus paid to Mr. Barnhart under the 2018 Management Bonus Plan with respect to the 2018 fiscal year was less than 50% of Mr. Barnhart’s annual base salary (prorated for the period of time employed during such year), the Company was required to make, and did so make, a
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payment to Mr. Barnhart so that the amount of bonus paid to Mr. Barnhart for the 2018 fiscal year equaled 50% of his prorated base salary for 2018. As such, Mr. Barnhart received a bonus of $232,945 for 2018.
Pursuant to their respective employment agreements, upon termination and in lieu of receiving a payment under the 2018 Management Bonus Plan discussed above, Mr. Walden received a cash severance payment of $3,000,000, a sum equal to two times his target bonus for 2018 and Messrs. Kumar and Severts received cash severance payments of $515,000 and $432,600, respectively, sums equal to their target bonuses for 2018.
For additional information about the amounts paid to our named executive officers under our 2018 Management Bonus Plan, see “Executive Compensation and Other Information—Summary Compensation Table” below.
2018 Long-Term Equity Awards: RSU, Stock Option and PSU Awards
In January 2018, and in light of the Company’s multi-year strategic plan announced in January 2018, the Compensation Committee approved a set of awards for our named executive officers in lieu of the annual long-term incentive awards the Company has typically made in the first quarter of the year. These awards consisted of a combination of service-based RSUs; service-based stock options; and PSUs, with performance measured over a three-year period. The Company chose the mix of award types to incentivize the named executive officers to lead the Company during a challenging time and better align the named executive officers’ interests with stockholder interests. The majority of these awards are expected“at-risk”: stock options require appreciation in the Company’s stock price for an award recipient to range from approximately $10.0 millionrealize value, and the PSUs require that challenging performance goals be met in order for the recipient to approximately $12.0 million,receive value. PSUs represent the largest component of which $7.0 millionthese awards based on grant date fair value. Grants of long-term equity awards in 2018 were not targeted to a specific percentile relative to our comparative group of peer companies, though Mr. Walden’s 2018 award value, as the Company’s then-President and Chief Executive Officer, was incurredbelow the median and the 2018 award value for all other named executive officers was generally below or near the median of our compensation peer group.
For 2018, target long-term compensation for our named executive officers was allocated as follows:
1.Time-Vested RSUs: 34% in time-vested RSUs that vest in equal installments over a four-year period, subject to the named executive officer’s continued employment through each vesting date;
2.Stock Options (At-Risk Award): 22% in stock options that vest in equal installments over a four-year period and have value only if our stock price increases over the grant price of the options; and
3.PSUs (At-Risk Award): 44% in PSUs that vest after a three-year performance period only if the Company meets pre-determined equally-weighted revenue and Adjusted EBITDA goals. Of the 2018 PSU grant, fifty percent (50%) of the target PSUs (the “AEBITDA PSUs”) shall be earned based on the Company’s achievement relative to a pre-determined Adjusted EBITDA performance goal during the second halfapplicable performance period and fifty percent (50%) of 2018.the target PSUs (the “Revenue PSUs”) shall be earned based on the Company’s achievement relative to a pre-determined revenue performance goal during the applicable performance period. The PSUs granted in 2018 are subject to a three-year performance period that began on January 1, 2018 and will end on December 31, 2020. For purposes of the AEBITDA PSUs, we use the same definition of Adjusted EBITDA as that used under the 2018 Management Bonus Plan. A percentage of target PSUs (if any) shall vest following the applicable performance period, subject to the participant’s continued service through such date and to the extent that the applicable performance goals are certified by the Compensation Committee, in its sole discretion, as having been achieved during the performance period. The Compensation Committee chose revenue and Adjusted EBITDA as the performance metrics for the 2018 PSU grants in order to align the incentive opportunities of executive officers with the interests of the Company’s stockholders. The Compensation Committee established threshold, target and maximum levels of revenue and Adjusted EBITDA for the PSUs at the beginning of the performance period, which correspond to payouts in shares of Company common stock at a rate of 0% to 200% of target as noted below. At the time the Compensation Committee established the target levels of performance, it believed that achievement of the threshold performance level was attainable, but not certain; that target performance would be difficult to achieve; and that the maximum level of performance was possible, but not likely to be achieved.
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Also
Performance Level | | AEBITDA PSUs Earned as a
Percentage of Target | | Revenue PSUs Earned as a
Percentage of Target | |
Below Threshold Performance | | 0% | | 0% | |
Threshold Performance | | 0% | | 0% | |
Target Performance | | 100% | | 100% | |
Maximum Performance | | 200% | | 200% | |
Total stock options, RSUs and PSUs granted to our named executive officers in 2018 were as follows:
Name | | Stock
Options | | RSUs | | PSUs | |
Scott D. Levin(1) | | 51,781 | | 777,929 | | 36,142 | |
John C. Walden(2) | | 100,000 | | 187,970 | | 187,970 | |
Steven D. Barnhart(3) | | 125,000 | | 200,000 | | 40,000 | |
Brian S. Cooper | | — | | — | | — | |
Rhys J. Hughes(1) | | 51,781 | | 202,929 | | 36,142 | |
Tom D. Moeller(1) | | 51,781 | | 202,929 | | 36,142 | |
Joseph R. Topper, Jr.(1) | | 51,781 | | 202,929 | | 36,142 | |
Simha Kumar(2) | | 54,032 | | 29,143 | | 37,714 | |
Jeffrey D. T. Severts(2) | | 54,032 | | 29,143 | | 37,714 | |
(1) The stock options and RSUs granted on January 22, 2018 vest in four equal annual installments beginning January 22, 2019. The RSUs granted on November 12, 2018 vest in four equal annual installments beginning January 22, 2020. The stock options expire ten years after the grant date. The PSUs granted on January 22, 2018 will vest, to the extent targets are met, following completion of the three-year performance period to end on December 31, 2020. For additional information about the awards granted on each grant date, including the award amounts and related grant date fair values, see “Executive Compensation and Other Information—Grants of Plan-Based Awards” below.
(2) The stock options and RSUs granted on January 22, 2018 were scheduled to vest in four equal annual installments beginning on January 22, 2019. The stock options expire ten years after the grant date. The PSUs granted on January 22, 2018 were scheduled to vest, to the extent targets were met, following completion of the three-year performance period to end on December 31, 2020. For additional information about the awards granted on each grant date, including the award amounts and related grant date fair values, see “Executive Compensation and Other Information—Grants of Plan-Based Awards” below.
Messrs. Walden’s, Kumar’s and Severts’ respective outstanding and unvested stock options, RSUs and PSUs were either accelerated or canceled upon termination of their respective employments with the Company. For additional information about the treatment of Messrs. Walden’s, Kumar’s and Severts’ equity awards upon termination of their respective employment with the Company, see footnote 17 to the Summary Compensation Table included in “Executive Compensation and Other Information” below.
(3) Awards granted on January 22, 2018 represent a hiring grant to Mr. Barnhart. The stock options and RSUs granted on January 22, 2018 vest in four equal annual installments beginning January 22, 2019. The RSUs granted on November 12, 2018 vest in four equal annual installments beginning January 22, 2020. The stock options expire ten years after the grant date. The PSUs granted on January 22, 2018 will vest, to the extent targets are met, following completion of the three-year performance period to end on December 31, 2020. For additional information about the awards granted on each grant date, including award amounts and related grant date fair values, see “Executive Compensation and Other Information—Grants of Plan-Based Awards” below.
Certain 2019 Compensation Actions
Additional Employment Agreements
Joseph R. Topper, Jr. Mr. Topper is party to an employment agreement with FTD, dated as of January 22, 2019. Under his employment agreement, Mr. Topper is eligible to receive a base salary of $396,550 per year, plus an additional $10,000 per month based on his retention letter agreement, discussed above, and a target bonus of 100% of base salary, subject to certain performance criteria to be established by the Board of Directors. If Mr. Topper’s employment is terminated without cause, or he resigns for good reason, other than in connection with a change in control of the
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Company, then he will receive, with certain exceptions, an additional 12 months of vesting credit under his outstanding equity awards, had each applicable award been structured to vest in successive equal monthly installments over the vesting schedule for that award, provided, however, that any PSUs will be subject to the vesting acceleration provisions set forth in the applicable PSU award agreement. The employment agreement also provides that if Mr. Topper’s employment is terminated without cause, or he resigns for good reason, in connection with a change in control or the execution of a definitive agreement for a change in control, then, with certain exceptions, his outstanding equity awards will vest in full (other than any PSUs which will be subject to the vesting acceleration provisions set forth in the applicable PSU award agreement). If Mr. Topper’s employment is terminated without cause, or he resigns for good reason, other than in connection with a change in control of the Company, then he will be entitled to a separation payment equal to the sum of (i) his then-current annual base salary and (ii) a prorated portion of his actual bonus (if any) he would have earned for the fiscal year of termination, based on the level at which the applicable performance goals for such fiscal year were attained. If Mr. Topper’s employment is terminated without cause, or he resigns for good reason, in the same fiscal year as a change in control of the Company, then he will be entitled to a separation payment equal to the sum of (i) his then-current annual base salary and (ii) a prorated portion of his target bonus for that fiscal year, reduced by any actual bonus received for the same fiscal year. Mr. Topper will also be entitled to any earned but unpaid bonus for the fiscal year preceding his termination, as well as be eligible to receive, for a period of 12 months following the date of termination, reimbursement for COBRA health care continuation coverage expenses. If Mr. Topper’s employment is terminated due to his death or disability, then he (or his estate or beneficiaries) will receive, with certain exceptions, an additional 12 months of vesting credit under his outstanding equity awards as if each applicable award had been structured to vest in successive equal monthly installments over the vesting schedule for that award. The employment agreement also required Mr. Topper to enter into customary confidentiality and non-competition agreements.
Mr. Topper is party to a retention letter agreement which, among other things, provides for cash awards in the event of certain transaction events (including a change in control) or certain involuntary terminations. Please refer to “—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of these benefits.
For a discussion of other employment agreements with the named executive officers, see “Executive Compensation and Other Information—Employment Agreements and Potential Payments Upon Termination or Change in Control—Employment Agreements.”
Tax and Accounting Implications
Under Section 162(m) of the Code, compensation paid to certain executive officers (and, beginning in 2018, certain former executive officers) in excess of $1 million is not tax deductible. Historically, compensation that qualifies as “performance-based compensation” under Section 162(m) of the Code could be excluded from this $1 million limit, but this exception has now been repealed, effective for taxable years beginning after December 31, 2017, unless certain transition relief for certain compensation arrangements in place as of November 2, 2017 is available.
Management and the Compensation Committee have in the past generally considered the impact of Section 162(m) of the Code when establishing incentive compensation plans. The Compensation Committee believes that the tax deduction limitation should not be permitted to compromise our ability to design and maintain executive compensation arrangements that will attract and retain the executive talent to compete successfully. Accordingly, achieving the desired flexibility in the design and delivery of compensation may result in compensation that in certain cases is not deductible for federal income tax purposes. Portions of the compensation we paid to certain of the named executive officers in 2018 may not be deductible due to the application of Section 162(m) of the Code and, with the general elimination of the “performance-based” exception and the expansion of the definition of “covered employees” brought about by 2017 tax reform, the Compensation Committee is likely to approve compensation that is not deductible under Section 162(m). In addition, because of the uncertainties associated with the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m), as in effect prior to 2018, will in fact be deductible.
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Compensation Committee Report
The Compensation Committee of the Board of Directors of FTD Companies, Inc. has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with the Company’s management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Amendment to our Annual Report on Form 10-K for the year ended December 31, 2018.
| Compensation Committee |
| |
| Robert Berglass (Chairman)
Joseph W. Harch
Robin S. Hickenlooper |
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following table provides certain summary information concerning the compensation earned by our named executive officers in 2018 and, for those who were named executive officers during such periods, the fiscal years ended December 31, 2017 and 2016.
Name and Principal Position | | Year | | Salary
(10) | | Bonus
(11) | | Stock
Awards
(12) | | Stock
Option
Awards
(13) | | Non-Equity
Incentive Plan
Compensation
(14) | | All Other
Compensation
(15)(16)(17) | | Total | |
Scott D. Levin(1) | | 2018 | | $ | 622,964 | | | — | | $ | 2,406,072 | | $ | 142,165 | | | — | | $ | 28,893 | | $ | 3,200,094 | |
President, Chief Executive Officer, Secretary and Director | | 2017 | | $ | 395,499 | | $ | 240,000 | | $ | 295,440 | | | — | | $ | 183,511 | | $ | 29,910 | | $ | 1,144,360 | |
| 2016 | | $ | 372,191 | | | — | | $ | 240,100 | | $ | 321,413 | | $ | 167,977 | | $ | 23,344 | | $ | 1,125,025 | |
John C. Walden(2)(3) | | 2018 | | $ | 651,240 | | | — | | $ | 2,500,002 | | $ | 274,550 | | | — | | $ | 7,542,518 | | $ | 10,968,310 | |
Former President, Chief Executive Officer and Director | | 2017 | | $ | 819,231 | | | — | | $ | 2,815,400 | | $ | 6,454,377 | | $ | 679,934 | | $ | 18,515 | | $ | 10,787,457 | |
Steven D. Barnhart(2)(4) | | 2018 | | $ | 508,885 | | | — | | $ | 894,250 | | $ | 343,188 | | $ | 232,945 | | $ | 26,944 | | $ | 2,006,212 | |
Executive Vice President and Chief Financial Officer | | | | | | | | | | | | | | | | | |
Brian S. Cooper(2)(5) | | 2018 | | $ | 54,000 | | | — | | | — | | | — | | | — | | | — | | $ | 54,000 | |
Former Interim Chief Financial Officer | | 2017 | | $ | 226,800 | | | — | | | — | | | — | | | — | | | — | | $ | 226,800 | |
Rhys J. Hughes(2)(6) | | 2018 | | $ | 262,480 | | | — | | $ | 888,072 | | $ | 142,165 | | | — | | $ | 49,668 | | $ | 1,342,385 | |
President, Interflora British Unit | | | | | | | | | | | | | | | | | |
Tom D. Moeller(2) | | 2018 | | $ | 428,025 | | | — | | $ | 888,072 | | $ | 142,165 | | | — | | $ | 28,893 | | $ | 1,487,155 | |
Executive Vice President, | | 2017 | | $ | 413,458 | | | — | | $ | 246,200 | | | — | | $ | 191,845 | | $ | 29,910 | | $ | 881,413 | |
Florist Division | | 2016 | | $ | 405,187 | | | — | | $ | 168,070 | | $ | 321,413 | | $ | 322,586 | | $ | 23,344 | | $ | 1,240,600 | |
Joseph R. Topper, Jr.(2) | | 2018 | | $ | 445,594 | | | — | | $ | 888,072 | | $ | 142,165 | | | — | | $ | 28,893 | | $ | 1,504,724 | |
Executive Vice President and Chief Digital Officer | | | | | | | | | | | | | | | | | | | | | | | | |
Simha Kumar(2)(7) | | 2018 | | $ | 324,824 | | | — | | $ | 444,599 | | $ | 148,345 | | | — | | $ | 1,049,730 | | $ | 1,967,498 | |
Former Executive Vice President and Chief Operating Officer | | 2017 | | $ | 200,000 | | | — | | $ | 346,250 | | $ | 880,488 | | $ | 100,000 | | $ | 6,006 | | $ | 1,532,744 | |
Jeffrey D. T. Severts(2)(8)(9) | | 2018 | | $ | 304,365 | | | — | | $ | 444,599 | | $ | 148,345 | | | — | | $ | 873,450 | | $ | 1,770,759 | |
Former Executive Vice President and Chief Marketing Officer | | 2017 | | $ | 367,840 | | | — | | $ | 346,250 | | $ | 880,488 | | $ | 96,923 | | $ | 1,564 | | $ | 1,693,065 | |
(1)Mr. Levin was appointed President and Chief Executive Officer of the Company on November 2, 2018 after serving as Interim President and Chief Executive Officer since July 2018, our board of directors appointed Scott D.18, 2018. Mr. Levin our then-currentalso serves as the Company’s Secretary. Prior to that, Mr. Levin served as the Executive Vice President, General Counsel and Secretary of the Company.
(2)Compensation for Messrs. Walden, Cooper, Kumar and Severts is provided only for 2018 and 2017 because they were not named executive officers in 2016. Compensation for Messrs. Barnhart, Hughes and Topper is provided only for 2018 because they were not named executive officers in 2017 or 2016. Although Mr. Moeller was not a named executive officer in 2017, his compensation information is provided for that year because Mr. Moeller was a named executive officer in 2016.
(3)Mr. Walden served as interim President and Chief Executive Officer. Officer and as a member of the Board of Directors from March 1, 2017 to July 18, 2018.
(4)Mr. Levin succeeded John C. Walden, who stepped down from these positions and from our board of directors. On November 2, 2018, our board of directors appointed Mr. LevinBarnhart joined the Company as Executive Vice President and Chief ExecutiveFinancial Officer effective January 8, 2018.
(5)Represents amounts paid to Tatum under an executive consulting services arrangement pursuant to which Mr. Cooper served as the Company’s Interim Chief Financial Officer until January 8, 2018 and as a consultant to the Company until January 27, 2018. Mr. Cooper did not participate in any Company employee benefit plans or receive any salary, bonus, equity awards or other compensation or benefits directly from the Company in connection with his service as Interim Chief Financial Officer. On December 7,
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(6)Mr. Hughes is the President of Interflora British Unit. Other than stock awards and stock option awards, all amounts shown in the table relating to Mr. Hughes are shown in U.S. Dollars and have been converted from British Pounds based on the currency exchange rate of £1:$1.335, which was the average exchange rate for 2018. The value of the stock awards and stock option awards are in U.S. Dollars as the stock underlying the awards is valued in U.S. Dollars.
(7)Effective July 18, 2018, Mr. Kumar was no longer employed by the Company.
(8)Includes consulting fees for 2017 of $174,000 for the period from April 2017 through July 5, 2017. Mr. Severts became an employee of FTD on July 10, 2017.
(9)Effective August 30, 2018, Mr. Severts was no longer employed by the Company.
(10)The salaries reflected in the Summary Compensation Table may be subject to future increase at the discretion of the Board of Directors. The base salary level, once increased, becomes the new minimum base salary. The amount reported as base salary in the Summary Compensation Table also includes the portion deferred under our board of directors appointed401(k) plan, a tax qualified deferred compensation plan. For those named executive officers who were terminated during 2018, base salary figures represent the amount paid through the respective termination date. For those named executive officers whose retention letter agreements provided for a monthly increase, this base salary was adjusted to reflect such increase. See “Compensation Discussion and Analysis—2018 Compensation Actions—Retention Letter Agreements” for further details.
(11)Represents cash bonus awards made to our named executive officers. The amount for 2017 includes $240,000 paid to Mr. Levin as a director.
As detailedmember of the Office of the CEO.(12)Amounts reflect the aggregate grant date fair value of the stock awards (RSUs and PSUs for 2018 and RSUs for 2017 and 2016) made in Footnote 6—“Financing Arrangements,” during the applicable fiscal year. The grant date fair values are, in each instance, calculated in accordance with ASC 718 and do not take into account estimated forfeitures relating to service based vesting requirements. For information regarding the assumptions underlying the ASC 718 valuation of these equity awards, see Note 10 to our audited consolidated financial statements for the fiscal year ended December 31, 2018 we entered into several amendmentsincluded in our Annual Report on Form 10-K for that period.
The amounts included for 2018 include PSUs granted on January 22, 2018 that will vest, to the Credit Agreement (as defined herein) with our lenders. These amendments, among other things, restricted combined usageextent equally-weighted revenue and Adjusted EBITDA goals are met, following completion of a three-year performance period to end on December 31, 2020. PSUs that vest will be paid out in shares of FTD common stock in early 2021.
If a relevant threshold performance measure is not met, the related PSU award is not earned. For PSU grants made in 2018, awards range from 0% to 200% of the credit facility portiontarget number of shares for performance between threshold and maximum. The amounts for 2018 in the Summary Compensation Table above that represent PSUs reflect the value of the Credit Agreement, modified measurement datesPSU grants at target. The table below provides the potential value of the 2018 PSU grants assuming threshold, target and maximum levels of performance achieved.
| | 2018-2020 PSUs
Granted 1/22/2018 | |
Name | | Value at Threshold
Level (0%) | | Value at Target
(100%) (Reported
in “Stock Awards
Column” Above) | | Value at Maximum
(200%) | |
Scott D. Levin | | — | | $ | 240,344 | | $ | 480,688 | |
John C. Walden* | | — | | $ | 1,250,001 | | $ | 2,500,002 | |
Steven D. Barnhart | | — | | $ | 266,000 | | $ | 532,000 | |
Rhys J. Hughes | | — | | $ | 240,344 | | $ | 480,688 | |
Tom D. Moeller | | — | | $ | 240,344 | | $ | 480,688 | |
Joseph R. Topper, Jr. | | — | | $ | 240,344 | | $ | 480,688 | |
Simha Kumar* | | — | | $ | 250,798 | | $ | 501,596 | |
Jeffrey D. T. Severts* | | — | | $ | 250,798 | | $ | 501,596 | |
* Messrs. Walden’s, Kumar’s and Severts’ 2018 PSU awards were canceled upon their departure from the Company.
The material terms of RSUs and PSUs granted in 2018 are described in the “Outstanding Equity Awards at Fiscal Year-End” and “Grants of Plan-Based Awards” tables included below. For additional information regarding the treatment of Messrs. Walden’s Kumar’s and Severts’ RSUs and PSUs upon termination of their respective employment with the Company, see Note 17 below.
(13)Amounts reflect the aggregate grant date fair value of the stock option awards made in the applicable fiscal year. The grant date fair values are, in each instance, calculated in accordance with ASC 718 and do not take into account estimated forfeitures relating to service based vesting requirements. For information regarding the assumptions underlying the ASC 718
23
valuation of these equity awards, see Note 10 to our audited consolidated financial statements for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K for that period. For additional information regarding the treatment of Messrs. Walden’s Kumar’s and Severts’ options upon termination of their respective employment with the Company, see Note 17 below.
(14)Represents performance-based cash bonuses paid pursuant to the FTD Companies, Inc. 2018 Management Bonus Plan, 2017 Management Bonus Plan or 2016 Management Bonus Plan, as applicable. The amount for 2018 includes $232,945 paid to Mr. Barnhart pursuant to his employment agreement.
(15)Includes a matching contribution we made to the 401(k) plan on behalf of each participating named executive officer. In 2018, 2017 and 2016, matching contributions for participating named executive officers were limited to the lesser of (1) 50% of the participating officer’s contribution, and (2) 50% of the first 6% of the participating officer’s eligible compensation, as determined under such plan.
See Note 17 below for the dollar amounts of the matching 401(k) plan included in the “All Other Compensation” column of the Summary Compensation Table.
(16)The RSUs and PSUs held by our named executive officers generally contain dividend equivalent rights. Pursuant to those rights, as dividends or other distributions are declared and paid on our outstanding shares of common stock, a special book account for such named executive officer will be established and credited with a phantom dividend equivalent to the actual dividend or distribution which would have been paid on the shares of common stock underlying those units had such shares been issued and outstanding at the time that dividend or distribution was made to our stockholders. As and to the extent such RSUs and PSUs subsequently vest, the phantom dividend equivalents so credited to such RSUs and PSUs in the book account will also vest, and the required ratios forvested dividend equivalents will be distributed to the consolidated net leverage ratio and fixed charge coverage ratio covenant tests and updated fees.
On March 13, 2019,named executive officer in the Company entered intosame form as the Seventh Amendmentactual dividend or distribution was paid to Credit Agreement (the Credit Agreement, as previously amended and as further amended bystockholders concurrently with the Seventh Amendment, the “Amended Credit Agreement”) with our lenders. The Amended Credit Agreement includes, among other terms, a minimum Consolidated Adjusted EBITDA covenant; further limitations on capital expenditures; a covenant requiring that, on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in fullpayment of the obligations under the Amended Credit Agreement no later than June 1, 2019,vested RSUs or (ii) fromPSUs to which all or substantially all of the aggregate net cash proceeds are usedthose phantom dividend equivalents relate, subject to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limitsapplicable withholding taxes. The Company does not currently pay dividends on our combined usage of the revolving credit facility portion of the Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods. For further information on the Credit Agreement, see “Liquidity and Capital Resources” within this MD&A and Footnote 6—“Financing Arrangements.”
KEY BUSINESS METRICS
We review a number of key business metrics to help us monitor our performance and trends affecting our segments and to develop forecasts and budgets. These key metrics include the following:
common stock.Segment operating income.(17) Our CODM uses segment operating income to evaluate the performance of our business segments and to make decisions about allocating resources among segments. Segment operating income is operating income excluding depreciation and amortization; impairment of goodwill, intangible assets, and other long-lived assets; litigation and dispute settlement charges or gains; transaction and integration costs; restructuring and other exit costs; and corporate reorganization costs. In addition, stock-based and incentive compensation and general corporate expenses are not allocated to the segments. Segment operating income is prior to intersegment eliminations and excludes other income/(expense), net. See Footnote 2—“Segment Information” for a reconciliation of segment operating income to consolidated operating income and consolidated income before income taxes.
Consumer orders. We monitor the number of consumer orders for floral, gift, and related products during a given period. Consumer orders are individual units delivered during the period that originated through our consumer websites, associated mobile sites and applications, and various telephone numbers. The number of consumer orders is not adjusted for non-delivered orders that are refunded on or after the scheduled delivery date. Orders originating with a florist or other retail location for delivery to consumers are not included as part of this number.
Average order value. We monitor the average value for consumer orders delivered in a given period, which we refer to as the average order value. Average order value represents the average amount received for consumer orders delivered during a period. The average order value of consumer orders within our U.S. Consumer and International segments is tracked in their local currency, which is the U.S. Dollar (“USD”) for the U.S. Consumer segment and the British Pound (“GBP”) for the International segment. The local currency amounts received for the International segment are then translated into USD at the average currency exchange rate for the period. Average order value includes merchandise revenues and shipping or service fees paid by the consumer, less discounts and refunds (net of refund-related fees charged to floral network members).
Average revenues per member. We monitor average revenues per member for our floral network members in the Florist segment. Average revenues per member represents the average revenues earned from a member of our floral network during a period. Revenues include services revenues and products revenues but exclude revenues from sales to non-members. Floral network members include our retail florists and other non-florist retail locations who offer floral and gifting solutions. Average revenues per member is calculated by dividing Florist segment revenues for the period, excluding sales to non-members, by the average number of floral network members for the period.
The table below sets forth the various items included in the “All Other Compensation” column of the Summary Compensation Table for our Continuing NEOs for each of the preceding three fiscal years in which they were named executive officers:Name | | Year | | 401(k)
Matching
Contribution | | Health
Benefits | | Company
Vehicle | | Pension
Benefits | | Total | |
Scott D. Levin | | 2018 | | $ | 8,250 | | $ | 20,643 | | | — | | | — | | $ | 28,893 | |
| | 2017 | | $ | 8,100 | | $ | 21,810 | | | — | | | — | | $ | 29,910 | |
| | 2016 | | $ | 7,950 | | $ | 15,394 | | | — | | | — | | $ | 23,344 | |
Steven D. Barnhart | | 2018 | | $ | 8,250 | | $ | 18,694 | | | — | | | — | | $ | 26,944 | |
Rhys J. Hughes | | 2018 | | | — | | $ | 3,372 | | $ | 26,090 | | $ | 20,206 | | $ | 49,668 | |
Tom D. Moeller | | 2018 | | $ | 8,250 | | $ | 20,643 | | | — | | | — | | $ | 28,893 | |
| | 2017 | | $ | 8,100 | | $ | 21,810 | | | — | | | — | | $ | 29,910 | |
| | 2016 | | $ | 7,950 | | $ | 15,394 | | | — | | | — | | $ | 23,344 | |
Joseph R. Topper, Jr. | | 2018 | | $ | 8,250 | | $ | 20,643 | | | — | | | — | | $ | 28,893 | |
The table below sets forth the various items included in the “All Other Compensation” column of the Summary Compensation Table for the periods presented, our consolidated revenues, segment revenues, segment operating income, consumer orders, average order values, average revenues per member,2018 and average currency exchange rates. 2017 fiscal years for Messrs. Walden, Kumar and Severts:
Name | | Year | | 401(k)
Matching
Contribution | | Health
Benefits | | Cash
Severance(a) | | Total | |
John C. Walden | | 2018 | | $ | 8,250 | | $ | 34,268 | | $ | 7,500,000 | | $ | 7,542,518 | |
| | 2017 | | $ | 2,146 | | $ | 16,369 | | | — | | $ | 18,515 | |
Simha Kumar | | 2018 | | $ | 7,692 | | $ | 12,038 | | $ | 1,030,000 | | $ | 1,049,730 | |
| | 2017 | | $ | 6,000 | | $ | 6 | | | — | | $ | 6,006 | |
Jeffrey D. T. Severts | | 2018 | | $ | 8,250 | | | — | | $ | 865,200 | | $ | 873,450 | |
| | 2017 | | $ | 808 | | $ | 756 | | | — | | $ | 1,564 | |
(a)Amounts reflect the cash severance paid to Messrs. Walden, Kumar and Severts upon their respective separations from the Company in 2018. In connection with his separation from the Company and pursuant to his employment agreement, Mr. Walden received a lump sum cash payment equal to (1) two times the sum of his then-current base salary plus his target bonus for the 2018 fiscal year, plus (2) two cash severance payments each equaling $1.25 million as a result of Mr. Walden’s 2019-2020 Service-Based RSU Grants (as defined herein) not being made. In connection with his separation from the Company and pursuant to his employment agreement, Mr. Kumar received a lump sum cash payment equal to his then-current base salary plus his target bonus for the 2018 fiscal year. In
24
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands, except for average order values, average revenues per member, and average currency exchange rates) |
| Consolidated: | | | | | |
| Consolidated revenues | $ | 1,014,244 |
| | $ | 1,084,028 |
| | $ | 1,121,999 |
|
| U.S. Consumer: | | | | | |
Segment revenues(a) | $ | 727,866 |
| | $ | 789,011 |
| | $ | 821,008 |
|
| Segment operating income/(loss) | $ | (4,556 | ) | | $ | 46,439 |
| | $ | 70,724 |
|
| Consumer orders | 14,171 |
| | 14,926 |
| | 15,293 |
|
| Average order value | $ | 49.95 |
| | $ | 51.31 |
| | $ | 52.06 |
|
| Florist: | | | | | |
Segment revenues(a) | $ | 150,308 |
| | $ | 165,737 |
| | $ | 166,881 |
|
| Segment operating income | $ | 42,673 |
| | $ | 46,477 |
| | $ | 48,406 |
|
| Average revenues per member | $ | 14,919 |
| | $ | 15,270 |
| | $ | 14,425 |
|
| International: | | | | | |
| In USD: | | | | | |
| Segment revenues | $ | 151,145 |
| | $ | 145,966 |
| | $ | 152,700 |
|
| Segment operating income | $ | 12,994 |
| | $ | 16,770 |
| | $ | 19,128 |
|
| Consumer orders | 2,690 |
| | 2,661 |
| | 2,690 |
|
| Average order value | $ | 46.69 |
| | $ | 45.30 |
| | $ | 46.67 |
|
| In GBP: | | | | | |
| Segment revenues | £ | 112,628 |
| | £ | 113,407 |
| | £ | 112,330 |
|
| Average order value | £ | 34.84 |
| | £ | 35.22 |
| | £ | 34.36 |
|
| Average currency exchange rate: GBP to USD | 1.34 |
| | 1.29 |
| | 1.36 |
|
connection with his separation from the Company and pursuant to his employment agreement, Mr. Severts received a lump sum cash payment equal to his then-current base salary plus his target bonus for the 2018 fiscal year.
In addition to the cash severance outlined above, pursuant to the terms of their respective employment agreements and equity award agreements, Messrs. Walden’s, Kumar’s and Severts’ respective outstanding and unvested stock options, RSUs and PSUs were either accelerated or canceled upon termination of their respective employments with the Company as follows:
Mr. Walden: Stock Options: The vesting of 50,000 stock options granted on January 22, 2018 and 479,167 stock options granted on March 17, 2017 was accelerated to July 27, 2018. As the exercise price exceeded the then-current stock price, the options were not exercised within the required three-month period following termination prior to their cancellation. RSUs: The vesting of 187,970 RSUs granted on January 22, 2018 and 67,083 RSUs granted on March 17, 2017 was accelerated to July 27, 2018. In compliance with Internal Revenue Code Section 409A, the shares underlying the accelerated RSUs were not distributed to Mr. Walden until February 1, 2019 at which time the shares had a value of $573,869. In connection with this delayed distribution, the taxes on such vesting were similarly delayed until February 1, 2019 upon which the Company retained 112,989 shares for the payment of such taxes. PSUs: All outstanding PSUs were canceled upon termination.
Mr. Kumar: Stock Options: The vesting of 20,262 stock options granted on January 22, 2018 and 100,000 stock options granted on August 11, 2017 was accelerated to July 27, 2018. As the exercise price exceeded the then-current stock price, the options were not exercised within the required three-month period following termination prior to their cancellation. RSUs: The vesting of 10,929 RSUs granted on January 22, 2018 and 12,500 RSUs granted on August 11, 2017 was accelerated to July 27, 2018, with an aggregate realized value upon vesting of $79,190. In connection with this distribution, the Company retained 6,866 shares for the payment of taxes on the award. PSUs: All outstanding PSUs were canceled upon termination.
Mr. Severts: Stock Options: The vesting of 21,388 stock options granted on January 22, 2018 and 58,334 stock options granted on August 11, 2017 was accelerated to September 7, 2018. As the exercise price exceeded the then-current stock price, the options were not exercised within the required three-month period following termination prior to their cancellation. RSUs: The vesting of 11,536 RSUs granted on January 22, 2018 and 7,292 RSUs granted on August 11, 2017 was accelerated to September 7, 2018, with an aggregate realized value upon vesting of $68,722. In connection with this distribution, the Company retained 5,518 shares for the payment of taxes on the award. PSUs: All outstanding PSUs were canceled upon termination.
25
| |
(a) | Segment revenues are prior to intersegment eliminations. See Footnote 2—“Segment Information” for a reconciliation of segment revenues to consolidated revenues.
|
CONSOLIDATED OPERATING RESULTS
Outstanding Equity Awards at Fiscal Year End
The following table sets forth,provides certain summary information concerning outstanding FTD equity awards held by the named executive officers as of December 31, 2018.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards | |
Name | | Grant
Date | | Number of
Securities
Underlying
Unexercised
Options
Exercisable | | Number of
Securities
Underlying
Unexercised
Options
Unexercisable(1) | | Option
Exercise
Price | | Option
Expiration
Date | | Grant
Date | | Number of
Shares of
Units of
Stock That
Have Not
Vested(1) | | Market
Value of
Shares or
Units That
Have Not
Vested(2) | | Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units, or
Other
Rights
That
Have
Not
Vested(3) | | Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units,
or Other
Rights
That
Have Not
Vested(3) | |
Scott D. Levin | | 3/11/2014 | | 7,000 | | — | | $ | 31.40 | | 3/10/2024 | | 3/9/2015 | | 2,500 | (7) | $ | 3,700 | | — | | | — | |
| | 8/10/2015 | | 112,500 | | 37,500 | (5) | $ | 29.97 | | 1/1/2021 | | 3/7/2016 | | 5,000 | (8) | $ | 7,400 | | — | | | — | |
| | 11/10/2016 | | 50,000 | | 25,000 | (5) | $ | 20.90 | | 1/1/2021 | | 1/3/2017 | | 9,000 | (9) | $ | 13,320 | | — | | | — | |
| | 1/22/2018 | | — | | 51,781 | (6) | $ | 6.65 | | 1/22/2028 | | 1/22/2018 | | 27,929 | (10) | $ | 41,335 | | 36,142 | | $ | 53,490 | |
| | | | | | | | | | | | 11/12/2018 | | 750,000 | (11) | $ | 1,110,000 | | — | | | — | |
John C. Walden(4) | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | | — | |
Steven D. Barnhart | | 1/22/2018 | | — | | 125,000 | (6) | $ | 6.65 | | 1/22/2028 | | 1/22/2018 | | 25,000 | (10) | $ | 37,000 | | 40,000 | | $ | 59,200 | |
| | | | | | | | | | | | 11/12/2018 | | 175,000 | (11) | $ | 259,000 | | — | | | — | |
Brian S. Cooper | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | | — | |
Rhys J. Hughes | | 3/11/2014 | | 9,000 | | — | | $ | 31.40 | | 3/10/2024 | | 3/9/2015 | | 2,250 | (7) | $ | 3,330 | | — | | | — | |
| | 8/10/2015 | | 112,500 | | 37,500 | (5) | $ | 29.97 | | 1/1/2021 | | 3/7/2016 | | 5,000 | (8) | $ | 7,400 | | — | | | — | |
| | 11/10/2016 | | 50,000 | | 25,000 | (5) | $ | 20.90 | | 1/1/2021 | | 8/15/2016 | | 500 | (12) | $ | 740 | | — | | | — | |
| | 1/22/2018 | | — | | 51,781 | (6) | $ | 6.65 | | 1/22/2028 | | 1/3/2017 | | 7,500 | (9) | $ | 11,100 | | — | | | — | |
| | | | | | | | | | | | 1/22/2018 | | 27,929 | (10) | $ | 41,335 | | 36,142 | | $ | 53,490 | |
| | | | | | | | | | | | 11/12/2018 | | 175,000 | (11) | $ | 259,000 | | — | | | — | |
Tom D. Moeller | | 3/11/2014 | | 7,000 | | — | | $ | 31.40 | | 3/10/2024 | | 3/9/2015 | | 1,750 | (7) | $ | 2,590 | | — | | | — | |
| | 8/10/2015 | | 112,500 | | 37,500 | (5) | $ | 29.97 | | 1/1/2021 | | 3/7/2016 | | 3,500 | (8) | $ | 5,180 | | — | | | — | |
| | 11/10/2016 | | 50,000 | | 25,000 | (5) | $ | 20.90 | | 1/1/2021 | | 1/3/2017 | | 7,500 | (9) | $ | 11,100 | | — | | | — | |
| | 1/22/2018 | | — | | 51,781 | (6) | $ | 6.65 | | 1/22/2028 | | 1/22/2018 | | 27,929 | (10) | $ | 41,335 | | 36,142 | | $ | 53,490 | |
| | | | | | | | | | | | 11/12/2018 | | 175,000 | (11) | $ | 259,000 | | — | | | — | |
Joseph R. Topper, Jr. | | 11/10/2016 | | 66,667 | | 33,333 | (5) | $ | 20.90 | | 1/1/2021 | | 11/15/2016 | | 4,000 | (13) | $ | 5,920 | | — | | | — | |
| | 1/22/2018 | | — | | 51,781 | (6) | $ | 6.65 | | 1/22/2028 | | 1/3/2017 | | 6,000 | (9) | $ | 8,880 | | — | | | — | |
| | | | | | | | | | | | 1/22/2018 | | 27,929 | (10) | $ | 41,335 | | 36,142 | | $ | 53,490 | |
| | | | | | | | | | | | 11/12/2018 | | 175,000 | (11) | $ | 259,000 | | — | | | — | |
Simha Kumar | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | | — | |
Jeffrey D. T. Severts | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | | — | |
(1)Each such unvested stock option or unvested RSU award will vest, in whole or in part, on an accelerated basis upon the occurrence of certain events, as described elsewhere herein.
