FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 23, 2002
OR
[ ] FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 1-9637
LILLIAN VERNON CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2529859
- --------------------------- --------------------------------------
(STATE OF INCORPORATION) (I. R. S. EMPLOYER IDENTIFICATION NO.)
ONE THEALL ROAD, RYE, NEW YORK 10580
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (914) 925-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
---------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE.
NAME OF EACH EXCHANGE ON WHICH REGISTERED
-----------------------------------------
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 16, 2002) WAS APPROXIMATELY $39,463,941.
AS OF MAY 16, 2002, THERE WERE 8,322,622 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 17, 2002.
THE INDEX TO EXHIBITS APPEARS ON PAGE 30.
LILLIAN VERNON CORPORATION
FISCAL 2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.....................................................................................1
Item 2. Properties...................................................................................9
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...................................22
Item 8. Financial Statements and Supplementary Data.................................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........23
PART III
Item 10. Directors and Executive Officers of the Registrant, Executive Compensation..................23
Item 11. Security Ownership of Certain Beneficial Owners and Management..............................23
Item 12. Certain Relationships.......................................................................23
Item 13. Related Transactions........................................................................23
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K...........................24
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, houseware,
gardening, 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 2002, the Company published 37 catalog
editions, and mailed approximately 162,100,000 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 26 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 from its websites, www.lillianvernon.com and www.ruedefrance.com.
The following table reflects the Company's history in the areas of
circulation of its catalogs, number of orders received and average revenue per
order received, over the last five fiscal years.
1
Fiscal Years Ended
-----------------------------------------------------------------------
February February February February February
23,2002(4) 24,2001(4) 26,2000 27,1999 22,1998(3)
---------- ---------- -------- -------- -----------
Number of catalogs
mailed (000's) (1) ... 162,100 172,948 165,855 188,678 178,917
Number of catalog
editions ............. 37 39 33 34 34
Number of orders
received (000's) ..... 4,062 4,467 4,627 4,812 4,936
Average revenue per
order received (2) ... $ 56.85 $ 57.82 $ 55.56 $ 55.23 $ 54.13
- ----------
(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) Fiscal 2002 and Fiscal 2001 include Rue de France statistics. Rue de
France, Inc. was acquired by the Company in April 2000.
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 2002)
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 (5 editions in fiscal 2002) 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 2002) features
toys, games, baby products, room decor and fashion accessories for children.
The Company's Christmas Memories Catalog (2 editions in fiscal 2002) 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 2002) features many of the
best-selling products from all Lillian Vernon catalogs.
The Company's Personalized Gifts Catalog (3 editions in fiscal 2002)
features gift items, all offered with personalization.
The Lillian Vernon Gardening Catalog (2 editions in fiscal 2002) features a
cross section of functional garden products, as well as garden and floral-themed
decorative accessories.
The Rue de France Catalog (4 editions in fiscal 2002) features upscale room
decor and customized window treatments and draperies with a French country
theme.
The number of products offered in each catalog varies from 300 products to
800 products depending on the time of the year.
The Company first offered its products over the Internet in 1995, and has
continually upgraded its site since that time. In fiscal 2002, the Company
launched a completely redesigned and reengineered e-commerce Internet site,
www.lillianvernon.com. This state-of-the-art website
3
incorporates features that represent industry-wide best practices. These
include: sophisticated cross-sell and promotional-sell merchandising
capabilities, real-time inventory availability of products, the ability to view
print catalogs online, and the opportunity for customers to see and buy all of
the products that the Company offers. The Company anticipates that on-line usage
by its existing customer base will continue to grow, and is now marketing the
site in ways that will expand the customer base. In fiscal 2002, orders received
through the web site increased 33% over fiscal 2001, and comprised approximately
13% of total orders.
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 2002 approximated 4.0% of net revenues.
The Company purchases its products from approximately 1,100 suppliers.
Approximately 85% 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 France. 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 7% 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 6% 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 material
disruptions to date.
Marketing
The Company maintains a proprietary customer data base containing
information with respect to over 26 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 162,100,000 catalogs
were mailed in fiscal 2002, 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 offers customers special promotions such as gifts with
purchase, free shipping and handling, and a deferred billing option, in order to
increase sales.
4
The Company believes that the size of its computerized data base and its
ability to analyze it, as well as rented lists, and to select recipients for a
particular mailing are important factors in its success. The Company analyzes
various factors (e.g., frequency of order, date of last order, order size, type
of products purchased and demographic data) to rank its customer and prospect
groups in order to target its catalog mailings to those most likely to purchase
its merchandise. The Company updates its data base to include new customers and
eliminate non-responders.
The Company periodically conducts focus groups and participates in customer
surveys to enhance its marketing efforts.
Third-Party Sales Programs
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 revenue to the Company for every magazine sold and upon
the completion of the billing cycles of the magazine subscriptions. The Company
recently began a similar program, selling a third-party membership program. The
program offers its members discounts at restaurants, movies and other national
chains.
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 over 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 to handle peak season order volume. The Company receives
telephone and internet orders on a 24-hour basis, seven days a week, with orders
entered directly into the computer. Orders received by mail 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 2002. The Company also ships orders via UPS Second Day Air
delivery as an option to its customers, for
5
an extra charge. In addition, the Company ships orders via UPS Next Day Air as
an option to Internet 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 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 believes that its ability to personalize many
types of products using a variety of personalization techniques, generally
within several days' processing time, gives it a unique niche in the retail
marketplace. 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 2002, the Company spent
approximately $20.6 million in total paper costs and also spent approximately
$54.1 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. There have been postal rate increases of
9.1% in late fiscal 2001 and 1.6% in July of 2001. Another increase of
approximately 7.5% is scheduled to occur in June 2002. No assurance can be given
that postal rates will not continue to increase in the future. The Company also
considers the use of alternative parcel delivery services besides the U.S.
Postal Service, but has determined that the U.S. Postal Service offers the best
balance of cost and service level for the bulk of its shipments. The other
carriers also have a history of significant rate increases from year to year.
The price of paper is dependent upon supply and demand in the marketplace.
The Company's paper cost per page decreased approximately 12% in fiscal 2002 as
compared to fiscal 2001, and is expected to be approximately 7% lower in fiscal
year 2003 as compared to fiscal 2002.
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 collar hedge contract to provide
price protection in the form of a floor and ceiling in purchasing certain of its
paper requirements. This agreement may no longer be operative due to the
bankruptcy filing of the counterparty, Enron North America Corporation ("Enron")
(see Item 7(A) - "Quantitative and
6
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.
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
7
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 2003.
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 23, 2002, the Company and its subsidiaries employed
approximately 1,400 employees. During the peak holiday season, the Company
utilizes approximately 5,300 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
8
commencing on February 27, 2000. No such payments have been required to date.
Rue de France, Inc., a 17 year-old retailer of home furnishings and
accessories, markets its products through catalogs, a web site and retail stores
in Newport and Portsmouth, Rhode Island. Rue de France, Inc.'s founder 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
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 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 Company has
attempted to sublease the facility, but has been unable to do so. On April 24,
2002, the Company decided to reactivate the facility as a seasonal call center
for the upcoming peak holiday selling season.
The Company leases 11,000 square feet in an office building in New
Rochelle, New York, which has been used as a seasonal telemarketing
9
facility. The current lease runs through December 31, 2002. The Company does not
plan to renew this lease at the end of its term.
The Company leases eighteen retail locations, which principally serve as
outlet stores, in the states of Virginia, New York, Delaware, South Carolina,
Rhode Island, Vermont and Tennessee. The typical retail store is approximately
3,000 square feet. The retail store leases expire from fiscal 2003 through
fiscal 2007, 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.
