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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
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 (Section 229.405 of this Chapter) is not contained
herein and will not be contained, to the best of registrant's knowledge, in
definitive proxy information statement, incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value for the Voting Stock held by non-affiliates
(based upon the closing price on May 15, 1998) was approximately $95,508,965.
As of May 15, 1998, there were 9,370,883 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 15, 1998.
-------------------
THE INDEX TO EXHIBITS APPEARS ON PAGE 15.
LILLIAN VERNON CORPORATION
FISCAL 1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business........................................................ 1
ITEM 2. Properties...................................................... 6
ITEM 3. Legal Proceedings............................................... 7
ITEM 4. Submission of Matters to a Vote of Security Holders............. 7
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .......................................... 8
ITEM 6. Selected Financial Data......................................... 9
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 10
ITEM 7(a) Quantitative and Qualitative Disclosure about Market Risk....... 14
ITEM 8. Financial Statements and Supplementary Data..................... 14
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 14
PART III
ITEM 10. Directors and Executive Officers of the Registrant ............. 15
ITEM 11. Executive Compensation.......................................... 15
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management ................................................... 15
ITEM 13. Certain Relationships and Related Transactions.................. 15
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K ..................................................... 15
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 1998, the Company published 34
catalog editions, and mailed approximately 179,000,000 catalogs to past and
prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of products purchased. These and other
factors are analyzed by computer to rank and segment customers to determine
those most likely to purchase products offered in the Company's catalogs. The
data base contains information with respect to approximately 21,800,000
people, approximately 3,250,000 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 has a Special Markets division, which makes
sales of premium and incentive products to numerous businesses, including
Fortune 500 companies. The Special Markets division also 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.
FISCAL YEARS ENDED
----------------------------------------------------------------------------
FEBRUARY 26, FEBRUARY 25, FEBRUARY 24, FEBRUARY 22, FEBRUARY 28,
1994 1995 1996 1997 1998 (3)
-------------- -------------- -------------- -------------- --------------
Number of catalogs mailed (000's)(1) .. 150,846 179,424 179,539 175,232 178,917
Number of catalog editions............. 22 26 27 29 34
Number of orders received (000's) ..... 4,602 4,940 4,903 4,643 4,936
Average revenue per order
received (2).......................... $ 42.86 $ 44.61 $ 49.31 $ 52.57 $ 54.13
- ------------
(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.
(3) Fiscal 1998 contained 53 weeks.
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 other
catalog costs, and its capacity to process and fill orders. In fiscal 1998,
the Company produced 34 different catalog editions.
1
The following table provides a breakdown of the various catalogs mailed in
fiscal 1998, and information regarding the range of pages and product
offerings in each:
APPROXIMATE
NO. OF
NO. OF NO. OF PRODUCTS
CATALOG TITLE EDITIONS PAGES OFFERED
- ------------- -------- ----- -------
Lillian Vernon ................... 9 84-132 500-850
Private Sale...................... 5 96 500-600
Lilly's Kids...................... 6 48-84 350-600
Christmas Memories................ 3 56-64 250-350
Neat Ideas for an Organized Life 2 48 300
Favorites......................... 4 48-72 300-500
Lillian Vernon Kitchen............ 3 56-72 450-550
Personalized Gift................. 2 48-64 380-500
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. It is anticipated that sales of personalized
merchandise will continue to grow in fiscal 1999.
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.
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 introduced a new Favorites catalog in early fiscal 1998. The
Favorites catalog features many of the best-selling products across all
Lillian Vernon catalog divisions.
The Company's Personalized Gift catalogs primarily feature gift items, all
offered with personalization.
Lillian Vernon Kitchen catalogs offer products which include cookware,
dinnerware, gourmet accessories, cutlery, glassware, flatware and gifts, many
of them exclusive to this catalog.
The Neat Ideas For An Organized Life catalogs offer a variety of home
decor, organizational products and housewares.
In fiscal 1999, the Company plans to combine Lillian Vernon's Kitchen and
Neat Ideas into one catalog utilizing the strongest elements of each catalog.
The new catalog will offer products which include holiday, closet, food
preparation, kitchen accessories, kitchen decor, tabletop, organization,
bath, laundry, car/garage and outdoor products.
The Company introduced a new catalog, Lillian Vernon Gardening, in March
1998, which features a cross-section of functional garden products, as well
as garden and floral-themed decorative accessories.
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.
2
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 1998 was approximately 4.5% of
revenues.
The Company purchases its products from approximately 1,100 suppliers.
Approximately 76% of the items sold by the Company are purchased abroad,
predominantly from manufacturers located in Taiwan, Hong Kong, the Peoples'
Republic of China, Italy 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 8% 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, but has experienced no material disruptions.
To date, the recent Asian economic downturn has not materially affected the
Company's sourcing of products in the region. Management is closely
monitoring the situation and believes that adequate replacement sources are
available to the Company should some of the Company's suppliers fail.
Marketing
The Company maintains a proprietary customer data base containing
information with respect to approximately 21,800,000 customers, gift
recipients and people who have requested its catalogs, approximately
3,250,000 of whom have placed orders with the Company during the last fiscal
year. In addition, the Company rents from and exchanges mailing lists or
specific portions of lists with direct marketers and other organizations in
an attempt to gain new customers. Approximately 179,000,000 catalogs were
mailed in fiscal 1998, of which approximately 80% were mailed to people whose
names were in the Company's proprietary data base and approximately 20% were
mailed to prospects derived from rented lists.
The Company believes that its ability to analyze its computerized data
base, as well as rented lists, and to select recipients for a particular
mailing are important factors in its development. 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.
The Company periodically offers customers special promotions such as gifts
with purchase, free shipping and handling, and a deferred billing option, in
order to increase sales.
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 temporary
telephone order call centers in New Rochelle, New York and Las Vegas, Nevada,
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 1998, the Company
continued upgrading its computer capacity to enable it to handle an increase
in telephone orders.
3
The Company has recently decided to install a new order entry system. The
new system will expand the Company's flexibility in processing customer
orders, aid the Company in year 2000 compliance, and allow the Company to
more easily offer incentives such as gift certificates, business to business
order processing and customer loyalty programs. It is expected that the new
system will be implemented by April, 1999.
All orders are processed, packed and shipped at the Company's National
Distribution Center. Approximately 50% of customer orders are shipped by
United Parcel Service, with nearly all other orders being sent by the U.S.
Postal Service. The Company also offers UPS Second Day Air delivery as an
option to its customers, for an extra charge.
The Company's National Distribution Center, an 821,000 square foot
facility located in Virginia Beach, Virginia, is owned and operated by the
Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc.
