<PAGE>
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 23, 1996.
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
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(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:
9,618,662 Shares of Common Stock, $.01 par value, as of January 3, 1997.
<PAGE>
LILLIAN VERNON CORPORATION
Form 10-Q
November 23, 1996
Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Consolidated Balance Sheets as of
November 23, 1996, November 25, 1995
(unaudited) and February 24, 1996
(audited) 3
Consolidated Statements of Income
for the quarter and nine months ended
November 23, 1996 and November 25, 1995
(unaudited) 4
Consolidated Statements of
Cash Flows for the nine months ended
November 23, 1996 and November 25, 1995
(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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
November 23, November 25, February 24,
1996 1995 1996
------------ ------------- -----------
(Unaudited) (Audited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,443 $ 8,939 $ 25,771
Accounts receivable 32,522 33,039 21,435
Merchandise inventories 44,888 43,142 30,948
Deferred income taxes -- -- 923
Prepayments and other current assets 11,121 16,424 14,231
--------- --------- ---------
Total current assets 91,974 101,544 93,308
Property, plant and equipment, net (Note 1) 40,847 29,530 33,624
Deferred catalog costs 19,196 18,163 6,506
Other assets 2,374 3,131 2,947
--------- --------- ---------
Total $ 154,391 $ 152,368 $ 136,385
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 30,204 $ 24,362 $ 12,115
Customer deposits 1,641 1,993 128
Current portion of long-term debt and lease obligations 1,480 1,443 1,452
Revolving debt (Note 2) -- -- --
Income taxes payable -- -- 2,892
Deferred income taxes 2,795 3,027 --
--------- --------- ---------
Total current liabilities 36,120 30,825 16,587
Long-term debt, less current portion 1,271 2,546 2,544
Capital lease obligations, less current portion 182 386 339
Deferred compensation 3,400 3,092 3,099
Deferred income taxes 393 714 623
--------- --------- ---------
Total liabilities 41,366 37,563 23,192
--------- --------- ---------
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 - 10,361,401 shares, 9,976,537 shares
and 9,993,643 shares 104 100 100
Additional paid-in capital 30,764 26,816 27,026
Retained earnings 92,827 91,980 91,923
Unearned compensation (127) -- --
Treasury stock, at cost -714,658 shares, 233,099 shares
and 359,999 shares (10,543) (4,091) (5,856)
--------- --------- ---------
Total stockholders' equity 113,025 114,805 113,193
--------- --------- ---------
Total $ 154,391 $ 152,368 $ 136,385
--------- --------- ---------
See Notes to Consolidated Financial Statements
Page 3 of 12
</TABLE>
<PAGE>
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 23, November 25, November 23, November 25,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 100,343 $ 97,450 $ 159,626 $ 163,984
Costs and expenses:
Product and delivery costs 42,039 41,659 72,457 73,645
Selling, general and administrative expenses 44,984 43,159 82,582 82,315
Merger - related expenses (Note 3) -- -- -- 950
--------- --------- --------- ---------
87,023 84,818 155,039 156,910
--------- --------- --------- ---------
Operating income 13,320 12,632 4,587 7,074
Interest income 4 109 418 997
Interest expense (265) (165) (492) (455)
--------- --------- --------- ---------
Income before income taxes 13,059 12,576 4,513 7,616
Provision for (benefit from) income taxes:
Current 3,121 3,195 (1,929) (662)
Deferred 1,261 955 3,491 3,175
--------- --------- --------- ---------
4,382 4,150 1,562 2,513
Net income $ 8,677 $ 8,426 $ 2,951 $ 5,103
--------- --------- --------- ---------
Net income per common share outstanding $ .90 $ .86 $ .31 $ .52
--------- --------- --------- ---------
Weighted average number of shares outstanding 9,666 9,749 9,670 9,721
See Notes to Consolidated Financial Statements
Page 4 of 12
</TABLE>
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
November 23, November 25,
1996 1995
-------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $2,951 $5,103
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 2,802 2,413
Amortization 341 285
(Increase) decrease in accounts receivable (11,087) (11,557)
(Increase) decrease in merchandise inventories (13,940) (12,724)
(Increase) decrease in prepayments and other current assets 3,110 (8,929)
(Increase) decrease in deferred catalog costs (12,690) (11,531)
(Increase) decrease in other assets (201) (370)
Increase (decrease) in trade accounts payable and accrued expenses 18,089 10,306
Increase (decrease) in customer deposits 1,513 1,608
Increase (decrease) in income taxes payable (2,892) (3,576)
