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 November 25, 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:
9,758,544 Shares of Common Stock, $.01 par value, as of January 8, 1996.
LILLIAN VERNON CORPORATION
Form 10-Q
November 25, 1995
Part I. Financial Information Page #
Item 1.
Consolidated Balance Sheets as of
November 25, 1995, November 26, 1994
(unaudited) and February 25, 1995
(audited) 3
Consolidated Statements of Income
for the quarter and nine months ended
November 25, 1995 and November 26, 1994
(unaudited) 4
Consolidated Statements of
Cash Flows for the nine months ended
November 25, 1995 and November 26, 1994
(unaudited) 5
Notes to Consolidated Financial
Statements 6-7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-9
Part II. Other Information 10
Signatures 11
Exhibits 12
Page 2 of 12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
November 25, November 26, February 25,
1995 1994 1995
------------ ----------- ------------
(Unaudited) (Audited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $8,939 $15,615 $38,779
Accounts receivable 33,039 29,819 21,482
Merchandise inventories 43,142 42,757 30,418
Deferred income taxes -- -- 331
Prepayments and other current
assets 16,424 9,599 7,495
------------ ----------- ------------
Total current assets 101,544 97,790 98,505
Property, plant and equipment,
net (Note 1) 29,530 29,347 29,587
Deferred catalog costs 18,163 13,980 6,632
Other assets 3,131 2,935 3,044
------------ ----------- ------------
Total $152,368 $144,052 $137,768
----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and
accrued expenses $24,362 $23,523 $14,056
Customer deposits 1,993 1,141 385
Current portion of long-term debt
and lease obligations 1,443 1,413 1,420
Income taxes payable -- 1,471 3,576
Deferred income taxes 3,027 2,661 --
------------ ----------- ------------
Total current liabilities 30,825 30,209 19,437
Long-term debt, less current
portion 2,546 3,822 3,820
Capital lease obligations, less
current portion 386 554 515
Deferred compensation 3,092 2,763 2,913
Deferred income taxes 714 1,027 896
------------ ----------- ------------
Total liabilities 37,563 38,375 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,
9,708,766 shares and 9,771,744
shares 100 97 98
Additional paid-in capital 26,816 22,288 23,300
Retained earnings 91,980 85,428 88,922
Unearned compensation -- (13) (2)
Treasury stock, at cost -233,099
shares, 139,404 shares and
139,892 shares (4,091) (2,123) (2,131)
------------ ----------- ------------
Total stockholders' equity 114,805 105,677 110,187
------------ ----------- ------------
Total $152,368 $144,052 $137,768
------------ ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 12
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
-------------------------------- --------------------------
November 25, November 26, November 25, November 26,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $97,450 $91,923 $163,984 $151,584
Costs and expenses:
Product and delivery costs 41,653 39,083 73,637 65,516
Selling, general and administrative
expenses 43,165 38,395 82,323 72,270
Merger - related expenses (Note 2) -- -- 950 --
------------ ------------ ------------ ------------
84,818 77,478 156,910 137,786
------------ ------------ ------------ ------------
Operating income 12,632 14,445 7,074 13,798
Interest income 109 183 997 857
Interest expense (165) (189) (455) (547)
------------ ------------ ------------ ------------
Income before income taxes 12,576 14,439 7,616 14,108
Provision for (benefit from) income taxes:
Current 3,195 3,112 (662) 1,821
Deferred 955 1,660 3,175 2,835
------------ ------------ ------------ ------------
4,150 4,772 2,513 4,656
------------ ------------ ------------ ------------
Net income $8,426 $9,667 $5,103 $9,452
------------ ------------ ------------ ------------
Net income per common and common
equivalent share $.86 $.98 $.52 $.95
------------ ------------ ------------ ------------
Net income per common and common
equivalent share - assuming full
dilution $.86 $.98 $.52 $.95
------------ ------------ ------------ ------------
Weighted average number of common
and common equivalent shares 9,749 9,881 9,721 9,930
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 12
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
November 25, November 26,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $5,103 $9,452
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 2,413 2,244
Amortization 285 395
(Increase) decrease in accounts receivable (11,557) (18,594)
(Increase) decrease in merchandise inventories (12,724) (15,418)
(Increase) decrease in prepayments and other
current assets (8,929) (4,626)
(Increase) decrease in deferred catalog costs (11,531) (9,749)
(Increase) decrease in other assets (370) (159)
Increase (decrease) in trade accounts payable
and accrued expenses 10,306 5,054
Increase (decrease) in customer deposits 1,608 912
Increase (decrease) in income taxes payable (3,576) (2,720)
Increase (decrease) in deferred compensation 179 450
Increase (decrease) in deferred income taxes 3,176 2,889
------------ ------------
Net cash used in operating activities (25,617) (29,870)
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,356) (4,940)
------------ ------------
Net cash used in investing activities (2,356) (4,940)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt and
capital lease obligations (1,380) (1,361)
Proceeds from issuance of common stock 1,381 656
Dividends paid (2,044) (1,815)
Payments to acquire treasury stock (77) --
Other 253 65
------------ ------------
Net cash used in financing activities (1,867) (2,455)
------------ ------------
Net decrease in cash and cash equivalents (29,840) (37,265)
------------ ------------
Cash and cash equivalents at beginning of period 38,779 52,880
------------ ------------
Cash and cash equivalents at end of period $8,939 $15,615
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $571 $718
Income taxes 3,920 4,720
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 12
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>
November 25, November 26, February 25,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Land and buildings $21,140 $19,741 $19,985
Machinery and equipment 22,801 20,920 21,840
Furniture and fixtures 3,158 2,884 3,033
Leasehold improvements 3,690 3,574 3,575
Capital leases 1,262 1,262 1,262
------------ ------------ ------------
Total property, plant &
equipment, at cost 52,051 48,381 49,695
Less, accumulated depreciation
and amortization 22,521 19,034 20,108
------------ ------------ ------------
Property, plant and
equipment - net $29,530 $29,347 $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. The costs of the
terminated merger of $950,000 have been recorded in the nine-month financial
statements. These costs consisted principally of legal, accounting and filing
fees.
