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 25, 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:
8,679,868 Shares of Common Stock, $.01 par value, as of January 5, 2001.
<PAGE>
LILLIAN VERNON CORPORATION
Form 10-Q
November 25, 2000
PART I. FINANCIAL INFORMATION PAGE #
Item 1.
Condensed Consolidated Balance Sheets
as of November 25, 2000, November 27, 1999
and February 26, 2000 (unaudited) 3
Consolidated Statements of Income
for the quarters and nine months ended
November 25, 2000 and November 27, 1999 (unaudited) 4
Consolidated Statements of Cash Flows
for the nine months ended November 25, 2000
and November 27, 1999 (unaudited) 5
Notes to Consolidated Financial
Statements 6-8
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-12
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
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 25, NOVEMBER 27, FEBRUARY 26,
ASSETS 2000 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 13,000 $ 16,388 $ 35,364
Accounts receivable, net of allowances of $744, $668,
and $576, respectively 28,747 32,774 22,403
Merchandise inventories 46,692 45,048 33,926
Deferred income taxes -- -- 1,355
Prepayments and other current assets 5,716 4,943 4,241
--------- --------- ---------
Total current assets 94,155 99,153 97,289
Property, plant and equipment, net 34,550 36,406 35,092
Deferred catalog costs 15,820 14,598 5,624
Other assets 6,141 4,490 3,313
--------- --------- ---------
Total $ 150,666 $ 154,647 $ 141,318
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 29,088 $ 30,169 $ 17,853
Cash overdrafts 249 2,441 758
Customer deposits 806 939 171
Income taxes payable -- 100 3,476
Deferred income taxes 2,851 814 --
--------- --------- ---------
Total current liabilities 32,994 34,463 22,258
Deferred compensation 3,276 2,979 3,392
Deferred income taxes 1,443 1,528 1,290
--------- --------- ---------
Total liabilities 37,713 38,970 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 105,112 103,766 103,847
Treasury stock, at cost -1,710,757 shares, 1,295,413 shares
and 1,419,433 shares, respectively (23,595) (19,529) (20,904)
--------- --------- ---------
Total stockholders' equity 112,953 115,677 114,378
--------- --------- ---------
Total $ 150,666 $ 154,647 $ 141,318
--------- --------- ---------
</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 25, NOVEMBER 27, NOVEMBER 25, NOVEMBER 27,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 98,340 $ 105,630 $ 174,802 $ 170,246
Costs and expenses:
Product and delivery costs 45,144 47,165 83,913 81,007
Selling, general and administrative expenses 41,908 43,130 85,025 81,310
---------- ---------- ---------- ----------
87,052 90,295 168,938 162,317
---------- ---------- ---------- ----------
Operating income 11,288 15,335 5,864 7,929
Net interest income (expense) 42 15 857 654
---------- ---------- ---------- ----------
Income before income taxes 11,330 15,350 6,721 8,583
Provision for (benefit from) income taxes:
Current 1,714 4,958 (1,150) 705
Deferred 3,065 722 4,269 2,471
---------- ---------- ---------- ----------
4,779 5,680 3,119 3,176
---------- ---------- ---------- ----------
Net income $ 6,551 $ 9,670 $ 3,602 $ 5,407
---------- ---------- ---------- ----------
Net income per common share - Basic $ .76 $ 1.06 $ .41 $ .59
---------- ---------- ---------- ----------
Net income per common share - Diluted $ .75 $ 1.06 $ .41 $ .59
---------- ---------- ---------- ----------
Weighted average number of common shares -
Basic 8,678 9,152 8,758 9,176
---------- ---------- ---------- ----------
Weighted average number of common shares -
Diluted 8,686 9,152 8,767 9,182
---------- ---------- ---------- ----------
</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 25, NOVEMBER 27,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,602 $ 5,407
Adjustments to reconcile net income to net cash provided by
(used in) operating activities (net of effects from purchase of
Rue de France, Inc.):
Depreciation 2,615 2,757
Amortization 569 169
Increase in accounts receivable (6,283) (11,681)
Increase in merchandise inventories (12,051) (18,348)
(Increase) decrease in prepayments and other current assets (1,475) 4,728
Increase in deferred catalog costs (9,867) (8,406)
Increase in other assets (797) (1,109)
Increase in trade accounts payable and accrued expenses 10,149 12,732
Increase in customer deposits 613 711
Decrease in income taxes payable (3,476) (972)
Decrease in deferred compensation (116) (70)
Increase in deferred income taxes 4,359 2,461
---------- ----------
Net cash used in operating activities (12,158) (11,621)
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,917) (1,352)
Purchase of assets of Rue de France, Inc. (net of acquired cash) (2,753) 0
---------- ----------
Net cash used in investing activities (4,670) (1,352)
---------- ----------
Cash flows from financing activities:
(Decrease) increase in cash overdrafts (509) 521
Dividends paid (2,085) (2,205)
Payments to acquire treasury stock (3,479) (1,669)
Reissuance of treasury stock 535 866
Other 2 14
---------- ----------
Net cash used in financing activities (5,536) (2,473)
---------- ----------
Net decrease in cash and cash equivalents (22,364) (15,446)
---------- ----------
Cash and cash equivalents at beginning of period 35,364 31,834
---------- ----------
Cash and cash equivalents at end of period $ 13,000 $ 16,388
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest -- --
Income taxes $ 3,690 $ 1,388
Supplemental schedule of noncash investing and financing activities:
The Company purchased the assets of Rue de France, Inc. as of April 1, 2000 for $2,823
(less acquired cash of $70). In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired $ 3,932
Cash paid for assets acquired (2,823)
-------
Liabilities assumed $ 1,109
=======
</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 26, 2000.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
November 25, November 27, February 26,
2000 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Land and buildings $ 32,822 $ 32,558 $ 32,578
Machinery and equipment 32,467 33,529 30,751
Furniture and fixtures 4,027 3,854 3,832
Leasehold improvements 1,102 1,061 985
---------- ---------- ----------
Total property, plant &
equipment, at cost 70,418 71,002 68,146
Less: accumulated depreciation
and amortization 35,868 34,596 33,054
---------- ---------- ----------
Property, plant and equipment-net $ 34,550 $ 36,406 $ 35,092
---------- ---------- ----------
</TABLE>
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 25, November 27, November 25, November 27,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares
for Basic EPS 8,678 9,152 8,758 9,176
Add: incremental shares from
stock option exercises 8 -- 9 6
---------- ---------- ---------- ----------
Weighted average shares for
Diluted EPS 8,686 9,152 8,767 9,182
---------- ---------- ---------- ----------
</TABLE>
For the third quarters ended November 25, 2000 and November 27, 1999, options on
1,123,167 and 1,162,000 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 25, 2000 and November 27, 1999, options on
1,123,167 and 972,000 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 paid a cash purchase price of $2.8 million (reflecting 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 of approximately $2.6 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 financial statements to
conform with the fiscal 2001 presentation.
Page 7 of 14
<PAGE>
5. RECENTLY ISSUED ACCOUNTING STANDARDS
FASB Emerging Issues Task Force Issue No. 00-10, " Accounting for Shipping
and Handling Fees and Costs", requires that shipping and handling fees
charged to customers be included in revenues. Presently, the Company
records such fees as a reduction of the related shipping and handling
expenses which are included in the "product and delivery costs" line in the
income statement. This pronouncement is effective for the fourth quarter of
fiscal year 2001, and the reclassification will be made in the Company's
year-end financial statements.
Page 8 of 14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED NOVEMBER 25, 2000
Revenues for the quarter ended November 25, 2000 were $98.3 million compared to
$105.6 million last year, principally caused by the slowing retail environment
and weak consumer demand, as well as a 7% reduction in circulation (excluding
Rue de France). Factors affecting consumer spending this holiday season included
rising interest rates and consumer debt, higher energy prices, and the
distraction caused by the presidential election. Because of this weakness in
demand, revenue per catalog was 2.7% lower in the current quarter as compared to
last year, although average revenue per order rose by 1.5% (excluding Rue de
France).
Product and delivery costs in the quarter ended November 25, 2000 of $45.1
million decreased by $2.0 million, or 4.3%, compared to the third quarter of the
prior year, principally because of lower order volume. These costs represented a
higher percentage of revenues (45.9%) in the current quarter than the same
period last year (44.7%). 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 principal factors that
caused product and delivery costs to rise as a percentage of revenues included
lower net shipping and handling revenue from customers and higher labor costs
due to an increase in personalized items during the period. Also, fixed costs
comprised a higher percentage of the reduced revenue in the current quarter.
Selling, general and administrative (SG&A) expenses of $41.9 million, the
largest component of which is the cost of producing, printing and mailing the
Company's catalogs, decreased $1.2 million, or 2.8%, during the quarter
principally because of lower circulation. As a percentage of revenues, SG&A
costs increased to 42.6% in the quarter compared to 40.8% last year. SG&A
expenses were higher as a percentage of revenues mostly because the Company
experienced lower revenue per catalog and circulated page in the current quarter
compared to last year. Also, the fixed elements of SG&A expenses comprised a
higher percentage of the reduced revenue in the current quarter.
Net interest income for the quarter ended November 25, 2000 was comparable to
that recorded in the third quarter of the prior year.
The effective income tax rate was 42.2% for the current quarter compared to
37.0% in the third quarter of the prior year. The higher rate resulted primarily
from the recognition of a valuation allowance on the Company's charitable
contribution tax carryfoward. Because of lower projected annual income discussed
below, and because taxable income is the basis of the allowable deduction under
the IRS code, it was determined that a portion of the carryfoward will not be
deductible prior to expiration.
Page 9 of 14
<PAGE>
Should sales continue to be weak through the fourth quarter, net income for
Fiscal 2001 ending February 24, 2001 may be in the range of 40% to 50% lower
than the $.69 per share earned in the fiscal year ended February 26, 2000.