(2)The valuations are based on the $1.48 closing price per share of FTD common stock on December 31, 2018.
(3)Represents PSUs that vest based on the achievement of predetermined equally-weighted revenue and Adjusted EBITDA goals at the end of a three-year performance period ending on December 31, 2020. PSUs that vest will be paid out in shares of FTD common stock in early 2021. At December 31, 2018, the Company did not expect the PSUs to vest. The valuations are based on the $1.48 closing price per share of FTD common stock on December 31, 2018.
(4)In connection with his separation from the Company and pursuant to his employment agreement, Mr. Walden had 255,053 RSUs that were accelerated and vested on July 27, 2018; the shares underlying the accelerated RSUs were not distributed to Mr. Walden until February 1, 2019 in compliance with Internal Revenue Code Section 409A.
(5)The remaining stock options vested on January 1, 2019.
(6)Subject to the named executive officer’s continued employment through each vesting date, the remaining stock options will vest in a series of four successive equal annual installments beginning January 22, 2019.
(7)The remaining RSUs vested on February 15, 2019.
26
(8)Subject to the named executive officer’s continued employment through each vesting date, the remaining RSUs will vest in a series of two successive equal annual installments beginning February 15, 2019.
(9)Subject to the named executive officer’s continued employment through each vesting date, the remaining RSUs will vest in a series of three successive equal annual installments beginning January 3, 2019.
(10)Subject to the named executive officer’s continued employment through each vesting date, the remaining RSUs will vest in a series of four successive equal annual installments beginning January 22, 2019.
(11)Subject to the named executive officer’s continued employment through each vesting date, the remaining RSUs will vest in a series of four successive equal annual installments beginning January 22, 2020.
(12)Subject to the named executive officer’s continued employment through each vesting date, the remaining RSUs will vest in a series of two successive equal annual installments beginning August 15, 2019.
(13)Subject to the named executive officer’s continued employment through each vesting date, the remaining RSUs will vest in a series of two successive equal annual installments beginning November 15, 2019.
27
Grants of Plan-Based Awards
| | | | | | Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards(1) | | Estimated Future Payouts
Under Equity Incentive
Plan Awards(2) | | All Other
Stock
Awards:
Number
of
Shares of
Stock or | | All Other
Option
Awards:
Number of
Securities
Underlying | | Exercise
or
Base
Price
of Option
Awards | | Grant
Date
Fair
Value of
Stock
and
Option | |
Name | | Award Type | | Grant Date | | Threshold ($) | | Target ($) | | Maximum ($) | | Threshold (#) | | Target (#) | | Maximum (#) | | Units(3) | | Options(4) | | ($/sh) | | Awards | |
Scott D. Levin | | 2018 MBP | | — | | $ | 62,296 | | $ | 622,964 | | $ | 747,557 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 27,929 | | — | | — | | $ | 185,728 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 51,781 | | $ | 6.65 | | $ | 142,165 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 36,142 | | 72,284 | | — | | — | | — | | $ | 240,344 | |
| | RSU | | 11/12/2018 | | — | | — | | — | | — | | — | | — | | 750,000 | | — | | — | | $ | 1,980,000 | |
John C. Walden(5) | | 2018 MBP | | — | | $ | 150,000 | | $ | 1,500,000 | | $ | 1,500,000 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 187,970 | | — | | — | | $ | 1,250,001 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 100,000 | | $ | 6.65 | | $ | 274,550 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 187,970 | | 375,940 | | — | | — | | — | | $ | 1,250,001 | |
Steven D. Barnhart | | 2018 MBP | | — | | $ | 232,945 | | $ | 475,000 | | $ | 570,000 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 25,000 | | — | | — | | $ | 166,250 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 125,000 | | $ | 6.65 | | $ | 343,188 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 40,000 | | 80,000 | | — | | — | | — | | $ | 266,000 | |
| | RSU | | 11/12/2018 | | — | | — | | — | | — | | — | | — | | 175,000 | | — | | — | | $ | 462,000 | |
Brian S. Cooper | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Rhys J. Hughes | | 2018 MBP | | — | | $ | 26,245 | | $ | 262,453 | | $ | 314,944 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 27,929 | | — | | — | | $ | 185,728 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 51,781 | | $ | 6.65 | | $ | 142,165 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 36,142 | | 72,284 | | — | | — | | — | | $ | 240,344 | |
| | RSU | | 11/12/2018 | | — | | — | | — | | — | | — | | — | | 175,000 | | — | | — | | $ | 462,000 | |
Tom D. Moeller | | 2018 MBP | | — | | $ | 42,803 | | $ | 428,025 | | $ | 513,630 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 27,929 | | — | | — | | $ | 185,728 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 51,781 | | $ | 6.65 | | $ | 142,165 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 36,142 | | 72,284 | | — | | — | | — | | $ | 240,344 | |
| | RSU | | 11/12/2018 | | — | | — | | — | | — | | — | | — | | 175,000 | | — | | — | | $ | 462,000 | |
Joseph R. Topper, Jr. | | 2018 MBP | | — | | $ | 39,655 | | $ | 396,550 | | $ | 475,860 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 27,929 | | — | | — | | $ | 185,728 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 51,781 | | $ | 6.65 | | $ | 142,165 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 36,142 | | 72,284 | | — | | — | | — | | $ | 240,344 | |
| | RSU | | 11/12/2018 | | — | | — | | — | | — | | — | | — | | 175,000 | | — | | — | | $ | 462,000 | |
Simha Kumar(5) | | 2018 MBP | | — | | $ | 51,500 | | $ | 515,000 | | $ | 618,000 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 29,143 | | — | | — | | $ | 193,801 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 54,032 | | $ | 6.65 | | $ | 148,345 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 37,714 | | 75,428 | | — | | — | | — | | $ | 250,798 | |
Jeffrey D. T. Severts(5) | | 2018 MBP | | — | | $ | 43,260 | | $ | 432,600 | | $ | 519,120 | | — | | — | | — | | — | | — | | — | | — | |
| | RSU | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | 29,143 | | — | | — | | $ | 193,801 | |
| | Stock Option | | 1/22/2018 | | — | | — | | — | | — | | — | | — | | — | | 54,032 | | $ | 6.65 | | $ | 148,345 | |
| | PSU | | 1/22/2018 | | — | | — | | — | | — | | 37,714 | | 75,428 | | — | | — | | — | | $ | 250,798 | |
(1)Amounts in this column represent annual incentive targets under the 2018 Management Bonus Plan paid, if earned, in 2019. Payouts could range from 0% to 120% of target for all named executive officers, except for Mr. Walden whose payout could have ranged from 0% to 150% of target. Actual payouts, if any, under the 2018 Management Bonus Plan are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above. Pursuant to Mr. Barnhart’s employment agreement, to the extent the bonus paid to Mr. Barnhart under the 2018 Management Bonus Plan with respect to the 2018 fiscal year was less than 50% of Mr. Barnhart’s annual base salary (prorated for the periods presented, selected historical consolidated statementsperiod of operations data.time employed during such year), Mr. Barnhart was entitled to a bonus equal to 50% of his prorated base salary for 2018. Therefore, the threshold amount for Mr. Barnhart is equal to 50% of his pro-rated base salary for 2018.
(2)Amounts in this column represent PSUs awarded for the 2018-2020 performance measurement period. The information containedCompensation Committee will determine the performance of the Company against predetermined equally-weighted revenue and Adjusted EBITDA goals to determine vesting of the PSU awards, if any, in 2021. The number of PSUs that will ultimately vest can range from 0% to 200% of the PSUs awarded. Because payment will be made in shares of FTD common stock, the actual value of the earned awards is based on the price of FTD common stock at the time of vesting. The grant date fair values were determined in accordance with FASB ASC Topic 718.
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(3)The amounts shown for RSUs represent the number of RSUs awarded in 2018 and the grant date fair values were determined in accordance with FASB ASC Topic 718. RSUs vest ratably over a period of four years.
(4)The amounts shown for stock options represent the number of nonqualified stock options granted in 2018. The option exercise prices and the grant date fair values were determined in accordance with FASB ASC Topic 718. The stock options vest in four successive equal annual installments, subject to the named executive officer’s continued employment with us through each vesting date over a period of four years.
(5)Messrs. Walden, Kumar and Severts departed the Company during 2018. For a discussion of their severance benefits, see “—Summary Compensation Table” above.
Option Exercises and Stock Vested
| | Stock Awards | |
Name | | Number of Shares
Acquired on
Vesting(#)(1) | | Value
Realized on
Vesting($)(2) | |
Scott D. Levin | | 8,875 | | $ | 58,221 | |
John C. Walden | | 290,053 | | $ | 1,067,179 | (3) |
Steven D. Barnhart | | — | | — | |
Brian S. Cooper | | — | | — | |
Rhys J. Hughes | | 9,750 | | $ | 62,268 | |
Tom D. Moeller | | 7,750 | | $ | 50,668 | |
Joseph R. Topper, Jr. | | 4,000 | | $ | 20,080 | |
Simha Kumar | | 23,429 | | $ | 79,190 | (4) |
Jeffrey D. T. Severts | | 25,078 | | $ | 97,097 | (5) |
(1) Includes the following number of shares retained by FTD for the payment of applicable taxes: Mr. Levin, 3,161; Mr. Hughes, 4,584; Mr. Moeller, 2,758; Mr. Topper, 1,338; Mr. Kumar, 6,866; and Mr. Severts, 7,350. For Mr. Walden, this figure includes 10,273 shares retained by FTD for the payment of applicable taxes on the vesting of the 35,000 RSUs that vested on March 1, 2018. See Note 3 below for a discussion of the tax implications related to the vesting of Mr. Walden’s 255,053 RSUs on July 27, 2018.
(2) The aggregate dollar value realized on vesting of the stock awards was calculated by multiplying the closing price of Common Stock on the vesting date by the number of vested shares. The named executive officers may keep the shares acquired upon vesting or sell them at different prices; therefore, these amounts do not necessarily reflect cash value received by the named executive officers.
(3) Mr. Walden had 35,000 RSUs vest on March 1, 2018 with a realized value of $205,100. In connection with his separation from the Company and pursuant to his employment agreement, Mr. Walden had 255,053 RSUs that were accelerated and vested on July 27, 2018 with a value of $862,079. In compliance with Internal Revenue Code Section 409A, the shares underlying the accelerated RSUs were not distributed to Mr. Walden until February 1, 2019 at which time the shares had a value of $573,869. In connection with this delayed distribution, the taxes on such vesting were similarly delayed until February 1, 2019 upon which the Company retained 112,989 shares for the payment of such taxes.
(4) Represents RSUs that were accelerated and vested on July 27, 2018 in connection with Mr. Kumar’s separation from the Company.
(5) Mr. Severts had 6,250 RSUs vest on July 10, 2018 with a realized value of $28,375. In connection with his separation from the Company and pursuant to his employment agreement, Mr. Severts had 18,828 RSUs that were accelerated and vested on September 7, 2018 with a realized value of $68,722.
Employment Agreements and Potential Payments Upon Termination or Change in Control
Employment Agreements
Scott D. Levin. Mr. Levin is party to an employment agreement with the Company, dated as of July 28, 2014 and amended on December 12, 2016, April 23, 2018 and November 12, 2018, with automatically renewing one-year terms following the end of the initial term expiring on December 31, 2019, subject to either party’s right to terminate upon 180 days’ notice of non-renewal prior to December 31, 2019 and on each one-year anniversary thereafter. The employment agreement provides that a notice of non-renewal from the Company will be construed as a termination
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“without cause” and will trigger the severance provisions described below. The employment agreement provides for a minimum base salary of $897,000 (which amount is subject to adjustment from time to time) and a target bonus of 100% of base salary, subject to certain performance criteria to be established by the Board of Directors. In addition, Mr. Levin’s termination without cause, or his resignation with good reason, whether or not in connection with a change of control, would trigger the full vesting on an accelerated basis of all non-vested shares of the Company’s common stock at the time subject to equity awards held by Mr. Levin, and he would have 12 months to exercise vested stock options upon such a termination, provided, however, that in the event of any conflict between the vesting acceleration provisions of his employment agreement and the vesting acceleration provisions of any PSU award, the terms of the PSU award will prevail. If Mr. Levin’s employment is terminated without cause, or he resigns for good reason, whether or not in connection with a change in control, then he will be entitled to a severance payment, payable in 12 equal monthly installments (or in a lump sum in the case of a change in control separation), in an aggregate amount equal to the sum of (i) two times his then-current annual rate of base salary and (ii) two times his target bonus for the year in which his employment is so terminated. He will also be entitled to any earned but unpaid bonus for the fiscal year preceding his termination and a prorated bonus for the year of termination based on the actual level of performance goal attainment or, in the case of an involuntary termination during the same year as the change in control event, based on his target bonus for such year as detailed in his employment agreement. In addition, Mr. Levin will be eligible to receive, for a period of 12 months following the date of termination, reimbursement for COBRA health care continuation coverage expenses. If Mr. Levin’s employment is terminated due to his death or disability, then he (or his estate or beneficiaries) will receive an additional 12 months of vesting credit under his outstanding equity awards as if each applicable award had been structured to vest in successive equal monthly installments over the vesting schedule for that award. As consideration for such severance benefits, Mr. Levin agreed to a 12 month non-competition agreement and to provide us with a standard release of claims.
Mr. Levin is party to a retention letter agreement which, among other things, provides for cash awards in the event of certain transaction events (including a change in control) or certain involuntary terminations. Please refer to “Compensation Discussion and Analysis—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of these benefits.
John C. Walden. Prior to his departure from the Company on July 18, 2018, Mr. Walden was party to an employment agreement with the Company. The agreement provided for a base salary of $1,000,000 per year and an annual bonus of 150% of base salary, subject to certain performance criteria established by the Board of Directors. The employment agreement provided for an initial three-year term, with automatic renewal for additional successive one-year terms, subject to either party’s right to terminate upon 180 days’ notice of non-renewal. A notice of non-renewal from the Company would have been construed as a termination without cause and would have triggered a severance payment and extended health care coverage, as discussed below. Pursuant to the employment agreement, if Mr. Walden’s employment had been terminated without cause, or had he resigned for good reason, other than in connection with a change in control of the Company, then he would have received (except as described below) an additional 18 months of vesting credit under his outstanding equity awards had each applicable award been structured to vest in equal monthly installments over the vesting schedule for that award. The employment agreement also provided that if Mr. Walden’s employment had been terminated without cause, or had he resigned for good reason, in connection with a change in control or the execution of a definitive agreement for a change in control, then his outstanding equity awards would have vested in full or, in certain circumstances, be deemed to vest in full with a corresponding payment of cash or stock by the Company. If Mr. Walden’s employment had been terminated without cause, or had he resigned for good reason (whether or not in connection with a change in control), then he would have been entitled to a severance payment equal to the sum of (i) two times his then-current annual base salary and (ii) two times his target bonus for the year of termination. Mr. Walden would also have been entitled to any earned but unpaid bonus for the fiscal year preceding his termination and a prorated bonus for the year of termination, as well as eligibility to receive, for a period of 12 months following the date of termination, reimbursement for COBRA health care continuation coverage expenses. If Mr. Walden’s employment had been terminated due to his death or disability, then he (or his estate or beneficiaries) would have been entitled to receive an additional 12 months of vesting credit under his outstanding equity awards had each applicable award been structured to vest in equal monthly installments over the vesting schedule for that award. The employment agreement also required Mr. Walden to enter into customary confidentiality and non-competition agreements. Pursuant to the April 2018 amendment to Mr. Walden’s employment agreement, if Mr. Walden had been employed by the company on each of January 22, 2019 and January 22, 2020, the Company would have taken action to grant him certain service-based RSU grants (such grants, the “2019-2020 Service-Based RSU Grants”), service-based stock option and tandem rights grants (the “2019-2020 Option Grants”), and performance-based RSU grants (the “2019-2020 PSU Grants”). The number of units granted for each set of 2019-2020 Service-Based RSU Grants and 2019-2020 PSU Grants would have been
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determined by dividing $1.25 million by the greater of $6.65 and the average closing price of the Company’s common stock for the ten trading days immediately prior to the respective grant date. Each set of 2019-2020 Option Grants would have been granted with respect to 100,000 shares of common stock. If Mr. Walden’s employment had been terminated without cause, or had he resigned for good reason (a) the 2019-2020 Service-Based RSU Grants that had been awarded as of such date would have vested in full and (b) Mr. Walden would have been entitled to a payment of $1.25 million for each of the unawarded 2019-2020 Service-Based RSU Grants. Under the amendment, the foregoing acceleration provisions would have also applied to the RSU grant Mr. Walden received in January 2018.
In accordance with his employment agreement, Mr. Walden was entitled to certain severance benefits in connection with his departure from the Company, including (i) a cash severance payment equal to the sum of (A) two times his then-current annual salary and (B) two times his target bonus for 2018, (ii) a cash payment in lieu of certain service-based RSUs, (iii) reimbursement for 12 months of COBRA coverage for Mr. Walden, his spouse and his dependents, and (iv) accelerated vesting of certain of his outstanding equity awards, subject in each case to his compliance with certain covenants in the employment agreement. For more information about Mr. Walden’s severance benefits, see “—Summary Compensation Table” above.
Steven D. Barnhart. Mr. Barnhart is party to an employment agreement with the Company, dated as of December 8, 2017 and amended April 23, 2018. Under his employment agreement, Mr. Barnhart is eligible to receive a base salary of $475,000 per year (which amount is subject to adjustment from time to time), plus an additional $10,000 per month based on his retention letter agreement, discussed above, and a target bonus of 100% of base salary, subject to certain performance criteria to be established by the Board of Directors. Additionally, his employment agreement provided that to the extent the bonus paid to Mr. Barnhart under the 2018 Management Bonus Plan with respect to the Company’s 2018 fiscal year was less than 50% of his annual earned base salary for the fiscal year (prorated for the period of time employed during such year), the Company was required to make, and did so make, a payment to Mr. Barnhart so that the amount of bonus paid to Mr. Barnhart for the 2018 fiscal year equaled 50% of his prorated base salary for 2018. If Mr. Barnhart’s employment is terminated without cause, or he resigns for good reason, other than in connection with a change in control of the Company, then he will receive, with certain exceptions, an additional 12 months of vesting credit under his outstanding equity awards, had each applicable award been structured to vest in successive equal monthly installments over the vesting schedule for that award, provided, however, that any PSUs will be subject to the vesting acceleration provisions set forth in the applicable PSU award agreement. The employment agreement also provides that if Mr. Barnhart’s employment is terminated without cause, or he resigns for good reason, in connection with a change in control or the execution of a definitive agreement for a change in control, then, with certain exceptions, his outstanding equity awards will vest in full (other than any PSUs which will be subject to the vesting acceleration provisions set forth in the applicable PSU award agreement). If Mr. Barnhart’s employment is terminated without cause, or he resigns for good reason (whether or not in connection with a change in control), then he will be entitled to a separation payment, payable in 12 equal monthly installments (or in a lump sum in the case of a change in control separation), equal to the sum of (i) his then-current annual base salary and (ii) his target bonus for the fiscal year of termination. Mr. Barnhart will also be entitled to any earned but unpaid bonus for the fiscal year preceding his termination, as well as be eligible to receive, for a period of 12 months following the date of termination, reimbursement for COBRA health care continuation coverage expenses. If Mr. Barnhart’s employment is terminated due to his death or disability, then he (or his estate or beneficiaries) will receive, with certain exceptions, an additional 12 months of vesting credit under his outstanding equity awards as if each applicable award had been structured to vest in successive equal monthly installments over the vesting schedule for that award. In addition, the employment agreement provides that Mr. Barnhart will receive a grant, which shall be made effective as of the third trading day after the Company announces its strategic plan to the public, of (i) 25,000 RSUs, (ii) 40,000 PSUs (with 20,000 units based upon Company revenue and 20,000 units based upon Company Adjusted EBITDA or similar targets) and (iii) 125,000 options. The RSUs and options vest at the rate of 25% on each of the first four anniversaries of the date of grant. The PSUs vest on the third anniversary of the date of grant (subject to achievement of the applicable target). The employment agreement also required Mr. Barnhart to enter into customary confidentiality and non-competition agreements.
Mr. Barnhart is party to a retention letter agreement which, among other things, provides for cash awards in the event of certain transaction events (including a change in control) or certain involuntary terminations. Please refer to “Compensation Discussion and Analysis—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of these benefits.
Brian S. Cooper. Mr. Cooper served as Interim Chief Financial Officer pursuant to a supplemental staffing services agreement between FTD, Inc., a subsidiary of the Company, and Tatum. Mr. Cooper remained an employee of
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Tatum during the time he served as Interim Chief Financial Officer. The Company paid Tatum a weekly fee of $13,500 plus actual out-of-town expenses. Mr. Cooper did not participate in any Company employee benefit plans or receive any
salary, bonus, equity awards or other compensation or benefits directly from the Company in connection with his service as Interim Chief Financial Officer.
Rhys J. Hughes. Mr. Hughes is party to a service agreement with Interflora Holdings Limited (“Interflora Holdings”), dated as of February 8, 2005 and amended July 31, 2006, September 6, 2006, October 13, 2008, December 24, 2009, May 31, 2012, May 23, 2014, June 30, 2016, October 1, 2016 and December 21, 2016. Under his service agreement, Mr. Hughes is eligible to receive a base salary of £192,268 per year (which amount has since been adjusted and is subject to further adjustment from time to time) and a target bonus of 100% of base salary, subject to certain performance criteria to be established by the Board of Directors. The service agreement commenced on February 8, 2005 and will continue until terminated by Interflora Holdings Limited with not less than twelve (12) months prior written notice or by Mr. Hughes with not less than six (6) months prior written notice. Interflora Holdings reserves the right to terminate Mr. Hughes without any notice or on notice less than that required by his service agreement, provided that Interflora Holdings pays Mr. Hughes a sum equal to, but no more than, his annual base salary in respect of that part of the period of notice which Interflora Holdings did not give to Mr. Hughes less any appropriate tax and other statutory deductions. The service agreement also contains customary confidentiality and non-competition agreements.
Mr. Hughes is party to a retention letter agreement which, among other things, provides for cash awards in the event of certain transaction events (including a change in control) or certain involuntary terminations. Please refer to “Compensation Discussion and Analysis—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of these benefits.
Tom D. Moeller. Mr. Moeller is party to an employment agreement with Florists’ Transworld Delivery, Inc., a wholly owned subsidiary of the Company, dated as of March 27, 2010 and amended February 26, 2016, December 12, 2016 and April 23, 2018. Under his employment agreement, Mr. Moeller is eligible to receive a base salary of $350,000 per year (which amount has since been adjusted and is subject to further adjustment from time to time) and a target bonus of 100% of base salary, subject to certain performance criteria to be established by Florists’ Transworld Delivery, Inc. The employment agreement provided for an initial two-year term, with automatic renewal for additional successive one-year terms, subject to Florists’ Transworld Delivery, Inc.’s right to terminate upon notice of non-renewal at least 90 days prior to the expiration of the then-current term. The employment agreement provides that a notice of non-renewal from Florists’ Transworld Delivery, Inc. will be construed as a termination “without cause” and will trigger the severance provisions described below. If Mr. Moeller’s employment is terminated without cause, or he resigns for good reason, other than in connection with a change in control of the Company, then he will receive, with certain exceptions, an additional 12 months of vesting credit under his outstanding equity awards, calculated as if each applicable award vested on a monthly basis, provided, however, that in the event of conflict between the vesting acceleration provisions of his employment agreement and the vesting acceleration provisions of any PSU award, the terms of the PSU award will prevail. The employment agreement also provides that if Mr. Moeller’s employment is terminated without cause, or he resigns for good reason, in connection with, or within 12 months after, a change in control of the Company or the execution of a definitive agreement for a change in control, then he will receive either an additional 12 months of vesting credit under his outstanding equity awards or, if greater, an additional period of service equal in duration to the actual period served between the date of the commencement of vesting for the applicable award and the date of termination, in either case calculated as if such awards vested on a monthly basis. If Mr. Moeller’s employment is terminated without cause, or he resigns for good reason (whether or not in connection with a change in control), then he will be entitled to a separation payment equal to the sum of (i) his then-current annual base salary, (ii) the lesser of (a) 100% of his then-current annual base salary and (b) the most recent annual bonus paid to him for a full fiscal year and (iii) a prorated portion of the lesser of (a) 100% of his then-current annual base salary and (b) the most recent annual bonus paid to him for a full fiscal year. Mr. Moeller will also be entitled to any earned but unpaid bonus for the fiscal year preceding his termination. If Mr. Moeller’s employment is terminated due to his death or disability, then he (or his estate or beneficiaries) will receive, with certain exceptions, an additional 12 months of vesting credit under his outstanding equity awards, calculated as if each applicable award vested on a monthly basis. In addition, the employment agreement provides that Mr. Moeller was to receive a grant, which was effective as of the 15th day of the second month of the calendar quarter coinciding with the date of the employment agreement, of 65,000 RSUs, which vested at the rate of 25% on each of the first four anniversaries of the date of grant, all of which have now fully vested. The employment agreement also required Mr. Moeller to enter into customary confidentiality and non-competition agreements.
Mr. Moeller is party to a retention letter agreement which, among other things, provides for cash awards in the event of certain transaction events (including a change in control) or certain involuntary terminations. Please refer to “Compensation Discussion and Analysis—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of these benefits.
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Joseph R. Topper, Jr. Mr. Topper was not party to an employment agreement during 2018. Mr. Topper entered into an employment agreement with the Company on January 22, 2019. For more information on Mr. Topper’s employment agreement, see “Compensation Discussion and Analysis—Certain 2019 Compensation Actions—Additional Employment Agreements” above.
Mr. Topper is party to a retention letter agreement which, among other things, provides for cash awards in the event of certain transaction events (including a change in control) or certain involuntary terminations. Please refer to “Compensation Discussion and Analysis—2018 Compensation Actions—Retention Letter Agreements” for a more detailed discussion of these benefits.
Simha Kumar. Prior to his departure from the Company on July 18, 2018, Mr. Kumar was party to an employment agreement with the Company. This agreement provided for a base salary of $500,000 per year (which amount was subsequently adjusted) and an annual bonus of 100% of base salary, subject to certain performance criteria established by the Board of Directors. Had Mr. Kumar’s employment been terminated without cause, or had he resigned for good reason, other than in connection with a change in control of the Company, then he would have received an additional 12 months of vesting credit under his outstanding equity awards had each applicable award been structured to vest in equal monthly installments over the vesting schedule for that award, provided, however, that in the event of conflict between the vesting acceleration provisions of his employment agreement and the vesting acceleration provisions of any PSU award, the terms of the PSU award would have prevailed. The employment agreement also provided that if Mr. Kumar’s employment had been terminated without cause, or had he resigned for good reason, in connection with a change in control or the execution of a definitive agreement for a change in control, then his outstanding equity awards would have vested in full. If Mr. Kumar’s employment had been terminated without cause, or had he resigned for good reason (whether or not in connection with a change in control), then he would have been entitled to a separation payment equal to the sum of (i) his then-current annual base salary and (ii) his target bonus for the year of termination. Mr. Kumar would also have been entitled to any earned but unpaid bonus for the fiscal year preceding his termination, as well as eligibility to receive, for a period of 12 months following the date of termination, reimbursement for COBRA health care continuation coverage expenses. If Mr. Kumar’s employment had been terminated due to his death or disability, then he (or his estate or beneficiaries) would have been entitled to receive an additional 12 months of vesting credit under his outstanding equity awards had each applicable award been structured to vest in equal monthly installments over the vesting schedule for that award. The employment agreement also required Mr. Kumar to enter into customary confidentiality and non-competition agreements.
In accordance with his employment agreement, Mr. Kumar was entitled to certain severance benefits in connection with his departure from the Company, including (i) a cash severance payment equal to the sum of (A) his then-current annual salary and (B) his target bonus for 2018, (ii) reimbursement for 12 months of COBRA coverage for Mr. Kumar and his spouse and dependents, and (iii) accelerated vesting of certain of his outstanding equity awards, subject in each case to his compliance with certain covenants in the employment agreement. For more information about Mr. Kumar’s severance benefits, see “—Summary Compensation Table” above.
Jeffrey D. T. Severts. Prior to his departure from the Company on August 30, 2018, Mr. Severts was party to an employment agreement with the Company. The agreement provided for a base salary of $420,000 per year (which amount was subsequently adjusted) and an annual bonus of 100% of base salary, subject to certain performance criteria established by the Board of Directors. Had Mr. Severts’ employment been terminated without cause, or had he resigned for good reason, other than in connection with a change in control of the Company, then he would have received an additional 12 months of vesting credit under his outstanding equity awards had each applicable award been structured to vest in equal monthly installments over the vesting schedule for that award, provided, however, that in the event of any conflict between the vesting acceleration provisions of his employment agreement and the vesting acceleration provisions of any PSU award, the terms of the PSU award would have prevailed. The employment agreement also provided that if Mr. Severts’ employment had been terminated without cause, or had he resigned for good reason, in connection with a change in control or the execution of a definitive agreement for a change in control, then his outstanding equity awards would have vested in full. If Mr. Severts’ employment had been terminated without cause, or had he resigned for good reason (whether or not in connection with a change in control), then he would have been entitled to a separation payment equal to the sum of (i) his then-current annual base salary and (ii) his target bonus for the year of termination. Mr. Severts would also have been entitled to any earned but unpaid bonus for the fiscal year preceding his termination, as well as eligibility to receive, for a period of 12 months following the date of termination, reimbursement for COBRA health care continuation coverage expenses. If Mr. Severts’ employment had been terminated due to his death or disability, then he (or his estate or beneficiaries) would have been entitled to receive an additional 12 months of vesting credit under his
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outstanding equity awards had each applicable award been structured to vest in equal monthly installments over the vesting schedule for that award. The employment agreement also required Mr. Severts to enter into customary confidentiality and non-competition agreements.
In accordance with his employment agreement, Mr. Severts was entitled to certain severance benefits in connection with his departure from the Company, including (i) a cash severance payment equal to the sum of (A) his then-current annual salary and (B) his target bonus for 2018, (ii) reimbursement for 12 months of COBRA coverage for Mr. Severts and his spouse and dependents, and (iii) accelerated vesting of certain of his outstanding equity awards, subject in each case to his compliance with certain covenants in the employment agreement. For more information about Mr. Severts’ severance benefits, see “—Summary Compensation Table” above.
Equity Acceleration
Prior to June 2015, we made equity awards to our named executive officers under the FTD Companies, Inc. Amended and Restated 2013 Incentive Compensation Plan (the “Prior Incentive Plan”). In June 2015, stockholders approved an amendment and restatement of the Prior Incentive Plan (as so amended, the “2015 Plan”). Under the 2015 Plan, the provisions with respect to the acceleration of awards in the event of a change in control of us were simplified to provide for “double trigger” equity acceleration so that, in general, an award under the 2015 Plan could provide for accelerated vesting in the event of a change in control only where either (1) within a specified period following the change in control the holder of the award is involuntarily terminated for reasons other than for “cause” (as defined in the 2015 Plan or the applicable award agreement) or terminates his or her employment for “good reason” (as defined in the applicable award agreement), or (2) the award is not assumed, continued or converted into replacement awards in a manner described in the award agreement, in each case as further described in the 2015 Plan. Under the Prior Incentive Plan, all outstanding options and RSUs will immediately vest upon a change in control, to the extent they are not assumed or otherwise continued in effect by the successor entity or replaced with an incentive compensation program that preserves the intrinsic value of the award at that time and provides for the subsequent vesting and concurrent payout of that value in accordance with the pre-existing vesting schedules for those awards. In June 2017, the stockholders approved the FTD Companies, Inc. Third Amended and Restated 2013 Incentive Compensation Plan (the “2017 Plan”), which amended and restated in its entirety the 2015 Plan. Among other things, the 2017 Plan included revisions to provide the plan administrator with flexibility to take certain actions with respect to outstanding awards in the event of a change in control. In June 2018, stockholders approved an amendment to the 2017 Plan (as amended, the “Plan”) to increase the number of shares of common stock available for awards under the Plan and to revise certain other provisions. The Plan generally provides that, in the event of a change in control, unless otherwise provided in an award agreement or as provided by the plan administrator at the time of grant, the plan administrator generally may continue or accelerate the vesting and/or exercisability of awards, waive or modify performance or other conditions related to the payment or other rights under awards, cancel and cash out awards, or make such other modifications or adjustments as the plan administrator deems appropriate to maintain and protect the rights and interests of holders of such awards upon or following the change in control. The plan administrator need not take the same action or actions with respect to all awards, or portions thereof, with respect to all holders of awards. Further, the plan administrator may take different actions with respect to the vested and unvested portions of awards.
2018 Named Executive Officer Departures
Walden Departure
In connection with his separation from the Company, Mr. Walden became entitled to certain severance payments pursuant to his employment agreement, which are detailed above under “—Summary Compensation Table.” The value of the cash severance payment to which Mr. Walden was entitled is included in the “All Other Compensation” column of, and is detailed in Note 17 to, the Summary Compensation Table. The value of any accelerated equity awards is further detailed in Note 17 to the Summary Compensation Table. For further information regarding Mr. Walden’s severance payments, see “—Employment Agreements—John C. Walden” above.
Kumar Departure
In connection with his separation from the Company, Mr. Kumar became entitled to certain severance payments pursuant to his employment agreement, which are detailed above under “—Summary Compensation Table.” The value of the cash severance payment to which Mr. Kumar was entitled is included in the “All Other Compensation” column of, and
34
is detailed in Note 17 to, the Summary Compensation Table. The value of any accelerated equity awards is further detailed in Note 17 to the Summary Compensation Table. For further information regarding Mr. Kumar’s severance payments, see “—Employment Agreements—Simha Kumar” above.
Severts Departure
In connection with his separation from the Company, Mr. Severts became entitled to certain severance payments pursuant to his employment agreement, which are detailed above under “—Summary Compensation Table.” The value of the cash severance payment to which Mr. Severts was entitled is included in the “All Other Compensation” column of, and is detailed in Note 17 to, the Summary Compensation Table. The value of any accelerated equity awards is further detailed in Note 17 to the Summary Compensation Table. For further information regarding Mr. Severts’ severance payments, see “—Employment Agreements— Jeffrey D. T. Severts” above.
Cooper Departure
Pursuant to the Company’s supplemental staffing services agreement with Tatum, Mr. Cooper was not entitled to any termination payments.
Estimated Payments
Termination: The tables below reflect the amount of compensation which is vested and also which would be paid to each of our named executive officers, except for Messrs. Walden, Cooper, Kumar and Severts, assuming the various termination events occurred on December 31, 2018. The amounts included in the tables are estimates of the present value of the amounts that would be payable to the executive officer upon various types of termination of employment. The actual amounts to be paid upon a termination cannot be determined until the event occurs. The amounts included for Mr. Topper do not take into consideration the employment agreement entered into on January 22, 2019 as such employment agreement was entered into after December 31, 2018. The acceleration of all equity awards is calculated based on the closing price of our common stock on December 31, 2018, which was $1.48 per share.
| | Termination Without Cause or Upon Resignation for Good
Reason in the Absence of a Change in Control | |
Name | | Cash
Payments(1) | | Value of
Benefits(2) | | Accelerated
Equity Awards(3) | | Total | |
Scott D. Levin | | $ | 4,338,000 | | $ | 22,399 | | $ | 1,175,755 | | $ | 5,536,154 | |
Steven D. Barnhart | | $ | 1,615,425 | | $ | 21,524 | | $ | 85,069 | | $ | 1,722,018 | |
Rhys J. Hughes | | $ | 664,378 | | | — | | | — | | $ | 664,378 | |
Tom D. Moeller | | $ | 1,023,253 | | | — | | $ | 101,360 | | $ | 1,124,613 | |
Joseph R. Topper, Jr. | | $ | 665,425 | | | — | | | — | | $ | 665,425 | |
(1) Includes cash payments based on annual salary and bonus as well as the monthly salary cash opportunity, if applicable, cash retention bonus opportunity and cash transaction bonus opportunity to be awarded pursuant to the respective Continuing NEO’s retention letter agreement.
(2) Represents payment of medical, dental and vision insurance premiums and other benefits for the named executive officer and his dependents for a period of 12 months.
(3) Includes accelerated vesting of RSUs, where applicable. For further information regarding the acceleration treatment of RSUs, see “—Employment Agreements.” For Mr. Hughes and Mr. Topper, any outstanding RSUs would be immediately canceled pursuant to their respective RSU award agreements. All outstanding unvested PSUs would be immediately canceled pursuant to the respective PSU award agreement. Options would vest pursuant to the respective employment agreement or option award agreement; however, as the exercise prices exceeded the December 31, 2018 stock price, any vested options would have had no value at that date, though they would have been subject to an extended exercise period of the earlier of (i) 12 months, for Mr. Levin, or three months, for all other Continuing NEOs, following the termination date; or (ii) the original expiration date set forth in the applicable option award agreement.
| | Termination Without Cause or Upon Resignation for Good
Reason in Connection With a Change in Control | |
Name | | Cash
Payments(1) | | Value of
Benefits(2) | | Accelerated
Equity Awards(3) | | Total | |
Scott D. Levin | | $ | 4,485,000 | | $ | 22,399 | | $ | 1,229,245 | | $ | 5,736,644 | |
Steven D. Barnhart | | $ | 1,015,425 | | $ | 21,524 | | $ | 355,200 | | $ | 1,392,149 | |
Rhys J. Hughes | | $ | 264,378 | | | — | | $ | 151,144 | | $ | 415,522 | |
Tom D. Moeller | | $ | 623,253 | | | — | | $ | 144,854 | | $ | 768,107 | |
Joseph R. Topper, Jr. | | $ | 65,425 | | | — | | $ | 143,374 | | $ | 208,799 | |
(1) Includes cash payments based on annual salary and bonus, as well as the monthly salary cash opportunity, if applicable, awarded pursuant to the respective named executive officer’s retention letter agreement. Excludes the cash retention bonus opportunity and cash transaction bonus opportunity, to be awarded pursuant to the respective Continuing NEO’s retention letter agreement, included in the “Cash Payments” column of the “Termination Without Cause or Upon Resignation for Good
35
Reason in the Absence of a Change in Control” table below shouldabove, as such payments would be readearned based on the change in conjunctioncontrol transaction regardless of whether the named executive officer was terminated for cause or resigned for good reason in connection with “Liquiditythe change in control. The total amount of the referenced cash retention bonus opportunity and Capital Resources,cash transaction bonus opportunity for each Continuing NEO is as follows: Mr. Levin, $750,000; Messrs. Barnhart and Topper, $600,000; and Messrs. Hughes and Moeller, $400,000.
