Back to GetFilings.com
================================================================================
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 24, 2001
-----------------
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 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 $.01 PER SHARE. AMERICAN STOCK EXCHANGE
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 (SS.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, 2001) WAS APPROXIMATELY $33,795,422.
AS OF MAY 17, 2001, THERE WERE 8,516,640 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 18, 2001.
THE INDEX TO EXHIBITS APPEARS ON PAGE 22.
================================================================================
LILLIAN VERNON CORPORATION
FISCAL 2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data....................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7a. Quantitative and Qualitative Disclosure about Market Risk..... 19
Item 8. Financial Statements and Supplementary Data................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant,
Executive Compensation...................................... 20
Item 11. Security Ownership of Certain Beneficial Owners
and Management.............................................. 20
Item 12. Certain Relationships......................................... 20
Item 13. Related Transactions.......................................... 20
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K......................................... 21
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 2001, the Company
published 35 catalog editions, and mailed approximately 169,000,000 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 24 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 Corporation 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 24, February 26, February 27, February 28, February 22,
2001(4) 2000 1999 1998(3) 1997
------------ ------------ ------------ ------------ -------------
Number of catalogs 169,065 165,855 188,678 178,917 175,232
mailed (000's) (1)
Number of catalog 35 33 34 34 29
editions
Number of orders 4,418 4,627 4,812 4,936 4,643
received (000's)
Average revenue per $ 56.52 $ 55.56 $ 55.23 $ 54.13 $ 52.57
order received (2)
(1) "Number of catalogs mailed" includes catalog circulation to the extent
that resulting 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.
(4) For comparative purposes, Fiscal 2001 does not include Rue de France
statistics. Rue de France Inc. (acquired by the Company in April 2000)
mailed 3,883,000 catalogs in 4 editions. The number of orders received
was approximately 45,000 and the average revenue per order received
was $173.
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 strategically 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") (9 editions in fiscal 2001)
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.
The Sales and Bargains Catalog (4 editions in fiscal 2001) is primarily
used to sell overstocked and discontinued merchandise, and is generally mailed
only to customers in the Company's data base.
The Company's Lilly's Kids Catalog (6 editions in fiscal 2001) features
toys, games, baby products, room decor and fashion accessories for children.
The Company's Christmas Memories Catalog (2 editions in fiscal 2001) is
targeted to the Christmas season and offers ornaments, holiday decor, gifts,
cards and many unique and exclusive products.
The Favorites Catalog (6 editions in fiscal 2001) features many of the
best-selling products from all Lillian Vernon catalogs.
The Company's Personalized Gifts Catalog (2 editions in fiscal 2001)
features gift items, all offered with personalization.
The Neat Ideas Catalog (4 editions in fiscal 2001) offers products which
include closet accessories, food preparation, kitchen accessories, kitchen
decor, tabletop, organization, bath, laundry, car/garage and outdoor products.
The Lillian Vernon Gardening Catalog (2 editions in fiscal 2001) features a
cross section of functional garden products, as well as garden and floral-themed
decorative accessories.
The number of products offered in each catalog varies from 300 products to
700 products depending on the time of the year.
The Company first offered its products over the Internet in 1995. In March
2000 (beginning of fiscal year 2001), the Company launched a redesigned Internet
site, www.lillianvernon.com. This e-commerce web site
3
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. In fiscal 2001, the number of orders received through the website nearly
doubled from the previous year, and comprised approximately 9% of total orders.
The Company plans to upgrade its consumer website again in the fall of 2001 to
build on the success of its online sales and attract new customers.
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 2001 approximated 4% of net revenues.
The Company purchases its products from approximately 1,000 suppliers.
Approximately 82% of the merchandise is purchased abroad, predominantly from
manufacturers located in Taiwan, India, Hong Kong and throughout 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 another 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.
Marketing
The Company maintains a proprietary customer data base containing
information with respect to over 24 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 169,000,000 catalogs
were mailed in fiscal 2001, of which approximately 80% were mailed to people
whose names were in the Company's proprietary data base and approximately 20%
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
4
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.
Magazine Sales Program
The Company operates a telemarketing program 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. The Company also operates a seasonal telephone
order call center in New Rochelle, New York and a call center in Las Vegas,
Nevada which was closed in May 2001 as part of a restructuring plan. 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's telephone representatives conduct upselling and
cross-selling, in which customers are offered merchandise at special prices, or
a substitute product if the product they ordered is unavailable or an additional
product related to the one ordered by the customer.
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 when this is the most cost-effective way of satisfying the
customer. Approximately 90% of customer orders were shipped by the U.S. Postal
Service in fiscal 2001. The Company also ships orders via UPS Second Day Air
delivery as an option to its customers, for an extra charge.
The Company's National Distribution Center, an 821,000 square foot facility
located in Virginia Beach, Virginia, is owned and operated by the
5
Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc.
Almost 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 2001, the Company spent
approximately $23.8 million in total paper costs and also spent approximately
$55.1 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. While there was no change in postal rates
in fiscal 2000, there was an increase of 9.1% in late fiscal 2001. Another
increase of approximately 1.6% will occur in July 2001. No assurance can be
given that postal rates will not continue to increase in the future. 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 increased approximately 6.6% in fiscal 2001 as
compared to fiscal 2000, and is expected to be approximately 6% lower in fiscal
year 2002 as compared to fiscal 2001.
The Company continually monitors the paper market and periodically meets
with its paper suppliers in order to react to changes in the paper supply
market. In addition, the Company entered into a paper hedge contract 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 Sales and Bargains catalogs, its outlet stores and through
special offers made to customers placing orders by telephone and on the
Internet.
6
Seasonality
The Company's business is seasonal. Historically, approximately 65% - 75%
of the Company's revenues and substantially all of its net income has 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.
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. Although the Company attempts to identify secondary sources for its
merchandise, 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.
Similarly, Congress is currently studying Internet taxation issues, but to date
has not enacted any bills which would require companies to collect sales tax on
Internet transactions in states where they do not have a physical presence.
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 2002.
7
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 24, 2001, the Company and its subsidiaries employed
approximately 1500 employees. During the peak Holiday season, the Company
utilizes approximately 5300 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.
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 and online company based in Newport,
Rhode Island. The Company paid a cash purchase price of $2.8 million.
Additionally, the Company agreed to make future payments contingent upon Rue de
France, Inc. achieving certain cumulative earnings before tax targets during the
five year fiscal period of the Company commencing on February 27, 2000.
Rue de France, Inc., a 16 year-old retailer of home furnishings and
accessories, 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 the
subsidiary which acquired the assets of Rue de France, Inc.
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, internet and
8
finance departments, as well as the Business to Business division. 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.
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.
Almost all distribution and warehousing activities, as well as mail order
processing, customer service and most telemarketing activities, are conducted at
the Virginia Beach facilities.
