<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 November 28, 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:
9,087,068 Shares of Common Stock, $.01 par value, as of January 8, 1999.
<PAGE>
LILLIAN VERNON CORPORATION
--------------------------
Form 10-Q/A
November 28, 1998
Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Consolidated Balance Sheets as of
November 28, 1998, November 22, 1997
(unaudited) and February 28, 1998
(audited) 4
Consolidated Statements of Income
for the quarters and nine months
ended November 28, 1998 and November 22, 1997
(unaudited) 5
Consolidated Statements of
Cash Flows for the nine months ended
November 28, 1998 and November 22, 1997
(unaudited) 6
Notes to Consolidated Financial
Statements 7-9
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10-14
Signatures 15
Page 2 of 15
<PAGE>
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 7 to the Company's
Consolidated Financial Statements.
Page 3 of 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 28, NOVEMBER 22, FEBRUARY 28,
ASSETS 1998 1997 1998
--------- --------- ---------
(Unaudited) (Audited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,163 $ 3,454 $ 26,136
Receivables 33,253 32,438 22,632
Inventories 44,811 52,892 36,935
Deferred income taxes -- -- 1,532
Prepayments and other current assets 12,764 8,082 10,173
--------- --------- ---------
Total current assets 92,991 96,866 97,408
Property, plant and equipment, net (Note 1) 38,080 38,397 37,823
Deferred catalog costs 18,133 19,618 5,922
Other assets 2,917 3,059 3,206
--------- --------- ---------
Total $ 152,121 $ 157,940 $ 144,359
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 28,041 $ 31,061 $ 16,331
Cash overdrafts 1,591 1,025 1,004
Customer deposits 1,551 1,550 147
Current portion of long-term debt and lease obligations -- 1,452 1,394
Revolving debt (Note 2) 1,000 -- --
Income taxes payable -- -- 4,581
Deferred income taxes 2,394 2,349 --
--------- --------- ---------
Total current liabilities 34,577 37,437 23,457
Deferred compensation 3,349 3,444 3,426
Deferred income taxes 1,835 753 637
--------- --------- ---------
Total liabilities 39,761 41,634 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, 10,387,858 shares
and 10,389,674 shares 104 104 104
Additional paid-in capital 31,131 31,120 31,160
Retained earnings 101,565 98,620 100,883
Unearned compensation -- (23) (6)
Treasury stock, at cost - 1,330,603 shares, 905,458 shares
and 1,016,491 shares (20,440) (13,515) (15,302)
--------- --------- ---------
Total stockholders' equity 112,360 116,306 116,839
--------- --------- ---------
Total $ 152,121 $ 157,940 $ 144,359
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 15
<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 28, NOVEMBER 22, NOVEMBER 28, NOVEMBER 22,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 107,871 $ 106,305 $ 179,390 $ 171,309
Costs and expenses:
Product and delivery costs 45,741 47,577 81,852 81,262
Selling, general and administrative expenses 48,777 44,105 91,575 80,055
Write-off - computer project 1,415 -- 1,415 --
--------- --------- --------- ---------
95,933 91,682 174,842 161,317
--------- --------- --------- ---------
Operating income 11,938 14,623 4,548 9,992
Interest income -- 3 457 586
Interest expense (294) (199) (472) (382)
--------- --------- --------- ---------
Income before income taxes 11,644 14,427 4,533 10,196
Provision for (benefit from) income taxes:
Current 2,418 2,090 (3,415) (976)
Deferred 1,588 2,815 5,003 4,442
--------- --------- --------- ---------
4,006 4,905 1,588 3,466
--------- --------- --------- ---------
Net income $7,638 $9,522 $2,945 $6,730
--------- --------- --------- ---------
Net income per common share - Basic $.84 $1.00 $.32 $.70
--------- --------- --------- ---------
Net income per common share - Diluted $.84 $.99 $.31 $.70
--------- --------- --------- ---------
Weighted average number of common shares -
Basic 9,111 9,516 9,255 9,575
--------- --------- --------- ---------
Weighted average number of common shares -
Diluted 9,147 9,655 9,386 9,670
--------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 15
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
NOVEMBER 28, NOVEMBER 22,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,945 $ 6,730
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 2,987 3,215
Amortization 177 180
Write-off-Computer Project 1,415 --
(Increase) decrease in receivables (10,621) (7,962)
(Increase) decrease in inventories (7,876) (22,412)
(Increase) decrease in prepayments and other current assets (2,591) 2,356