Increase (decrease) in deferred compensation 301 179
Increase (decrease) in deferred income taxes 3,488 3,176
-------------- -----------
Net cash used in operating activities (8,215) (25,617)
-------------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,522) (2,356)
-------------- -----------
Net cash used in investing activities (9,522) (2,356)
-------------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,402) (1,380)
Proceeds from issuance of common stock 1,057 1,381
Proceeds from short term borrowings 12,500 --
Repayment of short term borrowings (12,500) --
Dividends paid (2,048) (2,044)
Payments to acquire treasury stock (2,855) (77)
Other 657 253
-------------- -----------
Net cash used in financing activities (4,591) (1,867)
-------------- -----------
Net decrease in cash and cash equivalents (22,328) (29,840)
-------------- -----------
Cash and cash equivalents at beginning of period 25,771 38,779
-------------- -----------
Cash and cash equivalents at end of period $3,443 $8,939
-------------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $563 $571
Income taxes 3,129 3,920
Supplemental disclosure of noncash financing activities--See Note 4
See Notes to Consolidated Financial Statements
Page 5 of 12
</TABLE>
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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 3), 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 24, 1996.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
November 23, November 25, February 24,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Land and buildings $31,454 $21,140 $25,578
Machinery and equipment 25,978 22,801 21,894
Furniture and fixtures 3,310 3,158 3,240
Leasehold improvements 3,772 3,690 3,777
Capital leases 1,262 1,262 1,262
------- ------- --------
Total property, plant &
equipment, at cost 65,776 52,051 55,751
Less, accumulated depreciation
and amortization 24,929 22,521 22,127
------- ------- --------
Property, plant and equipment - net $40,847 $29,530 $33,624
------- ------- --------
</TABLE>
2. CREDIT FACILITY
On August 19, 1996, the Company entered into a $42 million four-year revolving
credit facility with Chase Manhattan Bank and NationsBank, which can be used
for general corporate purposes, including working capital needs, the expansion
of the National Distribution Center and up to $12 million of inventory letters
of credit. At the Company's option, up to $20 million of the facility can be
converted into term loans, with maturity dates no later than 2003. Interest is
payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate
plus 50 basis points, or a fixed rate, at the Company's option. The credit
facility is unsecured, and the Company is subject to various financial
covenants principally relating to its working capital, net worth, interest
coverage ratio and capital spending restrictions. The credit facility replaced
previously existing credit facilities. Commitment fees range from 5 basis
points annually on the letters of credit to 20 basis points annually on the
available revolving credit line.
Through the third quarter of fiscal 1997, the Company had borrowed up to $12.5
million under the revolving credit facility, but as of November 23, 1996, had
repaid all of these borrowings. Interest was payable at a weighted average
interest rate of approximately 5.8%. There were approximately $5.9 million of
letters of credit outstanding as of November 23, 1996.
Page 6 of 12
<PAGE>
3.TERMINATED MERGER AGREEMENT
On June 13, 1995, the Company entered into a Merger Agreement with an affiliate
of Freeman Spogli & Co. Incorporated, under which the Company would have been
recapitalized. The Merger Agreement was terminated on September 18, 1995 when
it was determined that financing for the transaction could not be obtained. A
provision for the costs of the terminated merger of $950,000 was recorded in
the financial statements for the period ended November 25, 1995. These costs
consisted principally of legal, accounting and filing fees.
4. NONCASH FINANCING ACTIVITIES
On May 25, 1996, non-qualified stock options aggregating 180,000 shares were
exercised by one of the Company's Officers, with a total exercise price of
$1,440,000. As consideration for the exercise price and for income taxes
required to be withheld, the Company received an aggregate of 133,759 shares
of Lillian Vernon Common Stock, which are reported as Treasury Stock on the
balance sheet. The number of shares was determined by the market price of the
Company's common stock on the exercise date.
5. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial statements
to conform with the current year presentation.