The Company leases approximately 20,000 square feet in an office complex in
Las Vegas, Nevada, as an additional telemarketing facility. The lease expires
March 31, 2005. The Company is responsible for its share of operating expenses,
real estate taxes and utility charges. Due to the Company's restructuring plan
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations"), the Nevada facility was closed in May, 2001. The lease, however,
will continue to be in effect and the Company intends to sublease the location
to a third party.
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 sixteen retail locations, which serve as outlet stores,
in the states of Virginia, New York, Delaware, South Carolina, Rhode Island and
Tennessee. The typical retail store is approximately 3,000 square feet. The
retail store leases expire from fiscal 2002 through fiscal 2006, and contain
various renewal options through fiscal 2011. The Company leases additional
outlet store locations on a short-term basis, particularly during the holiday
season.
The Company believes that its facilities are adequate and that its
properties are in good condition.
9
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.
10
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 29, 1999 $14 7/8 $12
August 28, 1999 14 5/8 12 1/2
November 27, 1999 13 5/16 12 3/4
February 26, 2000 12 5/8 10 1/2
May 27, 2000 10 5/8 9 1/8
August 26, 2000 11 1/8 9 3/4
November 25, 2000 11 1/4 8 5/8
February 24, 2001 9 5/16 6 1/4
As of May 17, 2001, there were 381 registered holders of the Company's
Common Stock.
The Company has paid 37 consecutive quarterly cash dividends on its common
stock since an initial quarterly dividend of five cents ($.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. 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, 2001, the Company
had repurchased 902,992 shares, at a total cost of approximately $9.4 million
under the current stock repurchase program. 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.
11
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended
--------------------------------------------------------------
February February February February February
24, 2001 26, 2000 27, 1999 28, 1998 22, 1997
-------- ---------- --------- -------- --------
(1)
Operating Results
- -----------------
(000's)
Revenues (2)(3)...... $ 287,094 $ 281,044 $ 296,384 $ 297,704 $ 277,613
Income before income
taxes ............. 175 10,350 5,079 14,740 7,925
Net income (loss) (3) (1,378) 6,289 3,139 9,728 5,231
Per Share
- ---------
Net income (loss)-
Basic (3).......... $ (.16) $ .69 $ .34 $ 1.02 $ .54
Net Income (loss)-
Diluted ........... (.16) .69 .34 1.01 .54
Book value .......... 12.38 12.75 12.37 12.46 11.83
Dividends ........... .32 .32 .32 .29 .28
Financial Position At
- ---------------------
Year End (000's)
- --------
Cash and cash
equivalents ....... $ 34,180 $ 35,364 $ 31,834 $ 26,136 $ 24,098
Working capital ..... 62,723 74,568 69,996 73,951 70,739
Total assets ........ 139,749 141,318 138,206 144,359 138,955
Long-term
obligations (4) ... -- -- -- 1,394 2,883
Stockholders' equity 106,973 114,378 113,264 116,839 113,702
Average shares
- --------------
outstanding (000's)
- -----------
Basic .......... 8,740 9,128 9,221 9,532 9,658
Diluted ........ 8,740 9,130 9,319 9,636 9,664
(1) Fiscal year 1998 contained 53 weeks.
(2) All revenues have been adjusted to reflect the adoption of EITF No.00-10.
See Note 1 to the Consolidated Financial Statements.
(3) In the fourth quarter of fiscal 2001, effective February 27, 2000, the
Company adopted the provisions of Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). See Note 1 to
the Consolidated Financial Statements. It is estimated that had SAB 101
been adopted for fiscal 1997, pro forma revenues, net income and earnings
per share would have been $276,795, $5,131, and $.53, respectively, for the
year ended February 22, 1997. Similarly, pro forma revenues, net income and
earnings per share would have been $296,477, $9,578, and $1.00,
respectively, for the year ended February 28, 1998, and $297,104, $3,182,
and $.35, respectively, for the year ended February 27, 1999. The pro forma
effect on the year ended February 26, 2000 is disclosed in Note 11 to the
Consolidated Financial Statements.
(4) Includes current installments and long-term portions of debt and capital
lease obligations.
12
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. In the
fourth quarter of fiscal 2001, the Company adopted the provisions of Emerging
Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and Handling Fees
and Costs" which requires that amounts billed to customers for shipping and
handling fees be classified as revenue. These fees were previously recorded as a
reduction of the related expenses in the "product and delivery costs" line on
the income statement. All periods shown reflect EITF No.00-10.
Fiscal Years Ended
--------------------------------------
February 24, February 26, February 27,
2001 2000 1999
----------- ----------- ------------
Revenues 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs (56.7) (55.7) (54.4)
Selling, general and
administrative expenses (43.0) (41.2) (43.2)
Restructuring and other charges (0.7) -- --
Write-off computer project,
severance costs -- -- (0.7)
Other income -- 0.3 --
----- ----- -----
Operating income (loss) (0.3) 3.3 1.6
Interest income, net 0.4 0.4 0.1
----- ----- -----
Income before income taxes 0.1 3.7 1.7
Provision for income taxes (0.3) (1.5) (0.6)
Cumulative effect of
accounting change (0.2) -- --
----- ----- -----
Net income (loss) (0.5)% 2.2% 1.1%
----- ----- -----
Fiscal 2001 Compared to Fiscal 2000
Revenues for fiscal 2001 were $287.1 million, an increase of $6.1 million,
or 2.2% compared to fiscal 2000. Revenues rose primarily because of the
acquisition in April 2000 of Rue de France, Inc., an upscale catalog and website
of home furnishings and accessories. Catalog revenues excluding Rue de France
declined slightly, although catalog circulation was 2% higher in fiscal 2001.
Response to the Company's catalogs was negatively impacted by the economic
downturn and decreased consumer spending during the Company's peak holiday
selling season, and the balance of the fiscal year. While the overall number of
orders received by the Company during fiscal 2001 declined by 4.5%, orders
received through the Company's website almost doubled compared to fiscal 2000,
and amounted to approximately 9% of incoming orders in fiscal 2001.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing and filling orders for the Company's customers.
Product and delivery costs in fiscal 2001 were $162.6 million, an increase of
$6.0 million, or 3.8% compared to $156.6 million for fiscal 2000. These costs
13
increased primarily due to the addition of the Rue de France business. As a
percentage of revenue, product and delivery costs increased from 55.7% in fiscal
2000 to 56.7% in fiscal 2001 due to the mix of the Company's merchandise and
services. Specifically, more of the Company's revenues were generated from lower
margin sources in fiscal 2001, such as Rue de France and providing incoming
order processing services to another catalog retailer.
Selling, general and administrative ("SG&A") expenses were $123.4 million
in fiscal 2001 compared to $115.8 million in fiscal 2000, an increase of $7.6
million, or 6.6%. These expenses rose for several reasons: approximately 2%
higher catalog circulation for the Company's existing catalogs, the expenses of
Rue de France, Inc. which was acquired in April 2000, and increased costs of
operating the Company's website. As a percentage of revenue, SG&A increased from
41.2% in fiscal 2000 to 43.0% in fiscal 2001 primarily because of weaker
response to the Company's catalogs. Specifically, the Company's mailings
generated 5% less revenue per catalog in fiscal 2001 than fiscal 2000, on higher
circulation.
