<PAGE>
Form 10-Q/A
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 29, 1998.
-----------------------------------------------
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)
1 Theall Road, Rye, New York 10580
----------------------------------
(Address of principal executive offices) (Zip Code)
914-925-1200
--------------------------------------------------
(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:
9,134,071 Shares of Common Stock, $.01 par value, as of October 9, 1998.
<PAGE>
LILLIAN VERNON CORPORATION
--------------------------
Form 10-Q/A
August 29, 1998
Part I. Financial Information Page #
- ------------------------------ ------
Item 1.
Consolidated Balance Sheets as of
August 29, 1998, August 23, 1997
(unaudited) and February 28, 1998
(audited) 4
Consolidated Statements of Operations
for the quarter and six months
ended August 29, 1998 and August 23, 1997
(unaudited) 5
Consolidated Statements of Cash Flows
for the six months ended August
29, 1998 and August 23, 1997
(unaudited) 6
Notes to Consolidated Financial
Statements 7-8
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-12
Signatures 13
Page 2 of 13
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RESTATED FORM 10-Q
In connection with the planned relocation of its corporate headquarters to
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).
The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.
The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated to the appropriate
fiscal periods.
For further information, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations and Footnote 3 to the Company's
Consolidated Financial Statements.
Page 3 of 13
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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>
AUGUST 29, AUGUST 23, FEBRUARY 28,
ASSETS 1998 1997 1998
------------------- --------------- -------------------
(Unaudited) (Audited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 398 $ 6,955 $ 26,136
Accounts receivable 12,340 12,115 22,632
Merchandise inventories 56,164 52,400 36,935
Deferred income taxes -- -- 1,532
Prepayments and other current assets 27,470 21,311 10,173
------------------- --------------- -------------------
Total current assets 96,372 92,781 97,408
Property, plant and equipment, net (Note 1) 37,975 38,796 37,823
Deferred catalog costs 11,327 10,210 5,922
Other assets 3,823 2,554 3,206
------------------- --------------- -------------------
Total $149,497 $144,341 $144,359
------------------- --------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 19,641 $ 25,774 $ 16,331
Cash overdrafts 5,596 3,716 1,004
Customer deposits 543 374 147
Current portion of long-term debt and lease
obligations 635 1,508 1,394
Revolving debt 10,500 -- --
Income taxes payable -- -- 4,581
Deferred income taxes 335 -- --
------------------- --------------- --------------------
Total current liabilities 37,250 31,372 23,457
Long-term debt , less current portion -- 635 --
Capital lease obligations, less current portion -- -- --
Deferred compensation 3,384 3,464 3,426
Deferred income taxes 2,185 422 637
------------------- --------------- --------------------
Total liabilities 42,819 35,893 27,520
------------------- --------------- --------------------
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 -10,389,674 shares,
10,368,061 shares and 10,389,674 shares 104 104 104
Additional paid-in capital 31,148 30,846 31,160
Retained earnings 94,653 89,765 100,883
Unearned compensation -- (40) (6)
Treasury stock, at cost - 1,240,659 shares, 825,958
shares and 1,016,491 shares (19,227) (12,227) (15,302)
-------------------- ----------------- ---------------------
Total stockholders' equity 106,678 108,448 116,839
-------------------- ----------------- ---------------------
Total $149,497 $144,341 $144,359
-------------------- ------------------ ---------------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 13
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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 29, AUGUST 23, AUGUST 29, AUGUST 23,
1998 1997 1998 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $39,386 $37,257 $71,397 $65,005
Costs and expenses:
Product and delivery costs 20,478 19,388 35,990 33,685
Selling, general and administrative
expenses 21,885 18,637 42,797 35,950
---------- ----------- ----------- ------------
42,363 38,025 78,787 69,635
---------- ----------- ----------- ------------
Operating loss (2,977) (768) (7,390) (4,630)
Interest income 100 229 456 582
Interest expense (105) (90) (178) (183)
---------- ----------- ----------- ------------