Page 7 of 12
<PAGE>
ITEM 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Results of Operations
- ---------------------
Quarter Ended November 23, 1996
- -------------------------------
Revenues for the quarter ended November 23, 1996 were $100.3 million, an
increase of $2.9 million, or 3.0%, over the quarter ended November 25, 1995.
The increase in revenues was primarily attributable to approximately 3% higher
average revenue per order.
Product and delivery costs increased $.4 million, or 1.0%, in the quarter
ended November 23, 1996, as compared to the third quarter of the prior year.
These costs comprised a lower percentage of revenues, 41.9% in the quarter
ended November 23, 1996, as compared to 42.7% in the quarter ended November
25, 1995. The main reason was because product profit margin improved, mostly
because of less inventory liquidation.
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 $1.8 million, or 4.2%, in part because catalog circulation
was approximately 4% higher. In addition, other SG&A costs rose, particularly
to support the Company's specialty catalogs and to develop new business
strategies such as the Frequent Buyers' Club and the Japanese catalog mailing.
As a percentage of revenues, SG&A costs increased from 44.3% in the quarter
ended November 25, 1995 to 44.8% in the quarter ended November 23, 1996.
When prices were higher than current prices, the Company had purchased paper
in advance of its needs to ensure an adequate supply. As a result, during the
third quarter, it still had an inventory of higher-priced paper for its core
catalogs, which is not expected to be substantially utilized until the end of
the current fiscal year. The Company has also bought paper at the lower
current market prices, mostly for its specialty catalogs, and the third
quarter has begun to reflect these lower paper costs. For the third quarter,
the average cost of paper (per ton) used in the Company's catalogs was about
8% lower than last year.
Interest income for the quarter ended November 23, 1996 decreased $.1 million,
and interest expense rose $.1 million as compared to the same period last
year. This year, the Company did not have excess funds invested during the
third quarter, and instead, borrowed under its revolving credit facility.
The effective income tax rate was 33.6% for the quarter ended November 23,
1996 and 33% for the quarter ended November 25, 1995.
Nine Months Ended November 23, 1996
- -----------------------------------
Revenues for the nine months ended November 23, 1996 were $159.6 million, a
decrease of $4.4 million, or 2.7%, lower than the corresponding period of the
prior year. The decline in revenues was primarily attributable to the
Company's strategic decision to reduce catalog circulation due to higher paper
prices in the first half of the fiscal year, and raise circulation in the
second half, its most important selling season. For the current nine-month
period, circulation was approximately 5% lower than the same period last year.
Average revenue per order increased 5% for the nine months ended November 23,
1996, while the volume of orders shipped declined about 7% as compared to the
corresponding nine month period last year.
Product and delivery costs declined $1.2 million, or 1.6%, for the nine months
ended November 23, 1996 because of the lower sales volume. These costs rose as
a percentage of revenues from 44.9% in the prior nine month period to 45.4% in
the current period. Although product profit margin improved principally
because of less inventory liquidation, the other elements of product and
delivery costs rose, particularly depreciation associated with the recent
expansion of the Company's National Distribution Center. Shipping and handling
revenue, which
Page 8 of 12
<PAGE>
offsets product and delivery costs in the financial statements, was reduced by
certain promotions the Company ran this year, also contributing to higher net
product and delivery costs.
Selling, general and administrative (SG&A) expenses increased $.3 million, or
0.3%, for the nine months ended November 23, 1996, as compared to the
corresponding period of the prior year. As a percentage of revenues, SG&A
costs increased from 50.2% for the nine months ended November 25, 1995 to
51.7% for the current nine month period. Even though average revenue per
catalog rose by approximately 3% for the current nine-month period, higher
paper prices for the Company's catalogs, and a rise in the other elements of
SG&A expenses, particularly to support the Company's specialty catalogs and to
develop new business strategies, caused the amount and ratio of SG&A costs as
a percentage of revenues to increase.
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. These costs consisted
principally of legal, accounting and filing fees.
Interest income for the current nine month period decreased $.6 million from
the corresponding period last year, due to a lower average investment balance.
Interest expense for the nine months ended November 23, 1996 was approximately
equal to the same period of the prior year. A reduction of interest expense
caused by the repayment of long-term debt was offset by additional interest
expense on borrowings under the Company's revolving credit facility in the
third quarter.
