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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999
OR
[ ] FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER 1-9637
LILLIAN VERNON CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2529859
- ------------------------ --------------------------------------
(STATE OF INCORPORATION) (I. R. S. EMPLOYER IDENTIFICATION NO.)
ONE THEALL ROAD, RYE, NEW YORK 10580
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (914) 925-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
PER SHARE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (SS.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND WILL
NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY
INFORMATION STATEMENT, INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K.
[X]
THE AGGREGATE MARKET VALUE FOR THE VOTING STOCK HELD BY NON-AFFILIATES (BASED
UPON THE CLOSING PRICE ON MAY 17, 1999) WAS APPROXIMATELY $69,240,000.
AS OF MAY 17, 1999, THERE WERE 9,194,347 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 21, 1999.
THE INDEX TO EXHIBITS APPEARS ON PAGE 24.
LILLIAN VERNON CORPORATION
FISCAL 1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS PAGE
PART I
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 10
Item 3. Legal Proceedings................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................. 12
Item 6. Selected Financial Data.......................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 14
Item 7a. Quantitative and Qualitative Disclosure about Market Risk....... 22
Item 8. Financial Statements and Supplementary Data..................... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 23
Item 11. Executive Compensation.......................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 23
Item 13. Certain Relationships and Related Transactions.................. 23
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................... 24
i
PART I
------
ITEM 1. BUSINESS
General
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Lillian Vernon Corporation (the "Company") is a direct mail specialty
catalog and online company concentrating on the marketing of gift, household,
gardening, kitchen, Christmas and children's products. The Company, a
predecessor of which was founded in 1951, seeks to provide customers with
reasonably priced products that can be differentiated from competitive products
either by design, price or personalization. In fiscal 1999, the Company
published 34 catalog editions, and mailed approximately 189,000,000 catalogs to
past and prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of products purchased. These and other factors
are analyzed by computer to rank and segment customers to determine those most
likely to purchase products offered in the Company's catalogs. The data base
contains information with respect to over 22 million customers, gift recipients
and people who have requested the Company's catalogs.
The Company derives a small portion of its revenue from the rental of its
customer list to direct mail marketers and other organizations and from a
magazine subscription upselling program. The Company has a Special Markets
Wholesale operation which makes sales of premium and incentive products to
numerous businesses, including Fortune 500 companies. Special Markets also sells
to the wholesale market. The Company additionally operates a chain of outlet
stores which sell Lillian Vernon merchandise. In addition to offering its
products through its catalogs, the Corporation offers its products through the
Internet, and in October 1998 launched its new Internet site.
The following table reflects the Company's history in the areas of
circulation of its catalogs, number of orders received and average revenue per
order received, over the last five fiscal years.
1
Fiscal Years Ended
-------------------------------------------------------------------------------
February February February February February
27, 1999 28, 1998 (3) 22, 1997 24, 1996 25, 1995
-------- ------------ -------- -------- --------
Number of catalogs 188,678 178,917 175,232 179,539 179,424
mailed (000's) (1)
Number of catalog 34 34 29 27 26
editions
Number of orders 4,812 4,936 4,643 4,903 4,940
received (000's)
Average revenue per $55.23 $54.13 $52.57 $49.31 $44.61
order received (2)
- --------------------
(1) "Number of catalogs mailed" includes catalog circulation to the extent
that related orders are received in that fiscal year.
(2) "Average revenue per order received" is not reduced for refunds, nor
does it include shipping and handling or applicable state sales tax
remittance.
(3) Fiscal 1998 contained 53 weeks.
Catalogs and Products
- ---------------------
The Company's catalogs are designed to capture the readers' interest
through the use of distinctive covers, colorful product presentations and
product descriptions that highlight significant features. The catalogs are
created and produced by the Company's in-house creative staff, which includes
designers, writers and production 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 1999, the
Company produced 34 different catalog editions.
2
Merchandise offered by the Company includes gifts, holiday products,
toys and children's products, personal and home accessories, kitchen and
houseware products, gardening and outdoor products. The Company employs a staff
of experienced buyers, who seek reliable sources for unique, quality
merchandise. The buyers attend numerous domestic and international trade and
merchandise shows, study merchandising trends, and review the performance of
merchandise previously offered. The Company also uses both its product
development staff and free-lance artists to develop distinctive designs for many
of its products, which the Company copyrights and has manufactured to its
specifications. The Company provides free monogramming and full name
personalization on many of the products it sells. In the past fiscal year,
products which can be personalized or which were manufactured to the Company's
exclusive design specifications accounted for about half of the products offered
by the Company.
Company Catalogs and Internet Activities
- ----------------------------------------
The Lillian Vernon catalog (the "Core catalog") offers a wide variety
of products including gifts, holiday products, toys and children's products,
personal and home accessories, kitchen and houseware products and outdoor
products. Depending on the time of the year, the Core catalogs contain between
96 and 120 pages, offering between 575 and 800 products. In fiscal 1999, the
Company produced 9 editions of its Core catalog.
The Private Sale catalog is primarily used to sell merchandise
overstocks and deleted products, and is generally mailed only to customers in
the Company's data base. The Private Sale catalog typically contains between 84
and 96 pages, offering between 450 and 550 products. In fiscal 1999, the Company
produced 4 editions of its Private Sale catalog.
The Company's Lilly's Kids catalog features toys, games, baby
products, room decor and fashion accessories for children. Depending upon the
time of the year, the Lilly's Kids catalog has between 56-84 pages, offering
between 325 and 550 products. In fiscal 1999, the Company produced 7 editions of
its Lilly's Kids catalog.
The Company's Christmas Memories catalog is targeted to the Christmas
season and offers ornaments, holiday decor, gifts, cards and many unique and
exclusive products. The Christmas Memories catalog typically is 64 pages,
offering 350 items. In fiscal 1999, the Company produced 2 editions of the
Christmas Memories catalog.
The Favorites catalog features many of the best-selling products
across all Lillian Vernon catalog divisions. The
3
Favorites catalog has between 48 and 72 pages, offering between 400 and 500
products. In fiscal 1999, the Company produced 4 editions of its Favorites
catalog.
The Company's Personalized Gift catalog features gift items, all
offered with personalization. The Personalized Gift catalog is typically between
48 and 72 pages and offers between 400 and 525 products. In fiscal 1999, the
Company produced 3 editions of its Personalized Gift catalog.
The Company combined its Lillian Vernon Kitchen and Neat Ideas
catalogs into one catalog utilizing the strongest elements of each catalog. The
new catalog, Neat Ideas, offers products which include closet, food preparation,
kitchen accessories, kitchen decor, tabletop, organization, bath, laundry,
car/garage and outdoor products. The Neat Ideas catalog has between 48 and 64
pages, offering between 350 and 450 products. In fiscal 1999, the Company
produced 4 editions of its Neat Ideas catalog.
The Lillian Vernon Gardening catalog, introduced in March 1998,
features a cross-section of functional garden products, as well as garden and
floral-themed decorative accessories. A typical Lillian Vernon Gardening catalog
has 48 pages offering 275 products. In fiscal 1999, the Company produced 1
edition of the Lillian Vernon Gardening catalog.
In the fall of fiscal 1999, the Company launched a new Internet site,
www.lillianvernon.com. This new World Wide Web catalog integrates upgraded
shopping capabilities and graphic enhancements to offer customers a
user-friendly site featuring the Company's most popular products in nine
categories. Additionally, all of the Company's 6,000-plus products from all of
its catalog titles can be ordered online using an electronic order form. The
online site features a Gift Registry and Gift Reminder which allows customers to
add items to a shopping list, automatically sent via e-mail to family and
friends as a reminder before special occasions such as birthdays, anniversaries
and holidays. The Company anticipates that online sales will continue to grow
and play an increasingly important role in the Company's future growth.
The Company offers a deferred billing program to its customers, in
which it agrees to charge the customers' credit cards for the full amount of
their purchase at a future date specified in each catalog. The Company does not
charge interest to the customers who participate in the deferred billing
program.
All products sold, including personalized products, are
unconditionally guaranteed. A customer may return any product, even if
personalized, for any reason. The dollar value of refunds requested by customers
under the guarantee in fiscal 1999 equated to approximately 4.6% of revenues.
4
The Company purchases its products from approximately 900 suppliers.
Approximately 79% of the merchandise is purchased abroad, predominantly from
manufacturers located in Taiwan, Hong Kong, the Peoples' Republic of China,
Italy, Germany and India. Most purchase orders are denominated in U.S. dollars.
Although no manufacturer is individually material to the Company's operations,
the Company buys significant quantities through several Far East trading
companies which utilize multiple manufacturers. The Company buys approximately
4% of its purchases through one Far Eastern buying agent, which acts as the
Company's representative in its dealings with many different manufacturers in
the Peoples' Republic of China, including Hong Kong. As a result of its use of
foreign suppliers, the Company is subject to the risks of doing business abroad,
but has experienced no disruptions. To date, the recent Asian economic downturn
has not materially affected the Company's sourcing of products in the region.