All of the Company's distribution, and a majority of its warehousing
activities, are conducted at this facility. The National Distribution Center
is generally operated on a five-day-a-week basis, except during the Holiday
season, when, depending upon demand, it may operate on a six or
seven-day-a-week, three-shift basis. Personalization of products is also done
at the Company's National Distribution Center. The Company is increasing the
size of its personalization area at the National Distribution Center to be
able to meet its needs for the 1998 peak season. 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 1998,
the Company spent approximately $23.0 million in total paper costs and
approximately $57.9 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. It is anticipated that the
U.S. Postal Service will again increase its rates in late fiscal 1999. The
size of the increase is estimated to be 3.0% to 3.5%. No assurance can be
given that postal rates will not continue to increase in the future. United
Parcel Service, which increased its rates in 1995, 1996 and 1997, has also
recently increased its rates. The Company expects that this rate increase
will raise its UPS shipping rates by 9.0% to 9.5%.
The price of paper is dependent upon supply and demand in the marketplace.
Fiscal 1996 and fiscal 1997 financial results were negatively affected by
substantially higher paper prices than prevailed prior to fiscal 1996, in
fiscal 1998, and those that presently prevail. The Company anticipates that
the price of paper will rise through fiscal 1999 and has secured the majority
of its fiscal 1999 paper needs at market prices for high-volume purchasers.
The Company attempts to recover a portion of these cost increases by
increasing its shipping and handling charges, and where possible, reducing
the dimensions and weight of catalogs, adjusting catalog page counts and
circulation, and improving efficiencies in distribution and shipping. 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 the
Internet.
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
4
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 British Crown Colony
ended, with its rule reverting to the Peoples' Republic of China. The Company
has not experienced any disruptions in its sourcing of merchandise since the
reversion.
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 customer response to the Company's
catalogs, and 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 28, 1998, the Company and its subsidiaries employed
approximately 1,500 employees. During the peak Holiday season, the Company
employs approximately 4,700 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.
5
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
presently located in a 41,664 square foot building in New Rochelle, New York.
This facility is leased from David C. and Fred P. Hochberg, under a net
sublease 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 is a former officer and
director, and a 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 and other expenses associated with the operation and maintenance
of the premises, including structural repairs. In fiscal 1998, the total cost
to the Company for this space, including rent, real estate taxes, and other
expenses was approximately $580,000 ($14 per square foot). After an
independent study of the Company's current space requirements, its need to
accommodate future growth, current rental prices, and the proposed rental
increase for the New Rochelle facility, as well as a thorough analysis of
available office space in Westchester County and environs, the Company
decided to vacate this facility at the expiration of the lease.
In July 1998 the Company will relocate its corporate headquarters and
administrative offices to a 65,000 square foot building in Rye, New York. The
corporate headquarters includes the executive offices, merchandising,
creative, marketing and finance departments, as well as the wholesale
division. This facility is leased from CVS New York, Inc. under a sublease
agreement expiring on January 30, 2005, with a present annual rental of
$1,153,000 ($17.75 per square foot). The sublease provides that the Company
is only responsible for increases in real estate taxes and operating costs
over a base year. The Company has received two renewal options, each for five
years, from the owners of the building, an unaffiliated entity, upon the
expiration of the sublease, in 2005.
The Company believes that the new headquarters facility, with its
increased area in one building, will be adequate for its anticipated growth
needs. Additionally, management believes that the new facility will provide
certain operational and managerial efficiencies.
The Company's 821,000 square foot National Distribution Center 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 is constructing a 10,000 square foot mezzanine expansion in
the personalization area of the National Distribution Center in order to
increase capacity in the personalization department, which is anticipated to
be needed in the 1998 peak season.
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.
In fiscal 1998 the Company leased a 3,600 square foot office in Las Vegas,
Nevada, which served as a temporary telephone order facility for its peak
selling season, and intends to lease a larger facility for the peak selling
season of fiscal 1999.
6
The Company leases fifteen retail locations, which serve as outlet stores,
in the states of Virginia, New York, Delaware and South Carolina. The typical
retail store is approximately 3,000 square feet, with leases expiring from
fiscal 1999 through fiscal 2004, and various renewal options through fiscal
2009.
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.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange
(symbol: LVC). The following table sets forth the high and low sale prices
for each quarterly period for the two most recent years. The stock prices are
rounded to the nearest 1/16 point.
QUARTER ENDED HIGH LOW
------------- ---- ---
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
May 24, 1997............................................ 15 15/16 12 1/2
August 23, 1997 ........................................ 17 1/4 15 1/2
November 22, 1997....................................... 17 1/2 14 7/8
February 28, 1998....................................... 18 5/8 14 1/8
As of May 15, 1998, there were 372 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. The quarterly dividend was increased to seven cents ($.07) per share
payable September 1, 1994. Since March 2, 1998, a quarterly dividend of eight
cents ($.08) 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, 1998, the Company
has purchased 687,700 shares at a total cost of approximately $10.0 million.
The Company uses these shares to make matching contributions to its Profit
Sharing/401(k) Plan and to issue shares under its Option Plans.
8
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
----------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24, FEBRUARY 25, FEBRUARY 26,
1998 (1) 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
OPERATING RESULTS (000'S)
Revenues ............................. $258,224 $240,053 $238,192 $222,211 $196,331
Income before income taxes ........... 13,603 8,112 8,425 19,134 19,495
Net income ........................... 8,978 5,354 5,729 13,620 12,772
PER SHARE
Net income--Basic (3)................. $ .94 $ .55 $ .59 $ 1.43 $ 1.35
Net Income--Diluted (3) .............. .93 .55 .57 1.38 1.33
Book value ........................... 12.45 11.90 11.75 11.44 10.22
Dividends ............................ .29 .28 .28 .26 .20
FINANCIAL POSITION AT YEAR END (000'S)
Cash and cash equivalents ............ $ 25,132 $ 22,746 $ 25,771 $ 38,779 $ 52,880
Working capital ...................... 74,453 70,739 76,721 79,068 72,665
Total assets ......................... 143,667 138,549 136,385 137,768 130,937
Long-term obligations (2) ............ 1,394 2,883 4,335 5,755 7,150
Stockholders' equity.................. 116,713 114,326 113,193 110,187 97,255
AVERAGE SHARES OUTSTANDING (000'S)
Basic (3) ............................ 9,532 9,658 9,713 9,555 9,448
Diluted (3) .......................... 9,636 9,664 9,981 9,892 9,632
- ------------
(1) Fiscal year 1998 contained 53 weeks.
(2) Includes current installments and long-term portions of debt and
capital lease obligations.
