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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] For the fiscal year ended February 22, 1997
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.)
543 Main Street. New Rochelle, New York 10801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (914) 576-6400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ----------------------
Common Stock, par value $.01 per share. American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this Chapter) is not contained herein and will
not be contained, to the best of registrant's knowledge, in definitive proxy
information statement, incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value for the Voting Stock held by non-affiliates (based
upon the closing price on May 15, 1997) was approximately $84,749,094.
As of May 15, 1997, there were 9,610,166 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 25, 1997.
The Index to Exhibits appears on page 20.
LILLIAN VERNON CORPORATION
FISCAL 1997 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 8. Financial Statements and Supplementary Data......... 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . ....... 18
PART III
Item 10. Directors and Executive Officers of the
Registrant.......................................... 19
Item 11. Executive Compensation.............................. 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................... 19
Item 13. Certain Relationships and Related Transactions...... 19
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K................................. 20
i
PART I
Item 1. Business
General
Lillian Vernon Corporation (the "Company") is a direct mail specialty
catalog company concentrating on the marketing of gift, household, gardening,
kitchen, Christmas and children's products. The Company, a predecessor of which
was founded in 1951, seeks to provide customers with reasonably priced products
that can be differentiated from competitive products either by design, price or
personalization. In fiscal 1997, the Company published 29 catalog editions, and
mailed over 175,000,000 catalogs to past and prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of items 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 approximately 19,400,000 people,
approximately 3,200,000 of whom have placed orders with the Company during the
last fiscal year. The Company derives a small portion of its revenue from the
rental of its customer list to direct mail marketers and other organizations.
The Company also has a Special Markets division, which makes sales of premium
and incentive products, and sells to the wholesale market. The Company also
operates a chain of outlet stores which offers Lillian Vernon merchandise.
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
27, 1993 26, 1994 25, 1995 24, 1996 22, 1997
-------- -------- -------- -------- --------
Number of
catalogs
mailed (000's)
(1) 140,999 150,846 179,424 179,539 175,232
Number of
catalog
editions 20 22 26 27 29
Number of
orders received
(000's) 4,405 4,602 4,940 4,903 4,643
Average revenue
per order
received (2) $40.09 $42.86 $44.61 $49.31 $52.57
Catalogs and Products
The Company's catalogs are designed to capture the reader's 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 assistants. The Company also hires free-lance
designers and photographers, as needed. The combination of in-house and
free-lance staff enables the Company to maintain both quality control and
flexibility in the production of its catalogs.
The Company varies the quantity of its catalog mailings based on the
selling season, anticipated revenue per catalog, the price of paper and its
capacity to process and fill orders. In the first half of fiscal 1997, the
Company reduced catalog circulation due to substantially higher paper costs.
During the second half of fiscal 1997 the Company experienced lower paper prices
and increased catalog circulation for its busy fall selling season. In fiscal
1997, the Company produced 29 different catalog editions.
- --------------------
(1) "Number of catalogs mailed" includes catalog circulation to the extent
that related orders are received in that fiscal year.
(2) "Average revenue per order received" is not reduced for
refunds, nor does it include shipping and handling or
applicable state sales tax remittance.
2
The following table provides a breakdown of the various catalogs mailed, and
information regarding the range of pages and product offerings in each:
No. of
No. of No. of Products
Catalog Title Editions Pages Offered
- ------------- -------- ------ -------
Lillian Vernon Spring
Catalog 5 84-96 550-650
Lillian Vernon Fall
Catalog 5 96-120 650-850
Private Sale 5 84-108 400-550
Lilly's Kids 5 44-84 200-400
Christmas Memories 3 48-64 250-350
Neat Ideas/Welcome
to an Organized Home 3 48 300
Lillian Vernon's
Kitchen 2 56-72 350-400
Personalized Gift 1 64 575
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 what the Company believes
to be 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 creative 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.
Private Sale catalogs are primarily used to sell merchandise
overstocks and deleted products, and are generally mailed only to customers in
the Company's data base.
The Company's Lilly's Kids catalogs feature toys, games, baby
products, room decor and fashion accessories for children.
3
The Company's Christmas Memories catalogs are targeted to the
Christmas season and offer ornaments, holiday decor, gifts, cards and many
unique and exclusive products.
The Company's Welcome to an Organized Home and its recently introduced
Neat Ideas catalogs, offer a variety of home decor, organizational products and
housewares.
The Company's Personalized Gift catalogs primarily feature gift items,
all offered with available personalization.
Lillian Vernon's Kitchen catalogs offer products which include
cookware, dinnerware, gourmet accessories, cutlery, glassware, flatware and
gifts, many of them exclusive to this catalog.
The Company has conducted limited test marketing of certain of its
catalogs in Japan. The Company is presently evaluating the results of the tests,
and is formulating further test market plans for the Japanese market.
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. An unsatisfied customer may return any product, even
if personalized, for any reason. The dollar value of refunds requested by
customers under the guarantee in fiscal 1997 was approximately 4.3% of revenues.
The Company purchases its products from approximately 1,000 suppliers.
Approximately 78% of the items sold by the Company are purchased abroad,
predominantly from manufacturers located in Taiwan, Hong Kong, the Peoples'
Republic of China, Italy, India and Germany. Most purchase orders are
denominated in U.S. dollars. Although no manufacturer is individually material
to the Company's operations, the Company buys significant quantities through
several Far East trading companies which utilize multiple manufacturers. Also,
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 and Hong Kong. As
a result of its reliance upon foreign suppliers, the Company is subject to the
risks of doing business abroad. To date, the Company has experienced no material
disruptions.
4
Marketing
The Company maintains a proprietary customer data base containing
information with respect to approximately 19,400,000 customers, gift recipients
and people who have requested its catalogs, approximately 3,200,000 of whom have
placed orders with the Company during the last fiscal year. In addition, the
Company rents from and exchanges lists or specific portions of lists with direct
marketers and other organizations in an attempt to gain new customers. Over
175,000,000 catalogs were mailed in fiscal 1997, of which approximately 82% were
mailed to people whose names were in the Company's proprietary data base and
approximately 18% were mailed to prospects derived from rented lists.
The Company believes that its ability to analyze its computerized data
base, as well as rented lists, and to select recipients for a particular mailing
are significant factors in its growth. 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 does not engage in unresearched,
speculative mailings.
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 mail, telephone, fax, and via
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 operated a temporary telephone
order call center in New Rochelle, New York during its peak selling season. The
Company receives telephone orders on a 24-hour basis, seven days a week, with
orders generally entered directly into the computer. Mail orders are opened,
compared to payments, batched and entered into computer terminals. The Company
uses its own data processing personnel to enter mail and telephone orders, as
well as service bureaus to enter telephone orders on an as-needed basis. During
fiscal 1997, the Company continued upgrading its computer capacity to enable it
to handle an increase in telephone orders.
All orders are processed, packed and shipped at the Company's National
Distribution Center. Approximately 52% of customer orders are shipped by United
Parcel Service, with nearly all other orders
5
being sent by the U.S. Postal Service. The Company also offers Federal Express
delivery as an option to its customers, for an extra charge.
The Company's newly expanded National Distribution Center, an 821,000
square foot facility located in Virginia Beach, Virginia, is owned and operated
by the Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services,
Inc. All of the Company's distribution, and a majority of its warehousing
activities, are conducted at this facility. The National Distribution Center is
generally operated on a five-day-a-week basis, except during the Holiday season,
when, depending upon demand, it may operate on a six or seven-day-a-week,
three-shift basis. Personalization of products is done at the Company's National
Distribution Center. The Company also owns a 154,000 square foot building in
Virginia Beach used for additional distribution and warehousing space.
The Company continually assesses the need to upgrade the capacity of
its 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 paper for boxes in which it ships its products. In fiscal 1997, the
Company spent approximately $31.2 million in total paper costs and
approximately $53.3 million in mailing catalogs and packages to its customers.