Management closely monitors the situation and believes that adequate replacement
sources are available to the Company if any of the Company's suppliers fail to
meet their obligations.
Marketing
- ---------
The Company maintains a proprietary customer data base containing
information with respect to over 22 million customers, gift recipients and
people who have requested its catalogs. In addition, the Company rents from, and
exchanges mailing lists or specific portions of lists with direct marketers and
other organizations to gain new customers. Approximately 189,000,000 catalogs
were mailed in fiscal 1999, of which approximately 80% were mailed to people
whose names were in the Company's proprietary data base and approximately 20%
were mailed to prospects derived from rented lists.
The Company offers customers special promotions such as gifts with
purchase, free shipping and handling, and a deferred billing option, in order
to increase sales.
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 success. The Company analyzes various factors
(e.g., frequency of order, date of last order, order size, type of products
purchased and demographic data) to rank its customer and prospect groups in
order to target its catalog mailings to those most likely to purchase its
merchandise. The Company updates its data base to include new customers and
eliminate non-responders. The Company does not engage in unresearched,
speculative mailings.
5
Magazine Upselling Program
- --------------------------
The Company launched a new telemarketing program in fiscal 1999 in
which all inbound order callers are offered the opportunity to subscribe to a
magazine of their choice at the guaranteed lowest subscription price. A third
party marketer of magazine subscriptions provides reimbursement to the Company
of costs related to this Program and provides revenue to the Company for every
magazine sold and upon the completion of the initial billing cycles of magazine
subscriptions.
List Rental
- -----------
The Company derives a small portion of its revenue from the rental of
its data base to direct mail marketers and other organizations, and from the
placement of advertisements for other companies' products in its outgoing
packages.
Order Fulfillment and Distribution
- ----------------------------------
Orders for merchandise are received by 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. Recently the Company established a
telemarketing center in Las Vegas, Nevada to supplement its Virginia Beach
telemarking facility. The Company also operates a temporary telephone order call
center in New Rochelle, New York during its peak selling season. The Company
receives telephone orders on a 24-hour basis, seven days a week, with orders
entered directly into the computer. Mail orders are opened, compared to
payments, batched and entered into computer terminals. During fiscal 1999, the
Company continued to upgrade its computer capacity to enable it to handle an
increase in telephone orders.
The Company is in the process of internally upgrading its existing
order entry system. The upgrade, which is expected to be completed by mid-1999,
will be Year 2000 compliant and will allow the Company cross-selling
capabilities where a customer will be offered a substitute or related product if
the product they are ordering is unavailable. The Company recently decided to
terminate the installation of a purchased order entry computer system. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
The majority of orders are processed, packed and shipped at the
Company's National Distribution Center. Some products are drop-shipped from
vendors directly to customers; this is the most cost-effective way of satisfying
the customer. Approximately 51% of customer orders were shipped by United Parcel
Service in fiscal 1999 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.
6
The Company's National Distribution Center, an 821,000 square foot
facility located in Virginia Beach, Virginia, is owned and operated by the
Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc. All
of the Company's distribution, and a majority of its warehousing activities, are
conducted at this facility. The National Distribution Center is generally
operated on a five-day-a-week basis, except during the Holiday season, when,
depending upon demand, it may operate on a six or seven-day-a-week, three-shift
basis. Personalization of products is also done at the Company's National
Distribution Center. In fiscal 1999, the Company increased the size of its
personalization area at the National Distribution Center to be able to meet
increased demand for personalized items. 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.
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 1999, the
Company spent approximately $23.2 million in total paper costs and approximately
$58.4 million in mailing catalogs and packages to its customers. In recent
years, the U.S. Postal Service has increased its rates for both the mailing of
catalogs and packages. The U.S. Postal Service increased its rates in late
fiscal 1999 by 3%. The Company does not anticipate a postal rate increase in
fiscal 2000; however, no assurance can be given that postal rates will not
continue to increase in the future. United Parcel Service, which increased its
rates in each of the last several years, also increased its rates in late fiscal
1999 by 5%. As of May 1, 1999, the Company will utilize the U.S. Postal Service
for regular delivery of all packages. The Company, after substantial testing and
review, chose the U.S. Postal Service as its principal carrier; this decision
will improve service to its customers and reduce costs for fiscal 2000 and
beyond. United Parcel Service will be used as an optional delivery service for
Second Day Air delivery at the customer's request for an additional charge.
The price of paper is dependent upon supply and demand in the
marketplace. The Company's paper costs increased approximately 10% in fiscal
1999 as compared to fiscal 1998, and are expected to be lower in fiscal year
2000. The Company has secured commitments for the majority of its fiscal 2000
paper needs, at the then-prevailing market prices for high-volume purchasers.
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.")
7
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 on the
Internet. In addition, the Company enters into barter transactions to eliminate
excess merchandise; no income is recoginized unless or until the barter credits
are utilized.
Seasonality
- -----------
The Company's business is seasonal. Historically, a substantial
portion of the Company's revenues and net income have been realized during its
third and fourth fiscal quarters, which encompass the period September through
February. Revenues and net income have been lower during its first and second
fiscal quarters, comprising the period March through August. The Company
believes this is the general pattern associated with mail order businesses.
Further discussion of the effect of seasonality upon revenues and income is
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Government Regulations
- ----------------------
The Company 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.
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
8
that state governments could not require out of state mail order companies to
collect and remit sales and use taxes without Congressional authorization. Since
that time, bills have periodically been introduced in Congress which would allow
states to impose sales tax collection responsibility upon mail order companies.
No bills have been enacted into law. Management is unable to predict the
likelihood of Congress passing such legislation. The Company does not expect
that the possible collection of sales tax would have a material effect on its
results of operations.
Trademarks and Copyrights
- -------------------------
The Company has federally registered service marks and/or logos for
"Lillian Vernon" and many of its catalog titles. In the opinion of the
management of the Company, the service mark "Lillian Vernon" is of significant
value because of its market recognition as a result of many years of use and the
large quantity of catalogs circulated.
The Company also possesses numerous copyrights and/or trademarks on
its products, none of which individually is material to the Company.
Employees
- ---------
As of February 27, 1999, the Company and its subsidiaries employed
approximately 1,500 employees. During the peak Holiday season, the Company
utilizes approximately 5,100 people including seasonal employees working in the
telephone order, order processing and distribution areas. Employees are not
covered by collective bargaining agreements. The Company considers its employee
relations to be good.
Competition
- -----------
The retail business in general, and mail order in particular, is
highly competitive. The Company competes primarily with other mail order
catalogs, as well as Internet websites and retail stores, including specialty
shops, and department stores, many of which have substantially greater financial
resources than the Company. The Company competes on the basis of its exclusive
product selection, its personalization capabilities, its proprietary customer
list, the quality of its customer service and its unconditional guarantee.
Although the Company attempts to market products not available elsewhere,
certain products similar to those marketed by the Company may be purchased from
time to time through other mail order catalogs, online, or in retail stores.
9
ITEM 2. PROPERTIES
Until July 1998, the Company's corporate headquarters and
administrative offices were located in a 41,664 square foot building in New
Rochelle, New York. This facility was leased from Port Chester Properties, an
entity owned by David C. and Fred P. Hochberg, sons of Lillian Vernon, the
Chairman and Chief Executive Officer of the Company, under a net sub-lease
expiring on July 30, 1998, with an 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 is a stockholder of the
Company. The terms of such net lease provided that the Company was 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 July 1998, the Company relocated 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 Special Markets Wholesale
operation. This facility is leased under a sublease agreement expiring on
January 30, 2005. In addition to base rent, the sublease provides that the
Company is responsible for increases in real estate taxes and operating costs
over a base year. The Company has received two renewal options, each for five
years, from the owners of the building, an unaffiliated entity, upon the
expiration of the sublease, in 2005.
The Company believes that its new headquarters facility, with its
increased area in one building, is adequate for its anticipated growth needs.
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. In fiscal 1999, the Company constructed 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 due to the increase in demand for personalized
products.
The Company also owns a 154,000 square foot building in Virginia Beach
which it utilizes for additional distribution and warehousing space.
All distribution and warehousing activities, as well as mail order
processing, customer service and telemarketing activities, are conducted at the
Virginia Beach facilities.
10
The Company leases 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. The current lease runs
through December 31, 2002.
In fiscal 1999, the Company leased 14,905 square feet in an office
complex in Las Vegas, Nevada, and established a permanent telemarketing
facility, with 150 telemarketing positions. The lease expires on February 28,
2004. In addition to base rent, the Company is responsible for its share of
operating expenses, real estate taxes and utility charges. The Company has an
option to extend the lease for a period of five years. Additionally, the
Company has a right of first offer with respect to any contiguous rental space
which may become vacant.