(3) Net income per share and average shares outstanding data have been
restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share".
9
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 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Revenues ...................................... 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs ................... (48.2) (46.0) (46.1)
Selling, general and administrative expenses (46.2) (50.6) (50.3)
Corporate headquarters relocation ............ (0.5) -- --
----- ----- -----
Operating income ............................ 5.1 3.4 3.6
Interest income ............................... 0.4 0.2 0.6
Interest expense .............................. (0.2) (0.3) (0.3)
Merger-related expenses ....................... -- -- (0.4)
----- ----- -----
Income before income taxes ................... 5.3 3.3 3.5
Provision for income taxes ................... (1.8) (1.1) (1.1)
----- ----- -----
Net income .................................. 3.5% 2.2% 2.4%
----- ----- -----
FISCAL 1998 AND FISCAL 1997
Revenues for fiscal 1998 were $258.2 million, an increase of $18.2
million, or 7.6%, over fiscal 1997. Average revenue per catalog rose by
approximately 7.4%, with increases in both response rate and average revenue
per order. Order volume rose by approximately 6.5%, including the effect of
an additional week in fiscal 1998 compared to 1997. While total catalog
circulation increased only about 2%, the Company added new Spring mailings of
its Lilly's Kids, Personalized Gift, and Neat Ideas catalogs. The Company
also introduced the Favorites catalog, featuring many strong-selling products
from its other catalogs.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs of $124.4 million
increased by $14.0 million, or 12.7% in fiscal 1998 compared to fiscal 1997,
partially because of the higher volume of orders shipped. As a percentage of
revenues, product and delivery costs increased from 46.0% in fiscal 1997 to
48.2% in fiscal 1998. The increase in the percentage of revenues was due both
to reduced profit margins on merchandise sold, as well as higher costs to
process orders in the Company's National Distribution Center. Some factors
affecting this ratio included offering merchandise at a broader range of
price points to increase sales, an increase in the percentage of personalized
products, with the related higher labor costs, an increase in government
tariffs on toll-free telephone calls, and higher package delivery costs due
to rate increases, heavier packages, and an increase in multiple shipments
per order. The Company believes that offering lower price points and more
personalized merchandise contributed favorably to achieving higher revenue
per catalog, although it increased costs relative to revenues.
Selling, general and administrative ("SG&A") expenses were $119.3 million
in fiscal 1998, compared to $121.5 million in fiscal 1997, a decrease of $2.3
million, or 1.9%. As a percentage of revenues, SG&A expenses also declined,
from 50.6% in fiscal 1997 to 46.2% in fiscal 1998. The largest component of
these expenses are the costs of producing, printing, and mailing the
Company's catalogs. Catalog circulation increased approximately 2% in fiscal
1998 compared to fiscal 1997. A lower ratio of catalog costs to revenues was
the principal reason for the improvement in SG&A expenses as a percentage of
revenues. The improvement came almost equally from lower paper costs and an
improvement in revenue generated per catalog.
The average cost of paper used in the Company's catalogs was approximately
25% lower in fiscal 1998 compared to fiscal 1997. Paper prices are expected
to rise in the upcoming fiscal year 1999. The Company
10
has obtained commitments from its suppliers to provide the majority of its
expected paper needs at the then-prevailing market price for high-volume
purchasers. Postal rates to mail the Company's catalogs are expected to rise
by 3.0% to 3.5% in fiscal 1999, but the timing of the rate increase is not
known at this time. United Parcel Service rates for packages have also
increased in fiscal 1999. The Company expects that this rate increase will
raise its UPS shipping rates by 9.0% to 9.5%. U.S. Postal rates for packages
are also expected to rise in the latter part of the fiscal year. Management
continually implements strategies to attempt to increase product sales, and,
in May 1998, raised the fees for shipping and handling that are charged to
its customers. These strategies are expected to partially offset the cost
increases; however, management cannot assess the negative impact of these
factors on its future earnings.
In fiscal 1998, the Company decided to relocate its Corporate Headquarters
to a larger facility located in Rye, New York. The relocation will take place
at the end of the Company's existing lease, in July 1998. The move will allow
for continued growth. In connection with the move, the Company wrote-off $1.3
million in the fourth quarter of fiscal 1998, representing the unamortized
value of the leasehold improvements in the old corporate headquarters. The
Company does not anticipate incurring any other significant expenses in
connection with the move.
Interest income in fiscal 1998 was $.9 million, compared to $.6 million in
fiscal 1997. The increase of $.3 million was the result of a higher average
investment balance, because of improved profitability and lower capital
expenditures. Interest expense declined by $.1 million, principally because
of the scheduled repayment of long-term debt.
The Company's effective income tax rate in fiscal 1998 was 34%, the same
as in fiscal 1997.
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 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 1996, an increase of
$1.9 million, or 1.6%. 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.
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.
11
Fiscal 1996 earnings reflect a non-recurring pre-tax charge of $921,000
for the costs of a terminated merger agreement (see Note 11 to Financial
Statements).
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.
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, and because of added fixed costs to increase sales year-round and
invest in future growth, the Company incurred a cumulative net loss during
the first six months of fiscal 1998, 1997, and 1996. Due to these factors,
management expects to incur a loss for the first half of fiscal 1999 as well.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet and liquidity are strong. At the end of fiscal
1998, cash and cash equivalents totaled $25.1 million; the current ratio was
4.3:1; stockholders' equity totalled $116.7 million; and debt obligations
(including current maturities) represented 1.2% of equity.
In fiscal 1998, the Company generated $13.7 million of cash from operating
activities. Inventory rose by $6.5 million as of the end of fiscal 1998
compared to 1997, due to new product offerings, in anticipation of higher
sales, and to enable the Company to better service customers. Management
expects to be able to sell this inventory without significant gross margin
reductions. The Company used $1.5 million of funds for long-term debt
repayments, and generated $.4 million from the sale of common stock through
its employee stock option and purchase plans.
Capital spending in fiscal 1998 was $3.1 million. Capital expenditures in
fiscal 1997 totaled $10.3 million, of which $8.5 million related to 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 fiscal 1996 expenditures), and was
completed in August of 1996. The fiscal 1998 major capital expenditures, as
well as the balance of the capital expenditures in fiscal 1997, were made to
upgrade the Company's computer equipment, and its distribution center
machinery and equipment. In fiscal 1999, the Company is planning to expand
the personalization area of its National Distribution Center to be able to
handle increased demand for personalized merchandise. The Company may
continue to find it necessary to expand the capacity of the National
Distribution Center in the future. The Company has committed to upgrade its
order entry system. In fiscal 1998, approximately $1.0 million was spent on
this project, and the Company expects to spend approximately $2.9 million on
hardware and software for the remainder of the project. In addition to
allowing the Company's telemarketing staff to enter orders more efficiently,
the new system will be Year 2000 compliant, and allow the Company to expand
certain marketing opportunities. The new system is expected to be operational
in April 1999.