In recent years, the U.S. Postal Service has increased its rates for both the
mailing of catalogs and packages. The last postage increase in January 1995,
increased the postage rate paid by the Company by 14%. In July 1996, Postal
Classification Reform was implemented, which resulted in the Company paying
approximately 4% lower postal rates in fiscal 1997 as compared with the previous
fiscal year. No assurance can be given that postal rates will not increase in
the future. United Parcel Service has also increased its rates, with increases
occurring in February of 1995, 1996 and 1997. The price of paper is dependent
upon supply and demand in the marketplace. In fiscal 1996, the supply was
extremely tight, and the price of paper rose significantly. The Company began
fiscal 1997 with an inventory of paper which it had purchased earlier, at prices
substantially higher than the then prevailing rate. This increased the Company's
cost of doing business and caused the Company to strategically reduce catalog
circulation in the first half of fiscal 1997. The Company experienced lower
paper prices in the second half of the fiscal year and increased catalog
circulation for its busy fall selling season. While the Company has been able to
recover a portion of these cost increases through an increase in shipping and
handling charges, a reduction in the dimensions and weight of the catalogs,
circulation adjustments and improved efficiencies in shipping, the Company's
fiscal 1996 and 1997 earnings have been negatively affected by the higher costs
of
6
paper. 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 Private Sale catalogs, its outlet stores and through
special offers made to customers placing orders by telephone and online.
Seasonality
The Company's business is seasonal. Historically, a substantial
portion of the Company's revenues and net income have been realized during its
third and fourth fiscal quarters, which encompass the period September through
February. Revenues and net income have been lower during its first and second
fiscal quarters, comprising the period March through August. The Company
believes this is the general pattern associated with the mail order and retail
industries. 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 must comply 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 operations and its ability to continue to import merchandise at
required levels could be adversely affected. The Company cannot now predict the
likelihood of any such events occurring or the effect on its business of any
such event.
A number of the Company's products are purchased from sources located
in Hong Kong. On July 1, 1997, Hong Kong's status as a
7
British Crown Colony will end, with its rule reverting to the Peoples' Republic
of China. After assessing the situation, the Company does not anticipate any
disruptions in its sourcing of merchandise; however, no assurance can be given
that such change will not adversely affect the Company.
In the past, various states had taken action to require mail order
retailers to collect sales tax from residents in their states, even if the only
contact with such states is the mailing of catalogs into the states. On May 26,
1992, the Supreme Court ruled that state governments could not require out of
state mail order companies to collect and remit sales and use taxes without
Congressional authorization. Since that time, bills have periodically been
introduced in Congress which would allow states to impose sales tax collection
responsibility upon mail order companies. Management is unable to predict the
likelihood of Congress passing such legislation, and whether the Company will,
in the future, be required to collect sales and use taxes in the various states.
The collection of sales tax by mail order companies could have an adverse effect
on the Company's competitive position by increasing both its cost of doing
business and the effective price of its products to its customers. Although the
Company believes the aforementioned adverse effect will not be of a material
nature, the Company is unable, at this time, to predict the impact of the
collection of sales tax on its financial position and results of operations. The
Company does not expect that the collection of sales tax would have a material
effect on its liquidity.
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
significant 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 22, 1997, the Company and its subsidiaries employed
approximately 1,350 employees. During the peak Holiday season, the Company
employs approximately 4,000 employees 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 satisfactory.
8
Competition
The retail business in general, and mail order in particular, is
highly competitive. The Company competes primarily with other mail order
catalogs and secondarily with 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 product selection,
personalization, its proprietary customer list, the quality of its customer
service and its unconditional guarantee. Although the Company attempts to market
products not available elsewhere, many products similar to those marketed by the
Company can be purchased through other mail order catalogs or in retail stores.
Item 2. Properties
The Company's corporate headquarters and administrative offices are
located in a 41,000 square foot building in New Rochelle, New York. This
facility is leased from David C. and Fred P. Hochberg, under a net sub-lease
expiring on July 30, 1998, with a present annual net rental of $429,788. David
C. Hochberg is an officer, director and a principal stockholder of the Company.
Fred P. Hochberg, a former officer and director, is a significant stockholder of
the Company. The terms of such net lease provide that the Company is also
responsible for the payment of all real estate taxes, insurance and other
expenses associated with the operation and maintenance of the premises,
including structural repairs.
In fiscal 1997, the Company expanded its National Distribution Center
by an additional 335,000 square feet to 821,000 square feet. The facility is
located on approximately 62 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 financed the construction and equipping of this expansion
primarily through internally generated cash. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
All distribution and the majority of its warehousing
activities, as well as mail order processing, customer service and telemarketing
activities, are conducted at the Virginia Beach facility.
The Company also owns a 154,000 square foot building in Virginia Beach
which it utilizes for additional distribution and warehousing space.
The Company leases, on a year-to-year basis, 11,000 square feet in an
office building in New Rochelle, New York, which provides additional telephone
order facilities for its peak selling season and administrative office space.
9
The Company leases twelve retail locations, which serve as outlet
stores, in the states of Virginia, New York and Delaware. The typical retail
store is approximately 3,000 square feet, with leases expiring from fiscal 1998
through fiscal 2003, and various renewal options through fiscal 2008.
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
Other than ordinary routine litigation incidental to its business, no
legal proceedings to which the Company is a party, or to which any of its
properties are subject, are pending or are known to be contemplated, and the
Company knows of no material legal proceedings, pending or threatened, or
judgments entered against 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 sales prices
for each quarterly period for the two most recent years. The stock prices are
rounded to the nearest 1/8 point.
Quarter Ended High Low
- ------------- ---- ---
May 27, 1995 22 1/4 17 1/4
August 26, 1995 20 3/4 16 3/8
November 25, 1995 17 1/8 13 1/8
February 24, 1996 14 3/4 12 7/8
May 25, 1996 15 1/4 12 5/8
August 24, 1996 14 5/8 10 3/8
November 23, 1996 13 1/2 10 7/8
February 22, 1997 13 11 1/4
As of May 15, 1997, there were 393 registered holders of the
Company's Common Stock.
The Company has paid quarterly cash dividends on its common stock
since an initial quarterly dividend of five cents ($.05) per share was paid in
May of 1992. Since September 1, 1994, a quarterly dividend of seven cents ($.07)
per share has been paid to stockholders. The Board of Directors intends to
continue to declare and pay a quarterly cash dividend. The amount of any such
dividends will depend on the Company's earnings, financial position, capital
requirements and other relevant factors.
On October 10, 1995, the Board of Directors authorized the Company to
purchase up to 1 million shares of its common stock in the open market from time
to time, subject to market conditions. As of May 15, 1997, the Company has
purchased 385,100 shares at a total cost of approximately $5.1 million.
11
Item 6. Selected Financial Data
Fiscal Years Ended
-------------------------------------------------------------------------------
February February February February February
22, 1997 24, 1996 25, 1995 26, 1994 27, 1993
-------- -------- -------- -------- --------
Operating Results
(000's)
Revenues............. $240,053 $238,192 $222,211 $196,331 $172,932
Income before income
taxes.............. 8,112 8,425 19,134 19,495 16,323
Net income .......... 5,354 5,729 13,620 12,772 10,773
Per Share
Net income.......... $ .55 $ .59 $ 1.38 $ 1.35 $ 1.15
Book value.......... 11.90 11.75 11.44 10.22 9.07
Dividends........... .28 .28 .26 .20 .20
Financial Position At
Year End (000's)
Cash and cash
equivalents........ $22,746 $ 25,771 $ 38,779 $ 52,880 $ 51,063
Working capital ..... 70,739 76,721 79,068 72,665 59,698
Total assets......... 138,549 136,385 137,768 130,937 115,040
Long-term
obligations (1).... 2,883 4,335 5,755 7,150 8,525
Stockholders' equity 114,326 113,193 110,187 97,255 85,104
Average shares
outstanding
(000's) ............ 9,658 9,713 9,892 9,448 9,355
- --------------------
(1) Includes current installments and long-term portions of debt and
capital lease obligations.