The Company leases sixteen retail locations, which serve as outlet
stores, in the states of Virginia, New York, Delaware and South Carolina. The
typical retail store is approximately 3,000 square feet. The retail store leases
expire from fiscal 2000 through fiscal 2004, and contain various renewal options
through fiscal 2009. The Company leases additional outlet store locations on a
short-term basis, particularly during the holiday season.
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.
11
PART II
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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 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
May 30, 1998 18 5/8 16 5/8
August 29, 1998 18 1/4 16
November 28, 1998 16 3/4 12 11/16
February 27, 1999 19 3/16 13 11/16
As of May 17, 1999, there were 355 registered holders of the Company's
Common Stock.
The Company has paid 29 consecutive quarterly cash dividends on its
common stock since an initial quarterly dividend of five cents ($.05) per share
was paid in May of 1992. The quarterly dividend was increased to seven cents
($.07) per share payable September 1, 1994, and to eight cents ($.08) per share
in March 1998. The Board of Directors intends to continue to declare and pay a
quarterly dividend. The amount of any such dividends will depend on the
Company's earnings, financial position, capital requirements and other relevant
factors.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the one million share repurchase program. The total cost of the
program was $15.1 million. On October 7, 1998, the Board of Directors approved a
new stock repurchase program which authorized the Company to repurchase up to an
additional one million shares of its common stock in the open market from time
to time, subject to market conditions. As of May 17, 1999, the Company had
repurchased 77,900 shares, at a total cost of approximately $1 million. The
Company uses these shares to make matching contributions to its Profit
Sharing/401(k) Plan and to issue shares under its Stock Option and Employee
Stock Purchase Plans.
12
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended
February February February February February
27, 1999 28, 1998 22, 1997 24, 1996 25, 1995
-------- -------- -------- -------- --------
Operating Results (3) (1) (3) (3) (3) (3)
(000's)
Revenues ................................. $255,220 $258,429 $240,053 $238,192 $222,211
Income before income taxes ............... 5,079 14,740 7,925 8,243 18,955
Net income ............................... 3,139 9,728 5,231 5,609 13,502
Per Share
Net income-Basic ......................... $ .34 $ 1.02 $ .54 $ .58 $ 1.42
Net Income-Diluted ....................... .34 1.01 .54 .56 1.37
Book value ............................... 12.37 12.46 11.83 11.70 11.40
Dividends ................................ .32 .29 .28 .28 .26
Financial Position At Year End (000's)
Cash and cash equivalents ................ $ 31,834 $ 26,136 $ 24,098 $ 25,771 $ 38,779
Working capital .......................... 69,996 73,951 70,739 76,721 79,068
Total assets ............................. 138,206 144,359 138,955 135,626 137,191
Long-term obligations (2) ................ -- 1,394 2,883 4,335 5,755
Stockholders' equity ..................... 113,264 116,839 113,702 112,692 109,806
Average shares outstanding (000's)
Basic ............................ 9,221 9,532 9,658 9,713 9,555
Diluted .......................... 9,319 9,636 9,664 9,981 9,892
- --------
(1) Fiscal year 1998 contained 53 weeks
(2) Includes current installments and long-term portions of debt and capital
lease obligations.
(3) Certain financial information has been restated. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,
and Note 7 to the Consolidated Financial Statements.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the results
of operations as a percentage of revenues. The table reflects certain
reclassifications made to conform to the current year's presentation.
Fiscal Years Ended
---------------------------------
February February February
27, 1999 28, 1998 22, 1997
-------- -------- --------
Revenues............................. 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs.......... (47.1) (48.2) (46.0)
Selling, general and
administrative expenses............ (50.1) (46.3) (50.7)
Write-off computer project,
severance costs (0.9) - -
----- ----- -----
Operating income................... 1.9 5.5 3.3
Interest income...................... 0.3 0.4 0.2
Interest expense..................... (0.2) (0.2) (0.3)
----- ----- -----
Income before income taxes........... 2.0 5.7 3.2
Provision for income taxes........... (0.8) (1.9) (1.0)
----- ----- -----
Net income........................... 1.2% 3.8% 2.2%
------ ------ ------
Fiscal 1999 and Fiscal 1998
- ---------------------------
Revenues for fiscal 1999 were $255.2 million, a decrease of $3.2
million, or 1.2% as compared to fiscal 1998. Order volume declined by
approximately 3% in fiscal 1999, principally due to one less week in the fiscal
year (52 weeks) as compared to fiscal 1998 (53 weeks). Catalog circulation was
higher by 5.5% in fiscal 1999. Average revenue per catalog declined in fiscal
1999 by approximately 5.7%, due to lower response rates, which were partially
offset by higher average revenue per order. The decline in revenues per catalog
was the result of the Company's circulation increase to prospective new
customers who were less responsive than existing customers,as well as less than
anticipated response in the existing customer data base. The current fiscal year
includes $1.6 million of revenue generated from the sale of magazine
subscriptions by the Company's telemarketing representatives, a new revenue
source in fiscal 1999.
Product and delivery costs include the cost of merchandise sold, the
cost of receiving, personalizing, filling and shipping orders, reduced by
shipping and handling revenue collected from customers. These costs of $120.1
million declined by $4.5 million, or 3.6% in fiscal 1999 compared to fiscal
1998, due principally to the lower volume of orders shipped. As a percentage of
revenues, product and delivery costs decreased from 48.2% in fiscal 1998 to
14
47.1% in fiscal 1999. The decrease in the percentage of revenues was primarily
due to higher gross profit on products sold, principally a result of higher
selling prices. United Parcel Service rates for packages increased by 9% in
late fiscal 1998, and by an additional 5% in late fiscal 1999. As of May 1,
1999, the Company will utilize the U.S. Postal Service for regular delivery of
all packages. The Company, after substantial testing and review, chose the U.S.
Postal Service as its principal carrier; this decision will improve service to
its customers and reduce costs for fiscal 2000 and beyond. United Parcel Service
will be used as an optional delivery service for second day delivery at the
customers' request, for an additional charge. Management continually implements
programs to attempt to increase revenues and reduce costs; in May 1998 the
fees for shipping and handling that are charged to its customers were increased.
Selling, general and administrative ("SG&A")expenses were $128.0
million in fiscal 1999, compared to $119.5 million in fiscal 1998, an increase
of $8.5 million, or 7.1%. The single largest component of these expenses is the
cost of producing, printing, and mailing the Company's catalogs. The increase
in SG&A expense was principally caused by 5.5% higher catalog circulation, as
well as an increase in the unit cost to produce a catalog. As a percentage of
revenues, SG&A expenses increased from 46.3% in fiscal 1998 to 50.1% in fiscal
1999. The percentage of SG&A expense to revenues increased primarily because the
average catalog generated lower revenue, and also cost more to produce. Paper
costs increased approximately 10% in fiscal 1999 as compared to fiscal 1998 and
are expected to be lower in fiscal year 2000. The Company 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 increased in January 1999 by approximately 3%, and there are no further
expected increases for the upcoming fiscal year.
In addition, SG&A costs in fiscal 1999 included approximately $1
million in computer costs related to the Company's Year 2000 compliance project.
The Company plans to spend an additional $1 million in fiscal year 2000, and it
is anticipating that full compliance in internal systems will be achieved in the
second fiscal quarter ending August 28, 1999.
Fiscal 1999 earnings reflected two non-recurring charges. In the third
quarter of fiscal 1999, the Company wrote-off its investment of $1.4 million
pre-tax ($920,000 after-tax) in a purchased order entry computer system. This
write-off had an earnings per share impact of $.10. The Company has decided to
internally upgrade its existing order entry system; the upgrade is scheduled to
be completed in mid-1999 at a substantially lower cost than installing and
customizing the purchased system. In the fourth quarter of fiscal 1999 the
Company incurred one-time severance costs of approximately $765,000 pre-tax
($497,000 after-tax) due to the departure of several executives. These severance
15
costs had an earnings per share impact of $.05.
The Company's previously reported operating results for the first three
quarters of fiscal 1999 have been restated by $190,000 pre-tax ($125,000
after-tax) due to the correction of an error made in the amortization of
leasehold improvements (See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fiscal 1998 and Fiscal 1997).
Interest income in fiscal 1999 was $.7 million, compared to $.9 million
in fiscal 1998. The decrease of $.2 million was the result of a lower average
investment balance. Interest expense in fiscal 1999 was comparable to fiscal
1998.
The Company's effective income tax rate in fiscal 1999 increased to
38.2%, as compared to 34% in fiscal 1998. The increase in the effective tax rate
was principally due to the establishment of a deferred tax valuation allowance
in fiscal 1999 related to management's current assessment of the Company's
inability to utilize its entire charitable contribution tax carryforward prior
to expiration.