The effective income tax rate for the nine months ended November 23, 1996 was
34.6%, as compared to 33.0% for the corresponding period last year.
Financial Condition
- -------------------
The Company's working capital ratio at November 23, 1996 was 2.55 to 1 as
compared to 5.63 to 1 at February 24, 1996 and 3.29 to 1 at November 25, 1995.
The Company's working capital needs have been met with funds generated from
operations, and from drawdowns against its revolving credit facility.
During the nine months ended November 23, 1996, the Company used less funds
for working capital needs than in the corresponding period last year, mostly
because of less advance purchases of paper for its catalogs. The Company
expended capital of approximately $9.5 million during the first nine months of
fiscal 1997, primarily to expand its National Distribution Center by an
additional 335,000 square feet, and to enhance its order processing system.
The expansion project was completed on time and on budget, and was fully
operational in early September 1996.
On August 19, 1996, the Company entered into a $42 million four-year revolving
credit facility with Chase Manhattan Bank and NationsBank. The funds drawn
down under the revolver can be used for general corporate purposes, including
working capital needs, capital spending, and up to $12 million of inventory
letters of credit. At the Company's option, up to $20 million can be converted
into term loans, with maturity dates no later than 2003. Interest is payable
at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus 50
basis points, or a fixed rate, at the Company's option. The credit facility is
unsecured, and the Company is subject to various financial covenants
principally relating to its working capital, net worth, interest coverage
ratio, and capital spending restrictions. The credit facility replaced
previously existing credit lines. Through the third quarter of fiscal 1997,
the Company had borrowed up to $12.5 million under the revolving credit
agreement, but as of the end of the quarter, had repaid all of these
borrowings. There were approximately $5.9 million of letters of credit
outstanding as of November 23, 1996.
During the nine months ended November 23, 1996, the Company continued its open
market stock repurchase program, and acquired 220,900 shares of its common
stock for approximately $2.9 million. As of November 23, 1996, the Company had
acquired a total of 353,200 shares since the repurchase plan was authorized on
October 10, 1995.
Page 9 of 12
<PAGE>
PART II.
OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.
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: None
Page 10 of 12
<PAGE>
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 6, 1997 By:
--------------- ------------------------
Robert S. Mednick
Vice President,
Chief Financial Officer
Page 11 of 12
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EXHIBIT 11
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 23, NOVEMBER 25, NOVEMBER 23, NOVEMBER 25,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income .................................. $8,677 $8,426 $2,951 $ 5,103
-------------- -------------- -------------- --------------
Primary Shares:
Average number of shares outstanding ...... 9,666 9,749 9,670 9,721
Assumed exercise of stock options .......... -- 208 7 301
-------------- -------------- -------------- --------------
9,666 9,957 9,677 10,022
-------------- -------------- -------------- --------------
Earnings Per Share Assuming Primary Dilution $ .90 $ .85 $ .30 $ .51
-------------- -------------- -------------- --------------
Fully Diluted Shares:
Average number of shares outstanding ...... 9,666 9,749 9,670 9,721
Assumed exercise of stock options .......... -- 212 7 303
-------------- -------------- -------------- --------------
9,666 9,961 9,677 10,024
-------------- -------------- -------------- --------------
Earnings Per Share Assuming Full Dilution .. $ .90 $ .85 $ .30 $ .51
-------------- -------------- -------------- --------------
Page 12 of 12
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-22-1997
<PERIOD-END> NOV-23-1996
<CASH> 3,443
<SECURITIES> 0
<RECEIVABLES> 32,522
<ALLOWANCES> 0
<INVENTORY> 44,888
<CURRENT-ASSETS> 91,974
<PP&E> 65,775
<DEPRECIATION> 24,928
<TOTAL-ASSETS> 154,391
<CURRENT-LIABILITIES> 36,120
<BONDS> 1,453
0
0
<COMMON> 104
<OTHER-SE> 112,921
<TOTAL-LIABILITY-AND-EQUITY> 154,391
<SALES> 159,626
<TOTAL-REVENUES> 159,626
<CGS> 72,457
<TOTAL-COSTS> 155,039
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492
<INCOME-PRETAX> 4,513
<INCOME-TAX> 1,562
<INCOME-CONTINUING> 2,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,951
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