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'
12
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 Company has paid quarterly cash dividends since May 1992, and has
increased its quarterly dividend from $.05 to $.07 per share in September
1994, and from $.07 to $.08 per share in March 1998. The Company anticipates
continuing to pay 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
declared in fiscal 1998 totaled $2.8 million, or $.29 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 28, 1998, the Company purchased 270,700 shares at a total cost of
$4.4 million. Shares repurchased under the plan from inception through
February 28, 1998 total 655,200, at a cost of $9.5 million.
The Company believes that its cash flow from operations, current
investment balance, and credit facilities will be sufficient to meet its
operating needs.
YEAR 2000 COMPLIANCE
The Company is in the process of modifying its computer software
applications and systems to function properly with respect to dates in the
Year 2000 and thereafter. The Company expects to complete the necessary
changes by early calendar 1999, using both its in-house staff and outside
resources, at a cost of less than $1 million. An assessment of the readiness
of external entities with which the Company interfaces, such as its vendors,
is ongoing. The Company does not currently anticipate any material disruption
to its operations as a result of a failure to properly modify its own
systems. However, failure of third parties with which the Company does
business to properly modify their systems could have a material adverse
effect upon the Company.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
The Company is generally able to reflect cost increases and decreases
resulting from the effects of inflation and foreign currency fluctuations in
its selling prices. In addition, most foreign purchase orders are denominated
in U.S. dollars. Accordingly, the results of operations for the periods
discussed have not been significantly affected by these factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and
losses); and No. 131 "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations, or cash flows, and any effect will be limited to the form and
content of its disclosures. Both Statements are effective for fiscal years
beginning after December 15, 1997, and accordingly, the Company will adopt
them in fiscal 1999.
Effective in the fourth quarter of fiscal 1998, the Company adopted SFAS
No. 128, "Earnings Per Share ", which required the Company to state a dual
presentation of basic and diluted earnings per share in its financial
statements. The basic calculation replaces the calculation of primary
earnings per share, and did not 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
13
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 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
14
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company
will file a definitive proxy statement pursuant to Regulation 14A with the
Commission, not later than 120 days after the end of the fiscal year, which
information is herein incorporated by reference as if set out in full.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report on pages F-1 through F-17.
(a)(1) Consolidated Financial Statements
--Balance Sheets--February 28, 1998 and February 22, 1997............... F-2
--Statements of Income for the three Fiscal Years ended 1998, 1997
and 1996 ........................................................... F-3
--Statements of Stockholders' Equity for the three Fiscal Years ended
1998, 1997 and 1996................................................. F-4
--Statements of Cash Flows for the three Fiscal Years ended 1998,
1997 and 1996 ...................................................... F-5
--Notes to Financial Statements......................................... F-6
--Report of Independent Accountants..................................... F-17
(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).
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)
10.1 --Amended and Restated Lillian Vernon Corporation Profit
Sharing Plan..................................................(16)
10.2 --Employees' Pension Plan.......................................(1)
10.3 --1987 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan...............................(1)
15
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.4 --First Amendment to Employment Agreement with Lillian Vernon,
formerly Lillian M. Katz......................................(6)
10.5 --Executive Deferred Compensation Agreement and first amendment
thereto with Lillian Vernon, formerly Lillian M. Katz.........(7)
10.6 --Second Amendment to Deferred Compensation Agreement with Fred
P. Hochberg...................................................(8)
10.7 --Second Amendment to Deferred Compensation Agreement with
David C. Hochberg.............................................(9)
10.8 --Form of Indemnification Agreement with officers and
directors.....................................................(1)
10.9 --Lease for Company's facility at New Rochelle, New York........(1)
10.10 --Trademark Registrations for Lillian Vernon Corporation--
Service Mark and Logo.........................................(1)
10.11 --Loan Agreement with Crestar Bank and related documents........(3)
10.12 --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)
10.13 --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)
10.14 --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.(5)
10.15 --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...............(5)
10.16 --Sublease between Fred P. and David C. Hochberg and
Company--New Rochelle facility................................(8)
10.17 --Lillian Vernon Corporation 1993 Stock Option Plan for
Non-Employee Directors........................................(10)
10.18 --Employment Agreement with Larry Blum..........................(11)
10.19 --Employment Agreement with Howard Goldberg.....................(12)
10.20 --Employment Agreement with Robert S. Mednick...................(13)
10.21 --Revolving Credit Agreement, Letter of Credit and Bankers
Acceptance facility dated as of August 19, 1996 among Lillian
Vernon Corporation as Borrower, Lillian Vernon Fulfillment
Services, Inc., LVC Retail Corporation and Lillian Vernon
International Ltd. as Guarantors, the Banks named therein and
The Chase Manhattan Bank as agent.............................(14)
10.22 --1997 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan...............................(15)
10.23 --1997 Stock Option Plan for Non-Employee Directors.............(15)
10.24 --Form of Agreement re Change of Control with certain executive
officers......................................................E-1
10.25 --Agreement of Sublease dated January 30, 1998 between CVS New
York, Inc. and the Company and exhibits.......................E-16
22 --Subsidiaries of registrant....................................E-140
24 --Consent of Coopers & Lybrand re: incorporated reference to
Form S-8......................................................E-141
27 --Financial Data Schedule.......................................E-142
16
- --------------
(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 23,
1991 and incorporated by reference herein.
(6) Filed with Annual Report on Form 10-K for the year ended February 29,
1992 and incorporated by reference herein.
(7) Amendment filed with Quarterly Report on Form 10-Q for the quarter
ended May 30, 1992 and incorporated by reference herein. Original
deferred compensation agreement filed with Registration
Statement--see (1) above.
(8) Filed with Annual Report on Form 10-K for the year ended February 27,
1993 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement. See (1)
above.
(9) Filed with Quarterly Report on Form 10-Q for the quarter ended August
28, 1993 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement--see (1)
above.
(10) Filed with Registration Statement on Form S-8 (File No. 33-71250) and
incorporated by reference herein.
(11) Filed with Annual Report on Form 10-K for the year ended February 25,
1995, and incorporated by reference herein.
(12) Filed with Quarterly Report on Form 10-Q for the quarter ended May
27, 1995 and incorporated by reference herein.
(13) Filed with Quarterly Report on Form 10-Q for the quarter ended May
25, 1996 and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended August
24, 1996 and incorporated by reference herein.