Fiscal 1998 and Fiscal 1997
- ---------------------------
Revenues for fiscal 1998 were $258.4 million, an increase of $18.4 million,
or 7.7%, 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 fiscal 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 best 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 $124.6 million
increased by $14.3 million, or 12.9% 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 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, higher package delivery costs due to rate increases and 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.
16
Selling, general and administrative ("SG&A") expenses were $119.5
million in fiscal 1998, compared to $121.7 million in fiscal 1997, a decrease of
$2.2 million, or 1.8%. As a percentage of revenues, SG&A expenses also declined,
from 50.7% in fiscal 1997 to 46.3% 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 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 also 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 for 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
increase profits, 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 took
place at the end of the Company's existing lease, in July 1998. The move allowed
for continued growth. In connection with the planned relocation to the new
corporate headquarters, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in New Rochelle,
NY on February 28, 1998. The pre-tax charge previously reported was $1,330,000
($878,000 after-tax).
In fiscal 1999, the Company realized that an error had been made over
a period of years in the calculation of its amortization of leasehold
improvements at its former corporate headquarters. The Company had assumed that
the assets' useful life of fifteen years was the appropriate amortization
period, rather than the shorter remaining life of the lease, which terminated in
July 1998.
17
The Company has restated its annual and quarterly financial statements
for the years ended February 28, 1998, February 22, 1997, and February 24, 1996
and for the fiscal 1999 quarters ended May 30, August 29, and November 28, 1998,
to charge the revised amortization expense to selling, general and
administrative expenses in each of those periods. The pre-tax write-off of $1.3
million previously charged in fiscal 1998 has been reversed and reallocated as
income (expense) to the appropriate fiscal years as follows:
EPS Impact-
-------------------
Fiscal Years Ended Pre-tax Amount After-tax Amount Basic Diluted
- ------------------ -------------- ---------------- ----- -------
1985 - 1995 ($ 577,000) ($ 381,000) Not Applicable
February 24, 1996 ($ 182,000) ($ 120,000) ($ .01) ($ .01)
February 22, 1997 ($ 187,000) ($ 124,000) ($ .01) ($ .01)
February 28, 1998 $1,136,000 $ 750,000 $ .08 $ .08
February 27, 1999 ($ 190,000) ($ 125,000) ($ .01) ($ .01)
To reflect the impact of the restatement on its financial statements,
the Company filed (on March 18, 1999)Form 10-K/A for the year ended February 28,
1998, and Forms 10-Q/A for the fiscal 1999 quarters ended May 30, 1998, August
29, 1998, and November 28, 1998 with the Securities and Exchange Commission.
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.
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 lower demand for its products in the first half of its
fiscal year, the Company incurred a cumulative net loss during the first six
months of fiscal 1999, 1998, and 1997; management expects to incur a loss for
the first half of fiscal 2000 as well.
18
Liquidity and Capital Resources
- -------------------------------
The Company's balance sheet and liquidity are strong. Cash and cash
equivalents increased $5.7 million during fiscal 1999 to $31.8 million; the
current ratio improved from 4.2:1 at February 28, 1998 to 4.4:1 at February 27,
1999, and the Company repaid all outstanding long-term debt during fiscal 1999.
In fiscal 1999, the Company generated $17.4 million of cash from
operating activities. Inventory was reduced by $10.2 million as of the end of
fiscal 1999 compared to fiscal 1998, due largely to improved inventory control
procedures. The Company used $1.4 million of funds for long-term debt
repayments, and generated $2.7 million from the sale of common stock through its
employee stock option and purchase plans.
Capital spending in fiscal 1999 was $4.5 million. In fiscal 1999, the
Company expanded the personalization area of its National Distribution Center in
order to handle increased demand for personalized merchandise. It also invested
capital to improve both its distribution and telemarketing capabilities. The
Company has no significant capital commitments for fiscal 2000.
The Company entered into a $42 million four-year revolving credit
facility in August 1996, which can be used to finance working capital needs,
fixed assets, and up to $12 million of inventory letters of credit. At the
Company's option, up to $20 million of the facility can be converted into term
loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus
50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a
fixed rate, at the Company's option. The credit facility is unsecured, and the
Company is subject to financial covenants principally relating to its working
capital, net worth, interest coverage ratio and capital spending restrictions.
The Company has complied with all financial covenants.
The Company has paid 29 consecutive quarterly cash dividends commencing
May 1992. It increased its quarterly dividend from $.05 to $.07 per share in
September 1994, and from $.07 to $.08 per share in March 1998. The Company
anticipates continuing to pay dividends to its stockholders in the future. The
amount of any such dividends will depend on the Company's earnings, financial
position, capital requirements, and other relevant factors. Dividends in fiscal
1999 totaled $2.9 million, or $.32 per share.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the 1 million share repurchase program at a total cost of $15.1
million.
19
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. As of February 27, 1999,
the Company had repurchased 75,000 shares at a total cost of $967,000.
Total payments made to repurchase shares under both programs in fiscal 1999 were
$6.6 million.
The Company believes that its cash flow from operations, current
investment balance, and credit facilities will be sufficient to meet its
operating needs.
Effects of Inflation and Foreign Exchange
- -----------------------------------------
The Company is generally able to reflect cost increases and decreases resulting
from the effects of inflation and foreign currency fluctuations in its selling
prices. In addition, most foreign purchase orders are denominated in U.S.
dollars. Accordingly, the results of operations for the periods discussed have
not been significantly affected by these factors.
Year 2000 Compliance Program
- ----------------------------
The Company's Year 2000 compliance program is directed primarily
towards ensuring that the Company will be able to continue to perform its
critical functions: (1) process sales orders from, and ship merchandise to
customers, (2) order and receive merchandise from vendors, and (3) process
payments to vendors, employees and shareholders.
The Company is in the process of modifying its internal computer software
applications and systems to function properly with respect to dates in the Year
2000 and thereafter. The Company is utilizing both its in-house staff as well as
outside resources to modify its systems. This work is expected to be completed
by the end of the Company's second fiscal quarter ending August 28, 1999 and is
currently on schedule. In addition to internal systems, the Company has
established procedures to determine that outside computer software vendors are
either already Year 2000 compliant or have timely dates when they intend to be
compliant. The Company is also reviewing all computer hardware such as
mid-range, mainframe and personal computers, networks, telephone switches, voice
mail systems, and time clocks, as well as its distribution and warehouse
equipment, to ensure Year 2000 compliance. The Company has also contacted its
various merchandise vendors to inquire as to their Year 2000 readiness, and is
continuing to follow up with those vendors who have not responded to-date.
Costs
- -----
The Company presently anticipates that the cost of modifying its
computer software applications and systems to be Year 2000 compliant will be
approximately $2.0 million, of which approximately $1.0 million has been spent
to date. These amounts are expected to be funded from operating cash flow.
20
Risks
- -----
The variety and complexity of the Year 2000 issues identified and the
proposed solutions, the Company's dependence on the technical skills of
employees and independent contractors, and especially the representations and
readiness of third parties are among the factors that could cause the Company's
efforts to be less than fully effective. In addition, Year 2000 issues present a
number of risks that are beyond the Company's reasonable control, such as
continued service from outside parties such as utility companies, financial
institutions, and transportation and delivery companies (such as the U.S.
Postal Service and United Parcel Service).
The Company's peak selling season runs from September through
mid-December; therefore, disruption of its business at the beginning of calendar
Year 2000 would be less significant than if it happened during its peak season.
The Company expects to have adequate inventory on hand to service its customers,
and the Company expects to be able to shift its customer delivery operations to
alternative carriers, if necessary. The Company does not rely on any single
supplier for a significant portion of its products, and many of its vendors do
not rely on computerized manufacturing systems. The Company has computerized
telephone systems which process customer phone orders; any interruption in
service by major telephone carriers could have a detrimental impact on the
Company's ability to receive orders and service its customers.
An assessment of the readiness of Year 2000 compliance of third party
entities with which the Company has relationships is ongoing. The Company has
inquired, or is in the process of inquiring, of significant third party entities
as to their readiness with respect to Year 2000 compliance and to date has
received indications that many of them are either compliant or in the process of
remediation. The Company will continue to monitor these third party entities to
determine the impact on the business of the Company and the actions the Company
must take, if any, in the event of non-compliance by any of these third parties.
Based upon the Company's initial assessment of compliance by third parties,
there appears to be no material business risk posed by any such noncompliance
and, therefore, the Company has not developed a contingency plan.
Although the Company believes that its Year 2000 compliance program is
designed to appropriately identify and address those Year 2000 issues that are
subject to the Company's reasonable control, there can be no assurance that the
Company's efforts in this regard will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Recently Issued Accounting Standards
- ------------------------------------
Effective in the fourth quarter of fiscal 1999, the Company
21
adopted 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 SFAS 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
does not impact the Company's consolidated financial position, results of
operations, or cash flows, and any effect is limited to the form and content of
its disclosures.
