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 23, 2002
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
----------------------------------------------------
(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:
8,363,955 Shares of Common Stock, $.01 par value, as of January 6, 2003.
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
Form 10-Q
November 23, 2002
Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Consolidated Balance Sheets
as of November 23, 2002, November 24, 2001
and February 23, 2002 (unaudited) ............................. 3
Consolidated Statements of Operations
for the quarters and nine months ended November 23,
2002 and November 24, 2001 (unaudited) ........................ 4
Consolidated Statements of Cash Flows
for the nine months ended November 23,
2002 and November 24, 2001 (unaudited) ........................ 5
Notes to Consolidated Financial
Statements (unaudited) ........................................ 6-9
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ................................................. 10-14
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk ............................................. 15-16
Item 4.
Controls and Procedures ....................................... 16
Part II. Other Information ............................................ 16
- --------------------------
Item 6.
Exhibits and Reports on Form 8-K............................... 16
Signatures ............................................................ 16
Officers' Certifications .............................................. 17-20
Sarbanes-Oxley Act Section 906 Certification .......................... 21
Page 2 of 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOVEMBER 23, NOVEMBER 24, FEBRUARY 23,
2002 2001 2002
ASSETS ----------- ------------ ------------
Current assets:
Cash and cash equivalents ............................................. $ 9,248 $ 10,393 $ 24,894
Accounts receivable, net of allowances of $447, $460,
and $534, respectively ....................................... 20,153 21,431 14,956
Merchandise inventories ............................................... 37,105 46,531 26,618
Deferred income taxes ................................................. -- -- 293
Prepayments and other current assets .................................. 5,447 13,148 8,081
--------- --------- ---------
Total current assets ......................................... 71,953 91,503 74,842
Property, plant and equipment, net ...................................... 29,659 31,942 30,798
Deferred catalog costs .................................................. 20,949 22,398 6,445
Deferred income taxes ................................................... 8,988 -- 1,113
Other assets ............................................................ 5,925 8,249 7,559
--------- --------- ---------
Total ........................................................ $ 137,474 $ 154,092 $ 120,757
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses ........................... $ 30,243 $ 33,714 $ 19,176
Cash overdrafts ....................................................... 3,560 256 489
Customer deposits ..................................................... 15,023 15,017 2,897
Deferred income taxes ................................................. 3,061 3,166 --
--------- --------- ---------
Total current liabilities .................................... 51,887 52,153 22,562
Other liabilities ....................................................... 8,241 5,952 6,782
--------- --------- ---------
Total liabilities ............................................ 60,128 58,105 29,344
--------- --------- ---------
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 - 10,386,324 shares, 10,389,674 shares
and 10,389,674 shares, respectively ......................... 104 104 104
Additional paid-in capital ............................................ 31,332 31,332 31,332
Retained earnings ..................................................... 71,924 92,167 87,387
Accumulated other comprehensive losses, net of taxes .................. (904) (1,736) (1,500)
Treasury stock, at cost -2,027,698 shares, 2,071,520 shares
and 2,088,731 shares, respectively ........................... (25,110) (25,880) (25,910)
--------- --------- ---------
Total stockholders' equity ................................... 77,346 95,987 91,413
--------- --------- ---------
Total ........................................................ $ 137,474 $ 154,092 $ 120,757
--------- --------- ---------
See Notes to Consolidated Financial Statements
Page 3 of 21
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRD QUARTER ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
NOVEMBER 23, NOVEMBER 24, NOVEMBER 23, NOVEMBER 24,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues ..................................................... $ 78,333 $ 87,022 $ 151,279 $ 163,543
Costs and expenses:
Product and delivery costs .............................. 44,747 48,281 91,212 94,850
Selling, general and administrative expenses ............ 36,140 34,284 76,855 76,609
Restructuring credit (Note 3) ........................... -- -- (387) (113)
--------- --------- --------- ---------
80,887 82,565 167,680 171,346
--------- --------- --------- ---------
Operating (loss) income ............................. (2,554) 4,457 (16,401) (7,803)
Interest income .............................................. 29 33 172 626
Financing expense (Note 4) ................................... (344) (57) (3,410) (213)
--------- --------- --------- ---------
(Loss) income before provision for (benefit from)
income taxes ................................... (2,869) 4,433 (19,639) (7,390)
Provision for (benefit from) income taxes (Note 5):
Current ................................................. 47 3,443 184 (1,759)
Deferred ................................................ 1,213 (1,594) (4,760) (885)
--------- --------- --------- ---------
1,260 1,849 (4,576) (2,644)
--------- --------- --------- ---------
Net (loss) income ................................... (4,129) 2,584 (15,063) (4,746)
--------- --------- --------- ---------
Net (loss) earnings per common share - Basic and Diluted ..... $ (.49) $ .31 $ (1.81) $ (.56)
--------- --------- --------- ---------
Weighted average number of common shares -
Basic and Diluted ............................................ 8,349 8,318 8,328 8,418
--------- --------- --------- ---------
See Notes to Consolidated Financial Statements.
Page 4 of 21
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
NOVEMBER 23, NOVEMBER 24,
2002 2001
----------- ----------
Cash flows from operating activities:
Net loss .................................................................... ($15,063) ($ 4,746)
Adjustments to reconcile net loss to net cash provided by
(used in ) operating activities:
Financing expense for paper collar contract ............................... 3,192 --
Depreciation .............................................................. 2,352 2,667
Amortization .............................................................. 2,252 726
Increase in accounts receivable ........................................... (5,197) (1,948)
Increase in merchandise inventories ....................................... (10,487) (14,587)
Decrease (increase) in prepayments and other current assets ............... 2,634 (7,566)
Increase in deferred catalog costs ........................................ (14,504) (13,601)
Increase in other assets .................................................. (22) (3,234)
Increase in trade accounts payable and accrued expenses ................... 9,427 11,056
Increase in customer deposits ............................................. 12,126 10,434
Decrease in other liabilities ............................................. (93) (130)
(Increase) decrease in deferred income taxes .............................. (4,521) 3,645
-------- --------
Net cash used in operating activities ............................ (17,904) (17,284)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment .................................. (1,213) (953)
-------- --------
Net cash used in investing activities ............................ (1,213) (953)
-------- --------
Cash flows from financing activities:
Increase (decrease) in cash overdrafts ...................................... 3,071 (1,045)
Dividends paid .............................................................. -- (2,014)
Payments to acquire treasury stock .......................................... (3) (2,969)
Reissuance of treasury stock for stock options and employee benefit plans ... 403 478
-------- --------
Net cash provided by (used in) financing activities .............. 3,471 (5,550)
-------- --------
Net decrease in cash and cash equivalents ........................ (15,646) (23,787)
-------- --------
Cash and cash equivalents at beginning of period ................................ 24,894 34,180
-------- --------
Cash and cash equivalents at end of period ...................................... $ 9,248 $ 10,393
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes .............................................................. $ 109 $ 518
-------- --------
For the nine months ended November 24, 2001, accounting for the Company's paper
hedge contract resulted in a non-cash charge of $1,736 (net of tax of $1,064) to
accumulated other comprehensive loss and a liability of $2,800. See Note 4.
See Notes to Consolidated Financial Statements.
Page 5 of 21
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. The year-end consolidated
balance sheet data as of February 23, 2002 was derived from audited financial
statements, but does not include all Notes to Financial Statements and
Statements of Stockholders' Equity 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 23, 2002.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows (in thousands):
NOVEMBER 23, NOVEMBER 24, FEBRUARY 23,
2002 2001 2002
------------ ------------ ------------
Land and buildings ................... $33,057 $32,962 $32,975
Machinery and equipment .............. 31,289 33,021 30,284
Furniture and fixtures ............... 4,260 4,247 4,162
Leasehold improvements ............... 1,005 1,021 977
------- ------- -------
Total property, plant &
equipment, at cost ............... 69,611 71,251 68,398
Less: accumulated depreciation
and amortization ............... 39,952 39,309 37,600
------- ------- -------
Property, plant and equipment, net ... $29,659 $31,942 $30,798
------- ------- -------
Page 6 of 21
2. (LOSS) EARNINGS PER SHARE
Basic and diluted (loss) earnings per share was calculated as follows
(amounts in thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
----------------------------- ---------------------------
NOVEMBER 23, NOVEMBER 24, NOVEMBER 23, NOVEMBER 24,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net (loss) income - Basic and
Diluted ................... ($ 4,129) $ 2,584 ($15,063) ($ 4,746)
Weighted average shares for
Basic and Diluted EPS ..... 8,349 8,318 8,328 8,418
For the quarters and nine month periods ended November 23, 2002 and
November 24, 2001, options on 2,077,000 and 1,737,000 shares of common stock,
respectively, were not included in the calculation of weighted average shares
for Diluted EPS because their effects were antidilutive.
3. RESTRUCTURING AND OTHER CHARGES (CREDITS)
During fiscal 2001, the Company recorded pretax restructuring and other
charges aggregating $2,050,000, which included severance pay for a former
officer ($360,000) and for a restructuring plan ($1,690,000) to streamline
operations and reduce costs in light of decreased consumer spending and an
uncertain economy ("the Plan"). Under the Plan, the Company eliminated
approximately 12% of its salaried workforce and consolidated its Las Vegas Call
Center into its National Distribution Center located in Virginia Beach. Changes
in the accrued balance for Plan costs through November 23, 2002 were as follows
(dollars in thousands):
INITIAL
PLAN ASSET WRITE-OFFS BALANCE AS OF
COST & EXPENDITURES ADJUSTMENTS NOVEMBER 23, 2002
-------- ---------------- ----------- -----------------
Severance and related benefits ... $ 687 ($ 687) -- $-
Write-off of leasehold
improvements and equipment .... 317 (204) ($ 113) --
Lease termination costs .......... 686 (299) (387) --
------- ------- ------- --
$ 1,690 ($1,190) ($ 500) $-
In the prior year's second quarter (ended August 25, 2001), a $113,000
restructuring credit was recorded due to the favorable disposition of certain
fixed assets.
On April 24, 2002, the Company decided to reactivate the Las Vegas Call
Center as a seasonal call center for the peak holiday selling season. As a
result of this decision, the remaining accrual of $387,000 for the lease
termination costs for this facility was reversed in the first quarter of fiscal
2003.
Page 7 of 21
4. PAPER HEDGE CONTRACT
The Company's earnings are impacted by fluctuating paper prices. In order
to partially mitigate this risk the Company entered into a collar hedge contract
in 1999. This contract covered certain grades of paper used by the Company to
produce its catalogs. There was a floor and ceiling on paper prices within the
contract. If paper prices remained within the range of the contract, there would
have been no payment to either party to the contract. If paper prices exceeded
the established ceiling the Company would have been entitled to be reimbursed by
the counterparty for the excess. Conversely, if paper prices fell below the
established floor, the Company would have been required to pay the counterparty.
The Company did not pay a premium at the inception of the contract. The contract
has an expiration date of August 2005.
Financial Accounting Standard ("FAS") No. 133 requires that all derivative
financial instruments be recorded on the balance sheet as either assets or
liabilities at fair value. Changes in the fair value of derivatives are recorded
each period in earnings or other comprehensive earnings (losses), depending on
whether a derivative is designated and effective as part of a hedge transaction
and, if it is, the type of hedge transaction. Gains and losses on derivative
instruments reported in other comprehensive earnings (losses) are reclassified
to earnings in the periods in which earnings are affected by the hedged item.
The collar hedge contract had been designated, and was effective, as a hedge
through November 2001. During the nine months ended November 24, 2001,
ineffectiveness related to the collar hedge contract was not significant.
In view of the financial situation of Enron North America Corporation
("Enron"), the counterparty, the Company discontinued hedge accounting during
the fourth quarter of fiscal 2002. As a result, amounts previously recorded in
Accumulated Other Comprehensive Losses under hedge accounting of $1,736,000 (net
of taxes of $1,064,000) through November 24, 2001 will continue to be
reclassified to earnings as a component of selling, general and administrative
expenses in the period in which earnings are affected by the paper costs.
Further, any changes in the fair value of the contract subsequent to November
24, 2001 will be recorded in earnings as financing expense. The fair value of
the contract at November 23, 2002 and November 24, 2001 was $4,372,000 and
$2,800,000 respectively, which is included in other liabilities in the
accompanying balance sheets. Total amounts expensed for the third quarter and
the first nine months of fiscal 2003 approximated $689,000 and $4,391,000,
respectively, on a pre-tax basis, which includes $259,000 and $3,192,000,
respectively, in financing expense for the change in the fair market value of
the contract and $430,000 and $1,199,000 respectively, of catalog expense
included in selling, general and administrative expenses.
Enron filed for bankruptcy in the Company's fourth quarter of fiscal 2002.
To date, the Company has not been entitled to receive any payments from Enron
under the paper price collar agreement. The Company has filed a claim with the
bankruptcy trustee regarding the validity of the paper price collar contract.
Although the Company does not know what effect Enron's bankruptcy will
ultimately have upon the paper price collar contract, amounts recorded on the
accompanying balance sheets are appropriate with respect to management's current
estimate of the liability.
Page 8 of 21
Hedging activity affected Accumulated Other Comprehensive Losses, net of
income taxes, for each quarter in fiscal year 2003 as follows (dollars in
thousands):
Balance as of February 23, 2002 ......................... $ 1,500
Derivative losses transferred to earnings:
Quarter ended May 25, 2002 ..................... (42)
Quarter ended August 24, 2002 .................. (450)
Quarter ended November 23, 2002 ................ (104)
-------
Balance as of November 23, 2002 ......................... $ 904
5. INCOME TAXES
As of November 23, 2002, the Company recorded a deferred tax asset, the
ultimate realization of which is dependent upon the generation of sufficient
amounts of future taxable income during the years in which the related net
expenses become deductible and the related net operating loss carryforwards may
be utilized prior to expiration. The Company's ability to generate sufficient
taxable income in future periods is contingent upon a number of factors,
including general economic conditions and the Company's sales levels in future
periods. Although management has developed plans which should enable the Company
to achieve sufficient income levels in the future, there can be no assurance
that the plans will be successful in enabling the Company to generate sufficient
taxable income from operations in the periods in which the net expenses become
deductible and prior to the expiration of the net operating loss carryforwards.
The Company has developed certain tax planning strategies relating to the
potential sale and leaseback of certain of its facilities which could be
employed, if necessary, to generate taxable income. However, it has been
determined that the taxable income generated by the tax planning strategies will
more likely than not be insufficient to fully offset the impact of the future
net deductible expenses and fully utilize the net operating loss carryforwards
prior to expiration. Therefore, in accordance with Financial Accounting Standard
("FAS") No. 109, the Company has recorded a tax charge of $2.3 million in the
third quarter of fiscal 2003 to record a deferred income tax valuation
allowance. This valuation allowance was a cumulative adjustment for the nine
month period and resulted in a net provision for income taxes of $1.3 million
for the quarter, offsetting any benefit that may have resulted from the net
operating loss for the quarter. The net deferred tax asset recorded at November
23, 2002 was $5.9 million. The Company expects to record a valuation allowance
on future tax benefits until it can be determined that it is more likely than
not that the deferred tax asset will be realized.
6. RECENTLY ADOPTED ACCOUNTING STANDARD
Effective February 24, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets". FAS No. 142 primarily addresses the accounting that
must be applied to goodwill and intangible assets subsequent to acquisition and
requires an annual review of goodwill for potential impairment. The adoption of
FAS No. 142 for fiscal 2003 does not have a material impact on the Company's
financial statements. Goodwill amortization included in the net loss for the
nine months ended November 24, 2001 was not material.
Page 9 of 21
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended November 23, 2002
The net loss for the third quarter of fiscal 2003 was ($4.1) million, or
($.49) per share, compared to a net profit of $2.6 million, or $.31 per share
for the same period last year. In addition to a decline in revenues of
approximately $8.7 million, the net loss for the third quarter resulted from
several factors: a) a tax valuation allowance of $2.3 million ($.27 per share)
related to the future utilization of the Company's net operating loss tax
carryforwards b) a financing charge of $.2 million after taxes ($.02 per share)
to record the change in the fair market value of the Company's paper price
collar contract and c) software amortization of the Company's upgraded website
installed last year which resulted in additional charges of $.2 million after
taxes ($.03 per share). Exclusive of these charges, the net loss per share would
have been ($.17) for the third quarter of fiscal 2003.
Revenues for the quarter ended November 23, 2002 decreased 10.0% to $78.3
million compared to $87.0 million last year, primarily due to the difficult
retail environment that has affected many direct marketing and retail companies.
The total number of orders shipped for the quarter decreased approximately 7%
from the same period last year. Average revenue per order for the Company was
comparable to the same period last year. Internet revenue rose by 49% compared
to last year, and represented approximately 20% of the total for the third
quarter of fiscal 2003, compared to approximately 13% in the third quarter last
year.
Product and delivery costs of $44.7 million in the third quarter of fiscal
2003 decreased 7.3% from $48.3 million for the comparable period last year.
Product and delivery costs include the cost of merchandise sold and the cost of
receiving, personalizing, and filling orders for the Company's customers. The
decrease in product and delivery costs was principally a result of the decline
in volume and the reduced number of orders shipped. As a percentage of revenue,
product and delivery costs increased from 55.5% in the third quarter of fiscal
2002 to 57.1% in the third quarter of fiscal 2003. This increase was a result of
the impact of fixed costs of the National Distribution Center as a percentage of
lower revenue, as well as higher postal rates to ship packages to customers and
higher packaging material costs. Additionally, higher salary and lease costs
were incurred due to the reactivation of the Las Vegas Call Center which
occurred in the second quarter of fiscal 2003. These lease costs were accrued by
the Company at the end of fiscal 2001 as part of a restructuring accrual, and,
therefore, there was no expense during the third quarter of fiscal 2002 as the
facility was not being utilized at that time. A portion of the restructuring
accrual, which related to lease costs was subsequently reversed in the first
quarter of fiscal 2003 and recorded in the restructuring credit line on the
Statement of Operations.
Page 10 of 21
Selling, general and administrative (SG&A) expenses were $36.1 million in
the third quarter of fiscal 2003 compared to $34.3 million in the third quarter
of fiscal 2002, an increase of $1.8 million or 5.4%. The cost of producing,
printing, and mailing the Company's catalogs represents the single largest
component of SG&A expenses. These costs increased principally because of an
increase of approximately 3.5% in the number of catalogs and total pages
circulated in the current quarter. As a percentage of revenue, SG&A expenses
increased from 39.4% in the third quarter of fiscal 2002 to 46.1% in the third
quarter of fiscal 2003, principally because of approximately 6.5% lower revenue
per catalog mailed. These costs also rose because of the Company's investment in
additional merchandising personnel and expansion into new product categories.
Higher internet advertising expenditures of $.4 million and higher software
amortization related to the Company's enhanced website, which was launched last
fall, of $.3 million also contributed to the higher costs for the current
quarter.
Interest income for the third quarter of fiscal 2003 was comparable to the
third quarter of fiscal 2002.
Financing expense for the third quarter of fiscal 2003 was $.3 million
compared to $.1 million for the third quarter of fiscal 2002. The current
quarter includes a financing charge of $.3 million to record the change in the
fair value of the Company's paper price collar contract. The Company cannot
predict what effect changes in paper prices will have on its earnings for the
balance of Fiscal 2003 or beyond.
The Company recorded a tax provision of $1.3 million for the third quarter
of fiscal 2003 despite a pretax loss of $2.9 million. The tax provision includes
a charge of $2.3 million to record a deferred tax valuation allowance in
accordance with Financial Accounting Standard ("FAS") No. 109 related to the
future utilization of the Company's net operating loss tax carryforwards. See
Note 5 to the Consolidated Financial Statements. The effective tax rate in the
third quarter of fiscal 2002 was 42%.
Results of Operations
Nine Months Ended November 23, 2002
The net loss for the nine months ended November 23, 2002 was ($15.1) million, or
($1.81) per share, compared to ($4.7) million, or ($.56) per share for the same
period last year. The net loss for the first nine months of fiscal 2003 included
financing charges of $2.1 million after taxes, ($.25 per share), to record the
change in the fair market value of the Company's paper price collar contract, a
charge of $.7 million after taxes, ($.08 per share), for higher software
amortization of the Company's upgraded website and a charge of $.4 million after
taxes, ($.05 per share) related to the implementation fees for installing a
pay-for-performance program net of the savings realized to date; it is
anticipated that the savings to be realized in this fiscal year will exceed the
cost of implementation. The pay-for-performance program introduced during the
second quarter of fiscal 2003 rewards Distribution Center employees for
increased efficiency. The first nine month results also included a tax charge
associated with the recognition of a deferred tax valuation
Page 11 of 21
allowance of $2.3 million ($.27 per share related to the future utilization of
the Company's net operating loss tax carryforwards. Exclusive of these charges,
the net loss per share for the first nine months of fiscal 2003 would have been
($1.16).
Revenues for the nine months ended November 23, 2002 decreased 7.5% to
$151.3 million compared to $163.5 million last year, primarily due to the
difficult retail environment and a reduction of approximately 3% in the number
of catalogs circulated during the nine months ended November 23, 2002.
Specifically, the Company's Neat Ideas catalog was consolidated into its other
catalogs and the Sales and Bargains catalog was not mailed in the first quarter.
Revenue per catalog declined by 1.3% compared to the same period last year. The
total number of orders shipped for the nine month period decreased by
approximately 4.5% from the comparable period last year. Internet revenue rose
56% compared to last year's comparable period and represented approximately 19%
of the total this year versus approximately 12% last year.
Product and delivery costs of $91.2 million for the nine months ended
November 23, 2002 decreased 3.8% from $94.9 million for the comparable period
last year, principally because of a decline in the volume of orders shipped. As
a percentage of revenue, product and delivery costs increased from 58.0% in the
nine months ended November 24, 2001 to 60.3% for the nine months ended November
23, 2002. The increase as a percentage of revenue occurred as a result of the
impact of fixed costs of the National Distribution Center on a lower revenue
base. In addition, costs related to a) higher packaging materials costs, b) a
$.4 million charge related to the implementation of a pay-for-performance
program net of the savings realized to date, c) higher salary and lease costs
related to the reactivation of the Las Vegas Call Center, and d) postal rate
increases impacting the cost of shipping packages to customers, negatively
affected product and delivery costs.
Selling, general and administrative (SG&A) expenses were $76.9 million for
the nine months ended November 23, 2002 compared to $76.6 million for the same
period last year, an increase of $.3 million or .3%. Catalog costs declined by
$1.7 million principally because of reduced circulation. However, this was
offset by increases in other costs. Higher costs were incurred because of the
Company's investment in additional merchandising personnel and expansion into
new product categories. Higher software amortization costs of the Company's
upgraded website of $1.1 million and higher internet advertising expenditures of
$.5 million also contributed to the increase in SG&A costs. As a percentage of
revenue, SG&A expenses increased to 50.8% for the nine months ended November 23,
2002 compared to 46.8% for the same period last year.
The restructuring credit of $.4 million for the nine months ended November
23, 2002 represents a reversal of an accrual that was previously recorded for
lease termination costs for the Las Vegas Call Center. During the first quarter
of fiscal 2003, the Company decided to reactivate the facility as a seasonal
call center for the peak holiday selling season.
Interest income for the nine months ended November 23, 2002 was $.2 million
compared to $.6 million for the same period of the prior year. The decrease was
due primarily to lower interest rates on the Company's cash investments.
Page 12 of 21
Financing expense for the nine months ended November 23, 2002 was $3.4
million compared to $.2 million for the same period last year. The nine months
ended November 23, 2002 results include a financing charge of $3.2 million to
record the change in the fair value of the Company's paper price collar
contract. The Company cannot predict what effect changes in paper prices will
have on its earnings for the balance of fiscal 2003 or beyond.
The effective tax benefit rate for the nine months ended November 23, 2002
was 23.3%, compared to 35.8% for the same period of the prior year. The lower
effective tax rate for fiscal 2003 was caused by the recording of a deferred tax
valuation allowance of $2.3 million in accordance with Financial Accounting
Standard ("FAS") No. 109 related to the future utilization of the Company's net
operating loss tax carryforwards. See Note 5 to the Consolidated Financial
Statements.
Financial Condition
The Company's balance sheet and liquidity remain strong. Cash and cash
equivalents were $9.2 million as of November 23, 2002. The current ratio was
1.4:1 as of November 23, 2002, compared to 1.8:1 as of November 24, 2001. The
reduction in the current ratio was due principally to lower inventory and
prepayments and other current assets as of November 23, 2002 compared to the
same period last year. Specifically, the income tax benefit for the nine month
period last year resulted in a current income tax refund, compared to a
long-term deferred tax benefit for the nine months this year. Other long-term
liabilities of $8.2 million as of November 23, 2002 were $2.3 million higher
than the comparable period last year principally as a result of the change in
the fair market value of the Company's paper price collar contract.
On January 3, 2003, the Company amended its revolving credit facility. The
amount available under the facility was reduced by $5 million, so that it now
provides for a credit line totaling $22 million for the Company's first and
second quarters, and $27 million for the third and fourth quarters. There has
been no change in the $12 million portion of the total facility that is
available for letters of credit. The Company does not believe that the amendment
materially affects its sources of liquidity. Other than for letters of credit
related to inventory purchases, the Company has neither borrowed money in the
current nine month period nor in the same period of the prior year, and its
working capital needs were met with funds on hand and generated from operations.
The Company's use of funds for operating activities for the nine months
ended November 23, 2002 was $.6 million more than the same period last year. The
$10.3 million higher net loss for the period and a $3.2 million higher increase
in accounts receivable was offset by $3.2 million less spending for other
assets, namely software development costs for the Company's website, lower
inventory purchases of $4.1 million and higher non-cash expenses such as the
financing expense related to the Company's paper collar contract of $3.2 million
and higher software amortization costs of the Company's enhanced website of $1.5
million. Inventory levels were $9.4 million or 20.3% lower this year as compared
to the same period last year, reflecting the Company's successful efforts to
reduce inventory and enhance cash flow.
Page 13 of 21
Capital spending of $1.2 million for the nine months ended November 23,
2002 was $.2 million higher than for the same period last year. These
expenditures were made principally to upgrade the Company's computer equipment
and distribution machinery and equipment. For the remainder of fiscal 2003, the
Company is not planning any major capital projects and will continue to
implement tight controls on capital expenditures and make commitments for items
that have a positive return on investment.
The Company generated $.4 million of cash from the issuance of common stock
through its employee benefit plans during the nine months ended November 23,
2002, compared to $.5 million last year.
At its February 28, 2002 meeting, the Board of Directors voted to
discontinue the regular quarterly cash dividend to conserve cash for
reinvestment in the business, whereas $2.0 million was paid for dividends during
the nine month period last year. The Company will evaluate its dividend policy
on an ongoing basis in view of its earnings, financial position, capital
requirements, and other relevant factors.
As of November 23, 2002, the Company had repurchased 1,178,442 shares at a
total cost of approximately $11.4 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. The Company paid $3.0
thousand to repurchase shares during the nine months ended November 23, 2002,
compared to $3.0 million paid for shares repurchased during the nine month
period last year.
Recently Adopted Accounting Standard
Effective February 24, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets". FAS No. 142 primarily addresses the accounting that
must be applied to goodwill and intangible assets subsequent to acquisition and
requires an annual review of goodwill for potential impairment. The adoption of
FAS No. 142 for fiscal 2003 does not have a material impact on the Company's
financial statements. Goodwill amortization included in the net loss for the
nine months ended November 24, 2001 was not material.
Forward Looking Statements
Except for historical information contained herein, statements included in
this 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 Company's future performance, including, without limitation, statements with
respect to the Company's anticipated results of operations, revenues, cash flows
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
Page 14 of 21
growing Internet market, changes in government regulations, risks associated
with the social, political, economic and other conditions affecting foreign
sourcing, including possible disruptions caused by the current unstable global
situation, 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 23, 2002.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are impacted by fluctuating paper prices. In order to
partially mitigate this risk, the Company entered into a collar hedge contract
in 1999. This contract covered certain grades of paper used by the Company to
produce its catalogs. There was a floor and ceiling on paper prices within the
contract. If paper prices remained within the range of the contract there would
have been no payment to either party to the contract. If paper prices exceeded
the established ceiling the Company would have been entitled to be reimbursed by
the counterparty for the excess. Conversely, if paper prices fell below the
established floor, the Company would have been required to pay the counterparty.
The Company did not pay a premium at the inception of the contract. The contract
has an expiration date of August 2005.
The paper price collar contract had been designated as, and was effective
as, a hedge through November 2001. During the nine months ended November 24,
2001, ineffectiveness related to the paper price collar contract was not
significant. Enron filed for bankruptcy in the fourth quarter of fiscal 2002. In
view of Enron's financial situation the Company discontinued hedge accounting
during the fourth quarter of fiscal 2002. As a result, amounts previously
recorded in Accumulated Other Comprehensive Losses under hedge accounting of
$1,736,000 (net of taxes of $1,064,000 ) through November 24, 2001 will continue
to be reclassified to earnings as a component of selling, general and
administrative expenses in the period in which earnings are affected by the
paper costs. Such amount is expected to be approximately $1 million of expense
(net of taxes) for fiscal 2003. Further, any changes in the fair value of the
contract subsequent to November 24, 2001 will be recorded in earnings as
financing expense. The fair value of the contract at November 23, 2002 was
$4,372,000, which is included in other liabilities in the accompanying balance
sheet. Total amounts expensed for the nine months ended November 23, 2002
approximated $4,391,000 on a pretax basis ($2.9 million after taxes). Changes in
future paper prices will result in changes in the fair market value of the
contract. The Company cannot predict what, if any, financing expenses under the
contract may be incurred for the balance of fiscal 2003 or beyond.
To date, the Company has not been entitled to receive any payments from
Enron under the paper price collar agreement. The Company has filed a claim with
the bankruptcy trustee regarding the validity of the paper price collar
contract. Although the Company does not know what effect Enron's bankruptcy will
ultimately have upon the paper price collar contract, amounts recorded on the
accompanying balance sheet are appropriate with respect to management's current
estimate of the liability.
Page 15 of 21
ITEM 4.
CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and the
Company's Executive Vice President / Chief Operating Officer / Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Executive Vice President / Chief Operating Officer / Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. Since the date of the evaluation, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect the controls.
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.
Exhibit No. 10.1 - Eighth Amendment to the Amended Revolving Credit Agreement,
Letter of Credit and Bankers Acceptance facility dated as of
August 19,1996 among Lillian Vernon Corporation as Borrower,
Lillian Vernon Fullfillment Services, Inc., LVC Retail
Corporation and Lillian Vernon International Ltd. As
Guarantors, the Banks named therein and JPMorgan Chase Bank
as agent.
Reports on Form 8-K: None.
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 6, 2003 By: /s/ RICHARD P. RANDALL
---------------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer
Page 16 of 21
CHIEF EXECUTIVE OFFICER
CERTIFICATION
I, Lillian Vernon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lillian Vernon
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Page 17 of 21
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 6, 2003
By: /s/ LILLIAN VERNON
----------------------------
Lillian Vernon
Chairman and Chief Executive Officer
Page 18 of 21
CHIEF FINANCIAL OFFICER
CERTIFICATION
I, Richard P. Randall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lillian Vernon
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Page 19 of 21
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 6, 2003
By: /s/ RICHARD P. RANDALL
----------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer
Page 20 of 21
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned,
being the Chief Executive Officer and the Chief Financial Officer of Lillian
Vernon Corporation (the "Issuer"), respectively, hereby certify that:
1. The 10-Q Report of the Issuer for the quarter ended November 23, 2002
("10-Q Report") fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934, and that
2. The 10-Q Report fairly presents, in all material respects, the
financial condition and results of operations of the Issuer.
Date: January 6, 2003
LILLIAN VERNON CORPORATION
By: /s/ LILLIAN VERNON
-----------------------------
Lillian Vernon
Chief Executive Officer
By: /s/ RICHARD P. RANDALL
-----------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer
Page 21 of 21