(2) Represents payment of medical, dental and vision insurance premiums and or other benefits for the named executive officer and his dependents for a period of 12 months.
(3) Includes accelerated vesting of RSUs and PSUs. RSUs would vest according to the applicable employment agreement or RSU award agreement. Pursuant to their RSU award agreements, in the case of Messrs. Hughes and Topper, all outstanding unvested RSUs would immediately vest in an amount equal to the greater of (i) twenty-five percent (25%) of the total number of RSUs subject to the applicable award and (ii) the additional number of RSUs that would have been vested at the time of such involuntary termination if (A) Mr. Hughes or Mr. Topper, as the case may be, had completed an additional period of service equal in duration to the actual period of service completed between the date of the applicable award and the date of such involuntary termination and (B) the RSUs subject to such award had vested in a series of successive equal monthly installments over the duration of the normal vesting schedule. All outstanding unvested PSUs would immediately vest at target, and such PSUs would settle pursuant to the respective PSU award agreement. For further information regarding the acceleration treatment of RSUs and PSUs, see “—Employment Agreements.” “Contractual Obligations, Other CommitmentsOptions would vest pursuant to the respective employment agreement or option award agreement; however, as the exercise prices exceeded the December 31, 2018 stock price, any vested options would have had no value at that date, though they would have been subject to an extended exercise period of the earlier of (i) 12 months following the termination date; or (ii) the original expiration date set forth in the applicable option award agreement.
Director Compensation
Cash Retainer Fees.
Our non-employee directors earn annual retainer fees of $66,000 for service as a member of the Board of Directors; an additional $90,000 for service as the Chairman of the Board of Directors; $39,000, $33,000 and Off-Balance Sheet Arrangements,”$19,200 for service as the Chairman of the Audit, Compensation and “Critical Accounting Policies, EstimatesNominating and Assumptions”Corporate Governance Committees, respectively; $18,000 for service as a non-chair member of the Audit Committee; $15,000 for service as a non-chair member of the Compensation Committee; and $9,600 for service as a non-chair member of the Nominating and Corporate Governance Committee. Since April 1, 2017, our non-employee directors have not earned additional fees for meeting attendance.
FTD reimburses non-employee directors for travel to/from Board of Directors or Committee meetings.
Equity Awards.
Our non-employee directors may receive option grants, restricted stock or RSU awards and other equity incentives in connection with their service on the Board of Directors.
On June 5, 2018, the Board of Directors made an RSU award with a grant date fair value of $126,000 to each of our non-employee directors other than Mr. Berglass. The number of shares of our common stock subject to each such RSU award was determined by dividing $126,000 by the $5.64 fair market value per share of our common stock on the effective date of the award. As a result, our non-employee directors other than Mr. Berglass each received an RSU award covering 22,340 shares of our common stock. The shares subject to these units vest and become issuable upon the non-employee director’s continued service on the Board of Directors through June 1, 2019.
On June 5, 2018, the Board of Directors made an RSU award with a grant date fair value of $162,000 to non-employee director Robert Berglass, who serves as the Chairman of our Board of Directors. The number of shares of our common stock subject to such RSU award was determined by dividing $162,000 by the $5.64 fair market value per share of our common stock on the effective date of the award. As a result, Mr. Berglass received an RSU award covering 28,723 shares of our common stock. The shares subject to these units vest and become issuable upon Mr. Berglass’ continued service on the Board of Directors through June 1, 2019.
Equity Retention Requirement.
Each non-employee director is required to establish a meaningful equity ownership interest in the Company. Non-employee directors are expected to own a number of shares of the Company’s common stock (including unvested RSUs) having a value equal to five times the annual cash retainer payable to non-employee directors (exclusive of any additional amounts payable with respect to committee membership or service as a chair of the Board of Directors or a committee thereof). In general, non-employee directors have five years from their initial election or appointment to the Board of Directors to establish this level of ownership.
36
Director Summary Compensation Table
The following table provides certain summary information concerning the compensation earned by our non-employee directors for the year ended December 31, 2018.
Name(1)(2) | | Fees Earned
in Cash(3) | | Stock
Awards(4)(5) | | Total | |
Mir Aamir | | $ | 38,500 | | $ | 125,998 | | $ | 164,498 | |
James T. Armstrong | | $ | 103,200 | | $ | 125,998 | | $ | 229,198 | |
Tracey L. Belcourt | | $ | 75,600 | | $ | 125,998 | | $ | 201,598 | |
Robert Berglass | | $ | 207,000 | | $ | 161,998 | | $ | 368,998 | |
Candace H. Duncan | | $ | 84,000 | | $ | 125,998 | | $ | 209,998 | |
Sue Ann R. Hamilton | | $ | 75,600 | | $ | 125,998 | | $ | 201,598 | |
Joseph W. Harch | | $ | 120,000 | | $ | 125,998 | | $ | 245,998 | |
Dennis Holt(6) | | $ | 33,750 | | | — | | $ | 33,750 | |
Robin S. Hickenlooper | | $ | 81,000 | | $ | 125,998 | | $ | 206,998 | |
Christopher W. Shean | | $ | 66,000 | | $ | 125,998 | | $ | 191,998 | |
(1) Mr. Levin, our President, Chief Executive Officer and Secretary, is not included in this Item 7,table because he is an FTD employee and “Quantitativedoes not earn any additional compensation for his services as a director. The compensation earned by Mr. Levin as an FTD employee is shown in the Summary Compensation Table.
(2) Mr. Walden, our former President and Qualitative Disclosures About Market Risk”Chief Executive Officer stepped down from such positions and from the consolidated financial statements and accompanying notes theretoBoard of Directors on July 18, 2018. Mr. Walden is not included elsewhere in this Form 10-K.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Revenues | $ | 1,014,244 |
| | $ | 1,084,028 |
| | $ | 1,121,999 |
|
| Operating expenses: | | | | | |
| Cost of revenues | 660,449 |
| | 674,574 |
| | 703,642 |
|
| Sales and marketing | 249,028 |
| | 249,565 |
| | 229,569 |
|
| General and administrative | 100,823 |
| | 112,630 |
| | 112,720 |
|
| Amortization of intangible assets | 3,624 |
| | 13,467 |
| | 61,050 |
|
| Restructuring and other exit costs | 18,247 |
| | 2,179 |
| | 11,758 |
|
| Impairment of goodwill, intangible assets, and other long-lived assets | 206,704 |
| | 300,342 |
| | 84,000 |
|
| Total operating expenses | 1,238,875 |
| | 1,352,757 |
| | 1,202,739 |
|
| Operating loss | (224,631 | ) | | (268,729 | ) | | (80,740 | ) |
| Interest expense, net | (21,552 | ) | | (9,797 | ) | | (9,195 | ) |
| Other income, net | 2,640 |
| | 311 |
| | 1,678 |
|
| Loss before income taxes | (243,543 | ) | | (278,215 | ) | | (88,257 | ) |
| Benefit from income taxes | (18,814 | ) | | (44,174 | ) | | (5,066 | ) |
| Net loss | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) |
Year Ended December 31,table because while he served on the Board of Directors during 2018, compared to Year Ended December 31, 2017
We present certain results from our International segment onhe was an FTD employee and did not earn any additional compensation for his services as a
constant currency basis, which results are considered non-GAAP financial measures. Management believes the inclusion of constant currency information permits comparison of results between periodsdirector. The compensation earned by Mr. Walden as
if foreign currency exchange rates had remained constant period-over-period. Our International segment operates principallyan FTD employee is shown in the
U.K. We calculate constant currency by applying the foreign currency exchange rate for the prior period to the local currency results for the current period. In addition, we have excluded intersegment revenues and expensesSummary Compensation Table.(3) Fees earned in the discussion below.
Consolidated Revenues
Consolidated revenues decreased $69.8 million, or 6.4%,cash for the year ended December 31, 2018
comparedconsisted of the following:Name | | Board
Annual
Retainer Fee | | Fees
Earned as
Chair or
Member of
One or
More
Board
Committees | | Fees Earned
in Cash | |
Mir Aamir | | $ | 38,500 | | | — | | $ | 38,500 | |
James T. Armstrong | | $ | 66,000 | | $ | 37,200 | | $ | 103,200 | |
Tracey L. Belcourt | | $ | 66,000 | | $ | 9,600 | | $ | 75,600 | |
Robert Berglass | | $ | 156,000 | | $ | 51,000 | | $ | 207,000 | |
Candace H. Duncan | | $ | 66,000 | | $ | 18,000 | | $ | 84,000 | |
Sue Ann R. Hamilton | | $ | 66,000 | | $ | 9,600 | | $ | 75,600 | |
Joseph W. Harch | | $ | 66,000 | | $ | 54,000 | | $ | 120,000 | |
Dennis Holt(6) | | $ | 27,500 | | $ | 6,250 | | $ | 33,750 | |
Robin S. Hickenlooper | | $ | 66,000 | | $ | 15,000 | | $ | 81,000 | |
Christopher W. Shean | | $ | 66,000 | | | — | | $ | 66,000 | |
(4) On June 5, 2018, each of our current non-employee directors other than Mr. Berglass was awarded RSUs covering 22,340 shares of our common stock. On June 5, 2018, Mr. Berglass was awarded RSUs covering 28,723 shares of our common stock. The amount reported in this column represents the grant date fair value of each such RSU award, calculated in accordance with Accounting Standards Codification Topic 718, Compensation—Stock Compensation (“ASC 718”), and does not take into account any estimated forfeitures related to the year ended December 31, 2017. The decreaseservice-based vesting condition in consolidated revenues was primarily due to a $61.1 million decrease in revenues from our U.S. Consumer segment and a $15.4 million decrease in revenues from our Florist segment. Partially offsetting these decreases, our International segment recorded a $5.2 million increase (decrease of $1.3 million in constant currency) in revenues. Foreign currency exchange rates favorably impacted consolidated revenues by $6.5 million during the year ended December 31, 2018.
Consolidated Cost of Revenues
Consolidated cost of revenues decreased $14.1 million, or 2.1%,effect for the
award. For information regarding assumptions underlying the ASC 718 valuation of our equity awards, see Note 10 to our audited consolidated financial statements for the fiscal year ended December 31, 2018
comparedincluded in our Annual Report on Form 10-K for that period.(5) The following table shows the number of shares of our common stock subject to the year ended December 31, 2017. The decrease was primarily due to decreasesoutstanding RSUs and stock options which each of $14.9 million and $3.4 million in costs associated with our U.S. Consumer and Florist segments, respectively, and were partially offset by a $5.9 million increase (increase of $1.4 million in constant currency) in costs associated with our International segment, all of which were primarily associated with the changes in revenue noted above. Foreign currency exchange rates unfavorably impacted consolidated cost of revenues by $4.6 million during the year ended December 31, 2018. Gross margin was 35%non-employee directors for the year ended December 31, 2018 a decrease from 38% when compared to the year ended December 31, 2017.
Consolidated Sales and Marketing
Consolidated sales and marketing expenses decreased $0.5 million, or less than 1%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. This decrease was primarily due to an increase of $4.9 million associated with our U.S. Consumer segment and an increase of $2.6 million (increase of $2.0 million in constant currency) in our International segment and partially offset by a decrease of $8.7 million associated with our Florist segment. Foreign currency exchange rates had a $0.6 million unfavorable impact on consolidated sales and marketing during the year ended December 31, 2018. Consolidated sales and marketing expenses as a percentage of consolidated revenues increased to 25% for the year ended December 31, 2018 as compared to 23% for the year ended December 31, 2017.
Consolidated General and Administrative
Consolidated general and administrative expenses decreased $11.8 million, or 10.5%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. General and administrative expenses decreased primarily due to $7.7 million in costs incurred in 2017 related to our corporate strategic planning, which was completed in 2017, and decreases of $6.7 million in depreciation expense and $8.7 million in personnel-related costs. These decreases were partially offset by $7.0 million in consulting and employee retention costs incurred in 2018 associated with our corporate reorganization and increases of $1.4 million in legal and professional fees expense, $1.3 million in legal and consulting costs related to potential transactions, and $0.5 million in bad debt expense. Foreign currency exchange rates had a $0.4 million unfavorable impact on consolidated general and administrative expenses during the year ended December 31, 2018. Consolidated general and administrative expenses as a percentage of consolidated revenues was stable at 10% for the years ended December 31, 2018 and 2017.
Amortization of Intangible Assets
Amortization expense related to intangible assets decreased $9.8 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 as certain intangible assets were impaired during the years ended December 31, 2018 and 2017.
Restructuring and Other Exit Costs
Restructuring costs incurred during the year ended December 31, 2018 totaled $18.2 million related to the corporate restructuring and cost savings plan announced in July 2018. Such costs included employee severance and accelerated vesting of equity awards under the terms of certain executive employment agreements. During the year ended December 31, 2017, the Company incurred restructuring and other exit costs of $2.2 million, primarily related to employee termination and facility closure costs.
Impairment of Goodwill, Intangible Assets, and Other Long-Lived Assets
During the years ended December 31, 2018 and 2017, we recorded pre-tax impairment charges of $206.7 million and $300.3 million, respectively. See Footnote 5—“Goodwill, Intangible Assets, and Other Long-Lived Assets” for a further description of these charges.
Interest Expense, Net
Interest expense, net for the year ended December 31, 2018 increased $11.8 million to $21.6 million as compared to $9.8 million the year ended December 31, 2017. The increase was primarily due to higher interest rates and fees related to the Sixth Amendment, as defined and further described in “—Liquidity and Capital Resources” within this MD&A.
Provision for Income Taxes
During the year ended December 31, 2018, we recorded a tax benefit of $18.8 million on a pre-tax loss of $243.5 million compared to a tax benefit of $44.2 million on a pre-tax loss of $278.2 million for the year ended December 31, 2017. The goodwill impairment charges recorded during the years ended December 31, 2018 and 2017 totaling $109.4 million and $196.7 million, respectively, are not tax deductible, and therefore, there is no tax benefit recorded on the charges.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Consolidated Revenues
Consolidated revenues decreased $38.0 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in consolidated revenues was primarily due to a $32.0 million decrease in revenues from our U.S. Consumer segment and a $6.7 million decrease in revenues from our International segment (increase of $1.3 million in constant currency). Foreign currency exchange rates unfavorably impacted revenues by $8.1 million during the year ended December 31, 2017.
Consolidated Cost of Revenues
Consolidated cost of revenues decreased $29.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease was primarily due to a decrease of $25.2 million in costs associated with our U.S. Consumer segment, driven primarily by the reduction in revenues, and a $3.8 million decrease (increase of $1.7 million in constant currency) in costs associated with our International segment. Foreign currency exchange rates favorably impacted consolidated cost of revenues by $5.5 million during the year ended December 31, 2017. Gross margin was 38% for the year ended December 31, 2017, an increase from 37% when compared to the year ended December 31, 2016.
Consolidated Sales and Marketing
Consolidated sales and marketing expenses increased $20.0 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in consolidated sales and marketing expenses was primarily due to an increase of $19.8 million associated with our U.S. Consumer segment due to additional marketing spend to drive customer acquisition and retention. This increase was partially offset by a decrease of $1.2 million associated with our Florist segment and a decrease of $0.7 million (increase of $0.3 million in constant currency) associated with our International segment. Foreign currency exchange rates had a $1.0 million favorable impact on consolidated sales and marketing expenses during the year ended December 31, 2017. Consolidated sales and marketing expenses as a percentage of consolidated revenues increased to 23% for the year ended December 31, 2017 as compared to 20% for the year ended December 31, 2016.
Consolidated General and Administrative
Consolidated general and administrative expenses were relatively stable at $112.6 million for the year ended December 31, 2017 compared to $112.7 million for the year ended December 31, 2016. During the year ended December 31, 2017 depreciation expense decreased $2.6 million, transaction and integration costs decreased $2.5 million, bad debt expense decreased $1.5 million, and audit, legal and other professional fees decreased $1.7 million. These decreases were offset primarily by $7.7 million in costs related to corporate strategic planning and an increase of $0.6 million in personnel-related costs. Foreign currency exchange rates had a $0.6 million favorable impact on consolidated general and administrative expenses during the year ended December 31, 2017. Consolidated general and administrative expenses as a percentage of consolidated revenues was stable at 10% for the years ended December 31, 2017 and 2016.
Amortization of Intangible Assets
Amortization expense related to intangible assets decreased $47.6 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 as certain intangible assets related to the Acquisition were fully amortized at December 31, 2016.
Restructuring and Other Exit Costs
During the year ended December 31, 2017, the Company incurred restructuring and other exit costs of $2.2 million, primarily related to employee termination and facility closure costs. During the year ended December 31, 2016, the Company incurred restructuring and other exit costs of $11.8 million, primarily related to senior management changes, including expenses for severance and related accelerated vesting of equity awards, as well as restructuring charges related to the consolidation of certain office and distribution facilities for Provide Commerce.
Impairment of Goodwill, Intangible Assets, and Other Long-Lived Assets
During the years ended December 31, 2017 and 2016, the Company recognized pre-tax impairment charges of $300.3 million and $84.0 million, respectively. See Footnote 5—“Goodwill, Intangible Assets, and Other Long-Lived Assets” for a further description of these charges.
Interest Expense, Net
Interest expense, net for the year ended December 31, 2017 increased $0.6 million to $9.8 million as compared to $9.2 million the year ended December 31, 2016. The increase was primarily due to the rising interest rate market during 2017 when compared to 2016.
Provision for Income Taxes
During the year ended December 31, 2017, we recorded a tax benefit of $44.2 million on a pre-tax loss of $278.2 million compared to a tax benefit of $5.1 million on a pre-tax loss of $88.3 million for the year ended December 31, 2016. During the years ended December 31, 2017 and 2016, the impairment charges related to goodwill ($196.7 million in 2017 and $84.0 million in 2016) are not tax deductible, and therefore, there is no tax benefit recorded on the charges. Excluding the impact of the non-deductible goodwill impairment, the increase in the tax benefit rate was due to the recognition of an additional net benefit ($14.1 million) related to the impact of the reduced tax rates per the TCJA, being applied to the deferred tax balances. The TCJA also resulted in the Company incurring a Transition Tax Liability of $0.3 millionheld as of December 31,
2017.2018:37
Name |
| Aggregate
Number of
Shares
Subject to
RSUs |
| Aggregate
Number of
Shares
Subject to
Options |
|
Mir Aamir | | 22,340 | | — | |
James T. Armstrong | | 22,340 | | — | |
Tracey L. Belcourt | | 22,340 | | — | |
Robert Berglass | | 28,723 | | — | |
Candace H. Duncan | | 22,340 | | — | |
Sue Ann R. Hamilton | | 22,340 | | — | |
Joseph W. Harch | | 22,340 | | — | |
Robin S. Hickenlooper | | 22,340 | | — | |
Dennis Holt(a) | | — | | — | |
Christopher W. Shean | | 22,340 | | — | |
(a) Mr. Holt did not stand for re-election at the 2018 annual meeting of stockholders. Therefore, the information above reflects his service on the Board of Directors through June 5, 2018.
Executive Pay Ratio
The pay ratio information is provided pursuant to Item 402(u) of Regulation S-K. We note that, due to our permitted use of reasonable estimates and assumptions in preparing this pay ratio disclosure, the disclosure may involve a degree of imprecision, and thus this pay ratio disclosure is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K using the data and assumptions described below. The pay ratio was not used to make management decisions and the Board of Directors does not use this pay ratio to make executive compensation decisions.
To determine the median employee in 2018, we evaluated the year to date base salary, overtime and bonus compensation (other than bonuses under our Management Incentive Plan, which were not widely distributed) earned by our full-time, part-time and temporary employees (other than our Chief Executive Officer) that were employed by us on October 1, 2018. We adjusted the compensation of permanent employees who were not employed for the full nine month period to reflect the estimated compensation they would have earned had those permanent employees been employed for the full nine month period, as permitted by the applicable SEC rules. In addition, tax shortfalls relatedcalculating the compensation used to identify the vestingmedian employee, the Company used Indian Rupee to U.S. Dollar and Pound Sterling to U.S. Dollar exchange rates as of equity awards increased tax expense by $1.6 million.
BUSINESS SEGMENT OPERATING RESULTS
We report our business in three reportable segments: U.S. Consumer, Florist, and International. Segment operating income is operating income excluding depreciation and amortization; impairment of goodwill, intangible assets, and other long-lived assets; litigation and dispute settlement charges or gains; transaction and integration costs; restructuring and other exit costs; and corporate reorganization costs. In addition, stock-based and incentive compensation and general corporate expenses areSeptember 30, 2018; the Company did not allocated tomake any cost-of-living adjustments for the segments. Segment operating income/loss is prior to intersegment eliminations and excludes other income/(expense), net.
The segment resultsemployees included in this MD&A are presented on a basis consistent with our internal management reporting. Segment information appearing in Footnote 2—“Segment Information” is also presented on this basis.
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2018 to 2017 | | 2017 to 2016 |
| | 2018 | | 2017 | | 2016 | | $ Change | | % Change | | $
Change | | % Change |
| | (in thousands, except for percentages and average order values) |
| Segment revenues | $ | 727,866 |
| | $ | 789,011 |
| | $ | 821,008 |
| | $ | (61,145 | ) | | (8 | )% | | $ | (31,997 | ) | | (4 | )% |
| Segment operating income/(loss) | $ | (4,556 | ) | | $ | 46,439 |
| | $ | 70,724 |
| | $ | (50,995 | ) | | (110 | )% | | $ | (24,285 | ) | | (34 | )% |
Key metrics and other financial data: | | | | | | | | | | | | | |
| Consumer orders | 14,171 |
| | 14,926 |
| | 15,293 |
| | (755 | ) | | (5 | )% | | (367 | ) | | (2 | )% |
| Average order value | $ | 49.95 |
| | $ | 51.31 |
| | $ | 52.06 |
| | $ | (1.36 | ) | | (3 | )% | | $ | (0.75 | ) | | (1 | )% |
| Segment operating margin/(loss) | (1 | )% | | 6 | % | | 9 | % | | | | | | | | |
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
U.S. Consumer Segment Revenues
U.S. Consumer segment revenues decreased $61.1 million, or 8%, for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily driven by a 5% decrease in consumer orders and a 3% decrease in average order value. The decrease in order volume was largely due to lower traffic on our websites, primarily driven by declines in mass media and paid search channels. The decrease in average order value was primarily due to a shift in the product mix to lower priced products and increased promotional offers. Revenues decreased 12%, 11%, and 7% for the FTD.com, ProFlowers, and Gourmet Foods units, respectively, for the year ended December 31, 2018 compared to the year ended December 31, 2017. Partially offsetting these decreases was a 9% increase in revenues for the Personal Creations unit for the year ended December 31, 2018 compared to the year ended December 31, 2017.
U.S. Consumer Segment Operating Income/(Loss)
U.S. Consumer segment operating income/(loss) decreased $51.0 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. The gross margin for the U.S. Consumer segment decreased to 32% for the year ended December 31, 2018 compared to 35% for the year ended December 31, 2017. The decrease was primarily driven by the reduced pricing noted above, increased inventory write-offs from lower than anticipated Valentine’s Day orders and increased freight costs. Sales and marketing expenses increased $4.9 million, or 3%, primarily due to increased rates paid for variable marketing per order, which was partially offset by lower order volume, and increased personnel-related costs. General and administrative expenses decreased $0.2 million, or 1%, when compared to the prior year. The U.S. Consumer segment operating loss was 1% for the year ended December 31, 2018 compared to operating margin of 6% for the year ended December 31, 2017.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
U.S. Consumer Segment Revenues
U.S. Consumer segment revenues decreased $32.0 million, or 4%, for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily driven by a 2% decrease in order volume and a 1% decrease in average order value. The decrease in order volume was primarily related to partner programs, including sympathy, group buying, and airlines, as well as other marketing channels. The decrease in average order value was primarily due to an increase in orders through the FTD.com Gold Program (a consumer membership program that offers reduced service and shipping fees), an unfavorable product mix, and lower service fees. Revenues decreased 11% and 5% for the FTD.com and ProFlowers units, respectively, for the year ended December 31, 2017 compared to the year ended December 31, 2016. Revenues for the Gourmet Foods and Personal Creations units both increased 6% for the year ended December 31, 2017 compared to the year ended December 31, 2016.
U.S. Consumer Segment Operating Income
U.S. Consumer segment operating income decreased $24.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The gross margin for the U.S. Consumer segment remained stable at 35% for both the years ended December 31, 2017 and 2016. Sales and marketing expenses increased $19.8 million primarily due to additional marketing spend to drive customer acquisition and retention, higher personnel-related costs, and higher-cost marketing channels. General and administrative expenses decreased $2.3 million primarily due to lower personnel-related costs and legal expenses. The U.S. Consumer segment operating margin decreased to 6% for the year ended December 31, 2017 from 9% for the year ended December 31, 2016.
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2018 to 2017 | | 2017 to 2016 |
| | 2018 | | 2017 | | 2016 | | $ Change | | % Change | | $
Change | | % Change |
| | (in thousands, except for percentages and average revenues per member) |
| Segment revenues | $ | 150,308 |
| | $ | 165,737 |
| | $ | 166,881 |
| | $ | (15,429 | ) | | (9 | )% | | $ | (1,144 | ) | | (1 | )% |
| Segment operating income | $ | 42,673 |
| | $ | 46,477 |
| | $ | 48,406 |
| | $ | (3,804 | ) | | (8 | )% | | $ | (1,929 | ) | | (4 | )% |
Key metrics and other financial data: | | | | | | | | | | | | | |
| Average revenues per member | $ | 14,919 |
| | $ | 15,270 |
| | $ | 14,425 |
| | $ | (351 | ) | | (2 | )% | | $ | 845 |
| | 6 | % |
| Segment operating margin | 28 | % | | 28 | % | | 29 | % | | | |
| | | | |
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Florist Segment Revenues
Florist segment revenues decreased $15.4 million, or 9%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. Services revenues decreased $10.6 million primarily due to lower clearinghouse order volume. Products revenues decreased $4.8 million primarily as a result of a planned reduction in container offerings and related pricing. Average revenues per member decreased 2% for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decline in clearinghouse order volume.
Florist Segment Operating Income
Florist segment operating income decreased $3.8 million, or 8%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The gross margin for the Florist segment decreased to 66% for the year ended December 31, 2018 compared to 67% for the year ended December 31, 2017 primarily due to declines in high-margin clearinghouse order-related revenues and planned reductions in container revenue and related pricing. Sales and marketing expenses decreased $8.7 million, or 17%, primarily due to fewer incentives paid to member florists as a result of lower order volume and lower personnel costs. General and administrative expenses increased $0.4 million primarily due to an increase in bad debt expense. Florist segment operating margin was 28% for the years ended December 31, 2018 and 2017.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Florist Segment Revenues
Florist segment revenues decreased $1.1 million, or 1%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. Services revenues decreased $1.6 million due to lower order-related revenues and lower fees associated with online and other services. Products revenues increased $0.5 million primarily due to an increase in sales of fresh flowers and floral, plant, and gift products to our floral network members which were partially offset by a decrease in technology system sales. Average revenues per member increased 6% for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Florist Segment Operating Income
Florist segment operating income decreased $1.9 million, or 4%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The gross margin for the Florist segment decreased to 67% for the year ended December 31, 2017 compared to 68% for the year ended December 31, 2016 primarily due to a decrease in services revenues and an increase in product costs. Sales and marketing expenses decreased $1.2 million, or 2%, due to a decrease in advertising and promotional expenses, lower personnel-related costs, and lower order-related marketing expenses. General and administrative expenses increased $0.1 million primarily due to an increase in personnel-related and technology costs partially offset by a decrease in bad debt expense which was primarily related to one member in the prior year. Florist segment operating margin decreased to 28% for year ended December 31, 2017 compared to 29% for the year ended December 31, 2016.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2018 | | 2017 | | $ Change | | % Change | | 2017 | | 2016 | | $
Change | | % Change |
| | (in thousands, except for percentages, average order values and average currency exchange rates) |
| In USD: | | | | | | | | | | | | | | | |
| Segment revenues | $ | 151,145 |
| | $ | 145,966 |
| | $ | 5,179 |
| | 4 | % | | $ | 145,966 |
| | $ | 152,700 |
| | $ | (6,734 | ) | | (4 | )% |
| Impact of foreign currency | (6,462 | ) | | — |
| | (6,462 | ) | | | | 8,054 |
| | — |
| | 8,054 |
| | |
Segment revenues (in constant currency) (a) | $ | 144,683 |
| | $ | 145,966 |
| | $ | (1,283 | ) | | (1 | )% | | $ | 154,020 |
| | $ | 152,700 |
| | $ | 1,320 |
| | 1 | % |
| | | | | | | | | | | | | | | | |
| Segment operating income | $ | 12,994 |
| | $ | 16,770 |
| | $ | (3,776 | ) | | (23 | )% | | $ | 16,770 |
| | $ | 19,128 |
| | $ | (2,358 | ) | | (12 | )% |
| Impact of foreign currency | (904 | ) | | — |
| | (904 | ) | | | | 902 |
| | — |
| | 902 |
| | |
Segment operating income (in constant currency) (a) | $ | 12,090 |
| | $ | 16,770 |
| | $ | (4,680 | ) | | (28 | )% | | $ | 17,672 |
| | $ | 19,128 |
| | $ | (1,456 | ) | | (8 | )% |
| | | | | | | | | | | | | | | | |
| Key metrics and other financial data: | | | | | | | | | | | | | | | |
| Consumer orders | 2,690 |
| | 2,661 |
| | 29 |
| | 1 | % | | 2,661 |
| | 2,690 |
| | (29 | ) | | (1 | )% |
| Average order value | $ | 46.69 |
| | $ | 45.30 |
| | $ | 1.39 |
| | 3 | % | | $ | 45.30 |
| | $ | 46.67 |
| | $ | (1.37 | ) | | (3 | )% |
| Segment operating margin | 9 | % | | 11 | % | | | | | | 11 | % | | 13 | % | | | | |
| | | | | | | | | | | | | | | | |
| In GBP: | | | | |
|
| |
|
| | | | | |
|
| |
|
|
| Segment revenues | £ | 112,628 |
| | £ | 113,407 |
| | £ | (779 | ) | | (1 | )% | | £ | 113,407 |
| | £ | 112,330 |
| | £ | 1,077 |
| | 1 | % |
| Average order value | £ | 34.84 |
| | £ | 35.22 |
| | £ | (0.38 | ) | | (1 | )% | | £ | 35.22 |
| | £ | 34.36 |
| | £ | 0.86 |
| | 3 | % |
| Average currency exchange rate: GBP to USD | 1.34 |
| | 1.29 |
| | | | | | 1.29 |
| | 1.36 |
| | | | |
| |
(a) | USD at prior year comparable period foreign currency exchange rate. |
We present certain results from our International segment on a constant currency basis, which results are considered non-GAAP financial measures. Management believes the inclusion of constant currency information permits the comparison of results between periods as if foreign currency exchange rates had remained constant period-over-period. Our International segment operates principally in the U.K. We calculate constant currency by applying the foreign currency exchange rate for the prior period to the local currency results for the current period.
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
International Segment Revenues
International segment revenues increased $5.2 million, or 4%, (decreased $1.3 million, or 1%, in constant currency) for the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in revenues in constant currency was primarily due to increases in indirect taxes not offset by price increases, the loss of credit card fee income as a result of statutory regulations, and increased discounts and refunds. These decreases were partially offset by the increase in revenues from the third quarter 2018 launch of the sale of floral-related supplies directly to our floral network members. See Footnote 4—“Transactions With Related Parties.” Consumer orders increased 1% primarily due to increased holiday orders during the first quarter of 2018 and increased non-peak orders due to reductions in pricing. Foreign currency exchange rates had a $6.5 million favorable impact on our International segment revenues during the year ended December 31, 2018.
International Segment Operating Income
International segment operating income decreased by $3.8 million, or 23%, ($4.7 million, or 28%, in constant currency) for the year ended December 31, 2018 compared to the year ended December 31, 2017. The gross margin for the International segment decreased to 29% for the year ended December 31, 2018 compared to 31% for the year ended December 31, 2017. Sales and marketing expenses increased $2.6 million ($2.0 million, or 12%, in constant currency) due to increased costs related to consumer marketing, the launch of the floral-related supplies business, and costs associated with marketing personnel. General and administrative expenses increased $0.4 million, or 4%, (stable in constant currency). International segment operating margin decreased to 9% for the year ended December 31, 2018 compared to 11% for the year ended December 31, 2017.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
International Segment Revenues
International segment revenues decreased $6.7 million, or 4%, (increased $1.3 million, or 1%, in constant currency) for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in revenues in constant currency was primarily due to an increase in average order value of 3% partially offset by a 1% decrease in order volume.
International Segment Operating Income
International segment operating income decreased by $2.4 million, or 12%, ($1.5 million, or 8%, in constant currency) for the year ended December 31, 2017 compared to the year ended December 31, 2016. The gross margin for the International segment decreased to 31% for the year ended December 31, 2017 compared to 32% for the year ended December 31, 2016. Sales and marketing expenses decreased $0.7 million (increased $0.3 million in constant currency). The increase in constant currency was primarily related to consumer marketing spend. General and administrative expenses increased $0.1 million ($0.8 million, or 7%, in constant currency). The increase in constant currency was primarily driven by an increase in personnel-related, legal and technology costs. International segment operating margin decreased to 11% for the year ended December 31, 2017 compared to 13% for the year ended December 31, 2016.
UNALLOCATED EXPENSES
The Company incurs certain expenses which are not allocated to its three reportable segments.
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| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 to 2017 | | 2017 to 2016 |
| | (in thousands, except for percentages) |
| Unallocated expenses | $ | 54,099 |
| | $ | 44,599 |
| | $ | 49,899 |
| | 21 | % | | (11 | )% |
Unallocated expenses include various corporate costs, such as executive management, corporate finance, and legal costs. In addition, unallocated expenses include stock-based and incentive compensation restructuring and other exit costs, transaction and integration costs, and litigation and dispute settlement charges or gains.
Unallocated expenses increased $9.5 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. During the year ended December 31, 2018, we incurred restructuring and other exit costs of $18.2 million and $7.0 million of financial consulting and employee retention costs associated with our corporate reorganization plan announced in July 2018, and $1.3 million of legal and consulting costs related to potential transactions. During the year ended December 31, 2017, we incurred restructuring costs of $2.2 million primarily related to employee termination and facility closure costs and $1.1 million related to transaction and integration costs. Legal and professional fees increased $3.0 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. Partially offsetting these increases in costs was a $7.1 million decrease in personnel-related costs. In addition, we incurred $7.7 million of costs related to corporate strategic planning during the year ended December 31, 2017.
Unallocated expenses decreased $5.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. During the year ended December 31, 2017, we incurred restructuring and other exit costs of $2.2 million, primarily related to employee termination and facility closure costs. During the year ended December 31, 2016, we incurred restructuring costs of $11.8 million primarily associated with senior management changes and related accelerated vesting of equity awards and the closure and consolidation of certain locations. Unallocated expenses also decreased during the year ended December 31, 2017 when compared to the year ended December 31, 2016 due to reductions in transaction and integration related costs of $2.5 million, personnel-related costs of $1.5 million, and litigation and dispute settlement charges (net of insurance recoveries) of $0.8 million. Partially offsetting these decreases was an increase in unallocated expenses related to corporate strategic planning of $7.7 million and other professional fees of $1.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Credit Agreement
In September 2014, FTD Companies, Inc. entered into the Credit Agreement (the “Credit Agreement”) with Interflora British Unit, certain wholly owned domestic subsidiaries of FTD Companies, Inc. party thereto as guarantors, the financial institutions party thereto from time to time, Bank of America Merrill Lynch and Wells Fargo Securities, LLC, as joint lead arrangers and book managers, and Bank of America, N.A., as the administrative agent for the lenders, which provided for a term loan in an aggregate principal amount of $200 million, the proceeds of which were used to repay a portion of outstanding revolving loans and also provided for a $350 million revolving credit facility. On December 31, 2014, we borrowed $120 million under the revolving credit facility to fund the cash portion of the Provide Commerce purchase price.
The obligations under the Credit Agreement are guaranteed by certain of FTD Companies, Inc.’s wholly owned domestic subsidiaries (together with FTD Companies, Inc., the “U.S. Loan Parties”). In addition, the obligations under the Credit Agreement are secured by a lien on substantially all of the assets of the U.S. Loan Parties, including a pledge of all of the outstanding capital stock of certain direct subsidiaries of the U.S. Loan Parties (except with respect to foreign subsidiaries and certain domestic subsidiaries whose assets consist primarily of foreign subsidiary equity interests, in which case such pledge is limited to 66% of the outstanding capital stock).
The Credit Agreement contains customary representations and warranties, events of default, affirmative covenants, and negative covenants, that, among other things, require us to maintain compliance with a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, and impose restrictions and limitations on, among other things, investments, dividends, share repurchases, asset sales, and our ability to incur additional debt and additional liens.
As detailed in Footnote 6—“Financing Arrangements,” since January 1, 2018, we entered into several amendments to the Credit Agreement with our lenders (the Credit Agreement, as previously amended and as further amended by the Sixth Amendment, the “Sixth Amendment”). The amendments, among other things, restricted the combined usage of the credit facility portion of the Credit Agreement, modified measurement dates and the required ratios for the consolidated net leverage ratio and fixed charge coverage ratio covenant tests and updated fees.
