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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 26, 2000
OR
[ ] 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 OF INCORPORATION) (I. R. S. EMPLOYER IDENTIFICATION NO.)
ONE THEALL ROAD, RYE, NEW YORK 10580
- ---------------------------------------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (914) 925-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
COMMON STOCK, PAR VALUE AMERICAN STOCK EXCHANGE
$.01 PER SHARE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 FOR 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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (section.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY INFORMATION STATEMENT, INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE FOR THE VOTING STOCK HELD BY NON-AFFILIATES (BASED
UPON THE CLOSING PRICE ON MAY 17, 2000) WAS APPROXIMATELY $43,738,000.
AS OF MAY 17, 2000, THERE WERE 8,706,279 SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE, OUTSTANDING.
PART III IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S PROXY STATEMENT
PURSUANT TO REGULATION 14A, COVERING THE ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD JULY 19, 2000.
THE INDEX TO EXHIBITS APPEARS ON PAGE 23.
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1
LILLIAN VERNON CORPORATION
FISCAL 2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business ...................................................... 1
Item 2. Properties .................................................... 11
Item 3. Legal Proceedings ............................................. 12
Item 4. Submission of Matters to a Vote of
Security Holders ............................................ 12
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters ...................... 13
Item 6. Selected Financial Data ....................................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................................. 15
Item 7a. Quantitative and Qualitative Disclosure
about Market Risk ........................................... 21
Item 8. Financial Statements and Supplementary Data ................... 21
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ....................................................21
PART III
Item 10. Directors and Executive Officers of the
Registrant, Executive Compensation .......................... 22
Item 11. Security Ownership of Certain Beneficial
Owners and Management ....................................... 22
Item 12. Certain Relationships ......................................... 22
Item 13. Related Transactions .......................................... 22
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K ..................................... 22
i
PART I
ITEM 1. BUSINESS
GENERAL
Lillian Vernon Corporation (the "Company") is a direct mail specialty
catalog and online company concentrating on the marketing of gift, household,
gardening, kitchen, Christmas and children's products. The Company, a
predecessor of which was founded in 1951, seeks to provide customers with
reasonably priced products that can be differentiated from competitive products
either by design, price or personalization. In fiscal 2000, the Company
published 33 catalog editions, and mailed approximately 166,000,000 catalogs to
past and prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of products purchased. These and other factors
are analyzed by computer to rank and segment customers to determine those most
likely to purchase products offered in the Company's catalogs. The data base
contains information with respect to over 23 million customers, gift
recipients and people who have requested the Company's catalogs.
The Company derives a small portion of its revenue from the rental of its
customer list to direct mail marketers and other organizations and from a
magazine subscription sales program. The Company has a Business to Business
operation which sells premium and incentive items, and other products to
numerous businesses, including Fortune 500 companies. Business to Business also
sells to the wholesale market. The Company also operates a chain of outlet
stores which sell Lillian Vernon merchandise. In addition to offering its
products through its catalogs, the Company offers its products over the
Internet.
The following table reflects the Company's history in the areas of
circulation of its catalogs, number of orders received and average revenue per
order received, over the last five fiscal years.
1
Fiscal Years Ended
--------------------------------------------------------
February February February February February
26, 2000 27, 1999 28, 1998(3) 22, 1997 24, 1996
-------- -------- -------- -------- --------
Number of ............ 165,855 188,678 178,917 175,232 179,539
catalogs
mailed
(000's) (1)
Number of ............ 33 34 34 29 27
catalog
editions
Number of ............ 4,627 4,812 4,936 4,643 4,903
orders
received
(000's)
Average .............. $ 55.56 $ 55.23 $ 54.13 $ 52.57 $ 49.31
revenue per
order
received (2)
--------------------
(1) "Number of catalogs mailed" includes catalog circulation to the extent
that related orders are received in that fiscal year.
(2) "Average revenue per order received" is not reduced for refunds, nor
does it include shipping and handling or applicable state sales tax.
(3) Fiscal 1998 contained 53 weeks.
CATALOGS AND PRODUCTS
The Company's catalogs are designed to capture the readers' interest
through the use of distinctive covers, colorful product presentations and
product descriptions that highlight significant features. The catalogs are
created and produced by the Company's in-house creative staff, which includes
designers, writers and production personnel. The Company also hires free-lance
designers and photographers, as needed. The combination of in-house and
free-lance staff enables the Company to maintain both quality control and
flexibility in the production of its catalogs.
The Company varies the quantity of its catalog mailings based on the
selling season, anticipated revenue per catalog, the price of paper and other
catalog costs, and its capacity to process and fill orders.
2
Merchandise offered by the Company includes gifts, holiday products, toys
and children's products, personal and home accessories, kitchen and houseware
products, gardening and outdoor products. The Company employs a staff of
experienced buyers, who seek reliable sources for unique, quality merchandise.
The buyers attend numerous domestic and international trade and merchandise
shows, study merchandising trends, and review the performance of merchandise
previously offered. The Company also uses both its product development staff and
free-lance artists to develop distinctive designs for many of its products,
which the Company copyrights and has manufactured to its specifications. The
Company provides free monogramming and full name personalization on many of the
products it sells. In the past fiscal year, products which can be personalized
or which were manufactured to the Company's exclusive design specifications
accounted for about half of the products offered by the Company.
COMPANY CATALOGS AND INTERNET ACTIVITIES
The Lillian Vernon catalog (the "Core Catalog") offers a wide variety of
products including gifts, holiday products, toys and children's products,
personal and home accessories, kitchen and houseware products and outdoor
products. Depending on the time of the year, the Core Catalog contains between
84 and 120 pages, offering between 500 and 700 products. In fiscal 2000, the
Company produced 9 editions of its Core Catalog.
The Super Sale catalog is primarily used to sell overstocked and deleted
merchandise, and is generally mailed only to customers in the Company's data
base. The Super Sale catalog typically contains between 84 and 96 pages,
offering between 480 and 560 products. In fiscal 2000, the Company produced 4
editions of its Super Sale catalog.
The Company's Lilly's Kids catalog features toys, games, baby products,
room decor and fashion accessories for children. Depending upon the time of the
year, the Lilly's Kids catalog has between 48-80 pages, offering between 300 and
550 products. In fiscal 2000, the Company produced 6 editions of its Lilly's
Kids catalog.
The Company's Christmas Memories catalog is targeted to the Christmas
season and offers ornaments, holiday decor, gifts, cards and many unique and
exclusive products. The Christmas Memories catalog typically is 84 pages,
offering 450 items. In fiscal 2000, the Company produced 1 edition of the
Christmas Memories catalog.
The Favorites catalog features many of the best-selling products from all
Lillian Vernon catalogs. The Favorites catalog has between 48 and 72 pages,
offering between 350 and 500 products. In fiscal 2000, the Company produced 4
editions of its Favorites catalog.
3
The Company's Personalized Gifts catalog features gift items, all offered
with personalization. The Personalized Gifts catalog is typically between 56 and
64 pages and offers between 350 and 500 products. In fiscal 2000, the Company
produced 3 editions of its Personalized Gifts catalog.
The Neat Ideas catalog offers products which include closet, food
preparation, kitchen accessories, kitchen decor, tabletop, organization, bath,
laundry, car/garage and outdoor products. The Neat Ideas catalog has between 48
and 64 pages, offering between 350 and 400 products. In fiscal 2000, the Company
produced 3 editions of its Neat Ideas Catalog.
The Lillian Vernon Gardening catalog features a cross-section of functional
garden products, as well as garden and floral-themed decorative accessories. A
typical Lillian Vernon Gardening catalog has 48 pages offering 300 products. In
fiscal 2000, the Company produced 3 editions of the Lillian Vernon Gardening
catalog.
In March 2000 (fiscal year 2001), the Company launched a redesigned
Internet site, www.lillianvernon.com. This new e-commerce web site integrates
upgraded shopping capabilities and graphic enhancements to offer customers a
user-friendly experience, featuring the Company's most popular products.
Additionally, all of the Company's 6,000-plus products from all of its catalog
titles can be ordered online using an electronic order form. The Company
anticipates that current and new customers' use of the website will continue to
grow.
The Company offers a deferred billing program to its customers, in which it
agrees to charge the customers' credit cards for the full amount of their
purchase at a future date specified in each catalog. The Company does not charge
interest to the customers who participate in the deferred billing program.
All products sold, including personalized products, are unconditionally
guaranteed. A customer may return any product, even if personalized, for any
reason. The dollar value of refunds requested by customers under the guarantee
in fiscal 2000 approximated 4.5% of net revenues.
4
The Company purchases its products from approximately 1,100 suppliers.
Approximately 79% of the merchandise is purchased abroad, predominantly from
manufacturers located in Hong Kong, Taiwan, India, the Peoples' Republic of
China, Italy, Thailand and Germany. Most purchase orders are denominated in U.S.
dollars. Although no manufacturer is individually material to the Company's
operations, the Company buys significant quantities through several Far East
trading companies which utilize multiple manufacturers. The Company buys
approximately 4% of its purchases through one Far Eastern buying agent, which
acts as the Company's representative in its dealings with many different
manufacturers in the Peoples' Republic of China, including Hong Kong. The
Company also buys approximately 5% of its purchases through one Hong Kong
vendor. As a result of its use of foreign suppliers, the Company is subject to
the risks of doing business abroad, but has experienced no disruptions. The
Asian economic downturn did not materially affect the Company's sourcing of
products in the region. Management continues to closely monitor the situation
and believes that adequate replacement sources are available to the Company if
any of the Company's suppliers fail to meet their obligations.
MARKETING
The Company maintains a proprietary customer data base containing
information with respect to over 23 million customers, gift recipients and
people who have requested its catalogs. In addition, the Company rents from, and
exchanges mailing lists or specific portions of lists with direct marketers and
other organizations to gain new customers. Approximately 166,000,000 catalogs
were mailed in fiscal 2000, of which approximately 81% were mailed to people
whose names were in the Company's proprietary data base and approximately 19%
were mailed to prospects derived from rented lists.
