<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 22, 1997.
-------------------------------------------------
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:
9,426,216 Shares of Common Stock, $.01 par value, as of January 2, 1998.
<PAGE>
LILLIAN VERNON CORPORATION
--------------------------
Form 10-Q
November 22, 1997
Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Consolidated Balance Sheets as of
November 22, 1997, November 23, 1996
(unaudited) and February 22, 1997
(audited) 3
Consolidated Statements of Income
for the quarter and nine months ended
November 22, 1997 and November 23, 1996
(unaudited) 4
Consolidated Statements of
Cash Flows for the nine months ended
November 22, 1997 and November 23, 1996
(unaudited) 5
Notes to Consolidated Financial
Statements 6
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7-9
Part II. Other Information 10
- --------------------------
Signatures 11
Exhibits 12
Page 2 of 12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 22, NOVEMBER 23, FEBRUARY 22,
ASSETS 1997 1996 1997
------ ------------- ------------- -------------
(Unaudited) (Audited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,429 $ 3,443 $ 22,746
Accounts receivable 32,438 32,522 24,476
Merchandise inventories 52,892 44,888 30,480
Deferred income taxes -- -- 1,548
Prepayments and other current assets 8,082 11,121 10,438
--------- --------- ---------
Total current assets 95,841 91,974 89,688
Property, plant and equipment, net (Note 1) 39,490 40,847 40,319
Deferred catalog costs 19,618 19,196 6,140
Other assets 3,059 2,374 2,402
--------- --------- ---------
Total $ 158,008 $ 154,391 $ 138,549
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable and accrued expenses $ 31,061 $ 30,204 $ 14,485
Customer deposits 1,550 1,641 260
Current portion of long-term debt and lease obligations 1,452 1,480 1,489
Revolving debt (Note 2) -- -- --
Income taxes payable -- -- 2,715
Deferred income taxes 2,722 2,795 --
--------- --------- ---------
Total current liabilities 36,785 36,120 18,949
Long-term debt, less current portion -- 1,271 1,270
Capital lease obligations, less current portion -- 182 124
Deferred compensation 3,444 3,400 3,500
Deferred income taxes 753 393 380
--------- --------- ---------
Total liabilities 40,982 41,366 24,223
--------- --------- ---------
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 - 10,387,858 shares, 10,361,401 shares
and 10,363,320 shares 104 104 104
Additional paid-in capital 31,120 30,764 30,783
Retained earnings 99,340 92,827 94,553
Unearned compensation (23) (127) (94)
Treasury stock, at cost - 905,458 shares, 714,658 shares
and 753,458 shares (13,515) (10,543) (11,020)
--------- --------- ---------
Total stockholders' equity 117,026 113,025 114,326
--------- --------- ---------
Total $ 158,008 $ 154,391 $ 138,549
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 12
<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 22, NOVEMBER 23, NOVEMBER 22, NOVEMBER 23,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 106,305 $ 100,343 $ 171,309 $ 159,626
Costs and expenses:
Product and delivery costs 47,577 42,039 81,262 72,457
Selling, general and administrative expenses 44,056 44,984 79,908 82,582
--------- --------- --------- ---------
91,633 87,023 161,170 155,039
--------- --------- --------- ---------
Operating income 14,672 13,320 10,139 4,587
Interest income 3 4 586 418
Interest expense (199) (265) (382) (492)
--------- --------- --------- ---------
Income before income taxes 14,476 13,059 10,343 4,513
Provision for (benefit from) income taxes:
Current 2,090 3,121 (976) (1,929)
Deferred 2,832 1,261 4,493 3,491
--------- --------- --------- ---------
4,922 4,382 3,517 1,562
--------- --------- --------- ---------
Net income $ 9,554 $ 8,677 $ 6,826 $ 2,951
--------- --------- --------- ---------
Net income per common share outstanding $ 1.00 $ .90 $ .71 $ .31
--------- --------- --------- ---------
Weighted average number of shares outstanding 9,516 9,666 9,575 9,670
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 12
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
NOVEMBER 22, NOVEMBER 23,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,826 $ 2,951
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 3,068 2,802
Amortization 180 341
(Increase) decrease in accounts receivable (7,962) (11,087)
(Increase) decrease in merchandise inventories (22,412) (13,940)
(Increase) decrease in prepayments and other current assets 2,356 3,110
(Increase) decrease in deferred catalog costs (13,478) (12,690)
(Increase) decrease in other assets (766) (201)
Increase (decrease) in trade accounts payable and accrued expenses 16,576 18,089
Increase (decrease) in customer deposits 1,290 1,513
Increase (decrease) in income taxes payable (2,715) (2,892)
Increase (decrease) in deferred compensation (56) 301
Increase (decrease) in deferred income taxes 4,643 3,488
-------- --------
Net cash used in operating activities (12,450) (8,215)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,239) (9,522)
-------- --------
Net cash used in investing activities (2,239) (9,522)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,431) (1,402)
Proceeds from issuance of common stock 317 1,057
Proceeds from short term borrowings 11,500 12,500
Repayment of short term borrowings (11,500) (12,500)
Dividends paid (2,039) (2,048)
Payments to acquire treasury stock (2,495) (2,855)
Other 20 657
-------- --------
Net cash used in financing activities (5,628) (4,591)