(15) Filed with Registration Statement on Form S-8 on September 26, 1997
(File No. 333-36467) and incorporated by reference herein.
(16) Filed with Registration Statement on Form S-8 on March 31, 1998 (File
No. 333-48951) and incorporated by reference herein.
17
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 26, 1998 By: /s/ Lillian Vernon
-------------------------------
Lillian Vernon, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Lillian Vernon Chairman of the Board of
- ------------------------------ Directors (Principal Executive
Lillian Vernon Officer) May 26, 1998
/s/ Robert S. Mednick Vice President--Chief
- ------------------------------ Financial Officer (Principal
Robert S. Mednick Financial and Accounting May 26, 1998
Officer)
/s/ Howard Goldberg President, Chief Operating
- ------------------------------ Officer and Director May 26, 1998
Howard Goldberg
/s/ David C. Hochberg Vice President--Public Affairs
- ------------------------------ and Director May 26, 1998
David C. Hochberg
/s/ Leo Salon Director May 26, 1998
- ------------------------------
Leo Salon
/s/ William E. Phillips Director May 26, 1998
- ------------------------------
William E. Phillips
/s/ Bert W. Wasserman Director May 26, 1998
- ------------------------------
Bert W. Wasserman
/s/ Elizabeth M. Eveillard Director May 26, 1998
- ------------------------------
Elizabeth M. Eveillard
/s/ Richard A. Berman Director May 26, 1998
- ------------------------------
Richard A. Berman
/s/ Jonah Gitlitz Director May 26, 1998
- ------------------------------
Jonah Gitlitz
18
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 28, 1998 FEBRUARY 22, 1997
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 25,132 $ 22,746
Accounts receivable, net.............................................. 22,632 24,476
Merchandise inventories............................................... 36,935 30,480
Deferred income taxes (Note 2)........................................ 2,034 1,548
Prepayments and other current assets (Note 4)......................... 10,173 10,438
-------- --------
Total current assets................................................. 96,906 89,688
Property, plant and equipment, net (Notes 5 and 7)..................... 37,633 40,319
Deferred catalog costs................................................. 5,922 6,140
Other assets........................................................... 3,206 2,402
-------- --------
Total................................................................ $143,667 $138,549
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses (Note 4).................. $ 16,331 $ 14,485
Customer deposits..................................................... 147 260
Current portion of long-term debt and lease obligations (Notes 6, 7) 1,394 1,489
Income taxes payable (Note 2)......................................... 4,581 2,715
-------- --------
Total current liabilities............................................ 22,453 18,949
Long-term debt, less current portion (Note 6).......................... -- 1,270
Capital lease obligations, less current portion (Note 7) .............. -- 124
Deferred compensation (Note 8)......................................... 3,426 3,500
Deferred income taxes (Note 2)......................................... 1,075 380
-------- --------
Total liabilities.................................................... 26,954 24,223
-------- --------
Commitments & Contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no
shares issued and outstanding........................................ -- --
Common stock, $.01 par value; 20,000,000 shares authorized;
issued--10,389,674 shares in 1998 and 10,363,320 shares in 1997 ..... 104 104
Additional paid-in capital............................................ 31,160 30,783
Retained earnings..................................................... 100,757 94,553
Unearned compensation................................................. (6) (94)
Treasury stock, at cost--1,016,491 shares in 1998 and
753,458 shares in 1997 (Note 12)..................................... (15,302) (11,020)
-------- --------
Total stockholders' equity........................................... 116,713 114,326
-------- --------
Total................................................................ $143,667 $138,549
-------- --------
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 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Revenues........................................... $258,224 $240,053 $238,192
Costs and expenses:
Product and delivery costs........................ 124,419 110,374 109,915
Selling, general and administrative expenses .... 119,278 121,530 119,635
Corporate headquarters relocation (Note 7) ....... 1,330 -- --
-------- -------- --------
245,027 231,904 229,550
-------- -------- --------
Operating income................................. 13,197 8,149 8,642
Interest income.................................... 910 614 1,314
Interest expense................................... (504) (651) (610)
Merger-related expenses (Note 11).................. -- -- (921)
-------- -------- --------
Income before income taxes....................... 13,603 8,112 8,425
Provision for (benefit from) income taxes (Note
2):
Current........................................... 4,566 3,622 3,560
Deferred.......................................... 59 (864) (864)
-------- -------- --------
4,625 2,758 2,696
-------- -------- --------
Net income....................................... $ 8,978 $ 5,354 $ 5,729
-------- -------- --------
Net income per common share--Basic................. $ .94 $ .55 $ .59
-------- -------- --------
Net income per common share--Diluted............... $ .93 $ .55 $ .57
-------- -------- --------
Weighted average number of common shares--Basic ... 9,532 9,658 9,713
Weighted average number of common shares and
common share equivalents--Diluted................. 9,636 9,664 9,981
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 25, 1995............. $110,187 9,771,744 $ 98 $23,300 $ 88,922 ($2) (139,892) ($2,131)
Exercise of non-qualified stock
options............................... 1,262 214,000 2 3,253 (95,307) (1,993)
Amortization of unearned compensation . 2 2
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 106 7,899 -- 106
Purchase of treasury stock............. (1,732) (124,800) (1,732)
Dividends ($.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 $.01 per
share pursuant to Restricted
Stock Plan............................ -- 15,000 -- 197 (197)
Exercise of non-qualified stock
options............................... 893 337,000 4 2,720 (133,759) (1,831)
Amortization of unearned compensation . 103 103
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ..... 184 17,677 -- 184
Purchase of treasury stock............. (3,333) (259,700) (3,333)
Dividends ($.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)
Exercise of non-qualified stock
options............................... 297 16,000 -- 200 (17) 7,667 114
Amortization of unearned compensation . 88 88
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 140 10,354 -- 140
Purchase of treasury stock............. (4,396) (270,700) (4,396)
Dividends ($.29 per share)............. (2,757) (2,757)
Other.................................. 37 37
Net income............................. 8,978 8,978
-------- ---------- ---- ------- -------- --- ---------- --------
BALANCE, FEBRUARY 28, 1998............. $116,713 10,389,674 $104 $31,160 $100,757 ($6) (1,016,491) ($15,302)
-------- ---------- ---- ------- -------- --- ---------- --------
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 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Cash flows from operating activities:
Net income........................................................ $ 8,978 $ 5,354 $ 5,729
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation..................................................... 4,478 4,092 3,586
Amortization..................................................... 324 454 395
Corporate Headquarters relocation................................ 1,330 -- --