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 replaced 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 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, as well as issues relating to Year 2000 compliance by
the Company's suppliers.
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-21.
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
None.
22
PART III
--------
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------
The information required by these Items is omitted because the Company
will file a definitive proxy statement pursuant to Regulation 14A with the
Commission, not later than 120 days after the end of the fiscal year, which
information is herein incorporated by reference as if set out in full.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted
as a separate section of this report on pages F-1 through F-21.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 27, 1999 and February 28, 1998..... F- 2
- -Statements of Income for the three Fiscal Years ended
1999, 1998 and 1997.......................................... F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 1999, 1998 and 1997....................... F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 1999, 1998 and 1997.................................... F- 5
- -Notes to Financial Statements................................ F- 6
- -Report of Independent Accountants............................ F-21
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are
not applicable or not required or because the required information is not
material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during the last
quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
24
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
2.1 - Plan and Agreement of Merger dated June 29, 1987 between
Lillian Vernon Corporation, a New York corporation, and
the Company......................................................... (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)
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)
25
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
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)
26
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
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............................................................ (17)
10.25 - Agreement of Sublease dated January 30, 1998 between CVS New
York, Inc. and the Company and exhibits............................. (17)
10.26 - Agreement between Lillian Vernon Corporation and Robert S.
Mednick dated June 11, 1998......................................... (18)
10.27 - Employment Agreement with Richard P. Randall dated August
11, 1998............................................................ (19)
10.28 - Employment Agreement with George Mollo, Jr. dated September 25,
1998................................................................ (20)
10.29 Rights Agreement dated as of April 15, 1999 between the Company
and Continental Stock Transfer & Trust Co........................... (21)
10.30 Supplement to Rights Agreement dated as of April 15, 1999
between the Company and Continental Stock Transfer & Trust Co. ..... E-1
10.31 - Industrial Real Estate Lease between the Company and Howard
Hughes Properties, Limited Partnership ............................. E-2
22 - Subsidiaries of registrant.......................................... E-70
24 - Consent of PricewaterhouseCoopers LLP re: incorporated reference
to Form S-8 ........................................................ E-72
27 - Financial Data Schedule............................................. E-74
- ------------------------------
(1) Filed with Registration Statement on Form S-1 (File No. 33-15430) and
incorporated by reference herein.
27
(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.
28
(17) Filed with Annual Report on Form 10-K for the year ended February 28, 1998,
and incorporated by reference herein.
(18) Filed with Quarterly Report on Form 10-Q for the quarter ended May 30,
1998, and incorporated by reference herein.
(19) Filed with Quarterly Report on Form 10-Q for the quarter ended August 29,
1998, and incorporated by reference herein.
(20) Filed with Quarterly Report on Form 10-Q for the quarter ended November 28,
1998, and incorporated by reference herein.
(21) Filed with Report on Form 8-K dated April 22, 1999, and incorporated by
reference herein.
29
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, 1999 By: /s/ Lillian Vernon
--------------------------
Lillian Vernon, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Lillian Vernon
- ---------------------------
Lillian Vernon Chairman of the Board May 26, 1999
of Directors (Principal
Executive Officer)
/s/ Richard P. Randall
- ---------------------------
Richard P. Randall Senior Vice President- May 26, 1999
Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Jonah Gitlitz
- ---------------------------
Jonah Gitlitz Acting President, May 26, 1999
and Director
/s/ David C. Hochberg
- ---------------------------
David C. Hochberg Vice President - Public May 26, 1999
Affairs and Director
/s/ Leo Salon
- ---------------------------
Leo Salon Director May 26, 1999
/s/ Bert W. Wasserman
- ---------------------------
Bert W. Wasserman Director May 26, 1999
/s/ Elizabeth M. Eveillard
- ---------------------------
Elizabeth M. Eveillard Director May 26, 1999
/s/ Richard A. Berman
- ---------------------------
Richard A. Berman Director May 26, 1999
30
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 27, FEBRUARY 28,
ASSETS 1999 1998
------ ------------------ ------------------
Current assets:
Cash and cash equivalents $31,834 $26,136
Accounts receivable, net 21,093 22,632
Merchandise inventories 26,700 36,935
Deferred income taxes (Note 2) 1,355 1,532
Prepayments and other current assets (Note 4) 9,671 10,173
------------------- ------------------
Total current assets 90,653 97,408
Property, plant and equipment, net (Notes 5 and 7) 37,811 37,823
Deferred catalog costs 6,192 5,922
Other assets 3,550 3,206
------------------- ------------------
Total $138,206 $144,359
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable and accrued expenses (Note 4) $17,437 $16,331
Cash overdrafts 1,920 1,004
Customer deposits 228 147
Current portion of long-term debt and lease obligations (Notes 6, 7) -- 1,394
Income taxes payable (Note 2) 1,072 4,581
------------------- ------------------
Total current liabilities 20,657 23,457
Deferred compensation (Note 8) 3,049 3,426
Deferred income taxes (Note 2) 1,236 637
------------------- ------------------
Total liabilities 24,942 27,520
------------------- ------------------
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 1999 and
in 1998 104 104
Additional paid-in capital 31,322 31,160
Retained earnings 100,760 100,883
Unearned compensation -- (6)
Treasury stock, at cost - 1,231,806 shares in 1999
and 1,016,491 shares in 1998 (Note 13) (18,922) (15,302)
------------------- ------------------
Total stockholders' equity 113,264 116,839
------------------- ------------------
Total $138,206 $144,359
------------------- ------------------
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 27, FEBRUARY 28, FEBRUARY 22,
1999 1998 1997
------------ ------------ ------------
Revenues $ 255,220 $ 258,429 $ 240,053
Costs and expenses:
Product and delivery costs 120,125 124,624 110,374
Selling, general and administrative expenses 128,002 119,471 121,717
Write-off - computer project, severance costs (Notes 11, 12) 2,180 -- --
--------- --------- ---------
250,307 244,095 232,091
--------- --------- ---------
Operating income 4,913 14,334 7,962
Interest income 731 910 614
Interest expense (565) (504) (651)
--------- --------- ---------
Income before income taxes 5,079 14,740 7,925
Provision for (benefit from) income taxes (Note 2):
Current 1,220 4,566 3,622
Deferred 720 446 (928)
--------- --------- ---------
1,940 5,012 2,694
--------- --------- ---------
Net income $ 3,139 $ 9,728 $ 5,231
--------- --------- ---------
Net income per common share - Basic $ .34 $ 1.02 $ .54
--------- --------- ---------
Net income per common share - Diluted $ .34 $ 1.01 $ .54
--------- --------- ---------
Weighted average number of common shares -
Basic 9,221 9,532 9,658
Weighted average number of common shares and
common share equivalents - Diluted 9,319 9,636 9,664
See Notes to Consolidated Financial Statements
F - 3
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK
------------------------ PAID -IN RETAINED UNEARNED
TOTAL SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
---------------------------- ------------ ------------ ----------- ------------
BALANCE, FEBRUARY 24, 1996 $ 112,692 9,993,643 $ 100 $ 27,026 $ 91,422 --
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan -- 15,000 -- 197 (197)
Exercise of non-qualified
stock options 893 337,000 4 2,720
Amortization of unearned
compensation 103 103
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 184 17,677 -- 184
Purchase of treasury stock (3,333)
Dividends ($.28 per share) (2,724) (2,724)
Other 656 656
Net income 5,231 5,231
---------------------------------------------------------------------------------------
BALANCE, FEBRUARY 22, 1997 113,702 10,363,320 104 30,783 93,929 (94)
Exercise of non-qualified
stock options 297 16,000 -- 200 (17)
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)
Dividends ($.29 per share) (2,757) (2,757)
Other 37 37
Net income 9,728 9,728
---------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 116,839 10,389,674 104 31,160 100,883 (6)
Exercise of non-qualified
stock options 2,048 (311)
Amortization of unearned
compensation 6 6
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 157 (33)
Shares issued for 401-k Plan
matching contribution 476 22
Purchase of treasury stock (6,623)
Dividends ($.32 per share) (2,940) (2,940)
Other 162 162
Net income 3,139 3,139
---------------------------------------------------------------------------------------
BALANCE, FEBRUARY 27, 1999 $ 113,264 10,389,674 $ 104 $ 31,322 $ 100,760 --
---------------------------------------------------------------------------------------
TREASURY STOCK
----------------------------
SHARES AMOUNT
------------ --------------
BALANCE, FEBRUARY 24, 1996 (359,999) ($ 5,856)
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan
Exercise of non-qualified
stock options (133,759) (1,831)
Amortization of unearned
compensation
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan
Purchase of treasury stock (259,700) (3,333)
Dividends ($.28 per share)
Other
Net income
----------------------------------
BALANCE, FEBRUARY 22, 1997 (753,458) (11,020)
Exercise of non-qualified
stock options 7,667 114
Amortization of unearned
compensation
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan
Purchase of treasury stock (270,700) (4,396)
