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 AUGUST 26, 2000
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
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(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
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(Address of principal executive offices) (Zip Code)
914-925-1200
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(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 issuer's classes of common stock:
8,664,823 Shares of Common Stock, $.01 par value, as of October 6, 2000.
<PAGE>
LILLIAN VERNON CORPORATION
Form 10-Q
August 26, 2000
PART I. FINANCIAL INFORMATION PAGE #
Item 1.
Consolidated Balance Sheets
as of August 26, 2000, August 28, 1999
and February 26, 2000 (unaudited) 3
Consolidated Statements of Operations
for the quarters and six months ended
August 26, 2000 and August 28, 1999 (unaudited) 4
Consolidated Statements of Cash Flows
for the six months ended August 26, 2000
and August 28, 1999 (unaudited) 5
Notes to Consolidated Financial
Statements 6-7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-10
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk 11
PART II. OTHER INFORMATION 12
Signatures 13
Page 2 of 13
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
August 26, August 28, February 26,
ASSETS 2000 1999 2000
------------ ------------ ------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 13,316 $ 14,278 $ 35,364
Accounts receivable, net of allowances of $604, $309,
and $576, respectively 11,277 11,153 22,403
Merchandise inventories 52,891 44,402 33,926
Deferred income taxes 401 -- 1,355
Prepayments and other current assets 9,752 16,097 4,241
------------ ------------ ------------
Total current assets 87,637 85,930 97,289
Property, plant and equipment, net 35,231 37,190 35,092
Deferred catalog costs 7,179 8,571 5,624
Other assets 6,180 4,354 3,313
------------ ------------ ------------
Total $ 136,227 $ 136,045 $ 141,318
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 23,682 $ 21,614 $ 17,853
Cash overdrafts 208 1,500 758
Customer deposits 214 389 171
Income taxes payable -- -- 3,476
Deferred income taxes -- 43 --
------------ ------------ ------------
Total current liabilities 24,104 23,546 22,258
Deferred compensation 3,315 2,985 3,392
Deferred income taxes 1,539 1,587 1,290
------------ ------------ ------------
Total liabilities 28,958 28,118 26,940
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; issued - 10,389,674 shares 104 104 104
Additional paid-in capital 31,332 31,336 31,331
Retained earnings 99,335 94,896 103,847
Treasury stock, at cost - 1,695,106 shares, 1,201,007 shares
and 1,419,433 shares, respectively (23,502) (18,409) (20,904)
------------ ------------ ------------
Total stockholders' equity 107,269 107,927 114,378
------------ ------------ ------------
Total $ 136,227 $ 136,045 $ 141,318
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 13
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<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Second Quarter Ended Six Months Ended
August 26, August 28, August 26, August 28,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $41,629 $35,499 $76,804 $64,616
Costs and expenses:
Product and delivery costs 21,869 19,221 38,886 33,841
Selling, general and administrative expenses 22,213 19,252 43,342 38,180
------- ------- ------- -------
44,082 38,473 82,228 72,021
------- ------- ------- -------
Operating loss (2,453) (2,974) (5,424) (7,405)
Net interest income (expense) 319 262 814 639
------- ------- ------- -------
Loss before income taxes (2,134) (2,712) (4,610) (6,766)
Provision for (benefit from) income taxes:
Current (1,560) (2,299) (2,864) (4,252)
Deferred 792 1,295 1,204 1,749
------- ------- ------- -------
(768) (1,004) (1,660) (2,503)
------- ------- ------- -------
Net loss ($1,366) ($1,708) ($2,950) ($4,263)
------- ------- ------- -------
Net loss per common share - Basic and diluted ($.16) ($.19) ($.34) ($.46)
------- ------- ------- -------
Weighted average number of common shares -
Basic and Diluted loss per share 8,703 9,195 8,798 9,188
------- ------- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 13
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<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
August 26, August 28,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,950) $ (4,263)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities (net of effects from purchase of
Rue de France, Inc.):
Depreciation 1,205 1,221
Amortization 284 81
Decrease in accounts receivable 11,198 9,940