(Gain) loss on sale of assets.................................... (7) (8) (6)
(Increase) decrease in accounts receivable....................... 1,844 (3,041) 47
(Increase) decrease in merchandise inventories................... (6,455) 468 (530)
(Increase) decrease in prepayments and other current assets ..... 265 3,793 (6,736)
(Increase) decrease in deferred catalog costs.................... 218 366 126
(Increase) decrease in other assets.............................. (1,040) (309) (296)
Increase (decrease) in trade accounts payable and accrued
expenses ....................................................... 1,846 2,370 (1,941)
Increase (decrease) in customer deposits......................... (113) 132 (257)
Increase (decrease) in income taxes payable...................... 1,866 (177) (684)
Increase (decrease) in deferred compensation..................... (74) 401 186
Increase (decrease) in deferred income taxes..................... 209 (868) (865)
------- -------- --------
Net cash provided by (used in) operating activities ............ 13,669 13,027 (1,246)
------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment........................ (3,122) (10,284) (7,712)
Proceeds from sale of assets...................................... 7 8 95
------- -------- --------
Net cash used in investing activities........................... (3,115) (10,276) (7,617)
------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease
obligations...................................................... (1,489) (1,452) (1,420)
Proceeds from issuance of common stock............................ 437 1,077 1,368
Dividends paid.................................................... (2,757) (2,724) (2,728)
Payments to acquire treasury stock................................ (4,396) (3,333) (1,732)
Other............................................................. 37 656 367
------- -------- --------
Net cash used in financing activities........................... (8,168) (5,776) (4,145)
------- -------- --------
Net increase (decrease) in cash and cash equivalents ........... 2,386 (3,025) (13,008)
------- -------- --------
Cash and cash equivalents at beginning of period................... 22,746 25,771 38,779
------- -------- --------
Cash and cash equivalents at end of period......................... $25,132 $ 22,746 $ 25,771
------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 347 $ 582 $ 599
Income taxes..................................................... 2,646 3,028 3,971
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 1998 consisted of 53
weeks, and fiscal 1997 and fiscal 1996 each consisted of 52 weeks.
Cash Equivalents
Cash equivalents, for purposes of the Statements of Cash Flows, consist
principally of commercial paper, municipal securities and U.S. Treasury
securities, with remaining maturities at acquisition of less than three
months. Under Statement of Financial Accounting Standards (SFAS) No.
115--"Accounting for Certain Investments in Debt and Equity Securities", the
Company's investments, totaling $25.7 million and $23.3 million as of
February 28, 1998 and February 22, 1997, respectively, are classified as
held-to-maturity securities, and as such, are stated at amortized cost, which
approximates market value.
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 totaled $188,000 in fiscal 1998, $320,000 in fiscal 1997, and $378,000
in fiscal 1996.
Capitalized software costs, net of accumulated amortization, are included
in other assets, and amounted to $1,275,000 and $429,000 at February 28, 1998
and February 22, 1997, 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.
Statement of Financial Accounting Standards No. 109 requires the company to
compute deferred income taxes 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.
F-6
Per Share Data
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". The standard revises the computation and presentation of earnings per
share and was adopted by the Company in the fourth quarter of fiscal 1998.
Earnings per share is computed and reported on a dual presentation basis.
Basic earnings per share is computed by dividing net income by the weighted
average number of outstanding shares for the period. Diluted earnings per
share is computed by dividing net income by the sum of the weighted average
number of outstanding shares and share equivalents computed. The Company's
common share equivalents consist of stock options issued to key employees and
Directors. As required by SFAS 128, all prior periods' reported earnings per
share computations were restated to reflect the new calculation methods. The
change in reported earnings per share was not material.
Basic and diluted earnings per share were calculated as follows (amounts
in thousands):
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Net Income--Basic and Diluted...................... $8,978 $5,354 $5,729
------ ------ ------
Weighted average shares for Basic EPS.............. 9,532 9,658 9,713
Add: incremental shares from stock option
exercises......................................... 104 6 268
------ ------ ------
Weighted average shares for Diluted EPS............ 9,636 9,664 9,981
------ ------ ------
In fiscal 1998, 1997, and 1996, options on 369,000, 813,500, and 212,000
shares of common stock, respectively, were not included in the calculation of
weighted average shares for diluted EPS because their effects were
antidilutive.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments does not materially
differ from their carrying values.
Revenue Recognition
The Company records revenue at the time of shipment for catalog sales, and
at point of sale for retail stores.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation
The Company follows the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the
difference, if any, between the quoted market price of the stock on the date
of grant and the amount an employee must pay to acquire the stock. The
Company implemented the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in
fiscal 1997, but continued its current accounting for stock-based employee
compensation, under APB Opinion No. 25 (see Note 9).
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which establishes standards for
F-7
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses); and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations, or cash flows, and
any effect will be limited to the form and content of its disclosures. Both
Statements are effective for fiscal years beginning after December 15, 1997,
and, accordingly, the Company will adopt them in fiscal 1999.
In fiscal 1997, the Company adopted 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.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Federal... $4,198 $3,314 $3,206
State..... 368 308 354
------ ------ ------
$4,566 $3,622 $3,560
====== ====== ======
The deferred income tax provision (benefit) consists of (dollars in
thousands):
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Charitable
contributions........... $ 124 $(216) $(499)
Depreciation............. 360 (63) (192)
Headquarters relocation . (502) -- --
Catalog costs............ (96) (204) (40)
Other, net............... 173 (381) (133)
----- ----- -----
$ 59 $(864) $(864)
===== ===== =====
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 totaled $37,000, $656,000, and $367,000 for
fiscal 1998, 1997, and 1996, respectively.
The Company's effective income tax rate is reconciled to the U.S. Federal
statutory tax rate as follows:
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Federal statutory tax rate..................... 34.0% 34.0% 34.0%
State income taxes, net of Federal tax
benefit....................................... 1.9 2.5 2.8
Charitable contributions of merchandise ....... (1.2) (3.5) (6.7)
Expired charitable contribution carry
forwards...................................... -- -- 4.9
Other, net..................................... (0.7) 1.0 (3.0)
---- ---- ----
34.0% 34.0% 32.0%
==== ==== ====
F-8
During fiscal 1996, expired charitable contribution carry forwards of
$1,079,000 resulted in a reduction in deferred tax assets of $416,000.
