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 27, 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
------------------------------------------------------
(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 issuer's classes of common stock:
8,702,545 Shares of Common Stock, $.01 par value, as of July 5, 2000.
<PAGE>
LILLIAN VERNON CORPORATION
Form 10-Q
May 27, 2000
PART I. FINANCIAL INFORMATION PAGE #
Item 1.
Condensed Consolidated Balance Sheets
as of May 27, 2000, May 29, 1999
and February 26, 2000 (unaudited) 3
Consolidated Statements of Operations
for the quarters ended May 27, 2000
and May 29, 1999 (unaudited) 4
Consolidated Statements of Cash Flows
for the quarters ended May 27, 2000
and May 29,1999 (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 10
PART II. OTHER INFORMATION 10
Signatures 11
Page 2 of 11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
May 27, May 29, February 26,
ASSETS 2000 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 33,288 $ 34,975 $ 35,364
Accounts receivable, net of allowances of $458, $455 and $576 9,533 9,057 22,403
Merchandise inventories 34,969 25,358 33,926
Deferred income taxes 1,064 1,088 1,355
Prepayments and other current assets 5,914 10,992 4,241
----------- ----------- -----------
Total current assets 84,768 81,470 97,289
Property, plant and equipment, net 35,047 37,374 35,092
Deferred catalog costs 5,502 6,097 5,624
Other assets 5,951 4,367 3,313
----------- ----------- -----------
Total $ 131,268 $ 129,308 $ 141,318
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 16,884 $ 12,651 $ 17,853
Cash overdrafts 38 1,626 758
Customer deposits 154 186 171
Income taxes payable -- -- 3,476
----------- ----------- -----------
Total current liabilities 17,076 14,463 22,258
Deferred compensation 3,354 3,017 3,392
Deferred income taxes 1,410 1,423 1,290
----------- ----------- -----------
Total liabilities 21,840 18,903 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,
20,000,000 shares, and 100,000,000 shares authorized,
respectively; issued - 10,389,674 shares, 10,389,674 shares
and 10,389,674 shares 104 104 104
Additional paid-in capital 31,332 31,236 31,331
Retained earnings 101,461 97,419 103,847
Treasury stock, at cost - 1,686,495 shares, 1,195,327 shares
and 1,419,433 shares, respectively (23,469) (18,354) (20,904)
----------- ----------- -----------
Total stockholders' equity 109,428 110,405 114,378
----------- ----------- -----------
Total $ 131,268 $ 129,308 $ 141,318
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 11
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Fiscal Quarters Ended
----------------------
May 27, May 29,
2000 1999
--------- ---------
Revenues $ 35,175 $ 29,118
Costs and expenses:
Product and delivery costs 16,483 14,620
Selling, general and administrative expenses 21,669 18,929
--------- ---------
38,152 33,549
--------- ---------
Operating loss (2,977) (4,431)
Interest income (expense) - net 501 377
--------- ---------
Loss before income taxes (2,476) (4,054)
Provision for (benefit from) income taxes:
Current (1,303) (1,954)
Deferred 412 454
--------- ---------
(891) (1,500)
--------- ---------
Net loss ($ 1,585) ($ 2,554)
--------- ---------
Net loss per common share - Basic ($ .18) ($ .28)
--------- ---------
Net loss per common share - Diluted ($ .18) ($ .28)
--------- ---------
Weighted average number of common shares -
Basic 8,892 9,180
--------- ---------
Weighted average number of common shares -
Diluted 8,894 9,195
--------- ---------
See Notes to Consolidated Financial Statements
Page 4 of 11
<PAGE>
<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Fiscal Quarters Ended
------------------------
May 27, May 29,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,585) ($ 2,554)
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 675 563
Amortization 125 39
Decrease in accounts receivable 12,942 12,036
(Increase) decrease in merchandise inventories (283) 1,342
Increase in prepayments and other current assets (1,673) (1,321)
Decrease in deferred catalog costs 451 95
Increase in other assets (416) (856)
Decrease in trade accounts payable and accrued expenses (2,036) (4,786)
Decrease in customer deposits (59) (42)
Decrease in income taxes payable (3,476) (1,072)
Decrease in deferred compensation (38) (32)
Increase in deferred income taxes 411 454
---------- ----------
Net cash provided by operating activities 5,038 3,866
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (474) (126)
Purchase of assets of Rue de France, Inc. (net of acquired cash) (2,555) --
---------- ----------
Net cash used in investing activities (3,029) (126)
---------- ----------
Cash flows from financing activities:
Decrease in cash overdrafts (720) (294)
Dividends paid (714) (787)
Payments to acquire treasury stock (2,809) (37)
Reissuance of treasury stock for stock option and
employee benefit plans 158 505
Other -- 14
---------- ----------
Net cash used in financing activities (4,085) (599)
---------- ----------
Net (decrease) increase in cash and cash equivalents (2,076) 3,141
---------- ----------
Cash and cash equivalents at beginning of period 35,364 31,834
---------- ----------
Cash and cash equivalents at end of period $ 33,288 $ 34,975
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
Income taxes 3,665 1,364
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 11
<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):
May 27, May 29, February 26,
2000 1999 2000
-------- -------- --------
Land and buildings $ 32,659 $ 32,520 $ 32,578
Machinery and equipment 31,244 32,619 30,751
Furniture and fixtures 3,922 3,716 3,832
Leasehold improvements 1,150 922 985
-------- -------- --------
Total property, plant &
equipment, at cost 68,975 69,777 68,146
Less: accumulated depreciation
and amortization 33,928 32,403 33,054
-------- -------- --------
Property, plant and equipment-net $ 35,047 $ 37,374 $ 35,092
-------- -------- --------
Page 6 of 11
<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):
Fiscal Quarters Ended
------------------------
May 27, May 29,
2000 1999
------- -------
Net loss - Basic and Diluted ($1,585) ($2,554)
------- -------
Weighted average shares for
Basic EPS 8,892 9,180
Add: incremental shares from
stock option exercises 2 15
------- -------
Weighted average shares for
Diluted EPS 8,894 9,195
------- -------
In the fiscal quarters ended May 27, 2000 and May 29, 1999, options on
1,113,000 and 830,000 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. 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 is approximately $2.3
million, and is being amortized on a straight-line basis over 20 years.
