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 November 27, 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 issuer's classes of common stock:
8,978,241 Shares of Common Stock, $.01 par value, as of January 6, 2000.
<PAGE>
LILLIAN VERNON CORPORATION
Form 10-Q
November 27, 1999
PART I. FINANCIAL INFORMATION PAGE #
Item 1.
Condensed Consolidated Balance Sheets
as of November 27, 1999, November 28, 1998
and February 27, 1999 (unaudited) 3
Consolidated Statements of Income
for the quarters and nine months ended
November 27, 1999 and November 28, 1998 (unaudited) 4
Consolidated Statements of Cash Flows
for the nine months ended November 27, 1999
and November 28, 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-12
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk 12
PART II. OTHER INFORMATION 13
Signatures 14
Page 2 of 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
November 27, November 28, February 27,
ASSETS 1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 16,388 $ 2,163 $ 31,834
Accounts receivable 32,774 33,253 21,093
Merchandise inventories 45,048 44,810 26,700
Deferred income taxes -- -- 1,355
Prepayments and other current assets 4,943 12,765 9,671
--------- --------- ---------
Total current assets 99,153 92,991 90,653
Property, plant and equipment, net 36,406 38,080 37,811
Deferred catalog costs 14,598 18,133 6,192
Other assets 4,490 2,917 3,550
--------- --------- ---------
Total $ 154,647 $ 152,121 $ 138,206
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 30,169 $ 28,041 $ 17,437
Cash overdrafts 2,441 1,591 1,920
Customer deposits 939 1,551 228
Revolving debt -- 1,000 --
Income taxes payable 100 -- 1,072
Deferred income taxes 814 2,394 --
--------- --------- ---------
Total current liabilities 34,463 34,577 20,657
--------- --------- ---------
Deferred compensation 2,979 3,349 3,049
Deferred income taxes 1,528 1,835 1,236
--------- --------- ---------
Total liabilities 38,970 39,761 24,942
--------- --------- ---------
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, 20,000,000 shares authorized, respectively;
issued - 10,389,674 shares 104 104 104
Additional paid-in capital 31,336 31,131 31,322
Retained earnings 103,766 101,565 100,760
Treasury stock, at cost - 1,295,413 shares, 1,330,603 shares
and 1,231,806 shares, respectively (19,529) (20,440) (18,922)
--------- --------- ---------
Total stockholders' equity 115,677 112,360 113,264
--------- --------- ---------
Total $ 154,647 $ 152,121 $ 138,206
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 14
<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 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 105,630 $ 107,872 $ 170,246 $ 179,423
Costs and expenses:
Product and delivery costs 47,165 45,742 81,007 81,885
Selling, general and administrative expenses 43,130 48,777 81,310 91,575
Write-off - computer project -- 1,415 -- 1,415
--------- --------- --------- ---------
90,295 95,934 162,317 174,875
--------- --------- --------- ---------
Operating income 15,335 11,938 7,929 4,548
Interest income (expense) - net 15 (294) 654 (15)
--------- --------- --------- ---------
Income before income taxes 15,350 11,644 8,583 4,533
Provision for (benefit from) income taxes:
Current 4,958 2,418 705 (3,415)
Deferred 722 1,588 2,471 5,003
--------- --------- --------- ---------
5,680 4,006 3,176 1,588
--------- --------- --------- ---------
Net income $ 9,670 $ 7,638 $ 5,407 $ 2,945
--------- --------- --------- ---------
Net income per common share - Basic $ 1.06 $ .84 $ .59 $ .32
--------- --------- --------- ---------
Net income per common share - Diluted $ 1.06 $ .84 $ .59 $ .31
--------- --------- --------- ---------
Weighted average number of common shares -
Basic 9,152 9,111 9,176 9,255
--------- --------- --------- ---------
Weighted average number of common shares -
Diluted 9,152 9,147 9,182 9,386
--------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 14
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
November 27, November 28,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,407 $ 2,945
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 2,757 2,987
Amortization 169 177
Write-off - computer project -- 1,415
Increase in receivables (11,681) (10,621)
Increase in inventories (18,348) (7,876)
(Increase) decrease in prepayments and other current assets 4,728 (2,591)
Increase in deferred catalog costs (8,406) (12,211)
Increase in other assets (1,109) (1,297)
Increase in trade accounts payable and accrued expenses 12,732 11,710
Increase in customer deposits 711 1,404
Decrease in income taxes payable (972) (4,581)
Decrease in deferred compensation (70) (77)
Increase in deferred income taxes 2,461 5,124
-------- --------
Net cash used in operating activities (11,621) (13,492)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,352) (3,244)
-------- --------
Net cash used in investing activities (1,352) (3,244)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations -- (1,394)
Increase in cash overdrafts 521 587
Proceeds from short term borrowings - net of repayments -- 1,000
Dividends paid (2,205) (2,262)
Payments to acquire treasury stock (1,669) (6,623)
Reissuance of treasury stock 866 1,485
Other 14 (30)
-------- --------
Net cash used in financing activities (2,473) (7,237)
-------- --------
Net decrease in cash and cash equivalents (15,446) (23,973)
-------- --------
Cash and cash equivalents at beginning of period 31,834 26,136
-------- --------
Cash and cash equivalents at end of period $ 16,388 $ 2,163