Loss before income taxes (2,982) (629) (7,112) (4,231)
Provision for (benefit from) income taxes:
Current (3,870) (1,611) (5,833) (3,066)
Deferred 2,856 1,397 3,415 1,627
---------- ----------- ----------- ------------
(1,014) (214) (2,418) (1,439)
---------- ----------- ----------- ------------
Net loss ($1,968) ($415) ($4,694) ($2,792)
---------- ----------- ----------- ------------
Net loss per common share - Basic ($.21) ($.04) ($.50) ($.29)
---------- ----------- ----------- ------------
Net loss per common share - Diluted ($.21) ($.04) ($.50) ($.29)
---------- ----------- ----------- ------------
Weighted average number of common shares
Basic and Diluted 9,285 9,599 9,325 9,605
---------- ----------- ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 13
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LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------------
AUGUST 29, AUGUST 23,
1998 1997
------------------------ ---------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,694) ($2,792)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,401 1,430
Amortization 96 247
(Increase) decrease in accounts receivable 10,292 12,361
(Increase) decrease in merchandise inventories (19,229) (21,920)
(Increase) decrease in prepayments and other current assets (17,297) (10,873)
(Increase) decrease in deferred catalog costs (5,405) (4,070)
(Increase) decrease in other assets (707) (345)
Increase (decrease) in trade accounts payable and accrued expenses 3,310 11,289
Increase (decrease) in customer deposits 396 114
Increase (decrease) in income taxes payable (4,581) (2,715)
Increase (decrease) in deferred compensation (42) (36)
Increase (decrease) in deferred income taxes 3,415 1,912
------------------------ ------------------------
Net cash used in operating activities (33,045) (15,398)
------------------------ ------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,553) (853)
------------------------ ------------------------
Net cash used in investing activities (1,553) (853)
------------------------ ------------------------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (759) (740)
Proceeds from short term borrowings 10,500 --
Increase in cash overdrafts 4,592 2,364
Proceeds from issuance of common stock -- 63
Dividends paid (1,536) (1,372)
Payments to acquire treasury stock (5,280) (1,207)
Reissuance of treasury stock 1,355 --
Other (12) --
------------------------ ------------------------
Net cash provided by (used in) financing activities 8,860 (892)
------------------------ ------------------------
Net decrease in cash and cash equivalents (25,738) (17,143)
------------------------ ------------------------
Cash and cash equivalents at beginning of period 26,136 24,098
------------------------ ------------------------
Cash and cash equivalents at end of period $ 398 $ 6,955
------------------------ ------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 125 $ 157
Income taxes 4,642 2,857
</TABLE>
See Notes to Consolidated Financial Statements
Page 6 of 13
<PAGE>
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 28, 1998.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
August 29, August 23, February 28,
1998 1997 1998
---------- ----------- ------------
<S> <C> <C> <C>
Land and buildings $31,897 $31,751 $31,778
Machinery and equipment 30,341 27,244 29,035
Furniture and fixtures 3,602 3,328 3,561
Leasehold improvements 996 3,787 3,989
Capital leases - 1,262 1,262
------- ------- -------
Total property, plant &
equipment, at cost 66,836 67,372 69,625
Less, accumulated depreciation
and amortization 28,861 28,576 31,802
------- ------- -------
Property, plant and equipment - net $37,975 $38,796 $37,823
------- ------- -------
</TABLE>
Page 7 of 13
<PAGE>
2. EARNINGS PER SHARE
------------------
Basic and Diluted loss per share were calculated in accordance with
Statement of Financial Accounting Standards No. 128 as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
---------------------- ---------------------
August 29, August 23, August 29, August 23,
1998 1997 1998 1997
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net Loss-Basic and Diluted ($1,968) ($415) ($4,694) ($2,792)
-------- -------- -------- --------
Weighted average shares for
Basic EPS 9,285 9,599 9,325 9,605
Add: Incremental shares from
stock option exercises - - - -
------- ------ ----- -----
Weighted average shares for
Diluted EPS 9,285 9,599 9,325 9,605
------- ------ ----- -----
</TABLE>
For the second quarters ended August 29, 1998 and August 23, 1997, options on
144,000 and 142,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.