(Increase) decrease in deferred catalog costs (12,211) (13,478)
(Increase) decrease in other assets (1,297) (766)
Increase (decrease) in trade accounts payable and accrued expenses 11,710 16,576
Increase (decrease) in customer deposits 1,404 1,290
Increase (decrease) in income taxes payable (4,581) (2,715)
Increase (decrease) in deferred compensation (77) (56)
Increase (decrease) in deferred income taxes 5,124 4,592
-------- --------
Net cash used in operating activities (13,492) (12,450)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,244) (2,239)
-------- --------
Net cash used in investing activities (3,244) (2,239)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,394) (1,431)
Proceeds from issuance of common stock -- 317
Increase in cash overdrafts 587 (327)
Proceeds from short term borrowings - net of repayments 1,000 --
Dividends paid (2,262) (2,039)
Payments to acquire treasury stock (6,623) (2,495)
Reissuance of treasury stock 1,485 --
Other (30) 20
-------- --------
Net cash used in financing activities (7,237) (5,955)
-------- --------
Net decrease in cash and cash equivalents (23,973) (20,644)
-------- --------
Cash and cash equivalents at beginning of period 26,136 24,098
-------- --------
Cash and cash equivalents at end of period $ 2,163 $ 3,454
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 371 $ 339
Income taxes 4,654 2,869
</TABLE>
See Notes to Consolidated Financial Statements
Page 6 of 15
<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, (except for Note 3, "Write-off-Computer
Project") 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>
November 28, November 22, February 28,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Land and buildings $32,288 $31,771 $31,778
Machinery and equipment 31,642 28,404 29,035
Furniture and fixtures 3,651 3,369 3,561
Leasehold improvements 909 3,952 3,989
Capital leases - 1,262 1,262
------- ------- -------
Total property, plant &
equipment, at cost 68,490 68,758 69,625
Less, accumulated depreciation
and amortization 30,410 30,361 31,802
------- ------- -------
Property, plant and equipment - net $38,080 $38,397 $37,823
------- ------- -------
</TABLE>
2. CREDIT FACILITY
During the third quarters of fiscal 1999 and fiscal 1998, the Company had
borrowed up to $21.0 million and $11.5 million, respectively, under its
revolving credit facility, and had repaid $20.0 million and $11.5 million as of
November 28, 1998 and November 22, 1997, respectively. Interest was payable at
weighted average rates of approximately 5.7% and 6.1% for the quarters ended
November 28, 1998 and November 22, 1997, respectively. There were approximately
$5.7 million and $6.9 million of letters of credit outstanding as of November
28, 1998 and November 22, 1997, respectively. The Company's revolving credit
facility expires on August 19, 2000.
Page 7 of 15
<PAGE>
3. 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 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 orginally
anticipated.
4. EARNINGS PER SHARE
Basic and Diluted earnings per share were calculated in accordance with
Statement of Financial Accounting Standards No. 128 as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
-------------------------- --------------------------
November 28, November 22, November 28, November 22,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income-Basic and Diluted $7,638 $9,522 $2,945 $6,730
------ ------ ------ ------
Weighted average shares for
Basic EPS 9,111 9,516 9,255 9,575
Add: Incremental shares from
assumed stock option exercises 36 139 131 95
------ ------ ------ ------
Weighted average shares for
Diluted EPS 9,147 9,655 9,386 9,670
------ ------ ------ ------
</TABLE>
For the third quarters ended November 28, 1998 and November 22, 1997, options
on 415,000 and 369,000 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 nine months ended November 28, 1998 and November 22, 1997, options on
237,000 and 369,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.
5. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial statements
to conform with fiscal 1999 presentation.
6. NEW ACCOUNTING STANDARDS
In the first quarter of fiscal 1999, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). SFAS No. 130 has no impact on the Company's
financial statements. In the fourth quarter of fiscal 1999, the Company intends
to adopt Statement of Financial
Page 8 of 15
<PAGE>
6. NEW ACCOUNTING STANDARDS (cont'd)
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
SFAS No. 131 will not have a material impact on the Company's financial
statements.