-------- --------
Net decrease in cash and cash equivalents (20,317) (22,328)
-------- --------
Cash and cash equivalents at beginning of period 22,746 25,771
-------- --------
Cash and cash equivalents at end of period $ 2,429 $ 3,443
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 339 $ 563
Income taxes 2,869 3,129
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 12
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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, 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 22, 1997.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
November 22, November 23, February 22,
1997 1996 1997
------------ ------------ ------------
Land and buildings $31,771 $31,454 $31,656
Machinery and equipment 28,404 25,978 26,512
Furniture and fixtures 3,369 3,310 3,313
Leasehold improvements 3,952 3,772 3,776
Capital leases 1,262 1,262 1,262
------- ------- -------
Total property, plant &
equipment, at cost 68,758 65,776 66,519
Less, accumulated depreciation
and amortization 29,268 24,929 26,200
------- ------- -------
Property, plant and equipment - net $39,490 $40,847 $40,319
------- ------- -------
2. CREDIT FACILITY
During the third quarter of fiscal 1998, the Company had borrowed up to $11.5
million under its revolving credit facility, but as of November 22, 1997, had
repaid all of these borrowings. Interest was payable at a weighted average
interest rate of approximately 6.1%. There were approximately $6.9 million of
inventory letters of credit outstanding as of November 22, 1997.
3. NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The standard
revises the computation and presentation of earnings per share and will be
adopted by the Company in the fourth quarter of fiscal 1998. The Company does
not expect the adoption of this statement to have a material impact on reported
earnings per share.
Page 6 of 12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended November 22, 1997
Revenues for the quarter ended November 22, 1997 were $106.3 million, an
increase of $6.0 million, or 5.9%, over the quarter ended November 23, 1996.
The increase in revenues was primarily attributable to an increased volume of
orders, resulting from improved response to the Company's merchandise
offerings. The Company's average amount of sales per catalog increased by over
8%.
Product and delivery costs increased $5.5 million, or 13.2%, in the quarter
ended November 22, 1997, as compared to the third quarter of the prior year.
These costs also comprised a higher percentage of revenues, 44.8% in the
current quarter, compared to 41.9% in the third quarter last year. The increase
in dollars was partially due to the higher volume of orders. In addition, the
Company broadened its range of prices, and offered a greater percentage of
personalized products compared to last year. While these strategies produced
incremental sales per catalog, the Company's costs of merchandise, and labor to
personalize products also rose relative to revenues. Other cost increases
included UPS and Postal rates to ship the Company's orders, toll-free telephone
charges, and wage rates.
Selling, general and administrative (SG&A) expenses, the largest component of
which is the cost of producing, printing and distributing the Company's
catalogs, declined $.9 million, or 2.1%, on approximately the same catalog
circulation. As a percentage of revenues, SG&A costs declined to 41.4% in the
third quarter this year, from 44.8% in the third quarter last year.
The average cost of paper used in the Company's catalogs was approximately
27% lower than the third quarter last year, contributing significantly to the
reduced costs and improved percentage of revenues. In addition, by generating
over 8% higher average sales per catalog, the Company improved the ratio
of catalog costs to revenues.
Interest income was comparable between the third quarters of both years.
Interest expense declined by $66,000 in the quarter ended November 22, 1997,
compared to the quarter ended November 23, 1996, principally because of the
scheduled repayment of long-term debt, and a lower average revolving debt
balance this year.
The effective income tax rate was 34% for the quarter ended November 22, 1997,
compared to 33.5% in the third quarter last year.
Nine Months Ended November 22, 1997
Revenues for the nine months ended November 22, 1997 were $171.3 million, an
increase of $11.7 million, or 7.3%, compared to the nine months ended November
23, 1996. The increase in revenues was attributable to both an increase of
approximately 5% in orders, and an increase of approximately 4% in average
revenue per order.
Page 7 of 12
<PAGE>
Product and delivery costs rose by $8.8 million, or 12.2%, in the nine months
ended November 22, 1997, compared to the same period last year. These costs
also rose as a percentage of revenues from 45.4% in the nine month period last
year, to 47.4% in the same period this year. The increase in dollars was
partially due to the higher volume of orders. The increase in the percentage of
revenues was due both to reduced profit margins on merchandise sold, as well
as higher costs to process orders in the Company's Distribution Center. Some
factors affecting these costs included an expansion of the Company's
merchandise mix to include a broader range of price points, and an increase in
the percentage of personalized products, both of which the Company believes
increased sales per catalog, but raised costs relative to revenues.