For the six months ended August 29, 1998 and August 23, 1997, options on
155,000 and 86,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.
3. RESTATED FINANCIAL INFORMATION
In connection with the planned relocation of its corporate headquarters to
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).
The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.
The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated as income (expense) to the
appropriate fiscal years as follows:
EPS Impact-
----------------
Fiscal Years Ended Pre-tax Amount After-tax Amount Basic Diluted
- ------------------ -------------- ---------------- ----- -------
1985 - 1995 ($577,000) ($381,000) Not Applicable
February 24, 1996 ($182,000) ($120,000) ($.01) ($.01)
February 22, 1997 ($187,000) ($124,000) ($.01) ($.01)
February 28, 1998 $1,136,000 $750,000 $.08 $.08
February 27, 1999 ($190,000) ($125,000) ($.01) ($.01)
4. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made in the prior year financial statements
to conform with fiscal 1999 presentation.
5. SUBSEQUENT EVENT -- WRITE-OFF -- COMPUTER PROJECT
-------------------------------------------------
During the third quarter of fiscal 1999, the Company had a non-recurring charge
related to the termination of the installation of a computer software package
for a new order entry system and wrote off its investment of $1.4 million on
a pre-tax basis ($920,000 after-tax). The Company had spent approximately $1.4
million on the project as of August 29, 1998. The Company has decided to
internally upgrade its existing order entry system; the upgrade is scheduled
to be completed in mid 1999, at a substantially lower cost than originally
anticipated.
Page 8 of 13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended August 29, 1998
Revenues for the quarter ended August 29, 1998 were $39.4 million, an increase
of $2.1 million, or 5.7% higher than the quarter ended August 23, 1997. The
increase in revenues was largely attributable to a 16% rise in catalog
circulation and, to a lesser extent, a 2.7% rise in average revenue per order.
Revenues per catalog mailed declined compared to last year because of an
unexpectedly weak retail environment, as well as a circulation increase to
prospective new customers who are generally less responsive than existing
customers. If the weak retail environment continues into the second half of
fiscal 1999, it could have a negative impact on the Company's revenues and
earnings.
Product and delivery costs increased by $1.1 million, or 5.6%, in the quarter
ended August 29, 1998, as compared to the second quarter of the prior year.
Product and delivery costs include the cost of merchandise sold, and the cost
of receiving, filling and shipping the Company's orders, reduced by shipping
and handling fees charged to customers. The increase in costs was principally
attributable to a 5.9% increase in orders received. These costs comprised
approximately the same percentage of revenues, 52.0% in both quarters, due to
improved gross margin on products sold, offset by an increase in the cost to
fill orders in the current quarter.
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 $3.2 million, or 17.4% in the current quarter. The increase
in expense is largely due to the 16% increase in catalog circulation, as well
as higher paper prices, and the cost of outside consultants working on the
Year 2000 project. As a percentage of revenues, SG&A costs increased from 50.0%
in the quarter ended August 23, 1997 to 55.6% in the quarter ended
August 29, 1998. The percentage of revenues rose principally because the cost
of producing and mailing additional catalogs exceeded the incremental revenue
generated in the current quarter.
In connection with the planned relocation of its corporate headquarters to
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).
The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.
The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated as income (expense) to the
appropriate fiscal years as follows:
EPS Impact-
-----------------
Fiscal Years Ended Pre-tax Amount After-tax Amount Basic Diluted
- ------------------ -------------- ---------------- ----- -------
1985 - 1995 ($577,000) ($381,000) Not Applicable
February 24, 1996 ($182,000) ($120,000) ($.01) ($.01)
February 22, 1997 ($187,000) ($124,000) ($.01) ($.01)
February 28, 1998 $1,136,000 $750,000 $.08 $.08
February 27, 1999 ($190,000) ($125,000) ($.01) ($.01)
Interest income for the quarter ended August 29, 1998 of $100,000 decreased by
$129,000 as compared to the second quarter of the prior year, due to a lower
investment balance. Interest expense for the quarter ended August 29, 1998 of
$105,000 was $15,000 higher than the same period last year, principally due to
higher seasonal borrowing.