Page 6 of 12
3. PER SHARE DATA
Net income per share is computed by dividing net income for the period by the
total number of weighted average shares outstanding and the weighted average
number of common share equivalents outstanding (if such equivalent shares have a
materially dilutive effect on the net income per share figure). The Company's
common share equivalents are comprised of stock options issued to key employees
and Directors. During the third quarter and nine month period ended November 26,
1994, the number of common share equivalents outstanding resulted in a
materially dilutive effect on the net income per share computation. In the
comparable periods this year, however, such common share equivalents did not
result in material dilution, and therefore were not reflected in the net income
per share calculation on the statement of income. See Exhibit 11.
4. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial
statements to conform with the current year presentation.
Page 7 of 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED NOVEMBER 25, 1995
Revenues for the quarter ended November 25, 1995 were $97.5 million, an increase
of $5.5 million, or 6.0%, over the quarter ended November 26, 1994. The increase
in revenues was primarily attributable to approximately 11% higher average
revenue per order. Incoming order volume was comparable to the same quarter last
year on approximately 2% higher circulation; however, a number of orders
received in late November were not shipped until the fourth quarter.
Product and delivery costs increased $2.6 million, or 6.6%, in the quarter ended
November 25, 1995, as compared to the third quarter of the prior year. These
costs also comprised a higher percentage of revenues, 42.7% in the quarter ended
November 25, 1995, as compared to 42.5% in the quarter ended November 26, 1994.
Product profit margin declined principally because of inventory liquidation, but
also because of promotional strategies such as the Company's free gift program.
Higher costs of fulfilling and shipping orders were offset by an increase in
shipping and handling charges collected from customers.
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 $4.8 million, or 12.4%, mainly because of higher paper and
postage costs. As a percentage of revenues, SG&A costs increased from 41.8% in
the quarter ended November 26, 1994 to 44.3% in the quarter ended November 25,
1995. Higher paper and postage costs reduced pretax income for the current
quarter by approximately $5 million ($3 million after-tax). The Company's
average cost of producing and mailing one of its catalogs rose 21% in the
current quarter compared to the same quarter last year. The impact of the higher
costs per catalog were partially offset by a 10% improvement in revenue
generated per catalog.
Interest income for the quarter ended November 25, 1995 decreased $.1 million as
compared to the third quarter of the prior year. The decrease was attributable
to a lower investment balance. Interest expense for the quarter ended November
25, 1995 was slightly lower than the same period last year, due to debt
repayments.
The effective income tax rate was 33% for both the quarter ended November 25,
1995 and the quarter ended November 26, 1994.
NINE MONTHS ENDED NOVEMBER 25, 1995
Revenues for the nine months ended November 25, 1995 were $164.0 million, an
increase of $12.4 million, or 8.2 %, over the corresponding period of the prior
year. The rise in revenues was primarily attributable to an increase of
approximately 10% in the average revenue per order. Order volume and catalog
circulation were comparable to the corresponding nine month period last year.
Product and delivery costs increased $8.1 million, or 12.4%, for the nine months
ended November 25, 1995. In addition, these costs rose as a percentage of
revenues from 43.2% in the prior nine month period to 44.9% 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.
Selling, general and administrative (SG&A) expenses increased $10.1 million, or
13.9%, for the nine months ended November 25, 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 47.7% for
the nine months ended November 26, 1994 to 50.2% for the current nine month
period. Higher paper and postage costs reduced pretax income for the current
nine-month period by approximately $8 million ($5 million after tax).