The deferred tax assets and deferred tax liabilities recorded on the
balance sheets are as follows (dollars in thousands):
FEBRUARY 28, 1998 FEBRUARY 22, 1997
----------------------- ----------------------
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Current:
Catalog deferrals....... $ -- $2,270 $ -- $2,373
Charitable
contributions.......... 2,042 -- 2,152 --
Inventory
capitalization......... 848 -- 807 --
Accrued expenses........ 660 -- 607 --
Headquarters
relocation............. 502 -- -- --
Other................... 261 9 363 8
------ ------ ------ ------
Total current......... 4,313 2,279 3,929 2,381
------ ------ ------ ------
Non-current:
Depreciation............ -- 2,208 -- 1,688
Amortization............ 33 183 84 101
Deferred compensation .. 1,283 -- 1,325 --
------ ------ ------ ------
Total non-current...... 1,316 2,391 1,409 1,789
------ ------ ------ ------
Total................. $5,629 $4,670 $5,338 $4,170
====== ====== ====== ======
As of February 28, 1998, the Company has $5,246,000 of charitable
contribution carry forwards for Federal income tax purposes, which expire
from fiscal 1999 to 2002.
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 totaling $15 million, which were in effect in fiscal 1996, bearing
interest at the prime rate.
In fiscal 1998 and 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,
the Company incurred commitment fees of approximately 20 basis points.
During fiscal 1998, the maximum amount outstanding under the new revolving
credit agreement was $11.5 million (excluding letters of credit). Interest
expense related to these borrowings was approximately $75,000. No amounts
were outstanding under the Company's credit facilities as of February 28,
1998 and February 22, 1997.
The Company had outstanding letters of credit approximating $7,324,000 and
$4,773,000 as of February 28, 1998 and February 22, 1997, respectively, for
the purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of
$7,365,300 and $7,851,800 as of February 28, 1998 and February 22, 1997,
respectively (see Note 1).
F-9
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
FEBRUARY 28, FEBRUARY 22,
1998 1997
------------ ------------
Trade accounts payable ... $ 8,644 $ 6,061
Catalog costs............. 1,892 1,696
Salaries and
compensation............. 1,264 1,566
Other..................... 4,531 5,162
------- -------
$16,331 $14,485
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
FEBRUARY 28, FEBRUARY 22,
1998 1997
------------ ------------
Land and buildings............................ $31,778 $31,656
Machinery and equipment....................... 29,035 26,512
Furniture and fixtures........................ 3,561 3,313
Leasehold improvements........................ 909 3,776
Capital leases................................ 1,262 1,262
------- -------
Total property, plant & equipment, at cost .. 66,545 66,519
Less, accumulated depreciation &
amortization................................. 28,912 26,200
------- -------
Property, plant & equipment, net............. $37,633 $40,319
======= =======
6. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
FEBRUARY 28, FEBRUARY 22,
1998 1997
------------ ------------
Senior Notes due September 1998, payable in semi-annual
installments of $300,000 with interest at 10.09%............. $ 600 $1,200
Senior Notes due October 1998, payable in semi-annual
installments of $335,000 with interest at 10.0%.............. 670 1,340
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%) through October 1997............................ -- 4
------ ------
$1,270 $2,544
Less, current portion....................................... 1,270 1,274
------ ------
$ -- $1,270
====== ======
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.
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 41,000 square foot building with a cost of $1,262,000 and
accumulated amortization of $1,223,000 as of February 28, 1998 and $1,144,000
as of February 22, 1997.
F-10
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 (total lease and related costs are approximately $580,000
or $14.00 per square foot).
The Company will relocate its corporate headquarters in July 1998 to a
65,000 square foot building in Rye, New York. This facility is leased from
CVS New York, Inc. under a sublease agreement expiring on January 30, 2005.
This operating lease will have an annual rent of $1,153,000 ($17.75 per
square foot), plus increases in real estate taxes and operating costs over
the initial lease year base costs. The Company has the right to renew the
lease, for 2 five-year periods, with the building owner upon expiration of
the sublease.
In connection with the planned relocation of its corporate headquarters,
in fiscal 1998, the Company wrote-off $1,330,000 on a pre-tax basis ($878,000
after tax), representing the entire unamortized value of its leasehold
improvements at the existing corporate headquarters facility in New Rochelle,
New York.
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 1999 through fiscal 2004, and
various renewal options through fiscal 2009. Most of the store leases also
provide for payment of common charges such as maintenance and real estate
taxes. Twelve stores require the payment of additional rent based upon a
percentage of sales. Minimum rental payments required under these agreements,
as well as the new Corporate Headquarters Sublease, are as follows (dollars
in thousands):
FISCAL YEAR
- -----------
1999............................................................... $ 2,549
2000............................................................... 2,934
2001............................................................... 2,703
2002............................................................... 2,566
2003............................................................... 2,127
Thereafter......................................................... 2,319
-------
$15,198
=======
Rent expense for fiscal 1998, 1997 and 1996 amounted to $2,612,000,
$2,171,000, and $1,840,000, respectively, which included $30,000, $14,000 and
$20,000 in fiscal 1998, 1997 and 1996, 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 become fully vested in their profit sharing account
balance after seven years. The authorized profit sharing contributions for
fiscal 1998, 1997, and 1996 were $480,000, $500,000, and $450,000,
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 1998, 1997, and 1996 were $460,000, $425,000, and
$398,000 respectively.
The Company has deferred compensation agreements to provide additional
retirement benefits for certain principal stockholders of the Company. The
deferred compensation agreements also provide for death benefits to be paid
to each party's beneficiary. The Company has purchased life insurance
policies to fund, in part, the payment of these benefits. Amounts expensed in
connection with these agreements were $353,000 in fiscal 1998, $366,000 in
fiscal 1997 and $150,000 in fiscal 1996.
F-11
9. STOCK COMPENSATION PLANS
At February 28, 1998, 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 in fiscal 1997, and by approximately $58,000 in fiscal
1998. If compensation cost for the Company's non-qualified stock options
issued and shares purchased through its stock purchase plan had been
determined based on the fair value at the grant dates for awards under those
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, the Company's net income and earnings per share would have
been reduced to the proforma amounts indicated below (dollars in thousands,
except per share amounts):
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
Net Income................. As reported $8,978 $5,354 $5,729
Pro forma $8,617 $5,112 $5,662
Basic earnings per share .. As reported $.94 $.55 $.59
Pro forma $.90 $.52 $.58
Diluted earnings per
share..................... As reported $.93 $.55 $.57
Pro forma $.89 $.52 $.56
The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan, and a total of 525,000 shares of
common stock have been reserved for issuance thereunder. Prior to adoption of
the 1997 Plan, the Company's 1987 Plan, which expired during the fiscal year,
had a total of 2,000,000 shares reserved for issuance. The Company has
granted and sold shares of restricted stock to certain executives at a
nominal price per share. In connection with the issuance of restricted stock,
unearned compensation is recorded ($197,400 in fiscal 1997) and amortized
over the respective vesting periods. Restricted shares were granted, and vest
as follows:
DATE GRANTED NUMBER OF SHARES DATE VESTED
------------ ---------------- -----------
March 1996..... 5,000 March 1997
March 1996..... 5,000 March 1998
June 1996...... 5,000 June 1997
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 for fiscal
years ended February 24, 1996 and February 22, 1997: 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%; for fiscal year
ended February 28, 1998: dividend yield of 2.0%, expected volatility of
29.0%, risk-free interest rate of 5.7%, expected term of five years, and a
forfeiture rate of 25%.