On March 13, 2019, the Company entered into the Amended Credit Agreement with our lenders. The Amended Credit Agreement includes, among other terms, a minimum Consolidated Adjusted EBITDA covenant; further limitations on capital expenditures; a covenant requiring that on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limits on our combined usage of the revolving credit facility portion of the Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods, as was the requirement that the auditor’s report on the Company’s financial statements for the year ended December 31, 2018 not contain a going concern explanatory paragraph. The Amended Credit Agreement also includes the provision of a pledge of 100% of the equity interests of certain of the Company’s subsidiaries and the Company’s use of best efforts to cause the UK Borrower to guarantee all obligations under the Amended Credit Agreement. evaluation.For additional information regarding the Amended Credit Agreement see Footnote 6—“Financing Arrangements.”
Pursuant to the Amended Credit Agreement, our combined usage of the revolving credit facility portion of the Credit Agreement is restricted to amounts ranging from $60.0 million to $167.5 million based on our expected borrowing needs at various points in our business cycle, with all borrowings in excess of $150 million from and after July 6, 2019 subject to our 13-week cash forecast supporting any borrowing above such level. The minimum Consolidated Adjusted EBITDA covenant requires that we maintain Consolidated Adjusted EBITDA based on specific minimums for each two to three-month period from February 1, 2019 through the September maturity date. These minimums range from negative $4.5 million to $21.8 million and were determined based on our forecasted Adjusted EBITDA for each such period. In addition, we will pay a fee in an amount equal to the actual daily funded amount of the Revolving A and B Commitments in excess of $100 million times 2.5% per annum, which shall be paid quarterly in arrears and which replaces the previous 2.5% fee related to the Aggregate Revolving B Loans. In connection with the Amended Credit Agreement, we incurred an amendment fee of $2.9 million, which was 1% of the total revolving commitments and term loan as of the execution date of the Amended Credit Agreement. Such fee is payable upon the earliest to occur of (a) the September 2019 maturity date, (b) the acceleration of the loans, (c) the date upon which all obligations under the Amended Credit Agreement have been satisfied in full, or (d) at the election of the lenders, after the occurrence of a default (as defined in the Amended Credit Agreement).
Our ability to continue as a going concern is dependent on our generating profitable operating results, having sufficient liquidity to fund our operations, maintaining compliance with the revised covenants and other requirements under the Amended Credit Agreement, and refinancing or repaying the indebtedness outstanding under the Amended Credit Agreement, including in connection with a sale or merger of the Company or other strategic transaction, as discussed below under “—Going Concern.”
The stated interest rate at December 31, 2018 under both the term loan and the revolving credit facility portions was 10.00%. The effective interest rates at December 31, 2018 under the term loan and the revolving credit facility were 16.22% and 16.54%, respectively. The effective interest rates include interest calculated at the stated rates, fees, and the amortization of the deferred financing fees.
The term loan is subject to amortization payments of $5 million per quarter and customary mandatory prepayments under certain conditions. During the year ended December 31, 2018, the Company made payments of $21.3 million under the term loan, which included a $1.3 million payment related to the sale of a business. We had net borrowings of $47 million on the revolving credit facility during the year ended December 31, 2018. The outstanding balance of the term loan and all amounts outstanding under the revolving credit facility are due upon maturity in September 2019.
As of December 31, 2018, the remaining borrowing capacity under the Sixth Amendment, whichtotal compensation for our CEO, Mr. Levin, was reduced by $1.5 million in outstanding letters of credit, was $69.5 million.
The degree to which our assets are leveraged and the terms of our debt could materially and adversely affect our ability to obtain additional capital,$3,200,094 as well as the terms at which such capital might be offered to us. If we seek to raise additional capital through public or private debt or equity financings, strategic relationships, or other arrangements as part of the strategic alternatives review discussed elsewhere in this Form 10-K, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could severely constrain or prevent us from, among other factors, developing new or enhancing existing services or products or funding necessary capital expenditures and may have a material adverse effect on our business, financial position, results of operations, and cash flows, as well as impair our ability to service our debt obligations. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then-current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences, or privileges senior to holders of our common stock. In addition, trendsreported in the securitiesSummary Compensation Table above, which amount includes base salary, equity award grants, health benefits and credit markets may restrict our ability401(k) contributions. Mr. Levin was already an employee of FTD at the time of his appointment to raise anyinterim CEO effective July 18, 2018 and CEO effective November 2, 2018. As such, additional funds, at least in the near term.
Going Concern
Our ability to continuedetermine his total compensation for purposes of this pay ratio, we annualized his base salary as a going concern is dependent on our generating profitable operating results, having sufficient liquidity, maintaining compliance with the revised covenantsCEO and other requirements under the Amended Credit Agreement, and refinancing or repaying the indebtedness outstanding under the Amended Credit Agreement, including in connection with a sale or merger of the Company or other strategic transaction, as discussed in more detail below. In the financial statements for the year ended December 31, 2017 as well as every quarter since, management’s assessment has beenadded that there is substantial doubt about the Company’s abilitybase salary to continue as a going concern.
As part of our efforts to address these issues, as previously announced, our board of directors has initiated a review of strategic alternatives. The strategic alternatives under consideration include, but are not limited to, a sale or merger of the Company, continuing to pursue value-enhancing initiatives as a standalone company, and potential financings or equity transactions. We also announced a corporate restructuring and cost savings plan, under which opportunities to optimize operations, drive efficiency, and reduce costs have been identified.
We will need to refinance or repay the outstanding indebtedness no later than its September 2019 maturity. Based on our 2019 year-to-date results of operations and outlook for the remainder of the
termdisclosed values in the Summary Compensation Table to arrive at a value of $3,474,130, used for the ratio of annual total compensation for our CEO to the annual total compensation for our median employee. Mr. Levin’s base salary was increased to $897,000 upon appointment to CEO, the value of which is included in the Summary Compensation Table for the pro rata portion of the
Amended Credit Agreement,year in which he was CEO. For information regarding the amounts granted to Mr. Levin during 2018, including his base salary, see the Summary Compensation Table above.Our median employee’s annual total compensation for 2018 was $47,559. As a result, we currently anticipateestimate that we will beMr. Levin’s annual total compensation was approximately 73 times that of our median employee. Given Mr. Levin was appointed as CEO in complianceJuly 2018, and as such, did not receive equity grants commensurate with the Consolidated Adjusted EBITDA covenantCEO position in 2018 but rather his prior position of Executive Vice President, General Counsel and will have sufficient liquiditySecretary, we anticipate the ratio of his compensation to fundthat of our operations into July 2019 but may not have sufficient liquiditymedian employee could increase in the next disclosure cycle associated with any future filings.
38
Compensation Committee Interlocks and Insider Participation
Messrs. Berglass and Harch and Ms. Hickenlooper serve as members of the Compensation Committee. Mr. Holt served on the Compensation Committee prior to fundhis departure from the Board of Directors at the expiry of his term at the 2018 annual meeting of stockholders. None of the foregoing current or former Compensation Committee members was employed by us at any time during 2018, and none has ever served or acted as one of our operations beyond then. In addition, there can be no assurancesofficers or employees or had any relationships requiring disclosure by the company under the SEC’s rules requiring disclosure of certain relationships and related-party transactions.
None of our current executive officers has ever served as a member of the board of directors or compensation committee (or other board committee performing equivalent functions) of any other entity (other than our subsidiaries) that we will be able to completehas or has had one or more transactions that will enable us to repay all or a portion of the outstanding indebtedness by June 1, 2019 or at all. If we are unable to meet the revised covenants of the Amended Credit Agreement and we are unable to obtain waivers or further amendments from our lenders, the lenders could exercise remedies under the Amended Credit Agreement and repayment of the indebtedness outstanding under the Amended Credit Agreement could be accelerated. We may not have sufficient capital to repay the obligations due under our Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement.
As noted above, we will need to refinance or repay the indebtedness outstanding under the Amended Credit Agreement no later than its September 2019 maturity date. There can be no assurance that we will be able to affect a refinancing on acceptable terms or repay this outstanding indebtedness, when required or if at all, includingexecutive officers serve as a result of the strategic alternatives review noted above. In this regard, there can be no assurance that the strategic alternatives review will result in any particular strategic alternative or strategic transaction. If we are not successful in our initiatives or do not have sufficient liquidity to fund our business activities, we may be forced to limit our business activities or be unable to continue as a going concern, which would have a material adverse effect on our results of operations and financial condition. The uncertainties identified above raise substantial doubt about our ability to continue as a going concern. The financial statements included in this Form 10-K do not include any adjustments that might result from the outcomemember of our efforts to address these uncertainties.
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Our total cash and cash equivalents balance decreased by $13.3 million to $16.2 million at December 31, 2018 compared to $29.5 million at December 31, 2017. Our summary cash flows for the periods presented were as follows (in thousands): |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net cash provided by/(used for) operating activities | $ | (11,239 | ) | | $ | 52,817 |
| | $ | 76,244 |
|
| Net cash used for investing activities | $ | (21,567 | ) | | $ | (17,572 | ) | | $ | (16,557 | ) |
| Net cash provided by/(used for) financing activities | $ | 19,911 |
| | $ | (88,483 | ) | | $ | (35,286 | ) |
Cash used for operations was $11.2 million for the year ended December 31, 2018 as compared to cash provided by operationsBoard of $52.8 million for the year ended December 31, 2017. Although the net loss for the year ended December 31, 2018 was $9.3 million lower than the net loss for the year ended December 31, 2017, the non-cash items, such as impairment of goodwill, intangible assets, and other long-lived assets; depreciation and amortization; deferred taxes; and stock-based compensation, included in such losses, were $72.9 million lower for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The changes inDirectors or our operating assets and liabilities included a reduction of $2.9 million in accounts payable and accrued liabilities due to timing of such payments; an increase of $2.4 million in other liabilities; a reduction of $2.2 million in prepaid expenses and other assets; and an increase in inventories of $2.0 million. Changes in working capital can cause variation in our cash flows provided by operating activities due to seasonality, timing, and other factors.
Net cash used for investing activities increased by $4.0 million, primarily related to $33.8 million of property and equipment purchases in 2018 as compared to $15.1 million in 2017. This increase was partially offset by proceeds received totaling $10.0 million from the surrender of corporate-owned life insurance policies and $2.2 million related to the sale of a business during 2018. In 2017, we paid $2.5 million, net of cash acquired, for the acquisition of a business. We currently anticipate that our total capital expenditures for 2019 will approximate $22.0 million to $28.0 million. The actual amount of future capital expenditures may fluctuate due to a number of factors, including, without limitation, new business initiatives, which are difficult to predict and which could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.
Net cash provided by financing activities increased by $108.4 million for 2018 as compared to 2017, primarily due to net proceeds from borrowings of $25.7 million of outstanding amounts under the Sixth Amendment during 2018 compared to net repayments of $88.0 million during 2017. Partially offsetting this increase in cash provided by financing activities was $5.8 million of cash paid for deferred financing fees.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Net cash provided by operating activities decreased by $23.4 million primarily driven by a $150.9 million increase in our net loss partially offset by a $128.0 million increase in non-cash items. Our non-cash items include, but are not limited to, impairment of goodwill, intangible assets, and other long-lived assets; depreciation and amortization; deferred taxes; stock-based compensation; and changes in operating assets and liabilities. These non-cash items increased primarily due to the impairment of goodwill, intangible assets, and other long-lived assets, which was partially offset by lower depreciation and amortization, deferred taxes, and stock-based compensation. Our working capital was relatively stable compared to prior year and included an $8.1 million decrease in income taxes payable, which was partially offset by increases of $4.3 million in accounts payable and accrued liabilities, $1.6 million in prepaid expenses, and $1.3 million in accounts receivable, net. Changes in working capital can cause variation in our cash flows provided by operating activities due to seasonality, timing, and other factors.
Net cash used for investing activities increased by $1.0 million, primarily related to $2.5 million of cash paid for the 2017 BloomThat acquisition, net of cash acquired, and a $1.9 million decrease in life insurance proceeds as compared to 2016. Fewer purchases of property and equipment totaling $15.1 million in 2017 as compared to $18.5 million in 2016 partially offset the increases.
Net cash used for financing activities increased by $53.2 million for 2017 as compared to 2016, primarily due to net repayments of $88.0 million of outstanding amounts under the Credit Agreement during 2017 compared to $20.0 million of repayments during 2016. During the year ended December 31, 2016, we repurchased $15.2 million of common stock under a repurchase program. During 2017, we did not repurchase any shares of our common stock under this program. The repurchase program expired in March 2018.
CONTRACTUAL OBLIGATIONS, OTHER COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
Compensation Committee.Contractual obligations at December 31, 2018 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 1 Year to Less than 3 Years | | 3 Years to Less than 5 Years | | More than 5 Years |
Debt, including interest(a) | $ | 241,074 |
| | $ | 241,074 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Noncancelable operating leases | 51,855 |
| | 7,828 |
| | 16,833 |
| | 12,268 |
| | 14,926 |
|
| Purchase obligations | 19,348 |
| | 13,533 |
| | 5,772 |
| | 43 |
| | — |
|
| Deferred compensation plans | 842 |
| | 161 |
| | 148 |
| | 62 |
| | 471 |
|
| Other liabilities | 287 |
| | 100 |
| | 96 |
| | 91 |
| | — |
|
| Total | $ | 313,406 |
| | $ | 262,696 |
| | $ | 22,849 |
| | $ | 12,464 |
| | $ | 15,397 |
|
| |
(a) | All outstanding amounts under the Sixth Amendment were current at December 31, 2018 as its maturity date is September 2019. Interest obligations were estimated based on stated rates under the credit facility. |
At December 31, 2018, we had liabilities for uncertain tax positions totaling $0.4 million, which are not included in the table above, as we are not able to reasonably estimate when or if cash payments for long-term liabilities related to uncertain tax positions will occur.
We had $1.5 million of commitments under letters of credit at December 31, 2018 which were scheduled to expire within one year. Standby letters of credit are maintained by FTD to secure credit card processing activity and additional letters of credit are maintained related to inventory purchases, insurance policies and lease obligations.
Other Commitments
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, sureties and insurance companies, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. We have entered into indemnification agreements with our current and former directors and certain of our officers and employees that require FTD, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. In addition, we have also agreed to indemnify certain former officers, directors, and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may, in certain circumstances, cover specified liabilities, including those arising from our obligation to indemnify our current and former directors, certain of our officers and employees, and certain former officers, directors, and employees of acquired companies.
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.
Off-Balance Sheet Arrangements
At December 31, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND ASSUMPTIONS
General
Our discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make accounting policy elections, estimates and assumptions that affect a number of reported amounts and related disclosures in the consolidated financial statements. Actual results could differ from those estimates and assumptions. Management believes that the following accounting policies, and estimates and assumptions made by management thereunder, are the most critical to aid in fully understanding and evaluating our reported financial results. These estimates and assumptions require management’s most difficult, subjective or complex judgment and may be based on matters the effects of which are inherently uncertain.
Revenue Recognition
We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from Contracts with Customers effective January 1, 2018, using the modified retrospective method. This method requires that the cumulative effect of the initial application is recognized as an adjustment to the opening balance of our retained earnings at January 1, 2018. The adoption did not have a material impact on our revenue recognition and therefore, we did not record an adjustment to our retained earnings at January 1, 2018.
We recognize revenue from short-term contracts for the sale of various products and services to our customers, which include consumers, floral network members, and wholesale customers. Sales to consumers are generated via our websites, mobile sites and applications, or over the telephone with payment made either at the time the order is placed or upon shipment. Product revenues from these short-term contracts are single performance obligations and are considered complete upon delivery to the recipient. Amounts collected from customers upon placement of an order are recorded as deferred revenue and recognized upon delivery of the product. Products revenues, less discounts and refunds, and the related cost of revenues are recognized when control of the goods is transferred to the recipient, which is generally upon delivery. Product sales are not refundable other than as related to customer service issues. Shipping and service fees charged to customers are recognized at the time the related products revenues are recognized and are included in products revenues. Shipping and delivery costs are included in cost of revenues. Sales taxes are collected from customers and remitted to the appropriate taxing authorities and are not reflected in our consolidated statements of operations as revenues.
We generally recognize revenues for sales to consumers on a gross basis because we control the goods before they are transferred to the recipient as we (i) bear primary responsibility for fulfilling the promise to the customer; (ii) bear inventory risk before and/or after the good or service is transferred to the customer; and (iii) have discretion in establishing the price for the sale of the good or service to the customer.
Services revenues related to orders sent through our floral network are variable based on either the number of orders or the value of orders and are recognized in the period in which the orders are delivered. Membership and other subscription-based fees are recognized monthly as earned, on a month-to-month basis. Each service we offer is separate and distinct from other services and represents an individual performance obligation.
We also sell point-of-sale systems and related technology services to our floral network members and recognize revenue in accordance with ASC 606. For hardware sales that include software, revenues are recognized when delivery, installation and customer acceptance have all occurred. The transaction price for point-of-sale systems is based on the equipment and the software modules ordered by the customer and include installation and training for the system. The sale of the system is considered a single performance obligation since the installation and training are a significant part of the sale in order for the floral network member to send and receive floral orders through the point-of-sale systems. We recognize revenues on hardware which is sold without software at the time of delivery.
Probability of collection for both products and services revenue is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If it is determined that collectability is not reasonably assured, revenues are not recognized until collectability becomes reasonably assured.
We incur contract costs that are incremental costs incurred for obtaining a contract. These contract costs are short-term (less than a year) and are expensed as incurred based on the practical expedient provided in ASC 606. As such, we do not capitalize costs incurred for obtaining a contract.
Goodwill, Intangible Assets, and Other Long-Lived Assets
Goodwill is tested for impairment at the reporting unit level. A reporting unit is a business or a group of businesses for which discrete financial information is available and is regularly reviewed by management. An operating segment is made up of one or more reporting units. We report our business operations in three operating and reportable segments: U.S. Consumer, Florist, and International. Each of the Florist and International segments is a reporting unit. The U.S. Consumer segment is comprised of three reporting units, FTD.com, ProFlowers/Gourmet Foods, and Personal Creations. The ProFlowers and Gourmet Foods businesses have similar margins and share operations and business team structure, among other similarities. Therefore, these businesses meet the aggregation criteria, and as such, we have aggregated these two businesses into one reporting unit.
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the net tangible and intangible assets acquired and liabilities assumed. Indefinite-lived intangible assets acquired in a business combination are initially recorded at management’s estimate of their fair value. We account for goodwill and indefinite-lived intangible assets in accordance with ASC 350, Intangibles, Goodwill and Other.
Goodwill and indefinite-lived intangible assets are not subject to amortization but are reviewed for impairment in the fourth quarter of each year, or more frequently if events or substantive changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value (i.e. that a triggering event has occurred). Additionally, we evaluate finite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset groups may not be recoverable. Testing goodwill, intangible assets, and other long-lived assets for impairment involves comparing the fair value of the reporting unit, intangible asset, or other long-lived asset to its carrying value. If the carrying amount of a reporting unit, intangible asset, or other long-lived asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, up to the carrying value of the goodwill, intangible asset, or other long-lived asset.
During the second quarter of 2018, due to continued declines in financial results and reductions in the projected results for the remainder of 2018, we determined that a triggering event had occurred that required an interim impairment assessment for all of our reporting units other than the International reporting unit, as that reporting unit’s year-to-date and projected results were relatively in line with expectations. The intangible assets and other long-lived assets associated with the reporting units assessed were also reviewed for impairment. In addition, we experienced a sustained decline in market capitalization during the fourth quarter of 2018 which, along with updated projections based on our long-term strategic plan finalized in the fourth quarter of 2018, was reflected in the annual impairment assessment of goodwill and indefinite-lived intangible assets. We also considered this a triggering event for another assessment of finite-lived intangible and other long-lived assets.
In calculating fair values for these interim and annual impairment tests, we used a combination of the income, market, and cost approaches for determining the valuations of our reporting units. The income approach was used primarily, as we believe that a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. Under the market approach, we used the guideline company method, which focuses on comparing our risk profile and growth prospects to select reasonably similar companies based on business description, revenue size, markets served, and profitability. The key assumptions used in the income approach discounted cash flow valuation model included discount rates, growth rates, cash flow projections, and terminal growth rates. The cash flow projections reflect management’s forecasts, taking into account both the historical performance of each reporting unit and the expected contributions from anticipated savings related to our corporate reorganization and cost savings plan as well as the benefits of the strategic initiatives identified in the strategic planning conducted in 2017. The discount rates utilized were indicative of the return an investor would expect to receive for investing in a similar business. Considering industry and company specific historical data and internal forecasts and projections, management developed growth rates and cash flow projections for each reporting unit. In determining the terminal growth rates, we considered GDP growth, consumer price inflation, and the long term growth prospects of each reporting unit. The discount rate, growth rates, royalty rates, cash flow projections, and terminal growth rates are also significant estimates used in the determination of the fair value of the indefinite-lived intangible assets. The indefinite-lived intangible assets were valued using the relief-from-royalty method, which assumes that, in lieu of ownership, a company would be willing to pay a royalty to exploit the benefits of the asset. The cost approach was used as this approach is a generally accepted valuation method when the valuation is either negative or the value of the net assets/liabilities exceeds the expected present value of the economic returns. Under the cost approach, we used the net asset value method, which is based on the premise that a prudent investor would pay no more for an asset than its replacement or reproduction cost.
The assessment of whether or not goodwill and/or indefinite-lived intangible assets are impaired involves a significant level of judgment and estimates in selecting the assumptions used to determine the fair values of our reporting units and indefinite-lived intangible assets. We believe the assumptions and rates used in our impairment assessments are reasonable, but they are judgmental, and variations in any assumptions could result in materially different calculations of fair value and/or other changes in other related assumptions. Factors that have the potential to create variances in the estimated fair value of the reporting units include, but are not limited to, fluctuations in (1) forecasted order volumes and average order values, which can be driven by multiple external factors affecting demand, including macroeconomic factors, competitive dynamics, and changes in consumer preferences; (2) marketing costs to generate orders; (3) product and fulfillment costs; (4) operational efficiency; and (5) equity valuations of peer companies.
For the interim impairment test, we used a combination of the income and market approaches for all reporting units tested other than the ProFlowers/Gourmet Foods reporting unit, for which we used the cost approach. The interim test resulted in our determination that the fair value of the Florist reporting unit exceeded its carrying value and, therefore, its goodwill was not impaired. That reporting unit’s fair value exceeded its carrying value by approximately 6%. The fair values of the FTD.com, ProFlowers/Gourmet Foods, and Personal Creations reporting units were less than their carrying values and, as such, goodwill impairment charges of $35.2 million, $14.8 million, and $12.5 million, respectively, were recorded during the second quarter of 2018 related to these reporting units. The ProFlowers/Gourmet Foods reporting unit’s goodwill was fully impaired as a result of the interim assessment.
For the annual impairment test, we used a combination of the income and market approaches for all reporting units other than the Personal Creations and ProFlowers/Gourmet Foods reporting units. For Personal Creations, only the income approach was used as the near-term financial results for that business were not considered normalized. The fair value of the ProFlowers/Gourmet Foods reporting unit, which was assessed only for purposes of deriving the enterprise value as their goodwill is fully impaired, was again determined using the cost approach. The annual test resulted in our determination that the fair value of the International reporting unit exceeded its carrying value by approximately 30% and, therefore, its goodwill was not impaired. The fair values of the Florist, Personal Creations, and FTD.com reporting units were less than their carrying values and, as such, goodwill impairment charges of $21.3 million, $13.8 million, and $11.9 million, respectively, were recorded during the fourth quarter of 2018 related to these reporting units.
Impairment charges are included in operating expenses in the consolidated statement of operations under the caption “Impairment of goodwill, intangible assets, and other long-lived assets.” Refer to Footnote 5—“Goodwill, Intangible Assets, and Other Long-Lived Assets” for the remaining balances of goodwill by reporting unit.
Certain key assumptions used in determining the fair value for our reporting units for the interim and annual impairment tests were as follows:
|
| | | | | | | | | | | |
| | Interim Assessment Second Quarter of 2018 | | Annual Assessment
Fourth Quarter of 2018 |
| | Discount Rates | | Terminal Growth Rates | | Discount Rates | | Terminal Growth Rates |
| FTD.com | 26.5 | % | | 2.0 | % | | 27.0 | % | | 2.0 | % |
| Florist | 20.0 | % | | 0.5 | % | | 20.0 | % | | 0.5 | % |
| International | 13.5 | % | | 2.0 | % | | 16.0 | % | | 2.0 | % |
| ProFlowers/Gourmet Foods | 26.5 | % | | 2.0 | % | | 27.0 | % | | 2.0 | % |
| Personal Creations | 26.5 | % | | 2.5 | % | | 27.0 | % | | 2.5 | % |
In conjunction with the interim goodwill impairment test, we also reviewed the indefinite-lived intangible assets of the reporting units tested for potential impairment. All indefinite-lived intangible assets were reviewed as part of the annual impairment test. The tests for impairment of the indefinite-lived intangible assets were performed by comparing the fair values of such assets to their respective carrying values. The interim impairment test resulted in the determination that the fair value of the indefinite-lived intangible asset related to the trademark and trade name shared between the FTD.com and Florist reporting units was less than its carrying value and, accordingly, a pre-tax impairment charge of $20.4 million was recorded during the second quarter of 2018. The annual impairment test indicated a further impairment of such trademark and trade name, resulting in an impairment charge of $7.7 million, which was recorded during the fourth quarter of 2018. In addition, the annual impairment test indicated that the fair value of the indefinite-lived intangible asset related to the International reporting unit’s trademark and trade name was also less than its carrying value and accordingly, a pre-tax impairment charge of $3.9 million was recorded during the fourth quarter of 2018. Certain key assumptions used in determining the fair value of the indefinite-lived intangible assets for both the interim and annual impairment tests were discount rates of 16.0% to 27.0% and average royalty rates of 1.5% to 5.0%, respectively.
We account for finite-lived intangible assets and other long-lived assets in accordance with ASC 360, Property, Plant and Equipment. Intangible assets acquired in a business combination are initially recorded at management’s estimate of their fair values. We evaluate the recoverability of identifiable intangible assets and other long-lived assets, other than indefinite-lived intangible assets, for impairment when events occur or circumstances change that would indicate that the carrying amount of an asset may not be recoverable. Events or circumstances that may indicate that an asset is impaired include, but are not limited to, significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future operating results, a change in the extent or manner in which an asset is used, shifts in technology, significant negative industry or economic trends, changes in our operating model or strategy, and competitive forces. In determining if an impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment is indicated based on a comparison of the assets’ carrying amounts and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amounts of the assets exceed the respective fair values of the assets. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from five to fifteen years. Our identifiable intangible assets were acquired primarily in connection with business combinations.
The process of evaluating the potential impairment of finite-lived intangible and other long-lived assets is subjective and requires significant judgment on matters such as, but not limited to, the asset group to be tested for recoverability. We are also required to make estimates that may significantly impact the outcome of the analyses. Such estimates include, but are not limited to, future operating performance and cash flows, cost of capital, terminal values, and remaining economic lives of assets.
In conjunction with the interim and annual impairment tests, we also reviewed our finite-lived intangible assets for potential impairment. The interim impairment evaluation of the finite-lived intangible assets indicated that the carrying amount of the ProFlowers trade name was not recoverable when compared to the expected undiscounted future cash flows. As such, a pre-tax impairment charge of the remaining carrying value of $51.9 million was recorded related to the ProFlowers trade name during the second quarter of 2018. In addition, due to a management decision to cease operations of BloomThat, a business acquired in 2017 that was included in the ProFlowers/Gourmet Foods reporting unit, a pre-tax impairment charge of $0.9 million was recorded related to the remaining carrying value of the finite-lived intangible assets associated with that business. The annual impairment evaluation indicated that the expected undiscounted future cash flows exceeded the carrying amounts of all remaining finite-lived intangible assets. As such, these assets were not deemed impaired during the fourth quarter of 2018.
In conjunction with the interim goodwill impairment test, we also reviewed the other long-lived assets of the reporting units tested for potential impairment. All other long-lived assets were reviewed as part of the annual impairment test. The tests for impairment of the other-long lived assets were performed by comparing the expected undiscounted future cash flows to the carrying amounts of the assets for each reporting unit tested. For the interim test, the expected undiscounted future cash flows exceeded the carrying amounts of the asset groups for all reporting units tested, resulting in no impairment. The results of the annual test indicated that the carrying amounts of other long-lived assets related to the Personal Creations reporting unit were not recoverable. Based on our assessment of the fair value of this asset group using a discounted cash flow analysis, we determined that the carrying value of this asset group exceeded its fair value. As a result, pre-tax impairment charges of $7.7 million, representing the remaining net book value of such assets, were recorded during the fourth quarter of 2018.
During the year ended December 31, 2017, the other long-lived assets related to the ProFlowers/Gourmet Foods reporting unit were fully impaired as the projected undiscounted cash flows of that reporting unit were less than the carrying amount of such assets. Additional impairment charges of $4.8 million were recorded during the year ended December 31, 2018 related to capital additions for that reporting unit as the undiscounted cash flows continue to be less than the carrying amount of the assets of that asset group.
We are currently completing a review of strategic alternatives for our businesses. Given the uncertainties regarding the related impacts such review and our limited liquidity, as discussed in “—Liquidity and Capital Resources” within this MD&A, could have on our financial performance, there can be no assurance that the estimates and assumptions made for purposes of either the interim or annual impairment testing will prove to be accurate predictions of the future. In addition, our stock price has continued to be volatile. If our projections of future cash flows and financial performance are not achieved, or if our market capitalization declines further, we may be required to record further impairment charges on our goodwill, intangible assets, or other long-lived assets in future periods. It is not possible at this time to determine if any such additional future impairment charge would result or, if it does, whether such charge would be material. See Footnote 5—“Goodwill, Intangible Assets, and Other Long-Lived Assets” for the remaining balances of goodwill by reporting unit and intangible assets.
Income Taxes
We apply the provisions of ASC 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In accordance with ASC 740, we recognize, in our consolidated financial statements, the impact of our tax positions that are more-likely-than-not to be sustained upon examination based on the technical merits of the positions. We recognize interest and penalties for uncertain tax positions in income tax expense.
Our U.S. businesses were in a cumulative three year net loss position, adjusted for permanent items, at the end of the year ended December 31, 2018. Given the cumulative losses, which are negative evidence that was considered in assessing the realizability of the U.S. deferred tax assets, we did not consider future taxable income exclusive of reversing temporary differences and carryforwards nor did we consider tax planning strategies related to those businesses. We did consider the future reversal of existing taxable temporary differences as positive evidence that was considered in assessing the need for a valuation allowance. At December 31, 2018, our valuation allowance totaled $5.6 million, which is an estimate of our expected exposure after taking into consideration deferred tax liabilities that are expected to reverse over future periods and create taxable income that will exceed the deductions created by the reversal of the deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
For information about recently adopted and recently issued accounting pronouncements refer to Footnote 1—“Description of Business, Basis of Presentation, Accounting Policies, and Recent Accounting Pronouncements.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions in the normal course of business; principally risk associated with interest rate and foreign currency exchange rate fluctuations.
Interest Rate Risk
We are exposed to interest rate risk on our cash and cash equivalents and the outstanding balance under the Amended Credit Agreement. At December 31, 2018, the interest rates applicable to borrowings under the Sixth Amendment were based on a base rate plus a margin ranging from 1.50% per annum to 6.50% per annum, calculated according to our net leverage ratio. At December 31, 2017, the interest rates applicable to borrowings under the Credit Agreement were based on either LIBOR plus a margin ranging from 1.50% per annum to 2.50% per annum, or a base rate plus a margin ranging from 0.50% per annum to 1.50% per annum, calculated according to our net leverage ratio. A 100 basis point increase in the applicable rates at December 31, 2018 and 2017 would result in an estimated annual increase in our interest expense related to the outstanding debt under the credit facility of approximately $2.2 million and $1.9 million, respectively.
While we do not currently maintain any short-term investments, we still maintain deposits, which are classified as cash equivalents. Therefore, our interest income is sensitive to changes in the general level of U.S. and certain foreign interest rates.
Foreign Currency Exchange Risk
We transact business in foreign currencies, and we are exposed to risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound (“GBP”) and the Euro (“EUR”), which may result in gains or losses being reported in our results of operations. Volatilities in GBP and EUR and other relevant foreign currencies are monitored by us throughout the year. We face two primary risks related to foreign currency exchange rates—translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. Dollars (“USD”) using period-end exchange rates. The
resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the consolidated balance sheets. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in USD as the USD weakens or strengthens against other currencies. Substantially all of the revenues of our foreign subsidiaries are received, and substantially all expenses are incurred, in currencies other than the USD, which increases or decreases the related USD-reported revenues and expenses depending on the exchange rate used to translate these revenues and expenses. Therefore, changes in foreign currency exchange rates may negatively affect our consolidated revenues and net income. A 10% adverse change in overall foreign currency exchange rates over an entire year would not have a material impact on estimated annual revenues or estimated annual income before income taxes. These estimates assume an adverse shift in all foreign currency exchange rates against the USD, which do not always move in the same direction or in the same degrees, and actual results may differ materially. Net foreign currency transaction gains or losses arising from transactions denominated in currencies other than the local functional currency are included in other income, net, in the consolidated statements of operations.
At times, we utilize forward foreign currency exchange contracts to protect the value of our net investments in certain foreign subsidiaries denominated in currencies other than the USD. These contracts are designated as hedges of net investments in foreign entities. At both December 31, 2018 and 2017, we had no forward foreign currency exchange contracts outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Supplemental Schedule on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 based on the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Based on our evaluation under this framework, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018.
Deloitte & Touche LLP, an independent registered public accounting firm, which audited our consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting as stated in its report appearing in Part II, Item 8 in this Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 13, 2019, we entered into the Amended Credit Agreement, which includes, among other terms, a minimum Consolidated Adjusted EBITDA covenant; further limitations on capital expenditures; a covenant requiring that, on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limits on our combined usage of the revolving credit facility portion of the Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods, as was the requirement that the auditor’s report on the Company’s financial statements for the year ended December 31, 2018 not contain a going concern explanatory paragraph.
Pursuant to the Amended Credit Agreement, our combined usage of the revolving credit facility portion of the Credit Agreement is restricted to amounts ranging from $60.0 million to $167.5 million based on our expected borrowing needs at various points in our business cycle, with all borrowings in excess of $150 million from and after July 6, 2019 subject to our 13-week cash forecast supporting any borrowing above such level. In addition, we will pay a fee in an amount equal to the actual daily funded amount of the Revolving A and B Commitments (as defined in the Amended Credit Agreement) in excess of $100 million times 2.5% per annum, which shall be paid quarterly in arrears and which replaces the previous 2.5% fee related to the Aggregate Revolving B Loans. In connection with the Amended Credit Agreement, we incurred an amendment fee of $2.9 million, which was 1.0% of the total revolving commitments and term loan as of the execution date of the Amended Credit Agreement. Such fee is payable upon the earliest to occur of (a) the September 2019 maturity date, (b) the acceleration of the loans, (c) the date upon which all obligations under the Amended Credit Agreement have been satisfied in full, or (d) at the election of the lenders, after the occurrence of a default (as defined in the Amended Credit Agreement). A copy of the Seventh Amendment to Credit Agreement was filed as Exhibit 10.1 to the Company’s Current Report on Form 8–K filed with the SEC on March 14, 2019.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required to be set forth hereunder will be included in an amendment to this report or incorporated by reference, when filed, from our proxy statement (the “Proxy Statement”) for the 2019 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Information required to be set forth hereunder will be included in an amendment to this report or incorporated by reference, when filed, from our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2018 with respect to the shares of our common stock that may be issued under our existing equity compensation plans:
| | A | | B | | C | |
Plan Category | | Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights(1)(2) | | Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants and
Rights(3) | | Number of
Securities
Remaining
Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in Column(A)) | |
Equity Compensation Plans Approved by Stockholders | | 6,016,526 | | $ | 20.07 | | 5,200,712 | (4)(5) |
Equity Compensation Plans Not Approved by Stockholders | | — | | — | | — | |
Total | | 6,016,526 | | | | 5,200,712 | |
| | | | | | | | |
Information required(1) This column reflects the aggregate number of shares of our common stock to be set forth hereunderissued upon the exercise of options (1,716,098 options) and shares underlying RSUs and PSUs (3,575,236 shares underlying RSUs; 725,192 shares underlying PSUs) outstanding as of December 31, 2018. The PSUs represent the maximum number of shares to be awarded assuming maximum performance is achieved, and accordingly, may overstate expected dilution.
(2) Excludes purchase rights outstanding under the 2015 ESPP.
(3) The calculation in this column does not include RSUs or PSUs because the shares underlying the RSUs and PSUs will be includedissued at the time the RSUs and PSUs vest without any cash consideration payable for those shares.
(4) As of December 31, 2018, 5,101,585 shares of our common stock remained available for issuance under the Plan. The shares available for issuance under the Plan may be issued upon the exercise of stock options or Stock Appreciation Rights granted under such plan, or those shares may be issued through direct stock issuances or pursuant to restricted stock awards, RSUs or performance shares or units that vest upon the attainment of prescribed performance milestones or the completion of designated service periods. Shares may also be issued as a bonus for services rendered to us, without any cash payment required from the recipient.
(5) As of December 31, 2018, 99,127 shares of our common stock remained subject to a right of purchase under the 2015 ESPP. Under the 2015 ESPP, each eligible employee may purchase up to 1,001 shares of our common stock at semi-annual intervals on the last business day of June and December each year at a purchase price per share equal to 85% of the lower of (i) the closing selling price per share of common stock on the start date of the particular offering period in an amendmentwhich the employee enrolls or (ii) the closing selling price per share on the purchase date.
39
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock as of April 24, 2019 (or, if applicable, based upon statements on Schedule 13D or 13G following such date and prior to the filing of this reportAmendment) by (i) each person who, to our knowledge, beneficially owns 5% or incorporatedmore of the outstanding shares of our common stock, (ii) each of our directors and nominees for director, (iii) each named executive officer and (iv) all current directors, nominees and executive officers as a group. Except for shares of our common stock held in brokerage accounts that may, from time to time, together with other securities held in those accounts, serve as collateral for margin loans made from such accounts, none of the shares reported as beneficially owned by reference, whenour directors or executive officers are currently pledged as security for any outstanding loan or indebtedness.