Selling, general and administrative (SG&A) expenses declined $2.7 million, or
3.2%, in the nine months ended November 22, 1997, compared to the nine months
ended November 23, 1996. As a percentage of revenues, SG&A costs declined to
46.6% in the nine month period this year, from 51.7% in the same period last
year. Catalog circulation was about the same in both periods. The average cost
of paper used in the Company's catalogs was approximately 26% lower than in
the nine month period last year. In addition, by generating 9% higher average
sales per catalog, the Company improved the ratio of catalog costs to revenues.
Interest income was $168,000 higher in the nine months ended November 22, 1997,
compared to the nine months ended November 23, 1996, due to a higher average
investment balance. Interest expense was $110,000 lower in the current nine
month period compared to the same period last year, due principally to
scheduled repayments of long-term debt.
The effective income tax rate in the current nine month period was 34%,
compared to 34.6% for the same period last year.
Financial Condition
The Company's working capital ratio at November 22, 1997 was 2.61 to 1 as
compared to 4.73 to 1 at February 22, 1997 and 2.55 to 1 at November 23, 1996.
The Company's working capital needs have been met with funds generated from
operations, and from drawdowns against its revolving credit facility.
The Company used more funds for operating activities in the current nine month
period compared to the same period last year, principally because of a higher
inventory balance at November 22, 1997. The Company built up inventory in
anticipation of higher fourth quarter sales compared to last year, but also to
try to minimize lost sales and costs from backorders. The Company expects to
end fiscal 1998 with a higher level of inventory than in the prior year, but
anticipates selling the inventory without major markdowns. The Company spent
$7.3 million less for capital expenditures in the current nine month period,
compared to last year, when the Company expanded its National Distribution
Center. The Company has committed to upgrade its order entry system, with total
projected spending of approximately $2.8 million in fiscal 1999. Overall,
during the current nine month period, the Company used a comparable amount of
cash as in the same period last year. Based on the Company's seasonal business,
the fourth quarter is a period of cash replenishment as receivables are
collected, inventories are sold, and prepaid catalog costs are utilized.
Page 8 of 12
<PAGE>
During the nine months ended November 22, 1997, the Company continued its open
market stock repurchase program, and acquired 152,000 shares of its common
stock for approximately $2.5 million. As of November 22, 1997, the Company had
acquired a total of 536,500 shares since the repurchase plan was authorized on
October 10, 1995.
At the Company's December 18, 1997 Board of Directors meeting, the regular
quarterly cash dividend was increased from $.07 per share to $.08 per share,
for all stockholders of record as of February 16, 1998, payable on March 2,
1998.
Forward Looking Statements
Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements which are based on the Company's current
expectations and assumptions. Various factors could cause actual results to
differ materially from those set forth in such statements. These factors
include, but are not limited to, the potential for changes in consumer
spending, consumer preferences and general economic conditions, increasing
competition in the direct mail industry, changes in government regulations,
dependence on foreign suppliers, and possible future increases in operating
costs, including postage and paper costs. For further information, see Part I
of Form 10-K for the fiscal year ended February 22, 1997.
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 5, 1998 By: /s/ Robert S. Mednick
------------------- --------------------------------
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 22, NOVEMBER 23, NOVEMBER 22, NOVEMBER 23,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $9,554 $8,677 $6,826 $2,951
------ ------ ------ ------
Primary Shares:
Average number of shares outstanding 9,516 9,666 9,575 9,670
Assumed exercise of stock options 139 -- 95 7
------ ------ ------ ------
9,655 9,666 9,670 9,677
------ ------ ------ ------
Earnings Per Share Assuming Primary Dilution $ .99 $ .90 $ .71 $ .30
------ ------ ------ ------
Fully Diluted Shares:
Average number of shares outstanding 9,516 9,666 9,575 9,670
Assumed exercise of stock options 139 -- 95 7
------ ------ ------ ------
9,655 9,666 9,670 9,677
------ ------ ------ ------
Earnings Per Share Assuming Full Dilution $ .99 $ .90 $ .71 $ .30
------ ------ ------ ------
</TABLE>
Page 12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-22-1997
<CASH> 2,429
<SECURITIES> 0
<RECEIVABLES> 32,438
<ALLOWANCES> 0
<INVENTORY> 52,892
<CURRENT-ASSETS> 95,841
<PP&E> 68,758
<DEPRECIATION> 29,268
<TOTAL-ASSETS> 158,008
<CURRENT-LIABILITIES> 36,785
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 116,922
<TOTAL-LIABILITY-AND-EQUITY> 158,008
<SALES> 171,309
<TOTAL-REVENUES> 171,309
<CGS> 81,262
<TOTAL-COSTS> 161,170
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 382
<INCOME-PRETAX> 10,343
<INCOME-TAX> 3,517
<INCOME-CONTINUING> 6,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,826
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
</TABLE>