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 cent.
Quarter Ended High Low
------------- ---- ---
May 27, 2000 ............................. $10.63 $9.13
August 26, 2000 .......................... 11.13 9.75
November 25, 2000 ........................ 11.25 8.63
February 24, 2001 ........................ 9.32 6.25
May 26, 2001 ............................. 8.75 5.60
August 25, 2001 .......................... 9.10 7.01
November 24, 2001 ........................ 9.10 7.06
February 23, 2002 ........................ 7.75 6.52
As of May 16, 2002, there were 364 registered holders of the Company's
Common Stock.
The Company paid 41 consecutive quarterly cash dividends on its common
stock since an initial quarterly dividend of five cents ($.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. Subsequently, the dividend was reduced to four cents ($.04) per
share payable on March 1, 2002. At its February 28, 2002 meeting, the Board of
Directors voted to discontinue the regular quarterly cash dividend effective
after the payment of the March 1, 2002 dividend to conserve cash for
reinvestment in the business. The Company will evaluate its dividend policy on
an ongoing basis.
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 authorized 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, 2002, the Company
had repurchased 1,178,442 shares, at a total cost of approximately $11.4 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
23, 2002 24, 2001 26, 2000 27, 1999 28, 1998
-------- ---------- --------- -------- --------
Operating Results (1)
- -----------------
(000's)
Revenues(2) ...................... $ 259,634 $ 287,094 $ 281,044 $ 296,384 $ 297,704
Income (loss) before
income taxes ................... (13,598) 175 10,350 5,079 14,740
Net income (loss)(2)- ............ (9,089) (1,378) 6,289 3,139 9,728
Per Share
Net income (loss)-
Basic(2) ....................... $ (1.08) $ (.16) $ .69 $ .34 $ 1.02
Net income (loss)-
Diluted ........................ (1.08) (.16) .69 .34 1.01
Book value ....................... 11.01 12.38 12.75 12.37 12.46
Dividends ........................ .28 .32 .32 .32 .29
Financial Position At
Year End (000's)
Cash and cash
equivalents .................... $ 24,894 $ 34,180 $ 35,364 $ 31,834 $ 26,136
Working capital .................. 52,280 62,723 74,568 69,996 73,951
Total assets ..................... 120,757 139,749 141,318 138,206 144,359
Long-term
obligations(3) ................. -- -- -- -- 1,394
Stockholders' equity ............. 91,413 106,973 114,378 113,264 116,839
Average shares
outstanding (000's)
Basic .......................... 8,389 8,740 9,128 9,221 9,532
Diluted ........................ 8,389 8,740 9,130 9,319 9,636
- ----------
(1) Fiscal year 1998 contained 53 weeks.
(2) 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 1998, 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.
Similarly, pro forma revenues, net income and earnings per share would have
been $297,104, $3,182, and $.35, respectively, for the year ended February
27, 1999 and $280,092, $6,161, and $.67 respectively, for the year ended
February 26, 2000.
(3) Includes current installments and long-term portions of debt and capital
lease obligations.
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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.
Fiscal Years Ended
------------------------------------------
February 23, February 24, February 26,
2002 2001 2000
------------ ------------ ------------
Revenues ......................... 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs ...... (59.4) (56.7) (55.7)
Selling, general and
administrative expenses ....... (45.8) (43.0) (41.2)
Restructuring and other charges.. -- (0.7) --
Other income .................... -- -- 0.3
----- ----- -----
Operating income (loss) ..... (5.2) (0.3) 3.3
Interest income .................. 0.3 0.5 0.4
Financing expense ................ (0.3) (0.1) --
----- ----- -----
Income (loss) before taxes ....... (5.2) 0.1 3.7
(Provision for) benefit from
income tax .................. 1.7 (0.3) (1.5)
Cumulative effect of
accounting change ........... -- (0.2) --
----- ----- -----
Net income (loss) ............... (3.5)% (0.5)% 2.2%
----- ----- -----
Fiscal 2002 Compared to Fiscal 2001
Revenues for fiscal 2002 were $259.6 million compared to $287.1 million
last year, a decrease of $27.5 million, or 9.6%. Revenues decreased primarily
because of a 6% reduction in catalog circulation, and 5% lower revenue per
catalog mailed, as a result of the recession, the effects of September 11th and
consumer concerns about anthrax in the mail. While the overall number of orders
received by the Company during fiscal 2002 declined 9.2%, orders received
through the Company's website increased 33% from the prior year, and represent
13% of total orders in fiscal 2002 as compared to 9% last year. The Company
believes most of this increase is due to customers now ordering from its website
as opposed to ordering by telephone.
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 2002 were $154.3 million, a decrease of
$8.3 million, or 5.1% compared to $162.6 million for fiscal 2001. This decrease
was primarily a result of the decline in the number of orders received by the
Company in fiscal 2002. As a percentage of revenue, product and delivery costs
increased from 56.7% in fiscal 2001 to
13
59.4% in fiscal 2002. This increase was due primarily to postal rate increases
on packages shipped to customers, effective in both January 2001 and July 2001,
and reduced order volume, which resulted in less productivity and lower
absorption of fixed costs in the Company's National Distribution Center. Another
postal rate increase will be effective in June 2002. The Company intends to
recover a portion of this increase by raising the shipping and handling charges
to its customers beginning in July 2002.
Selling, general and administrative ("SG&A") expenses were $118.9 million
in fiscal 2002 compared to $123.4 million in fiscal 2001, a decrease of $4.5
million, or 3.7%. The principal reasons for the decline in these expenses were a
6% reduction in catalog circulation, and a salary and workforce reduction plan
that was implemented by the Company to cut costs (see Note 15 to Consolidated
Financial Statements). As a percentage of revenue, SG&A increased from 43.0% in
fiscal 2001 to 45.8% in fiscal 2002 primarily because of weaker response to the
Company's catalogs. Specifically, the Company's mailings generated 5% less
revenue per catalog in fiscal 2002 than fiscal 2001. Additionally, the
continuing investment in Lillian Vernon Online led to an increase in internet
development costs.
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 decreased by approximately 12% in fiscal 2002 compared to fiscal
2001, and is expected to be lower again for fiscal 2003 due to a softer paper
market. Postal rates, however, continue to rise. A postal rate increase of 9% in
January 2001 was followed by a further increase in July 2001 of 1.6%, and there
is another postal rate increase of approximately 7.5% expected in June 2002. To
mitigate the impact of the postal rate increases, the Company takes steps such
as reducing the weight of the catalogs, making adjustments to catalog page
counts, and increasing the density of the photographs. Overall, the Company's
average cost to produce and mail a catalog is expected to be slightly higher in
fiscal 2003 compared to 2002.
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 collar hedge contract to provide
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). FAS No. 133 requires that all
derivative financial instruments be recorded on the balance sheet as either
assets or liabilities at fair value. Changes in the fair value of derivatives
are recorded each period in earnings or other comprehensive earnings (losses),
depending on whether a derivative is designated and effective as part of a hedge
transaction and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in other comprehensive earnings (losses) are
reclassified to earnings in the periods in which earnings are affected by the
hedged item. The collar hedge contract had been designated as and was effective
as a hedge through November 2001. During the nine months ended November 24,
2001, the ineffectiveness related to the collar hedge contract was not
significant. In view of Enron's financial situation, the
14
Company discontinued hedge accounting during the fourth quarter. As a result,
amounts previously recorded in accumulated other comprehensive losses under
hedge accounting of $1.736 million (net of taxes of $1.064 million) through
November 24, 2001 will continue to be reclassified to earnings in the period in
which earnings are affected by the paper costs. Further, any changes in the fair
value of the contract subsequent to November 24, 2001 will be recorded in
earnings. The fair value of the contract at February 23, 2002 was $2.820
million, which is included in other liabilities in the accompanying balance
sheet. Total amounts recorded in earnings for the year ended February 23, 2002
approximated $700,000. The Company is hedging transactions through August 2005.