Name and Address of Beneficial Owner | | Shares
Beneficially
Owned | | Percentage
Beneficial
Ownership(1) | |
5% Stockholders: | | | | | |
Qurate Retail, Inc.(2) | | 10,203,010 | | 36.0 | % |
Nantahala Capital Management, LLC(3) | | 3,710,763 | | 13.1 | % |
Dimensional Fund Advisors LP(4) | | 2,188,373 | | 7.7 | % |
Mauricio Jaramillo(5) | | 1,439,018 | | 5.1 | % |
| | | | | |
Directors, Nominees and Named Executive Officers: | | | | | |
Scott D. Levin(6) | | 277,807 | | * | |
Mir Aamir(7) | | 22,340 | | * | |
James T. Armstrong(8) | | 46,425 | | * | |
Steven D. Barnhart(9) | | 197,837 | | * | |
Tracey L. Belcourt(7) | | 43,187 | | * | |
Robert Berglass(10) | | 64,743 | | * | |
Brian S. Cooper(11) | | — | | * | |
Candace H. Duncan(7) | | 39,766 | | * | |
Sue Ann R. Hamilton(7) | | 39,766 | | * | |
Joseph W. Harch(7) | | 44,082 | | * | |
Robin S. Hickenlooper(7) | | 39,766 | | * | |
Rhys J. Hughes(12) | | 278,741 | | * | |
Simha Kumar(11) | | 16,563 | | * | |
Tom D. Moeller(6) | | 287,059 | | 1.0 | % |
Jeffrey D. T. Severts(11) | | 17,728 | | * | |
Christopher W. Shean(7) | | 53,818 | | * | |
Joseph R. Topper, Jr.(13) | | 122,729 | | * | |
John C. Walden(11) | | 166,791 | | * | |
All current directors, nominees and executive officers as a group (18 persons)(14) | | 1,759,148 | | 6.2 | % |
* Represents beneficial ownership of less than 1% of the outstanding shares of our common stock.
(1) Based on 28,322,635 shares of our common stock outstanding on April 24, 2019. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of our common stock subject to options that are currently exercisable or will become exercisable within 60 days after April 24, 2019 and shares issuable within 60 days after April 24, 2019 pursuant to outstanding RSU awards are deemed outstanding for computing the percentage ownership of the person or entity holding such securities but are not outstanding for computing the percentage ownership of any other person or entity. Except as indicated by footnote, and subject to community property laws where applicable, to our knowledge the persons named in the table above have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them. Unless otherwise indicated, the address for each person is our address at 3113 Woodcreek Drive, Downers Grove, Illinois 60515.
(2) This information is derived solely from Amendment No. 2 to Schedule 13D of Qurate Retail, Inc., formerly known as Liberty Interactive Corporation, filed March 16, 2018. According to the Schedule 13D, Qurate Retail, Inc. had sole voting power and sole dispositive power with respect to all of the reported shares. The address for Qurate Retail, Inc. is 12300 Liberty Boulevard, Englewood, Colorado 80112.
(3) This information is derived solely from Schedule 13G of Nantahala Capital Management, LLC, Wilmot B. Harkey and Daniel Mack filed February 14, 2019. Mr. Harkey and Mr. Mack are the managing members of
40
Nantahala Capital Management, LLC. According to the Schedule 13G, Nantahala Capital Management, LLC holds shared voting and dispositive power with Mr. Harkey and Mr. Mack with respect to all of the reported shares. Mr. Harkey and Mr. Mack may, under applicable regulatory definitions, be deemed to beneficially own all of the reported shares. The address for each of Nantahala Capital Management, LLC, Mr. Harkey and Mr. Mack is 19 Old Kings Highway S, Suite 200, Darien, Connecticut 06820.
(4) This information is derived solely from Amendment No. 5 to Schedule 13G of Dimensional Fund Advisors LP, filed February 8, 2019. According to the Schedule 13G, Dimensional Fund Advisors LP had sole voting power with respect to 2,077,390 of the reported shares and sole dispositive power with respect to all of the reported shares. The address for Dimensional Fund Advisors LP is Building One, 6300 Bee Cave Road, Austin, Texas 78746.
(5) This information is derived solely from the Schedule 13G of Terra Flowers, LLC, Herbert Jordan and Mauricio Jaramillo filed April 29, 2019. According to the Schedule 13G, Mr. Jaramillo holds shared voting and dispositive power with Terra Flowers, LLC and Mr. Jordan with respect to 1,099,280 shares and sole voting and dispositive power with respect to 339,738 shares. The address for each of Terra Flowers, LLC, Mr. Jaramillo and Mr. Jordan is 800 NW 62 Avenue, Suite 510, Miami, Florida 33126.
(6) Includes 244,945 shares of our Proxy Statement.common stock subject to options that are currently exercisable or that will become exercisable within 60 days after April 24, 2019.
(7) Includes 22,340 shares of our common stock subject to RSUs that will vest and become issuable within 60 days after April 24, 2019.
(8) Mr. Armstrong has shared voting and investment power over the shares of our common stock reflected in the table and disclaims beneficial interest of such shares of our common stock except to the extent of his beneficial ownership in Clearstone Venture Management Services. Includes 22,340 shares of our common stock subject to RSUs that will vest and become issuable within 60 days after April 24, 2019.
(9) Includes 31,250 shares of our common stock subject to options that are currently exercisable or that will become exercisable within 60 days after April 24, 2019.
(10) Includes (1) 35,420 shares of our common stock held directly by Mr. Berglass and (2) 600 shares held by the 1998 Robert H. Berglass Living Trust dated July 8, 1998, over which Mr. Berglass exercises voting power, as trustee. Includes 28,723 shares of our common stock subject to RSUs that will vest and become issuable within 60 days after April 24, 2019.
(11) Based solely on the Company’s records and may not reflect the current beneficial ownership of the former executive.
(12) Includes 246,945 shares of our common stock subject to options that are currently exercisable or that will become exercisable within 60 days after April 24, 2019.
(13) Includes 112,945 shares of our common stock subject to options that are currently exercisable or that will become exercisable within 60 days after April 24, 2019.
(14) Includes 207,443 shares of our common stock subject to RSUs that will vest and become issuable within 60 days after April 24, 2019 and 881,030 shares of our common stock subject to options that are currently exercisable or that will become exercisable within 60 days after April 24, 2019.
The following table shows the number of shares of our common stock that are subject to outstanding RSUs and PSUs held by our directors and named executive officers as of April 24, 2019 but that are not otherwise scheduled to vest and become issuable within the 60 day period measured from April 24, 2019. Each RSU and PSU (assuming target performance is achieved) entitles the director or named executive officer to one share of common stock at the time of vesting. The PSUs are tied to revenue and Adjusted EBITDA performance over a three-year period and the service-based RSUs generally vest over a one to four year period of continued service with the Company.
41
Directors and Named Executive Officers |
| Aggregate
Number of
Shares Subject
to PSUs and
RSUs |
|
Scott D. Levin | | 815,589 | |
Mir Aamir | | — | |
James T. Armstrong | | — | |
Steven D. Barnhart | | 233,750 | |
Tracey L. Belcourt | | — | |
Robert Berglass | | — | |
Brian S. Cooper(1) | | — | |
Candace H. Duncan | | — | |
Sue Ann R. Hamilton | | — | |
Joseph W. Harch | | — | |
Robin S. Hickenlooper | | — | |
Rhys J. Hughes | | 240,089 | |
Simha Kumar(2) | | — | |
Tom D. Moeller | | 238,839 | |
Jeffrey D. T. Severts(3) | | — | |
Christopher W. Shean | | — | |
Joseph R. Topper, Jr. | | 240,089 | |
John C. Walden(4) | | — | |
(1) Effective January 8, 2018, Mr. Cooper stepped down from the position of Interim Chief Financial Officer.
(2) Effective July 18, 2018, Mr. Kumar was no longer employed by the Company.
(3) Effective August 30, 2018, Mr. Severts was no longer employed by the Company.
(4) Effective July 18, 2018, Mr. Walden stepped down from the positions of President and Chief Executive Officer.
ITEM 13. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information requiredRELATED-PARTY TRANSACTIONS POLICIES AND PROCEDURES
Pursuant to be set forth hereunder will be includedour Code of Ethics, without full disclosure and prior written approval, our executive officers and directors are not permitted to make any investment, accept any position or benefits, participate in an amendmentany transaction or business arrangement or otherwise act in a manner that creates or appears to this report or incorporated by reference, when filed, from our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required to be set forth hereunder will be included in an amendment to this report or incorporated by reference, when filed, from our Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| |
(a) | The following documents are filed as part of this report: |
1.Consolidated Financial Statements:2.Financial Statement Schedule:
All other schedules have been omitted because the information required to be set forth therein is not applicable, not required or is shown in the consolidated financial statements or notes related thereto.
The agreements included as exhibits to this Annual Report on Form 10-K contain representationsinterest. Our executive officers and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
should not be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement;
may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisionsdirectors are required to make such disclosure to, and receive the statements in this Annual Report on Form 10-K not misleading.
Additional information aboutprior written approval of, our General Counsel and the Company may be found elsewhere in this Annual Report on Form 10-K and inChair of the Company’sAudit Committee, or such other public filings, which are available without charge through the SEC’s website at www.sec.gov.
|
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference to |
| No. | | Exhibit Description | | Filed
with this
Form 10-K | | Form | | File No. | | Date Filed | | Exhibit Number (if different) |
| | Amended and Restated Certificate of Incorporation of FTD Companies, Inc. | | | | 10-Q | | 001-35901 | | 11/6/2013 | | |
| | Second Amended and Restated Bylaws of FTD Companies, Inc. | | | | 10-Q | | 001-35901 | | 11/6/2013 | | |
| | Investor Rights Agreement, by and between Liberty Interactive Corporation (n/k/a Qurate Retail, Inc.) and FTD Companies, Inc., dated December 31, 2014 | | | | 8-K | | 001-35901 | | 12/31/2014 | | 10.1 |
| | Tax Sharing Agreement by and between United Online Inc. and FTD Companies, Inc. | | | | 10-Q | | 001-35901 | | 11/6/2013 | | 10.3 |
| | FTD Companies, Inc. Amended and Restated 2013 Incentive Compensation Plan** | | | | 8-K | | 001-35901 | | 11/13/2013 | | 10.1 |
| | Form of Restricted Stock Unit Issuance Agreement for Officers With Employment Agreements** | | | | 8-K | | 001-35901 | | 11/13/2013 | | |
| | Form of Option Agreement for Officers With Employment Agreements** | | | | 8-K | | 001-35901 | | 11/13/2013 | | |
| | Form of Restricted Stock Unit Issuance Agreement for Non-Employee Directors (Initial Grant)** | | | | 8-K | | 001-35901 | | 11/13/2013 | | |
| | Form of Restricted Stock Unit Issuance Agreement for Non-Employee Directors (Annual Grant)** | | | | 8-K | | 001-35901 | | 11/13/2013 | | |
| | Service Agreement by and between Interflora Holdings Limited and Rhys J. Hughes, as amended** | | | | 10/A | | 001-35901 | | 9/9/2013 | | 10.8 |
| | First Amendment to Credit Agreement, dated as of September 19, 2014, among FTD Companies, Inc., Interflora British Unit, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent for the lenders (including as Annex A thereto the amendment and restatement of the Credit Agreement, dated as of July 17, 2013, by and among FTD Companies, Inc., Interflora British Unit, the material wholly owned domestic subsidiaries of FTD Companies, Inc. party thereto as guarantors, the financial institutions party thereto from time to time, Bank of America Merrill Lynch and Wells Fargo Securities, LLC, as joint lead arrangers and book managers, and Bank of America, N.A., as administrative agent for the lenders) | | | | 8-K | | 001-35901 | | 9/23/2014 | | 10.1 |
| | Employment Agreement by and between FTD Companies, Inc. and Scott D. Levin** | | | | 10-Q | | 001-35901 | | 11/13/2014 | | 10.3 |
| | FTD Companies, Inc. Amended and Restated 2013 Incentive Compensation Plan (amended and restated as of June 9, 2015)** | | | | DEF-14A | | 001-35901 | | 4/28/2015 | | Exhibit A |
| | FTD Companies, Inc. 2015 Employee Stock Purchase Plan** | | | | DEF-14A | | 001-35901 | | 4/28/2015 | | Exhibit B |
| | Amendment to Service Agreement between Liberty Interactive Corporation (n/k/a Qurate Retail, Inc.) and Provide Commerce, Inc. | | | | 10-Q | | 001-35901 | | 5/8/2015 | | 10.2 |
| | Purchase and Sale Agreement dated as of April 30, 2015 by and between Provide Creations, Inc. and Provide Gifts, Inc. | | | | 10-Q | | 001-35901 | | 5/8/2015 | | 10.3 |
| | Amendment No. 1 to Separation and Distribution Agreement by and between United Online, Inc. and FTD Companies, Inc. | | | | 10-Q | | 001-35901 | | 8/6/2015 | | 10.3 |
| | Form of Restricted Stock Unit Issuance Agreement for Non-Employee Directors (Annual Grant) ** | | | | 10-Q | | 001-35901 | | 8/6/2015 | | 10.4 |
| | Form of Option Agreement for Officers with Employment Agreements** | | | | 10-Q | | 001-35901 | | 11/6/2015 | | 10.1 |
|
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference to |
| No. | | Exhibit Description | | Filed
with this
Form 10-K | | Form | | File No. | | Date Filed | | Exhibit Number (if different) |
| | Form of Option Agreement for Domestic Employees** | | | | 10-Q | | 001-35901 | | 11/6/2015 | | 10.2 |
| | Form of Option Agreement for UK and Canadian Employees** | | | | 10-Q | | 001-35901 | | 11/6/2015 | | 10.3 |
| | Form of Restricted Stock Unit Issuance Agreement for Officers with Employment Agreements** | | | | 10-K | | 001-35901 | | 3/10/2016 | | 10.24 |
| | Employment Agreement by and between Florists’ Transworld Delivery, Inc. and Tom D. Moeller** | | | | 10-K | | 001-35901 | | 3/10/2016 | | 10.25 |
| | Amendment to Employment Agreement by and between Florists’ Transworld Delivery, Inc. and Tom D. Moeller** | | | | 10-K | | 001-35901 | | 3/10/2016 | | 10.26 |
| | FTD Companies, Inc. 2016 Management Bonus Plan** | | | | 10-Q | | 001-35901 | | 5/6/2016 | | 10.1 |
| | Rhys Hughes Service Agreement Amendment** | | | | 10-Q | | 001-35901 | | 8/5/2016 | | 10.1 |
| | First Amendment to the FTD Companies, Inc. 2016 Management Bonus Plan** | | | | 10-Q | | 001-35901 | | 8/5/2016 | | 10.2 |
| | Rhys Hughes Service Agreement Second Amendment** | | | | 10-Q | | 001-35901 | | 11/8/2016 | | 10.1 |
| | Second Amendment to the FTD Companies, Inc. 2016 Management Bonus Plan** | | | | 10-Q | | 001-35901 | | 11/8/2016 | | 10.3 |
| | Second Amendment to the Employment Agreement by and between Florists’ Transworld Delivery, Inc. and Tom D. Moeller** | | | | 10-K | | 001-35901 | | 3/16/2017 | | 10.33 |
| | Amendment to the Employment Agreement by and between FTD Companies, Inc. and Scott D. Levin** | | | | 10-K | | 001-35901 | | 3/16/2017 | | 10.34 |
| | Rhys Hughes Service Agreement Third Amendment** | | | | 10-K | | 001-35901 | | 3/16/2017 | | 10.35 |
| | Letter Agreement Regarding Executive Severance Benefits by and between FTD Companies, Inc. and Eric Vratimos** | | | | 10-K | | 001-35901 | | 3/16/2017 | | 10.36 |
| | Employment Agreement by and between FTD Companies, Inc. and John C. Walden** | | | | 10-K | | 001-35901 | | 3/16/2017 | | 10.38 |
| | FTD Companies, Inc. Third Amended and Restated 2013 Incentive Compensation Plan (amended and restated as of June 6, 2017)** | | | | DEF-14A | | 001-35901 | | 4/26/2017 | | Exhibit A |
| | FTD Companies, Inc. 2017 Management Bonus Plan** | | | | 10-Q | | 001-35901 | | 5/10/2017 | | 10.1 |
| | Third Amended and Restated 2013 Incentive Compensation Plan Restricted Stock Unit Issuance Agreement** | | | | 10-Q | | 001-35901 | | 8/9/2017 | | 10.1 |
| | Employment Agreement by and between FTD Companies, Inc. and Jeffery Severts** | | | | 10-Q | | 001-35901 | | 11/9/2017 | | 10.1 |
| | Employment Agreement by and between FTD Companies, Inc. and Simha Kumar** | | | | 10-Q | | 001-35901 | | 11/9/2017 | | 10.2 |
| | Form of Option Agreement for Officers with Employment Agreements** | | | | 10-Q | | 001-35901 | | 11/9/2017 | | 10.4 |
| | Form of Restricted Stock Unit Issuance Agreement for Officers with Employment Agreements** | | | | 10-Q | | 001-35901 | | 11/9/2017 | | 10.5 |
| | Assignment and Assumption Agreement between General Communication, Inc., Liberty Interactive Corporation (n/k/a Qurate Retail Inc.), Liberty Interactive, LLC, Ventures Holdco, LLC, and FTD Companies, Inc. | | | | 10-Q | | 001-35901 | | 11/9/2017 | | 10.6 |
| | Form of Restricted Stock Unit Issuance Agreement for Officers with Employment Agreements** | | | | 10-K | | 001-35901 | | 4/2/2018 | | 10.1 |
| | Form of Performance-Based Restricted Stock Unit Issuance Agreement for Officers** | | | | 10-K | | 001-35901 | | 4/2/2018 | | 10.2 |
| | Form of Option Agreement for Officers** | | | | 10-K | | 001-35901 | | 4/2/2018 | | 10.3 |
| | Forbearance Agreement and Second Amendment to Credit Agreement, dated as of March 30, 2018, among FTD Companies, Inc., Interflora British Unit, the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as administrative agent for the Lenders | | | | 10-K | | 001-35901 | | 4/2/2018 | | 10.4 |
|
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference to |
| No. | | Exhibit Description | | Filed
with this
Form 10-K | | Form | | File No. | | Date Filed | | Exhibit Number (if different) |
| | Employment Agreement by and between FTD Companies, Inc. and Steven D. Barnhart** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.1 |
| | FTD Companies, Inc. 2018 Management Bonus Plan** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.2 |
| | Amendment to the Employment Agreement by and between FTD Companies, Inc. and John C. Walden** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.3 |
| | Second Amendment to the Employment Agreement by and between FTD Companies, Inc. and Scott D. Levin** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.4 |
| | Third Amendment to the Employment Agreement by and between Florists’ Transworld Delivery, Inc. and Tom D. Moeller** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.5 |
| | Amendment to the Employment Agreement by and between FTD Companies, Inc. and Simha Kumar** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.6 |
| | Amendment to the Employment Agreement by and between FTD Companies, Inc. and Jeffrey Severts** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.7 |
| | Amendment to the Employment Agreement by and between FTD Companies, Inc. and Steven D. Barnhart** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.8 |
| | Amendment to the Restricted Stock Unit Issuance Agreement for John C. Walden** | | | | 10-Q | | 001-35901 | | 5/8/2018 | | 10.9 |
| | Form of Restricted Stock Unit Issuance Agreement for Non-Employee Directors (Annual Grant)** | | | | 10-Q | | 001-35901 | | 8/9/2018 | | 10.1 |
| | Third Amendment to Credit Agreement, dated May 31, 2018, among FTD Companies, Inc., Interflora British Unit, the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as administrative agent for the Lenders | | | | 8-K | | 001-35901 | | 6/1/2018 | | 10.1 |
| | First Amendment to the FTD Companies, Inc. Third Amended and Restated 2013 Incentive Compensation Plan (amended and restated as of June 6, 2017)** | | | | DEF 14A | | 001-35901 | | 4/26/2018 | | 10.3 |
| | Letter of Special Retention Compensation between FTD Companies, Inc. and Scott Levin** | | | | 10-Q | | 001-35901 | | 11/7/2018 | | 10.1 |
| | Letter of Special Retention Compensation between FTD Companies, Inc. and Steven D. Barnhart** | | | | 10-Q | | 001-35901 | | 11/7/2018 | | 10.2 |
| | Letter of Special Retention Compensation between FTD Companies, Inc. and Joseph R. Topper, Jr.** | | | | 10-Q | | 001-35901 | | 11/7/2018 | | 10.3 |
| | Letter of Special Retention Compensation between FTD Companies, Inc. and Rhys Hughes** | | | | 10-Q | | 001-35901 | | 11/7/2018 | | 10.4 |
| | Letter of Special Retention Compensation between FTD Companies, Inc. and Tom Douglas Moeller** | | | | 10-Q | | 001-35901 | | 11/7/2018 | | 10.5 |
| | Fourth Amendment to Credit Agreement, dated September 28, 2018, among FTD Companies, Inc., Interflora British Unit, the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as administrative agent for the Lenders | | | | 8-K | | 001-35901 | | 10/01/2018 | | 10.1 |
| | Fifth Amendment to Credit Agreement, dated October 31, 2018, among FTD Companies, Inc., Interflora British Unit, the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as administrative agent for the Lenders | | | | 8-K | | 001-35901 | | 11/06/2018 | | 10.1 |
| | Sixth Amendment to Credit Agreement, dated November 5, 2018, among FTD Companies, Inc., Interflora British Unit, the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as administrative agent for the Lenders | | | | 8-K | | 001-35901 | | 11/06/2018 | | 10.2 |
| | Seventh Amendment to Credit Agreement, dated March 13, 2019, among FTD Companies, Inc., Interflora British Unit, the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as administrative agent for the Lenders | | | | 8-K | | 001-35901 | | 3/14/2019 | | 10.1 |
| | Third Amendment to the Employment Agreement by and between FTD Companies, Inc. and Scott D. Levin** | | X | | | | | | | | 10.1 |
|
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference to |
| No. | | Exhibit Description | | Filed
with this
Form 10-K | | Form | | File No. | | Date Filed | | Exhibit Number (if different) |
| | Amendment to the Letter of Special Retention Compensation between FTD Companies, Inc. and Scott Levin** | | X | | | | | | | | 10.2 |
| | Employment Agreement by and between FTD Companies, Inc. and Joseph R. Topper, Jr.** | | X | | | | | | | | 10.3 |
| | List of Subsidiaries of FTD Companies, Inc. | | X | | | | | | | | |
| | Consent of Independent Registered Public Accounting Firm | | X | | | | | | | | |
| | Power of Attorney (see signature page of this Annual Report on Form 10-K) | | X | | | | | | | | |
| | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | |
| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | |
| | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | |
| | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | |
| 101.INS | | XBRL Instance Document | | X | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | X | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Calculation Linkbase Document | | X | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Label Linkbase Document | | X | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Presentation Linkbase Document | | X | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Document | | X | | | | | | | | |
| |
* | Schedules and other similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of anyindividual or committee of the omitted schedules and other similar attachments upon request by the Securities and Exchange Commission, provided that the registrant may request confidential treatment for any schedule or other similar attachment so furnished. |
** Management contract or compensatory plan or arrangement.
| |
(c) | Financial Statement Schedules |
The financial statement schedules required by Regulation S-X and Item 8 of this Annual Report on Form 10-K are listed in Item 15(a)(2) of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
| | | |
Date: | March 18, 2019 | | FTD Companies, Inc. (Registrant) |
| | | |
| | By: | /s/ Scott D. Levin |
| | | Scott D. Levin |
| | | President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott D. Levin and Jennifer Baumann, as his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendment to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated below.
|
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Scott D. Levin | | President and Chief Executive Officer and Director (Principal Executive Officer) | | March 18, 2019 |
Scott D. Levin | | |
| | | | |
/s/ Steven D. Barnhart | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | March 18, 2019 |
Steven D. Barnhart | | |
| | | | |
/s/ Robert Berglass | | Chairman of the Board, Director | | March 18, 2019 |
Robert Berglass | | |
| | | | |
/s/ Mir Aamir | | Director | | March 18, 2019 |
Mir Aamir | | |
| | | | |
/s/ James T. Armstrong | | Director | | March 18, 2019 |
James T. Armstrong | | |
| | | | |
/s/ Tracey Belcourt | | Director | | March 18, 2019 |
Tracey Belcourt | | |
| | | | |
/s/ Candace Duncan | | Director | | March 18, 2019 |
Candace Duncan | | |
| | | | |
/s/ Sue Ann Hamilton | | Director | | March 18, 2019 |
Sue Ann Hamilton | | |
| | | | |
/s/ Robin Hickenlooper | | Director | | March 18, 2019 |
Robin Hickenlooper | | |
| | | | |
/s/ Joseph W. Harch | | Director | | March 18, 2019 |
Joseph W. Harch | | |
| | | | |
/s/ Christopher W. Shean | | Director | | March 18, 2019 |
Christopher W. Shean | | |
| | | | |
FTD COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors as may be designated by the Board of FTD Companies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FTD Companies, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for eachDirectors with respect to any related-party transactions. A current copy of the three years in the period ended December 31, 2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial positionCode of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the outstanding balance of the Company’s term loan and all amounts outstanding under the revolving credit facility (“credit agreement”) are due upon maturity in September 2019. The Company anticipates that, during 2019, prior to the maturity of the credit agreement, it may not be in compliance with certain requirements and covenants of its credit agreement. The Company may not have sufficient liquidity to repay the obligations due under its credit agreement upon maturity, or earlier if called for repayment by the lenders. Further, the credit facility may not provide sufficient liquidity over the remaining term of the revolving credit facility. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibilityEthics is
to express an opinion on the Company’s financial statements basedavailable on our
audits. We are a public accounting firm registered with the PCAOBcorporate website (www.ftdcompanies.com) under “Investor Relations.” In addition, each year, our directors and
executive officers are required to
complete Director and Officer Questionnaires that, among other things, identify any potential related-party transactions. Our Board of Directors determines, on an annual basis, which members of our Board of Directors meet the definition of an independent director as defined in the NASDAQ Marketplace Rules.Pursuant to our Audit Committee’s written charter, our Audit Committee is charged with monitoring and reviewing issues involving potential conflicts of interest, and reviewing and approving any potential related-party transactions which could be independentrequired to be disclosed under Item 404 of Regulation S-K, unless such transactions have been approved by a comparable committee of the Board of Directors or the Board of Directors as a whole. A copy of the Audit Committee’s written charter is available on our corporate website (www.ftdcompanies.com) under “Investor Relations.” Under Item 404 of Regulation S-K, a related-party transaction is defined as any transaction or proposed transaction in which the company was or is to be a participant, the amount involved exceeds $120,000, and in which any of the following had or will have a direct or indirect material interest: the company’s directors, director nominees, executive officers, greater than five percent beneficial owners or any immediate family member of any of the foregoing. In the course of the Audit Committee’s review to approve or disapprove related-party transactions, the Audit Committee
42
considers all of the relevant facts available, including (if applicable) but not limited to: the related party’s relationship to us; the nature of the party’s interest in the transaction; the benefits to us; the availability of other sources of comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees generally. The Audit Committee will approve only those related-party transactions that are in, or are not inconsistent with, the best interests of our company and our stockholders.
The Audit Committee has established written procedures to address situations when approvals need to be sought between meetings. Whenever possible, proposed related-party transactions will be included as an agenda item at the next scheduled Audit Committee meeting for review and approval. However, if it would be impractical or undesirable to wait until the next scheduled Audit Committee meeting, approval will be sought from the Chair of the Audit Committee between meetings, provided the Chair or his/her immediate family member is not the related party. If a related-party transaction is approved in this manner, the action will be reported at the next Audit Committee meeting.
RELATED-PARTY TRANSACTIONS
Qurate Investor Rights Agreement
As a part of the Acquisition, we entered into the Investor Rights Agreement with Liberty Interactive Corporation, now known as Qurate. Under the terms of the Investor Rights Agreement, Qurate and its controlled affiliates are currently restricted from acquiring additional shares of our common stock if, following such acquisition, Qurate would own in excess of 40% of the total number of outstanding shares of our common stock, subject to certain exceptions. Notwithstanding these restrictions, Qurate would be permitted, subject to certain conditions, to make a non-negotiated permitted tender offer (the “Permitted Offer”) to acquire additional shares of our common stock if, (a) Qurate has negotiated in good faith with our Board of Directors for a period of at least thirty days and is unable to reach an agreement on a transaction or (b) at any time, a third party makes an unsolicited tender offer for shares of our common stock and we fail to take customary defensive actions, provided, (i) in either case, that the Permitted Offer must be an offer for all outstanding shares of our common stock and (ii) the Permitted Offer cannot close until a majority of the outstanding shares of our common stock not owned by Qurate have been tendered (the “Minimum Condition”), provided that the requirement in this clause (ii) does not apply in the event a third party makes an unsolicited tender offer for shares of our common stock.
Qurate may sell shares of our common stock, subject to our right of first refusal with respect to certain market sales, provided that in no event may Qurate sell our common stock to any person if such person would beneficially own in excess of 15% of the total outstanding shares of our common stock, subject to certain exceptions. Effective December 31, 2017, Qurate is permitted to transfer its shares of our common stock in a block sale to a single party, subject to certain limitations with respect to the Company in accordance withtransferee and our right of first offer. The Investor Rights Agreement also includes limitations on pledging, stock lending transactions and hedging by Qurate of shares of our common stock.
Pursuant to the U.S. federal securities laws and the applicable rules and regulationsterms of the SecuritiesInvestor Rights Agreement, Qurate is entitled to customary demand and Exchange Commissionpiggyback registration rights and, the PCAOB.
We conductedsubject to certain limitations, a participation right pursuant to which Qurate may maintain its ownership percentage of our
audits in accordance with the standardscommon stock.The Investor Rights Agreement provides that, for so long as Qurate owns at least 15% of the PCAOB. Those standards requireoutstanding shares of our common stock, we are required to provide advance notice to Qurate before entering into an agreement regarding a merger, consolidation, change of control or other business combination transaction. In addition, if we enter into an agreement with a third party that would result in a change of control of us, we plan and perform the auditmay issue to obtain reasonable assurance about whether the financial statements are freesuch third party, outside of material misstatement, whether dueQurate’s participation right described above, a number of shares of our common stock equal to error or fraud. Our audits included performing procedures to assess the risks of material misstatement19.9% of the financial statements, whether duetotal number of shares then outstanding. However, such issuance will not dilute Qurate’s right to error or fraud,representation on our Board of Directors and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regardingwill be excluded from the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentationcalculation of the financial statements. We believeMinimum Condition in a Permitted Offer.
Qurate was entitled to select four new directors for appointment to our Board of Directors as of the closing of the Acquisition. Effective December 31, 2014, Candace H. Duncan, Sue Ann R. Hamilton, Robin S. Hickenlooper and Christopher W. Shean were appointed to our Board of Directors. Pursuant to the Investor Rights Agreement, (a) Qurate is entitled to proportional representation on our Board of Directors based upon its ownership percentage, rounded up to the next whole number of directors, (b) we are required to use our reasonable best efforts to cause the election of each Qurate nominee at subsequent meetings of our stockholders, (c) at least half of Qurate’s nominees must be independent under applicable stock exchange listing standards, subject to Qurate’s rights to have at least two Qurate officers serving as
43
directors, and (d) we must appoint one of Qurate’s nominees to each committee of our Board of Directors, subject to applicable stock exchange listing standards and provided that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 18, 2019
We have servedno such director may serve as the Company’s auditor since 2014.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors or chairman of FTD Companies, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reportinga committee. In addition, for a period of FTD Companies, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows, and the related notes and schedule listedfive years (or six years, in the Index at Item 15 (collectively referredevent our Board of Directors ceases to be classified or we implement majority voting for directors), and so long as the “financial statements”) as of and for the year ended December 31, 2018, of the Company and our report dated March 18, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s ability to continue as(x) a going concern.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionQurate-nominated director remains on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOBBoard of Directors and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 18, 2019
FTD COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
| | | | | | | |
| | December 31, |
| | 2018 |
| 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 16,227 |
|
| $ | 29,496 |
|
| Accounts receivable, net of allowances of $7,067 and $4,957 at December 31, 2018 and December 31, 2017, respectively | 24,920 |
|
| 26,028 |
|
| Inventories | 27,450 |
|
| 25,356 |
|
| Income taxes receivable | 1,407 |
|
| — |
|
| Prepaid expenses and other current assets | 12,874 |
|
| 14,911 |
|
| Total current assets | 82,878 |
|
| 95,791 |
|
| Property and equipment, net | 41,334 |
|
| 33,880 |
|
| Intangible assets, net | 91,403 |
|
| 181,965 |
|
| Goodwill | 162,316 |
|
| 277,041 |
|
| Other assets | 9,049 |
|
| 21,648 |
|
| Total assets | $ | 386,980 |
|
| $ | 610,325 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| |
| Current liabilities: | |
| |
| Accounts payable | $ | 71,240 |
|
| $ | 70,480 |
|
| Accrued liabilities | 60,511 |
|
| 76,767 |
|
| Accrued compensation | 18,641 |
|
| 14,261 |
|
| Interest payable | 7,332 |
| | 291 |
|
| Deferred revenue | 5,146 |
|
| 5,280 |
|
| Income taxes payable | 1,152 |
|
| 872 |
|
| Current portion of long-term debt | 208,076 |
|
| 189,666 |
|
| Total current liabilities | 372,098 |
|
| 357,617 |
|
| Deferred tax liabilities, net | 6,959 |
|
| 30,854 |
|
| Other liabilities | 9,323 |
|
| 7,330 |
|
| Total liabilities | 388,380 |
|
| 395,801 |
|
| Commitments and contingencies (Note 14) |
|
|
|
| Stockholders’ equity: | |
| |
| Preferred stock, 5,000,000 shares, par value $0.0001, authorized; no shares issued and outstanding | — |
|
| — |
|
| Common stock, 60,000,000 shares, par value $0.0001, authorized; 30,755,569 and 30,073,087 shares issued at December 31, 2018 and December 31, 2017, respectively | 3 |
|
| 3 |
|
| Treasury stock, 2,430,897 shares at December 31, 2018 and December 31, 2017, respectively | (65,221 | ) |
| (65,221 | ) |
| Additional paid-in capital | 720,092 |
|
| 705,388 |
|
| Accumulated deficit | (608,961 | ) |
| (384,232 | ) |
| Accumulated other comprehensive loss | (47,313 | ) |
| (41,414 | ) |
| Total stockholders’ equity | (1,400 | ) |
| 214,524 |
|
| Total liabilities and stockholders’ equity | $ | 386,980 |
|
| $ | 610,325 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FTD COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenues: | | | | | |
| Products | $ | 891,506 |
| | $ | 950,612 |
| | $ | 984,957 |
|
| Services | 122,738 |
| | 133,416 |
| | 137,042 |
|
| Total revenues | 1,014,244 |
| | 1,084,028 |
| | 1,121,999 |
|
| Operating expenses: | | | | | |
| Cost of revenues—products | 643,242 |
| | 657,180 |
| | 685,176 |
|
| Cost of revenues—services | 17,207 |
| | 17,394 |
| | 18,466 |
|
| Sales and marketing | 249,028 |
| | 249,565 |
| | 229,569 |
|
| General and administrative | 100,823 |
| | 112,630 |
| | 112,720 |
|
| Amortization of intangible assets | 3,624 |
| | 13,467 |
| | 61,050 |
|
| Restructuring and other exit costs | 18,247 |
| | 2,179 |
| | 11,758 |
|
| Impairment of goodwill, intangible assets, and other long-lived assets | 206,704 |
| | 300,342 |
| | 84,000 |
|
| Total operating expenses | 1,238,875 |
| | 1,352,757 |
| | 1,202,739 |
|
| Operating loss | (224,631 | ) | | (268,729 | ) | | (80,740 | ) |
| Interest income | 468 |
| | 478 |
| | 519 |
|
| Interest expense | (22,020 | ) | | (10,275 | ) | | (9,714 | ) |
| Other income, net | 2,640 |
| | 311 |
| | 1,678 |
|
| Loss before income taxes | (243,543 | ) | | (278,215 | ) | | (88,257 | ) |
| Benefit from income taxes | (18,814 | ) | | (44,174 | ) | | (5,066 | ) |
| Net loss | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) |
| Loss per common share | | | | | |
| Basic loss per share | $ | (8.03 | ) | | $ | (8.52 | ) | | $ | (3.03 | ) |
| Diluted loss per share | $ | (8.03 | ) | | $ | (8.52 | ) | | $ | (3.03 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
FTD COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net loss | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation | (6,119 | ) | | 9,878 |
| | (17,934 | ) |
| Cash flow hedges: | | | | | |
| Changes in net gains on derivatives, net of tax of $59, $214, and $196 for the years ended December 31, 2018, 2017, and 2016, respectively | 220 |
| | 345 |
| | 327 |
|
| Other comprehensive income (loss) | (5,899 | ) | | 10,223 |
| | (17,607 | ) |
| Total comprehensive loss | $ | (230,628 | ) | | $ | (223,818 | ) | | $ | (100,798 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
FTD COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at January 1, 2016 | 29,427 |
| | $ | 3 |
| | (1,831 | ) | | $ | (50,000 | ) | | $ | 678,558 |
| | $ | (34,030 | ) | | $ | (67,000 | ) | | $ | 527,531 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (83,191 | ) | | (83,191 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (17,607 | ) | | — |
| | (17,607 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 16,985 |
| | — |
| | — |
| | 16,985 |
|
| Tax benefits from equity awards | — |
| | — |
| | — |
| | — |
| | (705 | ) | | — |
| | — |
| | (705 | ) |
| Vesting of restricted stock units and related repurchases of common stock | 196 |
| | — |
| | — |
| | — |
| | (2,302 | ) | | — |
| | — |
| | (2,302 | ) |
| Repurchases of common stock | — |
| | — |
| | (600 | ) | | (15,221 | ) | | — |
| | — |
| | — |
| | (15,221 | ) |
| Issuance of common stock through employee stock purchase plan | 108 |
| | — |
| | — |
| | — |
| | 2,237 |
| | — |
| | — |
| | 2,237 |
|
| Balance at December 31, 2016 | 29,731 |
| | $ | 3 |
| | (2,431 | ) | | $ | (65,221 | ) | | $ | 694,773 |
| | $ | (51,637 | ) | | $ | (150,191 | ) | | $ | 427,727 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (234,041 | ) | | (234,041 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 10,223 |
| | — |
| | 10,223 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 11,098 |
| | — |
| | — |
| | 11,098 |
|
| Vesting of restricted stock units and related repurchases of common stock | 203 |
| | — |
| | — |
| | — |
| | (1,998 | ) | | — |
| | — |
| | (1,998 | ) |
| Issuance of common stock through employee stock purchase plan | 139 |
| | — |
| | — |
| | — |
| | 1,515 |
| | — |
| | — |
| | 1,515 |
|
| Balance at December 31, 2017 | 30,073 |
| | $ | 3 |
| | (2,431 | ) | | $ | (65,221 | ) | | $ | 705,388 |
| | $ | (41,414 | ) | | $ | (384,232 | ) | | $ | 214,524 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (224,729 | ) | | (224,729 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (5,899 | ) | | — |
| | (5,899 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 14,684 |
| | — |
| | — |
| | 14,684 |
|
| Vesting of restricted stock units and related repurchases of common stock | 480 |
| | — |
| | — |
| | — |
| | (517 | ) | | — |
| | — |
| | (517 | ) |
| Issuance of common stock through employee stock purchase plan | 203 |
| | — |
| | — |
| | — |
| | 537 |
| | — |
| | — |
| | 537 |
|
| Balance at December 31, 2018 | 30,756 |
| | $ | 3 |
| | (2,431 | ) | | $ | (65,221 | ) | | $ | 720,092 |
| | $ | (47,313 | ) | | $ | (608,961 | ) | | $ | (1,400 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
FTD COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) |
| Adjustments to reconcile net loss to net cash provided by/(used for) operating activities: | | | | | |
| Depreciation and amortization | 14,939 |
| | 33,474 |
| | 85,099 |
|
| Impairment of goodwill, intangible assets, and other long-lived assets | 206,704 |
| | 300,342 |
| | 84,000 |
|
| Stock-based compensation | 14,684 |
| | 11,098 |
| | 16,985 |
|
| Provision for doubtful accounts receivable | 2,510 |
| | 2,092 |
| | 3,423 |
|
| Amortization of deferred financing fees | 4,702 |
| | 1,360 |
| | 1,360 |
|
| Impairment of long-lived assets related to restructuring activities | — |
| | — |
| | 723 |
|
| Deferred taxes, net | (21,802 | ) | | (56,177 | ) | | (25,992 | ) |
| Gains on life insurance | — |
| | — |
| | (1,583 | ) |
| Gain on sale of business | (2,309 | ) | | — |
| | — |
|
| Other, net | (171 | ) | | (26 | ) | | 133 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable, net | (1,485 | ) | | (1,041 | ) | | (2,371 | ) |
| Inventories | (2,146 | ) | | (116 | ) | | 461 |
|
| Prepaid expenses and other assets | 4,306 |
| | 2,149 |
| | 598 |
|
| Accounts payable and accrued liabilities | (7,834 | ) | | (4,947 | ) | | (9,286 | ) |
| Interest payable | 858 |
| | 90 |
| | 90 |
|
| Deferred revenue | (24 | ) | | 226 |
| | (308 | ) |
| Income taxes receivable or payable | (1,525 | ) | | (1,376 | ) | | 6,741 |
|
| Other liabilities | 2,083 |
| | (290 | ) | | (638 | ) |
| Net cash provided by/(used for) operating activities | (11,239 | ) | | 52,817 |
| | 76,244 |
|
| Cash flows from investing activities: | | | | | |
| Cash paid for acquisitions, net of cash acquired | — |
| | (2,469 | ) | | — |
|
| Purchases of property and equipment | (33,756 | ) | | (15,103 | ) | | (18,503 | ) |
| Proceeds from life insurance | 10,003 |
| | — |
| | 1,946 |
|
| Proceeds from sale of business | 2,186 |
| | — |
| | — |
|
| Net cash used for investing activities | (21,567 | ) | | (17,572 | ) | | (16,557 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from revolving lines of credit | 283,000 |
| | 90,000 |
| | — |
|
| Payments on term debt and revolving lines of credit | (257,346 | ) | | (178,000 | ) | | (20,000 | ) |
| Payments for debt financing fees | (5,763 | ) | | — |
| | — |
|
| Purchases from employee stock plans | 537 |
| | 1,515 |
| | 2,237 |
|
| Repurchases of common stock withheld for taxes | (517 | ) | | (1,998 | ) | | (2,302 | ) |
| Repurchases of common stock | — |
| | — |
| | (15,221 | ) |
| Net cash provided by/(used for) financing activities | 19,911 |
| | (88,483 | ) | | (35,286 | ) |
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (374 | ) | | 1,732 |
| | (1,291 | ) |
| Change in cash and cash equivalents | (13,269 | ) | | (51,506 | ) | | 23,110 |
|
| Cash and cash equivalents, beginning of period | 29,496 |
| | 81,002 |
| | 57,892 |
|
| Cash and cash equivalents, end of period | $ | 16,227 |
| | $ | 29,496 |
| | $ | 81,002 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS
Description of Business
FTD Companies, Inc. (together with its subsidiaries, “FTD” or the “Company”), is a premier floral and gifting company with a vision to be the world’s floral innovator and leader, creating products, brands, and technology-driven services its customers love. The Company provides floral, specialty foods, gift and related products and services to consumers, retail florists, and other retail locations and companies in need of floral and gifting solutions. The business uses the highly recognized FTD® and Interflora® brands, both supported by the iconic Mercury Man® logo. While the Company operates primarily in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), and the Republic of Ireland, it has worldwide presence as its Mercury Man logo is displayed in over 30,000 floral shops in more(y) Qurate owns less than 125 countries. The Company’s diversified portfolio of brands also includes ProFlowers®, Shari’s Berries®, Personal Creations®, Flying Flowers®,Gifts.com™, and ProPlants®. While floral arrangements and plants are its primary offerings, the Company also markets and sells gift items, including gourmet-dipped berries and other specialty foods, personalized gifts, gift baskets, wine and champagne, jewelry and spa products.
The principal operating subsidiaries of FTD Companies, Inc. are Florists’ Transworld Delivery, Inc., FTD.com Inc. (“FTD.com”), Interflora British Unit (“Interflora”), and Provide Commerce, Inc. (“Provide Commerce”). The operations of the Company include those of its subsidiary, Interflora, Inc., of which one-third is owned by a third party. The Company’s corporate headquarters is located in Downers Grove, Illinois. The Company also maintains offices in Chicago and Woodridge, Illinois; San Diego, California; Centerbrook, Connecticut; Sleaford, England; and Hyderabad, India; and distribution centers in various locations throughout the U.S.
Separation from United Online
Prior to November 1, 2013, FTD was a wholly owned subsidiary of United Online, Inc. (“United Online”). On November 1, 2013, United Online separated into two independent, publicly traded companies: FTD Companies, Inc. and United Online, Inc. (the “Separation”). The Separation was consummated through a tax free dividend involving the distribution of all shares of FTD common stock to United Online’s stockholders. Following completion of the Separation, FTD Companies, Inc. became an independent, publicly traded company on the NASDAQ Global Select Market under the symbol “FTD”.
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all dollar amounts presented are in U.S. dollars.
The preparation of financial statements in accordance with GAAP requires management to make accounting policy elections, estimates and assumptions that affect a number of reported amounts and related disclosures in the consolidated financial statements. Management bases its estimates on historical experience and assumptions that it believes are reasonable. Actual results could differ from those estimates and assumptions.
Going Concern
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The ability to continue as a going concern is dependent on the Company generating profitable operating results, having sufficient liquidity, maintaining compliance with the revised covenants and other requirements under the Amended Credit Agreement (as defined below), and refinancing or repaying the indebtedness outstanding under the Amended Credit Agreement, including in connection with a sale or merger of the Company or other strategic transaction. In the financial statements for the year ended December 31, 2017 as well as every quarter since, management’s assessment has been that there is substantial doubt about the Company’s ability to continue as a going concern.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As part of the Company’s efforts to address these issues, as previously announced, the Company’s board of directors initiated a review of strategic alternatives. The strategic alternatives under consideration include, but are not limited to, a sale or merger of the Company, the Company continuing to pursue value-enhancing initiatives as a standalone company, and potential financings or other equity transactions. The Company also announced a corporate restructuring and cost savings plan, under which opportunities to optimize operations, drive efficiency, and reduce costs have been identified.
On March 13, 2019, the Company entered into the Seventh Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Seventh Amendment, the “Amended Credit Agreement”) with its lenders. The Amended Credit Agreement includes, among other terms, a minimum Consolidated Adjusted EBITDA covenant; further limitations on capital expenditures; a covenant requiring that, on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limits on the Company’s combined usage of the revolving credit facility portion of the Amended Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods, as was the requirement that the auditor’s report on the Company’s financial statements for the year ended December 31, 2018 not contain a going concern explanatory paragraph. For additional information regarding the Amended Credit Agreement, see Note 6—“Financing Arrangements.”
The Company will need to refinance or repay the outstanding indebtedness no later than its September 2019 maturity. Based on our 2019 year-to-date results of operations and outlook for the remainder of the term of the Amended Credit Agreement, the Company currently anticipates that it will be in compliance with the Consolidated Adjusted EBITDA (as defined in the Amended Credit Agreement) covenants and will have sufficient liquidity to fund its operations into July 2019 but may not have sufficient liquidity to fund its operations beyond then. In addition, there can be no assurances that the Company will be able to complete one or more transactions that will enable it to repay all or a portion50% of the outstanding indebtedness by June 1, 2019 or at all. If the Company is unable to meet the revised covenantsshares of the Amended Credit Agreement and it is unable to obtain waivers or further amendments from its lenders, the lenders could exercise remedies under the Amended Credit Agreement and repayment of the indebtedness outstanding under the Amended Credit Agreement could be accelerated. The Company may not have sufficient capital to repay the obligations due under the Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement.
As noted above, the Company will need to refinance or repay the indebtedness outstanding under the Amended Credit Agreement no later than its September 2019 maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement. There can be no assurance that the Company will be able to affect a refinancing on acceptable terms or repay the indebtedness outstanding, when required or if at all, including as a result of the strategic alternatives review noted above. In this regard, there can be no assurance that the strategic alternatives review will result in any particular strategic alternative or strategic transaction. If the Company is not successful in its initiatives or does not have sufficient liquidity to fund its business activities, the Company may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition. The uncertainties identified above raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of the Company’s efforts to address these uncertainties.
Accounting Policies
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which have a maturity date within three months from the date of purchase. At December 31, 2018 and 2017, the Company’s cash and cash equivalents were maintained primarily with major U.S. and U.K. financial institutions and brokerage firms. Deposits with these institutions are generally in excess of the amount insured by the respective government on such deposits.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable, including Financing Receivables
The Company’s accounts receivable are derived primarily from revenues earned from floral network members located in the U.S. and the U.K. The Company extends credit based upon an evaluation of the customer’s financial condition and, generally, collateral is not required. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable and, to date, such losses have been within management’s expectations.
The Company evaluates specific accounts receivable where information exists that the customer may have an inability to meet its financial obligations. In these cases, based on reasonably available facts and circumstances, a specific allowance is recorded for that customer against amounts due to reduce the receivable to the amount the Company believes is probable of collection. These specific allowances are re-evaluated and adjusted as additional information is received that impacts the amount of the allowance. Also, an allowance is established for all customers based on the aging of the receivables. If circumstances change (i.e., higher or lower than expected delinquencies or an unexpected material adverse change in a customer’s ability to meet its financial obligations), the estimates of the recoverability of amounts due to the Company are adjusted. The Company aggressively pursues collection of past due receivables through a number of avenues prior to writing off receivables. Past due receivables are those that remain outstanding beyond the payment due date.
The Company has financing receivables related to equipment sales to floral network members. The Company records all financing receivables at fair value and amortizes such receivables to stated value. The current and noncurrent portions of financing receivables are included in accounts receivable and other assets, respectively, in the consolidated balance sheets. The Company recognizes interest income as earned. The Company assesses credit quality indicators based on whether financing receivables are current or past due. Financing receivables are placed on nonaccrual status, with interest no longer accruing, when a floral network member ceases to be a member, either due to the member terminating its membership or due to the Company terminating such member’s membership, generally as a result of delinquent payments or violations of FTD’s network standards. The Company would not expect to resume the accrual of interest income unless a member who had terminated its membership chooses to be reinstated as a member at a later date and agrees to a plan to pay its balance, if any, that remains outstanding. The Company assesses financing receivables individually for balances due from current floral network members and collectively for balances due from terminated floral network members. A financing receivable is considered to be impaired when the Company determines that it is probable that it will not be able to collect amounts due under the contractual terms. The Company does not record interest income for impaired receivables. If cash is received, the receivable balance is reduced and related credit allowance adjusted accordingly. Fair value approximates the carrying amount of financing receivables because such receivables are discounted at a rate comparable to market rates for similar receivables.
Inventory
The Company’s inventories, which consist primarily of products held for sale, are stated at the lower of cost and net realizable value. Inventory is valued using the first-in, first-out or weighted-average cost method. The Company regularly assesses the valuation of inventory and reviews inventory quantities on hand and, if necessary, writes down excess and obsolete inventory based primarily on the age of the inventory and forecasts of product demand, as well as markdowns for the excess of cost over the amount the Company expects to realize from the sale of certain inventory. At December 31, 2018 and 2017, inventory reserves were approximately 8% and 7% of the inventory balance, respectively.
Property and Equipment
Property and equipment are stated at historical cost or fair value at the acquisition date less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer software and computer equipment, five years for furniture and fixtures, ten years for equipment, and forty years for buildings. Building improvements are depreciated using the straight-line method over the shorter of the remaining building life or the life of the building improvement. Leasehold improvements, which are included in furniture and fixtures, are amortized using the straight-line method over the shorter of the lease term or ten years. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company’s consolidated financial statements with the resulting gain or loss reflected in the Company’s consolidated statements of operations. Repairs and maintenance costs are expensed as incurred. See also “Goodwill, Intangible Assets, and Other Long-Lived Assets” below for the Company’s accounting policy related to the identification of and accounting for impairments of property and equipment.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Instruments
The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Through June 2018, the Company maintained interest rate cap instruments to reduce its interest rate risk associated with future cash interest payments on a portion of its outstanding borrowings under the Credit Agreement (as defined below). In addition, at times the Company enters into forward foreign currency exchange contracts to reduce the risk that its net investments in foreign subsidiaries, cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company records derivative instruments at fair value in other current assets, other assets or accrued liabilities in the consolidated balance sheets. The Company records changes in the fair value (i.e., gains or losses) of derivative instruments as interest expense or other expense, net, in the consolidated statements of operations or in accumulated other comprehensive loss in the consolidated balance sheets. Neither the interest rate caps nor the forward foreign currency exchange contracts contained any credit risk related contingent features. The Company’s hedging program is not designed for trading or speculative purposes. There were no outstanding hedges or interest rate cap instruments at December 31, 2018.
Cash Flow Hedges—The Company’s interest rate cap instruments were designated as cash flow hedges against expected future cash flows attributable to future interest payments on a portion of its outstanding borrowings under the Credit Agreement. The Company initially reported the gains or losses related to the effective portion of the hedges as a component of accumulated other comprehensive loss in the consolidated balance sheets and subsequently reclassifies the interest rate caps’ gains or losses to interest expense when the hedged expenses are recorded. The Company included the change in the time value of the interest rate caps in its assessment of their hedge effectiveness. The Company presented the cash flows from cash flow hedges in the same category in the consolidated statements of cash flows as the category for the cash flows from the hedged items.
For additional information related to derivative instruments, see Note 7—“Derivative Instruments.”
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, establishes a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters. If market observable inputs for model-based valuation techniques are not available, the Company is required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument. Fair values of cash and cash equivalents, short-term accounts receivable, accounts payable, accrued liabilities, and short-term borrowings approximate their carrying amounts because of their short-term nature. Derivative instruments are recognized in the consolidated balance sheets at their fair values. The fair values for the interest rate caps are calculated using an option pricing model based on available forward yield curves for caplets with the same characteristics adjusted for the counterparty risk of nonperformance based on the credit spread derived from the applicable five-year default swap rates. The fair values of the forward foreign currency exchange contracts are calculated based on quoted market prices of similar instruments adjusted for counterparty risk of nonperformance. The key assumptions used in calculating the fair value of these derivative instruments are the forward rates, discount rate and implied volatility. Long-term debt is carried at amortized cost. However, the Company is required to estimate the fair value of long-term debt under ASC 825, Financial Instruments, based on the discounted cash flow method. The Company estimates the fair value of its long-term debt using Level 2 inputs based on quoted prices of comparable risk bonds using market prices and expected future interest rates based on quoted market rates from the U.S. dollar-denominated interest rate swap curve.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill, Intangible Assets, and Other Long-Lived Assets
Goodwill is tested for impairment at the reporting unit level. A reporting unit is a business or a group of businesses for
which discrete financial information is available and is regularly reviewed by management. An operating segment is made up of
one or more reporting units. The Company reports its business operations in three operating and reportable segments: U.S. Consumer, Florist, and International. Each of the Florist and International segments is a reporting unit. The U.S. Consumer segment is comprised of three reporting units: FTD.com, ProFlowers/Gourmet Foods, and Personal Creations. The ProFlowers and Gourmet Foods businesses have similar margins and share operations and business team structure, among other similarities. Therefore, these businesses meet the aggregation criteria, and, as such, the Company has aggregated these two businesses into one reporting unit.
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the net tangible and intangible assets acquired and liabilities assumed. Indefinite-lived intangible assets acquired in a business combination are initially recorded at management’s estimate of their fair value. The Company accounts for goodwill and indefinite-lived intangible assets in accordance with ASC 350, Intangibles, Goodwill and Other.
Goodwill and indefinite-lived intangible assets are not subject to amortization. The Company tests goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of each year at the reporting unit level and on an interim basis if events or substantive changes in circumstances indicate that the carrying amount of a reporting unit or an indefinite-lived asset may exceed its fair value (i.e. that a triggering event has occurred). Additionally, the Company evaluates finite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset groupings may not be recoverable.
Testing goodwill, intangible assets, and other long-lived assets for impairment involves comparing the fair value of the reporting unit or intangible asset to its carrying value. If the carrying amount of a reporting unit, intangible asset, or other long-lived asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, up to the carrying value of the goodwill, intangible asset, or other long-lived asset. In calculating the fair value of the reporting units, the Company used a combination of the income approach, the market approach, and the cost approach valuation methodologies. The income approach was used primarily, as the Company believes that a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. Under the market approach, the Company used the guideline company method, which focuses on comparing our risk profile and growth prospects to select reasonably similar companies based on business description, revenue size, markets served and profitability. The cost approach was used as this approach is a generally accepted valuation method when the valuation is either negative or the value of the net assets/liabilities exceeds the expected present value of the economic returns. Under the cost approach, the Company used the net asset value method, which is based on the premise that a prudent investor would pay no more for an asset than its replacement or reproduction cost. The key assumptions used in the income approach discounted cash flow valuation model included discount rates, growth rates, cash flow projections, and terminal growth rates. The cash flow projections reflect management’s forecasts, taking into account both the historical performance of each reporting unit and the expected contributions from anticipated savings related to the Company’s corporate reorganization and cost savings plan as well as the benefits of the strategic initiatives identified in the strategic planning conducted in 2017. The discount rates utilized were indicative of the return an investor would expect to receive for investing in a similar business. Considering industry and company specific historical data and internal forecasts and projections, management developed growth rates and cash flow projections for each reporting unit. In determining the terminal growth rates, the Company considered GDP growth, consumer price inflation, and the long term growth prospects of each reporting unit. The discount rate, growth rates, royalty rates, cash flow projections, and terminal growth rates are also significant estimates used in the determination of the fair value of the indefinite-lived intangible assets. The indefinite-lived intangible assets were valued using the relief from royalty method, which assumes that, in lieu of ownership, a company would be willing to pay a royalty to exploit the benefits of the asset.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for finite-lived intangible assets and other long-lived assets in accordance with ASC 360, Property, Plant and Equipment. Intangible assets acquired in a business combination are initially recorded at management’s estimate of their fair values. The Company evaluates the recoverability of identifiable intangible assets and other long-lived assets, other than indefinite-lived intangible assets, for impairment when events occur or circumstances change that would indicate that the carrying amount of an asset may not be recoverable. Events or circumstances that may indicate that an asset is impaired include, but are not limited to, significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future operating results, a change in the extent or manner in which an asset is used, shifts in technology, significant negative industry or economic trends, changes in the Company’s operating model or strategy, and competitive forces. In determining if an impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment is indicated based on a comparison of the assets’ carrying amounts and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amounts of the assets exceed the respective fair values of the assets. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from five to fifteen years. The Company’s identifiable intangible assets were acquired primarily in connection with business combinations.
Revenue Recognition
The Company adopted FASB’s ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the modified retrospective method. This method requires that the cumulative effect of the initial application is recognized as an adjustment to the opening balance of the Company’s retained earnings at January 1, 2018. However, the adoption did not have a material impact on the Company’s revenue recognition. As such, the Company did not record an adjustment to its beginning balance of retained earnings at January 1, 2018.
The Company recognizes revenue from short-term contracts for the sale of various products and services to its customers, which include consumers, floral network members, and wholesale customers. Sales to consumers are generated via the Company’s websites, mobile sites and applications, or over the telephone with payment made either at the time the order is placed or upon shipment. Product revenues from these short-term contracts are single performance obligations and are considered complete upon delivery to the recipient. Amounts collected from customers upon placement of an order are recorded as deferred revenue and recognized upon delivery of the product. Products revenues, less discounts and refunds, and the related cost of revenues are recognized when control of the goods is transferred to the recipient, which is generally upon delivery. Product sales are not refundable other than as related to customer service issues. Shipping and service fees charged to customers are recognized at the time the related products revenues are recognized and are included in products revenues. Shipping and delivery costs are included in cost of revenues. Sales taxes are collected from customers and remitted to the appropriate taxing authorities and are not reflected in the Company’s consolidated statements of operations as revenues.
The Company generally recognizes revenues for sales to consumers on a gross basis because the Company controls the goods before they are transferred to the recipient as the Company (i) bears primary responsibility for fulfilling the promise to the customer; (ii) bears inventory risk before and/or after the good or service is transferred to the customer; and (iii) has discretion in establishing the price for the sale of the good or service to the customer.
Services revenues related to orders sent through the floral network are variable based on either the number of orders or the value of orders and are recognized in the period in which the orders are delivered. Membership and other subscription-based fees are recognized monthly as earned, on a month-to-month basis. Each service offered by the Company is separate and distinct from other services and represents an individual performance obligation.
The Company also sells point-of-sale systems and related technology services to its floral network members and recognizes revenue in accordance with ASC 606. For hardware sales that include software, revenues are recognized when delivery, installation and customer acceptance have all occurred. The transaction price for point-of-sale systems is based on the equipment and the software modules ordered by the customer and include installation and training for the system. The sale of the system is considered a single performance obligation since the installation and training are a significant part of the sale in order for the floral network member to send and receive floral orders through the point-of-sale systems. The Company recognizes revenues on hardware which is sold without software at the time of delivery.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Probability of collection for both products and services revenue is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If it is determined that collectability is not reasonably assured, revenues are not recognized until collectability becomes reasonably assured.
The Company incurs contract costs that are incremental costs incurred for obtaining a contract. These contract costs are short-term (less than a year) and are expensed as incurred based on the practical expedient provided in ASC 606. As such, the Company does not capitalize costs incurred for obtaining a contract.
Cost of Revenues
Cost of revenues primarily include product costs; shipping and delivery costs; costs associated with taking orders; printing and postage costs; systems installation, training and support costs; telecommunications and data center costs; depreciation of network computers and equipment; license fees; costs related to customer billing and billing support for the Company’s floral network members; fees associated with the storage and processing of customer credit cards and associated bank fees; and personnel and overhead-related costs associated with operating the Company’s networks.
Sales and Marketing
Sales and marketing expenses include expenses associated with promoting the Company’s brands, products and services. Such expenses include advertising and promotion expenses; fees paid to online and other corporate partners and to floral network members related to order volume sent through the Company’s floral network; and personnel and overhead-related expenses for marketing, merchandising, customer service and sales personnel. In addition, sales and marketing expenditures also include branding and customer acquisition campaigns consisting of television, internet, radio, public relations, sponsorships, print and outdoor advertising, and retail and other performance-based distribution relationships. Marketing and advertising costs to promote the Company’s brands, products, and services are expensed in the period incurred. Advertising expenses include media, agency, and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency costs are expensed over the period the advertising runs. Advertising and promotion expenses for the years ended December 31, 2018, 2017, and 2016, were $192.1 million, $192.6 million, and $173.7 million, respectively. At December 31, 2018 and 2017, $2.1 million and $2.0 million, respectively, of prepaid advertising and promotion expenses were included in other current assets in the consolidated balance sheets.
Software Development Costs
The Company accounts for costs incurred to develop software for internal-use in accordance with ASC 350, which requires such costs be capitalized and amortized over the estimated useful life of the software. Such capitalized costs include external direct costs incurred in developing or obtaining the applications and payroll and payroll related expenses for employees who are directly associated with developing the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and ready for its intended purpose. The Company capitalized costs associated with internal-use software totaling $19.5 million and $7.2 million in the years ended December 31, 2018 and 2017, respectively. The internal-use software capitalized costs are being depreciated on a straight-line basis over each project’s estimated useful life, which is generally three to five years. All other capitalized internal use software is included in the computer software category within property and equipment, net, in the consolidated balance sheets.
Software to be Sold, Leased, or Marketed
The Company follows the provisions of ASC 985, Software, which requires that all costs relating to the purchase or internal development and production of computer software products to be sold, leased or otherwise marketed be expensed in the period incurred unless the requirements for technological feasibility have been established. The Company capitalizes all eligible computer software costs incurred once technological feasibility is established. The Company amortizes these costs using the straight-line method over a period of three to five years. At December 31, 2018 and 2017, the carrying amount of capitalized computer software costs related to the purchase or internal development and production of computer software to be sold, leased or otherwise marketed was $0.9 million and $1.0 million, respectively, and is included within property and equipment, net, in the consolidated balance sheets. During the years ended December 31, 2018, 2017, and 2016, the Company amortized and recognized associated depreciation expense of $0.2 million, $0.3 million, and $0.4 million, respectively, related to these capitalized computer software costs.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
General and Administrative
General and administrative expenses include personnel-related expenses for executive, finance, legal, human resources, technology, facilities, and internal audit. In addition, general and administrative expenses include, among other costs, maintenance of existing software, technology, and websites; development of new or improved software technology; professional fees for legal, accounting, and financial services; insurance; occupancy and other overhead-related costs; non-income taxes; bad debt expense; reserves or expenses related to litigation, investigations, or similar matters; and gains and losses on sales of assets. General and administrative expenses also include expenses resulting from actual or potential transactions such as acquisitions, spin-offs, financing transactions, and other strategic transactions.
Restructuring and Other Exit Costs
Restructuring and other exit costs consist of costs associated with the realignment and reorganization of the Company’s operations and other employee termination events. Restructuring and other exit costs include employee termination costs, facility closure and relocation costs, impairments of fixed assets related to restructuring actions, and contract termination costs. The timing of associated cash payments is dependent upon the type of exit cost and can extend over a 12-month period. The Company records restructuring and other exit costs liabilities in accrued liabilities in the consolidated balance sheets.
Stock-Based Compensation
The Company’s employees and non-employee directors are generally eligible to participate in the Company’s stock-based compensation plans. Under these plans, certain employees and non-employee directors of the Company received grants of restricted stock units (“RSUs”), performance-based stock units (“PSUs”), and/or stock options for FTD common stock. For additional information related to equity awards, see Note 10—“Incentive Compensation Plans.”
Stock-based compensation expense is recognized on a straight-line basis over the vesting period of the award. The fair value of RSUs is based on the closing stock price on the date of grant. The fair value of stock options is determined using the Black-Scholes option-pricing model, which utilizes various assumptions including expected volatility and expected term. For awards issued by the Company, the simplified method was used to determine the term, and the forfeiture rates were based on historical trends for the Company’s employees. Volatility is determined based on a combination of the Company’s and United Online’s historical volatility as the Company represented a significant portion of consolidated United Online prior to the Separation and the Company does not yet have sufficient history to base the assumption on solely its historical volatility.
Comprehensive Income/(Loss)
The Company follows the provisions of ASC 220, Comprehensive Income, which establishes standards for reporting comprehensive income/(loss) and its components in financial statements. Comprehensive income/(loss), as defined, includes all changes in equity during a period from non-owner sources. For the Company, comprehensive income/(loss) primarily consists of its reported net income/(loss), changes in unrealized gains or losses on derivatives (net of tax), and foreign currency translation.
Foreign Currency Translation
The Company accounts for foreign currency translation in accordance with ASC 830, Foreign Currency Matters. The functional currency of each of the Company’s international subsidiaries is its respective local currency, with the exception of India for which it is the U.S. dollar. The financial statements of these subsidiaries are translated to U.S. Dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues and expenses. Translation gains and losses are recorded in accumulated other comprehensive loss as a component of equity in the consolidated balance sheets.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company applies the provisions of ASC 740, Income Taxes, under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more-likely-than-not to be realized. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including the Company’s operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In accordance with ASC 740, the Company recognizes, in its consolidated financial statements, the impact of its tax positions that are more-likely-than-not to be sustained upon examination based on the technical merits of the positions. The Company recognizes interest and penalties for uncertain tax positions in income tax expense.
The Company’s U.S. businesses were in a cumulative three year net loss position, adjusted for permanent items, at December 31, 2018. Given the cumulative losses, which are negative evidence that was considered in assessing the realizability of the U.S. deferred tax assets, the Company did not consider future taxable income exclusive of reversing temporary differences and carryforwards nor did it consider tax planning strategies related to those businesses. The Company did consider the future reversal of existing taxable temporary differences as positive evidence that was considered in assessing the need for a valuation allowance. At December 31, 2018, the Company’s valuation allowance totaled $5.6 million, which is the Company’s estimate of its expected exposure after taking into consideration deferred tax liabilities that are expected to reverse over future periods and create taxable income that will exceed the deductions created by the reversal of the deferred tax assets.
Earnings/(Loss) Per Share
The Company computes earnings/(loss) per share in accordance with ASC 260, Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock, and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Certain of the Company’s RSUs are considered participating securities because they contain non-forfeitable rights to dividends irrespective of whether dividends are actually declared or paid or the awards ultimately vest.
Legal Contingencies
The Company is currently involved in certain legal proceedings and investigations. The Company records a liability when it believes that it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company evaluates at least quarterly, developments in its legal matters that could affect the assessment of the probability of loss or the amount of liability, and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate, (ii) if the proceedings are in early stages, (iii) if there is uncertainty as to the outcome of pending appeals, motions or settlements, (iv) if there are significant factual issues to be determined or resolved, and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. The Company continually assesses the potential liability related to such pending matters.
Operating Leases
The Company leases space for warehouses, call center facilities, offices, distribution facilities, technology development and support, and data centers, and leases certain vehicles and office equipment under operating lease agreements with original lease periods of up to thirteen years. Certain of the lease agreements contain rent holidays, rent escalation provisions, and landlord allowances which are considered in determining straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) and issued subsequent amendments to the initial guidance between August 2015 and December 2016, (collectively, “Topic 606”). Topic 606 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company adopted the guidance under this topic as of January 1, 2018 with no material impact to its consolidated financial statements. See Accounting Policies—Revenue Recognition above.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The updated guidance enhances the reporting model for financial instruments, and includes amendments to address aspects of recognition, measurement, presentation and disclosure. The Company adopted the guidance under this topic as of January 1, 2018 with no impact to its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update was issued to address the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. The Company adopted the guidance under this topic as of January 1, 2018 with no impact to its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This update was issued to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification of terms or conditions of a share-based payment award. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards would require an entity to apply modification accounting under Topic 718. The Company adopted the guidance under this topic as of January 1, 2018 with no impact to its consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which provides guidance from the SEC allowing for the recognition of provisional amounts in the financial statements for the year ended December 31, 2017 as a result of the U.S. Tax Cuts and Jobs Act (“TCJA”) that was signed into law in December 2017. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the TCJA. The Company has applied the guidance in this update in its financial statements for the year ended December 31, 2017 and recorded adjustments related to the TCJA, which were not material, during 2018.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires the recognition of certain lease assets and lease liabilities on the balance sheet as well as the disclosure of key information about leasing arrangements. ASU 2016-02 includes a number of optional practical expedients which may be elected by the Company. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU 2018-11, Targeted Improvements to Topic 842 (Leases), which provides an additional, optional transition method that allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. An entity that adopts this method must report comparative periods in accordance with current guidance (Topic 840). The amendments will be effective for the Company for fiscal years, and the interim periods within those years, beginning after December 15, 2018.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company will adopt these ASUs beginning January 1, 2019 using the optional transition method and plans to elect certain practical expedients which permit it to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease components for all classes of underlying assets. The Company also plans to make an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets. These ASUs also require companies to determine whether impairment indicators for the right-of-use asset at that asset or asset-group level exist as of the January 1, 2019 adoption date. On the date of adoption, the Company will recognize a cumulative-effect adjustment in retained earnings due to impairment of certain right-of-use assets as of the effective date.
As a result of adopting the guidance under this topic, the Company will recognize on its balance sheet lease liabilities of approximately $33 million to $38 million associated with in-scope operating leases, based on the present value of the remaining minimum rental payments using incremental borrowing rates as of the effective date. The Company expects to record corresponding right-of-use assets, based upon the operating lease liabilities, adjusted for impairment of right-of-use assets recorded in retained earnings at adoption, and prepaid and deferred rent. The Company does not believe that this update will have a material impact on its consolidated statements of operations or on its consolidated statements of cash flows. The Company has implemented a new lease accounting system to support the new accounting requirements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This update seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which guidance is effective, which is a modified-retrospective approach. The Company is currently assessing the impact of this update on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update seeks to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. For cash flow and net investment hedges as of the adoption date, this ASU requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The amendments in this ASU are effective for the Company’s fiscal year beginning after December 31, 2018, with early adoption permitted. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. This update also requires certain disclosures about stranded tax effects. The amendments in this ASU will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company does not anticipate that the adoption of this update will have a material impact on its consolidated financial statements.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update allows existing employee guidance to apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. The amendments in this ASU will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company does not anticipate that the adoption of this update will have a material effect on its consolidated financial statements.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This update facilitates technical corrections, clarifications and other minor improvements and should eliminate the need for periodic agenda requests for narrow and incremental items. The FASB does not expect these changes to have a significant administrative cost to most entities. Some of the amendments in this ASU do not require transition guidance and were effective upon issuance. However, many of the amendments do have transition guidance effective for the Company for annual periods beginning after December 15, 2018. The Company does not anticipate that the adoption of this update will have a material effect on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update eliminates, amends and adds disclosure requirements for fair value measurement. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companiesQurate will be required to disclosevote its shares of our common stock in favor of our director nomination slate at each meeting of our stockholders at which directors are to be elected. So long as Qurate owns at least 5% of the rangeoutstanding shares of our common stock, Qurate has agreed to attend, in person or by proxy, all meetings of our stockholders so that such shares may be counted for purposes of determining a quorum at such meetings.The foregoing description of the Investor Rights Agreement does not purport to be complete and the weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact of this update on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact of this update on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This update requires entities to consider interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interestqualified in its entirety when determining whether a decision-making fee is a variable interest. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Agreements (Topic (808): Clarifying the Interaction between Topic 808 and Topic 606 which (1) clarifies that transactions between participants in a collaborative agreement should be accounted for under Topic 606 and (2) adds unit-of-account guidance in Topic 808 to align with Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SEGMENT INFORMATION
The Company reports its business in three reportable segments: U.S. Consumer, Florist, and International. Prior to January 1, 2018, the Company reported its business in four reportable segments. As a result of a change in the information provided to and utilized by the Company’s then-current Chief Executive Officer (who was also the Company’s Chief Operating Decision Maker (“CODM”)) to assess the performance of the business, the Company combined the previous Provide Commerce and Consumer segments into one reportable segment, U.S. Consumer. The current CODM continues to receive and utilize information provided for these three segments to assess the performance of the business.
The Company follows the reporting requirements of ASC 280, Segment Reporting. Management measures and reviews the Company’s operating results by segment in accordance with the “management approach” defined in ASC 280. The reportable segments identified below were the segments of the Company for which separate financial information was available and for which segment results were regularly reviewed by the Company’s CODM to make decisions about the allocation of resources and to assess performance. The CODM uses segment operating income to evaluate the performance of the business segments and make decisions about allocating resources among segments. Segment operating income/(loss) is operating income/(loss) excluding depreciation and amortization; impairment of goodwill, intangible assets and other long-lived assets; litigation and dispute settlement charges or gains; transaction and integration costs; restructuring and other exit costs; and corporate reorganization costs. In addition, stock-based and incentive compensation and general corporate expenses are not allocatedreference to the segments. Segment operating income/(loss) is prior to intersegment eliminations and excludes other income/(expense), net.