Increase in merchandise inventories (18,205) (17,702)
Increase in prepayments and other current assets (5,511) (6,426)
Increase in deferred catalog costs (1,226) (2,379)
Increase in other assets (804) (885)
Increase in trade accounts payable and accrued expenses 4,762 4,177
Increase in customer deposits 1 161
Decrease in income taxes payable (3,476) (1,072)
Decrease in deferred compensation (77) (64)
Increase in deferred income taxes 1,203 1,749
----------- -----------
Net cash used in operating activities (13,596) (15,462)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,188) (600)
Purchase of assets of Rue de France, Inc. (net of acquired cash) (2,555) 0
----------- -----------
Net cash used in investing activities (3,743) (600)
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Cash flows from financing activities:
Decrease in cash overdrafts (550) (420)
Dividends paid (1,400) (1,471)
Payments to acquire treasury stock (3,089) (258)
Reissuance of treasury stock 328 641
Other 2 14
----------- -----------
Net cash used in financing activities (4,709) (1,494)
----------- -----------
Net decrease in cash and cash equivalents (22,048) (17,556)
----------- -----------
Cash and cash equivalents at beginning of period 35,364 31,834
----------- -----------
Cash and cash equivalents at end of period $ 13,316 $ 14,278
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest -- --
Income taxes $ 3,690 $ 1,376
Supplemental schedule of noncash investing and financing activities:
The Company purchased the assets of Rue de France, Inc. as of April 1,
2000 for $2,625 (less acquired cash of $70). The purchase price is
subject to post-closing net worth adjustments. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $3,734
Cash paid for assets acquired (2,625)
------
Liabilities assumed $1,109
======
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 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 26, 2000.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
August 26, August 28, February 26,
2000 1999 2000
------- ------- -------
Land and buildings $32,799 $32,527 $32,578
Machinery and equipment 31,828 32,825 30,751
Furniture and fixtures 3,995 3,837 3,832
Leasehold improvements 1,073 1,061 985
------- ------- -------
Total property, plant &
equipment, at cost 69,695 70,250 68,146
Less, accumulated depreciation
and amortization 34,464 33,060 33,054
------- ------- -------
Property, plant and equipment-net $35,231 $37,190 $35,092
------- ------- -------
Page 6 of 13
<PAGE>
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):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
----------------------- -----------------------
August 26, August 28, August 26, August 28,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares for
Basic and Diluted EPS 8,703 9,195 8,798 9,188
</TABLE>
As of August 26, 2000 and August 28, 1999, options on 1,528,000 and
1,192,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because
their effects were antidilutive.
3. RUE DE FRANCE ACQUISITION
As of April 1, 2000, the Company purchased the assets of Rue de France,
Inc., a privately owned catalog company based in Newport, Rhode Island.
The Company agreed to pay a cash purchase price of up to $3 million,
subject to post closing net worth adjustments which are not expected to
be material. Additionally, the Company agreed to make future payments
contingent upon Rue de France, Inc. achieving certain projected
earnings before taxes during the five-year period commencing on
February 27, 2000. The excess of the purchase price over the fair value
of the tangible net assets of approximately $2.3 million is included in
other assets, and is being amortized on a straight-line basis over 20
years. The operating results of Rue de France have been included in the
Company's consolidated results of operations as of April 1, 2000.
4. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 2001 presentation.
Page 7 of 13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
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RESULTS OF OPERATIONS
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QUARTER ENDED AUGUST 26, 2000
-----------------------------
Revenues for the quarter ended August 26, 2000 increased 17.3% to $41.6 million,
compared to $35.5 million last year. Increased revenues resulted from
approximately 7% higher catalog circulation, higher average revenue per order,
the revenues of Rue de France, Inc. acquired in April 2000, and telemarketing
services that the Company provides for a major catalog retailer.