Dividends ($.29 per share)
Other
Net income
----------------------------------
BALANCE, FEBRUARY 28, 1998 (1,016,491) (15,302)
Exercise of non-qualified
stock options 154,833 2,359
Amortization of unearned
compensation
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 12,367 190
Shares issued for 401-k Plan
matching contribution 29,785 454
Purchase of treasury stock (412,300) (6,623)
Dividends ($.32 per share)
Other
Net income
----------------------------------
BALANCE, FEBRUARY 27, 1999 (1,231,806) ($ 18,922)
----------------------------------
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 27, FEBRUARY 28, FEBRUARY 22,
1999 1998 1997
------------ ----------- ----------
Cash flows from operating activities:
Net income $ 3,139 $ 9,728 $ 5,231
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 4,488 4,672 4,279
Amortization 250 324 454
Write-off - computer project 1,414 -- --
(Gain) loss on sale of assets -- (7) (8)
(Increase) decrease in accounts receivable 1,539 1,844 (3,041)
(Increase) decrease in merchandise inventories 10,235 (6,455) 468
(Increase) decrease in prepayments and other current assets 502 265 3,793
(Increase) decrease in deferred catalog costs (270) 218 366
(Increase) decrease in other assets (2,002) (1,040) (309)
Increase (decrease) in trade accounts payable and accrued expenses 1,106 1,846 2,370
Increase (decrease) in customer deposits 81 (113) 132
Increase (decrease) in income taxes payable (3,509) 1,866 (177)
Increase (decrease) in deferred compensation (377) (74) 401
Increase (decrease) in deferred income taxes 776 595 (932)
-------- -------- --------
Net cash provided by (used in) operating activities 17,372 13,669 13,027
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,476) (3,122) (10,284)
Proceeds from sale of assets -- 7 8
-------- -------- --------
Net cash used in investing activities (4,476) (3,115) (10,276)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,394) (1,489) (1,452)
Proceeds from issuance of common stock -- 437 1,077
Reissuance of treasury stock for stock option and employee benefit plans 2,681 -- --
Increase (decrease) in cash overdrafts 916 (348) 1,352
Dividends paid (2,940) (2,757) (2,724)
Payments to acquire treasury stock (6,623) (4,396) (3,333)
Other 162 37 656
-------- -------- --------
Net cash used in financing activities (7,198) (8,516) (4,424)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,698 2,038 (1,673)
-------- -------- --------
Cash and cash equivalents at beginning of period 26,136 24,098 25,771
-------- -------- --------
Cash and cash equivalents at end of period $ 31,834 $ 26,136 $ 24,098
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 370 $ 347 $ 582
Income taxes 4,567 2,646 3,028
Supplemental disclosure of noncash financing activities - see Note 14
See Notes to Consolidated Financial Statements
F - 5
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Lillian Vernon Corporation is a direct mail specialty catalog and online
company, concentrating on the marketing of gift, household, gardening, kitchen,
Christmas and children's products.
The consolidated financial statements include the accounts of Lillian
Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon Fulfillment
Services, Inc., Lillian Vernon International, Ltd., and LVC Retail Corporation
(the "Company"). All material intercompany balances and transactions have been
eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on the
last Saturday in February. Under this policy, fiscal 1999 and fiscal 1997 each
consisted of 52 weeks and fiscal 1998 consisted of 53 weeks.
Cash Equivalents
Cash equivalents 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 $30.9 million and $25.7 million
as of February 27, 1999 and February 28, 1998, respectively, are classified as
held-to-maturity securities, and as such, are stated at amortized cost, which
approximates market value.
Revenue Recognition
The Company records revenue at the time of shipment for catalog and online
sales, and at the point of sale in its retail stores.
Merchandise Inventories
Merchandise inventories are principally stated at the lower of average cost
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. Prepaid catalog costs, consisting mostly of
paper to be used to print future catalogs, are included in prepayments and other
current assets in the accompanying Balance Sheets.
F-6
Capitalized Software Costs
Direct costs of developing new software applications are capitalized and
are being amortized over five years. Amortization of capitalized software costs
totaled $127,000 in fiscal 1999, $188,000 in fiscal 1998, and $320,000 in fiscal
1997.
Capitalized software costs, net of accumulated amortization, are included
in other assets, and amounted to $212,000 and $1,275,000 at February 27, 1999
and February 28, 1998, respectively. (See Note 11).
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, or the
term of the applicable leases, whichever is shorter.
Income Taxes
Deferred income taxes arise from differences in the timing of income and
expense recognition for financial and income tax reporting purposes. Statement
of Financial Accounting Standards No. 109 requires the Company to compute
deferred income taxes on 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. Valuation allowances are
required to be established to reduce deferred tax assets to the amounts more
likely than not to be realized.
Per Share Data
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
are computed and reported on a dual presentation basis. Basic earnings per share
are computed by dividing net income by the weighted average number of
outstanding shares for the period. Diluted earnings per share are computed by
dividing net income by the sum of the weighted average number of outstanding
shares and share equivalents computed. The Company's common share equivalents
consist of stock options issued to key employees and Directors. 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.
F-7
Basic and diluted earnings per share were calculated as follows (amounts in
thousands):
February 27, February 28, February 22,
Fiscal Years Ended 1999 1998 1997
- --------------------------------------------------------------------------
Net Income-Basic and Diluted $3,139 $9,728 $5,231
---------------------------------
Weighted average number of outstanding
shares for Basic EPS 9,221 9,532 9,658
Add: incremental shares from
stock option exercises 98 104 6
-------------------------------
Weighted average number of outstanding
shares for Diluted EPS 9,319 9,636 9,664
-------------------------------
In fiscal 1999, 1998, and 1997, options on 394,000, 369,000, and 813,500 shares
of common stock, respectively, were not included in the calculation of weighted
average shares for diluted EPS because their effects were antidilutive.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments does not materially
differ from their carrying values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation
The Company follows the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company implemented
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," in fiscal 1997, but continued
its current accounting for stock-based employee compensation, under APB Opinion
No. 25 (see Note 9).
Comprehensive Income
In fiscal 1999, the Company adopted 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
F-8
and losses). SFAS No. 130 has no impact on the Company's financial statements,
and the Company does not have any items of "other comprehensive income" to
report for the fiscal years 1999, 1998, and 1997.
Segment and Geographic Information
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) 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. The Company operates
primarily in one business segment, the direct mail specialty catalog and online
business. The Company derives all revenues from customers in the United States,
and no individual customer accounted for 10% or more of revenues for any of the
periods presented. Substantially all identifiable assets are located in the
United States.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform with the fiscal 1999 presentation.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 27, February 28, February 22,
1999 1998 1997
------------------------------------------
Federal $ 1,026 $ 4,198 $ 3,314
State 194 368 308
--------------- ----------- ------------
$ 1,220 $ 4,566 $ 3,622
--------------- ----------- ------------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 27, February 28, February 22,
1999 1998 1997
------------------------------------------
Charitable contributions $ - $ 124 $ (216)
Depreciation 848 245 (127)
Catalog costs 135 (96) (204)
Capitalized software (175) (74) (85)
Valuation allowance-charitable
contributions carryforward 250 - -
Other, net (338) 247 (296)
---------- ---------- ----------
$ 720 $ 446 $ (928)
---------- ---------- ----------
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 $162,000, $37,000, and $656,000 for fiscal 1999, 1998, and
1997, respectively.
F-9
The Company's effective income tax rate is reconciled to the U.S. federal
statutory tax rate as follows:
Fiscal Years Ended
-----------------------------------------
February 27, February 28, February 22,
1999 1998 1997
-----------------------------------------
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal tax benefit 2.5 1.9 2.5
Charitable contributions of
merchandise (2.0) (1.2) (3.5)
Valuation allowance-charitable
contributions carryforward 4.9 - -
Other, net (1.2) (0.7) 1.0
------- ------- ------
38.2% 34.0% 34.0%
------- ------- ------
The deferred tax assets and deferred tax liabilities recorded on the Balance
Sheets are as follows (dollars in thousands):
February 27, 1999 February 28, 1998
-------------------- ----------------------
Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Catalog deferrals $ - $ 2,406 $ - $ 2,270
Charitable contributions 1,894 - 2,042 -
Inventory capitalization 873 - 848 -
Accrued expenses 959 - 660 -
Valuation allowance (250) - - -
Other 294 9 261 9
------ ------ ------ ------
Total current 3,770 2,415 3,811 2,279
------- ------- ------ ------
Non-current:
Depreciation - 2,529 - 1,770
Amortization 7 8 33 183
Deferred compensation 1,294 - 1,283 -
-------- -------- ----- -------
Total non-current 1,301 2,537 1,316 1,953
------- ------- ------- ------
Total $ 5,071 $ 4,952 $5,127 $4,232
------- ------- ------- ------
As of February 27, 1999, the Company has $3,975,000 of charitable contributions
carryforward for Federal income tax purposes, which expire from fiscal 2000 to
2002. The Company established a deferred tax valuation allowance in fiscal 1999
related to management's current assessment of the Company's inability to utilize
its entire charitable contributions tax carryforward prior to expiration.