The Company consistently offers customers special promotions such as gifts
with purchase, free shipping and handling, and a deferred billing option, in
order to increase sales.
The Company believes that the size of its computerized data base and its
ability to analyze it, as well as rented lists, and to select recipients for a
particular mailing are important factors in its success. The Company analyzes
various factors (e.g., frequency of order, date of last order, order size, type
of products purchased and demographic data) to rank its customer and prospect
groups in order to target its catalog mailings to those most likely to purchase
its merchandise. The Company updates its data base to include new customers and
eliminate non-responders.
The Company periodically conducts focus groups and participates in customer
surveys to enhance its marketing efforts.
5
MAGAZINE SALES PROGRAM
The Company launched a new telemarketing program in fiscal 1999 in which
inbound order callers are offered the opportunity to subscribe to a magazine of
their choice at the guaranteed lowest subscription price. A third party marketer
of magazine subscriptions provides reimbursement to the Company for costs
related to this program and provides revenue to the Company for every magazine
sold and upon the completion of the billing cycles of the magazine
subscriptions.
LIST RENTAL
The Company derives a small portion of its revenue from the rental of its
data base to direct mail marketers and other organizations, and from the
placement of advertisements for other companies' products in its outgoing
packages.
ORDER FULFILLMENT AND DISTRIBUTION
Orders for merchandise are received by telephone, mail, fax, and the
Internet. Orders are received and processed at the Company's National
Distribution Center in Virginia Beach, Virginia. Customer Service operations are
also conducted at this facility. Recently the Company expanded its telemarketing
center in Las Vegas, Nevada, which supplements its Virginia Beach telemarketing
facility. The Company also operates a telephone order call center in New
Rochelle, New York. The Company receives telephone orders on a 24-hour basis,
seven days a week, with orders entered directly into the computer. Mail orders
are opened, compared to payments, batched and entered into computer terminals.
The Company completed an internal upgrading of its existing order entry
system during fiscal 2000. The upgrade allows the Company cross-selling
capabilities in which a customer is offered a substitute product if the product
they ordered is unavailable, or an additional product related to the one ordered
by the customer.
In April of 2000 (fiscal year 2001) the Company began providing
telemarketing services to another company.
The majority of orders are processed, packed and shipped at the Company's
National Distribution Center. Some products are drop-shipped from vendors
directly to customers; this is the most cost-effective way of satisfying the
customer. Approximately 95% of customer orders were shipped by the U.S.Postal
Service in fiscal 2000. The Company shipped the balance of its orders via UPS
Second Day Air delivery as an option to its customers, for an extra charge.
6
The Company's National Distribution Center, an 821,000 square foot facility
located in Virginia Beach, Virginia, is owned and operated by the Company's
wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc. All of the
Company's distribution, and a majority of its warehousing activities, are
conducted at this facility. The National Distribution Center is generally
operated on a five-day-a-week basis, except during the Holiday season, when,
depending upon demand, it may operate on a six or seven-day-a-week, three-shift
basis. Personalization of products is also done at the Company's National
Distribution Center. The Company also owns a 154,000 square foot building in
Virginia Beach used for additional distribution and warehousing space.
The Company continually assesses the need to upgrade the capacity of its
telemarketing and distribution facilities. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
PAPER AND MAILING COSTS
The Company expends significant amounts on paper in the production of its
catalogs. The Company also uses substantial amounts of packing supplies and
corrugated boxes to ship its products. In fiscal 2000, the Company spent
approximately $21.9 million in total paper costs and also spent approximately
$52.0 million in mailing catalogs and packages to its customers.
In recent years, the U.S. Postal Service has increased its rates for both
the mailing of catalogs and packages. The U.S. Postal Service increased its
rates in late fiscal 1999 by 3%. There was no change in postal rates in fiscal
2000, and no increases are expected until January 2001. No assurance can be
given that postal rates will not continue to increase in the future. United
Parcel Service, which increased its rates in each of the last several years,
also increased its rates in late fiscal 1999 by 5%. As of May 1, 1999, the
Company began utilizing the U.S. Postal Service for regular delivery of all
packages. The Company, after substantial testing and review, chose the U.S.
Postal Service as its principal carrier; this decision was made to maintain
service to its customers and reduce costs for fiscal 2000 and beyond. United
Parcel Service is utilized as an optional delivery service for Second Day Air
delivery at the customer's request for an additional charge.
The price of paper is dependent upon supply and demand in the marketplace.
The Company's paper cost per page decreased approximately 13% in fiscal 2000 as
compared to fiscal 1999, and is expected to be approximately 8% higher in fiscal
year 2001 as compared to fiscal 2000.
7
The Company has secured paper supply commitments for the majority of its
fiscal 2001 paper needs at market prices (for high-volume purchasers) in effect
at the time orders are placed. The Company continually monitors the paper market
and periodically meets with its paper suppliers in advance of its purchases in
order to react to changes in the paper supply market. In addition, the Company
entered into a four year paper hedge contract in September 1999 with Enron
Capital and Trade Resources Corporation which provides the Company with price
protection in the form of a floor and ceiling in purchasing certain of its paper
requirements (see Item 7(A) - "Quantitative and Qualitative Disclosure About
Market Risk" for further discussion). While the Company cannot estimate the
magnitude of future paper and postage increases or decreases, such changes may
impact the Company's future earnings. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations").
MERCHANDISE OVERSTOCKS
The Company sells its overstocks to its customers at reduced prices,
primarily through its Super Sale catalogs, its outlet stores and through special
offers made to customers placing orders by telephone and on the Internet. In
addition, the Company enters into barter transactions to eliminate excess
merchandise.
SEASONALITY
The Company's business is seasonal. Historically, approximately 70% - 75%
of the Company's revenues and substantially all of its net income have been
realized during its third and fourth fiscal quarters, which encompass the period
September through February. Lower revenue and net losses are typically incurred
during its first and second fiscal quarters, comprising the period March through
August. The Company believes this is the general pattern associated with other
mail order and retail gift businesses. Further discussion of the effect of
seasonality upon revenues and income is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
GOVERNMENT REGULATIONS
The Company complies with Federal, state and local laws affecting its
business. In particular, the Company is subject to Federal Trade Commission
regulations governing the Company's advertising and trade practices and Consumer
Product Safety Commission regulations governing the standards its products,
particularly toys, must meet. While the Company believes it is presently in
compliance with such regulations, in the event of noncompliance, the Company may
be subject to cease and desist orders, injunctive proceedings, civil fines and
other penalties. To date, such governmental regulations have not had a material
adverse effect on the Company. On occasion, products offered by the Company have
been subject to voluntary recall; however, no such recall has had a material
adverse effect on the Company.
8
The United States and the other countries in which the Company's products
are manufactured may, from time to time, impose new or adjust existing quotas,
duties, tariffs or other restrictions, with the result that the Company's
ability to continue to import merchandise at required levels could be adversely
affected. The Company cannot now predict the likelihood of any such events
occurring or the effect on its business of any such event.
In the past, various states had taken action to require mail order
retailers to collect sales tax from residents in their states, even if the only
contact with such states is the mailing of catalogs into the states. On May 26,
1992, the Supreme Court ruled that state governments could not require out of
state mail order companies to collect and remit sales and use taxes without
Congressional authorization. Since that time, bills have periodically been
introduced in Congress which would allow states to impose sales tax collection
responsibility upon mail order companies. No bills have been enacted into law.
In October 1998, the Internet Tax Freedom Act was signed into law by
Congress. Among the provisions of this Act is a three-year moratorium on the
collection of sales taxes on Internet sales activities. An advisory commission
was appointed by Congress to study and recommend whether, and how Internet sales
activities should be taxed. The commission recently was unable to reach a
consensus opinion, and is no longer in existence. Congress is currently studying
the Internet taxation issues, but to date has not enacted any bills into law.
Although management is unable to predict the likelihood of Congress passing
sales tax legislation in the future, the Company does not expect that the
collection of sales tax will have a material effect on its results of operations
in fiscal 2001.
TRADEMARKS AND COPYRIGHTS
The Company has federally registered service marks and/or logos for
"Lillian Vernon" and many of its catalog titles. In the opinion of the
management of the Company, the service mark "Lillian Vernon" is of significant
value because of its market recognition as a result of many years of use and the
large quantity of catalogs circulated.
The Company also possesses numerous copyrights and/or trademarks on its
products, none of which individually is material to the Company.
EMPLOYEES
As of February 26, 2000, the Company and its subsidiaries employed
approximately 1,500 employees. During the peak Holiday season, the Company
utilizes approximately 5,500 people including seasonal employees working in the
telephone order, order processing and distribution areas. Employees are not
covered by collective bargaining agreements. The Company considers its employee
relations to be good.
9
COMPETITION
The retail business in general, and mail order in particular, is highly
competitive. The Company competes primarily with other mail order catalogs, as
well as Internet websites and retail stores, including specialty shops and
department stores, many of which have substantially greater financial resources
than the Company. The Company competes on the basis of its exclusive product
selection, its personalization capabilities, its proprietary customer list, the
quality of its customer service and its unconditional guarantee. Although the
Company attempts to market products not available elsewhere, certain products
similar to those marketed by the Company may be purchased through other mail
order catalogs, online, or in retail stores.
ACQUISITION - RUE DE FRANCE, INC.
On April 6, 2000 the Company completed the purchase of the assets of Rue de
France, Inc., a privately owned catalog company based in Newport, Rhode Island.
The Company agreed to pay a cash purchase price of up to $3 million, subject to
post closing net worth adjustments. Additionally, the Company agreed to make
future payments, contingent upon Rue de France, Inc. achieving certain projected
earnings before taxes during the five year fiscal period of the Company
commencing on February 27, 2000.
Rue de France, Inc., a 15 year-old retailer of home furnishings, markets
its products through catalogs, a web site and a retail store in Newport, Rhode
Island. Rue de France, Inc.'s founder has joined Lillian Vernon Corporation
under a multi-year employment contract as President of a newly formed Company
subsidiary which acquired the assets of Rue de France, Inc.