The cost of producing, printing and mailing the Company's catalogs
represent the single largest component of SG&A expenses. The Company's paper
cost per page increased by approximately 6.6% in fiscal 2001 compared to fiscal
2000, but is expected to be lower for fiscal 2002 due to a softening paper
market. Postal rates, however, are expected to rise. A postal rate increase of
9% in January 2001 will be followed by another increase in July 2001 of
approximately 1.6%. To mitigate the impact of the postal rate increases,
however, the Company made changes to the weight of the catalogs and adjustments
to catalog page counts. Overall, the average cost to produce and mail a catalog
is expected to be slightly lower in fiscal 2002 compared to 2001.
The Company continually monitors the paper market and periodically meets
with its paper suppliers in order to react to changes in the paper supply
market. In addition, the Company entered into a paper hedge contract 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).
During fiscal 2001, the Company recorded pretax restructuring and other
charges aggregating $2.1 million, which included severance pay for a former
officer ($.4 million) and costs of a restructuring plan ($1.7 million). The
restructuring plan (the "Plan") was approved in February 2001 to streamline
operations and reduce costs in light of decreased consumer spending and an
uncertain economy. Under the Plan, the Company eliminated approximately 12% of
its salaried workforce and closed its Las Vegas, Nevada Call Center,
consolidating these operations into its National Distribution Center located in
Virginia Beach. The costs of the Plan include $ .7 million for employee-related
costs (mostly severance pay), $.3 million of asset write-offs from the Call
Center closure, $.7 million of projected future lease payments and sublease
costs for the Call Center. No payments under the Plan have been made as of
February 24, 2001. The Company expects to make the remaining severance payments
by October 15, 2001. With respect to the lease costs, the Company currently
estimates that it may take in excess of 12 months to enter into a suitable
sublease for the Las Vegas facility. The restructuring and other charges reduced
fiscal 2001 net income by $1.3 million ($.15 per share).
14
Net interest income in fiscal 2001 was $1.2 million compared to $1.0
million in fiscal 2000. The increase of $.2 million was due primarily to higher
interest rates on the Company's cash investments. There were no short-term
borrowings during fiscal year 2001 or fiscal year 2000.
The Company's unusually high effective income tax rate in fiscal 2001 is
primarily due to recognizing the expiration of charitable contribution tax
carryforwards. The Company recorded additional tax expense of $.8 million
related to the expiration of these credits, which reduced earnings per share by
$.09.
In the fourth quarter of fiscal 2001, effective February 27, 2000, the
Company adopted the provisions of SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), and recorded a
one-time charge to earnings of $.6 million, net of income taxes of $.4 million,
($.07 per share) to reflect the accounting change.
After all charges, the net loss for the fiscal year was $(1.4) million, or
$(.16) per share, compared to net income of $6.3 million, or $.69 per share, the
prior year. Before the cumulative effect of adopting SAB 101 in Fiscal 2001, and
excluding the restructuring charge and the effect of the expiration of tax
carryforwards, the Company would have had net income of $1.4 million or $.15 per
share, compared to $6.3 million or $.69 per share last year.
Fiscal 2000 Compared to Fiscal 1999
Revenues for fiscal 2000 were $281.0 million, a decrease of $15.3 million,
or 5.2%, 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. These costs ($156.6
million) declined by $4.6 million, or 2.9% 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 54.4% in fiscal 1999 to
55.7% 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
catalog circulation. As a percentage of revenues, SG&A expenses decreased from
43.2% in fiscal 1999 to 41.2% 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
15
compared to fiscal 1999.
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%.
Other income of $.7 million was a result of the sale of stock received from
the demutualization of an insurance company which insures the lives of two
Company officers ($.6 million), and profit from the sale of Company 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.
Seasonality
The Company's business is seasonal. Historically, approximately 65% - 75%
of the Company's revenue and substantially all of its net income has 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 fixed costs incurred to increase sales year-round and
invest in future growth, the Company reported a cumulative net loss during the
first six months of fiscal 2001, 2000, and 1999. Due to these seasonal factors,
management expects to incur a loss for the first half of fiscal 2002 as well.
Liquidity and Capital Resources
The Company's balance sheet and liquidity are strong. Cash and cash
equivalents totaled $34.2 million as of February 24, 2001; the current ratio was
3.2:1 at February 24, 2001 compared to 4.3:1 at February 26, 2000. The reduction
in the current ratio was due principally to lower accounts receivable and
inventory, and higher accounts payable and accrued expenses as of February 24,
2001. The Company has not borrowed money in the current fiscal year; its working
capital needs have been met with funds on hand and cash generated from
operations.
In fiscal 2001, the Company generated $9.8 million of cash from operating
16
activities. Inventory as of the end of fiscal 2001 decreased by $4.2 million on
a comparable basis as fiscal 2000 (i.e. excluding the inventory of Rue de France
and the impact of implementing SAB 101), due to the Company's efforts to better
manage inventory.
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 $2.8 million. Additionally, the Company agreed to make future
payments contingent upon Rue de France, Inc. achieving certain cumulative
earnings before tax targets during the five fiscal years commencing February 27,
2000.
Capital spending in fiscal 2001 of $2.7 million was made to upgrade the
Company's computer equipment and its distribution machinery and equipment. In
addition, the Company has partnered with IBM to develop a new website. The cost
for the development of the website, and the related software and hardware is
expected to be $4.5 million in fiscal 2002. Aside from the new website
development, fiscal 2002 capital spending is expected to be comparable to the
Company's annual spending in the past several years. In fiscal 2002, the Company
also plans to conduct an extensive review and assessment of its major computer
systems, facilities and business processes. A major goal of the study is to plan
systems that will enable the Company to take advantage of additional business
opportunities, streamline operations, and reduce its costs.
The Company has a $42 million revolving credit facility with two banks,
expiring in fiscal 2006. 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. Up to $20 million of the facility can be converted
into term loans, with maturity dates no later than 2008. At the Company's
option, interest is payable at LIBOR plus 50 basis points, prime rate, bankers'
acceptance rate plus 50 basis points, or a fixed rate. 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 generated $.7 million of cash from the issuance of common stock
through its employee benefit plans during fiscal 2001, compared to $1.1 million
in fiscal 2000.
The Company has paid 37 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
2001 totaled $2.8 million, or $.32 per share.
On October 7, 1998, 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. On September 28, 1999, the Board of
Directors authorized the Company to repurchase an additional 500,000 shares of
its common stock. In fiscal 2001, the Company repurchased 400,492 shares under
17
the current program at a total cost of $3.9 million. As of February 24, 2001,
the Company had purchased 751,392 shares since inception of the current program
at a total cost of $8.2 million. Prior to this, the Company completed an earlier
stock repurchase program in which it repurchased 1 million shares for a total
cost of $15.1 million. Cumulatively from October 1995 through February 24, 2001,
the Company has spent $23.3 million to repurchase its stock in the open market.
The Company believes that its cash flow from operations, funds on hand, 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.
Recently Issued Accounting Standards
In the fourth quarter of fiscal 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" which requires that amounts billed to customers for
shipping and handling fees be classified as revenue. The Company previously
recorded these fees as reductions of the related expenses. The adoption of EITF
00-10 had no effect on the net income of the Company.
In the fourth quarter of fiscal 2001, effective February 27, 2000, the
Company adopted the provisions of SEC Staff Accounting Bulletin 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). The Company recorded a
one-time charge of $.6 million, net of income taxes of $.4 million, or $.07 per
share in fiscal 2001, to reflect the accounting change. The use of the revised
method reduced the fiscal 2001 loss before cumulative effect by $79,000, net of
income taxes. The Company does not expect the implementation of SAB 101 to have
a material effect on future operating results on an annual basis; however, it
will significantly impact the results of the third and fourth quarters, similar
to the impact disclosed in Note 11 to the Consolidated Financial Statements.
Forward Looking Statements
Except for historical information contained herein, statements included in this
Form 10-K may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to the
Company's future performance, including, without limitation, statements with
respect to the Company's anticipated results of operations, revenues and/or
level of business. Such statements represent the Company's current expectations
only and are subject to certain risks, assumptions and uncertainties. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated or projected. Among the factors that could cause actual results to
materially differ include the overall strength of the economy, the level of
consumer confidence and spending, customer preferences, circulation changes and
other initiatives, increased competition in the direct mail industry and from
the growing Internet market, changes in government regulations, risks associated
with the social, political, economic and other conditions affecting foreign
18
sourcing, and possible future increases in operating costs including postage and
paper costs.
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 by entering into a collar hedge contract. This contract
covers 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 January and February
2001, market prices for paper fell below the established floor of the contract.
The Company, therefore, made minimal payments to the counterparty. In March
2001, the Company renegotiated the floor and ceiling prices under the contract
and extended the term of the contract until August 2005. The contract now covers
63,560 short tons of paper between March 2001 and its expiration date.
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 price as of February
24, 2001 for the grade of paper subject to this contract was $990 per short ton.
If the price of this grade of paper should increase by 10% over the next 12
months, the Company would be entitled to maximum payments totaling $89,000 from
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 in the maximum total amount of $826,000. However, these 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 Financial Statements for
fiscal 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are found in Part IV at
pages F-1 through F-20 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
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.
20
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-20.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 24, 2001 and February 26, 2000 ................. F- 2
- -Statements of Operations for the three Fiscal Years ended
2001, 2000, and 1999...................................................... F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 2001, 2000, and 1999................................... F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 2001, 2000, and 1999................................................ 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).
21
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 - Amended By-Laws of Lillian Vernon Corporation............................................ (19)
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 in New Rochelle, New York................................... (1)
10.10 - Trademark Registrations for Lillian Vernon Corporation - Service Mark and Logo .......... (1)
22
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
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 - Amended Revolving Credit Agreement, Letter of Credit and Bankers
Acceptance facility dated as of August 19, 1996 among
Lillian Vernon Corporation as Borrower, Lillian Vernon
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)
10.29 - Rights Agreement dated as of April 15, 1999 between the Company and Continental Stock
Transfer & Trust Co. .................................................................... (14)
10.30 - Supplement to Rights Agreement dated as of April 15, 1999 between the Company and
Continental Stock Transfer & Trust Co. .................................................. (15)
23
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
10.31 - Industrial Real Estate Lease between the Company and Howard Hughes Properties,
Limited Partnership ..................................................................... (15)
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 ......................................................... (18)
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
March 31, 2000 .......................................................................... (18)
10.35 - Proprietary Rights Assignment between Pamela Kelley and RDF Acquisition
Corporation ............................................................................. (18)
10.36 - Right of First Refusal Agreement between Lillian Vernon Corporation and Pamela F.
Kelley dated March 31, 2000 ............................................................. (18)
10.37 - Employment Agreement between RDF Acquisition Corporation and Pamela F. Kelley dated
March 31, 2000 .......................................................................... (18)
10.38 - Intellectual Property Protection Agreement between RDF Acquisition Corporation and
Pamela F. Kelley dated March 31, 2000 ................................................... (18)
21 - Subsidiaries of registrant .............................................................. E-107
23 - Consent of PricewaterhouseCoopers LLP ................................................... E-108
(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.
24
Original deferred compensation agreement filed with Registration Statement
- see (1) above.
(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. The Amended Revolving Credit
Agreement is filed herewith.
(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.
(14) Filed with Report on Form 8-K dated April 22, 1999, and incorporated by
reference herein.
(15) 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.
(18) Filed with Annual Report on Form 10-K for the year ended February 26, 2000,
and incorporated by reference herein.
(19) Filed with Quarterly Report on Form 10-Q for the quarter ended August 26,
2000 and incorporated by reference herein.
25
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 22, 2001 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 22, 2001
of Directors (Principal
Executive Officer)
/s/ WAYNE A. PALLADINO
- ----------------------------
Wayne A. Palladino Senior Vice President- May 22, 2001
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JONAH GITLITZ
- ----------------------------
Jonah Gitlitz Director May 22, 2001
/s/ DAVID C. HOCHBERG
- ----------------------------
David C. Hochberg Vice President - Public May 22, 2001
Affairs and Director
/s/ JOEL SALON
- ----------------------------
Joel Salon Director May 22, 2001
/s/ BERT W. WASSERMAN
- ----------------------------
Bert W. Wasserman Director May 22, 2001
/s/ ELIZABETH M. EVEILLARD
- ----------------------------
Elizabeth M. Eveillard Director May 22, 2001
/s/ RICHARD A. BERMAN
- ----------------------------
Richard A. Berman Director May 22, 2001
26
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Lillian Vernon International, Ltd.
Lillian Vernon Fulfillment Services, Inc.
LVC Retail Corporation
Rue de France, Inc.
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 24, FEBRUARY 26,
2001 2000
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 34,180 $ 35,364
Accounts receivable, net of allowances of $687 and $576 19,483 22,403
Merchandise inventories 31,944 33,926
Deferred income taxes 262 1,355
Prepayments and other current assets 5,582 4,241
--------- ---------
Total current assets 91,451 97,289
Property, plant and equipment, net 33,841 35,092
Deferred catalog costs 8,797 5,624
Other assets 5,660 3,313
--------- ---------
Total $ 139,749 $ 141,318
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 22,844 $ 18,316
Cash overdrafts 1,301 758
Customer deposits 4,583 171
Income taxes payable 3,476
--------- ---------
Total current liabilities 28,728 22,721
Deferred compensation 3,282 2,929
Deferred income taxes 766 1,290
--------- ---------
Total liabilities 32,776 26,940
--------- ---------
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 authorized; issued - 10,389,674 shares in
2001 and 2000 104 104
Additional paid-in capital 31,332 31,331
Retained earnings 99,312 103,847
Treasury stock, at cost - 1,745,668 shares in 2001
and 1,419,433 shares in 2000 (23,775) (20,904)
--------- ---------
Total stockholders' equity 106,973 114,378
--------- ---------
Total $ 139,749 $ 141,318
========= =========
See Notes to Consolidated Financial Statements.
F-2
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ENDED
-----------------------------------------------
FEBRUARY 24, FEBRUARY 26, FEBRUARY 27,
2001 2000 1999
------------ ------------ ------------
Revenues $ 287,094 $ 281,044 $ 296,384
Costs and expenses:
Product and delivery costs 162,647 156,640 161,289
Selling, general and administrative expenses 123,398 115,792 128,002
Restructuring and other charges 2,050
Write-off - computer project and severance costs 2,180
Other income (746)
--------- --------- ---------
288,095 271,686 291,471
--------- --------- ---------
Operating income (loss) (1,001) 9,358 4,913
Interest income, net 1,176 992 166
--------- --------- ---------
Income before provision for income taxes 175 10,350 5,079
Provision for income taxes:
Current 434 3,998 1,220
Deferred 479 63 720
--------- --------- ---------
913 4,061 1,940
--------- --------- ---------
Income (loss) before cumulative effect (738) 6,289 3,139
--------- --------- ---------
Cumulative effect of accounting change, net of
income taxes of $360 640
--------- --------- ---------
Net income (loss) ($ 1,378) $ 6,289 $ 3,139
--------- --------- ---------
Basic and diluted net income (loss) per common share:
Income (loss) before cumulative effect of accounting change ($ 0.09) $ .69 $ .34
Cumulative effect of accounting change (0.07)
--------- --------- ---------
Net income (loss) per common share - Basic and Diluted ($ 0.16) $ .69 $ .34
--------- --------- ---------
Weighted average number of common shares - Basic 8,740 9,128 9,221
Weighted average number of common shares and
common share equivalents - Diluted 8,740 9,130 9,319
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 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 -- (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 ($.32 per share) (2,922) (2,922)
Other 9 9
Net income 6,289 6,289
-------- ---------- ---- ------- -------- --- ---------- --------
BALANCE, FEBRUARY 26, 2000 114,378 10,389,674 104 31,331 103,847 -- (1,419,433) (20,904)
-------- ---------- ---- ------- -------- --- ---------- --------
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 158 (90) 17,727 248
Shares issued for 401-k Plan
matching contribution 508 (287) 56,530 795
Purchase of treasury stock (3,914) (400,492) (3,914)
Dividends ($.32 per share) (2,780) (2,780)
Other 1 1
Net loss (1,378) (1,378)
-------- ---------- ---- ------- -------- --- ---------- --------
BALANCE, FEBRUARY 24, 2001 $106,973 10,389,674 $104 $31,332 $ 99,312 -- (1,745,668) ($23,775)
======== ========== ==== ======= ======== === ========== ========
See Notes to Consolidated Financial Statements.
F-4
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FISCAL YEARS ENDED
------------------------------------------
FEBRUARY 24, FEBRUARY 26, FEBRUARY 27,
2001 2000 1999
------------ ------------- ------------
Cash flows from operating activities:
Net income (loss) ($ 1,378) $ 6,289 $ 3,139
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities (net of effects from purchase of
Rue de France, Inc.)
Cumulative effect of accounting change 640
Depreciation 4,021 4,321 4,488
Amortization 827 250 250
Restructuring, net of cash payments 1,690
Write-off-computer project 1,414
Loss (gain) on disposal of assets 89 (81)
(Increase) decrease in accounts receivable 2,981 (1,310) 1,539
(Increase) decrease in merchandise inventories 4,229 (7,226) 10,235
(Increase) decrease in prepayments and other current assets (508) 5,430 502
(Increase) decrease in deferred catalog costs (1,442) 568 (270)
Increase in other assets (574) (13) (2,002)
Increase in trade accounts payable and accrued expenses 1,752 879 1,106
Increase (decrease) in customer deposits (377) (57) 81
Increase (decrease) in income taxes payable (3,116) 2,404 (3,509)
Increase (decrease) in deferred compensation 353 (120) (377)
Increase in deferred income taxes 569 54 776
-------- -------- --------
Net cash provided by operating activities 9,756 11,388 17,372
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,703) (1,621) (4,476)
Purchase of assets of Rue de France, Inc. (net of acquired cash) (2,753)
Proceeds from sale of assets 100
-------- -------- --------
Net cash used in investing activities (5,456) (1,521) (4,476)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,394)
Increase (decrease) in cash overdrafts 543 (1,162) 916
Dividends paid (2,780) (2,922) (2,940)
Payments to acquire treasury stock (3,914) (3,332) (6,623)
Reissuance of treasury stock for stock options and employee benefit plans 666 1,070 2,681
Other 1 9 162
-------- -------- --------
Net cash used in financing activities (5,484) (6,337) (7,198)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,184) 3,530 5,698
-------- -------- --------
Cash and cash equivalents at beginning of period 35,364 31,834 26,136
-------- -------- --------
Cash and cash equivalents at end of period $ 34,180 $ 35,364 $ 31,834
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 370
Income taxes $ 3,707 $ 1,612 $ 4,567
Supplemental schedule of noncash investing and financing activities:
The Company purchased the assets of Rue de France, Inc.
as of April 1, 2000 for $2,823 (less acquired cash of $70).
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $3,932
Cash paid for assets acquired (2,823)
------
Liabilities assumed $1,109
======
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., Rue de France, Inc. (since
date of acquisition on April 1, 2000) and LVC Retail Corporation (collectively,
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 2001, fiscal 2000 and
fiscal 1999 each consisted of 52 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 No. 115 - "Accounting for Certain Investments in
Debt and Equity Securities", the Company's investments, totaling $33.4 million
and $34.8 million as of February 24, 2001 and February 26, 2000, respectively,
are classified as held-to-maturity securities, and as such, are stated at cost
plus accrued interest, which approximates fair value.
Revenue Recognition
In the fourth quarter of fiscal 2001, effective February 27, 2000, the
Company adopted the provisions of SEC Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). As a result of adopting SAB
101, the Company records revenue at the time of delivery for catalog and online
sales, and at the point of sale in its retail stores. The Company recorded a
charge to earnings of $640,000, net of income taxes of $360,000, to reflect the
cumulative effect of the accounting change. The use of the revised method
reduced the fiscal 2001 loss before cumulative effect by $79,000, net of income
taxes.
In the fourth quarter of fiscal 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" which requires that amounts billed to customers for
shipping and handling fees be classified as revenue. Previously, the Company
recorded shipping and handling fees as a reduction of the related expenses in
the "product and delivery costs" line on the income statement. All periods shown
have been reclassified to reflect the provisions of EITF No. 00-10. There was no
effect on net income as a result of adopting EITF No. 00-10.
F6
Merchandise Inventories
Merchandise inventories are stated at the lower of cost 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.
Capitalized Software Costs
Direct costs of purchasing and developing new software applications are
capitalized and amortized over estimated useful lives of two to five years.
Amortization of capitalized software costs totaled $515,000 in fiscal 2001,
$113,000 in fiscal 2000, and $127,000 in fiscal 1999.
Capitalized software costs are included in other assets, and amounted to
$9,006,000 and $8,488,000 at February 24, 2001 and February 26, 2000,
respectively. Accumulated amortization of capitalized software costs amounted to
$8,298,000 and $7,783,000 at February 24, 2001 and February 26, 2000,
respectively.
Depreciation and Amortization
Depreciation is recorded on the straight line method over 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 are amortized over 15 years, or the term of the
applicable leases, whichever is shorter. The excess of the purchase price for
Rue de France, Inc. over the estimated fair value of the net tangible assets
acquired ($2.6 million) is being amortized over a period of twenty years. The
accumulated amortization of the excess purchase price at February 24,2001
amounted to $119,000. The Financial Accounting Standards Board has adopted final
rules whereby companies will no longer be required to amortize excess purchase
price beginning as of January 1, 2002.
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.
F7
Basic and diluted earnings(loss) per share were calculated as follows
(amounts in thousands):
Fiscal Years Ended
----------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Net Income (loss)-Basic and Diluted $ (1,378) $ 6,289 $ 3,139
------------ ------------ ------------
Weighted average number of outstanding
shares for Basic EPS 8,740 9,128 9,221
Add: incremental shares from
stock option exercises -- 2 98
------------ ------------ ------------
Weighted average number of outstanding
shares for Diluted EPS 8,740 9,130 9,319
------------ ------------ ------------
In fiscal 2001, 2000, and 1999, options on 1,427,000, 1,097,000, and 394,000
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 value.
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 APB 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.
Comprehensive Income
The Company does not have any items of "other comprehensive income" to
report for fiscal 2001, 2000, and 1999 under Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income".
F8
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 to the prior years' financial
statements to conform with the fiscal 2001 presentation.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Federal $409 $3,642 $1,026
State and local 25 356 194
---- ------ ------
$434 $3,998 $1,220
==== ====== ======
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Charitable contributions $ 42 $ 448 $--
Depreciation (2) 99 848
Catalog costs 738 (275) 135
Capitalized software (16) (17) (175)
Change in valuation allowance-
charitable contributions
carryforward 780 202 250
Restructuring charges (514) -- --
Profit sharing contribution (187) -- --
Other, net (362) (394) (338)
----- ----- -----
$ 479 $ 63 $ 720
===== ===== =====
The exercise of non-qualified stock options and the vesting of restricted stock
(see Note 10) result 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 and $162,000 for fiscal 2000 and 1999,
respectively.
F9
The Company's effective income tax rate is reconciled to the U.S. federal
statutory tax rate as follows:
Fiscal Years Ended
------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal tax benefit 9.3 2.3 2.5
Non-deductible items 47.0 -- --
Charitable contributions of
merchandise -- -- (2.0)
Change in valuation allowance-
charitable contributions carryforward 445.7 1.9 4.9
Other, net (14.3) 1.0 (1.2)
----- ---- ----
521.7% 39.2% 38.2%
===== ==== ====
The deferred tax assets and deferred tax liabilities recorded on the Balance
Sheets are as follows (dollars in thousands):
February 24, 2001 February 26, 2000
--------------------- --------------------
Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Current:
Catalog deferrals $ -- $ 2,869 $ -- $ 2,130
Charitable contributions 1,396 -- 1,432 --
Inventory capitalization 1,213 -- 963 --
Accrued expenses 1,507 -- 1,104 --
Valuation allowance-
charitable contributions (1,232) -- (452) --
Other 256 9 447 9
------- ------- ------- -------
Total current 3,140 2,878 3,494 2,139
------- ------- ------- -------
Non-current:
Depreciation -- 2,633 -- 2,630
Amortization -- (29) 7 (9)
Restructuring charges 382 -- -- --
Deferred compensation 1,456 -- 1,324 --
------- ------- ------- -------
Total non-current 1,838 2,604 1,331 2,621
------- ------- ------- -------
Total $ 4,978 $ 5,482 $ 4,825 $ 4,760
======= ======= ======= =======
As of February 24, 2001, the Company had $2,610,000 of charitable contribution
carryforward for Federal income tax purposes, which expires by fiscal 2002.
Offsetting this amount, the Company established deferred tax valuation
allowances related to management's continued assessment of the Company's
inability to utilize its entire charitable contribution tax carryforward prior
to expiration.
F10
3. CREDIT FACILITIES
The Company has a $42 million revolving credit facility with two banks
expiring in fiscal 2006. 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. Up to $20 million of the facility can be converted
into term loans, with maturity no later than 2008. At the Company's option,
interest is payable at LIBOR plus 50 basis points, prime rate, bankers'
acceptance rate plus 50 basis points, or a fixed rate. 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.
In fiscal 2001, 2000 and 1999, 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.
No amounts were outstanding under the Company's credit facilities during
fiscal years 2001 and 2000, or as of February 24, 2001 or February 26, 2000
(excluding letters of credit).
The Company had outstanding letters of credit approximating $5,534,000 and
$5,517,000 as of February 24, 2001 and February 26, 2000, respectively, for the
purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of
$1,646,000 and $1,045,000 as of February 24, 2001 and February 26, 2000,
respectively.
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
Fiscal Years Ended
---------------------------
February 24, February 26,
2001 2000
------------ ------------
Trade accounts payable $ 9,049 $ 5,671
Catalog costs 734 1,738
Salaries and compensation 2,616 2,386
Accrued refunds 1,360 1,403
Restructuring charges 1,690 --
Other 7,395 7,118
------------ ------------
$ 22,844 $ 18,316
------------ ------------
F11
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
Fiscal Years Ended
---------------------------
February 24, February 26,
2001 2000
------------ ------------
Land and buildings $ 32,884 $ 32,578
Machinery and equipment 32,685 30,751
Furniture and fixtures 4,093 3,832
Leasehold improvements 1,130 985
------------ ------------
Total property, plant & equipment, at cost 70,792 68,146
Less: accumulated depreciation & amortization 36,951 33,054
------------ ------------
Property, plant & equipment, net $ 33,841 $ 35,092
------------ ------------
6. PAPER HEDGE CONTRACT
The Company's earnings are impacted by fluctuating paper prices. In order
to mitigate this risk, the Company entered into a collar hedge contract. This
contract covers a certain grade of paper used by the Company, among other
grades, to produce its catalogs. There is a floor and ceiling on 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. During January and February
2001, market prices for paper fell below the established floor of the contract.
The Company, therefore, made payments during fiscal 2001 to the counterparty
which were not material. In March 2001, the Company renegotiated the floor and
ceiling prices under the contract, and extended the term of the contract until
August 2005.
In June 1999, FAS Statement No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," was issued, deferring the effective date of FAS Statement No. 133.
"Accounting for Derivative Instruments and Hedging Activities," from January 1,
2000 to January 1, 2001. These statements establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires recognition
of all derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. The Company will adopt FAS 133,
as amended by FAS Statement No. 138, "Accounting for Certain Derivative
Instruments and Hedging Activities, an amendment of FAS Statement 133",
beginning February 25, 2001. The Company does not expect adoption of these
statements to have a material effect on its financial position or results of
operations.
F12
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 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.
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, 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 2002 through fiscal 2006, and various renewal options
through fiscal 2011. As part of the Company's restructuring plan (see Note 15),
the Nevada call center has been closed. The lease agreement, however, will
continue to be in effect and the Company intends to sublease the location to a
third party. Most of the store leases also provide for payment of common charges
such as maintenance and real estate taxes. Nine stores require the payment of
additional rent based upon a percentage of sales. Minimum rental payments
required under lease agreements, including the Corporate Headquarters sublease
and the Nevada call center lease, are as follows (dollars in thousands):
Fiscal Year
-----------
2002 $ 3,324
2003 3,015
2004 2,059
2005 1,653
2006 133
-------
$10,184
=======
Rent expense for fiscal 2001, 2000, and 1999 amounted to $4,598,000,
$4,536,000, and $3,882,000, respectively, which included $12,000, $3,000 and
$18,000 in fiscal 2001, 2000 and 1999, respectively, for contingent rentals
based upon a percentage of outlet store sales.
8. RUE DE FRANCE ACQUISITION
As of April 1, 2000, the Company purchased the assets of Rue de France,
Inc., a privately owned catalog company based in Newport, Rhode Island. The
Company paid a cash purchase price of $2.8 million.
F13
Additionally, the Company agreed to make future payments contingent upon Rue de
France, Inc. achieving certain cumulative earnings before tax targets during the
five-year period commencing on February 27, 2000. The excess of the purchase
price over the fair value of the tangible net assets of approximately $2.6
million is included in other assets, and is being amortized on a straight-line
basis over 20 years. The operating results of Rue de France have been included
in the Company's consolidated results of operations as of April 1, 2000.
9. 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 contribution for each of the fiscal years 2001,
2000, and 1999 was $500,000.
The Company's profit sharing plan includes an employee contribution and
employer matching contribution (401-k) feature. Under the 401-k 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 2001, 2000 and 1999 were $529,000, $479,000, and $509,000,
respectively.
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 $817,000 in fiscal 2001, $930,000 in fiscal 2000 and
$129,000 in fiscal 1999.
10. STOCK COMPENSATION PLANS
At February 24, 2001, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 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):
F14
February 27, February 26, February 24,
Fiscal Years Ended 1999 2000 2001
- ------------------ ------------ ------------ ------------
Net Income (loss) As reported $3,139 $6,289 $(1,378)
Pro forma $2,724 $5,892 $(1,780)
Basic earnings (loss) As reported $0.34 $0.69 $(0.16)
per share Pro forma $0.30 $0.65 $(0.20)
Diluted earnings (loss) As reported $0.34 $0.69 $(0.16)
per share Pro forma $0.29 $0.65 $(0.20)
The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan, and a total of 1,275,000 shares of
common stock have been reserved for issuance thereunder.
The Company has 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 27, February 26, February 24,
Fiscal Years Ended 1999 2000 2001
- ------------------ ------------ ------------ ------------
Expected volatility 29.3% 29.3% 31.0%
Dividend yield 2.0 2.3 3.4
Risk-free interest rate 5.3 6.2 4.5
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 24, 2001 follows:
F15
Fiscal Years Ended
-----------------------------------------------------------------------------------------
February 27, 1999 February 26, 2000 February 24, 2001
-------------------------- ------------------------- -------------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding
at beginning
of year 1,054,333 $14.72 898,004 $14.96 1,072,501 $14.74
Granted 40,000 15.42 261,500 13.84 447,500 9.76
Exercised (154,833) 13.21 (23,867) 13.36 - -
Forfeited (41,496) 15.77 (63,136) 14.68 (205,401) 13.78
--------- --------- ---------
Outstanding
at end of yr. 898,004 $14.96 1,072,501 $14.74 1,314,600 $13.19
--------- --------- ---------
Options
exercisable
at year-end 676,841 742,498 780,591
Weighted average
fair value of
options granted
during the year $2.87 $2.49 $1.47
The following table summarizes information about stock options outstanding
at February 24, 2001:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted Avg.
Range of Remaining Weighted Weighted
Exercise Shares Contractual Average Shares Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------- ----------- ----------- -------------- ----------- --------------
$ 7.58-11.00 391,500 9.1 Yrs. $ 9.76 -- --
$12.50-18.13 923,100 4.9 Yrs. $14.65 780,591 $14.79
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. 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:
F16
February 27, February 26, February 24,
Fiscal Years Ended 1999 2000 2001
- ------------------ ------------ ------------ ------------
Expected volatility 29.3% 29.3% 31.0%
Dividend yield 2.0 2.3 3.4
Risk-free interest rate 5.2 6.2 4.5
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 24, 2001 follows:
Fiscal Years Ended
-------------------------------------------------------------------------------
February 27, 1999 February 26, 2000 February 24, 2001
----------------------- ----------------------- -----------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding
at beginning
of year 60,000 $14.92 80,000 $15.41 95,000 $15.21
Granted 20,000 16.88 15,000 14.13 20,000 10.50
------ ------ ------
Outstanding
at end of yr. 80,000 $15.41 95,000 $15.21 115,000 $14.39
------ ------ ------
Options
exercisable
at year-end 60,000 80,000 95,000
Weighted average
fair value of
options granted
during the year $4.63 $3.97 $2.54
The following table summarizes information about stock options outstanding
at February 24, 2001:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Shares Contractual Average Shares Average
Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ------ ----------- ----------- ---------- ----------- ----------
$10.50-15.75 75,000 6.8 Yrs. $12.89 55,000 $13.76
$16.88-18.00 40,000 6.2 Yrs. $17.19 40,000 $17.19
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 17,727 shares, 22,857 shares, and 18,207 shares in
fiscal 2001, 2000, and 1999, respectively.