The operating results of Rue de France, which were not significant, have
been included in the Company's consolidated results of operations as of
April 1, 2000.
Page 7 of 11
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED MAY 27, 2000
The net loss for the first quarter ended May 27, 2000 was reduced by $1.0
million, from $2.6 million last year to $1.6 million this year. Net loss per
common share was reduced from $.28 to $.18 in the current first quarter. The
results for the current quarter include those of Rue de France, Inc. since April
1, 2000, the date the net assets were acquired. The results of Rue de France,
Inc. were not material to consolidated operations.
Revenues for the quarter ended May 27, 2000 were $35.2 million, an increase of
$6.1 million, or 20.8% higher than the quarter ended May 29, 1999. The primary
cause for the higher revenue was an approximate 27% increase in catalog
circulation during the quarter. Despite the significant increase in circulation,
revenue per catalog page circulated rose slightly in the first quarter as
compared to the same period last year. Average revenue per order rose by
approximately 3%.
Product and delivery costs of $16.5 million increased by $1.9 million, or 12.7%
in the quarter ended May 27, 2000, as compared to the first quarter of the prior
year. These costs comprised a lower percentage of revenues, 46.9% in the current
quarter, compared to 50.2% 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
increase in costs was primarily due to an increase in the volume of orders
shipped, while the decrease as a percentage of revenue was principally due to
the fixed costs of the Company's Distribution Center being absorbed by the
higher revenue in the current quarter, as well as higher net shipping and
handling revenue.
Selling, general and administrative (SG&A) expenses of $21.7 million, the
largest component of which is the cost of producing, printing and distributing
the Company's catalogs, increased $2.7 million, or 14.5% during the first
quarter. As a percentage of revenues, SG&A costs decreased to 61.6% in the first
quarter this year, compared to 65.0% in the first quarter last year. The
increase in SG&A expenses was largely due to an increase in catalog costs, which
was the result of higher circulation during the quarter, as well as the addition
of Rue de France, Inc. which was acquired during the current quarter, and a
non-recurring charge for the early termination of a lease at one of the
Company's retail outlet stores. The improved percentage of revenues was largely
the result of higher revenue generated per catalog page circulated, as well as
the fixed nature of certain SG&A expenses compared to the higher revenue in the
current quarter.
Page 8 of 11
<PAGE>
Interest income (expense)- net for the quarter ended May 27, 2000 was $124
thousand higher than the first quarter of the prior year. This was due to higher
interest rates and a higher average investment balance during the current
quarter as compared to last year.
The effective income tax rate was 36.0% in the current quarter, compared to 37%
in the first quarter of the prior year. The higher rate last year included the
recording of a valuation allowance related to the Company's inability to fully
deduct its entire charitable contribution tax carryforward prior to its
expiration.
FINANCIAL CONDITION
The Company's balance sheet and liquidity remain strong. Cash and cash
equivalents were $33.3 million (net of cash overdrafts) as of both May 27, 2000
and May 29, 1999. The current ratio was 5.0:1 at May 27, 2000, compared to 5.6:1
as of May 29, 1999, and there was no short or long term debt outstanding. The
Company's working capital needs have been met with funds generated from
operations. The Company's revolving credit facility, which expires in August
2000, is expected to be extended for a one year period on essentially the same
terms and conditions as the current facility.
The Company generated $1.2 million more funds from operating activities in the
current quarter compared to the same period last year, principally due to the
reduced net loss. Inventory levels were $9.6 million, or 38%, higher this year
as compared to last year's first 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 slightly higher as compared to last
year's level, and there are no significant capital commitments planned for the
remainder of fiscal 2001. The Company paid dividends totaling $.7 million ($.08
per share) during its first quarter, comparable to the first quarter of the
prior year.
During the three months ended May 27, 2000, the Company acquired 283,592 shares
of its common stock at a cost of approximately $2.8 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 May 27,
2000, the Company had repurchased 634,492 shares under the new program at a
total cost of approximately $7.1 million.
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. 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 the operating funds of the Company.
Page 9 of 11
<PAGE>
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.
ITEM 3.
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 May 27, 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.
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: None.
Page 10 of 11
<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
Date: July 11, 2000 By: /s/ SUSAN C. HANDLER
---------------------------
Susan C. Handler
Vice President - Corporate
Controller, Secretary
Page 11 of 11