As of February 23, 2002, the Company estimates derivative losses of
approximately $1 million (net of taxes) reported in accumulated other
comprehensive losses will be reclassified to earnings within the next 12 months.
The counterparty, Enron, has filed for bankruptcy in the fourth quarter of
fiscal 2002. To date, the Company has not been entitled to receive any payments
from Enron under the hedge agreement. Presently, the Company does not know what
effect Enron's bankruptcy will have upon the collar hedge contract. The
Company's management and legal counsel are currently exploring the status of the
contract.
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 its operations into the National Distribution Center located in
Virginia Beach. The costs of the Plan included $ .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. The restructuring and other charges reduced fiscal
2001 net income by $1.3 million net-of-tax ($.15 per share), and had no material
impact on fiscal 2002. As of the end of fiscal 2002, all employee-related costs
and asset write-offs have been recorded. The Company has attempted to sublease
the Las Vegas facility, but has been unable to do so. On April 24, 2002, the
Company decided to reactivate the facility as a seasonal call center for its
upcoming peak holiday selling season.
Interest income in fiscal 2002 was $.7 million compared to $1.5 million in
fiscal 2001. The decrease of $.8 million was due primarily to lower interest
rates on the Company's cash investments as well as lower amounts invested.
Financing expense was $.8 million in fiscal 2002, compared to $.3 million in
fiscal 2001, principally because a $.5 million financing expense was recorded in
the fourth quarter of fiscal 2002 to reflect the valuation of the paper hedge
contract. There were no short-term borrowings during fiscal year 2002, 2001 or
2000.
The Company's effective income tax benefit rate of 33.2% in fiscal 2002 is
primarily due to the ability of the Company to carry back its fiscal 2002 loss
to obtain a refund of prior years' taxes. As of February 23, 2002, the Company
has recorded a net deferred tax asset of $1.4 million. The ultimate realization
of the Company's net deferred tax asset is dependent upon the generation of
sufficient amounts of future taxable
15
income during the years in which the related net expenses become deductible. The
Company's ability to generate sufficient taxable income in future periods is
contingent upon a number of factors, including general economic conditions and
the Company's sales levels in future periods. Although management has developed
plans which should enable the Company to achieve sufficient income levels in the
future, there can be no assurance that the plans will be successful in enabling
the Company to generate sufficient taxable income in the periods in which the
net expenses become deductible. However, the Company has developed certain tax
planning strategies relating to the sale and leaseback of certain of its
facilities, which could be employed, if necessary, to generate taxable income in
amounts sufficient enough to offset the impact of the net deductible expenses.
Accordingly, the Company has not recorded a valuation allowance with respect to
the net deferred tax asset as of February 23, 2002. The Company's unusually high
effective income tax rate in fiscal 2001 was primarily due to recognizing the
expiration of charitable contribution tax carryforwards. The Company recorded
additional tax expense of $.8 million in fiscal 2001 related to the expiration
of these credits, which reduced earnings per share by $.09.
Fiscal 2001 results included a cumulative effect of an accounting change
(after-tax) of $.6 million, or $.07 per share, as a result of the adoption of
SEC Staff Accounting Bulletin No. 101, relating to revenue recognition (see Note
1).
The net loss for fiscal year 2002 was $(9.1) million, or $(1.08) per share,
compared to the net loss of $(1.4) million, or $(.16) per share, in fiscal 2001,
which, 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, would have had net income of $1.4 million or $.15 per share.
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
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
16
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.
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).
Interest income in fiscal 2001 was $1.5 million compared to $1.2 million in
fiscal 2000. The increase of $.3 million was due primarily to higher interest
rates on the Company's cash investments. Financing expense was $.3 million in
both fiscal 2001 and fiscal 2000. 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
17
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.
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.
Liquidity and Capital Resources
The Company's balance sheet and liquidity are strong. Cash and cash
equivalents totaled $24.9 million as of February 23, 2002; the current ratio was
3.3:1 at February 23, 2002 compared to 3.2:1 at February 24, 2001. The increase
in the current ratio was due principally to higher prepayments and other current
assets (specifically, higher refundable income taxes), and lower accounts
payable and accrued expenses as of February 23, 2002.
In fiscal 2002, the Company's operating activities generated funds of $1.5
million, compared to $10.3 million in fiscal 2001. The principal reason for the
reduction in cash generated was the increase in the net loss from $(1.4) million
in fiscal 2001 to $(9.1) million in fiscal 2002. The Company carefully monitored
and controlled inventory during fiscal 2002, and reduced year-end inventory by
$5.3 million (16.7%). The Company did not borrow money in fiscal 2002; its
working capital needs were met with funds on hand and cash generated from
operations.
In fiscal 2002, the Company's use of funds for investing activities totaled
$5.0 million. Capital spending in fiscal 2002 was $1.1 million. These
expenditures were made principally to upgrade the Company's computer equipment
and distribution machinery and equipment. In addition, the Company completed the
development of its new website for a cost of $4.0 million ($3.9 million related
to software). The website project was funded from cash on hand. For fiscal 2003,
the Company is not planning any major capital projects and will continue to
implement tight controls on capital expenditures and make commitments for items
that have a positive return on investment.
18
The Company has commitments under non-cancelable operating leases for real
estate and equipment that total $9.5 million for the five fiscal years ending
2003 through 2007.
The Company generated $.6 million of cash from the issuance of common stock
through its employee benefit plans during fiscal 2002, compared to $.7 million
in fiscal 2001.
The Company paid 41 consecutive quarterly cash dividends through fiscal
2002. At its December 19, 2001 meeting, the Board of Directors announced a 50%
reduction in the regular cash dividend of $.08 per share to $.04 per share,
payable on March 1, 2002. At its February 28, 2002 meeting, the Board of
Directors voted to discontinue the regular quarterly cash dividend effective
after the payment of the March 1, 2002 dividend to conserve cash for
reinvestment in the business. The Company will evaluate its dividend policy on
an ongoing basis in view of its earnings, financial position, capital
requirements, and other relevant factors. Dividends in fiscal 2002 totaled $2.3
million, or $.28 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 2002, the Company repurchased 426,650 shares under
the current program at a total cost of $3.2 million. As of February 23, 2002,
the Company had purchased 1,178,042 shares since inception of the current
program at a total cost of $11.4 million. Prior to this, the Company completed
an earlier stock repurchase program in which it repurchased 1 million shares for
a total cost of $15.2 million. Cumulatively from October 1995 through February
23, 2002, the Company has spent $26.6 million to repurchase its stock in the
open market.
The Company has amended its revolving credit facility. The amended credit
facility provides for a maximum credit line of $27 million for the Company's
first and second quarters, and $32 million for the third and fourth quarters.
The credit line can be used for general corporate purposes, including working
capital needs, capital expenditures, and up to $12 million of letters of credit.
There is a ninety-day period in which the Company must have no amounts
outstanding (except letters of credit) under the facility each year. It expires
in fiscal 2006. At the Company's option, interest is payable at LIBOR plus 100
basis points, prime rate, bankers' acceptance rate plus 100 basis points, or a
fixed rate. The fees payable under the revised credit line range from 5 basis
points on the letters of credit to 37.5 basis points on the available line. 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.
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 targets during the five fiscal years
19
commencing February 27, 2000. No such payments have been required to date.
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 June 2001, the Financial Accounting Standards Board issued FAS No. 141,
"Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets".