The effective income tax rate was 34% for the current quarter, the same rate
as the second quarter of fiscal 1998.
Six Months Ended August 29, 1998
Revenues for the six months ended August 29, 1998 were $71.4 million, an
increase of $6.4 million, or 9.8% higher than the corresponding period of the
prior year. The increase in revenues was primarily attributable to 19% higher
catalog circulation, including the introduction of a new catalog, Lillian
Vernon Gardening, new Spring editions of the Lilly's Kids and Personalized
Gifts catalogs, and increased circulation of the same catalog editions mailed
in the first half last year. While
Page 9 of 13
<PAGE>
the weakness in the retail environment was not fully anticipated, which caused
revenues to fall below expectations, the additional circulation established
contact with more potential customers for the Company's busy Fall/holiday
season.
Product and delivery costs increased by $2.3 million, or 6.8% as compared to
the same period last year primarily because of 9.2% more orders received. These
costs declined as a percentage of revenues from 51.8% in the prior six month
period to 50.4% in the current period. The decline in the percentage was driven
by higher gross margin on merchandise sold. The margin improvement was
principally the result of higher markups, but also was affected by the mix of
the merchandise sold, which included more full-priced and higher margin product
lines as compared to the first six months last year.
Selling, general and administrative (SG&A) expenses increased $6.8 million, or
19.0%, for the current six months as compared to the same period last year, due
primarily to a 19% increase in catalog circulation, higher paper prices, and
additional labor costs of outside consultants working on the Year 2000 project.
As a percentage of revenues, SG&A costs increased from 55.3% for the six months
ended August 23, 1997 to 59.9% in the current six month period. The increase in
the percentage of revenues is mainly due to the lower revenue per catalog
generated in the current period, as well as higher paper prices.
In connection with the planned relocation of its corporate headquarters to
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).
The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.
The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated as income (expense) to the
appropriate fiscal years as follows:
EPS Impact-
-----------------
Fiscal Years Ended Pre-tax Amount After-tax Amount Basic Diluted
- ------------------ -------------- ---------------- ----- -------
1985 - 1995 ($577,000) ($381,000) Not Applicable
February 24, 1996 ($182,000) ($120,000) ($.01) ($.01)
February 22, 1997 ($187,000) ($124,000) ($.01) ($.01)
February 28, 1998 $1,136,000 $750,000 $.08 $.08
February 27, 1999 ($190,000) ($125,000) ($.01) ($.01)
Interest income for the current six months ended August 29, 1998 of $456,000
decreased by $126,000 as compared to the same period of the prior year, due to
a lower investment balance. Interest expense for the six months ended
August 29, 1998 of $178,000 was comparable with the same period last year.
The effective income tax rate was 34% for the six months ended August 29, 1998,
the same rate as in the six months ended August 23, 1997.
Financial Condition
The Company's working capital ratio at August 29, 1998 was 2.59 to 1, as
compared to 4.15 to 1 at February 28, 1998 and 3.22 to 1 at August 23, 1997.
Due to the seasonality of the Company's business, the first half of the fiscal
year has historically been a loss period and a period of working capital demand
in preparation for the peak selling season. The Company builds up its inventory
and prepays substantial catalog costs during this period. It also collects its
year-end receivables from customers under its deferred billing program during
this period. For the six months ended August 29, 1998, the Company used $17.6
million more cash for working capital needs as compared to the corresponding
period last year. The major contributing factors were an increased loss, higher
catalog-related expenditures, and the timing of payments for inventory. As a
result of the higher cash demands in the current six month period as compared
to the same period last year, the Company drew down earlier on its revolving
credit facility. Inventory levels are 7.2% higher at the end of the second
quarter of fiscal 1999 compared to the same point last year. Management expects
to be able to sell this inventory without significant overall gross margin
reduction.