7. 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) ($120,000) ($.01) ($.01)
Page 9 of 15
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended November 28, 1998
Revenues for the third quarter ended November 28, 1998 were $107.9 million, an
increase of $1.6 million, or 1.5% higher than the quarter ended November 22,
1997. Revenues per catalog declined as compared to last year. There was a 9.6%
increase in catalog circulation, as well as lower response rates by the
Company's customers; the decline in customer response rates was due to weaker
retail demand. The decline in revenues per catalog was a result of the
Company's circulation increase to prospective new customers who were generally
less responsive than existing customers. The current quarter includes $.7
million of revenues generated from the sales of magazine subscriptions by the
Company's telemarketing representatives, a new revenue source in fiscal 1999.
Product and delivery costs of $45.7 million decreased by $1.8 million, or 3.9%
in the third quarter of the current year, as compared to the third quarter of
the prior year. These costs represented a lower percentage of revenues, 42.4%
in the current quarter, compared to 44.8% in the third quarter last 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. The decrease in costs were due to a decrease in the number
of orders received, lower unit costs to process orders at the Company's
distribution center, and as to lower percentage of revenues, improved gross
margin on products sold.
Selling, general and administrative (SG&A) expenses of $48.8 million, the
largest component of which is the cost of producing, printing and distributing
the Company's catalogs, increased $4.7 million, or 10.6% during the third
quarter. As a percentage of revenues, SG&A costs increased to 45.2% in the
third quarter this year, compared to 41.5% in the third quarter last year. The
increase in SG&A expense is largely due to an increase of $4 million in catalog
costs. The increased catalog costs are due to the aforementioned 9.6% increase
in catalog circulation, as well as 8% higher paper prices. The Company incurred
approximately $337,000 in computer costs related to its Year 2000 compliance
project.
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) ($120,000) ($.01) ($.01)
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 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.
Interest income was comparable between the third quarters of fiscal 1999 and
fiscal 1998. Interest expense increased $95,000 in the quarter ended November
28, 1998, compared to the quarter ended November 22, 1997, principally due to
higher average revolving debt levels during the third quarter of fiscal 1999.
The Company spent approximately $8.5 million to fund the repurchase of its
common stock since the third quarter of last year under its open market stock
repurchase programs which contributed to the higher level of borrowings
required in the current quarter.
Page 10 of 15
<PAGE>
The effective income tax rate was 34.4% for the current quarter, compared to
34% in the third quarter of fiscal 1998.
Nine Months Ended November 28, 1998
Revenues for the nine months ended November 28, 1998 were $179.4 million, an
increase of $8.1 million, or 4.7% compared to the nine months ended November
22, 1997. The increase in revenues was attributable to both an increase of
approximately 2% in the number of orders, and an increase of approximately 2%
in average revenue per order. Included in revenues for the nine months ended
November 28, 1998 is $.8 million of revenue generated from the sales of
magazine subscriptions by the Company's telemarketing representatives, a new
revenue source in fiscal 1999.
Product and delivery costs of $81.9 million rose by $.6 million or .7% in the
nine months ended November 28, 1998, compared to the same period last year.
These costs comprised a lower percentage of revenues, 45.6% in the current nine
month period, compared to 47.4% in the same period last year. A higher number
of orders received and processed resulted in the increase in product and
delivery expense. The decline as a percentage of revenues is due to higher
gross profit margins realized on merchandise sold, as well as lower unit costs
to process orders at the Company's distribution facility.
Selling, general and administrative (SG&A) expenses of $91.6 million increased
$11.5 million, or 14.4% in the nine months ended November 28, 1998 compared to
the nine months ended November 22, 1997. As a percentage of revenues, SG&A
costs increased to 51.0% in the nine month period this year, compared to 46.7%
in the same period last year. Higher catalog costs of approximately $9 million
were incurred during the current nine month period, due to a 14% higher
circulation, as well as a 15% increase in paper prices. The Company incurred
approximately $765,000 in computer costs related to its Year 2000 compliance
project.
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) ($120,000) ($.01) ($.01)
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 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 orginally
anticipated.
Interest income was $129,000 lower in the nine months ended November 28, 1998
compared to the nine months ended November 22, 1997, due to a lower average
investment balance. Interest expense was $90,000 higher in the current nine
month period compared to the same period last year, due to higher revolving
debt levels. The Company spent approximately $8.5 million to fund the
repurchase of its common stock since the end of the third quarter of fiscal
1998 under its open market stock repurchase programs, which contributed to the
higher borrowings required during the period.
The effective income tax rate in the current nine month period was 35% compared
to 34% for the same period last year.