Product and delivery costs in the quarter ended August 26, 2000 of $21.9 million
increased by $2.6 million, or 13.8%, as compared to the second quarter of the
prior year. These costs represented a lower percentage of revenues (52.5%) in
the current quarter than the same period last year (54.1%). 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
increase in costs was due to a higher number of orders shipped, the inclusion of
the cost of sales for Rue de France and the cost of providing telemarketing
services to a catalog retailer. The improvement as a percentage of revenue was
principally because of fewer backorders, which reduced fulfillment costs such
as labor, postage and packaging.
Selling, general and administrative (SG&A) expenses of $22.2 million, the
largest component of which is the cost of producing, printing and mailing the
Company's catalogs, increased $3.0 million, or 15.4% during the quarter,
principally because of higher circulation and the inclusion of Rue de France's
operations. As a percentage of revenues, SG&A costs decreased to 53.4% in the
quarter, compared to 54.2% last year, primarily because more revenues in the
current period came from sources with lower SG&A costs. This was partially
offset by an increase in the cost to produce an average catalog.
Net interest income for the quarter ended August 26, 2000 was $.3 million,
comparable to the second quarter of the prior year.
The effective income tax rate was 36% for the current quarter, compared to 37%
in the second quarter of the prior year. The higher prior year tax rate included
a charge because of the Company's expected inability to fully deduct its entire
charitable contribution tax carryforward prior to expiration.
Page 8 of 13
<PAGE>
RESULTS OF OPERATIONS
---------------------
SIX MONTHS ENDED AUGUST 26, 2000
--------------------------------
Revenues for the six months ended August 26, 2000 increased to $76.8 million,
18.9% higher than the $64.6 million for the same period last year. Factors
contributing to the revenue growth included approximately 14% higher catalog
circulation, higher average revenue per order, the revenues from Rue de France,
Inc. acquired in April 2000, and providing telemarketing services for a major
catalog retailer.
Product and delivery costs of $38.9 million increased by $5.0 million, or 14.9%
for the six months ended August 26, 2000 as compared to the prior year. These
costs represented a lower percentage of revenues (50.6%) in the current period,
compared to the same period last year (52.4%). The increase in costs was due to
an increase in the number of orders received, the inclusion of the cost of sales
of Rue de France, and the cost of providing telemarketing services to a catalog
retailer. The decrease as a percentage of revenue was primarily due to fewer
backorders, which reduced fulfillment costs such as labor, postage and
packaging.
Selling, general and administrative (SG&A) expenses of $43.3 million increased
$5.2 million, or 13.5%, during the current six month period, as compared to last
year, principally because of higher catalog circulation, the inclusion of Rue de
France, and a non-recurring charge for the early termination of a lease at one
of the Company's retail outlet stores. As a percentage of revenues, SG&A costs
declined to 56.4% in the current period, compared to 59.1% last year,
principally because the Company's catalogs performed well, contributing towards
overhead to a greater extent than catalog costs and other SG&A rose.
Net interest income for the six months ended August 26, 2000 was $.2 million
higher than the same period of the prior year, principally as a result of higher
interest rates.
The effective income tax rate was 36% for the six months ended August 26, 2000,
compared to 37% in the same period of the prior year. The higher prior year tax
rate included a charge because of the Company's expected inability to fully
deduct its entire charitable contribution tax carryforward prior to expiration.