F-12
A summary of the Company's non-qualified stock option activity and
weighted average exercise prices for the three years ended February 28, 1998
follows:
FISCAL YEARS ENDED
-------------------------------------------------------------------------------
FEBRUARY 24, 1996 FEBRUARY 22, 1997 FEBRUARY 28, 1998
-------------------------- -------------------------- -------------------------
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................. 1,253,500 $13.36 1,057,000 $12.59 878,500 $14.20
Granted.................. 187,500 $13.38 262,500 $13.15 209,500 $16.29
Exercised................ (214,000) $15.21 (337,000) $8.08 (23,667) $12.62
Forfeited................ (170,000) $15.82 (104,000) $15.07 (10,000) $14.25
--------- --------- ---------
Outstanding at end of
year.................... 1,057,000 $12.59 878,500 $14.20 1,054,333 $14.72
========= ========= =========
Options exercisable at
year-end................ 695,667 472,833 628,165
Weighted-avg. fair value
of options granted
during the year......... $2.43 $2.38 $2.85
The following table summarizes information about stock options outstanding
at February 28, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED AVG.
REMAINING WEIGHTED WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
RANGE OF EXER. PRICES OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- --------------------- ----------- ---- ----------- ----------- -----------
$12.25-$18.13......... 1,054,333 7.1 YRS. $14.72 628,165 $14.71
The Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 50,000 shares of common stock for issuance
thereunder. Prior to the adoption of the 1997 Plan, the Company's 1993 Plan,
which expired during the fiscal year, had a total of 100,000 shares reserved
for issuance. The Company has granted non-qualified stock options to its
non-employee Directors both pursuant to the Plan and outside of the Plan.
These options are granted at market value, vest one year from the date of
grant and expire within ten years from the date of grant. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for fiscal years ended
February 24, 1996 and February 22, 1997: 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%; for the fiscal year ended February 28,
1998; dividend yield of 2.0%, expected volatility of 29.0%, risk-free
interest rate of 5.7%, expected term of five years, and a forfeiture rate of
6%.
F-13
A summary of the Company's stock option activity under the Non-Employee
Director Plan, and options granted to non-employee Directors outside the
Plan, for the three years ended February 28, 1998 follows:
FISCAL YEARS ENDED
----------------------------------------------------------------------
FEBRUARY 24, 1996 FEBRUARY 22, 1997 FEBRUARY 28, 1998
----------------------- ----------------------- ----------------------
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................. 20,000 $15.25 30,000 $14.79 40,000 $14.19
Granted.................. 10,000 $13.88 10,000 $12.38 20,000 $16.38
Exercised................ 0 -- 0 -- 0 --
Forfeited................ 0 -- 0 -- 0 --
------ ------ ------ ------ ------ ------
Outstanding at end of
year.................... 30,000 $14.79 40,000 $14.19 60,000 $14.92
====== ====== ======
Options exercisable at
year-end................ 20,000 30,000 40,000
Weighted-avg. fair value
of options granted
during the year......... $4.02 $3.61 $4.59
The following table summarizes information about stock options outstanding
under the Non-Employee Directors Plan, and options granted to non-employee
Directors outside the Plan, at February 28, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
RANGE OF EXER. PRICES OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- --------------------- ----------- ---- ----------- ----------- -----------
$12.38-$18.00......... 60,000 8.0 YRS. $14.92 40,000 $14.19
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 9,450 shares, 13,809 shares, and 9,878 shares
in fiscal 1998, 1997, and 1996, respectively. Pro forma compensation cost
equal to the 15% discount received by employees who purchased shares was
approximately $23,000 in fiscal 1998, $24,000 in fiscal 1997, and $21,000 in
fiscal 1996.
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10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL QUARTERS ENDED
------------------------------------------------------
MAY 24, AUGUST 23, NOVEMBER 22, FEBRUARY 28,
FISCAL 1998 1997 1997 1997 1998
- ----------- ---- ---- ---- ----
Revenues....................................... $27,748 $37,257 $106,305 $86,914
Income (loss) before income taxes.............. (3,553) (580) 14,476 3,260(1)
Net income (loss).............................. (2,345) (383) 9,554 2,152(1)
Net income (loss) per common share--Basic (2) . (.24) (.04) 1.00 .23(1)
Net income (loss) per common share--Diluted
(2)........................................... (.24) (.04) .99 .23(1)
Market price of shares outstanding
--market high................................. 15 15/16 17 1/4 17 1/2 18 5/8
--market low.................................. 12 1/2 15 1/2 14 7/8 14 1/8
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--Basic (2) . (.38) (.22) .90 .25
Net income (loss) per common share--Diluted
(2)........................................... (.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
- --------------
(1) Includes pre-tax write-off of $1,330 of unamortized leasehold
improvements ($878 or $.09 per share after-tax) due to the relocation
of the Company's Corporate Headquarters.
(2) Net income (loss) per common share has been restated to comply with
SFAS No. 128 (see Note 1 to the Consolidated Financial Statements).
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
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of February 28, 1998, the
Company had purchased 655,200 shares at a total cost of $9,461,000. The
shares are used by the Company to make the matching contribution to its
Profit Sharing/401(k) Plan, and to issue shares under its 1997 Performance
Unit, Restricted Stock, Non-Qualified and Incentive Stock Option Plan.
F-15
13. NONCASH FINANCING ACTIVITIES
During fiscal 1996 and 1997, certain non-qualified stock options were
exercised by stock plan participants using noncash 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
noncash 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 LOAN COMMON STOCK
---- --------- ----- ---- ------------
1996..... 112,500 shares $1,766,550 $117,393 95,307 shares
1997..... 180,000 shares $1,440,000 -- 133,759 shares
F-16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lillian Vernon Corporation:
We have audited the accompanying consolidated balance sheets of Lillian
Vernon Corporation and Subsidiaries as of February 28, 1998 and February 22,
1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
February 28, 1998. 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 28, 1998 and February 22,
1997, and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended February 28, 1998, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
New York, New York
April 15, 1998
F-17