12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following table sets forth, for the periods indicated, the results
of operations as a percentage of revenues. The table reflects certain
reclassifications made to conform to the current year's presentation.
Fiscal Years Ended
------------------------------
February February February
22, 1997 24, 1996 25, 1995
-------- -------- --------
Revenues............................. 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs.......... (46.0) (46.1) (44.2)
Selling, general and
administrative expenses............ (50.6) (50.3) (47.4)
------ ------ ------
Operating income.................... 3.4 3.6 8.4
Interest income...................... 0.2 0.6 0.5
Interest expense..................... (0.3) (0.3) (0.3)
Merger-related expenses.............. - (0.4) -
------ ----- ---
Income before income taxes.......... 3.3 3.5 8.6
Provision for income taxes........... (1.1) (1.1) (2.5)
------ ------ ------
Net income........................... 2.2% 2.4% 6.1%
------ ------ ------
Fiscal 1997 and Fiscal 1996
Revenues for fiscal 1997 were $240.1 million, an increase of $1.9
million, or 0.8% over fiscal 1996. Sales grew marginally, principally because
catalog circulation for the year was reduced by about 2% compared to fiscal
1996. Circulation was reduced in the first half of the fiscal year because
higher paper costs required the Company to more closely target its circulation
to those customers whose purchases were expected to cover the higher costs of
the catalogs. Average revenue per catalog rose by approximately 3%, driven by an
increase in average order value of almost 7%. The volume of orders shipped
decreased by approximately 5%.
Product and delivery costs include the cost of merchandise sold, the
cost of receiving, filling and shipping orders, reduced by shipping and handling
revenue collected from customers. These costs of $110.4 million increased $.5
million, or 0.4% in fiscal 1997 as compared to fiscal 1996. As a percentage of
revenues, product and delivery costs decreased slightly from 46.1% in fiscal
1996 to 46.0% in fiscal 1997. Product profit margin improved significantly,
principally because less inventory liquidation was needed. The Company's postage
expense to customers was positively impacted by the expansion of the Company's
National Distribution Center, which eliminated some capacity constraints of the
prior year. These cost reductions were partially offset by less shipping and
handling revenue, which was lower because less orders were shipped, and because
of certain marketing promotions run by the Company.
Selling, general and administrative ("SG&A") expenses were $121.5
million in fiscal 1997, compared to $119.6 million in fiscal
13
1996, an increase of $1.9 million, or 1.6%. The largest component of these
expenses are the costs of producing, printing and distributing the Company's
catalogs. As a percentage of revenues, SG&A expenses increased from 50.3% in
fiscal 1996 to 50.6% in fiscal 1997.
The ratio of catalog costs to revenues improved in fiscal 1997, even
though the cost of producing an average catalog was slightly higher. The ratio
improved because of a rise in average revenue per catalog. High paper costs
continued to be reflected in the Company's catalog expense, particularly in the
core catalogs, while the prices of its specialty catalog paper improved during
the latter part of the fiscal year.
Paper prices have declined, and the Company has future commitments for
paper at favorable prices. Postal costs to mail the Company's catalogs also
declined in the second half of fiscal 1997 because of Postal Classification
Reform regulations. The Company does not expect that any postal rate increases
will have a significant impact on fiscal 1998 earnings. Lower paper and postage
costs will enable the Company to reduce its cost structure, and to expand
circulation in fiscal 1998.
Other elements of SG&A expense besides catalog costs rose, principally
because the Company made investments in staff in the executive, merchandising
and creative areas. In addition, growth in the Company's Special Markets
division, which sells to other businesses, and an increase in the number of
outlet stores, were major factors affecting this increase.
Interest income in fiscal 1997 was $.6 million, as compared to $1.3
million in fiscal 1996. The decrease of $.7 million was the result of a lower
average investment balance, because of higher expenditures required for
expansion of the Company's National Distribution Center. Interest expense
increased by $.1 million in fiscal 1997 as compared to fiscal 1996 because of
short term borrowings under the Company's revolving credit facility during
fiscal 1997.
The Company's effective income tax rate in fiscal 1997 was 34.0% as
compared to 32.0% in fiscal 1996, principally due to higher tax deductions for
charitable contributions in fiscal 1996.
Fiscal 1996 and Fiscal 1995
Revenues for fiscal 1996 were $238.2 million, an increase of $16.0
million, or 7.2%, over fiscal 1995. The increase in revenues was primarily
attributable to an increase of approximately 10.5% in the average revenue per
order. The volume of orders shipped decreased by approximately 1%. Catalog
circulation was approximately 1% higher than in fiscal 1995.
14
Product and delivery costs of $109.9 million increased $11.6 million,
or 11.8% in fiscal 1996 as compared to fiscal 1995. As a percentage of revenues,
these costs increased from 44.2% in fiscal 1995 to 46.1% in fiscal 1996. Gross
margin percentage on products sold declined because a greater portion of sales
came from lower margin sources. Also, the Company expanded its free gift
promotion in fiscal 1996, which contributed to an increase in the cost of goods
sold, and the decline in gross margin. Gross margin also declined in the
Company's outlet stores due to more in-store promotions, and in the Special
Markets division, which primarily sells to other businesses. The Company's cost
of order fulfillment rose in fiscal 1996 principally because of increases in the
costs of packaging materials, postal and UPS rates, as well as additional costs
caused by physical constraints of the Company's Distribution Center. A backlog
of unshipped orders resulted in additional costs for expedited delivery before
Christmas, and for related customer service inquiries. An expansion of the
Company's Distribution Center, which commenced in fiscal 1996, was completed in
fiscal 1997. The increase in fulfillment costs was largely offset by an increase
in the shipping and handling fees charged to customers. After the effect of
these product and delivery cost increases, higher sales contributed $4.4 million
more toward catalog costs and overhead, as compared to fiscal 1995.
Selling, general and administrative ("SG&A") expenses were $119.6
million in fiscal 1996, compared to $105.2 million in fiscal 1995, an increase
of $14.4 million, or 13.7%. The largest component of these expenses are the
costs of producing, printing and distributing the Company's catalogs. As a
percentage of revenues, SG&A expenses increased from 47.4% in fiscal 1995 to
50.3% in fiscal 1996, driven by a rise in the ratio of catalog costs to
revenues. Both the dollars and percentage of revenues rose principally because
of higher paper prices and U.S. Postal rates. Although the Company employed a
variety of techniques to reduce its costs, such as changes in circulation, page
counts, and paper weight, higher paper and postal costs negatively impacted
fiscal 1996 pretax earnings by approximately $12 million. The Company achieved
higher revenue per catalog in fiscal 1996, which offset a portion of the
increase as a percentage of revenues. Other elements of SG&A besides catalog
costs declined as a percentage of revenues.
Interest income in fiscal 1996 was $1.3 million, as compared to $1.2
million in fiscal 1995. The increase of $.1 million was the result of higher
interest rates. The average investment balance declined in fiscal 1996
principally because of higher expenditures required for catalog costs. Interest
expense declined by $.1 million in fiscal 1996 as compared to fiscal 1995
because of scheduled debt repayments.
Fiscal 1996 earnings reflect a non-recurring pretax charge of
$921,000 for the costs of a terminated merger agreement. See Note
11 to Financial Statements.
15
The Company's effective income tax rate in fiscal 1996 was 32.0% as
compared to 28.8% in fiscal 1995. The fiscal 1995 effective tax rate was reduced
by a favorable settlement of an outstanding tax matter, and the related reversal
of tax reserves not ultimately needed. See Note 2 to Financial Statements.
Seasonality
The Company's business is seasonal. Historically, a substantial portion
of the Company's revenue and net income has been realized during the third and
fourth fiscal quarters, which encompass the period September through February.
Revenue and net income have been lower during the first and second fiscal
quarters, comprising the period March through August. The Company believes this
is the general pattern associated with the mail order and retail industries.
Because of slower demand for its products in the first half of its
fiscal year, the Company incurred a cumulative net loss during the first six
months of fiscal 1997, 1996, and 1995. Due to these seasonal factors, management
expects to incur a loss for the first half of fiscal 1998 as well.