The Company expended capital of $1,553,000 during the six months ended Auqust
29,1998, compared to $853,000 last year. The Company paid dividends totaling
$1.5 million, $.2 million higher than the first half last year due to the
increase in quarterly dividend rate per share from $.07 to $.08 in March 1998.
Page 10 of 13
<PAGE>
During the six months ended August 29, 1998, the Company continued its open
market stock repurchase program, and acquired 314,000 shares of its common
stock at a total cost of $5.3 million. This compares to $1.2 million spent for
the first six months last year. As of September 3, 1998, the Company completed
its 1 million share stock repurchase program which was started in October 1995.
The total cost of the plan was $15.2 million.
On October 7, 1998, the Company's Board of Directors approved a new stock
repurchase program which authorizes management to repurchase up to 1 million
shares of its common stock in the open market from time to time.
Year 2000
Year 2000 Compliance Program
The Company's Year 2000 compliance program is directed primarily towards
ensuring that the Company will be able to continue to perform its critical
functions: (1) process sales orders from and ship goods to customers, (2) order
and receive merchandise from vendors, and (3) process payments to vendors and
employees.
The Company is in the process of modifying its internal computer software
applications and systems to function properly with respect to dates in the Year
2000 and thereafter. The Company is utilizing both in-house staff as well as
outside resources to modify its systems. This work is expected to be completed
by July 31, 1999. In addition to internal systems, the Company has established
procedures to determine that outside computer software vendors are either
already Year 2000 compliant or have timely dates when they intend to be
compliant. The Company is also reviewing all computer hardware such as
mid-range, mainframe and personal computers, networks, telephone switches,
voice mail systems, and timeclocks, as well as its distribution and warehouse
equipment, to ensure Year 2000 compliance. The Company has also contacted its
various merchandise vendors to inquire as to their Year 2000 readiness, and is
following up with those vendors who have not responded to-date.
Costs
The Company presently anticipates that the cost of modifying its computer
software applications and systems to be Year 2000 compliant will be
approximately $1.2 million, of which approximately $500,000 has been spent to
date. These amounts are expected to be funded from operating cash flow.
Risks
The variety and complexity of the Year 2000 issues identified and the
proposed solutions, the Company's dependence on the technical skills of
employees and independent contractors, and especially the representations and
readiness of third parties are among the factors that could cause the Company's
efforts to be less than
Page 11 of 13
<PAGE>
fully effective. In addition, Year 2000 issues present a number of risks that
are beyond the Company's reasonable control, such as continued service from
outside parties such as utility companies, financial institutions, and
transportation and delivery companies (such as the US Postal Service and United
Parcel Service).
The Company's peak selling season runs from September through mid-December;
therefore, disruption of its business at the beginning of Year 2000 would be
less significant than if it happened during its peak season. The Company
expects to have adequate inventory on hand to service its customers, and the
Company can shift its customer delivery operations to alternative carriers, if
necessary. The Company does not rely on any supplier for a significant portion
of its products, and the majority of its vendors do not rely on computerized
manufacturing systems. The Company has computerized telephone systems which
process customer phone orders; any interruption in service by major telephone
carriers could have a detrimental impact on the Company's ability to receive
orders and service its customers.
The Company intends to develop a contingency plan after its risk assessment
is completed, in the event that any unresolved issues are identified.
Although the Company believes that its Year 2000 compliance program is
designed to appropriately identify and address those Year 2000 issues that are
subject to the Company's reasonable control, there can be no assurance that the
Company's efforts in this regard will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations.
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, possible future increases in operating costs,
including postage and paper costs, as well as a delay or inability to become
Year 2000 compliant. For further information, see Part I of Form 10-K for the
fiscal year ended February 28, 1998.
Page 12 of 13
<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: March 16, 1999 By: /s/ Richard P. Randall
----------------------------
Richard P. Randall
Senior Vice President-Chief Financial Officer
Page 13 of 13
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