FAS No. 141 addresses accounting for business combinations, including the
elimination of pooling of interests, the recognition of intangible assets, and
modifications to certain disclosure requirements. FAS No. 142 primarily
addresses the accounting that must be applied to goodwill and intangible assets
subsequent to acquisition. In addition, the Company will be required to conduct
an annual review of goodwill for potential impairment. The adoption of FAS Nos.
141 and 142 for fiscal 2003 will not have a material impact on the Company's
financial statements since goodwill amortization for fiscal 2002 totaled
$120,400.
Forward Looking Statements
Except for the 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, cash
flows and/or level of business. Such statements represent the Company's current
expectations only and are subject to certain risks, assumptions and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated or projected. Among the factors that could
cause actual results to materially differ include the overall strength of the
economy, the level of consumer confidence and spending, customer preferences,
circulation changes and other initiatives, increased competition in the direct
mail industry and from the growing Internet market, changes in government
regulations, risks associated with the social, political, economic and other
conditions affecting foreign sourcing, including possible disruptions caused by
the current global situation, and possible future increases in operating costs
including postage and paper costs.
20
Critical Accounting Policies and Estimates
In addition to the forward-looking estimates and assumptions mentioned in
the paragraph above, the accounting policies listed below represent the
Company's most critical accounting policies with respect to the financial
results reported.
Provision for Inventory Allowance
The Company records a charge to cost of goods sold in the current year
related to products in inventory that it expects to sell below its cost. These
estimates are based on assumptions of future sales, prices, and disposition
plans. If actual sales are less favorable than those projected, additional
write-downs may be required.
Catalog Costs
Catalog costs are deferred and amortized over the estimated useful life of
the catalog, generally three months. The estimated life is based on the
projected total revenues of the catalog. The related costs of the catalog are
expensed according to the percentage that actual revenue as of an income
statement date comprises of total revenue projected at that time. Should this
future sales projection prove to be incorrect, catalog costs may not be properly
matched to the proper periods that include the revenues.
Income Taxes
As discussed above, the Company's realization of future benefits from its
net deferred tax asset of $1.4 million recorded on the books as of February 23,
2002 is dependent upon the generation of sufficient amounts of future taxable
income during the years in which the net expenses become deductible. The
Company's ability to generate sufficient taxable income in future periods is
contingent upon a number of factors, including general economic conditions and
the Company's sales levels in future periods. Although management has developed
plans which should enable the Company to achieve sufficient income levels in the
future, there can be no assurance that the plans will be successful in enabling
the Company to generate sufficient taxable income in the periods in which the
net expenses become deductible. However, the Company has developed certain tax
planning strategies relating to the sale and leaseback of certain of its
facilities, which could be employed, if necessary, to generate taxable income in
amounts sufficient enough to offset the impact of the net deductible expenses.
Accordingly, the Company has not recorded a valuation allowance with respect to
the net deferred tax asset as of February 23, 2002. If the Company was not able
to structure such a sale and leaseback arrangement with a suitable buyer, an
adjustment to the deferred tax asset would be charged to earnings in the period
such a determination was made.
21
Capitalized Software Costs
Capitalized software costs are amortized over estimated useful lives of two
to five years. Should it be decided that the actual useful lives of these assets
are less than those estimated due to technology changes or operability of the
software or other reason, there would be a significant negative impact on the
future earnings of the Company.
Paper Hedge Contract
The Company has a collar hedge contract with a third party. (See Item
7a-"Quantitative and Qualitative Disclosure about Market Risk"). Since the end
of the third quarter, when the Company discontinued hedge accounting, any
changes in the fair value of the contract will be recorded in earnings. The fair
value of the Company's contract is based on projected future paper prices. The
price of paper is dependent upon supply and demand in the marketplace. If paper
prices vary from those estimated, the Company would be required to record an
additional liability. The current treatment of the contract may result in
greater earnings volatility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings are impacted by fluctuating paper prices. In order
to partially mitigate this risk, the Company implemented a price protection
program by entering into a collar hedge contract. This contract covers certain
grades 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 would be no payment
to either party to the contract. If paper prices exceed the established ceiling,
the Company is entitled to be reimbursed by the counterparty for the excess.
Conversely, if paper prices fall below the established floor, the Company must
pay the counterparty. The Company did not pay a premium at the inception of the
contract. The contract has an expiration date of August 2005.
The collar hedge contract had been designated as and was effective as a
hedge through November 2001. During the nine months ended November 24, 2001, the
ineffectiveness related to the collar hedge contract was not significant. Enron
filed for bankruptcy in the fourth quarter of fiscal 2002. In view of Enron's
financial situation, the Company discontinued hedge accounting during the fourth
quarter. As a result, amounts previously recorded in accumulated other
comprehensive losses under hedge accounting of $1.736 million (net of taxes of
$1.064 million) through November 24, 2001 will continue to be reclassified to
earnings in the period in which earnings are affected by the paper costs.
Further, any changes in the fair value of the contract subsequent to November
24, 2001 will be recorded in earnings. The fair value of the contract at
February 23, 2002 was $2.820 million, which is included in other liabilities in
the accompanying balance sheet. Total amounts recorded in earnings for the year
ended February 23, 2002 approximated $700,000. The Company is hedging
transactions through August 2005. As of February 23, 2002, the
22
Company estimates derivative losses of approximately $1 million (net of taxes)
reported in accumulated other comprehensive losses will be reclassified to
earnings within the next 12 months. Changes in future paper prices will result
in changes in the fair market value of the contract, thus the Company cannot
predict what, if any, financing expenses under the contract may be incurred in
fiscal 2003.
To date, the Company has not been entitled to receive any payments from
Enron under the hedge agreement. Presently, the Company does not know what
effect Enron's bankruptcy will have upon the collar hedge contract. The
Company's management and legal counsel are currently exploring the status of the
contract.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are found in Part IV at
pages F-1 through F-21 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report on pages F-1 through F-21.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 23, 2002 and February 24, 2001 ..................F- 2
- -Statements of Operations for the three Fiscal Years ended
2002, 2001, and 2000.......................................................F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 2002, 2001, and 2000....................................F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 2002, 2001, and 2000.................................................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.
A Form 8-K report was filed by the Registrant on March 5, 2002. The Form 8-K was
filed under Item 5 as related to a Regulation FD disclosure.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
24
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, with First and Second Amendment to
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)
25
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.10 - Trademark Registrations for Lillian Vernon Corporation
- Service Mark and Logo.................................. (1)
10.16 - Sublease between Fred P. and David C. Hochberg and
Company - New Rochelle facility.......................... (5)
10.17 - Lillian Vernon Corporation 1993 Stock Option Plan for
Non-Employee Directors................................... (7)
10.21 - 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, including amendments 5 and 6
to Amended Revolving Credit Agreement.................... (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)
26
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 North
America Corporation (f/k/a 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 dated March 31, 2000......... (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.............................. See Index
to
Exhibits
23 - Consent of PricewaterhouseCoopers LLP .................. See Index
to
Exhibits
(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.
27
(3) Filed with Annual Report on Form 10-K for the year ended February 29,
1992 and incorporated by reference herein.
(4) Amendment filed with Quarterly Report on Form 10-Q for the quarter ended
May 30, 1992 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement - see (1) above.
(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. Amendments Numbers 5 and 6 to
the Amended Revolving Credit Agreement are filed herewith.
(9) Filed with Registration Statement on Form S-8 on September 26, 1997 (File
No. 333-36467) and on Forms S-8 on December 19, 2001 (File Nos. 333-75426
and 333-75428) 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. Amendments Numbers 1
and 2 to the Profit Sharing Plan are filed herewith.