Liquidity and Capital Resources
The Company's balance sheet and liquidity are strong. At the end of
fiscal 1997, cash and cash equivalents totalled $22.7 million; the current ratio
was 4.7:1; stockholders' equity totalled $114.3 million; and debt obligations
(including current maturities) represented 2.5% of equity.
In fiscal 1997, the Company generated $13.0 million of cash from
operating activities. A significant contributing factor to the Company's
positive operating cash flow was the utilization of the large, higher-priced
paper inventory from the prior year. The Company used $1.5 million of funds for
long-term debt repayments, and generated $1.1 million from the sale of common
stock through its employee stock option and purchase plans.
Capital spending in fiscal 1997 totalled $10.3 million. Expenditures of
$8.5 million were made as part of the expansion of the Company's National
Distribution Center. The expansion project, consisting principally of a 335,000
square foot addition to the building, and related warehousing, shipping and
computer equipment, cost approximately $14 million (including the fiscal 1996
expenditures), and was completed in August of 1996. Although the Company may
find it necessary to expand the capacity of the National Distribution Center in
the future, the Company has made no significant commitments for capital spending
in fiscal 1998. The other major capital expenditures in fiscal 1997 were made to
upgrade the Company's computer equipment, and its distribution center machinery
and equipment.
16
The Company entered into a $42 million four-year revolving credit
facility in August 1996, which can be used to finance working capital needs,
fixed assets, and up to $12 million of inventory letters of credit. At the
Company's option, up to $20 million of the facility can be converted into term
loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus
50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a
fixed rate, at the Company's option. The credit facility is unsecured, and the
Company is subject to financial covenants principally relating to its working
capital, net worth, interest coverage ratio and capital spending restrictions.
The new credit facility replaced previous facilities totaling $15 million which
the Company had maintained with two banks.
The Company has paid quarterly cash dividends since May 1992, increased
its quarterly dividend from $.05 to $.07 per share in September 1994, and
anticipates continuing to pay cash dividends to its stockholders in the future.
The amount of any such dividends will depend on the Company's earnings,
financial position, capital requirements, and other relevant factors. Dividends
in fiscal 1997 totalled $2.7 million, or $.28 per share.
On October 10, 1995, the Board of Directors authorized the Company to
purchase up to 1 million shares of its common stock in the open market from time
to time, subject to market conditions. During the fiscal year ended February 22,
1997, the Company purchased 259,700 shares at a total cost of $3.3 million.
Shares repurchased under the plan from inception through February 22, 1997
total 384,500, at a cost of $5.1 million.
The Company believes that its cash flow from operations, current
investment balance, and credit facilities will be sufficient to meet its
operating needs.
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
The Company follows the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company has
17
implemented the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" in fiscal
1997, but has retained its current accounting method.
In the first quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 107 - "Disclosures about Fair Value of
Financial Instruments". The fair value of the Company's financial instruments
does not materially differ from their carrying values.
Effective in the fourth quarter of fiscal 1998, the Company will be
required to adopt Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", which will require the Company to state a dual presentation of basic
and diluted earnings per share on its Statements of Income. The basic
calculation replaces the calculation of primary earnings per share, and is not
expected to have a material impact on reported earnings per share.
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-K
contains forward-looking statements which are based on the Company's current
expectations and assumptions. Various factors could cause actual results to
differ materially from those set forth in such statements. These factors
include, but are not limited to, the potential for changes in consumer spending,
consumer preferences and general economic conditions, increasing competition in
the direct mail industry, changes in government regulations, dependence on
foreign suppliers, and possible future increases in operating costs, including
postage and paper costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this
report on pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
18
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.
19
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-18.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 22, 1997 and February 24, 1996. . . F- 2
- -Statements of Income for the three Fiscal Years ended
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 1997, 1996 and 1995. . . . . . . . . . . .F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . F- 5
- -Notes to Financial Statements . . . . . . . . . . . . . . . . F- 6
- -Report of Independent Accountants . . . . . . . . . . . . . . F-18
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are
not applicable or not required or because the required information is not
material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during
the last quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601
of Regulation S-K).
20
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...................................... (1)
2.2 -Certificate of Ownership and Merger
between Lillian Vernon Corporation
and the Company filed in Delaware.................... (1)
2.3 -Certificate of Merger between Lillian
Vernon Corporation and the Company
filed in New York.................................... (2)
3.1 -Certificate of Incorporation with
Amendments of Lillian Vernon
Corporation.......................................... (2)
3.2 -By-Laws of Lillian Vernon Corporation................ (1)
4.3 -Right of First Refusal Agreement among
Lillian M. Katz, Fred P. Hochberg,
David C. Hochberg and the Company.................... (1)
10.1 -Amended and Restated Lillian Vernon
Corporation Profit Sharing Plan ..................... (12)
10.2 -Employees' Pension Plan.............................. (1)
10.3 -1987 Performance Unit, Restricted
Stock, Non-Qualified Option and
Incentive Stock Option Plan.......................... (1)
10.4 -Employee Stock Purchase Plan ........................ (1)
10.5 -First Amendment to Employment Agreement
with Lillian Vernon, formerly
Lillian M. Katz...................................... (7)
10.6 -Executive Deferred Compensation
Agreement and first amendment
thereto with Lillian Vernon,
formerly Lillian M. Katz............................. (8)
10.7 -Employment Agreement with Fred P.
Hochberg............................................. (1)
10.8 -Second Amendment to Deferred
Compensation Agreement with Fred P.
Hochberg............................................. (9)
10.9 -Second Amendment to Deferred
Compensation Agreement with
David C. Hochberg.................................... (10)
10.10 -Industrial Development Bond and
Guaranty among the New Rochelle
Industrial Development Agency,
Bankers Trust, Fred P. Hochberg,
David C. Hochberg, the Company and
others............................................... (1)
10.11 -Industrial Development Bond, Series B,
Acknowledgment of Assignment of
Interest in the Lease and Guaranty
and Sale Agreement among the Port
Chester Industrial Development Agency,
21
Bankers Trust, Fred P. Hochberg, David
C. Hochberg, the Company and others................. (1)
10.12 -Form of Indemnification Agreement with
officers and directors.............................. (1)
10.13 -Hochbergs' Release of Company re:
Port Chester Distribution Center.................... (1)
10.14 -Lease for Company's facility at
New Rochelle, New York.............................. (1)
10.15 -Lease for Company's facility at
Port Chester, New York.............................. (1)
10.16 -Lease for Company's facility at
Elmsford, New York.................................. (1)
10.17 -Trademark Registrations for Lillian
Vernon Corporation - Service Mark
and Logo............................................ (1)
10.18 -Loan Agreement with Crestar Bank
and related documents............................... (3)
10.19 -Note Purchase Agreement between the
Company and Northwestern National Life
Insurance Co., Farm Bureau Life
Insurance Co. of Michigan, FB Annuity
Corp., and Farm Bureau Mutual Insurance
Co. of Michigan and related Promissory
Notes dated September 9, 1988....................... (4)
10.20 -Note Purchase Agreement between the
Company and Northern Life Insurance Co.,
Commercial Union Life Insurance Co.
of America, Life Insurance Co. of
Georgia and Texas Life Insurance Co.
and related Promissory Notes dated
October 28, 1988.................................... (4)
10.21 -Sublease between the Company and the
United States Postal Service........................ (4)
10.22 -Termination of Elmsford Lease (500
Saw Mill River Road)................................ (5)
10.23 -Letter Amendment dated November 30,
1990 to Note Purchase Agreement
between the Company and Northwestern
National Life Insurance Co.,
Farm Bureau Life Insurance Co. of
Michigan, FB Annuity Corp., and Farm
Bureau Mutual Insurance Co. of
Michigan and related Promissory Notes
dated September 9, 1988............................. (6)
10.24 -Letter Amendment dated November 30,
1990 to Note Purchase Agreement between
the Company and Northern Life Insurance
Co., Commercial Union Life Insurance Co.
of America, Life Insurance Co. of
Georgia and Texas Life Insurance Co.
and related Promissory Notes dated
October 28, 1988.................................... (6)
22
10.25 -Sublease between Fred P. and David C.