Anticipated Fourth Quarter Fiscal 1999 Results
The Company anticipates that its fourth quarter fiscal 1999 revenues and net
income will be lower than last year's levels, due partially to reduced catalog
circulation, as well as the current year's shorter fourth quarter period (13
weeks in fiscal 1999
Page 11 of 15
<PAGE>
versus 14 weeks in fiscal 1998). Notwithstanding the forecast for the fourth
quarter, the Company is encouraged by the significant increase in volume
between Thanksgiving and Christmas realized in its Website which was updated
October 19, 1998.
Financial Condition
The Company's working capital ratio at November 28, 1998 improved to 2.69 to 1
as compared to 2.57 to 1 at November 22, 1997. The ratio was 4.15 to 1 at
February 28, 1998. 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 a comparable amount of funds for operating
activities in its current nine month period compared to the same period last
year, notwithstanding lower income for the period. This was caused in part by
inventory levels which were 15% lower this year than last year; the Company
expects its inventory level to be lower at the end of fiscal 1999 as compared
to fiscal 1998. Capital spending was approximately $1 million higher than last
year's level due to improvements made to the Company's National Distribution
Center in the current fiscal year. The Company borrowed more funds during the
nine months ended November 28, 1998 as compared to the same period last year by
drawing down its revolving credit line, but has repaid all except $1 million of
the borrowing as of November 28, 1998. All borrowings were repaid as of
November 30, 1998. The Company was in full compliance with all debt covenants
during the quarter and nine months ended November 28, 1998.
During the nine months ended November 28, 1998, the Company spent $6.6 million
to acquire 412,300 shares of its common stock under its open market stock
repurchase programs. As of September 3, 1998, the Company completed its one
million share stock repurchase program which commenced October 1995. On October
7, 1998, the Company's Board of Directors approved a new stock repurchase
program which authorizes management to repurchase up to one million shares of
its common stock in the open market from time to time. As of November 28, 1998,
the Company had repurchased 75,000 shares under the new program at a total cost
of approximately $1 million.
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 merchandise 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 and is currently on schedule. 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 continuing to follow up with those vendors
who have not responded to-date.
Page 12 of 15
<PAGE>
Costs
The Company presently anticipates that the cost of modifying its computer
software applications and systems to be Year 2000 compliant will be
approximately $2.0 million, of which approximately $788,000 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 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 calendar 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 expects to be able to 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.
An assessment of the readiness of Year 2000 compliance of third party entities
with which the Company has relationships is ongoing. The Company has inquired,
or is in the process of inquiring, of the significant aforementioned third
party entities as to their readiness with respect to Year 2000 compliance and
to date has received indications that many of them are either compliant or in
the process of remediation. The Company will continue to monitor these third
party entities to determine the impact on the business of the Company and the
actions the Company must take, if any, in the event of non-compliance by any of
these third parties. Based upon the Company's initial assessment of compliance
by third parties, there appears to be no material business risk posed by any
such noncompliance and, therefore, the Company has not developed a contingency
plan.
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
Page 13 of 15
<PAGE>
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 14 of 15
<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 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> NOV-28-1998
<CASH> 2,163
<SECURITIES> 0
<RECEIVABLES> 33,253
<ALLOWANCES> 0
<INVENTORY> 44,811
<CURRENT-ASSETS> 92,991
<PP&E> 68,490
<DEPRECIATION> 30,410
<TOTAL-ASSETS> 152,121
<CURRENT-LIABILITIES> 34,577
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 112,256
<TOTAL-LIABILITY-AND-EQUITY> 152,121
<SALES> 179,390
<TOTAL-REVENUES> 179,390
<CGS> 81,852
<TOTAL-COSTS> 174,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 472
<INCOME-PRETAX> 4,533
<INCOME-TAX> 1,588
<INCOME-CONTINUING> 2,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,945
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-22-1997
<CASH> 3,454
<SECURITIES> 0
<RECEIVABLES> 32,438
<ALLOWANCES> 0
<INVENTORY> 52,892
<CURRENT-ASSETS> 96,866
<PP&E> 68,758
<DEPRECIATION> 30,361
<TOTAL-ASSETS> 157,940
<CURRENT-LIABILITIES> 37,437
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 116,202
<TOTAL-LIABILITY-AND-EQUITY> 157,940
<SALES> 171,309
<TOTAL-REVENUES> 171,309
<CGS> 81,262
<TOTAL-COSTS> 161,317
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 382
<INCOME-PRETAX> 10,196
<INCOME-TAX> 3,466
<INCOME-CONTINUING> 6,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,730
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