(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.
28
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 17, 2002 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 Chairman of the Board May 17, 2002
- -------------------------- of Directors (Principal
Lillian Vernon Executive Officer)
/s/ WAYNE A. PALLADINO Senior Vice President- May 17, 2002
- -------------------------- Chief Financial Officer
Wayne A. Palladino (Principal Financial and
Accounting Officer)
/s/ JONAH GITLITZ
- -------------------------- Director May 17, 2002
Jonah Gitlitz
/s/ DAVID C. HOCHBERG
- -------------------------- Vice President - Public May 17, 2002
David C. Hochberg Affairs and Director
/s/ JOEL SALON
- -------------------------- Director May 17, 2002
Joel Salon
/s/ BERT W. WASSERMAN
- -------------------------- Director May 17, 2002
Bert W. Wasserman
/s/ ELIZABETH M. EVEILLARD
- -------------------------- Director May 17, 2002
Elizabeth M. Eveillard
/s/ RICHARD A. BERMAN
- -------------------------- Director May 17, 2002
Richard A. Berman
29
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 23, FEBRUARY 24,
ASSETS 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents ............................. $ 24,894 $ 34,180
Accounts receivable, net of allowances of $534 and $687 14,956 19,483
Merchandise inventories ............................... 26,618 31,944
Deferred income taxes ................................. 293 262
Prepayments and other current assets .................. 8,081 5,582
--------- ---------
Total current assets ............................. 74,842 91,451
Property, plant and equipment, net ........................ 30,798 33,841
Deferred catalog costs .................................... 6,445 8,797
Deferred income taxes ..................................... 1,113
Other assets .............................................. 7,559 5,660
--------- ---------
Total ............................................ $ 120,757 $ 139,749
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses ........... $ 19,176 $ 22,844
Cash overdrafts ....................................... 489 1,301
Customer deposits ..................................... 2,897 4,583
--------- ---------
Total current liabilities ........................ 22,562 28,728
Deferred income taxes ..................................... 766
Other liabilities ......................................... 6,782 3,282
--------- ---------
Total liabilities ................................ 29,344 32,776
--------- ---------
Commitments (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
2002 and 2001 .................................... 104 104
Additional paid-in capital ............................ 31,332 31,332
Retained earnings ..................................... 87,387 99,312
Accumulated other comprehensive losses, net of taxes .. (1,500)
Treasury stock, at cost - 2,088,731 shares in 2002
and 1,745,668 shares in 2001 ..................... (25,910) (23,775)
--------- ---------
Total stockholders' equity ....................... 91,413 106,973
--------- ---------
Total ............................................ $ 120,757 $ 139,749
========= =========
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 23, FEBRUARY 24, FEBRUARY 26,
2002 2001 2000
------------ ------------ ------------
Revenues ....................................................... $ 259,634 $ 287,094 $ 281,044
Costs and expenses:
Product and delivery costs ................................ 154,294 162,647 156,640
Selling, general and administrative expenses .............. 118,864 123,398 115,792
Restructuring and other charges ........................... 2,050
Other income ................................................... (746)
--------- --------- ---------
273,158 288,095 271,686
--------- --------- ---------
Operating income (loss) ............................... (13,524) (1,001) 9,358
Interest income ................................................ 718 1,464 1,248
Financing expense .............................................. (792) (288) (256)
--------- --------- ---------
Income (loss) before provision for
(benefit from) income taxes ...................... (13,598) 175 10,350
Provision for (benefit from) income taxes:
Current ................................................... (3,613) 434 3,998
Deferred .................................................. (896) 479 63
--------- --------- ---------
(4,509) 913 4,061
--------- --------- ---------
Income (loss) before cumulative effect ................ (9,089) (738) 6,289
--------- --------- ---------
Cumulative effect of accounting change, net of
income taxes of $360 ...................................... 640
--------- --------- ---------
Net income (loss) ..................................... $ (9,089) $ (1,378) $ 6,289
--------- --------- ---------
Basic and diluted net income (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (1.08) $ (0.09) $ 0.69
Cumulative effect of accounting change .................... (0.07)
--------- --------- ---------
Net income (loss) per common share - Basic and Diluted ......... $ (1.08) $ (0.16) $ 0.69
--------- --------- ---------
Weighted average number of common shares - Basic ............... 8,389 8,740 9,128
--------- --------- ---------
Weighted average number of common shares and
common share equivalents - Diluted ........................ 8,389 8,740 9,130
--------- --------- ---------
See Notes to Consolidated Financial Statements.
F-3
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TREASURY STOCK
---------------------- PAID -IN RETAINED COMPREHENSIVE ----------------------
TOTAL SHARES AMOUNT CAPITAL EARNINGS LOSSES SHARES AMOUNT
-------- ----------- -------- -------- --------- ----------- ----------- --------
BALANCE, FEBRUARY 27, 1999 ........ $113,264 10,389,674 $ 104 $ 31,322 $ 100,760 $ 0 (1,231,806) $(18,922)
Exercise of non-qualified
stock options ................ 319 (48) 23,867 367
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan ............... 286 (111) 25,992 397
Shares issued for 401-k Plan
matching contribution ...... 465 (121) 38,414 586
Purchase of treasury stock ........ (3,332) (275,900) (3,332)
Dividends ($.32 per share) ....... (2,922) (2,922)
Other ............................. 9 9
Net income ........................ 6,289 6,289
-------- ----------- ------- -------- --------- ----------- ----------- --------
BALANCE, FEBRUARY 26, 2000 ........ 114,378 10,389,674 104 31,331 103,847 0 (1,419,433) (20,904)
-------- ----------- ------- -------- --------- ----------- ----------- --------
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 ($.32 per share) ........ (2,780) (2,780)
Other ............................. 1 1
Net loss .......................... (1,378) (1,378)
-------- ----------- ------- -------- --------- ----------- ----------- --------
BALANCE, FEBRUARY 24, 2001 ........ 106,973 10,389,674 104 31,332 99,312 0 (1,745,668) (23,775)
-------- ----------- ------- -------- --------- ----------- ----------- --------
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan ............... 104 (102) 15,754 206
Shares issued for 401-k Plan
matching contribution ...... 491 (388) 67,833 879
Purchase of treasury stock ........ (3,220) (426,650) (3,220)
Dividends ($.28 per share) ........ (2,346) (2,346)
Change in fair value of derivatives
accounted for as a hedge .. (1,500) (1,500)
Net loss .......................... (9,089) (9,089)
-------- ----------- ------- -------- --------- ----------- ----------- --------
BALANCE, FEBRUARY 23, 2002 ........ $ 91,413 10,389,674 $ 104 $ 31,332 $ 87,387 $ (1,500) (2,088,731) $(25,910)
-------- ----------- ------- -------- --------- ----------- ----------- --------
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 23, FEBRUARY 24, FEBRUARY 26,
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ............................................................. $ (9,089) $ (1,378) $ 6,289
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 .............................................................. 3,838 4,021 4,321
Amortization .............................................................. 1,690 827 250
Restructuring, net of cash payments ....................................... 301 1,690
Loss (gain) on disposal of assets ......................................... 89 (81)
(Increase) decrease in accounts receivable ................................ 4,527 2,981 (1,310)
(Increase) decrease in merchandise inventories ............................ 5,326 4,229 (7,226)
(Increase) decrease in prepayments and other current assets ............... (2,499) (508) 5,430
(Increase) decrease in deferred catalog costs ............................. 2,352 (1,442) 568
(Increase) decrease in other assets ....................................... 715 (56) 593
Increase (decrease) in trade accounts payable and accrued expenses ........ (3,668) 1,752 879
Decrease in customer deposits ............................................. (1,686) (377) (57)
Increase (decrease) in income taxes payable ............................... (3,116) 2,404
Increase (decrease) in other liabilities .................................. 700 353 (120)
Increase (decrease) in deferred income taxes .............................. (978) 569 54
-------- -------- --------
Net cash provided by operating activities ..................... 1,529 10,274 11,994
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment .................................... (1,096) (2,703) (1,621)
Purchases of software ......................................................... (3,936) (518) (606)
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 ......................... (5,032) (5,974) (2,127)
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in cash overdrafts ........................................ (812) 543 (1,162)
Dividends paid ................................................................ (2,346) (2,780) (2,922)
Payments to acquire treasury stock ............................................ (3,220) (3,914) (3,332)
Reissuance of treasury stock for stock options and employee benefit plans ..... 595 666 1,070
Other ......................................................................... 1 9
-------- -------- --------
Net cash used in financing activities ......................... (5,783) (5,484) (6,337)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... (9,286) (1,184) 3,530
-------- -------- --------
Cash and cash equivalents at beginning of period ................................ 34,180 35,364 31,834
-------- -------- --------
Cash and cash equivalents at end of period ...................................... $ 24,894 $ 34,180 $ 35,364
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes ................................................................ $ 542 $ 3,707 $ 1,612
-------- -------- --------
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 2002, fiscal 2001 and
fiscal 2000 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 $24.3 million
and $33.4 million as of February 23, 2002 and February 24, 2001, respectively,
are classified as held-to-maturity securities, and as such, are stated at cost
plus accrued interest, which approximates fair value.