Hochberg and Company - New Rochelle
facility............................................. (9)
10.26 -Consulting Agreement with Fred P.
Hochberg............................................. (9)
10.27 -Employment Agreement with Stephen S.
Marks................................................ (10)
10.28 -Lillian Vernon Corporation 1993
Stock Option Plan for Non-Employee
Directors ........................................... (11)
10.29 -Employment Agreement with Larry Blum................. (13)
10.30 -Agreement with Andrew Gregor......................... (13)
10.31 -Resignation and General Release Agreement
with Stephen S. Marks................................ (14)
10.32 -Employment Agreement with Howard Goldberg (15)
10.33 -Employment Agreement with Robert S. Mednick (16)
10.34 -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 ....................................... (17)
11.0 -Statement re Computation of Earnings
Per Share............................................ E-1
22 -Subsidiaries of registrant........................... E-2
24 -Consent of Coopers & Lybrand re:
incorporated reference to Form S-8................... E-3
27 -Financial Data Schedule . . . . . . . ............... E-4
- -----------------------
(1) Filed with Registration Statement on Form S-1 (File No.
33-15430) and incorporated by reference herein.
(2) Filed with Quarterly Report on Form 10-Q for the quarter ended
August 28, 1987 and incorporated by reference herein.
(3) Filed with Annual Report on Form 10-K for the year ended February
26, 1988 and incorporated by reference herein.
(4) Filed with Annual Report on Form 10-K for the year ended February
24, 1989 and incorporated by reference herein.
(5) Filed with Annual Report on Form 10-K for the year ended February
24, 1990 and incorporated by reference herein.
(6) Filed with Annual Report on Form 10-K for the year ended February
23, 1991 and incorporated by reference herein.
(7) Filed with Annual Report on Form 10-K for the year ended
23
February 29, 1992 and incorporated by reference herein.
(8) Amendment filed with Quarterly Report on Form 10-Q for the
quarter ended May 30, 1992 and incorporated by reference
herein. Original agreement filed with Registration Statement
- see (1) above.
(9) Filed with Annual Report on Form 10-K for the year ended February
27, 1993 and incorporated by reference herein.
(10) Filed with Quarterly Report on Form 10-Q for the quarter ended
August 28, 1993 and incorporated by reference herein. Exhibit
10.9 - Original deferred compensation agreement filed with
Registration Statement - see (1) above.
(11) Filed with Registration Statement on Form S-8 (File No. 33-
71250) and incorporated by reference herein.
(12) Filed with Annual Report on Form 10-K for the year ended February
26, 1994 and incorporated by reference herein.
(13) Filed with Annual Report on Form 10-K for the year ended February
25, 1995, and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended May
27, 1995 and incorporated by reference herein.
(15) Filed with Annual Report on Form 10-K for the year ended February
24, 1996 and incorporated by reference herein.
(16) Filed with Quarterly Report on Form 10-Q for the quarter ended May
25, 1996 and incorporated by reference herein.
(17) Filed with Quarterly Report on Form 10-Q for the quarter ended
August 24, 1996 and incorporated by reference herein.
24
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS,
SCHEDULES AND
REPORTS
F-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
FEBRUARY 22, FEBRUARY 24,
1997 1996
-------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 22,746 $ 25,771
Accounts receivable, net 24,476 21,435
Merchandise inventories 30,480 30,948
Deferred income taxes (Note 2) 1,548 923
Prepayments and other current assets (Note 4) 10,438 14,231
-------------- --------------
Total current assets 89,688 93,308
Property, plant and equipment, net (Notes 5 and 7) 40,319 33,624
Deferred catalog costs 6,140 6,506
Other assets 2,402 2,947
-------------- --------------
Total $138,549 $136,385
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable and accrued expenses (Note 4) $ 14,485 $ 12,115
Customer deposits 260 128
Current portion of long-term debt and lease obligations (Notes 6,
7) 1,489 1,452
Income taxes payable (Note 2) 2,715 2,892
-------------- --------------
Total current liabilities 18,949 16,587
Long-term debt, less current portion (Note 6) 1,270 2,544
Capital lease obligations, less current portion (Note 7) 124 339
Deferred compensation (Note 8) 3,500 3,099
Deferred income taxes (Note 2) 380 623
-------------- --------------
Total liabilities 24,223 23,192
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, $.01 par value, 20,000,000 shares authorized;
issued--10,363,320 shares in 1997 and 9,993,643 shares in 1996 104 100
Additional paid-in capital 30,783 27,026
Retained earnings 94,553 91,923
Unearned compensation (94) --
Treasury stock, at cost--753,458 shares in 1997 and 359,999 shares
in 1996 (11,020) (5,856)
-------------- --------------
Total stockholders' equity 114,326 113,193
-------------- --------------
Total $138,549 $136,385
-------------- --------------
See Notes to Consolidated Financial Statements
F-2
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fiscal Years Ended
----------------------------------------------------------------
February 22, February 24, February 25,
1997 1996 1995
------------------- ------------------- -------------------
Revenues $240,053 $238,192 $222,211
Costs and expenses:
Product and delivery costs 110,374 109,915 98,304
Selling, general and administrative expenses 121,530 119,635 105,229
------------------- ------------------- -------------------
231,904 229,550 203,533
------------------- ------------------- -------------------
Operating income 8,149 8,642 18,678
Interest income 614 1,314 1,189
Interest expense (651) (610) (733)
Merger-related expenses (Note 11) -- (921) --
------------------- ------------------- -------------------
Income before income taxes 8,112 8,425 19,134
Provision for (benefit from) income taxes (Note 2):
Current 3,622 3,560 5,802
Deferred (864) (864) (288)
------------------- ------------------- -------------------
2,758 2,696 5,514
------------------- ------------------- -------------------
Net income $ 5,354 $ 5,729 $ 13,620
------------------- ------------------- -------------------
Net income per common and common
equivalent share $ .55 $ .59 $1.38
------------------- ------------------- -------------------
Net income per common and common
equivalent share - assuming full dilution $ .55 $ .59 $1.38
------------------- ------------------- -------------------
Weighted average number of common
and common equivalent shares (Note 1) 9,658 9,713 9,892
See Notes to Consolidated Financial Statements
F-3
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
COMMON STOCK TREASURY STOCK
---------------------- PAID-IN RETAINED UNEARNED -------------------
TOTAL SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES AMOUNT
--------- --------- -------- ------- -------- ------------ -------- --------
BALANCE, FEBRUARY 26, 1994 $97,255 9,606,437 $96 $20,672 $77,792 ($31) (92,774) ($1,274)
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan -- 2,500 -- 46 (46)
Exercise of non-qualified
stock options 1,322 147,500 2 2,177 (47,118) (857)
Amortization of unearned
compensation 75 75
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 234 15,307 -- 234
Dividends Paid ($.26 per share) (2,490) (2,490)
Other 171 171
Net income 13,620 13,620
--------- --------- -------- ------- -------- ------------ -------- --------
BALANCE, FEBRUARY 25, 1995 110,187 9,771,744 98 23,300 88,922 (2) (139,892) (2,131)
Exercise of non-qualified
stock options 1,262 214,000 2 3,253 (95,307) (1,993)
Amortization of unearned
compensation 2 2
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 106 7,899 -- 106
Purchase of treasury stock (1,732) (124,800) (1,732)
Dividends paid ($.28 per share) (2,728) (2,728)
Other 367 367
Net income 5,729 5,729
--------- --------- -------- ------- -------- ------------ -------- --------
BALANCE, FEBRUARY 24, 1996 113,193 9,993,643 100 27,026 91,923 0 (359,999) (5,856)
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan -- 15,000 -- 197 (197)
Exercise of non-qualified
stock options 893 337,000 4 2,720 (133,759) (1,831)
Amortization of unearned
compensation 103 103
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 184 17,677 -- 184
Purchase of treasury stock (3,333) (259,700) (3,333)
Dividends paid ($.28 per share) (2,724) (2,724)
Other 656 656
Net income 5,354 5,354
--------- --------- -------- ------- -------- ------------ -------- --------
BALANCE, FEBRUARY 22, 1997 $114,326 10,363,320 $104 $30,783 $94,553 ($94) (753,458) ($11,020)
--------- --------- -------- ------- -------- ------------ -------- --------
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 22, February 24, February 25,
1997 1996 1995
-------------- ------------- -------------