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 371
Income taxes 1,388 4,654
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 14
<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 27, 1999.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
November 27, November 28, February 27,
1999 1998 1999
------------ ------------ ------------
Land and buildings $ 32,558 $ 32,288 $ 32,507
Machinery and equipment 33,529 31,642 32,577
Furniture and fixtures 3,854 3,651 3,670
Leasehold improvements 1,061 909 896
--------- --------- ---------
Total property, plant &
equipment, at cost 71,002 68,490 69,650
Less: accumulated depreciation
and amortization 34,596 30,410 31,839
--------- --------- ---------
Property, plant and equipment-net $ 36,406 $ 38,080 $ 37,811
--------- --------- ---------
Page 6 of 14
<PAGE>
2. 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 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares
for Basic EPS 9,152 9,111 9,176 9,255
Add: incremental shares from
stock option exercises -- 36 6 131
--------- ---------- --------- --------
Weighted average shares for
Diluted EPS 9,152 9,147 9,182 9,386
--------- ---------- --------- --------
</TABLE>
For the third quarters ended November 27, 1999 and November 28, 1998,
options on 1,162,000 and 415,000 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 27, 1999 and November 28, 1998, options
on 972,000 and 237,000 shares of common stock, respectively, were not
included in the calculation of weighted average shares for Diluted EPS
because their effects were antidilutive.
3. WRITE-OFF - COMPUTER PROJECT
During the third quarter of the prior year (fiscal 1999), the Company
recorded 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).
4. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 2000 presentation.
Page 7 of 14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED NOVEMBER 27, 1999
Revenues for the quarter ended November 27, 1999 were $105.6 million compared to
$107.9 million last year principally as a result of a strategic decision to
reduce circulation to improve profits. Revenue per catalog increased by 10.4% in
the quarter on 12% lower circulation as compared to last year. The increased
revenue per catalog was due in large part to positive consumer response to a
significant increase in the number of new products offered, more targeted
circulation and an emphasis on value pricing.
Product and delivery costs in the quarter ended November 27, 1999 of $47.2
million increased by $1.4 million, or 3.1%, compared to the third quarter of the
prior year. These costs represented a higher percentage of revenues (44.7%) in
the current quarter than the same period last year (42.4%). 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. Some
principal factors that caused product and delivery costs to rise in dollars and
as a percentage of revenues included higher wage rates at the Company's National
Distribution Center, the operation of a third call center in Las Vegas, Nevada,
and lower gross margins due to the Company's emphasis on value pricing.
Selling, general and administrative (SG&A) expenses of $43.1 million, the
largest component of which is the cost of producing, printing and mailing the
Company's catalogs, decreased $5.6 million, or 11.6%, during the quarter
principally because of lower circulation. As a percentage of revenues, SG&A
costs decreased to 40.8% in the quarter compared to 45.2% last year. The
improvement in SG&A expenses as a percentage of revenues is largely attributable
to higher revenue per circulated page which rose 13% in the third quarter this
year compared to last year. A Company-wide focus on cost cutting also
contributed to lower SG&A. In support of the Company's strategy to expand its
online sales and customer base, higher expenses related to its Internet site
were incurred in the third quarter as compared to the prior year.
Net interest income for the quarter ended November 27, 1999 was $.3 million
higher than the third 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. This was principally due to the repayment of all long term
debt in the third quarter of the prior year; no short term borrowings existed
during the current quarter.
The effective income tax rate was 37.0% for the current quarter compared to
34.4% in the third quarter of the prior year. The higher rate more closely
reflects the fiscal 1999 annual rate.
Page 8 of 14
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 27, 1999
Revenues for the nine months ended November 27, 1999 were $170.2 million
compared to $179.4 million last year principally as a result of a strategic
decision to reduce circulation to improve profits. Revenue per catalog rose
11.0% in the first nine months of the current year on 15.0% lower circulation as
compared to last year. The increased revenue per catalog was due in large part
to positive consumer response to a significant increase in the number of new
products offered, more targeted circulation and an emphasis on value pricing.
Product and delivery costs of $81.0 million decreased by $.9 million, or 1.1%
for the nine months ended November 27, 1999 as compared to the prior year. These
costs represented a higher percentage of revenues (47.6%) in the current period,
than the same period last year (45.7%). The decrease in costs was primarily due
to a decrease in the number of orders processed, while the increase as a
percentage of revenue was primarily due to higher wage rates at the Company's
National Distribution Center and the operation of a third call center in Las
Vegas, Nevada.