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
F-10
payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus
50 basis points, or a fixed rate, at the Company's option. The credit facility
is unsecured, and the Company is subject to various financial covenants
principally relating to its working capital, net worth, interest coverage ratio
and capital spending restrictions. The Company is in compliance with all
financial covenants.
In fiscal 1999, 1998, and 1997, the Company incurred commitment fees on the
credit facility ranging from 5 basis points on the letters of credit to 20 basis
points on the available revolving credit line.
During fiscal 1999, the maximum amount outstanding under the revolving
credit agreement was $21.0 million (excluding letters of credit). Interest
expense related to these borrowings was approximately $263,000. No amounts were
outstanding under the Company's credit facilities as of February 27, 1999 and
February 28, 1998.
The Company had outstanding letters of credit approximating $4,845,000 and
$7,324,000 as of February 27, 1999 and February 28, 1998, respectively, for the
purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs
(principally paper) of $7,246,000 and $7,365,000 as of February 27, 1999 and
February 28, 1998, respectively.
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
February 27, February 28,
1999 1998
------------ -----------
Trade accounts payable $ 5,025 $ 8,644
Catalog costs 4,612 1,892
Salaries and compensation 2,514 1,264
Other 5,286 4,531
------------ -----------
$ 17,437 $ 16,331
------------ -----------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
February 27, February 28,
1999 1998
------------ -----------
Land and buildings $ 32,507 $ 31,778
Machinery and equipment 32,577 29,035
Furniture and fixtures 3,670 3,561
Leasehold improvements 896 3,989
Capital leases - 1,262
------------ ------------
Total property, plant & equipment, at cost 69,650 69,625
Less: accumulated depreciation & amortization 31,839 31,802
------------ ------------
Property, plant & equipment, net $ 37,811 $ 37,823
------------ ------------
F-11
6. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
February 27, February 28,
1999 1998
------------ -----------
Senior Notes due September 1998,
payable in semi-annual installments
of $300,000 with interest at 10.09% ......... $ - $ 600
Senior Notes due October 1998, payable
in semi-annual installments of
$335,000 with interest at 10.0% ............. - 670
------------- ------------
$ - $ 1,270
Less, current portion ..................... - 1,270
------------- ------------
$ - $ -
------------- ------------
The Company's long-term debt agreements required that the Company meet
certain financial covenants, principally related to working capital and tangible
net worth, both as defined in the agreements. The Company was in full compliance
with all financial covenants during the fiscal years ended February 27, 1999 and
February 28, 1998.
7. LEASES
In July 1998, the Company relocated its corporate headquarters to a 65,000
square foot building in Rye, New York. This facility is leased under a sublease
agreement expiring on January 30, 2005. The sublease provides that the Company,
in addition to base rent, is only responsible for increases in real estate taxes
and operating costs over the initial lease year base costs. The Company has the
right to renew the lease, for two five-year periods, with the building owner
upon expiration of the sublease.
The Company leased its former New Rochelle, New York corporate headquarters
under a capital lease arrangement with a partnership, Port Chester Properties,
the partners of which are certain stockholders of the Company. The leased asset
consisted 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. The lease
expired on July 30, 1998 and provided for the payment by the Company of an
annual rent of $430,000 and all real estate taxes, insurance, and certain other
costs.
In connection with the relocation of its corporate headquarters, in fiscal
1998, the Company initially reported a write-off of $1,330,000, representing the
entire unamortized value of its leasehold improvements at the former corporate
headquarters facility in New Rochelle, New York.
F-12
In fiscal 1999, the Company realized that an error had been made over a
period of years in the calculation of its amortization of leasehold
improvements. The Company had assumed that the assets' useful life of fifteen
years was the appropriate amortization period, rather than the shorter remaining
life of the lease, which terminated in July 1998.
The Company has restated its annual and quarterly financial statements for
the fiscal years ended February 28, 1998, February 22, 1997, and February 24,
1996, and for the fiscal 1999 quarters ended May 30, August 29, and November 28,
1998, to charge the revised amortization expense to selling, general and
administrative expenses in each of those periods. The pre-tax write-off of $1.3
million previously charged in fiscal 1998 has been reversed and reallocated as
income (expense) to the appropriate fiscal years as follows:
EPS Impact-
Fiscal Years Pre-tax After-tax ------------------
Ended Amount Amount Basic Diluted
- ----------------- ----------- --------- ----- -------
1985-1995 ($577,000) ($381,000) Not Applicable
February 24, 1996 ($182,000) ($120,000) ($.01) ($.01)
February 22, 1997 ($187,000) ($124,000) ($.01) ($.01)
February 28, 1998 $1,136,000 $750,000 $.08 $.08
February 27, 1999 ($190,000) ($125,000) ($.01) ($.01)
The Company has operating lease agreements for certain computer and other
equipment used in its operations, for its outlet store locations, and for its
Las Vegas Call Center, with existing lease terms ranging from fiscal 2000
through fiscal 2005, and various renewal options through fiscal 2015. Most of
the store leases also provide for payment of common charges such as maintenance
and real estate taxes. Eleven stores require the payment of additional rent
based upon a percentage of sales. Minimum rental payments required under these
agreements, as well as the Corporate Headquarters sublease, are as follows
(dollars in thousands):
Fiscal Year
- ------------------
2000 $ 3,154
2001 2,971
2002 2,843
2003 2,409
2004 1,385
Thereafter 1,058
-------
$13,820
-------
Rent expense for fiscal 1999, 1998, and 1997 amounted to $3,882,000, $2,612,000,
and $2,171,000 respectively, which included $18,000, $30,000 and $14,000 in
fiscal 1999, 1998 and 1997 respectively, for contingent rentals based upon a
percentage of outlet store sales.
F-13
8. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for the benefit of all
employees who meet certain minimum service requirements. The Company's profit
sharing contribution is discretionary, as determined by the Board of Directors.
Employees fully vest in their profit sharing account balance after seven years.
The authorized profit sharing contributions for fiscal 1999, 1998, and 1997 were
$500,000, $480,000, and $500,000, respectively.
The Company's profit sharing plan includes an employee contribution and
employer matching contribution (401k) feature. Under the 401k feature of the
plan, eligible employees may make pre-tax contributions up to 10% of their
annual compensation. Employee contributions of up to 6% of compensation are
currently matched by the Company at a rate of 50%. The matching contribution is
made with Company stock. Employees are 100% vested in their pre-tax
contributions at all times, and become fully vested in the employer matching
contribution after two years of service. The Company's matching contributions to
the plan for fiscal 1999, 1998, and 1997 were $509,000, $460,000, and $425,000
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 $129,000 in fiscal 1999, $353,000 in fiscal 1998 and
$366,000 in fiscal 1997.
9. STOCK COMPENSATION PLANS
At February 27, 1999, 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 $4,000 in
fiscal 1999, by approximately $58,000 in fiscal 1998, and by approximately
$68,000 in fiscal 1997. 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
F-14
been reduced to the proforma amounts indicated below (dollars in thousands,
except per share amounts):
February 22, February 28, February 27,
Fiscal Years Ended 1997 1998 1999
- ------------------------------------------------- -------------- ------------
Net Income As reported $5,231 $9,728 $3,139
Pro forma $4,989 $9,367 $2,724
Basic earnings As reported $0.54 $1.02 $0.34
per share Pro forma $0.51 $0.98 $0.30
Diluted earnings As reported $0.54 $1.01 $0.34
per share Pro forma $0.51 $0.97 $0.29
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 in fiscal 1998, had a total of
2,000,000 shares reserved for issuance. The Company has granted and sold shares
of restricted stock to certain executives at a nominal price per share. In
connection with the issuance of restricted stock, unearned compensation is
recorded ($197,400 in fiscal 1997) and amortized over the respective vesting
periods. No such restricted shares were granted or sold by the Company in fiscal
1999 or 1998. In fiscal 1997, restricted shares were granted, and vested 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:
February 22, February 28, February 27,
Fiscal Years Ended 1997 1998 1999
- ----------------------------------------------------------------------
Expected volatility 29.1% 29.0% 29.3%
Dividend yield 2.0% 2.0% 2.0%
Risk-free interest rate 6.3% 5.7% 5.3%
Expected option term 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate 25.0% 25.0% 25.0%
F-15
A summary of the Company's non-qualified stock option activity and weighted
average exercise prices for the three years ended February 27, 1999 follows:
Fiscal Years Ended
-----------------------------------------------------------------
February 22, 1997 February 28, 1998 February 27, 1999
------------------- ------------------- -------------------
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 1,057,000 $12.59 878,500 $14.20 1,054,333 $14.72
Granted 262,500 $13.15 209,500 $16.29 40,000 $15.42
Exercised (337,000) $ 8.08 (23,667) $12.62 (154,833) $13.21
Forfeited (104,000) $15.07 (10,000) $14.25 (41,496) $15.77
Expired 0 - 0 - 0 -
--------- --------- ---------
Outstanding
at end of yr. 878,500 $14.20 1,054,333 $14.72 898,004 $14.96
--------- --------- ---------
Options
exercisable
at year-end 472,833 628,165 676,841
Weighted-avg.
fair value of
options granted
during the year $2.38 $2.85 $2.87
The following table summarizes information about stock options outstanding
at February 27, 1999.