RESULTS OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 25, 2000
Revenues for the nine months ended November 25, 2000 were $174.8 million
compared to $170.2 million last year. Revenues rose primarily because of the
acquisition of the Rue de France catalog in April 2000, and from providing
telemarketing services to another catalog retailer. Aside from Rue de France,
catalog circulation was comparable with the nine-month period last year.
Positive trends in response and revenue per catalog that the Company experienced
in the first half of the fiscal year were offset by the slowing economy during
the Company's peak season.
Product and delivery costs of $83.9 million increased by $2.9 million, or 3.6%
for the nine months ended November 25, 2000 as compared to the prior year,
principally because of the costs associated with the revenue of Rue de France
and providing telemarketing services to another catalog retailer. Product and
delivery costs represented a higher percentage of revenues (48.0%) in the
current period, than the same period last year (47.6%). While the product gross
margin was relatively constant year-to-year in the Company's ongoing catalogs,
the mix of the Company's revenues, with more revenues coming from lower margin
sources this year, caused the rise in the percentage of revenues. This was
partially offset by fewer backorders, which reduced fulfillment costs such as
labor, postage and packaging.
Selling, general and administrative (SG&A) expenses of $85.0 million increased
$3.7 million, or 4.6%, during the current nine month period compared to last
year, principally because of the inclusion of the catalog costs and
administrative expenses of Rue de France, Inc. since April 1, 2000. As a
percentage of revenues, SG&A costs rose to 48.6% in the current period, compared
to 47.8% last year. The increase in SG&A expenses as a percentage of revenues
was due to several factors, including higher expenses related to the Company's
Internet site in the current period as compared to the prior year, the inclusion
of Rue de France, and a non-recurring charge in the first quarter related to the
early termination of the lease of one of its outlet stores.
Net interest income for the nine months ended November 25, 2000 was $.2 million,
or 31%, higher than the same period of the prior year, principally because of
higher interest rates.
The effective income tax rate was 46.4% for the nine months ended November 25,
2000, compared to 37.0% in the same period of the prior year. As discussed above
for the third quarter, the higher rate resulted primarily from the recognition
that a portion of the Company's charitable contribution tax carryforward will
not be deductible on its tax return prior to expiration.
Page 10 of 14
<PAGE>
FINANCIAL CONDITION
The Company's balance sheet and liquidity are strong. Cash and cash equivalents
(net of cash overdrafts) were $12.8 million as of November 25, 2000 and $13.9
million as of November 27, 1999. The current ratio was 2.85:1 at November 25,
2000 and 2.88:1 at November 27, 1999. The Company had no long-term debt or
short-term borrowings outstanding. The Company's working capital needs have been
met with funds generated from operations.
The Company utilized approximately $12 million of funds for operating activities
in both the current nine month period and the same period last year. In the
current nine month period, inventory purchases were less, but this was offset by
the lower level of net income and other operating cash flows. Inventory totaled
$46.7 million as of the end of the third quarter (including Rue de France, which
was not in last year's balance sheet), compared to $45.0 million last year. The
Company is currently making an active effort to reduce its inventory level,
while balancing its revenue and gross margin goals.
Capital spending during the current nine month period was $1.9 million. While
there are no significant capital commitments anticipated for the balance of
fiscal 2001, the Company is currently assessing its needs in the area of
information technology, including future growth of its website, and enhancement
of the systems in the National Distribution Center.
The Company paid dividends totaling $2.1 million ($.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 $1.8 million more 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 25, 2000, the Company acquired 347,042 shares of its
common stock at a total cost of $3.5 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 program to 697,942 shares at a total cost of
approximately $7.8 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 paid
a cash purchase price of $2.8 million. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB Emerging Issues Task Force Issue No. 00-10, " Accounting for Shipping and
Handling Fees and Costs", requires that shipping and handling fees charged to
customers be included in revenues. Presently, the Company records such fees as a
reduction of the related shipping and handling expenses which are included in
the "product and delivery costs" line in the income statement. This
pronouncement is effective for the fourth quarter of fiscal year 2001, and the
reclassification will be made in the Company's year-end financial statements.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, statements included in
this Report on Form 10-Q may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to the
Page 11 of 14
<PAGE>
Company's future performance, including without limitation, statements with
respect to the Company's anticipated results of operations, revenues and/or
level of business. Such statements represent the Company's current expectations
only and are subject to certain risks, assumptions, and uncertainties. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated or projected.
Among the factors that could cause actual results to materially differ include
the overall strength of the economy, the level of consumer confidence and
spending, customer preferences, circulation changes and other initiatives,
increased competition in the direct mail industry and from the growing Internet
market, changes in government regulations, risks associated with the social,
political, economic and other conditions affecting foreign sourcing, possible
future increases in operating costs including postage and paper costs, and other
factors which are discussed in 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 November 25, 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 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 8, 2001 By: /s/ WAYNE A. PALLADINO
-----------------------------------
Wayne A. Palladino
Senior Vice President and
Chief Financial Officer
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