Cash flows from operating activities:
Net income $5,354 $5,729 $13,620
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 4,092 3,586 3,366
Amortization 454 395 525
(Gain) loss on sale of assets (8) (6) (9)
(Increase) decrease in accounts receivable (3,041) 47 (10,257)
(Increase) decrease in merchandise inventories 468 (530) (3,079)
(Increase) decrease in prepayments and other current assets 3,793 (6,736) (2,522)
(Increase) decrease in deferred catalog costs 366 126 (2,401)
(Increase) decrease in other assets (309) (296) (387)
Increase (decrease) in trade accounts payable and accrued expenses 2,370 (1,941) (4,413)
Increase (decrease) in customer deposits 132 (257) 156
Increase (decrease) in income taxes payable (177) (684) (615)
Increase (decrease) in deferred compensation 401 186 600
Increase (decrease) in deferred income taxes (868) (865) (234)
-------------- ------------- -------------
Net cash provided by (used in) operating activities 13,027 (1,246) (5,650)
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (10,284) (7,712) (6,305)
Proceeds from sale of assets 8 95 12
-------------- ------------- -------------
Net cash used in investing activities (10,276) (7,617) (6,293)
-------------- ------------- -------------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,452) (1,420) (1,395)
Proceeds from issuance of common stock 1,077 1,368 1,556
Dividends paid (2,724) (2,728) (2,490)
Payments to acquire treasury stock (3,333) (1,732) --
Other 656 367 171
-------------- ------------- -------------
Net cash used in financing activities (5,776) (4,145) (2,158)
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (3,025) (13,008) (14,101)
-------------- ------------- -------------
Cash and cash equivalents at beginning of period 25,771 38,779 52,880
-------------- ------------- -------------
Cash and cash equivalents at end of period $22,746 $25,771 $38,779
-------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $582 $599 $752
Income taxes 3,028 3,971 6,863
Supplemental disclosure of noncash financing activities -see Note 13
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 company,
concentrating on the marketing of gift, household, gardening, kitchen, Christmas
and children's products.
The consolidated financial statements include the accounts of Lillian
Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon Fulfillment
Services, Inc., Lillian Vernon International, Ltd., and LVC Retail Corporation
(the "Company"). All material intercompany balances and transactions have been
eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on
the last Saturday in February. Under this policy, fiscal 1997, 1996 and 1995
consisted of 52 weeks.
Cash Equivalents
Cash equivalents, for purposes of the Statements of Cash Flows, consist
principally of municipal securities, U.S. Treasury securities and commercial
paper, with remaining maturities at acquisition of less than three months. In
the first quarter of fiscal 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 - "Accounting for Certain Investments in
Debt and Equity Securities". Under SFAS No. 115, the Company's investments,
totalling $23.3 million as of February 22, 1997, are classified as
held-to-maturity securities, and as such, are stated at amortized cost, which
approximates market value. The adoption of SFAS No. 115 did not have a material
effect on the Company's financial statements.
Merchandise Inventories
Merchandise inventories are principally stated at the lower of average
cost or market, determined by the retail inventory method.
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.
Capitalized Software Costs
Direct costs of developing new software applications are capitalized
and are being amortized over five years. Amortization of capitalized software
costs totalled $320,000 in fiscal 1997, $378,000 in fiscal 1996, and $435,000 in
fiscal 1995.
F-6
Capitalized software costs, net of accumulated amortization, are included in
other assets, and amounted to $429,000 and $681,000 at February 22, 1997 and
February 24, 1996, respectively.
Depreciation and Amortization
Depreciation is provided on the straight line method for assets placed
in service over estimated useful lives of approximately 30 and 8 years for
buildings and building improvements, respectively, and for other property, over
estimated useful lives ranging from 3 to 10 years. Leasehold improvements and
assets under capital leases are amortized over approximately 15 years.
Income Taxes
Deferred income taxes arise from differences in the timing of income
and expense recognition for financial and income tax reporting purposes.
Deferred income taxes are computed on the differences between the financial
statement and tax bases of the assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Per Share Data
Net income per common share is computed by dividing the net income for
the period by the sum of the weighted average number of outstanding shares and
share equivalents (if the addition of such share equivalents has a materially
dilutive effect). The Company's common share equivalents consist of stock
options issued to key employees and directors. For the years ended February 22,
1997 and February 24, 1996, the number of common share equivalents outstanding
did not result in a materially dilutive effect on the net income per share
computation. For fiscal 1995, however, such common share equivalents did result
in material dilution, and therefore were reflected in the net income per share
calculation on the Statement of Income.
Fair Value of Financial Instruments
In the first quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 107 "Disclosures about Fair Value of
Financial Instruments." The fair value of the Company's financial instruments
does not materially differ from their carrying values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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-7
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 these guidelines, compensation cost for stock-based employee
compensation plans is recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to acquire the stock. The Company implemented the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," in fiscal 1997, but will continue its current
accounting method for stock-based employee compensation, as permitted by the
Statement. See Note 9.
Reclassifications
Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 1997 presentation.
New Accounting Standards
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." The adoption of SFAS 121 did not
have a material effect on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The
standard revises the computation and presentation of earnings per share and will
be adopted by the Company in the fourth quarter of fiscal 1998. The Company does
not expect the adoption of this statement to have a material impact on reported
earnings per share.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
-----------------------------------------
February 22, February 24, February 25,
1997 1996 1995
------------- ------------ ------------
Federal $ 3,314 $ 3,206 $ 5,202
State 308 354 600
------------- ------------ ------------
$ 3,622 $ 3,560 $ 5,802
------------- ------------ ------------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended
-----------------------------------------
February 22, February 24, February 25,
1997 1996 1995
------------- ------------ ------------
Charitable contributions $ (216) $ (499) $ (668)
Depreciation (63) (192) (169)
Capitalized software development
costs (74) (50) (77)
Catalog costs (204) (40) 1,023
Other, net (307) (83) (397)
------------ --------- ----------
$ (864) $ (864) $ (288)
------------ --------- ----------
F-8
The exercise of non-qualified stock options and the vesting of restricted stock
(see Note 9) 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 totalled $656,000, $367,000, and $171,000 for fiscal 1997, 1996,
and 1995, respectively.
The Company's effective income tax rate is reconciled to the U.S.
federal statutory tax rate as follows:
Fiscal Years Ended
-----------------------------------------
February 22, February 24, February 25,
1997 1996 1995
------------- ------------ ------------
Federal statutory tax rate 34.0% 34.0% 35.0%
State income taxes, net of
federal tax benefit 2.5 2.8 2.0
Charitable contributions of
merchandise (3.5) (6.7) (3.2)
Reversal of tax provisions of
prior years - - (2.8)
Expired charitable contribution
carryforwards - 4.9 -
Other, net 1.0 (3.0) (2.2)
------ ------- ------
34.0% 32.0% 28.8%
------- ------- ------
During fiscal 1996, expired charitable contribution carryforwards of $1,079,000
resulted in a reduction in deferred tax assets of $416,000. During the fourth
quarter of fiscal 1995, the Company favorably settled an outstanding tax matter
that resulted in a one-time reduction in income tax expense of $740,000,
including the reversal of excess tax reserves.
