Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended August 26, 1995.
-----------------------------------------------
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 1-9637.
LILLIAN VERNON CORPORATION
--------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-2529859
- ----------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
543 Main Street, New Rochelle, New York 10801
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
914-576-6400
-------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 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
--- ---
Number of shares outstanding of each of the issuer's classes of common stock:
9,748,838 Shares of Common Stock, $.01 par value, as of October 6, 1995.
LILLIAN VERNON CORPORATION
Form 10-Q
August 26, 1995
Part I. Financial Information Page #
Item 1.
Consolidated Balance Sheets as of
August 26, 1995, August 27, 1994
(unaudited) and February 25, 1995
(audited) 3
Consolidated Statements of Operations
for the quarter and six months ended
August 26, 1995 and August 27, 1994
(unaudited) 4
Consolidated Statements of
Cash Flows for the six months ended
August 26, 1995 and August 27, 1994
(unaudited) 5
Notes to Consolidated Financial
Statements 6
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7-8
Part II. Other Information 9
Signatures 10
Exhibits 11
Page 2 of 11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In thousands)
<TABLE>
<CAPTION>
August 26, August 27, February 25,
ASSETS 1995 1994 1995
------ --------- ---------- ------------
(Unaudited) (Audited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $12,550 $21,177 $38,779
Accounts receivable 12,757 6,127 21,482
Merchandise inventories 49,808 49,177 30,418
Deferred income taxes -- -- 331
Prepayments and other current assets 18,338 15,257 7,495
-------- -------- --------
Total current assets 93,453 91,738 98,505
Property, plant and equipment, net (Note 1) 30,071 26,650 29,587
Deferred catalog costs 12,716 7,730 6,632
Other assets 3,136 3,053 3,044
-------- -------- --------
Total $139,376 $129,171 $137,768
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable and accrued expenses $21,075 $21,273 $14,056
Customer deposits 261 307 385
Current portion of long-term debt
and lease obligations 1,435 1,407 1,420
Income taxes payable -- -- 3,576
Deferred income taxes 1,852 704 --
------- ------ -------
Total current liabilities 24,623 23,691 19,437
Long-term debt, less current portion 3,183 4,458 3,820
Capital lease obligations, less current portion 431 591 515
Deferred compensation 3,077 2,613 2,913
Deferred income taxes 933 1,270 896
-------- -------- --------
Total liabilities 32,247 32,623 27,581
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; issued -9,976,537 shares, 9,700,110 shares
and 9,771,744 shares 100 97 98
Additional paid-in capital 26,806 22,146 23,300
Retained earnings 84,237 76,431 88,922
Unearned compensation 0 (25) (2)
Treasury stock, at cost -227,699 shares,
138,204 shares and 139,892 shares (4,014) (2,101) (2,131)
-------- -------- --------
Total stockholders' equity 107,129 96,548 110,187
-------- -------- --------
Total $139,376 $129,171 $137,768
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 11
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- -----------------------
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $36,920 $33,659 $66,534 $59,661
Costs and expenses:
Product and delivery costs 16,754 14,324 31,983 26,355
Selling, general and administrative
expenses 20,137 18,253 39,109 33,953
Merger-related expenses (Note 2) 1,000 -- 1,000 --
------- ------ ------- -------
37,891 32,577 72,092 60,308
------- ------ ------- -------
Operating income (loss) (971) 1,082 (5,558) (647)
Interest income 366 283 887 674
Interest expense (138) (174) (290) (358)
------- ------ ------- -------
Income (loss) before income taxes (743) 1,191 (4,961) (331)
Provision for (benefit from) income taxes:
Current (2,116) 307 (3,857) (1,291)
Deferred 1,871 110 2,220 1,175
------- ------ ------- -------
(245) 417 (1,637) (116)
------- ------ ------- -------
Net income (loss) ($498) $774 ($3,324) ($215)
------- ------ ------- -------
Net income (loss) per common share ($0.05) $0.08 ($0.34) ($0.02)
------- ------ ------- -------
Weighted average number of common shares
outstanding 9,727 9,541 9,707 9,531
------- ------ ------- -------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of ll
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
August 26, August 27,
1995 1994
---------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,324) ($215)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,212 1,024
Amortization 172 241
(Increase) decrease in accounts receivable 8,725 5,098
(Increase) decrease in merchandise inventories (19,390) (21,838)
(Increase) decrease in prepayments and other current assets (10,843) (10,284)
(Increase) decrease in deferred catalog costs (6,084) (3,499)
(Increase) decrease in other assets (262) (135)