F17
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended
-----------------------------------------------------------------------------------------
Fiscal 2001 May 27, 2000 August 26, 2000 November 25, 2000
---------------------------- ---------------------------- ---------------------------
As Reported As Restated(1) As Reported As Restated(1) As Reported As Restated(1)
----------- -------------- ----------- -------------- ----------- --------------
Revenues $35,175 $41,973 $41,629 $45,824 $98,340 $104,138
Income (loss) before
income taxes (2,476) (2,207) (2,134) (2,453) 11,330 9,097
Income (loss) before
cumulative effect (1,585) (1,413) (1,366) (1,570) 6,551 5,122
Cumulative effect of
accounting change (640)
Net income (loss) (1,585) (2,053) (1,366) (1,570) 6,551 5,122
Income (loss) per common
share before cumulative effect $ (0.18) $ (0.16) $ (0.16) $ (0.18) $ 0.76 $ 0.59
Cumulative effect per share $ (0.07)
Net income (loss) per
common share - Basic $ (0.18) $ (0.23) $ (0.16) $ (0.18) $ 0.76 $ 0.59
Net income (loss) per
common share - Diluted $ (0.18) $ (0.23) $ (0.16) $ (0.18) $ 0.75 $ 0.59
Market price of shares
outstanding
- -market high $10 5/8 $11 1/8 $11 1/4
- -market low 9 1/8 9 3/4 8 5/8
Fiscal Quarters Ended Year Ended
Fiscal 2001 February 24, 2001 February 24, 2001
------------------------------------ -------------------------------------
Before Restatement(2) As Reported Before Restatement(2) As Reported
--------------------- ----------- --------------------- -----------
Revenues $72,024 $95,159 $247,168 $287,094
Income (loss) before
income taxes (6,668) (4,261)(3) 52 175 (3)
Income (loss) before
cumulative effect (4,418) (2,877)(3) (818) (738)(3)
Cumulative effect of
accounting change (640)
Net income (loss) (4,418) (2,877)(3) (818) (1,378)(3)
Income (loss) per common
share before cumulative effect $ (0.51) $ (0.33)(3) $ (0.09) $ (0.09)(3)
Cumulative effect per share $ (0.07)
Net income (loss) per
common share - Basic $ (0.51) $ (0.33)(3) $ (0.09) $ (0.16)(3)
Net income (loss) per
common share - Diluted $ (0.51) $ (0.33)(3) $ (0.09) $ (0.16)(3)
Market price of shares
outstanding
- -market high $9 5/16
- -market low 6 1/4
Fiscal Quarters Ended
----------------------------------------------------------------------------------------
Fiscal 2000 May 28, 1999 August 28, 1999 November 27, 1999
--------------------------- --------------------------- ---------------------------
As Reported Pro forma(1) As Reported Pro forma(1) As Reported Pro forma(1)
----------- ------------ ----------- ------------ ----------- ------------
Revenues $29,118 $34,175 $35,499 $39,306 $105,630 $110,456
Income (loss) before
income taxes (4,054) (3,979) (2,712) (2,969) 15,350 12,645
Net income (loss) (2,554) (2,506) (1,708) (1,873) 9,670 7,939
Net income (loss) per
common share - Basic $ (0.28) $ (0.27) $ (0.19) $ (0.20) $ 1.06 $ 0.87
Net income (loss) per
common share - Diluted $ (0.28) $ (0.27) $ (0.19) $ (0.20) $ 1.06 $ 0.87
Market price of shares
outstanding
- -market high $14 7/8 $14 5/8 $13 5/16
- -market low 12 12 1/2 12 3/4
Fiscal Quarters Ended Year Ended
Fiscal 2000 February 26, 2000 February 26, 2000
--------------------------- ------------------------------
As Reported Pro forma(1) As Reported Pro forma(1)(2)
----------- ------------ ----------- ---------------
Revenues $71,527 $96,155 $241,773 $280,092
Income (loss) before
income taxes 1,766 4,453(4) 10,350 10,150(4)
Net income (loss) 881 2,601(4) 6,289 6,161(4)
Net income (loss) per
common share - Basic $ 0.10 $ 0.29(4) $ 0.69 $ 0.67(4)
Net income (loss) per
common share - Diluted $ 0.10 $ 0.29(4) $ 0.69 $ 0.67(4)
Market price of shares
outstanding
- -market high $12 5/8
- -market low 10 1/2
1. Restatements have been made to the previously reported information
for the quarters ended May 27, 2000, August 26, 2000 and November 25,
2000 to reflect the adoption of Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements". Additionally,
reclassifications have been made to all periods prior to the quarter ended
February 24, 2001 to reflect the provisions of Emerging Issues Task Force
("EITF") No. 00-10, "Accounting for Shipping and Handling Fees and Costs"
that resulted in additional revenues of $39,156 and $39,271 for the years
ended February 24,2001 and February 26,2000, respectively. See Note 1.
2. For comparison purposes only, fiscal 2001 fourth quarter and full year
information, which was reported after implementation of the two new
pronouncements, have been presented to exclude the impact of SAB 101 and
EITF 00-10. Also for fiscal 2000, pro forma data has been included to show
the impact of SAB 101, which would have resulted in a reduction of revenues
of $952 for the fiscal year. For fiscal 1999, pro forma revenues, net
income and earnings per share would have been $297,104, $3,182, and $.35,
respectively.
3. See Note 15 - Restructuring and Other Charges
4. See Note 12 - Other Income (Expense)
F18
12. OTHER INCOME (EXPENSE)
During the fourth quarter of fiscal 2000, the Company recorded a pre-tax
gain of $665,000 ($404,000 after-tax), which resulted from the sale of stock
received from the demutualization of an insurance company and a pre-tax gain of
$81,000 ($49,000 after-tax) on the sale of Company-owned land.
During the third quarter of fiscal 1999, the Company recorded a pre-tax
charge of $1.4 million related to the termination of the installation of a
computer system, ($920,000 after-tax).
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.
13. STOCK REPURCHASE PROGRAMS
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 24, 2001, the Company had
repurchased 751,392 shares of its common stock under the current 1.5 million
share repurchase program at a total cost of $8,215,000.
14. 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
F19
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 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.
15. RESTRUCTURING AND OTHER CHARGES
During fiscal 2001, the Company recorded pretax restructuring and other
charges aggregating $2,050,000, which included severance pay for a former
officer ($360,000) and for a restructuring plan ($1,690,000). The Company
approved and began implementation of a restructuring plan (the "Plan") in
February 2001 to streamline operations and reduce costs in light of decreased
consumer spending and an uncertain economy. Under the Plan, the Company
eliminated approximately 12% of its salaried workforce and is consolidating its
Las Vegas Call Center into its National Distribution Center located in Virginia
Beach. The costs of the Plan are as follows (dollars in thousands):
Severance and related benefits $ 687
Write-off of leasehold improvements,
equipment 317
Lease termination costs 686
------
$1,690
======
No amounts relating to the Plan were paid as of February 24, 2001.
The Company expects to make the remaining severance payments by October 15,
2001. With respect to the lease costs, the Company currently estimates that it
may take in excess of 12 months to enter into a suitable sublease for the Las
Vegas facility.
F20
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 operations, 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 24,
2001 and February 26, 2000, and the results of their operations and their cash
flows for each of the three years in the period ended February 24, 2001, in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America, 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.
As discussed in Note 1 of the Notes to the Consolidated Financial
Statements, as of February 27, 2000, the Company changed its method of
accounting for revenue recognition as a result of the adoption of the provisions
of Staff Accounting Bulletin No. 101, "Revenue Recognition".
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 20, 2001
F21
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-18849, 33-37694, 33-71250, 33-71252,
333-36467, 333-48951, 333-62283, 333-63559 and 333-91299) of Lillian Vernon
Corporation of our report dated April 20, 2001 relating to the financial
statements, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
May 23, 2001
F22