The deferred tax assets and deferred tax liabilities recorded on the balance
sheets are as follows (dollars in thousands):
February 22, 1997 February 24, 1996
--------------------- ------------------
Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Catalog deferrals $ - $ 2,373 $ - $2,577
Charitable contributions 2,152 - 1,936 -
Inventory capitalization 807 - 801 -
Accrued expenses 607 - 690 -
Other 363 8 147 74
Valuation allowance - - - -
-------- -------- ------- ------
Total current 3,929 2,381 3,574 2,651
-------- -------- ------- ------
Non-current:
Depreciation - 1,688 - 1,753
Amortization 84 101 122 175
Deferred compensation 1,325 - 1,183 -
-------- -------- ----- ------
Total non-current 1,409 1,789 1,305 1,928
------- ------- ------- ------
Total $ 5,338 $ 4,170 $4,879 $4,579
======== ======== ======= ======
As of February 22, 1997, the Company has $5,571,000 of charitable contribution
carryforwards for Federal income tax purposes, which expire from fiscal 1999 to
2002.
F-9
3. CREDIT FACILITIES
The Company entered into a $42 million four-year revolving credit
facility in August 1996 with two banks. This credit facility can be used for
general corporate purposes, including working capital needs, capital
expenditures, and up to $12 million of inventory letters of credit. At the
Company's option, up to $20 million of the facility can be converted into term
loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus
50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a
fixed rate, at the Company's option. The credit facility is unsecured, and the
Company is subject to various financial covenants principally relating to its
working capital, net worth, interest coverage ratio and capital spending
restrictions. The new credit facility replaced previous unused credit facilities
totalling $15 million, which were in effect in fiscal 1996 and fiscal 1995,
bearing interest at the prime rate.
In fiscal 1997, the Company incurred commitment fees on the new credit
facility ranging from 5 basis points on the letters of credit to 20 basis points
on the available revolving credit line. In fiscal 1996 and fiscal 1995, the
Company incurred commitment fees of approximately 20 and 25 basis points,
respectively. During the year, the maximum amount outstanding under the new
revolving credit agreement was $12.5 million (excluding letters of credit).
Interest expense related to these borrowings was approximately $143,000. No
amounts were outstanding under the Company's credit facilities as of February
22, 1997 and February 24, 1996.
The Company had outstanding letters of credit approximating $4,773,000
and $5,227,000 as of February 22, 1997 and February 24, 1996, respectively, for
the purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of
$7,851,800 and $11,586,000 as of February 22, 1997, and February 24, 1996,
respectively (See Note 1).
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
February 22, February 24,
1997 1996
------------ ------------
Trade accounts payable $ 6,061 $ 4,557
Catalog costs 1,696 1,485
Salaries and compensation 1,566 1,471
Other 5,162 4,602
------------ --------
$ 14,485 $ 12,115
------------ --------
F-10
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
February 22, February 24,
1997 1996
------------ ------------
Land and buildings $ 31,656 $ 25,578
Machinery and equipment 26,512 21,894
Furniture and fixtures 3,313 3,240
Leasehold improvements 3,776 3,777
Capital leases 1,262 1,262
------------ --------
Total property, plant & equipment, at cost 66,519 55,751
Less, accumulated depreciation & amortization 26,200 22,127
------------ --------
Property, plant & equipment, net $ 40,319 $ 33,624
------------ --------
6. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
February 22, February 24,
1997 1996
------------ ------------
Senior Notes due September 1998,
payable in semi-annual installments
of $300,000 with interest at 10.09% ......... $ 1,200 $ 1,800
Senior Notes due October 1998, payable
in semi-annual installments of
$335,000 with interest at 10.0% ............. 1,340 2,010
Industrial Revenue Bond of the City of New
Rochelle Industrial Development Agency,
payable in quarterly installments of
$1,500 with interest at prime rate
(February 1997 = 8.25%, February 1996 = 8.25%)
through October 1997 ........................ 4 10
------------- -------
$ 2,544 $ 3,820
Less, current portion ..................... 1,274 1,276
------------- -------
$ 1,270 $ 2,544
------------- -------
The Company's long-term debt agreements require that the Company meet
certain financial covenants, principally related to working capital and tangible
net worth, both as defined in the agreements.
Long-term debt as of February 22, 1997 matures as follows (dollars in
thousands):
Fiscal Year
-----------
1998 .................................... $ 1,274
1999 .................................... 1,270
-------
$ 2,544
-------
7. LEASES
The Company leases its New Rochelle, New York corporate headquarters
under a capital lease arrangement with a partnership, Port Chester Properties,
the partners of which are stockholders of the Company. The leased asset consists
of land and a building with a cost of $1,262,000 and accumulated
F-11
amortization of $1,144,000 as of February 22, 1997. The lease expires July 30,
1998 and provides for the payment by the Company of an annual rent of $430,000,
and all real estate taxes, insurance, and certain other costs.
The Company has operating lease agreements for certain computer and
other equipment used in its operations and for its outlet store locations, with
existing lease terms ranging from fiscal 1998 through fiscal 2003, and various
renewal options through fiscal 2008. Most of the store leases also provide for
payment of common charges such as maintenance and real estate taxes. Seven
stores require the payment of additional rent based upon a percentage of sales.
Minimum rental payments required under these agreements are as follows (dollars
in thousands):
Fiscal Year
-----------
1998 ...................................... $1,221
1999 ...................................... 1,157
2000 ...................................... 1,055
2001 ...................................... 611
2002 ...................................... 265
Thereafter ................................. 94
------
$4,403
------
Rent expense for fiscal 1997, 1996 and 1995 amounted to $2,171,000,
$1,840,000, and $2,363,000, respectively, which included $14,000, $20,000 and
$11,000 in fiscal 1997, 1996 and 1995, respectively, for contingent rentals
based upon a percentage of outlet store sales.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for the benefit of all
employees who meet certain minimum service requirements. The Company's profit
sharing contribution is discretionary, as determined by the Board of Directors.
Employees fully vest in their profit sharing account balance after seven years.
The authorized profit sharing contributions for fiscal 1997, 1996, and 1995 were
$500,000, $450,000, and $500,000, respectively.
The Company's profit sharing plan includes an employee contribution and
employer matching contribution (401k) feature. Under the 401k feature of the
plan, eligible employees may make pre-tax contributions up to 10% of their
annual compensation. Employee contributions of up to 6% of compensation are
currently matched by the Company at a rate of 50%. The matching contribution is
made with Company stock. Employees are 100% vested in their pre-tax
contributions at all times, and become fully vested in the employer matching
contribution after two years of service. The Company's matching contributions to
the plan for fiscal 1997, 1996, and 1995 were $425,000, $398,000, and $355,000
respectively.
F-12
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 $366,000 in fiscal 1997, $150,000 in fiscal 1996 and
$600,000 in fiscal 1995.
9. STOCK COMPENSATION PLANS
At February 22, 1997, the Company had three stock-based compensation
plans, which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recognized for its non-qualified stock options
granted and for shares issued through its employee stock purchase plan.
Compensation cost has been charged against income for the issuance of restricted
stock during Fiscal 1997; net income was reduced by approximately $68,000. If
compensation cost for the Company's non-qualified stock options issued and
shares purchased through its stock purchase plan had been determined based on
the fair value at the grant dates for awards under those plans consistent with
the requirements of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below:
Fiscal Years Ended
----------------------------
Feb. 22, 1997 Feb. 24, 1996
------------- -------------
Net Income As reported $5,354,000 $5,729,000
Pro forma $5,112,000 $5,662,000
Primary earnings per share As reported $.55 $.59
Pro forma $.52 $.58
Fully diluted earnings As reported $.55 $.59
per share Pro forma $.52 $.58
The Company has a Performance Unit, Restricted Stock,
Non-Qualified Option and Incentive Stock Option Plan, and a total of 2,000,000
shares of common stock have been reserved for issuance thereunder. The Company
has granted and sold shares of restricted stock to certain executives at a
nominal price per share. In connection with the issuance of restricted stock,
unearned compensation is recorded ($197,400 in fiscal 1997) and amortized over
the respective vesting periods. In fiscal 1997, restricted shares were granted,
and vest as follows:
Date Number Date
Granted Of Shares Vested
------- --------- ------
March 1996 5,000 March 1997
March 1996 5,000 March 1998
June 1996 5,000 June 1997
F-13
The Company has also granted non-qualified stock options to employees. Such
options have been granted at market value, vest within three years from the date
of grant and expire within ten years from the date of grant. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 2.0%,
expected volatility of 29.1%, risk-free interest rate of 6.3%, expected option
term of five years, and a forfeiture rate of 25%.