Selling, general and administrative (SG&A) expenses of $81.3 million decreased
$10.3 million, or 11.2%, during the current nine month period compared to last
year, principally because of lower circulation. As a percentage of revenues,
SG&A costs decreased to 47.8% in the current period, compared to 51.0% last
year. The improvement in SG&A expenses as a percentage of revenues is largely
attributable to higher revenue per circulated page which rose 13.8% in the
current nine month period compared to last year. A Company-wide focus on cost
cutting also contributed to lower SG&A. In support of the Company's strategy to
expand its online sales and customer base, higher expenses related to its
Internet site were incurred in the current nine month period as compared to the
prior year.
Net interest income for the nine months ended November 27, 1999 was $.7 million
higher than the same period of the prior year, as a result of greater interest
earned on substantially higher cash investments and lower interest expense in
the current period. This was principally due to the repayment of all long term
debt in the third quarter of the prior year; no short term borrowings existed
during the current nine month period.
The effective income tax rate was 37.0% for the nine months ended November 27,
1999, compared to 35.0% in the same period of the prior year. The higher rate
more closely reflects the fiscal 1999 annual rate.
Page 9 of 14
<PAGE>
FINANCIAL CONDITION
The Company's balance sheet and liquidity are strong. Cash and cash equivalents
were $16.4 million as of November 27, 1999, $14.2 million higher than November
28, 1998; the current ratio improved from 2.69:1 at November 28, 1998 to 2.88:1
at November 27, 1999. There was neither long-term debt nor short-term borrowings
outstanding during the current quarter, as compared to significant short term
borrowings last year. The Company has not borrowed money in the current fiscal
year; its working capital needs have been met with funds generated from
operations.
The Company utilized $1.9 million less funds for operating activities in the
current nine month period compared to the same period last year due to lower
catalog costs and lower income tax payments, partially offset by higher
inventory purchases. Inventory levels ($45.0 million) are approximately the same
this year as last year. Capital spending was lower than last year's level and
there are no significant capital commitments anticipated for the balance of
fiscal 2000. The Company paid dividends totaling $2.2 million ($.24 per share)
during the first nine months of the current year, comparable to the first nine
months of the prior year.
The Company utilized $5 million less funds for its share repurchase program in
the current nine month period compared to the same period last year. During the
nine months ended November 27, 1999, the Company acquired 132,800 shares of its
common stock at a total cost of $1.7 million as part of its current 1.5 million
shares open market stock repurchase program which was authorized by the Board of
Directors on September 28, 1999 and October 7, 1998, bringing the total shares
repurchased since inception of the new program to 207,800 shares at a total cost
of approximately $2.6 million.
Subsequent to the end of the third quarter (November 28 through January 6,
2000), the Company repurchased 135,100 additional shares; the remaining number
of shares authorized to be repurchased at January 6, 2000 was 1,157,100.
PAPER HEDGE CONTRACT
In prior years the Company's earnings have been negatively 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 the purchase of 56,000 short tons of
paper which the Company uses to produce its catalogs; this represents
approximately 55% - 65% of the Company's projected catalog production
requirements. There is a floor and ceiling to paper prices within the contract
which expires in August 2003. 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.
Page 10 of 14
<PAGE>
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 November 27, 1999, 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.
YEAR 2000 COMPLIANCE PROGRAM
The Company is fully Year 2000 compliant and experienced no interruptions to its
normal operations at the start of calendar year 2000. The Company completed the
modification of its internal computer software applications and systems to
function properly with respect to dates in the Year 2000 and thereafter. The
Company utilized both its in-house staff as well as outside resources to modify
its systems.
The Company's total cost of modifying its computer software applications and
systems to be Year 2000 compliant was approximately $1.5 million. These amounts
have been funded from operating cash flow.
As of January 6, 2000, the Company has not experienced any material disruptions
of its internal computer systems or software applications, and has not
experienced any problems with the computer systems or software applications of
its third party vendors and service providers. The Company will continue to
monitor these third party entities to determine the impact, if any, 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
assessment of compliance by third parties, there appears to be no material
business risk posed by any such noncompliance.
Page 11 of 14
<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 emerging 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 27, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 12 of 14
<PAGE>
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 13 of 14
<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: January 10, 2000 By: /s/ RICHARD P. RANDALL
---------------------------
Richard P. Randall
Senior Vice President,
Chief Financial Officer
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818008
<NAME> LILLIAN VERNON CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-START> FEB-28-1999
<PERIOD-END> NOV-27-1999
<EXCHANGE-RATE> 1
<CASH> 16,388
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0
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<COMMON> 104
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</TABLE>