Revenue Recognition
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 and the related costs
classified as cost of goods sold (product and delivery costs). Previously, the
Company recorded shipping and handling fees as a reduction of the related
expenses in the "product and delivery costs" line on the statement of
operations. All periods shown have been reclassified to reflect the provisions
of EITF No. 00-10.
F-6
There was no effect on net income as a result of adopting EITF No. 00-10.
Merchandise Inventories
Merchandise inventories are stated at the lower of average 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 $1,043,000 in fiscal 2002,
$515,000 in fiscal 2001, and $113,000 in fiscal 2000.
Capitalized software costs are included in other assets, and amounted to
$12,942,000 and $9,006,000 at February 23, 2002 and February 24, 2001,
respectively. Accumulated amortization of capitalized software costs amounted to
$9,341,000 and $8,298,000 at February 23, 2002 and February 24, 2001,
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 ($2.5 million) is being amortized over a period of twenty years. The
accumulated amortization of the excess purchase price at February 23, 2002
amounted to $240,000.
In June 2001, the Financial Accounting Standards Board issued FAS No. 141,
"Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets".
FAS No. 141 addresses accounting for business combinations, including the
elimination of pooling of interests, the recognition of intangible assets, and
modifications to certain disclosure requirements. FAS No. 142 primarily
addresses the accounting that must be applied to goodwill and intangible assets
subsequent to acquisition. In addition, the Company will be required to conduct
an annual review of goodwill for potential impairment. The adoption of FAS Nos.
141 and 142 for fiscal 2003 will not have a material impact on the Company's
financial statements, since goodwill amortization for fiscal 2002 totaled
$120,400.
F-7
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.
Basic and diluted earnings(loss) per share were calculated as follows
(amounts in thousands):
Fiscal Years Ended
-------------------------------------------
February 23, February 24, February 26,
2002 2001 2000
------------ ------------ ------------
Net income (loss)-Basic and Diluted ...... $(9,089) $(1,378) $ 6,289
------- ------- -------
Weighted average number of outstanding
shares for Basic EPS .................... 8,389 8,740 9,128
Add: incremental shares from
stock option exercises .................. -- -- 2
------- ------- -------
Weighted average number of outstanding
shares for Diluted EPS .................. 8,389 8,740 9,130
------- ------- -------
In fiscal 2002, 2001, and 2000, options on 1,736,000, 1,427,000, and 1,097,000
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 accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions, including those relating to
deferred catalog costs, inventory allowance, and income taxes, which 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.
F-8
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.
Comprehensive Losses
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which was adopted and became
effective for the Company in Fiscal 2002, requires that all derivative financial
instruments be recorded on the balance sheet as either assets or liabilities at
fair value. Changes in the fair value of derivatives are recorded each period in
earnings or accumulated other comprehensive earnings (losses), depending on
whether a derivative is designated and effective as part of a hedge transaction
and, if it is, the type of hedge transaction. Gains and losses on derivative
instruments reported in accumulated other comprehensive earnings (losses) are
reclassified as earnings in the periods in which earnings are affected by the
hedged item. The collar hedge contract had been designated as and was effective
as a hedge through the third quarter of Fiscal 2002. In the fourth quarter, due
to the bankruptcy of the counterparty, Enron North America Corporation
("Enron"), the contract was no longer deemed to be an effective hedge. The
Company has recorded accumulated other comprehensive losses of $1,500,000 (net
of taxes) as of February 23, 2002 related to the collar hedge contract for the
period it was effective as a hedge.
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 2002 presentation.
F-9
2. INCOME TAXES
The current income tax provision (benefit) consists of (dollars in
thousands):
Fiscal Years Ended
-------------------------------------------
February 23, February 24, February 26,
2002 2001 2000
------------ ------------ ------------
Current:
Federal ..................... $(3,595) $ 409 $ 3,642
State and local ............. (18) 25 356
------- ------- -------
(3,613) 434 3,998
------- ------- -------
Deferred .................... (896) 479 63
------- ------- -------
Total provision (benefit) ... $(4,509) $ 913 $ 4,061
------- ------- -------
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 were not material for fiscal 2000.
The Company's effective income tax rate is reconciled to the U.S. federal
statutory tax rate as follows:
Fiscal Years Ended
--------------------------------------
February 23, February 24, February 26,
2002 2001 2000
------------ ------------ ------------
Federal statutory tax rate ............... (34.0%) 34.0% 34.0%
State income taxes, net of
federal tax effect ..................... (1.0) 9.3 2.3
Non-deductible items ..................... .3 47.0 --
Change in valuation allowance-
charitable contributions carryforward ... 1.3 445.7 1.9
Other, net ............................... .2 (14.3) 1.0
----- ----- ----
(33.2%) 521.7% 39.2%
----- ----- ----
The deferred tax assets and deferred tax liabilities recorded on the
accompanying balance sheets are as follows (dollars in thousands):
February 23, 2002 February 24, 2001
------------------------ -----------------------
Deferred Tax Deferred Tax
------------------------ -----------------------
Assets Liabilities Assets Liabilities
Current:
Catalog deferrals ............ $ -- $ 2,268 $ -- $ 2,869
Charitable contributions ..... -- -- 1,396 --
Valuation allowance-
charitable contributions ..... -- -- (1,232) --
Inventory capitalization ..... 1,135 -- 1,213 --
Accrued expenses ............. 1,102 -- 1,507 --
Other ........................ 377 53 256 9
------- ------- ------- -------
Total current .............. 2,614 2,321 3,140 2,878
------- ------- ------- -------
Non-current:
Depreciation/amortization .... -- 2,340 -- 2,604
Deferred compensation ........ 1,698 -- 1,456 --
Collar hedge for paper ....... 1,183 -- -- --
State net operating loss
carryforward ............. 109 -- -- --
Other ........................ 463 -- 382 --
------- ------- ------- -------
Total non-current .......... 3,453 2,340 1,838 2,604
------- ------- ------- -------
Total ...................... $ 6,067 $ 4,661 $ 4,978 $ 5,482
======= ======= ======= =======
F-10
The valuation allowance at February 24, 2001 related to the Company's
assessment of the amount of charitable contributions carryforward that would
expire unused. As of February 23, 2002, the Company's charity carryforwards have
expired.