Below is a reconciliation of segment revenues to consolidated revenues (in thousands): |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Products revenues: | | | | | |
| U.S. Consumer | $ | 727,866 |
| | $ | 789,011 |
| | $ | 821,008 |
|
| Florist | 44,579 |
| | 49,402 |
| | 48,952 |
|
| International | 133,806 |
| | 128,501 |
| | 133,249 |
|
| Segment products revenues | 906,251 |
| | 966,914 |
| | 1,003,209 |
|
| Services revenues: | | | | | |
| Florist | 105,729 |
| | 116,335 |
| | 117,929 |
|
| International | 17,339 |
| | 17,465 |
| | 19,451 |
|
| Segment services revenues | 123,068 |
| | 133,800 |
| | 137,380 |
|
| Intersegment eliminations | (15,075 | ) | | (16,686 | ) | | (18,590 | ) |
| Consolidated revenues | $ | 1,014,244 |
| | $ | 1,084,028 |
| | $ | 1,121,999 |
|
Intersegment revenues represent amounts charged from one segment to the other for services provided based on order volume at a set rate per order. Intersegment revenues by segment were as follows (in thousands): |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Intersegment revenues: | | | | | |
| U.S. Consumer | $ | (14,745 | ) | | $ | (16,302 | ) | | $ | (18,252 | ) |
| Florist | (330 | ) | | (384 | ) | | (338 | ) |
| Total intersegment revenues | $ | (15,075 | ) | | $ | (16,686 | ) | | $ | (18,590 | ) |
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The U.S. Consumer segment is comprised of the FTD.com, ProFlowers, Gourmet Foods, and Personal Creations business units. The revenues for the business units were as follows: |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| U.S. Consumer revenues: | | | | | |
| FTD.com | $ | 227,199 |
| | $ | 258,085 |
| | $ | 291,275 |
|
| ProFlowers | 240,819 |
| | 271,015 |
| | 284,360 |
|
| Gourmet Foods | 133,583 |
| | 144,048 |
| | 135,796 |
|
| Personal Creations | 126,265 |
| | 115,863 |
| | 109,577 |
|
| Total U.S. Consumer revenues | $ | 727,866 |
| | $ | 789,011 |
| | $ | 821,008 |
|
Geographic revenues from sales to external customers were as follows for the periods presented (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| U.S. | $ | 863,099 |
| | $ | 938,062 |
| | $ | 969,299 |
|
| U.K. | 151,145 |
| | 145,966 |
| | 152,700 |
|
| Consolidated revenues | $ | 1,014,244 |
| | $ | 1,084,028 |
| | $ | 1,121,999 |
|
Below is a reconciliation of segment operating income to consolidated operating loss and loss before income taxes (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Segment Operating income/(loss)(a) | | | | | |
| U.S. Consumer | $ | (4,556 | ) | | $ | 46,439 |
| | $ | 70,724 |
|
| Florist | 42,673 |
| | 46,477 |
| | 48,406 |
|
| International | 12,994 |
| | 16,770 |
| | 19,128 |
|
| Total segment operating income | 51,111 |
| | 109,686 |
| | 138,258 |
|
Unallocated expenses(b) | (54,099 | ) | | (44,599 | ) | | (49,899 | ) |
| Impairment of goodwill, intangible assets, and other long-lived assets | (206,704 | ) | | (300,342 | ) | | (84,000 | ) |
| Depreciation expense and amortization of intangible assets | (14,939 | ) | | (33,474 | ) | | (85,099 | ) |
| Operating loss | (224,631 | ) | | (268,729 | ) | | (80,740 | ) |
| Interest expense, net | (21,552 | ) | | (9,797 | ) | | (9,195 | ) |
| Other income, net | 2,640 |
| | 311 |
| | 1,678 |
|
| Loss before income taxes | $ | (243,543 | ) | | $ | (278,215 | ) | | $ | (88,257 | ) |
| |
(a) | Segment operating income/(loss) is operating income/(loss) excluding depreciation and amortization; impairment of goodwill, intangible assets, and other long-lived assets; litigation and dispute settlement charges or gains; transaction and integration costs; restructuring and other exit costs, and corporate reorganization costs. In addition, stock-based and incentive compensation and general corporate expenses are not allocated to the segments. Segment operating income/(loss) is prior to intersegment eliminations and excludes other income/(expense), net. |
| |
(b) | Unallocated expenses include various corporate costs, such as executive management, corporate finance, and legal costs. In addition, unallocated expenses include stock-based and incentive compensation, restructuring and other exit costs, corporate reorganization costs, transaction and integration costs, and litigation and dispute settlement charges or gains. |
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and liabilities are reviewed at the consolidated level by management. Segment assets are not reported to, or used by, the Company’s CODM to allocate resources to or assess performance of the segments, and therefore, total segment assets have not been disclosed. Geographic information for long-lived assets, consisting of amortizable intangible assets, property and equipment, and other non-current assets, was as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| U.S | $ | 58,072 |
| | $ | 118,581 |
|
| U.K. | 5,368 |
| | 6,393 |
|
| Total long-lived assets | $ | 63,440 |
| | $ | 124,974 |
|
3. FINANCING RECEIVABLES
The Company has financing receivables related to equipment sales to its floral network members. The current and noncurrent portions of financing receivables are included in accounts receivable and other assets, respectively, in the consolidated balance sheets. The Company assesses financing receivables individually for balances due from current floral network members and collectively for balances due from terminated floral network members.
The credit quality and the aging of past due financing receivables was as follows (in thousands): |
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Current | $ | 8,158 |
| | $ | 10,571 |
|
| Past due: | | | |
| 1 - 150 days past due | 207 |
| | 167 |
|
| 151 - 364 days past due | 272 |
| | 213 |
|
| 365 - 730 days past due | 258 |
| | 184 |
|
| 731 or more days past due | 441 |
| | 357 |
|
| Total | $ | 9,336 |
| | $ | 11,492 |
|
Financing receivables on nonaccrual status totaled $1.2 million at December 31, 2018 and $1.0 million at December 31, 2017. For further information, see table below “Allowance for Credit Losses.”
The allowance for credit losses and the recorded investment in financing receivables were as follows (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Allowance for credit losses: | | | |
| Balance at January 1 | $ | 912 |
| | $ | 846 |
|
| Provision | 385 |
| | 446 |
|
| Write-offs charged against allowance | (167 | ) | | (382 | ) |
| Recoveries of amounts previously written off | 11 |
| | 2 |
|
| Balance at December 31 | $ | 1,141 |
| | $ | 912 |
|
| Ending balance collectively evaluated for impairment | $ | 1,093 |
| | $ | 865 |
|
| Ending balance individually evaluated for impairment | $ | 48 |
| | $ | 47 |
|
| Recorded investments in financing receivables: | | | |
| Balance collectively evaluated for impairment | $ | 1,214 |
| | $ | 1,013 |
|
| Balance individually evaluated for impairment | $ | 8,122 |
| | $ | 10,479 |
|
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Individually evaluated impaired loans, including the recorded investment in such loans, the unpaid principal balance, and the allowance related to such loans, each totaled less than $0.1 million at both December 31, 2018 and 2017. The average recorded investment in such loans was less than $0.1 million at both December 31, 2018 and 2017. Interest income recognized on impaired loans was less than $0.1 million for both the years ended December 31, 2018 and 2017.
4. TRANSACTIONS WITH RELATED PARTIES
Transactions with Qurate
As of December 31, 2018, Qurate Retail, Inc. (“Qurate”), formerly Liberty Interactive Corporation, owned 36.0% of the issued and outstanding shares of FTD common stock. An Investor Rights Agreement, governs certain rights of and restrictionswhich is filed as Exhibit 10.1 to our Current Report on Qurate in connectionForm 8-K filed with the shares of FTD common stock that Qurate owns.
SEC on December 31, 2014.The I.S. Group Limited
Interflora holds an equity investment of 20.7% in The I.S. Group Limited (“I.S. Group”). The investment was $1.7 million at both December 31, 2018 and 2017, and is included in other assets in the consolidated balance sheets. Until September 2018, I.S. Group supplied floral-related products to Interflora’s floral network members in both the U.K. and the Republic of Ireland as well as to other customers. In September 2018, Interflora began selling floral-related products directly to its floral network members. I.S. Group continues to supply floral-related products to its other customers. Under the previous arrangement, Interflora derived revenues from I.S. Group from (i) the sale of products (sourced from third-party suppliers) to I.S. Group for which revenue was recognized on a gross basis, (ii) commissions on products sold by I.S. Group (sourced from third-party suppliers) to floral network members, and (iii) commissions for acting as a collection agent on behalf of I.S. Group. Revenues related to products sold to and commissions earned from I.S. Group were $1.6 million, $2.2 million, and $2.4 million in the years ended December 31, 2018, 2017, and 2016, respectively. In addition, Interflora purchased products from I.S. Group for sale to consumers. The cost of revenues related to products purchased from I.S. Group was $0.5 million, $0.3 million, and $0.4 million in the years ended December 31, 2018, 2017, and 2016, respectively. In preparation for Interflora to begin selling floral-related products directly to floral network members, Interflora purchased inventory of such products from I.S. Group. The total amount of inventory purchased during the year ended December 31, 2018 was $2.8 million. Amounts due from I.S. Group were $0.2 million and $0.3 million at December 31, 2018 and 2017, respectively, and amounts payable to I.S. Group were $0.4 million and $1.0 million at December 31, 2018 and 2017, respectively.
5. GOODWILL, INTANGIBLE ASSETS, AND OTHER LONG-LIVED ASSETS
GoodwillBOARD INDEPENDENCE
Our Board of Directors currently consists of ten members, all of whom are “independent directors” as that term is tested for impairment at the reporting unit level. A reporting unit is a business or a group of businesses for which discrete financial information is available and is regularly reviewed by management. An operating segment is made up of one or more reporting units. The Company reports its business operationsdefined in three operating and reportable segments: U.S. Consumer, Florist, and International. EachRule 5605(a)(2) of the FloristNASDAQ Marketplace Rules, except for Mr. Levin, our President, Chief Executive Officer and International segments is a reporting unit. The U.S. Consumer segment is comprised of three reporting units, ProFlowers/Gourmet Foods, and Personal Creations.
The Company tests goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of each year at the reporting unit level and on an interim basis if events or substantive changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value (i.e. that a triggering event has occurred). Additionally, the Company evaluates finite-lived intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset groupings may not be recoverable. Impairment charges are included in operating expenses in the consolidated statement of operations under the caption “Impairment of goodwill, intangible assets, and other long-lived assets.”
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the three months ended June 30, 2018, due to continued declines in financial results and reductions in the projected results for the remainder of 2018, the Company determined that a triggering event had occurred that required an interim impairment assessment for all of its reporting units other than the International reporting unit, as that reporting unit’s year-to-date and projected results were relatively in line with expectations. The intangible assets and other long-lived assets associated with the reporting units assessed were also reviewed for impairment.Secretary. In addition, the Company experiencedBoard of Directors previously determined that Mr. Holt, who was a sustained decline in market capitalization during the three months ended December 31, 2018 which, along with updated projections based on its long-term strategic plan finalized in the fourth quarter of 2018, was reflected in the annual impairment assessment of goodwill and indefinite-lived intangible assets. The Company also considered this a triggering event for another assessment of finite-lived intangible and other long-lived assets.
Goodwill
The Company performed quantitative interim and annual impairment assessments during the year ended December 31, 2018. For these assessments, the Company used a combinationmember of the
income, market,Board of Directors and
cost approaches for determiningCompensation Committee prior to his retirement from the
fair valueBoard of
its reporting units. The income approachDirectors at the expiration of his term at the 2018 annual meeting, was
used primarily,an independent director as
management believes that a discounted cash flow method is the most reliable indicatordefined in Rule 5605(a)(2) of the
fair valuesNASDAQ Marketplace Rules for the period in which he served on the Board of Directors. Mr. Walden, our former President and Chief Executive Officer and former member of the
businesses. Under the market approach, the guideline company methodBoard of Directors, was
used, which focuses on comparing the Company’s risk profile and growth prospects to select reasonably similar companies based on business description, revenue size, markets served, and profitability. The cost approach was usednot an independent director as
this approach is a generally accepted valuation methodology when the valuation is either negative or the valuedefined in Rule 5605(a)(2) of the
net assets/liabilities exceedsNASDAQ Marketplace Rules during his tenure on the
expected present valueBoard of Directors.Our Board of Directors currently has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.
Audit Committee.
The Audit Committee consists of Messrs. Armstrong, Berglass and Harch and Ms. Duncan. Our Board of Directors has determined that all members of the economic returns. Under the cost approach, the Company used the net asset value method, which is based on the premise that a prudent investor would pay no more for an asset than its replacement or reproduction cost.
For the interim impairment test, the Company used a combinationAudit Committee are independent directors as defined in Rule 5605(a)(2) of the
incomeNASDAQ Marketplace Rules and
market approachesalso satisfy the additional criteria for
all reporting units tested other thanindependence for Audit Committee members set forth in Rule 10A-3(b)(1) under the
ProFlowers/Gourmet Foods reporting unit, for which the Company used the cost approach. Exchange Act.44
Nominating and Corporate Governance Committee.
The interim test resultedNominating and Corporate Governance Committee consists of three directors, Mr. Armstrong and Mses. Belcourt and Hamilton, each of whom is an independent director as defined in the Company’s determination that the fair valueRule 5605(a)(2) of the Florist reporting unit exceeded its carrying valueNASDAQ Marketplace Rules.
Compensation Committee.
The Compensation Committee consists of three directors, Messrs. Berglass and therefore, its goodwill was not impaired. The reporting unit’s fair value exceeded its carrying value by approximately 6%. The fair valuesHarch and Ms. Hickenlooper, each of whom is an independent director as defined in Rule 5605(a)(2) of the FTD.com, ProFlowers/Gourmet Foods, and Personal Creations reporting units were less than their carrying values and,NASDAQ Marketplace Rules.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche LLP has served as such, goodwill impairment charges of $35.2 million, $14.8 million, and $12.5 million, respectively, were recorded during the second quarter of 2018 related to these reporting units.our independent registered public accounting firm since 2014. The ProFlowers/Gourmet Foods reporting unit’s goodwill was fully impaired at June 30, 2018.
For the annual impairment test, the Company used a combination of the income and market approaches for all reporting units other than the Personal Creations and ProFlowers/Gourmet Foods reporting units. For Personal Creations, only the income approach was used as the near-term financial results for that business were not considered normalized. The fair value of the ProFlowers/Gourmet Foods reporting unit, which was assessed only for purposes of deriving the enterprise value as their goodwill is fully impaired, was again determined using the cost approach. The annual test resulted in the Company’s determination that the fair value of the International reporting unit exceeded its carrying valueaggregate fees billed by approximately 30% and, therefore, its goodwill was not impaired. The fair values of the Florist, Personal Creations, and FTD.com reporting units were less than their carrying values and, as such, goodwill impairment charges of $21.3 million, $13.8 million, and $11.9 million, respectively, were recorded during the fourth quarter of 2018 related to these reporting units. The Personal Creations reporting unit’s goodwill was fully impaired at December 31, 2018.
These goodwill impairment charges are not deductible for tax purposes. At December 31, 2018, the remaining goodwill balancesDeloitte & Touche LLP for the U.S. Consumer, Florist, and International segments are as noted in the table below. Within the U.S. Consumer segment, the remaining goodwill balance at December 31, 2018 relates to the FTD.com reporting unit.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in the net carrying amount of goodwillprofessional services described below for the years ended December 31, 2018 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | U.S. Consumer | | Florist | | International | | Total |
| Goodwill at December 31, 2016 | $ | 280,727 |
| | $ | 109,651 |
| | $ | 73,087 |
| | $ | 463,465 |
|
| Foreign currency translation | — |
| | — |
| | 6,947 |
| | 6,947 |
|
BloomThat acquisition(a) | 3,329 |
| | — |
| | — |
| | 3,329 |
|
| Impairment of Goodwill | (177,700 | ) | | (19,000 | ) | | — |
| | (196,700 | ) |
| Goodwill at December 31, 2017 | 106,356 |
| | 90,651 |
| | 80,034 |
| | 277,041 |
|
| Foreign currency translation | — |
| | — |
| | (4,495 | ) | | (4,495 | ) |
| Purchase accounting adjustment - BloomThat acquisition | (792 | ) | | — |
| | — |
| | (792 | ) |
| Impairment of Goodwill | (88,138 | ) | | (21,300 | ) | | — |
| | (109,438 | ) |
| Goodwill at December 31, 2018 | $ | 17,426 |
| | $ | 69,351 |
| | $ | 75,539 |
| | $ | 162,316 |
|
| |
(a) | On December 15, 2017, the Company acquired all of the assets and liabilities of BloomThat. |
During the year ended December 31, 2017, the Company also performed interim and annual impairment tests resulting in total goodwill impairment charges of $196.7 million as identified in the table above. In 2016, 2015, and 2008, the Company also recorded impairment charges of $84.0 million, $85.0 million, and $116.3 million, respectively. The table above reflects the Company’s goodwill balances net of the previously recorded impairment charges. The total accumulated goodwill impairment was $591.4 million at December 31, 2018.
On December 15, 2017, the Company acquired all of the outstanding shares of capital stock of BloomThat, a small on-demand floral delivery service. The cash purchase price was $2.5 million, excluding acquired cash on hand of $0.7 million. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on management’s best estimates of their respective fair values as of the closing date of the acquisition. The fair value of the assets acquired and liabilities assumed consisted of current assets (excluding cash) of $0.4 million, furniture and equipment of $0.1 million, definite-lived intangible assets of $1.0 million, current liabilities of $1.9 million, and deferred tax liabilities of $0.4 million with the remainder of the purchase price ($2.5 million) allocated to goodwill. In September 2018, the Company ceased operations of BloomThat. BloomThat was included in the Company’s U.S. Consumer segment.
Intangible Assets
In conjunction with the interim impairment test, the Company reviewed the indefinite-lived intangible assets of the reporting units that had triggering events for potential impairment by calculating the fair values of the assets using a discounted cash flow approach and comparing the fair value to their respective carrying amounts. All indefinite-lived intangible assets were reviewed as part of the annual impairment test.
The interim impairment test resulted in the determination that the fair value of the indefinite-lived intangible asset related to the trademark and trade name shared between the FTD.com and Florist reporting units was less than its carrying value and, accordingly, a pre-tax impairment charge of $20.4 million was recorded during the second quarter of 2018. The impairment evaluation of the finite-lived intangible assets indicated that the carrying amount of the ProFlowers trade name was not recoverable when compared to the expected undiscounted future cash flows. As such, a pre-tax impairment charge of $51.9 million, representing the remaining carrying value, was recorded related to the ProFlowers trade name during the second quarter of 2018. In addition, due to a management decision to cease operations of BloomThat, a pre-tax impairment charge of $0.9 million was recorded related to the remaining carrying value of the finite-lived intangible assets associated with that business.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The annual impairment test resulted in the determination that the fair value of the indefinite-lived intangible asset related to the trademark and trade name shared between the FTD.com and Florist reporting units was further impaired and, accordingly, a pre-tax impairment charge of $7.7 million was recorded during the fourth quarter of 2018. This asset has a total remaining value of $46.7 million at December 31, 2018. The fair value of the indefinite-lived intangible asset related to the International reporting unit’s trademark and trade name was also less than its carrying value and accordingly, a pre-tax impairment charge of $3.9 million was recorded during the fourth quarter of 2018, resulting in a remaining value of $31.6 million.
Intangible assets are primarily related to the acquisition of the Company by United Online in 2008 and the acquisition of Provide Commerce by the Company in 2014 and consist of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Gross Value(a) | | Accumulated Amortization | | Net | | Gross Value(a) | | Accumulated Amortization | | Net |
| Complete technology | $ | 60,325 |
| | $ | (60,325 | ) | | $ | — |
| | $ | 61,274 |
| | $ | (60,653 | ) | | $ | 621 |
|
| Customer contracts and relationships | 192,706 |
| | (192,706 | ) | | — |
| | 193,775 |
| | (193,667 | ) | | 108 |
|
| Trademarks and trade names |
|
| |
|
| | | | | | | | |
| Finite-lived | 41,413 |
| | (28,356 | ) | | 13,057 |
| | 93,593 |
| | (24,875 | ) | | 68,718 |
|
Indefinite-lived(b) | 78,346 |
| | — |
| | 78,346 |
| | 112,518 |
| | — |
| | 112,518 |
|
| Total | $ | 372,790 |
| | $ | (281,387 | ) | | $ | 91,403 |
| | $ | 461,160 |
| | $ | (279,195 | ) | | $ | 181,965 |
|
| |
(a) | Gross value has been reduced by the impairments recorded as follows: |
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Complete technology | | $ | 561 |
| | $ | 16,335 |
|
| Customer contracts and relationships | | 90 |
| | — |
|
| Trademarks and trade names: | | | | |
| Finite-lived | | 52,108 |
| | 27,000 |
|
| Indefinite-lived | | 32,025 |
| | 38,300 |
|
| Total | | $ | 84,784 |
| | $ | 81,635 |
|
| |
(b) | As indefinite-lived assets are not amortized, the indefinite-lived trademarks and trade names have no associated amortization expense or accumulated amortization. |
As of December 31, 2018, estimated future intangible assets amortization expense for each of the next five years and thereafter, was as follows (in thousands): |
| | | |
| For the Year Ended | Future Amortization Expense |
| 2019 | $ | 1,253 |
|
| 2020 | 1,245 |
|
| 2021 | 1,241 |
|
| 2022 | 1,187 |
|
| 2023 | 1,162 |
|
| Thereafter | 6,969 |
|
| Total | $ | 13,057 |
|
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Long-Lived Assets
As a result of the triggering events noted above in the second and fourth quarters of 2018, the Company performed impairment evaluations of its other long-lived assets by comparing the expected undiscounted future cash flows to the carrying amounts of the assets. For the interim test, the expected undiscounted future cash flows exceeded the carrying amounts of the assets for all reporting units tested, resulting in no impairment. The results of the annual test indicated that the carrying amounts of the other long-lived assets related to the Personal Creations reporting unit were not recoverable. Based on the Company’s assessment of the fair value of this asset group using a discounted cash flow analysis, the Company determined that the carrying value of this asset group exceeded its fair value. As a result, pre-tax impairment charges of $7.7 million, representing the remaining carrying value, were recorded during the fourth quarter of 2018.
During the year ended December 31, 2017, the other long-lived assets related to the ProFlowers/Gourmet Foods reporting unit were fully impaired as the projected undiscounted cash flows of that reporting unit were less than the carrying amount of such assets. Additional impairment charges of $4.8 million were recorded during the year ended December 31, 2018 related to capital additions for that reporting unit as the undiscounted cash flows continue to be less than the carrying amount of the assets of that asset group.
Property and equipment consisted of the following (in thousands):
|
| | | | | | | |
| | December 31,(a) |
| | 2018 | | 2017 |
| Land and improvements | $ | 1,571 |
| | $ | 1,583 |
|
| Buildings and improvements | 17,145 |
| | 16,375 |
|
| Leasehold improvements | 9,348 |
| | 10,883 |
|
| Equipment | 8,706 |
| | 13,122 |
|
| Computer equipment | 21,332 |
| | 25,208 |
|
| Computer software | 73,076 |
| | 58,991 |
|
| Furniture and fixtures | 4,494 |
| | 3,215 |
|
| | 135,672 |
| | 129,377 |
|
| Accumulated depreciation | (94,338 | ) | | (95,497 | ) |
| Total | $ | 41,334 |
| | $ | 33,880 |
|
(a) The impairment charges of $12.5 million and $22.0 million recorded during thefiscal years ended December 31, 2018 and 2017, respectively, are
reflected as reductionsset forth in the
gross balances.table below. | | Year Ended December 31, | |
| | 2018 | | 2017 | |
Audit Fees(1) | | $ | 2,004,250 | | $ | 2,215,000 | |
Audit Related Fees(2) | | 9,000 | | 8,000 | |
Tax Fees(3) | | 32,435 | | — | |
All Other Fees(4) | | 7,600 | | 7,600 | |
Total | | $ | 2,053,285 | | $ | 2,230,600 | |
Depreciation expense, including the amortization of leasehold improvements,(1) For 2018 and 2017, represents fees incurred for the years ended December 31,audit of our consolidated financial statements, as well as fees incurred for audit services that are normally provided by Deloitte & Touche LLP in connection with other statutory or regulatory filings or engagements.
(2) For 2018 and 2017, represents fees incurred for assurance and 2016related services that are normally performed by Deloitte & Touche LLP, are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.”
(3) Represents fees primarily incurred in connection with tax compliance and consulting services.
(4) For 2018 and 2017, fees for other professional services were related to accessing Deloitte & Touche LLP’s online research databases.
DETERMINATION OF INDEPENDENCE
The Audit Committee of the Board of Directors has determined that the provision by Deloitte & Touche LLP of the services covered under the heading “All Other Fees” above was $11.3 million, $20.0 million, and $24.0 million, respectively.
6. FINANCING ARRANGEMENTS
Credit Agreement
In 2014, FTD Companies, Inc. entered into a credit agreement (the “Credit Agreement”)compatible with Interflora, certain wholly owned domestic subsidiaries of FTD Companies, Inc. party thereto as guarantors (collectively, the “Borrowers”), the financial institutions party thereto from time to time, Bank of America Merrill Lynch and Wells Fargo Securities, LLC, as joint lead arrangers and book managers, and Bank of America, N.A., as administrative agentmaintaining Deloitte & Touche LLP’s independence for the lenders. The Credit Agreement provided for a term loan in an aggregate principal amount of $200 million, the proceeds of which were used to repay a portion of outstanding revolving loans, and also provided for a $350 million revolving credit facility. On December 31, 2014, the Company borrowed $120 million under the revolving credit facility to fund the cash portion of the Provide Commerce purchase price.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The obligations under the Credit Agreement are guaranteed by certain of FTD Companies, Inc.’s wholly owned domestic subsidiaries (together with FTD Companies, Inc., the “U.S. Loan Parties”). In addition, the obligations under the Credit Agreement are secured by a lien on substantially all of the assets of the U.S. Loan Parties, including a pledge of all of the outstanding capital stock of certain direct subsidiaries of the U.S. Loan Parties (except with respect to foreign subsidiaries and certain domestic subsidiaries whose assets consist primarily of foreign subsidiary equity interests, in which case such pledge is limited to 66% of the outstanding capital stock).
The Credit Agreement contains customary representations and warranties, events of default, affirmative covenants, and negative covenants, that, among other things, require the Company to maintain compliance with a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, and impose restrictions and limitations on, among other things, investments, dividends, share repurchases, asset sales, and the Company’s ability to incur additional debt and additional liens.
On March 30, 2018, the Company entered into a Forbearance Agreement and Second Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Second Amendment, the “Second Amendment”) with its lenders, which included an agreement by the lenders to forbear from exercising remedies available to them until May 31, 2018 with respect to defaults caused by (1) the inclusion of a going concern uncertainty explanatory paragraph in the audit opinion of the Company’s financial statements for thefiscal year ended December 31,
2017 and (2) breach2018.POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON AUDIT SERVICES
Under its charter, the Audit Committee must pre-approve all engagements of our independent registered public accounting firm, unless an exception to such pre-approval exists under the Exchange Act or the rules of the consolidated net leverage ratio covenant forSEC. The Audit Committee maintains a policy requiring the quarter ended March 31, 2018. The Second Amendment also restricted the Company’s combined usagepre-approval of the revolving credit facility portion of the Credit Agreement, which usage was further restricted by the Company’s subsequent amendments to the Credit Agreement, as discussed below. During the forbearance period, the interest rate margin applicable to Eurocurrency borrowings and letter of credit fees was increased to 4.25% per annum and the interest rate margin for base rate borrowings was increased to 3.25%. In addition, the Company paid a forbearance fee of 0.125% and commitment fees of 0.50% per annum on the unused portion of the revolving credit facility during the forbearance period.
On May 31, 2018, the Company entered into the Third Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Third Amendment, the “Third Amendment”) with its lenders, which included an agreement by the lenders to waive existing defaults caused by (1) the inclusion of a going concern uncertainty explanatory paragraph in the audit opinion of the Company’s financial statements for the year ended December 31, 2017 and (2) the breach of the consolidated net leverage ratio covenant for the three months ended March 31, 2018. The Third Amendment also restricted the Company’s combined usage of the revolving credit facility portion of the Credit Agreement, which usage was further restricted by the Fourth Amendment, the Fifth Amendment, and the Sixth Amendment, as discussed below. In addition, under the Third Amendment, the consolidated net leverage ratio and fixed charge coverage ratio covenants were revised for each quarterly period through the September 19, 2019 maturity date, as were the interest rates. The Company paid an amendment fee of 0.625% times the revolver commitments and outstanding term loan ($1.9 million) in addition to a $0.5 million work fee related to the structuring and arranging of the amendment.
On September 28, 2018, the Company entered into the Fourth Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Fourth Amendment, the “Fourth Amendment”) with its lenders. The Fourth Amendment further restricted the Company’s combined usage of the revolving credit facility portion of the Credit Agreement, which usage was further restricted by the Fifth Amendment and the Sixth Amendment, as discussed below. The Fourth Amendment also required the Company to pay a monthly fee equal to 2.50% per annum times the actual daily amount of the Aggregate Revolving B Loans (as defined in the Credit Agreement) and subjected the Company to certain additional restrictions on capital expenditures. Together, the Fourth Amendment and the Fifth Amendment, as discussed below, restrict the borrowers from borrowing any Eurocurrency loans without the consent of the lenders for the remaining term of the credit facility. The Company paid fees of $0.5 million related the Fourth Amendment.
On October 31, 2018, the Company entered into the Fifth Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Fifth Amendment, the “Fifth Amendment”) with its lenders. Among other modifications, the Fifth Amendment further restricted the Company’s combined usage of the revolving credit facility portion of the Credit Agreement, which usage was further restricted by the Sixth Amendment as discussed below. In addition, the Fifth Amendment subjected the Company to certain additional restrictions on capital expenditures and certain additional events of default.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 5, 2018, the Company entered into the Sixth Amendment to Credit Agreement (the Credit Agreement, as previously amended and as further amended by the Sixth Amendment, the “Sixth Amendment”) with its lenders. The Sixth Amendment further restricted the Company’s combined usage of the revolving credit facility portion of the Credit Agreement to amounts ranging from $90 million to $170 million based on the Company’s expected borrowing needs at various points in its business cycle, with all borrowings in excess of $150 million from and after July 6, 2019 subject to the Company’s 13-week cash forecast supporting any borrowing above such level. The Sixth Amendment also revised the consolidated net leverage ratio and fixed charge coverage ratio covenants set forth in the Fifth Amendment for each period through the September 19, 2019 maturity date of the Sixth Amendment. In connection with the Sixth Amendment, the Company incurred an amendment fee in an amount equal to 5.50% of the outstanding term loan as of the execution date of the Sixth Amendment, payable in two installments, (a) 0.50% which was paid on November 6, 2018 and (b) 5.0% upon the earliest to occur of, (x) the acceleration of the loans, (y) the maturity date and (z) the date upon which all obligations under the credit facility are satisfied, provided that if (z) occurs prior to the events in (x) or (y), the deferred portion of the fee will be prorated based on the number of days remaining until the maturity date, in addition to other fees of $0.5 million. The deferred portion of this fee was $6.2 million at December 31, 2018 and was included in interest payable on the consolidated balance sheet.
At December 31, 2018, the interest rates applicable to borrowings under the Sixth Amendment were based on a base rate plus a margin ranging from 1.50% per annum to 6.50% per annum, calculated according to the Company’s net leverage ratio. In addition, the Company pays a commitment fee of 0.50% per annum on the unused portion of the revolving credit facility and a letters of credit fee ranging between 2.50% per annum to 7.50% per annum. The Company is also required to pay a monthly fee equal to 2.50% per annum times the actual daily amount of the Aggregate Revolving B Loans (as defined in the Credit Agreement).
The stated interest rates (based on Prime) at December 31, 2018, under the term loan and the revolving credit facility were both 10.00%. The effective interest rates at December 31, 2018, under the term loan and the revolving credit facility were 16.22% and 16.54%, respectively. The effective interest rates include interest calculated at the stated rates and the amortization of the deferred financing fees.
At December 31, 2018, the remaining borrowing capacity under the Sixth Amendment, which was reduced by $1.5 million in outstanding letters of credit, was $69.5 million.
The changes in the Company’s debt balances for the years ended December 31, 2018 and 2017 were as follows for the Sixth Amendment (in thousands): |
| | | | | | | | | | | | | | | |
| | Balance at December 31, 2016 | | Draw Down of Debt | | Repayments of Debt | | Balance at December 31, 2017 |
| Revolving Credit Facility | $ | 120,000 |
| | $ | 90,000 |
| | $ | (158,000 | ) | | $ | 52,000 |
|
| Term Loan | 160,000 |
| | — |
| | (20,000 | ) | | 140,000 |
|
| Total Principal Outstanding | $ | 280,000 |
| | $ | 90,000 |
| | $ | (178,000 | ) | | $ | 192,000 |
|
| Unamortized Debt Financing Fees | (3,694 | ) | | | | | | (2,334 | ) |
| Total Debt, Net of Unamortized Debt Financing Fees | $ | 276,306 |
| | | | | | $ | 189,666 |
|
|
| | | | | | | | | | | | | | | |
| | Balance at December 31, 2017 | | Draw Down of Debt | | Repayments of Debt | | Balance at December 31, 2018 |
| Revolving Credit Facility | $ | 52,000 |
| | $ | 283,000 |
| | $ | (236,000 | ) | | $ | 99,000 |
|
| Term Loan | 140,000 |
| | — |
| | (21,346 | ) | | 118,654 |
|
| Total Principal Outstanding | $ | 192,000 |
| | $ | 283,000 |
| | $ | (257,346 | ) | | $ | 217,654 |
|
| Unamortized Debt Financing Fees | (2,334 | ) | | | | | | (9,578 | ) |
| Total Debt, Net of Unamortized Debt Financing Fees | $ | 189,666 |
| | | | | | $ | 208,076 |
|
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The term loan is subject to amortization payments of $5 million per quarter and customary mandatory prepayments under certain conditions. During the year ended December 31, 2018, the Company made payments of $21.3 million under the term loan, which includes a $1.3 million payment made from the proceeds received from the sale of a business in accordance with the Sixth Amendment.
On March 13, 2019, the Company entered into the Amended Credit Agreement with our lenders. The Amended Credit Agreement includes, among other terms, a minimum Consolidated Adjusted EBITDA covenant; further limitations on capital expenditures; a covenant requiring that on or before June 1, 2019, the Company shall consummate one or more transactions (i) that would permit the Company and its subsidiaries to continue as a going concern, which must provide for the repayment in full of the obligations under the Amended Credit Agreement no later than June 1, 2019, or (ii) from which all or substantially all of the aggregate net cash proceeds are used to repay obligations and permanently reduce the commitments under the Amended Credit Agreement; and updated limits on our combined usage of the revolving credit facility portion of the Amended Credit Agreement throughout its remaining term. In addition, the consolidated net leverage ratio and fixed charge coverage ratio covenants were deleted for the period ending March 31, 2019 and subsequent periods. The Amended Credit Agreement also includes the provision of a pledge of 100% of the equity interests of certain of the Company’s subsidiaries and the Company’s use of best efforts to cause the UK Borrower to guarantee all obligations under the Amended Credit Agreement.
Pursuant to the Amended Credit Agreement, the Company’s combined usage of the revolving credit facility portion of the Amended Credit Agreement is restricted to amounts ranging from $60.0 million to $167.5 million based on the Company’s expected borrowing needs at various points in its business cycle, with all borrowings in excess of $150 million from and after July 6, 2019 subject to the Company’s 13-week cash forecast supporting any borrowing above such level. The minimum Consolidated Adjusted EBITDA covenant requires that the Company maintain Consolidated Adjusted EBITDA based on specific minimums for each two to three-month period from February 1, 2019 through the September maturity date. These minimums range from negative $4.5 million to $21.8 million and were determined based on the Company’s forecasted Adjusted EBITDA for each such period. In addition, the Company will pay a fee in an amount equal to the actual daily funded amount of the Revolving A and B Commitments (as defined in the Amended Credit Agreement) in excess of $100 million times 2.5% per annum, which shall be paid quarterly in arrears and which replaces the previous 2.5% fee related to the Aggregate Revolving B Loans. In connection with the Amended Credit Agreement, the Company incurred an amendment fee of $2.9 million, which was 1.0% of the total revolving commitments and term loan as of the execution date of the Amended Credit Agreement. Such fee is payable upon the earliest to occur of (a) the September 2019 maturity date, (b) the acceleration of the loans, (c) the date upon which all obligations under the Amended Credit Agreement have been satisfied in full, or (d) at the election of the lenders, after the occurrence of a default (as defined in the Amended Credit Agreement).
The Company will need to refinance or repay the outstanding indebtedness no later than its September 2019 maturity. Based on the Company’s 2019 year-to-date results of operations and outlook for the remainder of the term of the Amended Credit Agreement, it currently anticipates that it will be in compliance with the Consolidated Adjusted EBITDA requirement and will have sufficient liquidity to fund its operations into July 2019 but may not have sufficient liquidity to fund its operations beyond then. In addition, there can be no assurances that the Company will be able to complete one or more transactions that will enable it to repay all or a portion of the outstanding indebtedness by June 1, 2019 or at all.
If the Company is unable to meet the revised covenants or other requirements of the Amended Credit Agreement and it is unable to obtain waivers or further amendments from its lenders, the lenders could exercise remedies under the Amended Credit Agreement and repayment of the indebtedness outstanding could be accelerated. The Company may not have sufficient capital to repay the obligations due under the Amended Credit Agreement upon maturity, or earlier if called for repayment by the lenders following a failure to meet the revised covenants under the Amended Credit Agreement. These conditions raise substantial doubt about the Company’s ability to continue as a going concern as discussed in Note 1—“Description of Business, Basis of Presentation, Accounting Policies, and Recent Accounting Pronouncements.”
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DERIVATIVE INSTRUMENTS
In 2012, the Company purchased, for $1.9 million, forward starting interest rate cap instruments based on 3-month LIBOR, effective January 2015 through June 2018. The forward starting interest rate cap instruments had aggregated notional values totaling $130 million. The interest rate cap instruments were designated as cash flow hedges against expected future cash flows attributable to future 3-month LIBOR interest payments on a portion of the outstanding borrowings under the Company’s Credit Agreement. The gains or losses on the instruments were reported in accumulated other comprehensive loss to the extent that they were effective and were reclassified into earnings when the cash flows attributable to 3-month LIBOR interest payments were recognized in earnings.
The interest rate caps matured on June 30, 2018. The estimated fair values and notional values of outstanding derivative instruments as of December 31, 2017 were as follows (in thousands): |
| | | | | | | | | |
| | | | December 31, 2017 |
| | Balance Sheet Location | | Estimated Fair Value of Derivative Instruments | | Notional Value of Derivative Instruments |
| Derivative Assets: | | | | | |
| Interest rate caps | Other assets | | $ | — |
| | $ | 130,000 |
|
The Company recognized the following losses from derivatives, before tax, in accumulated other comprehensive loss (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Derivatives Designated as Cash Flow Hedging Instruments: | | | | | |
| Interest rate caps | $ | — |
| | $ | (1 | ) | | $ | (34 | ) |
As of December 31, 2017 and 2016, the effective portion, before tax effect, of such interest rate caps, which were designated as cash flow hedging instruments, was $0.3 million and $0.8 million, respectively. During the years ended December 31, 2018, 2017, and 2016, $0.3 million, $0.6 million, and $0.6 million, respectively, was reclassified from accumulated other comprehensive loss to interest expense in the consolidated statement of operations.
During the year ended December 31, 2016, the Company entered into a forward foreign currency exchange contract which was not designated as a hedging instrument. Accordingly, gains and losses related to changes in the fair value of this contract are reflected in other income, net in the consolidated statement of operations for the year ended December 31, 2016. During the years ended December 31, 2018 and 2017, the Company had no forward foreign currency exchange contracts outstanding.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FAIR VALUE MEASUREMENTS
The following table presents estimated fair values of financial assets and liabilities and derivative instruments that were required to be measured at fair value on a recurring basis (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 |
| Assets: | | | | | | | | | | | |
| Cash equivalents | $ | 1,840 |
| | $ | 1,840 |
| | $ | — |
| | $ | 2,705 |
| | $ | 2,705 |
| | $ | — |
|
| Total | $ | 1,840 |
| | $ | 1,840 |
| | $ | — |
| | $ | 2,705 |
| | $ | 2,705 |
| | $ | — |
|
| Liabilities: | | | | | | | | | | | |
| Non-qualified deferred compensation plan | $ | 842 |
| | $ | — |
| | $ | 842 |
| | $ | 1,228 |
| | $ | — |
| | $ | 1,228 |
|
| Total | $ | 842 |
| | $ | — |
| | $ | 842 |
| | $ | 1,228 |
| | $ | — |
| | $ | 1,228 |
|
Provide Commerce, Inc. has an executive deferred compensation plan for key management level employees under which such employees could elect to defer receipt of current compensation. This plan is intended to be an unfunded, non-qualified deferred compensation plan that complies with the provisions of section 409A of the Internal Revenue Code. At the time of the Provide Commerce acquisition, contributions to the plan were suspended except those relating to any compensation earned but not yet paid as of the date of the acquisition. The plan assets, which consist primarily of life insurance contracts recorded at their cash surrender value, totaled $1.6 million and $11.7 million at December 31, 2018 and 2017, respectively, and are included in other assets in the consolidated balance sheets. During the year ended December 31, 2018, the Company surrendered certain of the life insurance contracts and received proceeds totaling $10.0 million.
During 2018, as a result of the triggering events in the second quarter and fourth quarter, the Company performed impairment tests of its finite-lived intangible and other long-lived assets. Based on these tests, the Company determined that the carrying value of certain finite-lived intangible assets and fixed assets exceeded their fair values as determined using the income approach based on gross cash flows. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs, including projected cash flows over the estimated projection period and the discount rate. The resulting $97.3 million non-cash, pre-tax impairment charges (excluding goodwill impairment charges of $109.4 million) were recorded related to certain intangible assets and other long-lived assets of the U.S. Consumer, Florist, and International segments. See Note 5—“Goodwill, Intangible Assets, and Other Long-Lived Assets” for additional information.
The Company estimated the fair value of its outstanding debt using a discounted cash flow approach that incorporates a market interest yield curve with adjustments for duration and risk profile. In determining the market interest yield curve, the Company considered, among other factors, its estimated credit spread. At December 31, 2018, the Company estimated its credit spread as 18.4% and 19.4% for the term loan and revolving credit facility, respectively, resulting in yield-to-maturity estimates for the term loan and revolving credit facility of 20.9% and 21.9%, respectively. At December 31, 2017, the Company estimated its credit spread as 1.0% and 1.6% for the term loan and revolving credit facility, respectively, resulting in yield-to-maturity estimates for the term loan and revolving credit facility of 2.9% and 3.4%, respectively. The table below summarizes the carrying amounts and estimated fair values for long-term debt (in thousands): |
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| | | Level 2 | | | Level 2 |
| Debt outstanding | $ | 217,654 |
| | $ | 201,967 |
| | $ | 192,000 |
| | $ | 192,000 |
|
Fair value approximates the carrying amount of financing receivables because such receivables are discounted at a rate comparable to market. Fair values of cash and cash equivalents, short-term accounts receivable, accounts payable, and accrued liabilities approximate their carrying amounts because of their short-term nature.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. STOCKHOLDERS’ EQUITY
Capital Stock
The Company’s authorized shares of capital stock of 65.0 million are divided into 60.0 million shares of common stock, par value $0.0001 per share, and 5.0 million shares of preferred stock, par value $0.0001 per share. In connection with the Provide Commerce acquisition, the Company issued 10.2 million shares of FTD common stock to Qurate. At December 31, 2018, Qurate held 36.0% of the outstanding shares of FTD common stock.
At December 31, 2018, none of the 5.0 million shares of preferred stock were outstanding, and the Company has no present plans to issue any shares of preferred stock. The Company’s board of directors has the authority, without action by the Company’s stockholders, to designate and issue the preferred stock in one or more series and to designate the rights, preferences, limitations and privileges of each series of preferred stock, which may be greater than the rights of the Company’s common stock.
Dividends
The Company has not paid any cash dividends on its common stock during the periods presented.
Common Stock Repurchases
In March 2016, the Company’s board of directors authorized a common stock repurchase program that allowed FTD Companies, Inc. to repurchase up to $60 million of its common stock from time to time over a two-year period in both open market and privately negotiated transactions. During the year ended December 31, 2016, the Company repurchased 0.6 million shares at an average cost per share of $25.37. The Company did not repurchase any shares during the years ended December 31, 2018 and 2017. The repurchase program expired on March 8, 2018. Repurchased shares are generally held in treasury pending use for general corporate purposes, including issuances under various employee and director stock plans.
Upon vesting of RSUs or exercise of stock options, the Company does not collect withholding taxes in cash from employees. Instead, the Company automatically withholds, from the RSUs that vest or stock options exercised, the portion of those shares with a fair market value equal to the amount of the minimum statutory withholding taxes due. The withheld shares are accounted for as repurchases of common stock. The Company then pays the minimum statutory withholding taxes in cash. During the year ended December 31, 2018, 0.6 million RSUs vested for which 0.1 million shares were withheld to cover the minimum statutory withholding taxes of $0.5 million. During the year ended December 31, 2017, 0.3 million RSUs vested for which 0.1 million shares were withheld to cover the minimum statutory withholding taxes of $2.0 million.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCENTIVE COMPENSATION PLANS
In June 2018, stockholders approved the First Amendment to the FTD Companies, Inc. Third Amended and Restated 2013 Incentive Compensation Plan (as so amended and restated, the “Amended Plan”), which amended and restated in its entirety the FTD Companies, Inc. Amended and Restated 2013 Incentive Compensation Plan, as previously amended June 9, 2017. The Amended Plan provides for the granting of awards to employees and non-employee directors, including stock options, stock appreciation rights, RSUs, PSUs, and other stock based awards. At December 31, 2018, the Company had 5.1 million shares available for issuance under the Amended Plan, which includes additional shares approved by shareholders in June 2018.
Stock-Based Compensation
The following table summarizes the non-cash stock-based compensation incurred under the Amended Plan that has been included in the consolidated statements of operations (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cost of revenues | $ | 148 |
| | $ | 269 |
| | $ | 135 |
|
| Sales and marketing | 3,108 |
| | 4,169 |
| | 4,128 |
|
| General and administrative | 5,971 |
| | 6,660 |
| | 9,349 |
|
| Restructuring and other exit costs | 5,457 |
| | — |
| | 3,373 |
|
| Total stock-based compensation | $ | 14,684 |
| | $ | 11,098 |
| | $ | 16,985 |
|
| Tax benefit recognized | $ | 3,423 |
| | $ | 4,171 |
| | $ | 6,240 |
|
Restricted Stock Units
RSUs have been granted to certain employees and non-employee directors of the Company and represent the right to receive unrestricted shares of common stock based on service. Compensation cost is recognized over the service period. The fair value of each grant is equal to the share price at the date of grant. RSUs generally vest over a one- to four-year period under a variety of vesting schedules and are canceled upon termination of employment or board membership.
The following table summarizes activity for RSUs awarded to the Company’s eligible employees and non-employee directors during the years ended December 31, 2018, 2017 and 2016: |
| | | | | | |
| | FTD Restricted Stock Units | | Weighted-Average Grant Date Fair Value |
| | (in thousands) | | |
| Non-vested at December 31, 2015 | 649 |
| | $ | 30.91 |
|
| Granted | 413 |
| | 24.36 |
|
| Vested | (289 | ) | | 28.96 |
|
| Cancelled | (145 | ) | | 29.16 |
|
| Non-vested at December 31, 2016 | 628 |
| | 27.90 |
|
| Granted | 565 |
| | 21.40 |
|
| Vested | (288 | ) | | 27.95 |
|
| Cancelled | (167 | ) | | 26.52 |
|
| Non-vested at December 31, 2017 | 738 |
| | 23.19 |
|
| Granted | 3,463 |
| | 3.60 |
|
| Vested | (568 | ) | | 16.60 |
|
| Cancelled | (313 | ) | | 13.30 |
|
| Non-vested at December 31, 2018 | 3,320 |
| | $ | 4.82 |
|
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of RSUs that vested during the years ended December 31, 2018, 2017, and 2016 was $9.4 million, $8.1 million, and $8.4 million, respectively. The intrinsic value of non-vested RSUs awarded to the Company’s eligible employees and non-employee directors was $4.9 million at December 31, 2018. At December 31, 2018, 2.4 million non-vested RSUs were expected to vest, with an intrinsic value totaling $3.6 million. At December 31, 2018, total unrecognized compensation cost related to non-vested RSUs, net of expected forfeitures, was $12.2 million, which was expected to be recognized over a weighted-average period of 3.1 years.
Performance Stock Units
PSUs have been granted to certain employees and non-employee directors of the Company. Vesting of the PSUs is based on the achievement of certain performance criteria, as specified in the plan, at the end of a three-year performance period ending on December 31, 2020. The actual number of shares that will ultimately vest is dependent upon the level of achievement of the performance conditions. If the minimum targets are not achieved, none of the shares will vest and any compensation expense previously recognized will be reversed. The Company recognizes stock-based compensation expense related to performance awards based upon the Company’s estimate of the likelihood of achievement of the performance targets at each reporting date. At December 31, 2018, the Company does not expect the PSUs to vest. As such, no expense was recorded during the year ended December 31, 2018 related to these awards.
The following table summarizes activity for PSUs awarded to the Company’s eligible employees and non-employee directors during the year ended December 31, 2018: |
| | | | | | |
| | FTD Performance Stock Units | | Weighted-Average Grant Date Fair Value |
| | (in thousands) | | |
| Non-vested at December 31, 2017 | — |
| | $ | — |
|
| Granted | 649 |
| | 6.63 |
|
| Vested | — |
| | — |
|
| Cancelled | (347 | ) | | 6.63 |
|
| Non-vested at December 31, 2018 | 302 |
| | 6.63 |
|
Stock Option Awards
Stock options are granted with an exercise price equal to the market value of the underlying stock on the grant date, and generally vest over a three- or four-year period under a variety of vesting schedules and are canceled upon termination of employment. Stock option grants expire after 5-10 years unless canceled earlier due to termination of employment. Upon the exercise of a stock option award, shares of common stock are issued from authorized but unissued shares. Stock-based compensation is measured at fair value and expensed on a straight-line basis over the requisite service period.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes stock option activity for the years ended December 31, 2018, 2017, and 2016 and stock options outstanding and exercisable at December 31, 2018:
|
| | | | | | | | |
| | FTD Options Outstanding | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life |
| | (in thousands) | | | | (in years) |
| Outstanding options at December 31, 2015 | 2,138 |
| | $ | 29.98 |
| | 5.4 |
| Options granted | 1,113 |
| | 23.08 |
| | |
| Options exercised | — |
| | — |
| | |
| Options forfeited | (516 | ) | | 28.53 |
| | |
| Options expired | (77 | ) | | 30.06 |
| | |
| Outstanding options at December 31, 2016 | 2,658 |
| | 27.37 |
| | 4.2 |
| Options granted | 1,520 |
| | 18.25 |
| | |
| Options exercised | — |
| | — |
| | |
| Options forfeited | (422 | ) | | 26.04 |
| | |
| Options expired | (382 | ) | | 28.07 |
| | |
| Outstanding options at December 31, 2017 | 3,374 |
| | 23.35 |
| | 4.0 |
| Options granted | 773 |
| | 6.70 |
| | |
| Options exercised | — |
| | — |
| | |
| Options forfeited | (667 | ) | | 14.60 |
| | |
| Options expired | (1,764 | ) | | 22.52 |
| | |
| Outstanding options at December 31, 2018 | 1,716 |
| | 20.07 |
| | 4.4 |
| Exercisable at December 31, 2018 | 835 |
| | 26.55 |
| | 2.4 |
| Expected to vest December 31, 2018 | 763 |
| | $ | 14.86 |
| | 6.0 |
The weighted-average grant date fair value of these stock options was $2.73, $5.85, and $5.28 for the years ended December 31, 2018, 2017, and 2016, respectively. At December 31, 2018 total unrecognized compensation cost related to non-vested stock options awarded to the Company’s eligible employees, net of expected forfeitures, was $1.5 million, which was expected to be recognized over a weighted-average period of 1.5 years. There was no intrinsic value of the outstanding options, the exercisable options, or the options expected to vest at December 31, 2018. No options were exercised during the years ended December 31, 2018, 2017, and 2016.
For stock options granted by the Company for the years ended December 31, 2018, 2017, and 2016, the fair value of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model. The table below summarizes the weighted average assumptions used by the Company to estimate the fair value of stock options at the grant date:
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | 2.5 | % | | 1.9 | % | | 1.2 | % |
| Expected term (in years) | 6.21 |
| | 4.75 |
| | 3.12 |
|
| Dividend yield | — | % | | — | % | | — | % |
| Expected volatility | 37.8 | % | | 33.9 | % | | 30.6 | % |
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The risk-free interest rate assumed by the Company in valuing stock options was based on the U.S. Treasury yield curve in effect at the time of the grant. The Company used the simplified method for estimating the expected term because the Company did not have adequate historical data to estimate expected term. The Company estimated the dividend yield as 0% as the Company does not currently intend to pay dividends. The Company calculated expected stock price volatility based on a combination of the historical volatility of both the Company’s and United Online’s common stock as the Company represented a significant portion of consolidated United Online prior to the Separation and the Company does not yet have sufficient history on which to base an assumption solely on its historical volatility.
Employee Stock Purchase Plan
Eligible employees of the Company are able to participate in the FTD Companies, Inc. 2015 Employee Stock Purchase Plan (“ESPP Plan”), through which employees may authorize payroll deductions of up to the lower of 15% of their compensation or $25,000 to purchase up to 1,001 shares of FTD common stock on each purchase date at a purchase price per share equal to 85% of the lower of (i) the closing market price per share of FTD common stock on the employee’s entry date or (ii) the closing market price per share of FTD common stock on the purchase date. Each offering period has a six-month duration and purchase interval with a purchase date of the last business day of June and December each year. At December 31, 2018, the Company had 0.1 million shares available for purchase under the ESPP Plan.
The fair value of the ESPP Plan shares was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
| | | | | |
| | For the Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | 1.9% | | 0.9% | | 0.4% |
| Expected term (in years) | 0.5 | | 0.5 | | 0.5 |
| Dividend yield | —% | | —% | | —% |
| Expected Volatility | 75.0% | | 41.8% | | 32.4% |
The risk-free interest rate assumed by the Company in valuing the ESPP Plan shares was based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term represents the amount of time remaining in the respective offering period. The Company estimated the dividend yield as 0% as the Company does not currently intend to pay dividends. Expected volatility was determined based on the Company’s historical volatility.
For the years ended December 31, 2018, 2017, and 2016, the Company recognized $0.2 million, $0.5 million, and $0.6 million, respectively, of stock-based compensation related to the ESPP Plan.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES
The Company files tax returns as a separate company in Federal, state and local jurisdictions, the U.K. and certain other foreign jurisdictions.
Loss before income taxes was comprised of the following (in thousands): |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Domestic | $ | (250,735 | ) | | $ | (289,888 | ) | | $ | (101,943 | ) |
| Foreign | 7,192 |
| | 11,673 |
| | 13,686 |
|
| Loss before income taxes | $ | (243,543 | ) | | $ | (278,215 | ) | | $ | (88,257 | ) |
The benefit from income taxes was comprised of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| Federal | $ | 614 |
| | $ | 8,657 |
| | $ | 16,297 |
|
| State | 434 |
| | 1,101 |
| | 2,116 |
|
| Foreign | 2,271 |
| | 2,361 |
| | 2,709 |
|
| | 3,319 |
| | 12,119 |
| | 21,122 |
|
| Deferred: | | | | | |
| Federal | (16,770 | ) | | (50,837 | ) | | (20,895 | ) |
| State | (5,142 | ) | | (5,313 | ) | | (4,809 | ) |
| Foreign | (221 | ) | | (143 | ) | | (484 | ) |
| | (22,133 | ) | | (56,293 | ) | | (26,188 | ) |
| Benefit for income taxes | $ | (18,814 | ) | | $ | (44,174 | ) | | $ | (5,066 | ) |
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The benefit for income taxes reconciled to the amount computed by applying the statutory federal rate to loss before taxes as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Federal taxes at statutory rate(a) | $ | (51,145 | ) | | $ | (97,375 | ) | | $ | (30,890 | ) |
| State income taxes, net | (4,708 | ) | | (3,205 | ) | | (749 | ) |
| Nondeductible goodwill | 22,982 |
| | 68,845 |
| | 29,336 |
|
| Nondeductible officer compensation | 3,291 |
| | 377 |
| | — |
|
| Effects of foreign income | 425 |
| | (1,419 | ) | | (3,283 | ) |
| Foreign distribution | 697 |
| | 1,658 |
| | 4,723 |
|
| Foreign tax credit | — |
| | (1,317 | ) | | (2,664 | ) |
| Deferred tax adjustment - statutory rate changes | 2 |
| | (13,654 | ) | | (726 | ) |
| Change in valuation allowance | 5,149 |
| | — |
| | — |
|
| Stock-based compensation | 4,199 |
| | 1,589 |
| | 7 |
|
| Other items, net | 294 |
| | 327 |
| | (820 | ) |
| Benefit from income taxes | $ | (18,814 | ) | | $ | (44,174 | ) | | $ | (5,066 | ) |
| |
(a) | The federal statutory tax rates for the Company were 21%, 35%, and 35% for the years ended December 31, 2018, 2017, and 2016, respectively. |
The significant components of net deferred tax balances were as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Net operating loss and foreign tax credit carryforwards | $ | 3,030 |
| | $ | 1,580 |
|
| Allowances and reserves | 3,266 |
| | 2,985 |
|
| Stock-based compensation | 1,257 |
| | 4,360 |
|
| Deferred compensation | 2,310 |
| | 2,090 |
|
| Deferred business interest expense | 4,902 |
| | — |
|
| Deferred rent | 1,028 |
| | 830 |
|
| Depreciation and amortization | 1,735 |
| | — |
|
| Other, net | 3,267 |
| | 2,241 |
|
| Total gross deferred tax assets | 20,795 |
| | 14,086 |
|
| Less: valuation allowance | (5,565 | ) | | (416 | ) |
| Total deferred tax assets, net of valuation allowance | 15,230 |
| | 13,670 |
|
| Deferred tax liabilities: | | | |
| Amortization of intangible assets | (21,064 | ) | | (39,047 | ) |
| Depreciation and amortization | — |
| | (4,342 | ) |
| Other, net | (1,125 | ) | | (1,135 | ) |
| Total deferred tax liabilities | (22,189 | ) | | (44,524 | ) |
| Total net deferred tax liabilities | $ | (6,959 | ) | | $ | (30,854 | ) |
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2017, the U.S. Congress enacted the TCJA, which resulted in a reduction of federal tax rates, thereby reducing the December 31, 2017 deferred tax balances by $14.1 million. The TCJA also resulted in the Company incurring a Transition Tax Liability of $0.3 million in 2017, which was revised to $0.1 million during 2018. During the fourth quarter of 2018 and in accordance with SEC Staff Accounting Bulletin No. 118, the Company completed its accounting for the provisional amounts recognized at December 31, 2017. The Company will be electing to pay the Transition Tax over an eight-year period, as allowed by the TCJA. The Company has analyzed the effects of the TCJA’s Global and Intangible Low-Taxed Income provision and the Base Erosion Anti-Abuse Tax provision and has determined that these provisions had no effect on the Company’s 2017 or 2018 tax provision.
In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including the Company’s operating results and the existence of substantial doubt regarding the Company’s ability to continue as a going concern, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. The valuation allowance at December 31, 2018 relates to the Company’s expectations regarding its ability to realize its U.S. deferred tax assets in the future. The valuation allowance at December 31, 2017 relates to deferred tax assets of a business acquired in December 2017.
The Company adopted ASU 2016-09 in January 2017 and recorded tax shortfalls or excess tax benefits in the provision for income taxes for the years ended December 31, 2018 and 2017 rather than in additional paid-in-capital as was previously required.
The Company had gross unrecognized tax benefits totaling $0.1 million, of which $0.1 million would have an impact on the Company’s effective income tax rate, if recognized, at December 31, 2018, 2017, and 2016. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (before federal impact of state items), excluding interest and penalties, was as follows (in thousands): |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 124 |
| | $ | 140 |
| | $ | 269 |
|
| Additions for prior year tax positions | 120 |
| | 124 |
| | 115 |
|
| Reductions for prior year tax positions | (124 | ) | | (115 | ) | | (110 | ) |
| Settlements | — |
| | — |
| | (78 | ) |
| Reductions due to lapse in statutes of limitations | — |
| | (25 | ) | | (56 | ) |
| Ending balance | $ | 120 |
| | $ | 124 |
| | $ | 140 |
|
In the U.S., the Company is currently under audit by certain state and local tax authorities. The examinations are in varying stages of completion. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, case law developments and closing of statutes of limitations. Such adjustments are reflected in the provision for income taxes, as appropriate. Tax years prior to 2013 are generally not subject to examination by the Internal Revenue Service except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. With few exceptions, the Company is not subject to state or local examinations for years prior to 2012. In the U.K., tax years 2014 and prior are closed to audit due to the expiration of the statute of limitations. The Company is generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. While the Company does not expect material changes, it is possible that the amount of unrecognized benefit with respect to its uncertain tax positions could significantly increase or decrease within the next 12 months related to the Company’s ongoing audits. At this time, the Company is unable to make a reasonable estimate of the range of impact on the balance of uncertain tax positions or the impact on the effective income tax rate related to such positions.
The Company had immaterial amounts accrued for interest and penalties relating to uncertain tax positions at December 31, 2018 and 2017, which is included in income taxes payable. The Company recognized immaterial amounts of net interest and penalties relating to uncertain tax positions for the years ended December 31, 2018, 2017, and 2016, respectively.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. LOSS PER SHARE
Certain of the Company’s RSUs are considered participating securities because they contain a non-forfeitable right to dividends irrespective of whether dividends are actually declared or paid or the awards ultimately vest. Accordingly, the Company computes earnings per share pursuant to the two-class method in accordance with ASC 260, Earnings Per Share.
The following table sets forth the computation of basic and diluted loss per common share (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Numerator: | | | | | |
| Net loss | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) |
| Income allocated to participating securities | — |
| | — |
| | — |
|
| Net loss attributable to common stockholders | $ | (224,729 | ) | | $ | (234,041 | ) | | $ | (83,191 | ) |
| Denominator: | | | | | |
| Basic average common shares outstanding | 27,972 |
| | 27,484 |
| | 27,483 |
|
| Add: Dilutive effect of securities | — |
| | — |
| | — |
|
| Diluted average common shares outstanding | 27,972 |
| | 27,484 |
| | 27,483 |
|
| Basic loss per common share | $ | (8.03 | ) | | $ | (8.52 | ) | | $ | (3.03 | ) |
| Diluted loss per common share | $ | (8.03 | ) | | $ | (8.52 | ) | | $ | (3.03 | ) |
The authorized shares of FTD Companies, Inc. capital stock total 65.0 million, which is divided into 60.0 million shares of common stock, par value $0.0001 per share, and 5.0 million shares of preferred stock, par value $0.0001 per share. In connection with the Provide Commerce acquisition, the Company issued 10.2 million shares of FTD common stock to Qurate. The diluted earnings per common share computations exclude antidilutive stock options, RSUs, and PSUs. Weighted-average antidilutive shares for the years ended December 31, 2018, 2017, and 2016 were 4.0 million, 3.8 million, and 2.3 million, respectively.
13. RESTRUCTURING AND OTHER EXIT COSTS
Restructuring and other exit costs were as follows (in thousands): |
| | | | | | | | | | | |
| | Employee Termination Costs | | Facility Closure Costs | | Total |
| Accrued as of December 31, 2016 | $ | 8,566 |
| | $ | 1,378 |
| | $ | 9,944 |
|
| Charges | 1,834 |
| | 345 |
| | 2,179 |
|
| Cash paid | (6,842 | ) | | (1,518 | ) | | (8,360 | ) |
| Other non-cash adjustments | (3,374 | ) | | (12 | ) | | (3,386 | ) |
| Accrued as of December 31, 2017 | 184 |
| | 193 |
| | 377 |
|
| Charges | 18,265 |
| | (18 | ) | | 18,247 |
|
| Cash paid | (4,310 | ) | | (175 | ) | | (4,485 | ) |
| Other non-cash adjustments | (5,457 | ) | | — |
| | (5,457 | ) |
| Accrued as of December 31, 2018 | $ | 8,682 |
| | $ | — |
| | $ | 8,682 |
|
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July 18, 2018, the Company announced that its former President and Chief Executive Officer, John C. Walden, had stepped down from such positions. Under the terms of Mr. Walden’s employment agreement, he is entitled to the severance and other benefits described in such agreement, including cash severance payments, as well as accelerated vesting of a portion of his outstanding nonvested RSUs and unvested stock options. On the same day, the Company also announced a corporate restructuring plan. During the year ended December 31, 2018, the Company recorded $18.2 million in restructuring charges, which included employee severance costs to be paid in cash of $12.7 million and non-cash stock-based compensation related to the acceleration of certain equity awards of $5.5 million, which is included as an other non-cash adjustment in the above table.
14. COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments at December 31, 2018 under non-cancelable operating leases with initial lease terms in excess of one year were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ending December 31, |
| | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| Operating leases | $ | 51,855 |
| | $ | 7,828 |
| | $ | 8,245 |
| | $ | 8,588 |
| | $ | 7,345 |
| | $ | 4,923 |
| | $ | 14,926 |
|
The Company leases certain office space, data centers, distribution centers, vehicles, and office equipment under operating leases expiring at various periods through 2030. Certain of the Company’s operating leases include rent holidays, rent escalation provisions, and landlord allowances. The Company records rent expense on a straight-line basis over the lease term. Rent expense under operating leases for the years ended December 31, 2018, 2017, and 2016 was $10.5 million, $9.8 million, and $9.8 million, respectively.
Letters of Credit
Standby letters of credit are maintained by the Company to secure credit card processing activity and certain inventory purchases. The Company had $1.5 million of commitments under letters of credit at December 31, 2018 which were scheduled to expire within one year.
Other Commitments
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, sureties and insurance companies, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by
our independent registered public accounting firm. The Audit Committee has delegated to its Chair the
Company, or from intellectual property infringement claims madeauthority to evaluate and approve service engagements on behalf of the full Audit Committee in the event a need arises for specific pre-approval between Audit Committee meetings. All of the audit, audit-related, tax services and all other services provided by
third parties. FTD has entered into indemnification agreements with its current and former directors and certain of its officers and employees that require FTD, among other things, to indemnify them against certain liabilities that may ariseour independent registered public accounting firm for the 2018 fiscal year were approved by
reason of their status or service as directors, officers or employees. In addition, FTD has also agreed to indemnify certain former officers, directors and employees of acquired companiesthe Audit Committee in
connectionaccordance with the
acquisitionforegoing procedures.45
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b)Exhibits
The exhibits listed in Part IV, Item 15. “Exhibits and Financial Statement Schedules” of such companies. FTD maintains directorthe 2018 Form 10-K were filed or incorporated by reference as part of the 2018 Form 10-K and officer insurance, which may, in certain circumstances, cover specified liabilities, including those arising from its obligation to indemnify its current and former directors, certainthe exhibits listed below are filed as part of its officers and employees, and certain former officers, directors and employees of acquired companies.this Amendment.
** Management contract or compensatory plan or arrangement.
46
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due
SIGNATURES
Pursuant to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal Matters
Commencing on August 19, 2009, the first of a series of putative consumer class action lawsuits was brought against Provide Commerce, Inc. and co-defendant Regent Group, Inc. d/b/a Encore Marketing International (“EMI”). These cases were ultimately consolidated during the next three years into Case No. 09 CV 2094 in the United States District Court for the Southern District of California under the title In re EasySaver Rewards Litigation. Plaintiffs’ claims arise from their online enrollment in subscription based membership programs known as EasySaver Rewards, RedEnvelope Rewards, and Preferred Buyers Pass (collectively the “Membership Programs”). Plaintiffs claim that after they ordered items from certain of Provide Commerce’s websites, they were presented with an offer to enroll in onerequirements of the Membership Programs, eachSecurities Exchange Act of which is offered and administered by EMI. Plaintiffs purport1934, as amended, the Registrant has duly caused this report to represent a nationwide class of consumers allegedly damaged by Provide Commerce’s purported unauthorized or otherwise allegedly improper transferring of billing information to EMI, who then posted allegedly unauthorized charges to their credit or debit card accounts for membership fees for the Membership Programs. In the operative fourth amended complaint, plaintiffs asserted ten claims against Provide Commerce and EMI: (1) breach of contract (against Provide Commerce only); (2) breach of contract (against EMI only); (3) breach of implied covenant of good faith and fair dealing; (4) fraud; (5) violations of the California Consumers Legal Remedies Act; (6) unjust enrichment; (7) violation of the Electronic Funds Transfer Act (against EMI only); (8) invasion of privacy; (9) negligence; and (10) violations of the Unfair Competition Law. Plaintiffs seek damages, attorneys’ fees, and costs. After motion practice regarding the claims asserted and numerous settlement conferences and mediations in an effort to informally resolve the matter, the parties reached an agreementbe signed on the high level terms of a settlement on April 9, 2012, conditioned on the parties negotiating and executing a complete written agreement. In the weeks following April 9, 2012, the parties negotiated a formal written settlement agreement (the “Settlement”), which the court preliminarily approved on June 13, 2012. After notice to the purported class and briefingits behalf by the parties, the court conducted a final approval hearing (also known as a fairness hearing) on January 28, 2013, but did not rule. On February 4, 2013, the court entered its final order approving the Settlement, granting plaintiffs’ motion for attorneys’ fees, costs, and incentive awards, and overruling objections filed by a single objector. The court entered judgment on the Settlement on February 21, 2013. The objector filed a notice of appeal with the Ninth Circuit Court of Appeals on March 4, 2013. After the completion of briefing, the Ninth Circuit set oral argument for February 2, 2015. But on January 29, 2015, the Ninth Circuit entered an order deferring argument and resolution of the appeal pending the Ninth Circuit’s decision in a matter captioned Frank v. Netflix, No. 12 15705+. On March 19, 2015, the Ninth Circuit entered an order vacating the judgment in this matter and remanding it to the district court for further proceedings consistent with its opinion in Frank v.Netflix issued on February 27, 2015. The district court ordered supplemental briefing on the issue of final Settlement approval May 21, 2015. After briefing, the district court conducted a hearing on July 27, 2016 and took the matter under submission. On August 9, 2016, the district court entered an order reapproving the Settlement without any changes, and accordingly entered judgment and dismissed the case with prejudice. On September 6, 2016, the objector filed a notice of appeal. On November 22, 2016, plaintiffs filed a motion for summary affirmance of the district court’s judgment, to which the objector responded and filed a cross-motion for sanctions. Plaintiffs’ motion for summary affirmance temporarily stayed briefing on the appeal. On March 2, 2017, the Ninth Circuit denied plaintiffs’ motion for summary affirmance and objector’s cross-motion for sanctions, and reset the briefing schedule. The Objector filed his opening brief on May 1, 2017. Thirteen state Attorneys General filed an amicus brief in support of the Objector on May 8, 2017. The parties filed their answering briefs on June 30, 2017. Various legal aid organizations filed an amicus brief in support of no party regarding cy pres relief also on June 30, 2017. The Objector’s optional reply brief was filed on August 14, 2017 and the Ninth Circuit heard oral arguments on May 17, 2018. On October 3, 2018, the Ninth Circuit issued an opinion vacating the district court’s award of attorney’s fees, but otherwise affirmed the district court’s approval of the class action settlement. On October 10, 2018, the objector filed a motion to stay the issuance of mandate, which would return jurisdiction to the district court, and for an extension of time to file a petition for panel rehearing. The Ninth Circuit denied the objector’s motion on November 21, 2018, and issued the mandate on November 29, 2018. In March 2019, the parties completed submission of supplemental briefings to the district court regarding the amount of Plaintiffs’ counsel’s attorneys’ fees and costs award. As of the date of these financial statements, the district court has not issued a decision on the matter. On February 13, 2019, the objector filed a petition seeking Supreme Court review of the Ninth Circuit’s decision. As of the date of these financial statements, the Supreme Court has not reviewed the objector’s petition. The negotiated settlement amount has been fully reserved under ASC 450, Contingencies.
There can be no assurances that other legal actions or governmental investigations will not be instituted in connection with the Company’s current or former business practices. The Company cannot predict the outcome of governmental investigations or other legal actions or their potential implications for its business.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company records a liability when it believes that it is both probable that a loss has been incurred, and the amount of loss can be reasonably estimated. The Company evaluates at least quarterly, developments in its legal matters that could affect the assessment of the probability of loss or the amount of liability and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate, (ii) if the proceedings are in early stages, (iii) if there is uncertainty as to the outcome of pending appeals, motions or settlements, (iv) if there are significant factual issues to be determined or resolved, and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. At December 31, 2018 and 2017, the Company had reserves totaling $2.8 million and $2.5 million, respectively, for estimated losses related to certain legal matters. With respect to other legal matters, the Company has determined, based on its current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow disclosures (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cash paid for interest | $ | 16,280 |
| | $ | 8,215 |
| | $ | 7,556 |
|
| Cash paid for income taxes, net | $ | 4,930 |
| | $ | 13,315 |
| | $ | 13,972 |
|
At December 31, 2018, non-cash investing items included $0.5 million of property and equipment purchases that were included in accounts payable and accrued liabilities in the Company’s consolidated balance sheet. The purchases will be reflected in investing activities in the consolidated statement of cash flows in the periods in which they are paid. Also at December 31, 2018, non-cash financing items included $6.2 million of deferred financing fees that were included in interest payable in the Company’s consolidated balance sheet. These deferred financing fees will be paid when the outstanding debt under the Amended Credit Agreement is repaid or refinanced and will be reflected in financing activities in the consolidated statement of cash flows in the period in which they are paid.
FTD COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables have been prepared on a basis consistent with the Company’s annual consolidated financial statements and include all adjustments necessary for the fair presentation of the unaudited quarterly data.
|
| | | | | | | | | | | | | | | |
| | Quarter |
| | First | | Second | | Third | | Fourth |
| | (in thousands, except per share data) |
| Year Ended December 31, 2018: | | | | | | | |
| Revenues | $ | 318,170 |
| | $ | 299,921 |
| | $ | 148,621 |
| | $ | 247,532 |
|
| Operating loss | (4,417 | ) | | (127,117 | ) | | (28,453 | ) | | (64,644 | ) |
| Net loss | (6,596 | ) | | (118,085 | ) | | (31,210 | ) | | (68,838 | ) |
| Basic loss per common share | (0.24 | ) | | (4.25 | ) | | (1.11 | ) | | (2.44 | ) |
| Diluted loss per common share | (0.24 | ) | | (4.25 | ) | | (1.11 | ) | | (2.44 | ) |
|
| | | | | | | | | | | | | | | |
| | Quarter |
| | First | | Second | | Third | | Fourth |
| | (in thousands, except per share data) |
| Year Ended December 31, 2017: | | | | | | | |
| Revenues | $ | 316,493 |
| | $ | 328,146 |
| | $ | 161,304 |
| | $ | 278,085 |
|
| Operating income/(loss) | 17,840 |
| | 17,749 |
| | (116,645 | ) | | (187,673 | ) |
| Net income/(loss) | 9,023 |
| | 9,716 |
| | (99,319 | ) | | (153,461 | ) |
| Basic earnings/(loss) per common share | 0.32 |
| | 0.35 |
| | (3.61 | ) | | (5.57 | ) |
| Diluted earnings/(loss) per common share | 0.32 |
| | 0.35 |
| | (3.61 | ) | | (5.57 | ) |
During the second and fourth quarters of 2018, the Company recorded goodwill, intangible assets, and other long-lived asset impairments totaling $136.9 million and $67.1 million, respectively. In addition, during the third quarter of 2018, the Company recorded restructuring charges totaling $18.1 million related to its corporate restructuring plan. During the third and fourth quarters of 2017, the Company recorded goodwill, intangible assets, and other long-lived asset impairments totaling $105.7 million and $194.6 million, respectively.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
FTD COMPANIES, INC.
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Additions Charged to Expense | | Charged to Other Accounts | | Write-offs | | Balance at End of Period |
| Allowance for doubtful accounts and sales allowances: | | | | | | | | | |
| Year Ended December 31, 2018 | $ | 4,957 |
| | $ | 2,636 |
| | $ | 30 |
| | $ | (556 | ) | | $ | 7,067 |
|
| Year Ended December 31, 2017 | $ | 4,962 |
| | $ | 2,084 |
| | $ | 513 |
| | $ | (2,602 | ) | | $ | 4,957 |
|
| Year Ended December 31, 2016 | $ | 4,802 |
| | $ | 3,386 |
| | $ | 744 |
| | $ | (3,970 | ) | | $ | 4,962 |
|
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Tax Valuation Allowance Charged to Income Tax Provision(1) | | Charged to Other Accounts(2) | | Balance at End of Period |
| Valuation allowances for deferred tax assets: | | | | | | | |
| Year Ended December 31, 2018 | $ | 416 |
| | $ | 5,149 |
| | $ | — |
| | $ | 5,565 |
|
| Year Ended December 31, 2017 | $ | — |
| | $ | — |
| | $ | 416 |
| | $ | 416 |
|
| Year Ended December 31, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
undersigned, thereunto duly authorized.Date: April 30, 2019 | FTD Companies, Inc. (Registrant) |
| |
| | |
| By: | /s/ Scott D. Levin |
| | Name: Scott D. Levin |
| | Title: President and Chief Executive Officer |
(1) Relates to the Company’s assessment of the recoverability of its deferred tax assets.
(2) The valuation allowance at December 31, 2017 related to deferred tax assets of a business acquired in December 2017.