Page 8 of 12
The Company's average cost of producing and mailing one of its catalogs rose 18%
in the current nine 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 a 10% improvement in revenue generated per
catalog. Higher paper and postage costs are expected to continue to negatively
impact profits in the fourth quarter, and at least through the first half of
fiscal 1997.
The results for the nine month period ended November 25, 1995 reflect a non-
recurring provision of $950,000 for costs of the Company's terminated merger
with Freeman Spogli & Co. Incorporated, which is discussed more fully under
"Financial Condition" below. These costs consisted principally of legal,
accounting and filing fees.
Interest income for the current nine month period increased $.1 million from the
corresponding period last year, due to higher interest rates. Interest expense
for the nine months ended November 25, 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 nine months ended November 25, 1995 was
33%, the same as for the corresponding period last year.
FINANCIAL CONDITION
The Company's working capital ratio at November 25, 1995 was 3.29 to 1 as
compared to 5.07 to 1 at February 25, 1995 and 3.24 to 1 at November 26, 1994.
The Company's working capital needs have been met with funds generated from
operations.
During the nine months ended November 25, 1995, the Company used less funds for
working capital needs than in the corresponding period last year, despite
increased accounts receivable from higher revenues and the expansion of the
Company's deferred billing program. The Company also 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 and postage costs. Capital
expenditures were lower in the current period than last year because of the
purchase of a building for additional warehousing and distribution capacity last
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. On October 10, 1995, the Board of Directors
authorized the Company to repurchase up to one million shares of its common
stock from time to time in the open market, subject to market conditions.
The Company is in the process of expanding its 486,000 square foot National
Distribution Center by an additional 335,000 square feet. The Company believes
that its internally generated cash, as well as its available borrowing capacity,
will be sufficient to fund the project.
Page 9 of 12
PART II.
OTHER INFORMATION
Items 1, 2 and 3 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
On November 20, 1995, the Company held its Annual Meeting of
Stockholders. The matters voted upon at the meeting and the results with
respect to each such matter are summarized below:
1. Election of two Directors for the term expiring at the 1998
Annual Meeting of Stockholders.
For Withheld
--- --------
William E. Phillips 8,017,073 1,082,750
Bert W. Wasserman 8,017,073 1,082,750
2. Approval of the appointment of Coopers & Lybrand, LLP, as the
independent auditors of the Company for the year ended February 24, 1996.
For Against Abstained
--- ------- ---------
8,335,281 644,157 120,385
Item 5. Other Information
On October 10, 1995, the Company announced that its Board of Directors
had authorized the Company to purchase up to 1 million shares of its common
stock. The shares would be purchased from time to time in the open market,
subject to market conditions.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11: Computation of Earnings per Share Assuming Primary and
Full Dilution
Reports on Form 8-K:
- Filed September 19, 1995 - Item 1 - Change in Control of
Registrant:
Termination of Merger Agreement Between Registrant and
VB Investment Corporation
Page 10 of 12
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: January 8, 1996 By: /S/ Susan N. Cortazzo
Susan N. Cortazzo
Vice President, Controller
Corporate Secretary
Page 11 of 12
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Share Assuming Primary and Full Dilution
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------------- ----------------------------
November 25, November 26, November 25, November 26,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $8,426 $9,667 $5,103 $9,452
-------- -------- -------- --------
Primary Shares:
Average number of shares outstanding 9,749 9,569 9,721 9,543
Assumed exercise of stock options 208 312 301 387
-------- -------- -------- --------
9,957 9,881 10,022 9,930
-------- -------- -------- --------
Earnings Per Share Assuming Primary Dilution $.85 $.98 $.51 $.95
-------- -------- -------- --------
Fully Diluted Shares:
Average number of shares outstanding 9,749 9,569 9,721 9,543
Assumed exercise of stock options 212 312 303 387
-------- -------- -------- --------
9,961 9,881 10,024 9,930
-------- -------- -------- --------
Earnings Per Share Assuming Full Dilution $.85 $.98 $.51 $.95
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-24-1996
<PERIOD-END> NOV-25-1995
<CASH> 8,939
<SECURITIES> 0
<RECEIVABLES> 33,039
<ALLOWANCES> 0
<INVENTORY> 43,142
<CURRENT-ASSETS> 101,544
<PP&E> 52,051
<DEPRECIATION> 22,521
<TOTAL-ASSETS> 152,368
<CURRENT-LIABILITIES> 30,825
<BONDS> 2,932
0
0
<COMMON> 100
<OTHER-SE> 114,705
<TOTAL-LIABILITY-AND-EQUITY> 152,368
<SALES> 163,984
<TOTAL-REVENUES> 163,984
<CGS> 73,637
<TOTAL-COSTS> 155,960
<OTHER-EXPENSES> 950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 455
<INCOME-PRETAX> 7,616
<INCOME-TAX> 2,513
<INCOME-CONTINUING> 5,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,103
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