As of February 23, 2002, the Company has recorded a net deferred tax asset of
$1.4 million. The ultimate realization of the Company's net deferred tax asset
is dependent upon the generation of sufficient amounts of future taxable income
during the years in which the related net expenses become deductible. The
Company's ability to generate sufficient taxable income in future periods is
contingent upon a number of factors, including general economic conditions and
the Company's sales levels in future periods. Although management has developed
plans which should enable the Company to achieve sufficient income levels in the
future, there can be no assurance that the plans will be successful in enabling
the Company to generate sufficient taxable income in the periods in which the
net expenses become deductible. However, the Company has developed certain tax
planning strategies relating to the sale and leaseback of certain of its
facilities, which could be employed, if necessary, to generate taxable income in
amounts sufficient enough to offset the impact of the net deductible expenses.
Accordingly, the Company has not recorded a valuation allowance with respect to
the net deferred tax asset as of February 23, 2002.
3. CREDIT FACILITIES
The Company has amended its revolving credit facility. The amended credit
facility provides for a credit line totaling $27 million for the Company's first
and second quarters, and $32 million for the third and fourth quarters. The
credit facility can be used for general corporate purposes, including working
capital needs, capital expenditures, and up to $12 million of letters of credit.
There is a ninety-day period in which the Company must have no amounts
outstanding (except letters of credit) under the facility each year. The credit
facility expires in fiscal 2006. At the Company's option, interest is payable at
LIBOR plus 100 basis points, prime rate, bankers' acceptance rate plus 100 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.
F-11
In fiscal 2002, 2001 and 2000, 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. The fees payable under the
revised credit line range from 5 basis points on the letters of credit to 37.5
basis points on the available line.
No amounts were outstanding under the Company's credit facilities during
fiscal years 2002, 2001, and 2000 or as of February 23, 2002 or February 24,
2001 (excluding letters of credit).
The Company had outstanding letters of credit approximating $4,443,000 and
$5,534,000 as of February 23, 2002 and February 24, 2001, respectively, for the
purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of
$1,495,000 and $1,646,000 as of February 23, 2002 and February 24, 2001,
respectively. Prepayments and other current assets also include refundable
income taxes of $4,162,000 and $31,200 as of February 23, 2002 and February 24,
2001, respectively.
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
Fiscal Years Ended
----------------------------
February 23, February 24,
2002 2001
------------ ------------
Trade accounts payable ...... $ 6,558 $ 9,049
Salaries and compensation ... 2,326 2,616
Accrued refunds ............. 1,308 1,360
Restructuring charges ....... 387 1,690
Other ....................... 8,597 8,129
------- -------
$19,176 $22,844
------- -------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
Fiscal Years Ended
---------------------------
February 23, February 24,
2002 2001
------------ ------------
Land and buildings ............................. $32,975 $32,884
Machinery and equipment ........................ 30,284 32,685
Furniture and fixtures ......................... 4,162 4,093
Leasehold improvements ......................... 977 1,130
------- -------
Total property, plant & equipment, at cost ... 68,398 70,792
Less: accumulated depreciation & amortization .. 37,600 36,951
------- -------
Property, plant & equipment, net ............... $30,798 $33,841
------- -------
F-12
6. PAPER HEDGE CONTRACT
The Company's earnings are impacted by fluctuating paper prices. In order
to partially mitigate this risk, the Company entered into a collar hedge
contract. This contract covers certain grades 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 would be no payment to either party to the contract. If paper
prices exceed the established ceiling, the Company is entitled to be reimbursed
by the counterparty for the excess. Conversely, if paper prices fall below the
established floor, the Company must pay the counterparty. The Company did not
pay a premium at the inception of the contract. The contract has an expiration
date of August 2005.
FAS No. 133 requires that all derivative financial instruments be recorded on
the balance sheet as either assets or liabilities at fair value. Changes in the
fair value of derivatives are recorded each period in earnings or other
comprehensive earnings (losses), depending on whether a derivative is designated
and effective as part of a hedge transaction and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in other
comprehensive earnings (losses) are reclassified to earnings in the periods in
which earnings are affected by the hedged item. The collar hedge contract had
been designated as and was effective as a hedge through November 2001. During
the nine months ended November 24, 2001, the ineffectiveness related to the
collar hedge contract was not significant.
In view of the financial situation of Enron, the counterparty, the Company
discontinued hedge accounting during the fourth quarter. As a result, amounts
previously recorded in accumulated other comprehensive losses under hedge
accounting of $1.736 million (net of taxes of $1.064 million) through November
24, 2001 will continue to be reclassified to earnings in the period in which
earnings are affected by the paper costs. Further, any changes in the fair value
of the contract subsequent to November 24, 2001, will be recorded in earnings.
The fair value of the contract at February 23, 2002 was $2.820 million, which is
included in other liabilities in the accompanying balance sheet. Total amounts
recorded in earnings for the year ended February 23, 2002 approximated $700,000.
The Company is hedging transactions through August 2005. As of February 23,
2002, the Company estimates derivative losses of approximately $1 million (net
of taxes) reported in accumulated other comprehensive losses will be
reclassified to earnings within the next twelve months.
Enron has filed for bankruptcy in the fourth quarter of fiscal 2002. To date,
the Company has not been entitled to receive any payments from Enron under the
hedge agreement. Presently, the Company does not know what effect Enron's
bankruptcy will have upon the collar hedge contract. The Company's management
and legal counsel are currently exploring the status of the contract.
F-13
Hedging activity affected accumulated other comprehensive losses, net of income
taxes, during the year ended February 23, 2002 as follows (dollars in
thousands):
Balance as of February 25, 2001 .................. $ --
Change in fair value through November 24, 2001 ... (1,736)*
Derivative losses transferred to earnings ........ 236
-------
Balance as of February 23, 2002 .................. $(1,500)
-------
* Represents a non-cash charge to accumulated other comprehensive losses of
$1,736 (net of taxes of $1,064) through November 24, 2001.
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.
The Company has operating lease agreements for certain computer and other
equipment used in its operations, for its outlet store locations, and for its
call centers, with existing lease terms ranging from fiscal 2003 through fiscal
2007, and various renewal options through fiscal 2011. Most of the store leases
also provide for payment of common charges such as maintenance and real estate
taxes. Ten stores require the payment of additional rent based upon a percentage
of sales. Minimum rental payments required under lease agreements, including the
Corporate Headquarters sublease and the Las Vegas Call Center lease, are as
follows (dollars in thousands):
Fiscal Year
-----------
2003 ............... $3,732
2004 ............... 2,677
2005 ............... 2,222
2006 ............... 652
2007 ............... 200
------
$9,483
------
Rent expense for fiscal 2002, 2001, and 2000 amounted to $4,969,000,
$4,598,000, and $4,536,000, respectively, which included $43,000, $12,000 and
$3,000 in fiscal 2002, 2001 and 2000, 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
F-14
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
period commencing on February 27, 2000. No such payments have been required to
date. The excess of the purchase price over the fair value of the tangible net
assets of approximately $2.5 million is included in other assets, and was
amortized on a straight-line basis over 20 years. Commencing in fiscal 2003,
amortization of excess purchase price will no longer be required under FAS No.
142. Amortization in fiscal 2002 totaled $120,400. 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 2002,
2001, and 2000 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 2002, 2001 and 2000 were $472,000, $529,000, and $479,000,
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 $1,143,000 in fiscal 2002, $817,000 in fiscal 2001
and $930,000 in fiscal 2000.
