<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 May 29, 1999.
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)
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 issuers classes of common stock:
9,191,417 Shares of Common Stock, $.01 par value, as of July 2, 1999.
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LILLIAN VERNON CORPORATION
--------------------------
Form 10-Q
May 29, 1999
Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Consolidated Balance Sheets as of
May 29, 1999, May 30, 1998
(unaudited) and February 27, 1999
(audited) 3
Consolidated Statements of Operations
for the quarters ended May 29, 1999
and May 30, 1998 (unaudited) 4
Consolidated Statements of
Cash Flows for the quarters ended
May 29, 1999 and May 30,1998
(unaudited) 5
Notes to Consolidated Financial
Statements 6-7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-11
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk 11
Part II. Other Information 12
- --------------------------
Signatures 13
Page 2 of 13
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MAY 29, MAY 30, FEBRUARY 27,
1999 1998 1999
----------- ---------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,975 $ 16,493 $ 31,834
Accounts receivable, net 9,057 10,763 21,093
Merchandise inventories 25,358 39,961 26,700
Deferred income taxes 1,088 1,214 1,355
Prepayments and other current assets 10,992 14,502 9,671
----------- ---------- --------------
Total current assets 81,470 82,933 90,653
Property, plant and equipment, net (Note 1) 37,374 37,953 37,811
Deferred catalog costs 6,097 5,805 6,192
Other assets 4,367 3,431 3,550
----------- ---------- --------------
Total $129,308 $130,122 $138,206
----------- ---------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 12,651 $ 11,662 $ 17,437
Overdrafts 1,626 29 1,920
Customer deposits 186 109 228
Current portion of long-term debt and lease obligations -- 699 --
Income taxes payable -- -- 1,072
----------- ---------- --------------
Total current liabilities 14,463 12,499 20,657
Deferred compensation 3,017 3,407 3,049
Deferred income taxes 1,423 878 1,236
----------- ---------- --------------
Total liabilities 18,903 16,784 24,942
----------- ---------- --------------
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 104 104 104
Additional paid-in capital 31,236 31,166 31,322
Retained earnings 97,419 97,367 100,760
Treasury stock, at cost-1,195,327 shares, 1,012,339
shares and 1,231,806 shares, respectively (18,354) (15,299) (18,922)
----------- ---------- --------------
Total stockholders' equity 110,405 113,338 113,264
----------- ---------- --------------
Total $129,308 $130,122 $138,206
----------- ---------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 13
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LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Quarters Ended
-------------------------------------
May 29, May 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues $29,118 $32,040
Costs and expenses:
Product and delivery costs 14,620 15,540
Selling, general and administrative expenses 18,929 20,912
------- -------
33,549 36,452
------- -------
Operating loss (4,431) (4,412)
Interest income (expense) - net 377 283
------- -------
Loss before income taxes (4,054) (4,129)
Provision for (benefit from) income taxes:
Current (1,954) (1,963)
Deferred 454 559
------- -------
(1,500) (1,404)
------- -------
Net loss ($2,554) ($2,725)
------- -------
Net loss per common share - Basic ($.28) ($.29)
------- -------
Net loss per common share - Diluted ($.28) ($.29)
------- -------
Weighted average number of common shares -
Basic 9,180 9,368
------- -------
Weighted average number of common and
common share equivalents - Diluted 9,195 9,552
------- -------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 13
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LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Quarters Ended
--------------------------------------
May 29, May 30,
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,554) ($2,725)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 564 663
Amortization 39 49
(Increase) decrease in accounts receivable 12,036 11,869
(Increase) decrease in merchandise inventories 1,342 (3,026)
(Increase) decrease in prepayments and other current assets (1,321) (4,329)
(Increase) decrease in deferred catalog costs 95 117
(Increase) decrease in other assets (856) (268)
Increase (decrease) in trade accounts payable and accrued expenses (4,786) (4,669)
Increase (decrease) in customer deposits (42) (38)
Increase (decrease) in income taxes payable (1,072) (4,581)
Increase (decrease) in deferred compensation (32) (19)
Increase (decrease) in deferred income taxes 454 559
------- -------
Net cash provided by (used in) operating activities 3,867 (6,398)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (127) (793)
------- -------
Net cash used in investing activities (127) (793)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations -- (695)
Increase (decrease) in cash overdrafts (294) (975)
Dividends paid (787) (792)
Payments to acquire treasury stock (37) (549)
Reissuance of treasury stock for stock option and employee benefit plans 505 552
Other 14 7
------- -------
Net cash used in financing activities (599) (2,452)
------- -------
Net increase (decrease) in cash and cash equivalents 3,141 (9,643)
------- -------
Cash and cash equivalents at beginning of period 31,834 26,136
------- -------
Cash and cash equivalents at end of period $34,975 $16,493
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $74
Income taxes 1,364 4,630
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 13
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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 27, 1999.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
May 29, May 30, February 27,
1999 1998 1999
------- ------- ------------
Land and buildings $32,520 $31,840 $32,507
Machinery and equipment 32,619 29,687 32,577
Furniture and fixtures 3,716 3,583 3,670
Leasehold improvements 922 4,046 896
Capital leases - 1,262 -
------- ------- -------
Total property, plant &
equipment, at cost 69,777 70,418 69,650
Less, accumulated depreciation
and amortization 32,403 32,465 31,839
------- ------- -------
Property, plant and equipment-net $37,374 $37,953 $37,811
------- ------- -------
Page 6 of 13
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2. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share were calculated in accordance
with Statement of Financial Accounting Standards No. 128 as follows
(amounts in thousands):
Fiscal Quarters Ended
---------------------
May 29, May 30,
1999 1998
------- -------
Net Loss-Basic and Diluted ($2,554) ($2,725)
------- -------
Weighted average shares for
Basic EPS 9,180 9,368
Add: incremental shares from
stock option exercises 15 184
------- -------
Weighted average shares for
Diluted EPS 9,195 9,552
------- -------
In the fiscal quarters ended May 29, 1999 and May 30, 1998, options on
830,000 and 177,000 shares of common stock, respectively, were not
included in the calculation of weighted average shares for Diluted EPS
because their effects were antidilutive.
3. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 2000 presentation.
Page 7 of 13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended May 29, 1999
Revenues for the quarter ended May 29, 1999 were $29.1 million, a decrease of
$2.9 million, or 9.1% lower than the quarter ended May 30, 1998. The primary
cause for the lower revenue was an approximate 22% planned reduction in catalog
circulation during the quarter. Revenue per catalog rose 17% in the first
quarter as compared to the same period last year.
Product and delivery costs of $14.6 million decreased by $.9 million, or 5.9% in
the quarter ended May 29, 1999, as compared to the first quarter of the prior
year. These costs comprised a higher percentage of revenues, 50.2% in the
current quarter, compared to 48.5% in the first 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 was primarily due to a decrease in the number of
orders received, while the increase as a percentage of revenue was due to the
fixed costs of the Company's Distribution Center being absorbed by the lower
revenue in the current quarter, as well as higher United Parcel Service and U.S.
Postal Service rates.
Selling, general and administrative (SG&A) expenses of $18.9 million, the
largest component of which is the cost of producing, printing and distributing
the Company's catalogs, decreased $2.0 million, or 9.5% during the first
quarter. As a percentage of revenues, SG&A costs decreased to 65.0% in the first
quarter this year, compared to 65.3% in the first quarter last year. The
decrease in SG&A expenses was largely due to a decrease in catalog costs, which
was the result of lower circulation during the quarter. The improved percentage
of revenues was largely the result of achieving 17% higher revenue per catalog
than the first quarter last year. The Company experienced increases over the
prior year for computer costs related to its Year 2000 project, as well as
higher expenses related to its improved Internet site.
Interest income (expense)-net for the quarter ended May 29, 1999 was $.1 million
higher than the first quarter of the prior year, as a result of greater interest
earned on substantially higher cash investments, and lower interest expense in
the current quarter, principally due to the repayment of all long term debt in
the third quarter of the prior year.
The effective income tax rate was 37.0% in the current quarter, compared to 34%
in the first quarter of the prior year. The higher tax rate more closely
reflects the fiscal 1999 annual tax rate incurred.
Page 8 of 13
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Financial Condition
The Company's balance sheet and liquidity are strong. Cash and cash equivalents
increased $3.1 million during the first quarter of fiscal 2000 to $35.0 million,
the current ratio improved from 4.4:1 at February 27, 1999 to 5.6:1 at May 29,
1999, and there was no long term debt outstanding during the current quarter.
The Company's working capital needs have been met with funds generated from
operations. Compared to the end of the first quarter last year, cash and cash
equivalents rose by $18.5 million, or 112%, principally because of carrying
reduced inventory.
The Company generated $10.3 million more funds from operating activities in the
current three month period compared to the same period last year, due to less
prepaid catalog costs, lower inventory purchases, and reduced income tax
payments. Inventory levels are $14.6 million or 37% lower this year, as compared
to last year's first quarter. Capital spending was also lower as compared to
last year's level, and there are no significant capital commitments for fiscal
2000. The Company paid dividends totaling $.8 million ($.08 per share) during
its first quarter, the same as in the first quarter of the prior year.
During the three months ended May 29, 1999, the Company acquired 2,900 shares of
its common stock at a cost of approximately $37,000 under its current open
market stock repurchase program which was authorized by the Board of Directors
on October 7, 1998. As of May 29, 1999, the Company had repurchased 77,900
shares under the new program at a total cost of approximately $1 million.
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,
employees and shareholders. The Company is in the final stages of modifying its
internal computer software applications and systems to function properly with
respect to dates in the Year 2000 and thereafter. The Company has utilized both
its 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 has
also reviewed all computer hardware such as mid-range, mainframe and personal
computers, networks, telephone switches, voice mail systems, and time clocks, as
well as its distribution and warehouse equipment, and has made the necessary
modifications 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 9 of 13
<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 $1.3 million 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 U.S. 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 single
supplier for a significant portion of its products, and many 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 significant 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.
Page 10 of 13
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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 strength of the economy and overall level
of consumer spending, the performance of the Company's products within the
prevailing retail environment, 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, as well as issues relating to Year 2000 compliance by the Company's
suppliers. For further information, see Part I of Form 10-K for the fiscal year
ended February 27, 1999.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
Page 11 of 13
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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.
Exhibits: None
Reports on Form 8-K: Form 8-K - Item 5 - Other Events.
Shareholder Rights Agreement
Dated April 15, 1999.
Page 12 of 13
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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
Date: July 12, 1999 By: /s/ Richard P. Randall
---------------------------
Richard P. Randall
Senior Vice President,
Chief Financial Officer
Page 13 of 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> MAY-29-1999
<CASH> 34,975
<SECURITIES> 0
<RECEIVABLES> 9,057
<ALLOWANCES> 0
<INVENTORY> 25,358
<CURRENT-ASSETS> 81,470
<PP&E> 69,777
<DEPRECIATION> 32,403
<TOTAL-ASSETS> 129,308
<CURRENT-LIABILITIES> 14,463
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 110,301
<TOTAL-LIABILITY-AND-EQUITY> 129,308
<SALES> 29,118
<TOTAL-REVENUES> 29,118
<CGS> 14,620
<TOTAL-COSTS> 33,549
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> (4,054)
<INCOME-TAX> (1,500)
<INCOME-CONTINUING> (2,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,554)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