Increase (decrease) in trade accounts payable and
accrued expenses 7,019 2,804
Increase (decrease) in customer deposits (124) 78
Increase (decrease) in income taxes payable (3,576) (4,191)
Increase (decrease) in deferred compensation 164 300
Increase (decrease) in deferred income taxes 2,220 1,175
---------- ---------
Net cash used in operating activities (24,091) (29,442)
---------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,696) (1,023)
---------- ---------
Net cash used in investing activities (1,696) (1,023)
---------- ---------
Cash flows from financing activities:
Principal payments on long-term debt and capital
lease obligations (706) (694)
Proceeds from issuance of common stock 1,381 543
Dividends paid (1,361) (1,146)
Other 244 59
---------- ---------
Net cash used in financing activities (442) (1,238)
---------- ---------
Net decrease in cash and cash equivalents (26,229) (31,703)
---------- ---------
Cash and cash equivalents at beginning of period 38,779 52,880
---------- ---------
Cash and cash equivalents at end of period $12,550 $21,177
---------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $319 $395
Income taxes $3,896 $4,703
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 11
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The year-end condensed balance sheet data was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. The interim financial statements
furnished with this report reflect all adjustments, consisting only of items of
a normal recurring nature, (except for the provision for merger costs described
in note 2), which are, in the opinion of management, necessary for the fair
statement of the consolidated financial condition and consolidated results of
operations for the interim periods presented. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended February 25, 1995.
1. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
August 26, August 27, February 25,
1995 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Land and buildings $20,812 $17,308 $19,985
Machinery and equipment 22,594 19,489 21,840
Furniture and fixtures 3,102 2,808 3,033
Leasehold improvements 3,621 3,597 3,575
Capital leases 1,262 1,262 1,262
------- -------- --------
Total property, plant &
equipment, at cost 51,391 44,464 49,695
Less, accumulated depreciation
and amortization 21,320 17,814 20,108
-------- -------- --------
Property, plant and equipment - net $30,071 $26,650 $29,587
-------- -------- --------
</TABLE>
2. TERMINATED MERGER WITH FREEMAN SPOGLI & CO. INCORPORATED
--------------------------------------------------------
On June 13, 1995, the Company entered into a Merger Agreement with an
affiliate of Freeman Spogli & Co. Incorporated. Pursuant to the Agreement, the
Company would have been recapitalized through a merger transaction in which all
of the shares of common stock of the Company, other than certain shares held by
Lillian Vernon and David Hochberg, would have been converted into the right to
receive $19 per share in cash. The Merger Agreement was terminated on September
18, 1995 when it was determined that financing for the transaction at the $19
per share price could not be obtained as a result of recent trends in the
catalog industry, particularly the continued increase in paper prices, general
uncertainty facing retailing and the Company's expectation that its net income
would not reach projected levels for the 1996 fiscal year. A provision for the
costs of the terminated merger of $1 million has been recorded in the financial
statements for the period ended August 26, 1995. These costs consist
principally of legal, accounting and filing fees.
3. RECLASSIFICATIONS
------------------
Certain reclassifications have been made in the prior year financial
statements to conform with the current year presentation.
Page 6 of 11
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 26, 1995
Revenues for the quarter ended August 26, 1995 were $36.9 million, an
increase of $3.3 million, or 9.7%, over the quarter ended August 27, 1994.
The increase in revenues was primarily attributable to approximately 9%
higher average revenue per order. Order volume was comparable to the prior
quarter on approximately 5% lower circulation, due to an improvement in
response rate.
Product and delivery costs increased $2.4 million, or 17.0%, in the
quarter ended August 26, 1995, as compared to the second quarter of the prior
year, due partially to the higher sales level. These costs also comprised a
higher percentage of revenues, 45.4% in the quarter ended August 26, 1995, as
compared to 42.6% in the quarter ended August 27, 1994. The primary reason
for these increases is product profit margin, which declined because of
higher markdowns, promotional strategies such as the Company's free gift
program, and a greater percentage of revenues from lower margin sources such
as the Company's Special Markets and outlet store divisions.
Selling, general and administrative (SG&A) expenses, the largest component
of which is the cost of producing, printing and distributing the Company's
catalogs, increased $1.9 million, or 10.3%, mainly because of higher paper
and postage costs. The Company's average cost of producing and mailing one of
its catalogs, including paper costs, rose 14% in the current quarter compared
to the same quarter last year. The Company expects this trend to accelerate
for the balance of the year. As a percentage of revenues, however, SG&A costs
increased only slightly from 54.2% in the quarter ended August 27, 1994 to
54.5% in the quarter ended August 26, 1995. The impact of the higher costs
per catalog were almost offset by a comparable improvement in revenue
generated per catalog.
The results for the quarter ended August 26, 1995 reflect a non-recurring
provision of $1.0 million for estimated costs of the Company's terminated
merger with Freeman Spogli & Co. Incorporated, which is discussed more fully
under "Financial Condition" on the next page. The estimated costs consist
principally of legal, accounting, and filing fees.
Interest income for the quarter ended August 26, 1995 increased $.1
million as compared to the second quarter of the prior year. The increase was
attributable to higher interest rates. Interest expense for the quarter ended
August 26, 1995 was slightly lower than the same period last year, due to
debt repayments.
The effective income tax rate was 33% for the quarter ended August 26,
1995 and was 35% for the quarter ended August 27, 1994.
SIX MONTHS ENDED AUGUST 26, 1995
Revenues for the six months ended August 26, 1995 were $66.5 million, an
increase of $6.9 million, or 11.5%, over the corresponding period of the
prior year. The rise in revenues was primarily attributable to an increase of
approximately 8% in the average revenue per order. Order volume rose about 2%
on catalog circulation that was comparable to the prior six month period, due
to an improvement in response rate.
Product and delivery costs increased $5.6 million, or 21.4%, for the six
months ended August 26, 1995, partially as a result of the higher sales
level. In addition, these costs rose as a percentage of revenues from 44.2%
in the prior six month period to 48.1% in the current period. Product profit
margin declined because of higher markdowns, promotional strategies such as
the Company's free gift program, and a greater percentage of revenues from
lower margin sources such as the Company's Special Markets and outlet store
divisions.
Page 7 of 11
Selling, general and administrative (SG&A) expenses increased $5.2
million, or 15.2%, for the six months ended August 26, 1995, as compared to
the corresponding period of the prior year, mainly because
of higher paper and postage costs. As a percentage of revenues, SG&A costs
increased from 56.9% for the six months ended August 27, 1994 to 58.8% for
the current six month period. The Company's average cost of producing and
mailing one of its catalogs rose 17% in the current six month period compared
to the same period last year. The rise in SG&A costs as a percentage of
revenues was attributable to this trend; however, it was partially offset by
an improvement in revenue generated per catalog.
The results for the six month period ended August 26, 1995 reflect a
non-recurring provision of $1.0 million for estimated costs of the Company's
terminated merger with Freeman Spogli & Co. Incorporated, which is discussed
more fully under "Financial Condition" below. The estimated costs consist
principally of legal, accounting and filing fees.
Interest income for the current six month period increased $.2 million from
the corresponding period last year, due to higher interest rates. Interest
expense for the six months ended August 26, 1995 decreased $.1 million as
compared to the same period of the prior year, because loan repayments
lowered the average debt balance.
The effective income tax rate for the six months ended August 26, 1995 was
33%, as compared with 35% for the same period last year.
FINANCIAL CONDITION
The Company's working capital ratio at August 26, 1995 was 3.80 to 1 as
compared to 5.07 to 1 at February 25, 1995 and 3.87 to 1 at August 27, 1994.
Due to the seasonality of the Company's business, the first half of the
fiscal year has been a loss period, and a period of working capital demand in
preparation for the peak selling season. The Company's working capital needs
have been met with funds generated from operations.
During the six months ended August 26, 1995, the Company used less funds
for working capital needs than in the corresponding period last year. Due to
higher revenues and the expansion of the Company's deferred billing program,
the accounts receivable balance as of August 26, 1995 is higher than the
corresponding period last year. Likewise, higher receivables from year-end
were collected in the current period as compared with the same period last
year. The Company spent more on future catalog editions than last year, due
to the introduction of the Lillian Vernon's Kitchen catalog and because of
higher paper costs. The higher level of inventory as compared to August 27,
1994 is attributable to a planned increase in sales for the remainder of the
fiscal year.
On June 13, 1995, the Company entered into a Merger Agreement with an
affiliate of Freeman Spogli & Co. Incorporated. Pursuant to the Agreement,
the Company would have been recapitalized through a merger transaction in
which all of the shares of common stock of the Company, other than certain
shares held by Lillian Vernon and David Hochberg, its principal stockholders,
would have been converted into the right to receive $19 per share in cash.