A summary of the Company's non-qualified stock option activity and weighted
average exercise prices for the three years ended February 22, 1997 follows:
Fiscal Years Ended
----------------------------------------------------------
February 25, 1995 February 24, 1996 February 22, 1997
------------------- ------------------- -----------------
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 1,135,500 $12.43 1,253,500 $13.36 1,057,000 $12.59
Granted 278,000 $18.17 187,500 $13.38 262,500 $13.15
Exercised (145,000) $14.81 (214,000) $15.21 (337,000) $ 8.08
Forfeited (15,000) $18.50 (170,000) $15.82 (104,000) $15.07
--------- -------- --------
Outstanding
at end of yr. 1,253,500 $13.36 1,057,000 $12.59 878,500 $14.20
========== ========= =========
Options
exercisable
at year-end 737,500 695,667 472,833
Weighted-avg.
fair value of
options granted
during the year N/A $2.43 $2.38
The following table summarizes information about stock options outstanding at
February 22, 1997.
Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ----------- ----------- ----------- ---------- ----------- ----------
$12.25-18.13 878,500 7.5 Yrs. $14.20 472,833 $14.61
The Company also has a Stock Option Plan for Non-Employee Directors, and has
reserved a total of 100,000 shares of common stock for issuance thereunder. The
Company has granted non-qualified stock options to its non-employee Directors.
These options are granted at market value, vest one year from the date of grant
and expire within ten years from the date of grant. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
F-14
dividend yield of 2.0%, expected volatility of 29.1%, risk-free interest rate of
6.3%, expected term of five years, and a forfeiture rate of 6%.
A summary of the Company's stock option activity under the Non- Employee
Directors Plan for the three years ended February 22, 1997 follows:
Fiscal Years Ended
----------------------------------------------------------
February 25, 1995 February 24, 1996 February 22, 1997
------------------- ------------------ -----------------
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 12,500 $12.50 20,000 $15.25 30,000 $14.79
Granted 12,500 $18.00 10,000 $13.88 10,000 $12.38
Exercised (2,500) $12.50 0 - 0 -
Forfeited (2,500) $18.00 0 - 0 -
------ ------ ------
Outstanding
at end of yr. 20,000 $15.25 30,000 $14.79 40,000 $14.19
====== ====== ======
Options
exercisable
at year-end 10,000 20,000 30,000
Weighted-avg.
fair value of
options granted
during the year N/A $4.02 $3.61
The following table summarizes information about stock options outstanding under
the Non-Employee Directors Plan at February 22, 1997:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ----------- ----------- ----------- ---------- ----------- -----------
$12.38-18.00 40,000 8.0 Yrs. $14.19 30,000 $14.79
The Company also has an Employee Stock Purchase Plan, with a total of 150,000
shares reserved for issuance. Under the Employee Stock Purchase Plan, eligible
employees can purchase shares of the Company 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 450 shares may be purchased by an
eligible employee in each fiscal year. Under the Plan, employees elected to
purchase 13,809 shares, 9,878 shares, and 15,022 shares in fiscal 1997, 1996,
and 1995, respectively. Pro forma compensation cost equal to the 15% discount
received by employees who purchased shares was approximately $24,000 in fiscal
1997, and $21,000 in fiscal 1996.
F-15
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended
-----------------------------------------------------
May 25, August 24, November 23, February 22,
Fiscal 1997 1996 1996 1996 1997
- ----------- ------- ---------- ------------ ------------
Revenues $ 26,313 $ 32,970 $100,343 $ 80,428
Income (loss) before
income taxes (5,419) (3,128) 13,059 3,599
Net income (loss) (3,631) (2,096) 8,677 2,403
Net income (loss) per
common share (.38) (.22) .90 .25
Market price of shares
outstanding
- -market high 15 1/4 14 5/8 13 1/2 13
- -market low 12 5/8 10 3/8 10 7/8 11 1/4
Fiscal Quarters Ended
-----------------------------------------------------
May 27, August 26, November 25, February 24,
Fiscal 1996 1995 1995 1995 1996
- ----------- ------- --------- ----------- ------------
Revenues $ 29,614 $ 36,920 $ 97,450 $ 74,207
Income (loss) before
income taxes (4,218) (743) 12,576 809
Net income (loss) (2,826) (498) 8,426 626
Net income (loss) per
common share (.29) (.05) .86 .06
Market price of shares
outstanding
- market high 22 1/4 20 3/4 17 1/8 14 3/4
- market low 17 1/4 16 3/8 13 1/8 12 7/8
11. TERMINATED MERGER AGREEMENT
On June 13, 1995, the Company entered into a Merger Agreement with an
affiliate of Freeman Spogli & Co., Incorporated. Pursuant to the Agreement, the
Company would have been recapitalized through a merger transaction in which all
of the shares of common stock of the Company, other than certain shares held by
Lillian Vernon and David Hochberg, would have been converted into the right to
receive $19 per share in cash. The Merger Agreement was terminated on September
18, 1995 when it was determined that financing for the transaction at the $19
per share price could not be obtained. The costs of the terminated merger of
$921,000 have been recorded in the fiscal 1996 financial statements. These costs
consisted principally of legal, accounting and filing fees.
12. STOCK REPURCHASE PROGRAM
On October 10, 1995, the Board of Directors authorized the Company to
purchase up to 1 million shares of its common stock in the open market from time
to time, subject to market conditions. As of February 22, 1997, the Company had
purchased 384,500 shares at a total cost of $5,065,000.
F-16
13. NONCASH FINANCING ACTIVITIES
During fiscal 1995, 1996, and 1997, certain non-qualified stock options were
exercised by stock plan participants using non-cash consideration. The Company
has received shares of its Common Stock in consideration for the exercise price
and for income taxes required to be withheld. Such stock is reported as Treasury
Stock on the Balance Sheets. The number of Treasury Stock shares accepted as
consideration for such stock option exercises was determined by the market price
of the Company's common stock on the exercise dates. These transactions, for
purposes of the Statements of Cash Flows, are deemed to be non-cash financing
activities and, as such, have not been reflected on the Statements.
A summary of activity follows:
Consideration
-----------------------------------
Fiscal Options Exercise Lillian Vernon Corp.
Year Exercised Price Cash(Loan) Common Stock
- ------ --------- -------- --------- ---------------------
1995 78,000 shares $1,147,800 $376,947 47,118 shares
1996 112,500 shares $1,766,550 ($117,393) 95,307 shares
1997 180,000 shares $1,440,000 - 133,759 shares
F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Lillian Vernon Corporation:
We have audited the accompanying consolidated balance sheets of Lillian
Vernon Corporation and Subsidiaries as of February 22, 1997 and February 24,
1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
February 22, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lillian
Vernon Corporation and Subsidiaries as of February 22, 1997 and February 24,
1996 and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended February 22, 1997 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
April 11, 1997
F-18
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 20, 1997 By: /s/ Lillian Vernon
------------------
Lillian Vernon, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Lillian Vernon
Lillian Vernon Chairman of the Board May 20, 1997
of Directors (Principal
Executive Officer)
/s/ Robert S. Mednick
Robert S. Mednick Vice President- May 20, 1997
Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Howard P. Goldberg
Howard P. Goldberg President, Chief May 20, 1997
Operating Officer and
Director
/s/ David C. Hochberg
David C. Hochberg Vice President - Public May 20, 1997
Affairs and Director
/s/ Lilyan H. Affinito
Lilyan H. Affinito Director May 20, 1997
/s/ Leo Salon
Leo Salon Director May 20, 1997
/s/ William E. Phillips
William E. Phillips Director May 20, 1997
/s/ Bert W. Wasserman
Bert W. Wasserman Director May 20, 1997
25