10
ITEM 2. PROPERTIES
The Company's corporate headquarters and administrative offices are located
in a 65,000 square foot building in Rye, New York. The corporate headquarters
includes the executive offices, merchandising, creative, marketing and finance
departments, as well as the Business to Business operation. This facility is
leased under a sublease agreement expiring on January 30, 2005. In addition to
base rent, the sublease provides that the Company is responsible for increases
in real estate taxes and operating costs over a base year. The Company has
received two renewal options, each for five years, from the owners of the
building, an unaffiliated entity, upon the expiration of the sublease, in 2005.
The Company believes that its headquarters facility is adequate for its
anticipated growth needs.
Until July 1998, the Company's corporate headquarters and administrative
offices were located in a 41,664 square foot building in New Rochelle, New York
which was leased from two related parties under a net sub-lease which expired on
July 30, 1998, with an annual net rental of $430,000, plus all real estate
taxes, insurance and capital improvements.
The Company's 821,000 square foot National Distribution Center is located
on approximately 61 acres in Virginia Beach, Virginia. The facility, which
became fully operational during the summer of 1988, is owned and operated by the
Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc.
The Company also owns a 154,000 square foot building in Virginia Beach
which it utilizes for additional distribution and warehousing space.
All distribution and warehousing activities, as well as mail order
processing, customer service and most telemarketing activities, are conducted at
the Virginia Beach facilities.
In fiscal 1999, the Company leased a 14,905 square foot space in an office
complex in Las Vegas, Nevada, as an additional telemarketing facility. The
original lease was scheduled to expire on February 28, 2004. In fiscal 2000, the
Company signed an amendment to the original lease, which added an additional
4,928 square foot space and extended the lease term until March 31, 2005. The
Company is responsible for its share of operating expenses, real estate taxes
and utility charges. The Company has an option to extend the amended lease for a
period of five years. Additionally, the Company has a right of first offer with
respect to any contiguous rental space which may become vacant.
The Company leases 11,000 square feet in an office building in New
Rochelle, New York, which provides additional telemarketing facilities. The
current lease runs through December 31, 2002.
The Company leases thirteen retail locations, which serve as outlet stores,
in the states of Virginia, New York, Delaware and South Carolina. The typical
retail store is approximately 3,000 square feet. The retail store leases expire
from fiscal 2001 through fiscal 2005, and contain various renewal options
through fiscal 2009. The Company leases additional outlet store locations on a
short-term basis, particularly during the holiday season.
11
The Company believes that its facilities are adequate and that its
properties are in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material legal proceedings, pending or threatened,
or judgments entered against the Company or any Director or Officer of the
Company in his or her capacity as such. See "Government Regulations" for
additional discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange
(symbol: LVC). The following table sets forth the high and low sale prices for
each quarterly period for the two most recent fiscal years. The stock prices are
rounded to the nearest 1/16 point.
QUARTER ENDED HIGH LOW
------------- ---- ---
May 30, 1998 ..................... 18 5/8 16 5/8
August 29, 1998 .................. 18 1/4 16
November 28, 1998 ................ 16 3/4 12 11/16
February 27, 1999 ................ 19 3/16 13 11/16
May 29, 1999 ..................... 14 7/8 12
August 28, 1999 .................. 14 5/8 12 1/2
November 27, 1999 ................ 13 5/16 12 3/4
February 26, 2000 ................ 12 5/8 10 1/2
As of May 17, 2000, there were 364 registered holders of the Company's
Common Stock.
The Company has paid 33 consecutive quarterly cash dividends on its Common
Stock since an initial quarterly dividend of five cents ($.05) per share was
paid in May of 1992. The quarterly dividend was increased to seven cents ($.07)
per share payable September 1, 1994, and to eight cents ($.08) per share in
March 1998. The Board of Directors intends to continue to declare and pay a
quarterly dividend. The amount of any such dividends will depend on the
Company's earnings, financial position, capital requirements and other relevant
factors.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its Common Stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the one million share repurchase program. The total cost of the
program was $15.1 million. On October 7, 1998, the Board of Directors approved a
new stock repurchase program which authorizes the Company to repurchase up to an
additional one million shares of its Common Stock in the open market from time
to time, subject to market conditions. On September 28, 1999, the Board of
Directors authorized the Company to repurchase an additional 500,000 shares of
its Common Stock. As of May 17, 2000, the Company had repurchased 631,392
shares, at a total cost of approximately $7.1 million. The Company uses these
shares to make matching contributions to its Profit Sharing/401(k) Plan and to
issue shares under its Stock Option and Employee Stock Purchase Plans.
13
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
-----------------------------------
February February February February February
OPERATING RESULTS 26, 2000 27, 1999 28, 1998(1) 22, 1997 24, 1996
- ----------------- -------- -------- -------- -------- --------
(000's)
Revenues ........... $241,773 $255,220 $258,429 $240,053 $238,192
Income before income
taxes ............ 10,350 5,079 14,740 7,925 8,243
Net income ......... 6,289 3,139 9,728 5,231 5,609
PER SHARE
- ---------
Net income-Basic ... $ .69 $ .34 $ 1.02 $ .54 $ .58
Net Income-
Diluted .......... .69 .34 1.01 .54 .56
Book value ......... 12.75 12.37 12.46 11.83 11.70
Dividends .......... .32 .32 .29 .28 .28
FINANCIAL POSITION AT
- ---------------------
YEAR END (000's)
- --------
Cash and cash
equivalents ........ $ 35,364 $ 31,834 $ 26,136 $ 24,098 $ 25,771
Working capital ...... 75,031 69,996 73,951 70,739 76,721
Total assets ......... 141,318 138,206 144,359 138,955 135,626
Long-term
obligations (2) .... - - 1,394 2,883 4,335
Stockholders' equity . 114,378 113,264 116,839 113,702 112,692
AVERAGE SHARES
- --------------
OUTSTANDING (000's)
- -------------------
Basic ........... 9,128 9,221 9,532 9,658 9,713
Diluted ......... 9,130 9,319 9,636 9,664 9,981
- --------------------
(1) Fiscal year 1998 contained 53 weeks.
(2) Includes current installments and long-term portions of debt and capital
lease obligations.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following table sets forth, for the periods indicated, the results of
operations as a percentage of revenues. The table reflects certain
reclassifications made to conform to the current year's presentation.
FISCAL YEARS ENDED
February 26, February 27, February 28,
2000 1999 1998
---------------------------------
Revenues ....................... 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs .... (48.5) (47.1) (48.2)
Selling, general and
administrative expenses ..... (47.9) (50.1) (46.3)
Other income ................... 0.3 - -
Write-off computer project,
severance costs ............. - (0.9) -
----- ----- ----
Operating income .......... 3.9 1.9 5.5
Net interest income ............ 0.4 0.1 0.2
----- ----- ----
Income before income taxes .... 4.3 2.0 5.7
Provision for income taxes ..... (1.7) (0.8) (1.9)
------ ----- -----
Net income ..................... 2.6% 1.2% 3.8%
------ ----- -----
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues for fiscal 2000 were $241.8 million, a decrease of $13.4 million,
or 5.3%, compared to fiscal 1999, principally as a result of a strategic
decision to reduce circulation to improve profits. Catalog circulation was 12.1%
lower in fiscal 2000 compared to the prior year. Order volume declined by 3.9%
in fiscal 2000, and average revenue per order was slightly higher. Revenue per
catalog increased in fiscal 2000 by approximately 10.0%, due principally to
higher response rates. The significant factors which led to increased revenue
per catalog were more new product offerings, targeted circulation, and the
Company's continued value pricing.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs ($117.4 million)
declined by $2.8 million, or 2.3% in fiscal 2000 compared to fiscal 1999, due
principally to the lower volume of orders shipped. As a percentage of revenues,
product and delivery costs increased from 47.1% in fiscal 1999 to 48.5% in
fiscal 2000 primarily due to higher wage rates at the Company's National
Distribution Center, the operation of a third call center in Las Vegas, Nevada,
and increased shipping and handling costs to satisfy demand for backordered
products.
Selling, general and administrative ("SG&A") expenses, the single largest
component of which is the cost of producing, printing, and mailing the Company's
catalogs, were $115.8 million in fiscal 2000, compared to $128.0 million in
fiscal 1999, a decrease of $12.2 million, or 9.5%, principally due to reduced
15
catalog circulation. As a percentage of revenues, SG&A expenses decreased from
50.1% in fiscal 1999 to 47.9% in fiscal 2000 primarily because the average
catalog generated higher revenue, and also cost less to produce. Specifically,
the Company's paper cost per page decreased approximately 13% in fiscal 2000
compared to fiscal 1999, and paper cost per page is expected to be approximately
8% higher in fiscal year 2001.
SG&A costs in fiscal 2000 also included approximately $500,000 in computer
costs related to the Company's Year 2000 compliance project; this was in
addition to the $1 million spent in fiscal year 1999. The Company completed its
Year 2000 compliance project on time and at less than its projected cost and
experienced no significant computer problems related to Year 2000. Higher SG&A
expenses related to the expansion of the Company's online sales and customer
base were incurred during fiscal 2000 compared to the prior year. In addition,
postal rates increased in January 1999 by approximately 3%; another increase is
not expected until January 2001.
The Company has secured paper supply commitments to purchase the majority
of its expected paper needs for the fiscal year ending February 24, 2001 at
market prices (for high-volume purchasers) in effect at the time orders are
placed. The Company continually monitors the paper market and periodically meets
with its paper suppliers in advance of its purchases in order to react to
changes in the paper supply market. In addition, the Company entered into a four
year paper hedge contract in September 1999 with Enron Capital and Trade
Resources Corporation which provides the Company with price protection in the
form of a floor and ceiling in purchasing certain of its paper requirements (see
Item 7(A)- "Quantitative and Qualitative Disclosure About Market Risk" for
further discussion).
Other income of $.7 million was a result of the sale of stock received from
the de-mutualization of an insurance company which insures the lives of two
Company officers ($.6 million), and profit from the sale of Company-owned land
under an easement order in the City of Virginia Beach, Virginia ($.1 million).
Net interest income in fiscal 2000 was $1.0 million, compared to $.2
million in fiscal 1999. The increase of $.8 million was principally the result
of interest earned on substantially higher cash investments. Interest expense
was also lower in the current fiscal year, principally due to the repayment of
all long-term debt in the third quarter of the prior fiscal year and no
short-term borrowings during fiscal year 2000.
The Company's effective income tax rate in fiscal 2000 increased to 39.2%,
as compared to 38.2% in fiscal 1999. The increase in the effective tax rate was
principally related to the Company's inability to fully deduct its entire
charitable contribution tax carryforward prior to its expiration.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues for fiscal 1999 were $255.2 million, a decrease of $3.2 million,
or 1.2%, compared to fiscal 1998. Order volume declined by approximately 3% in
fiscal 1999, partially due to one less week in the fiscal year (52 weeks), as
compared to fiscal 1998 (53 weeks). Catalog circulation was higher by 5.5% in
fiscal 1999. Average revenue per catalog declined in fiscal 1999 by
16
approximately 5.7%, due to lower response rates which were partially offset by
higher average order size. The decline in revenues per catalog was the result of
the Company's circulation increase to prospective new customers who were less
responsive than existing customers, as well as less than anticipated response in
the existing customer data base. The 1999 fiscal year includes $1.6 million of
revenue generated from the sale of magazine subscriptions by the Company's
telemarketing representatives, a new revenue source in fiscal 1999.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs of $120.1 million
declined by $4.5 million, or 3.6%, in fiscal 1999 compared to fiscal 1998,
principally due to the lower volume of orders shipped. As a percentage of
revenues, product and delivery costs decreased from 48.2% in fiscal 1998 to
47.1% in fiscal 1999. The decrease in the percentage of revenues was primarily
due to higher gross profit on products sold, a result, in part, of higher
initial markups. United Parcel Service rates for packages increased by 9% in
early fiscal 1999. As of May 1, 1999, the Company utilized the U.S. Postal
Service for regular delivery of all packages. The Company, after substantial
testing and review, chose the U.S. Postal Service as its principal carrier; this
decision will maintain service to its customers and reduce costs for fiscal 2000
and beyond. United Parcel Service will be used as an optional delivery service
for second day delivery at the customers' request, for an additional charge.
Management continually implements strategies to attempt to increase revenues,
and reduce costs; in May 1998 the fees for shipping and handling that are
charged to its customers were increased.
Selling, general and administrative ("SG&A") expenses were $128.0 million
in fiscal 1999, compared to $119.5 million in fiscal 1998, an increase of $8.5
million, or 7.1%. The single largest component of these expenses is the cost of
producing, printing, and mailing the Company's catalogs. The increase in SG&A
expenses was principally caused by 5.5% higher catalog circulation, as well as
an increase in the unit cost to produce a catalog. As a percentage of revenues,
SG&A expenses increased from 46.3% in fiscal 1998 to 50.1% in fiscal 1999
primarily because the average catalog generated lower revenue and also cost more
to produce. Paper costs increased approximately 10% in fiscal 1999 as compared
to fiscal 1998. Postal rates increased in January 1999 by approximately 3%. SG&A
costs in fiscal 1999 also included approximately $1 million in computer costs
related to the Company's Year 2000 compliance project.
Fiscal 1999 earnings reflected several non-recurring charges. In the third
quarter of fiscal 1999, the Company wrote-off its investment of $1.4 million
pre-tax ($920,000 after-tax) in a computer project related to a new order entry
system. This write-off had an earnings per share impact of $.10. The Company
decided to internally upgrade its existing order entry system; the upgrade was
completed in mid-1999 (fiscal 2000) at a substantially lower cost than
originally anticipated. In the fourth quarter of fiscal 1999, the Company
incurred one-time severance costs of approximately $765,000 pre-tax ($497,000
after-tax) due to the departure of several executives. These severance costs had
an earnings per share impact of $.05.
Net interest income in fiscal 1999 was $.2 million, compared to $.4 million
in fiscal 1998. The decrease of $.2 million was the result of reduced interest
income due to a lower average investment balance. Interest expense in fiscal
17
1999 was comparable to fiscal 1998.
The Company's effective income tax rate in fiscal 1999 increased to 38.2%,
as compared to 34% in fiscal 1998. The increase in the effective tax rate was
principally due to the Company's inability to fully deduct its entire charitable
contribution tax carryforward prior to expiration.
SEASONALITY
The Company's business is seasonal. Historically, approximately 70% - 75%
of the Company's revenue and substantially all of its net income have been
realized during the third and fourth fiscal quarters, which encompass the period
September through February. Lower revenue and net losses are typically incurred
during the first and second fiscal quarters, comprising the period March through
August. The Company believes this is the general pattern associated with other
mail order and retail gift businesses.
Because of slower demand for its products in the first half of its fiscal
year, and because of added fixed costs to increase sales year-round and invest
in future growth, the Company incurred a cumulative net loss during the first
six months of fiscal 2000, 1999, and 1998. Due to these seasonal factors,
management expects to incur a loss for the first half of fiscal 2001 as well.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet and liquidity are strong. Cash and cash
equivalents increased $3.5 million during fiscal 2000 to $35.4 million; the
current ratio remained at the same level of 4.4:1 at February 26, 2000 and
February 27, 1999. The Company has not borrowed money in the current fiscal
year; its working capital needs have been met with funds generated from
operations.
In fiscal 2000, the Company generated $11.4 million of cash from operating
activities. Inventory increased by $7.2 million as of the end of fiscal 2000
compared to fiscal 1999, due to lower than expected sales in the second half of
fiscal 2000, more purchases to provide for higher anticipated Spring sales in
fiscal 2001, as well as the addition of many new products. The Company's prepaid
catalog costs declined by $6.2 million in fiscal 2000 due to significantly lower
year-end paper inventory.
The Company generated $1.1 million from the issuance of common stock
through its employee benefit plans.
Capital spending in fiscal 2000 of $1.6 million was made to upgrade the
Company's computer equipment and its distribution machinery and equipment. The
Company has no material capital commitments for fiscal 2001. During fiscal 2001,
the Company is studying the need to expand the capacity of the National
Distribution Center in the future.
The Company has a $42 million four-year revolving credit facility with two
banks which expires in August 2000, and is anticipated to be renewed at that
time. This credit facility can be used for general corporate purposes, including
working capital needs, capital expenditures, and up to $12 million of letters of
credit. At the Company's option, up to $20 million of the facility can be
converted into term loans, with maturity dates no later than 2003. Interest is
payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus
50 basis points, or a fixed rate, at the Company's
18
option. The credit facility is unsecured, and the Company is subject to
financial covenants principally relating to its working capital, net worth,
interest coverage ratio and capital spending restrictions. The Company is in
compliance with all financial covenants.
The Company has paid 33 consecutive quarterly cash dividends commencing May
1992. It increased its quarterly dividend from $.05 to $.07 per share in
September 1994, and from $.07 to $.08 per share in March 1998. The Company
anticipates continuing to pay dividends to its stockholders in the future. The
amount of any such dividends will depend on the Company's earnings, financial
position, capital requirements, and other relevant factors. Dividends in fiscal
2000 totaled $2.9 million, or $.32 per share.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
had completed the 1 million share repurchase program at a total cost of
$15,118,000.
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. On September 28, 1999,
the Board of Directors authorized the Company to repurchase an additional
500,000 shares of its common stock. In fiscal 2000, the Company repurchased
275,900 shares under the current program at a total cost of $3.3 million. As of
February 26, 2000, the Company had purchased 350,900 shares since inception of
the current program at a total cost of $4.3 million.
On April 6, 2000, the Company purchased the assets of Rue de France, Inc.,
a privately owned catalog company based in Newport, Rhode Island for a cash
purchase price of up to $3 million, subject to post closing net worth
adjustments. Additionally, the Company agreed to make future payments contingent
upon Rue de France, Inc. achieving certain projected earnings before taxes
during the five fiscal years commencing February 27, 2000.
The Company believes that its cash flow from operations, current investment
balance, and credit facilities will be sufficient to meet its operating needs
for the upcoming fiscal year.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
The Company is generally able to reflect cost increases and decreases
resulting from the effects of inflation and foreign currency fluctuations in its
selling prices. In addition, most foreign purchase orders are denominated in
U.S. dollars. Accordingly, the results of operations for the periods discussed
have not been significantly affected by these factors.
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 or through the
current date. The Company utilized both its in-house staff as well as outside
resources to modify its systems at a total cost of approximately $1.5 million.
These amounts have been funded from operating cash flow. The Company has not
experienced any significant problems with the computer systems or software
19
applications of its third party vendors and service providers, and will continue
to monitor these third party entities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which established accounting and
reporting standards for derivative instruments and hedging activities. In June
1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
which changed the effective date of SFAS 133 from all fiscal quarters of all
fiscal years beginning after June 15, 1999 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company plans to adopt SFAS 133 and
SFAS 137 in the first quarter of its fiscal year commencing February 25, 2001.
The Company does not expect adoption of these statements to have a material
impact on its financial statements.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-K contains
forward-looking statements which are based on the Company's current expectations
and assumptions. Various factors could cause actual results to differ materially
from those set forth in such statements. These factors include, but are not
limited to, the strength of the economy and overall level of consumer spending,
the performance of the Company's products within the prevailing retail
environment, increasing competition in the direct mail industry and the
expanding Internet market, changes in government regulations, dependence on
foreign suppliers, and possible future increases in operating costs, including
postage and paper costs.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
February 26, 2000, market prices for paper remained within the ranges specified
in the contract and as a result, no payments have been required to be made by
either party under the agreement.
The Company has performed a sensitivity analysis to determine what the
impact would be under the hedge contract if the price of paper covered by this
contract were to change by 10% over the next 12 months. The current price as of
February 26, 2000 for the grade of paper subject to this contract is $985 per
short ton. If the price of this grade of paper should increase by 10% over the
next 12 months, there would be no payment to the Company by the counterparty. If
the price of this grade of paper should decrease by 10% over the next 12 months,
the Company would be required to make payment to the counterparty. However, any
payments made would be offset by the corresponding cost savings the Company
would achieve in the lower prices it would pay for its purchases of paper.
Therefore, the overall cost would not be material to the Company's Consolidated
Statement of Income, Balance Sheet or Statement of Cash Flows as of February 24,
2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are found in Part IV at
pages F-1 through F-21 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company will
file a definitive proxy statement pursuant to Regulation 14A with the
Commission, not later than 120 days after the end of the fiscal year, which
information is herein incorporated by reference as if set out in full.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report on pages F-1 through F-21.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 26, 2000 and February 27, 1999 ................ F- 2
- -Statements of Income for the three Fiscal Years ended
2000, 1999 and 1998...................................................... F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 2000, 1999 and 1998................................... F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 2000, 1999 and 1998................................................ F- 5
- -Notes to Financial Statements ........................................... F- 6
- -Report of Independent Accountants ....................................... F-21
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are
not applicable or not required or because the required information is not
material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during the last
quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
22
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
2.1 - Plan and Agreement of Merger dated June 29, 1987 between
Lillian Vernon Corporation, a New York corporation, and
the Company incorporated in Delaware ......................... (1)
2.2 - Certificate of Ownership and Merger between Lillian Vernon
Corporation and the Company incorporated in Delaware filed
in Delaware .................................................. (1)
2.3 - Certificate of Merger between Lillian Vernon Corporation
and the Company incorporated in Delaware filed in New York ... (2)
3.1 - Certificate of Incorporation with Amendments of Lillian
Vernon Corporation ........................................... (2)
3.2 - By-Laws of Lillian Vernon Corporation ........................ (1)
10.1 - Amended and Restated Lillian Vernon Corporation Profit
Sharing Plan ................................................. (10)
10.3 - 1987 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan ....................... (1)
10.4 - First Amendment to Employment Agreement with Lillian
Vernon, formerly Lillian M. Katz ............................. (3)
10.5 - Executive Deferred Compensation Agreement and first
amendment thereto with Lillian Vernon, formerly
Lillian M. Katz .............................................. (4)
10.6 - Second Amendment to Deferred Compensation Agreement with
Fred P. Hochberg ............................................. (5)
10.7 - Second Amendment to Deferred Compensation Agreement with
David C. Hochberg ............................................ (6)
10.8 - Form of Indemnification Agreement with officers and
directors .................................................... (1)
10.9 - Lease for Company's facility at New Rochelle, New York ....... (1)
23
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.10 - Trademark Registrations for Lillian Vernon Corporation -
Service Mark and Logo ........................................ (1)
10.16 - Sublease between Fred P. and David C. Hochberg and Company -
New Rochelle facility ........................................ (5)
10.17 - Lillian Vernon Corporation 1993 Stock Option Plan for Non-
Employee Directors ........................................... (7)
10.21 - Revolving Credit Agreement, Letter of Credit and Bankers
Acceptance facility dated as of August 19, 1996 among
Lillian Vernon Corporation as Borrower, Lillian Vernon
Fulfillment Services, Inc., LVC Retail Corporation and
Lillian Vernon International Ltd. as Guarantors, the Banks
named therein and The Chase Manhattan Bank as agent .......... (8)
10.22 - 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan ....................... (9)
10.23 - 1997 Stock Option Plan for Non-Employee Directors ............ (9)
10.24 - Form of Agreement re: Change of Control with certain
executive officers ........................................... (11)
10.25 - Agreement of Sublease dated January 30, 1998 between CVS
New York, Inc. and the Company and exhibits .................. (11)
10.26 - Agreement between Lillian Vernon Corporation and Robert S.
Mednick dated June 11, 1998 .................................. (12)
10.27 - Employment Agreement with Richard P. Randall dated
August 11, 1998 .............................................. (13)
10.28 - Employment Agreement with George Mollo, Jr. dated
September 25, 1998 ........................................... (14)
10.29 - Rights Agreement dated as of April 15, 1999 between
the Company and Continental Stock Transfer & Trust Co. ....... (15)
10.30 - Supplement to Rights Agreement dated as of April 15, 1999
between the Company and Continental Stock Transfer & Trust
Co. .......................................................... (16)
24
10.31 - Industrial Real Estate Lease between the Company
and Howard Hughes Properties, Limited Partnership ............ (16)
10.32 - Master Agreement between Registrant and Enron Capital &
Trade Resources Corporation .................................. (17)
10.33 - Amendment to Industrial Real Estate Lease between the
Company and Howard Hughes Properties, Limited Partnership .... E-1
10.34 - Asset Purchase Agreement by and among RDF Acquisition
Corporation and Lillian Vernon Corporation and Rue de
France, Inc., and Pamela F. Kelley and Brendan P. Kelley
dated as of March 31, 2000 ................................... E-9
10.35 - Proprietary Rights Assignment between Pamela Kelley and
RDF Acquisition Corporation .................................. E-82
10.36 - Right of First Refusal Agreement between Lillian Vernon
Corporation and Pamela F. Kelley dated as of March 31, 2000 .. E-85
10.37 - Employment Agreement between RDF Acquisition Corporation
and Pamela F. Kelley dated as of March 31, 2000 .............. E-90
10.38 - Intellectual Property Protection Agreement between RDF
Acquisition Corporation and Pamela F. Kelley dated
as of March 31, 2000 ......................................... E-100
21 - Subsidiaries of registrant ................................... E-107
23 - Consent of PricewaterhouseCoopers LLP ........................ E-108
27 - Financial Data Schedule ...................................... E-109
- ------------------------------
(1) Filed with Registration Statement on Form S-1 (File No. 33-15430) and
incorporated by reference herein.
(2) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1987 and incorporated by reference herein.
(3) Filed with Annual Report on Form 10-K for the year ended February 29, 1992
and incorporated by reference herein.
(4) Amendment filed with Quarterly Report on Form 10-Q for the quarter ended
May 30, 1992 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement - see (1) above.
25
(5) Filed with Annual Report on Form 10-K for the year ended February 27, 1993
and incorporated by reference herein. Original deferred compensation
agreement filed with Registration Statement. See (1) above.
(6) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1993 and incorporated by reference herein. Original deferred compensation
agreement filed with Registration Statement - see (1) above.
(7) Filed with Registration Statement on Form S-8 (File No.33-71250) and
incorporated by reference herein.
(8) Filed with Quarterly Report on Form 10-Q for the quarter ended August 24,
1996 and incorporated by reference herein.
(9) Filed with Registration Statement on Form S-8 on September 26, 1997 (File
No. 333-36467) and incorporated by reference herein.
(10) Filed with Registration Statement on Form S-8 on March 31,1998 (File
No.333-48951)and incorporated by reference herein.
(11) Filed with Annual Report on Form 10-K for the year ended February 28, 1998,
and incorporated by reference herein.
(12) Filed with Quarterly Report on Form 10-Q for the quarter ended May 30,
1998, and incorporated by reference herein.
(13) Filed with Quarterly Report on Form 10-Q for the quarter ended August 29,
1998, and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended November 28,
1998, and incorporated by reference herein.
(15) Filed with Report on Form 8-K dated April 22, 1999, and incorporated by
reference herein.
(16) Filed with Annual Report on Form 10-K for the year ended February 27, 1999,
and incorporated by reference herein.
(17) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1999, and incorporated by reference herein.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, duly authorized.
LILLIAN VERNON CORPORATION
Dated May 24, 2000 By: /S/ LILLIAN VERNON
-----------------------------
Lillian Vernon, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ LILLIAN VERNON
- --------------------------
Lillian Vernon Chairman of the Board May 24, 2000
of Directors (Principal
Executive Officer)
/S/ SUSAN C. HANDLER
- --------------------------
Susan C. Handler Vice President- May 24, 2000
Controller
(Principal Financial
and Accounting Officer)
- -------------------
Jonah Gitlitz Acting President, May , 2000
and Director
/S/ DAVID C. HOCHBERG
- --------------------------
David C. Hochberg Vice President - Public May 24, 2000
Affairs and Director
/S/ JOEL SALON
- --------------------------
Joel Salon Director May 24, 2000
/S/ BERT W. WASSERMAN
- --------------------------
Bert W. Wasserman Director May 24, 2000
/S/ ELIZABETH M. EVEILLARD
- --------------------------
Elizabeth M. Eveillard Director May 24, 2000
/S/ RICHARD A. BERMAN
- --------------------------
Richard A. Berman Director May 24, 2000
27
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULES AND REPORTS
F-1
PART II FINANCIAL INFORMATION
ITEM 8. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
February 26, February 27,
ASSETS 2000 1999
----------- -----------
Current assets:
Cash and cash equivalents ............................. $ 35,364 $ 31,834
Accounts receivable, net of allowances of $576 and $818 22,403 21,093
Merchandise inventories ............................... 33,926 26,700
Deferred income taxes ................................. 1,355 1,355
Prepayments and other current assets .................. 4,241 9,671
----------- -----------
Total current assets ................................ 97,289 90,653
Property, plant and equipment, net ...................... 35,092 37,811
Deferred catalog costs .................................. 5,624 6,192
Other assets ............................................ 3,313 3,550
----------- -----------
Total ............................................... $141,318 $138,206
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses ........... $ 17,853 $ 17,437
Cash overdrafts ....................................... 758 1,920
Customer deposits ..................................... 171 228
Income taxes payable .................................. 3,476 1,072
----------- -----------
Total current liabilities ........................... 22,258 20,657
Deferred compensation ................................... 3,392 3,049
Deferred income taxes ................................... 1,290 1,236
----------- -----------
Total liabilities ................................... 26,940 24,942
----------- -----------
Commitments & Contingencies (Note 7)
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 and
20,000,000 shares authorized in 2000 and 1999
respectively;Issued - 10,389,674 shares in 2000
and 1999 ............................................ 104 104
Additional paid-in capital ............................ 31,331 31,322
Retained earnings ..................................... 103,847 100,760
Treasury stock, at cost - 1,419,433 shares in 2000
and 1,231,806 shares in 1999 ........................ (20,904) (18,922)
----------- -----------
Total stockholders' equity .......................... 114,378 113,264
----------- -----------
Total ............................................... $ 141,318 $ 138,206
----------- -----------
See Notes to Consolidated Financial Statements
F-2
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Fiscal Years Ended
-----------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- ----------
Revenues ......................................... $ 241,773 $ 255,220 $ 258,429
Costs and expenses:
Product and delivery costs ..................... 117,369 120,125 124,624
Selling, general and administrative expenses ... 115,792 128,002 119,471
Write-off - computer project and severance costs 2,180
Other income ................................... (746)
----------- ----------- ----------
232,415 250,307 244,095
----------- ----------- ----------
Operating income ............................. 9,358 4,913 14,334
Net interest income .............................. 992 166 406
----------- ----------- ----------
Income before income taxes ................... 10,350 5,079 14,740
Provision for income taxes:
Current ........................................ 3,998 1,220 4,566
Deferred ....................................... 63 720 446
----------- ----------- ----------
4,061 1,940 5,012
----------- ----------- ----------
Net income ................................... $ 6,289 $ 3,139 $ 9,728
----------- ----------- ----------
Net income per common share - Basic .............. $ .69 $ .34 $ 1.02
----------- ----------- ----------
Net income per common share - Diluted ............ $ .69 $ .34 $ 1.01
----------- ----------- ----------
Weighted average number of common shares -
Basic .......................................... 9,128 9,221 9,532
Weighted average number of common shares and
common share equivalents - Diluted ............. 9,130 9,319 9,636
See Notes to Consolidated Financial Statements
F-3
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Stock Treasury Stock
-------------------- Paid -in Retained Unearned -----------------------
Total Shares Amount Capital Earnings Compensation Shares Amount
-------- ---------- ------- --------- --------- ------------ ---------- ---------
BALANCE, FEBRUARY 22, 1997 ....... $113,702 10,363,320 $ 104 $ 30,783 $ 93,929 $ (94) (753,458) $(11,020)
Exercise of non-qualified
stock options .................. 297 16,000 200 (17) 7,667 114
Amortization of unearned
compensation ................... 88 88
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan .................. 140 10,354 140
Purchase of treasury stock ....... (4,396) (270,700) (4,396)
Dividends ($.29 per share) ...... (2,757) (2,757)
Other ............................ 37 37
Net income ....................... 9,728 9,728
------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 ....... 116,839 10,389,674 104 31,160 100,883 (6) (1,016,491) (15,302)
Exercise of non-qualified
stock options .................. 2,048 (311) 154,833 2,359
Amortization of unearned
compensation ................... 6 6
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan .................. 157 (33) 12,367 190
Shares issued for 401-k Plan
matching contribution .......... 476 22 29,785 454
Purchase of treasury stock ....... (6,623) (412,300) (6,623)
Dividends ($.32 per share) ...... (2,940) (2,940)
Other ............................ 162 162
Net income ....................... 3,139 3,139
------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 27, 1999 ....... 113,264 10,389,674 104 31,322 100,760 0 (1,231,806) (18,922)
Exercise of non-qualified
stock options .................. 319 (48) 23,867 367
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan .................. 286 (111) 25,992 397
Shares issued for 401-k Plan
matching contribution .......... 465 (121) 38,414 586
Purchase of treasury stock ....... (3,332) (275,900) (3,332)
Dividends ($.32 per share) ...... (2,922) (2,922)
Other ............................ 9 9
Net income ....................... 6,289 6,289
------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 26, 2000 ....... $114,378 10,389,674 $ 104 $ 31,331 $103,847 $ 0 (1,419,433) $(20,904)
------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
F-4
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Years Ended
--------------------------------
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
Cash flows from operating activities:
Net income ............................................................. $ 6,289 $ 3,139 $ 9,728
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ......................................................... 4,321 4,488 4,672
Amortization ......................................................... 250 250 324
Write-off - computer project ......................................... 1,414
Gain on sale of assets ............................................... (81) (7)
(Increase) decrease in accounts receivable ........................... (1,310) 1,539 1,844
(Increase) decrease in merchandise inventories ....................... (7,226) 10,235 (6,455)
Decrease in prepayments and other current assets ..................... 5,430 502 265
(Increase) decrease in deferred catalog costs ........................ 568 (270) 218
Increase in other assets ............................................. (13) (2,002) (1,040)
Increase in trade accounts payable and accrued expenses .............. 416 1,106 1,846
Increase (decrease) in customer deposits ............................. (57) 81 (113)
Increase (decrease) in income taxes payable .......................... 2,404 (3,509) 1,866
Increase (decrease) in deferred compensation ......................... 343 (377) (74)
Increase in deferred income taxes .................................... 54 776 595
-------- -------- --------
Net cash provided by operating activities .......................... 11,388 17,372 13,669
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment ............................. (1,621) (4,476) (3,122)
Proceeds from sale of assets ........................................... 100 7
-------- -------- --------
Net cash used in investing activities ................................ (1,521) (4,476) (3,115)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations ..... (1,394) (1,489)
Proceeds from issuance of common stock ................................. 437
Reissuance of treasury stock for stock option and employee benefit plans 1,070 2,681
Increase (decrease) in cash overdrafts ................................. (1,162) 916 (348)
Dividends paid ......................................................... (2,922) (2,940) (2,757)
Payments to acquire treasury stock ..................................... (3,332) (6,623) (4,396)
Other .................................................................. 9 162 37
-------- -------- --------
Net cash used in financing activities ................................ (6,337) (7,198) (8,516)
-------- -------- --------
Net increase in cash and cash equivalents ............................ 3,530 5,698 2,038
-------- -------- --------
Cash and cash equivalents at beginning of period ......................... 31,834 26,136 24,098
-------- -------- --------
Cash and cash equivalents at end of period ............................... $ 35,364 $ 31,834 $ 26,136
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................. $ $ 370 $ 347
Income taxes ......................................................... 1,612 4,567 2,646
See Notes to Consolidated Financial Statements
F-5
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
Lillian Vernon Corporation is a direct mail specialty catalog and online
company, concentrating on the marketing of gift, household, gardening, kitchen,
Christmas and children's products.
The consolidated financial statements include the accounts of Lillian
Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon Fulfillment
Services, Inc., Lillian Vernon International, Ltd., and LVC Retail Corporation
(the "Company"). All material intercompany balances and transactions have been
eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on the
last Saturday in February. Under this policy, fiscal 2000 and fiscal 1999 each
consisted of 52 weeks and fiscal 1998 consisted of 53 weeks.
Cash Equivalents
Cash equivalents consist principally of commercial paper with remaining
maturities at acquisition of less than three months. Under Statement of
Financial Accounting Standards (SFAS) No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities", the Company's investments, totaling
$34.8 million and $30.9 million as of February 26, 2000 and February 27, 1999,
respectively, are classified as held-to-maturity securities, and as such, are
stated at amortized cost, which approximates market value.
Revenue Recognition
The Company records revenue at the time of shipment for catalog and online
sales, and at the point of sale in its retail stores.
Merchandise Inventories
Merchandise inventories are principally stated at the lower of average
cost, determined by the retail inventory method, or market.
Catalog Costs
Catalog costs are deferred and amortized over the estimated productive life
of the catalog, generally three months. Such deferred costs are considered
direct-response advertising in accordance with AICPA Statement of Position No.
93-7, "Reporting on Advertising Costs", and are reflected as long-term assets in
the accompanying Balance Sheets. Prepaid catalog costs, consisting mostly of
paper to be used to print future catalogs, are included in prepayments and other
current assets in the accompanying Balance Sheets.
F-6
Capitalized Software Costs
Direct costs of purchasing and developing new software applications are
capitalized and are being amortized over five years. Amortization of capitalized
software costs totaled $113,000 in fiscal 2000, $127,000 in fiscal 1999, and
$188,000 in fiscal 1998.
Capitalized software costs are included in other assets, and amounted to
$8,488,000 and $7,882,000 at February 26, 2000 and February 27, 1999,
respectively. Accumulated amortization of capitalized software costs amounted to
$7,783,000 and $7,670,000 at February 26, 2000 and February 27, 1999,
respectively.
Depreciation and Amortization
Depreciation is recorded on the straight line method over maximum estimated
useful lives of 30 and 8 years for buildings and building improvements,
respectively, and for other property, over estimated useful lives ranging from 3
to 10 years. Leasehold improvements and assets under capital leases are
amortized over approximately 15 years, or the term of the applicable leases,
whichever is shorter.
Income Taxes
Deferred income taxes arise from differences in the timing of income and
expense recognition for financial and income tax reporting purposes. Statement
of Financial Accounting Standards No. 109 requires the Company to compute
deferred income taxes on such differences using enacted tax rates in effect in
the years in which the differences are expected to reverse. Valuation allowances
are required to be established to reduce deferred tax assets to the amounts more
likely than not to be realized.
Per Share Data
Earnings per share are computed and reported on a dual presentation basis.
Basic earnings per share are computed by dividing net income by the weighted
average number of outstanding shares for the period. Diluted earnings per share
are computed by dividing net income by the sum of the weighted average number of
outstanding shares and share equivalents computed. The Company's common share
equivalents consist of stock options issued to key employees and Directors.
F-7
Basic and diluted earnings per share were calculated as follows (amounts in
thousands):
Fiscal Years Ended
--------------------------------
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
Net Income-Basic and Diluted ......... $6,289 $3,139 $9,728
-------- -------- --------
Weighted average number of
outstanding shares for Basic EPS ..... 9,128 9,221 9,532
Add: incremental shares from
stock option exercises .............. 2 98 104
-------- -------- --------
Weighted average number of outstanding
shares for Diluted EPS ............... 9,130 9,319 9,636
-------- -------- --------
In fiscal 2000, 1999, and 1998, options on 1,097,000, 394,000, and 369,000
shares of common stock, respectively, were not included in the calculation of
weighted average shares for diluted EPS because their effects were antidilutive.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments does not materially
differ from their carrying values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation
The Company follows the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company implemented
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," but continues its current
accounting for stock-based employee compensation under APB Opinion No. 25.
F-8
Comprehensive Income
The Company does not have any items of "other comprehensive income" to
report for fiscal years 2000, 1999, and 1998 pursuant to Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
Segment and Geographic Information
The Company operates primarily in one business segment. The Company derives
all revenues from customers in the United States, and no individual customer
accounted for 10% or more of revenues for any of the periods presented.
Substantially all identifiable assets are located in the United States.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform with the fiscal 2000 presentation.
2. Income Taxes
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
Federal .......................... $ 3,642 $ 1,026 $ 4,198
State ............................ 356 194 368
----------- ----------- -----------
$ 3,998 $ 1,220 $ 4,566
----------- ----------- -----------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
Charitable contributions ......... $ 448 $ - $ 124
Depreciation ..................... 99 848 245
Catalog costs .................... (275) 135 (96)
Capitalized software ............. (17) (175) (74)
Valuation allowance-charitable
contributions carryforward .... 202 250 -
Other, net ....................... (394) (338) 247
----------- ----------- -----------
$ 63 $ 720 $ 446
----------- ----------- -----------
The exercise of non-qualified stock options and the vesting of restricted stock
(see Note 9) results in a tax deduction to the Company equivalent to the taxable
compensation recognized by the individuals. For accounting purposes, the tax
benefit of these deductions is credited directly to additional paid-in capital.
These amounts totaled $9,000, $162,000, and $37,000 for fiscal 2000, 1999, and
1998, respectively.
F-9
The Company's effective income tax rate is reconciled to the U.S. Federal
statutory tax rate as follows:
Fiscal Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
Federal statutory tax rate ....... 34.0% 34.0% 34.0%
State income taxes, net of
Federal tax benefit ............ 2.3 2.5 1.9
Charitable contributions of
merchandise .................... - (2.0) (1.2)
Valuation allowance-charitable
contributions carryforward ..... 1.9 4.9 -
Other, net ....................... 1.0 (1.2) (0.7)
----------- ----------- -----------
39.2% 38.2% 34.0%
----------- ----------- -----------
The deferred tax assets and deferred tax liabilities recorded on the Balance
Sheets are as follows (dollars in thousands):
February 26, 2000 February 27, 1999
--------------------- ---------------------
Deferred Tax Deferred Tax
--------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Catalog deferrals .......... $ - $2,130 $ - $2,406
Charitable contributions ... 1,432 - 1,894 -
Inventory capitalization ... 963 - 873 -
Accrued expenses ........... 1,104 - 959 -
Valuation allowance ........ (452) - (250) -
Other ...................... 447 9 294 9
------ ------ ------ ------
Total current ............ 3,494 2,139 3,770 2,415
------ ------ ------ ------
Non-current:
Depreciation ............... - 2,630 - 2,529
Amortization ............... 7 (9) 7 8
Deferred compensation ...... 1,324 - 1,294 -
------ ------ ------ ------
Total non-current ........ 1,331 2,621 1,301 2,537
------ ------ ------ ------
Total .................... $4,825 $4,760 $5,071 $4,952
====== ====== ====== ======
As of February 26, 2000, the Company has $2,754,000 of charitable contributions
carryforward for Federal income tax purposes, which expire from fiscal 2001 to
fiscal 2002. The Company established deferred tax valuation allowances in fiscal
2000 and fiscal 1999 related to management's current assessment of the Company's
inability to utilize its entire charitable contributions tax carryforward prior
to expiration.
F-10
3. Credit Facilities
The Company entered into a $42 million four-year revolving credit facility
in August 1996 with two banks. This credit facility can be used for general
corporate purposes, including working capital needs, capital expenditures, and
up to $12 million of letters of credit. At the Company's option, up to $20
million of the facility can be converted into term loans, with maturity dates no
later than 2003. Interest is payable at LIBOR plus 50 basis points, prime rate,
bankers' acceptance rate plus 50 basis points, or a fixed rate, at the Company's
option. The credit facility is unsecured, and the Company is subject to various
financial covenants principally relating to its working capital, net worth,
interest coverage ratio and capital spending restrictions. The Company is in
compliance with all financial covenants.
In fiscal years 2000, 1999, and 1998, the Company incurred commitment fees
on the credit facility ranging from 5 basis points on the letters of credit to
20 basis points on the available revolving credit line.
During fiscal years 2000 and 1999, there were $0 and $21 million
outstanding, respectively, under the revolving credit agreement (excluding
letters of credit). No amounts were outstanding under the Company's credit
facilities as of February 26, 2000 or February 27, 1999 (excluding letters of
credit).
The Company had outstanding letters of credit approximating $5,517,000 and
$4,845,000 as of February 26, 2000 and February 27, 1999, respectively, for the
purchase of inventory in the normal course of business.
4. Other
Prepayments and other current assets include prepaid catalog costs of
$1,045,000 and $7,246,000 as of February 26, 2000 and February 27, 1999,
respectively.
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
February 26, February 27,
2000 1999
----------- -----------
Trade accounts payable ....................... $ 5,671 $ 5,025
Catalog costs ................................ 1,738 4,612
Salaries and compensation .................... 2,386 2,514
Accrued refunds .............................. 1,403 888
Other ........................................ 6,655 4,398
----------- -----------
$ 17,853 $ 17,437
----------- -----------
F-11
5. Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in
thousands):
February 26, February 27,
2000 1999
----------- -----------
Land and buildings .......................... $ 32,578 $ 32,507
Machinery and equipment ..................... 30,751 32,577
Furniture and fixtures ...................... 3,832 3,670
Leasehold improvements ...................... 985 896
----------- -----------
Total property, plant & equipment, at cost . 68,146 69,650
Less: accumulated depreciation & amortization 33,054 31,839
----------- -----------
Property, plant & equipment, net ........... $ 35,092 $ 37,811
----------- -----------
6. Paper Hedge Contract
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
February 26, 2000, market prices for paper remained within the ranges specified
in the contract and as a result, no payments have been required to be made by
either party under the agreement.
7. Leases
The Company's corporate headquarters and administrative offices are located
in a 65,000 square foot building in Rye, New York. This facility is leased under
a sublease agreement expiring on January 30, 2005. The sublease provides that
the Company, in addition to base rent, is only responsible for increases in real
estate taxes and operating costs over the initial lease year base costs. The
Company has the right to renew the lease, for two five-year periods, with the
building owner upon expiration of the sublease.
F-12
Until July 1998, the Company's corporate headquarters and administrative
offices were located in a 41,664 square foot building in New Rochelle, New York
which was leased from two related parties under a net sub-lease which expired on
July 30, 1998, with an annual net rental of $430,000, plus all real estate
taxes, insurance and capital improvements.
The Company has operating lease agreements for certain computer and other
equipment used in its operations, for its outlet store locations, and for its
New Rochelle, New York and Las Vegas, Nevada Call Centers, with existing lease
terms ranging from fiscal 2001 through fiscal 2006, and various renewal options
through fiscal 2015. Most of the store leases also provide for payment of common
charges such as maintenance and real estate taxes. Ten stores require the
payment of additional rent based upon a percentage of sales. Minimum rental
payments required under these agreements, as well as the Corporate Headquarters
sublease, are as follows (dollars in thousands):
Fiscal Year
- -----------
2001 $ 3,334
2002 3,242
2003 2,804
2004 1,815
2005 1,490
2006 27
-------
$12,712
-------
Rent expense for fiscal 2000, 1999, and 1998 amounted to $4,536,000, $3,882,000,
and $2,612,000 respectively, which included $3,000, $18,000 and $30,000 in
fiscal 2000, 1999 and 1998 respectively, for contingent rentals based upon a
percentage of outlet store sales.
8. Employee Benefit Plans
The Company maintains a profit sharing plan for the benefit of all
employees who meet certain minimum service requirements. The Company's profit
sharing contribution is discretionary, as determined by the Board of Directors.
Employees fully vest in their profit sharing account balance after seven years.
The authorized profit sharing contributions for fiscal 2000, 1999, and 1998 were
$500,000, $500,000, and $480,000, respectively.
The Company's profit sharing plan includes an employee contribution and
employer matching contribution (401k) feature. Under the 401k feature of the
plan, eligible employees may make pre-tax contributions up to 10% of their
annual compensation. Employee contributions of up to 6% of compensation are
currently matched by the Company at a rate of 50%. The matching contribution is
made with Company stock. Employees are 100% vested in their pre-tax
contributions at all times, and become fully vested in the employer matching
contribution after two years of service. The Company's matching contributions to
the plan for fiscal 2000, 1999, and 1998 were $479,000, $509,000, and $460,000
respectively.
F-13
The Company has deferred compensation agreements to provide additional
retirement benefits for certain principal stockholders of the Company. The
deferred compensation agreements also provide for death benefits to be paid to
each party's beneficiary. The Company has purchased life insurance policies to
fund, in part, the payment of these benefits. Amounts expensed in connection
with these agreements were $930,000 in fiscal 2000, $129,000 in fiscal 1999 and
$353,000 in fiscal 1998.
9. Stock Compensation Plans
At February 26, 2000, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recognized for its non-qualified stock options
granted and for shares issued through its Employee Stock Purchase Plan. If
compensation cost for the Company's non-qualified stock options issued and
shares purchased through its stock purchase plan had been determined based on
the fair value at the grant dates for awards under those plans consistent with
the requirements of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below (dollars in thousands, except per share
amounts):
February 28, February 27, February 26,
Fiscal Years Ended 1998 1999 2000
- ------------------ ----------- ----------- -----------
Net Income As reported $9,728 $3,139 $6,289
Pro forma $9,367 $2,724 $5,892
Basic earnings As reported $ 1.02 $ 0.34 $ 0.69
per share Pro forma $ 0.98 $ 0.30 $ 0.65
Diluted earnings As reported $ 1.01 $ 0.34 $ 0.69
per share Pro forma $ 0.97 $ 0.29 $ 0.65
The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan, and a total of 750,000 shares of common stock
have been reserved for issuance thereunder. Prior to adoption of the 1997 Plan,
the Company's 1987 Plan, which expired in fiscal 1998, had a total of 2,000,000
shares reserved for issuance.
The Company has granted and sold shares of restricted stock to certain
executives at a nominal price per share.
F-14
The Company has also granted non-qualified stock options to employees. Such
options have been granted at market value, vest within three years from the date
of grant and expire within ten years from the date of grant. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
February 28, February 27, February 26,
Fiscal Years Ended 1998 1999 2000
- ------------------ ----------- ----------- -----------
Expected volatility ........ 29.0% 29.3% 29.3%
Dividend yield ............. 2.0% 2.0% 2.3%
Risk-free interest rate .... 5.7% 5.3% 6.2%
Expected option term ....... 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate ............ 25.0% 25.0% 25.0%
A summary of the Company's non-qualified stock option activity and weighted
average exercise prices for the three years ended February 26, 2000 follows:
Fiscal Years Ended
-------------------------------------------------------------------------------
February 28, 1998 February 27, 1999 February 26, 2000
----------------------- ------------------------ -----------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
--------- ---------- --------- ---------- -------- ----------
Outstanding
at beginning
of year .............. 878,500 $14.20 1,054,333 $14.72 898,004 $14.96
Granted .............. 209,500 $16.29 40,000 $15.42 261,500 $13.84
Exercised ............ (23,667) $12.62 (154,833) $13.21 (23,867) $13.36
Forfeited ............ (10,000) $14.25 (41,496) $15.77 (63,136) $14.68
--------- ------- ---------
Outstanding
at end of year ....... 1,054,333 $14.72 898,004 $14.96 1,072,501 $14.74
========= ====== ======= ====== ========= ======
Options
exercisable
at year-end .......... 628,165 676,841 742,498
Weighted-average
fair value of
options granted
during the year ...... $2.85 $2.87 $2.49
The following table summarizes information about stock options outstanding
at February 26, 2000:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted Avg.
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ------------ ----------- ----------- ---------- ----------- ----------
$12.50-$18.13 1,072,501 6.0 Yrs. $14.74 742,498 $14.92
F-15
The Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 100,000 shares of common stock for issuance
thereunder. Prior to the adoption of the 1997 Plan, the Company's 1993 Plan,
which expired in fiscal 1998, had a total of 100,000 shares reserved for
issuance. The Company has granted non-qualified stock options to its
non-employee Directors both pursuant to the Plan and outside the Plan. These
options are granted at market value, vest one year from the date of grant and
expire within ten years from the date of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
February 28, February 27, February 26,
Fiscal Years Ended 1998 1999 2000
- ------------------ ----------- ----------- -----------
Expected volatility 29.0% 29.3% 29.3%
Dividend yield 2.0% 2.0% 2.3%
Risk-free interest rate 5.7% 5.2% 6.2%
Expected option term 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate 6.0% 6.0% 6.0%
A summary of the Company's stock option activity under the Non-Employee
Directors Plan, and options granted to non-employee Directors outside the Plan,
for the three years ended February 26, 2000 follows:
Fiscal Years Ended
-------------------------------------------------------------------------------
February 28, 1998 February 27, 1999 February 26, 2000
----------------------- ------------------------ -----------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
--------- ---------- --------- ---------- -------- ----------
Outstanding
at beginning
of year .............. 40,000 $14.19 60,000 $14.92 80,000 $15.41
Granted .............. 20,000 $16.38 20,000 $16.88 15,000 $14.13
--------- --------- --------
Outstanding
at end of year ....... 60,000 $14.92 80,000 $15.41 95,000 $15.21
========= ========= ========
Options
exercisable
at year-end .......... 40,000 60,000 80,000
Weighted-average
fair value of
options granted
during the year ...... $4.59 $4.63 $3.97
F-16
The following table summarizes information about stock options outstanding
at February 26, 2000:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ------------ ----------- ----------- ---------- ----------- ----------
$12.38-$18.00 95,000 7.0 Yrs. $15.21 80,000 $15.41
The Company also has an Employee Stock Purchase Plan, with a total of
100,000 shares reserved for issuance. Under the Employee Stock Purchase Plan,
eligible employees can purchase shares of the Company's stock at the end of each
fiscal quarter, at a price equal to 85% of the average price of the stock on the
last trading day of the fiscal quarter. A maximum of $25,000 of common stock may
be purchased by an eligible employee in each calendar year. Under the Plan,
employees elected to purchase 22,857 shares, 18,207 shares, and 9,450 shares in
fiscal 2000, 1999, and 1998, respectively.
F-17
10. Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended
---------------------------------------
May 28, August 28, November 27, February 26,
Fiscal 2000 1999 1999 1999 2000
- ----------- ----------- ----------- ----------- -----------
Revenues ........................ $ 29,118 $ 35,499 $ 105,630 $ 71,527
Income (loss) before
income taxes ................... (4,054) (2,712) 15,350 1,766 (1)
Net income (loss) ............... (2,554) (1,708) 9,670 881 (1)
Net income (loss) per
common share-Basic ............. (.28) (.19) 1.06 .10 (1)
Net income (loss) per
common share-Diluted ........... (.28) (.19) 1.06 .10 (1)
Market price of shares
outstanding
- -market high .................... 14 7/8 14 5/8 13 5/16 12 5/8
- -market low ..................... 12 12 1/2 12 3/4 10 1/2
Fiscal Quarters Ended
---------------------------------------
May 30, August 29, November 28, February 27,
Fiscal 1999 1998 1998 1998 1999
- ----------- ----------- ----------- ----------- -----------
Revenues ........................ $ 32,040 $ 39,510 $ 107,872 $ 75,796
Income (loss) before
income taxes ................... (4,129) (2,982) 11,644 (1) 546 (1)
Net income (loss) ............... (2,725) (1,968) 7,638 (1) 194 (1)
Net income (loss) per
common share-Basic ............. (.29) (.21) .84 (1) .02 (1)
Net income (loss) per
common share-Diluted ........... (.29) (.21) .84 (1) .02 (1)
Market price of shares
outstanding
- market high .................. 18 5/8 18 1/4 16 3/4 19 3/16
- market low ................... 16 5/8 16 12 11/16 13 11/16
(1) See Note 11 - Other Income (Expense)
11. Other Income (Expense)
During the fourth quarter of fiscal 2000, the Company recorded two items of
other income. One was a pre-tax gain of $665,000 ($404,000 after-tax), which
resulted from the sale of stock received from the de-mutualization of an
insurance company which insures the lives of two Company officers. The second
item was a pre-tax gain of $81,000 ($49,000 after-tax) on the sale of Company
owned land under an easement order in the City Of Virginia Beach, Virginia.
During the third quarter of fiscal 1999, the Company recorded a
non-recurring charge related to the termination of the installation of a
purchased order entry computer system, and wrote off its investment of $1.4
million on a pre-tax basis ($920,000 after-tax).
F-18
In the fourth quarter of fiscal 1999, the Company recorded severance costs
of $765,000 on a pre-tax basis ($497,000 after-tax) related to the departure of
several executives.
12. Stock Repurchase Programs
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the 1 million share repurchase program at a total cost of $15,118,000.
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. On September 28, 1999
the Board of Directors authorized the Company to repurchase an additional
500,000 shares of its common stock. As of February 26, 2000, the Company had
repurchased 350,900 shares of its common stock under the current 1.5 million
share repurchase program at a total cost of $4,300,000.
The repurchased shares are used by the Company to make matching
contributions to its Profit Sharing/401(k) Plan, to issue shares under its
Performance Unit, Restricted Stock, Non-Qualified and Incentive Stock Option
Plans, to issue shares under its Stock Option Plans for Non-Employee Directors,
and to issue shares under its Employee Stock Purchase Plan.
13. Shareholder Rights Plan
On April 15, 1999, the Company's Board of Directors unanimously adopted a
shareholder rights plan (the "Plan"), commonly referred to as a poison pill.
Under the Plan, shareholders of record on April 30, 1999, and shareholders who
acquire the Company's common stock after that date (unless as excepted under the
terms of the Plan) will receive rights to purchase a unit consisting of one
one-thousandth of a Series A Preferred Share of the Company at $70.00 per unit.
The rights are not exercisable until the Board of Directors declares a
distribution date.
The Board of Directors may declare a distribution date within 10 days
following (i)the acquisition of or right to acquire by a person or group, 20% or
more of the outstanding common shares of the Company or (ii) the commencement of
a tender offer or exchange offer that would, if completed, result in a person or
group beneficially owning 20% or more of the Company's common shares. A
distribution date will not be declared if a person or group owns more than 20%
but less than 25% on April 30, 1999, and that person or group does not become
the beneficial owner of any additional shares of common stock. Upon the
declaration of a distribution date, each holder of the right will have the right
to receive, upon exercise, common shares having a value equal to two times the
exercise price of the right. In the
F-19
alternative, the Board of Directors at its option may exchange all outstanding
and exercisable rights for common shares at an exchange ratio of one common
share per each right. The Board may redeem the rights prior to an event
triggering a distribution date at $.001 per right.
14. Subsequent Event
On April 6, 2000 the Company purchased the assets of Rue de France, Inc., a
privately owned catalog company based in Newport, Rhode Island. The Company
agreed to pay a cash purchase price of up to $3 million, subject to post closing
net worth adjustments. Additionally, the Company agreed to make future payments
contingent upon Rue de France, Inc., achieving certain projected earnings before
taxes during the five year period commencing on February 27, 2000.
Rue de France, Inc., a 15 year-old retailer of home furnishings, markets
its products through catalogs, a web site and a retail store in Newport, Rhode
Island. Rue de France, Inc.'s founder has joined Lillian Vernon Corporation
under a multi-year employment contract as President of a newly formed Company
subsidiary which acquired the assets of Rue de France, Inc.
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lillian Vernon
Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Lillian
Vernon Corporation and its subsidiaries (the "Company") at February 26, 2000 and
February 27, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended February 26, 2000, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 25, 2000
F-21