The Merger Agreement was terminated on September 18, 1995 when it was
determined that financing for the transaction at the $19 per share price
could not be obtained as a result of recent trends in the catalog industry,
particularly the continued increase in paper prices, general uncertainty
facing retailing and the Company's expectation that its net income would not
reach projected levels for the 1996 fiscal year. The Company will continue to
explore all potential business opportunities which will enhance stockholders'
value.
The Company will expend capital of approximately $36.8 million on a
project to expand its 486,000 square foot National Distribution Center by an
additional 335,000 square feet, and to enhance its order processing system in
order to handle future growth. The expansion will begin in October 1995, and
is anticipated to be completed in the summer of 1997, with the majority of
the funds to be expended over this period. The Company believes that its
internally generated cash, as well as its available borrowing capacity, will
be sufficient to fund the project.
Page 8 of 11
PART II.
OTHER INFORMATION
-----------------
Items 1, 2, 3, and 4 are not applicable and have been omitted.
Item 5. Other Information
- -------
The Company will construct a 335,000 square foot addition to its existing
486,000 square foot National Distribution Center located in Virginia Beach,
Virginia, as well as enhance its order processing system. The cost of the
project is expected to total $36.8 million and is expected to be completed in
the summer of 1997. The expansion will increase the Company's order processing
and inventory storage capacity, to handle future growth.
Item 6. Exhibits and Reports on Form 8-K
- -------
Exhibit 11: Computation of Earnings (Loss) per Share Assuming Primary and
Full Dilution
Reports on Form 8-K:
- Filed June 22, 1995 - Item 5 - Other Events: Resignation of
Registrant's President and Chief Operating Officer
- Filed June 27, 1995 - Item 1 - Change in Control of Registrant:
Merger Agreement Between Registrant and VB Investment Corporation
- Filed September 19, 1995 - Item 1 - Change in Control of
Registrant:
Termination of Merger Agreement Between Registrant and VB
Investment Corporation
Page 9 of 11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Lillian Vernon Corporation
--------------------------
(Registrant)
Date: October 6, 1995 By: /s/ Susan N. Cortazzo
--------------- --------------------------
Susan N. Cortazzo
Vice President, Controller
Corporate Secretary
Page 10 of 11
EXHIBIT 11
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
Computation of Earnings (Loss) Per Share Assuming Primary and Full Dilution
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- ---------------------
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ($498) $774 ($3,324) ($215)
-------- ------- -------- -------
Primary Shares:
Average number of shares outstanding 9,727 9,541 9,707 9,531
Assumed exercise of stock options 307 350 333 414
-------- ------- -------- -------
10,034 9,891 10,040 9,945
-------- ------- -------- -------
Earnings (Loss) Per Share Assuming Primary Dilution ($0.05) $0.08 ($0.33) ($0.02)
-------- ------- -------- -------
Fully Diluted Shares:
Average number of shares outstanding 9,727 9,541 9,707 9,531
Assumed exercise of stock options 307 425 333 419
-------- ------- -------- -------
10,034 9,966 10,040 9,950
-------- ------- -------- -------
Earnings (Loss) Per Share Assuming Full Dilution ($0.05) $0.08 ($0.33) ($0.02)
-------- ------- -------- -------
</TABLE>
Page 11 of ll
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> FEB-24-1996
<PERIOD-END> AUG-26-1995
<PERIOD-TYPE> 6-MOS
<CASH> 12,550
<SECURITIES> 0
<RECEIVABLES> 12,757
<ALLOWANCES> 0
<INVENTORY> 49,808
<CURRENT-ASSETS> 93,453
<PP&E> 51,391
<DEPRECIATION> 21,320
<TOTAL-ASSETS> 139,376
<CURRENT-LIABILITIES> 24,623
<BONDS> 3,614
0
0
<COMMON> 100
<OTHER-SE> 107,029
<TOTAL-LIABILITY-AND-EQUITY> 139,376
<SALES> 66,534
<TOTAL-REVENUES> 66,534
<CGS> 31,983
<TOTAL-COSTS> 71,092
<OTHER-EXPENSES> 1,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290
<INCOME-PRETAX> (4,961)
<INCOME-TAX> (1,637)
<INCOME-CONTINUING> (3,324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,324)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