FINANCIAL CONDITION
-------------------
The Company's balance sheet and liquidity remain strong. Cash and cash
equivalents (net of cash overdrafts) were $13.1 million as of August 26, 2000,
compared to $12.8 million as of August 28, 1999. The current ratio was 3.64:1 at
August 26, 2000, compared to 3.65:1 the prior year, and there was no debt
outstanding. The Company's working capital needs have been met with funds
generated from operations. In August 2000, the Company's revolving credit
facility was extended for a one-year period on essentially the same terms and
conditions as the expiring facility
Page 9 of 13
<PAGE>
The Company's second quarter is traditionally 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. Principally because of
the reduced net loss for the current period, the Company's use of funds for
operating activities was $1.9 million lower in the current six month period
compared to the same period last year. Inventory levels were $8.5 million (19%)
higher this year, as compared to last year, but more in-line with the historical
level of inventory at the end of the Company's second quarter. The Company is
currently making an active effort to reduce its inventory level, while balancing
its revenue and gross margin goals. Capital spending was $.6 million higher as
compared to last year's level; there are no significant capital commitments for
the remainder of fiscal 2001. The Company utilized $2.8 million more funds for
its share repurchase program in the current six month period, compared to the
same period last year. The Company paid dividends totaling $1.4 million ($.16
per share) during the first six months of the current year, comparable to the
first six months of the prior year.
During the six months ended August 26, 2000, the Company acquired 309,992 shares
of its common stock at a total cost of $3.1 million under its current 1.5
million share open market stock repurchase program which was authorized by the
Board of Directors on October 7, 1998 and September 28, 1999. As of August 26,
2000, 660,892 shares have been repurchased since inception of the current
program at a total cost of approximately $7.4 million. The balance of authorized
shares (839,108 shares) will be purchased from time to time in the open market.
As of April 1, 2000, the Company purchased the assets of Rue de France, Inc., a
privately owned catalog company based in Newport, Rhode Island. The Company
agreed to pay a cash purchase price of up to $3 million, subject to post-closing
net worth adjustments which are not expected to be material. Additionally, the
Company agreed to make future payments contingent upon Rue de France, Inc.
achieving certain projected earnings before taxes during the five-year period
commencing on February 27, 2000. The purchase price was paid from operating
funds.
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 and the expanding Internet market, 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 26, 2000.
Page 10 of 13
<PAGE>
ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's earnings are impacted by significant increases in paper prices. In
order to mitigate this risk, the Company implemented a price protection program
beginning in September 1999 by signing a collar hedge contract with Enron
Capital and Trade Resources Corporation. This four-year contract covers 56,000
short tons of a certain grade of paper which the Company uses, among other
grades, to produce its catalogs. There is a floor and ceiling to paper prices
within the contract. If paper prices remain within the range of the contract,
there will be no payment to either party to the contract. If paper prices exceed
the established ceiling, the Company will be reimbursed by the counterparty for
the excess. Conversely, if paper prices fall below the established floor, the
Company would pay the counterparty. The Company did not pay a premium in
connection with the establishment of the contract. No amounts are required to be
recorded in the accompanying financial statements. As of August 26, 2000, market
prices for paper remained within the ranges specified in the contract and as a
result, no payments have been required to be made by either party under the
agreement. For further information, see Part II, Item 7A of Form 10-K for the
fiscal year ended February 26, 2000.
Page 11 of 13
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PART II.
OTHER INFORMATION
-----------------
Items 1, 2, 3, and 5 are not applicable and have been omitted.
ITEM 4. Submission of Matters to a Vote of Security Holders.
-------
On July 19, 2000, the Company held its Annual Meeting of Stockholders.
The matters voted upon at the meeting and the results with respect to
each such matter are summarized below:
1. Election of three Directors for a three year term expiring at the
2003 Annual Meeting of Stockholders.
For Withheld
--------- --------
David C. Hochberg 8,999,147 57,385
Elizabeth M. Eveillard 9,004,297 52,235
Jonah Gitlitz 9,002,547 53,985
2. Approval of the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the year ending February
24, 2001.
For Against Abstained
--- ------- ---------
9,044,025 11,869 638
ITEM 6. Exhibits and Reports on Form 8-K.
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Exhibit 3.1 - Amended By-Laws
Reports on Form 8-K: None.
Page 12 of 13