Options Outstanding Options Exercisable
------------------------------- ----------------------
Weighted Avg.
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ----------- ----------- ------------ ---------- ----------- -----------
$12.25-18.13 898,004 6.2 Yrs. $14.96 676,841 $14.88
The Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 100,000 shares of common stock for issuance
thereunder. Prior to the adoption of the 1997 Plan, the Company's 1993 Plan,
which expired in fiscal 1998, had a total of 100,000 shares reserved for
issuance. The Company has granted non-qualified stock options to its
non-employee Directors both pursuant to the Plan and outside the Plan. These
options are granted at market value, vest one year from the date of grant and
expire within ten years from the date of grant.
F-16
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
February 22, February 28, February 27,
Fiscal Years Ended 1997 1998 1999
- --------------------------------------------------------------------
Expected volatility 29.1% 29.0% 29.3%
Dividend yield 2.0% 2.0% 2.0%
Risk-free interest rate 6.3% 5.7% 5.2%
Expected option term 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate 6.0% 6.0% 6.0%
A summary of the Company's stock option activity under the Non-Employee
Director Plan, and options granted to non-employee Directors outside the Plan,
for the three years ended February 27, 1999 follows:
Fiscal Years Ended
---------------------------------------------------------------
February 22, 1997 February 28, 1998 February 27, 1999
------------------- ------------------- -------------------
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 30,000 $14.79 40,000 $14.19 60,000 $14.92
Granted 10,000 $12.38 20,000 $16.38 20,000 $16.88
Exercised 0 - 0 - 0 -
Forfeited 0 - 0 - 0 -
Expired 0 - 0 - 0 -
------ ------ ------
Outstanding
at end of yr. 40,000 $14.19 60,000 $14.92 80,000 $15.41
------ ------ ------
Options
exercisable
at year-end 30,000 40,000 60,000
Weighted-avg.
fair value of
options granted
during the year $3.61 $4.59 $4.63
The following table summarizes information about stock options outstanding
at February 27, 1999:
Options Outstanding Options Exercisable
----------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ----------- ----------- ----------- ---------- ----------- ----------
$12.38-18.00 80,000 8.1 Yrs. $15.41 60,000 $14.92
F-17
The Company also has an Employee Stock Purchase Plan, with a total of
100,000 shares reserved for issuance. Under the Employee Stock Purchase Plan,
eligible employees can purchase shares of the Company's stock at the end of each
fiscal quarter, at a price equal to 85% of the average price of the stock on the
last trading day of the fiscal quarter. A maximum of $25,000 of common stock may
be purchased by an eligible employee in each calendar year. Under the Plan,
employees elected to purchase 18,207 shares, 9,450 shares, and 13,809 shares in
fiscal 1999, 1998, and 1997, respectively. Pro forma compensation cost equal to
the 15% discount received by employees who purchased shares was approximately
$38,000 in fiscal 1999, $23,000 in fiscal 1998, and $24,000 in fiscal 1997.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended
-------------------------------------------------------
Fiscal 1999 May 30, August 29, November 28, February 27,
- ----------- 1998 1998 1998 1999
-------- ---------- ------------ -----------
Revenues $ 32,012 $ 39,386 $107,871 $ 75,951
Income (loss) before
income taxes (4,129) (2,982) 11,644(1) 546(2)
Net income (loss) (2,725) (1,968) 7,638(1) 194(2)
Net income (loss) per
common share-Basic (.29) (.21) .84(1) .02(2)
Net income (loss) per
common share-Diluted (.29) (.21) .84(1) .02(2)
Market price of shares
outstanding
- -market high 18 5/8 18 1/4 16 3/4 19 3/16
- -market low 16 5/8 16 12 11/16 13 11/16
Fiscal Quarters Ended
----------------------------------------------------
May 24, August 23, November 22, February 28,
Fiscal 1998 1997 1997 1997 1998
- ----------- -------- ---------- ------------ -----------
Revenues $ 27,748 $ 37,257 $ 106,305 $ 87,119(3)
Income (loss) before
income taxes (3,602) (629) 14,427 4,544
Net income (loss) (2,377) (415) 9,522 2,998
Net income (loss) per
common share-Basic (.25) (.04) 1.00 .32
Net income (loss) per
common share-Diluted (.25) (.04) .99 .32
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
(1) See Note 11 -- Write-off of Computer Project.
(2) See Note 12 -- Severance Costs.
(3) Restated to conform with the current year presentation.
F-18
11. WRITE-OFF OF COMPUTER PROJECT
During the third quarter of fiscal 1999, the Company recorded a
non-recurring charge related to the termination of the installation of a
purchased order entry computer system, and wrote off its investment of
$1.4 million on a pre-tax basis ($920,000 after-tax). The Company has decided
to internally upgrade its existing order entry system; the upgrade is scheduled
to be completed in mid-1999 at a substantially lower cost than installing and
customizing the purchased system.
12. SEVERANCE COSTS
In the fourth quarter of fiscal 1999, the Company recorded severance costs
of $765,000 on a pre-tax basis ($497,000 after-tax) related to the departure of
several executives.
13. STOCK REPURCHASE PROGRAMS
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the 1 million share repurchase program at a total cost of $15,118,000.
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. As of February 27, 1999,
the Company had repurchased 75,000 shares at a total cost of $967,000.
The repurchased shares are used by the Company to make matching
contributions to its Profit Sharing/401(k) Plan, to issue shares under its 1997
Performance Unit, Restricted Stock, Non-Qualified and Incentive Stock Option
Plan, to issue shares under its 1997 Stock Option Plan for Non-Employee
Directors, and to issue shares under its Employee Stock Purchase Plan.
14. NONCASH FINANCING ACTIVITIES
During fiscal 1997, certain non-qualified stock options were exercised by
a stock plan participant 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 Sheet. The number of Treasury Stock shares accepted as
consideration for such stock option exercise was determined by the market price
of the Company's Common Stock on the exercise date. 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.
F-19
A summary of activity follows:
Consideration
----------------------
Fiscal Options Exercise Lillian Vernon Corp.
Year Exercised Price Common Stock
- ---- -------------- ---------- ------------
1997 180,000 shares $1,440,000 133,759 shares
15. SUBSEQUENT EVENT
On April 15, 1999, the Company's Board of Directors unanimously adopted a
shareholder rights plan (the "Plan"), commonly referred to as a poison pill.
Under the Plan, shareholders of record on April 30, 1999, and shareholders who
acquire the Company's common stock after that date (unless as excepted under the
terms of the Plan) until the distribution date will receive rights to purchase a
unit consisting of one one-thousandth of a Series A Preferred Share of the
Company at $70.00 per unit. The rights are not exercisable until the Board of
Directors declares a distribution date.
The Board of Directors may declare a distribution date within 10 days
following (i) the acquisition of or right to acquire by a person or group, 20%
or more of the outstanding common shares of the Company or (ii) the commencement
of a tender offer or exchange offer that would, if completed, result in a person
or group beneficially owning 20% or more of the Company's common shares. A
distribution date will not be declared if a person or group owns more than 20%
but less than 25% on April 30, 1999, and that person or group does not become
the beneficial owner of any additional shares of common stock. Upon the
declaration of a distribution date, each holder of the right will have the right
to receive, upon exercise, common shares having a value equal to two times the
exercise price of the right. In the alternative, the Board of Directors at its
option may exchange all outstanding and exercisable rights for common shares at
an exchange ratio of one common share per each right. The Board may redeem the
rights prior to an event triggering a distribution date at $.001 per right.
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lillian Vernon Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Lillian
Vernon Corporation and its subsidiaries (the "Company") at February 27, 1999 and
February 28, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended February 27, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 20, 1999
F-21
LILLIAN VERNON CORPORATION
--------------------------
Form 10-K
Exhibits