10. STOCK COMPENSATION PLANS
At February 23, 2002, 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
F-15
consistent with the requirements of Statement of Financial Accounting Standards
No. 123, the Company's net income (loss) and earnings (loss) per share would
have been equal to the pro forma amounts indicated below (dollars in thousands,
except per share amounts):
February 23, February 24, February 26,
Fiscal Years Ended 2002 2001 2000
- ------------------ ------------ ------------ ------------
Net income (loss) ....... As reported $(9,089) $(1,378) $ 6,289
Pro forma $(9,498) $(1,780) $ 5,892
Basic and Diluted
earnings (loss) ....... As reported $ (1.08) $ (0.16) $ 0.69
per share ............. Pro forma $ (1.13) $ (0.20) $ 0.65
The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan, and a total of 2,275,000 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 Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 350,000 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 for both plans are estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:
February 23, February 24, February 26,
Fiscal Years Ended 2002 2001 2000
- ------------------ ------------ ------------ ------------
Range of expected volatility ........ 32.4%-32.9% 31.0% 29.3%
Dividend yield ...................... 3.8% 3.4% 2.3%
Range of risk-free interest rates ... 3.5%- 3.8% 4.5% 6.2%
Expected option term ................ 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate:
Performance Unit Plan ....... 25.0% 25.0% 25.0%
Non-Employee Director Plan .. 6.0% 6.0% 6.0%
F-16
A summary of the Company's stock option activity for the three years ended
February 23, 2002 follows:
Fiscal Years Ended
-----------------------------------------------------------------------------------
February 23, 2002 February 24, 2001 February 26, 2000
-------------------------- ------------------------- -----------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
--------- ---------- --------- ---------- --------- ----------
Outstanding
at beginning
of year ............ 1,429,600 $13.29 1,167,501 $14.77 978,004 $14.99
Granted ............ 439,000 6.96 467,500 9.79 276,500 13.86
Exercised .......... -- -- -- -- (23,867) 13.36
Forfeited .......... (132,350) 11.83 (205,401) 13.78 (63,136) 14.68
--------- --------- ---------
Outstanding
at end of year ..... 1,736,250 $11.80 1,429,600 $13.29 1,167,501 $14.77
--------- --------- ---------
Options
exercisable
at year-end ........ 1,025,168 875,591 822,498
--------- --------- ---------
Weighted-average
fair value of
options granted
during the year..... $ 1.05 $ 1.51 $ 2.58
------ ------ ------
The following table summarizes information about stock options outstanding
at February 23, 2002:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted Avg.
Range of Remaining Weighted Weighted
Exercise Shares Contractual Average Shares Average
Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ------------ ----------- ------------- ---------- ----------- ----------
$6.92- 9.82 .... 744,250 8.7 Yrs. $ 8.15 106,497 $ 9.73
$10.50-15.75 .... 719,000 4.3 13.46 645,671 13.44
$15.94-18.13 .... 273,000 4.1 17.37 273,000 17.39
The Company also has an Employee Stock Purchase Plan, with a total of
200,000 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 15,754 shares, 17,727 shares, and 22,857 shares in
fiscal 2002, 2001, and 2000, respectively.
F-17
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended Year Ended
------------------------------------------------------------------------------------------------
Fiscal 2002 (1) May 26, 2001 August 25, 2001 November 24, 2001 February 23, 2002 February 23, 2002
Revenues ........................... $ 39,693 $ 36,828 $ 87,022 $ 96,091 $ 259,634
Income (loss) before
income taxes ..................... (6,295) (5,528) 4,433 (6,207) (13,598)
Net income (loss) .................. (3,903) (3,428) 2,584 (4,343) (9,089)
Net income (loss) per ............
common share - Basic and Diluted.. $ (0.46) $ (0.41) $ 0.31 $ (0.52) $ (1.08)
Market price of shares
outstanding
- -market high ....................... $ 8.75 $ 9.10 $ 9.10 $ 7.75
- -market low ........................ 5.60 7.01 7.06 6.52
Fiscal Quarters Ended Year Ended
-----------------------------------------------------------------------------------------------
Fiscal 2001 (1) May 27, 2000 August 26, 2000 November 25, 2000 February 24, 2001 February 24, 2001
Revenues ........................... $ 41,973 $ 45,824 $ 104,137 $ 95,159 $ 287,094
Income (loss) before
income taxes ..................... (2,207) (2,453) 9,097 (4,261)(2) 175 (2)
Income (loss) before
cumulative effect ................ (1,413) (1,570) 5,122 (2,877)(2) (738)(2)
Cumulative effect of
accounting change ................ (640) (640)
Net income (loss) .................. (2,053) (1,570) 5,122 (2,877)(2) (1,378)(2)
Income (loss) per common
share before cumulative effect.... $ (0.16) $ (0.18) $ 0.59 $ (0.33)(2) $ (0.09)(2)
Cumulative effect per share ...... $ (0.07) $ (0.07)
Net income (loss) per
common share - Basic and Diluted.. $ (0.23) $ (0.18) $ 0.59 $ (0.33)(2) $ (0.16)(2)
Market price of shares
outstanding
- -market high ....................... $ 10.63 $ 11.13 $ 11.25 $ 9.32
- -market low ........................ 9.13 9.75 8.63 6.25
1. All periods reflect the adoption of SAB No. 101 and EITF No. 00-10; See
Note 1.
2. See Note 15 - Restructuring and Other Charges
F-18
12. OTHER INCOME
During the fourth quarter of fiscal 2000, the Company recorded a pretax
gain of $665,000 ($404,000 net of taxes), which resulted from the sale of stock
received from the demutualization of an insurance company and a pretax gain of
$81,000 ($49,000 net of taxes) on the sale of Company-owned land.
13. STOCK REPURCHASE PROGRAMS
The Company completed a repurchase program for one million shares of its
common stock in September 1998, for a total cost of $15,228,000. On October 7,
1998, the Board of Directors authorized the Company to repurchase up to one
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 23, 2002, the Company had repurchased 1,178,042 shares of
its common stock under the current 1.5 million share repurchase program at a
total cost of $11,435,000.
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 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.
F-19
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) to streamline
operations and reduce costs in light of decreased consumer spending and an
uncertain economy (the "Plan"). Under the Plan, the Company eliminated
approximately 12% of its salaried workforce and consolidated its Las Vegas Call
Center into its National Distribution Center located in Virginia Beach. Changes
in the accrued balance for Plan costs during the twelve months ended February
23, 2002 were as follows (dollars in thousands):
Initial Asset
Plan Write-offs Balance as of
Cost & Expenditures Adjustment February 23,2002
------- -------------- ---------- ----------------
Severance and
related benefits ......... $ 687 ($ 687) $ --
Write-off of leasehold
improvements and
equipment ................ 317 (204) (113) --
Lease termination costs ... 686 (299) 387
------- ------- ------- -------
$ 1,690 ($1,190) ($ 113) $ 387
------- ------- ------- -------
In the second quarter ended August 25, 2001, a $113,000 restructuring
credit was recorded due to the favorable disposition of certain fixed assets.
The Company has attempted to sublease the Las Vegas Call Center, but has
been unable to do so. On April 24, 2002, the Company decided to reactivate the
facility as a seasonal call center for the upcoming peak holiday selling season.
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lillian Vernon Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of 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 23,
2002 and February 24, 2001, and the results of their operations and their cash
flows for each of the three years in the period ended February 23, 2002, 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 our opinion.
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 22, 2002
F-21
Index to Exhibits
Exhibit
- -------
10.1 First and Second Amendments to Lillian Vernon Corporation Profit
Sharing Plan.
10.21 Amendments Number 5 and 6 to Amended Revolving Credit Agreement.
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLC.