Item 1. Business
General
Lillian Vernon Corporation (the "Company") is a direct mail specialty catalog company concentrating on the marketing of gift, household, gardening, kitchen, Christmas and children's products. The Company, a predecessor of which was founded in 1951, seeks to provide customers with reasonably priced products that can be differentiated from competitive products either by design, price or personalization. In fiscal 1997, the Company published 29 catalog editions, and mailed over 175,000,000 catalogs to past and prospective customers.
The Company has developed a proprietary customer data base containing information about its customers, including such data as order frequency, size and date of last order, and type of items purchased. These and other factors are analyzed by computer to rank and segment customers to determine those most likely to purchase products offered in the Company's catalogs. The data base contains information with respect to approximately 19,400,000 people, approximately 3,200,000 of whom have placed orders with the Company during the last fiscal year. The Company derives a small portion of its revenue from the rental of its customer list to direct mail marketers and other organizations. The Company also has a Special Markets division, which makes sales of premium and incentive products, and sells to the wholesale market. The Company also operates a chain of outlet stores which offers Lillian Vernon merchandise.
The following table reflects the Company's history in the areas of circulation of its catalogs, number of orders received and average revenue per order received, over the last five fiscal years.
Fiscal Years Ended ---------------------------------------------------- February February February February February 27, 1993 26, 1994 25, 1995 24, 1996 22, 1997 -------- -------- -------- -------- -------- Number of catalogs mailed (000's) (1) 140,999 150,846 179,424 179,539 175,232
Number of catalog editions 20 22 26 27 29
Number of orders received (000's) 4,405 4,602 4,940 4,903 4,643
Average revenue per order received (2) $40.09 $42.86 $44.61 $49.31 $52.57
Catalogs and Products
The Company's catalogs are designed to capture the reader's interest through the use of distinctive covers, colorful product presentations and product descriptions that highlight significant features. The catalogs are created and produced by the Company's in-house creative staff, which includes designers, writers and production assistants. The Company also hires free-lance designers and photographers, as needed. The combination of in-house and free-lance staff enables the Company to maintain both quality control and flexibility in the production of its catalogs.
The Company varies the quantity of its catalog mailings based on the selling season, anticipated revenue per catalog, the price of paper and its capacity to process and fill orders. In the first half of fiscal 1997, the Company reduced catalog circulation due to substantially higher paper costs. During the second half of fiscal 1997 the Company experienced lower paper prices and increased catalog circulation for its busy fall selling season. In fiscal 1997, the Company produced 29 different catalog editions.
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(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.
The following table provides a breakdown of the various catalogs mailed, and information regarding the range of pages and product offerings in each:
No. of No. of No. of Products Catalog Title Editions Pages Offered - ------------- -------- ------ ------- Lillian Vernon Spring Catalog 5 84-96 550-650
Lillian Vernon Fall Catalog 5 96-120 650-850
Private Sale 5 84-108 400-550
Lilly's Kids 5 44-84 200-400
Christmas Memories 3 48-64 250-350
Neat Ideas/Welcome to an Organized Home 3 48 300
Lillian Vernon's Kitchen 2 56-72 350-400
Personalized Gift 1 64 575
Merchandise offered by the Company includes gifts, holiday products, toys and children's products, personal and home accessories, kitchen and houseware products, gardening and outdoor products. The Company employs a staff of experienced buyers, who seek reliable sources for what the Company believes to be unique, quality merchandise. The buyers attend numerous domestic and international trade and merchandise shows, study merchandising trends and review the performance of merchandise previously offered. The Company also uses both its creative staff and free-lance artists to develop distinctive designs for many of its products, which the Company copyrights and has manufactured to its specifications. The Company provides free monogramming and full name personalization on many of the products it sells. In the past fiscal year, products which can be personalized or which were manufactured to the Company's exclusive design specifications accounted for about half of the products offered by the Company.
Private Sale catalogs are primarily used to sell merchandise overstocks and deleted products, and are generally mailed only to customers in the Company's data base.
The Company's Lilly's Kids catalogs feature toys, games, baby products, room decor and fashion accessories for children.
The Company's Christmas Memories catalogs are targeted to the Christmas season and offer ornaments, holiday decor, gifts, cards and many unique and exclusive products.
The Company's Welcome to an Organized Home and its recently introduced Neat Ideas catalogs, offer a variety of home decor, organizational products and housewares.
The Company's Personalized Gift catalogs primarily feature gift items, all offered with available personalization.
Lillian Vernon's Kitchen catalogs offer products which include cookware, dinnerware, gourmet accessories, cutlery, glassware, flatware and gifts, many of them exclusive to this catalog.
The Company has conducted limited test marketing of certain of its catalogs in Japan. The Company is presently evaluating the results of the tests, and is formulating further test market plans for the Japanese market.
The Company offers a deferred billing program to its customers, in which it agrees to charge the customers' credit cards for the full amount of their purchase at a future date specified in each catalog. The Company does not charge interest to the customers who participate in the deferred billing program.
All products sold, including personalized products, are unconditionally guaranteed. An unsatisfied customer may return any product, even if personalized, for any reason. The dollar value of refunds requested by customers under the guarantee in fiscal 1997 was approximately 4.3% of revenues.
The Company purchases its products from approximately 1,000 suppliers. Approximately 78% of the items sold by the Company are purchased abroad, predominantly from manufacturers located in Taiwan, Hong Kong, the Peoples' Republic of China, Italy, India and Germany. Most purchase orders are denominated in U.S. dollars. Although no manufacturer is individually material to the Company's operations, the Company buys significant quantities through several Far East trading companies which utilize multiple manufacturers. Also, the Company buys approximately 7% of its purchases through one Far Eastern buying agent, which acts as the Company's representative in its dealings with many different manufacturers in the Peoples' Republic of China and Hong Kong. As a result of its reliance upon foreign suppliers, the Company is subject to the risks of doing business abroad. To date, the Company has experienced no material disruptions.
Marketing
The Company maintains a proprietary customer data base containing information with respect to approximately 19,400,000 customers, gift recipients and people who have requested its catalogs, approximately 3,200,000 of whom have placed orders with the Company during the last fiscal year. In addition, the Company rents from and exchanges lists or specific portions of lists with direct marketers and other organizations in an attempt to gain new customers. Over 175,000,000 catalogs were mailed in fiscal 1997, of which approximately 82% were mailed to people whose names were in the Company's proprietary data base and approximately 18% were mailed to prospects derived from rented lists.
The Company believes that its ability to analyze its computerized data base, as well as rented lists, and to select recipients for a particular mailing are significant factors in its growth. The Company analyzes various factors (e.g., frequency of order, date of last order, order size, type of products purchased and demographic data) to rank its customer and prospect groups in order to target its catalog mailings to those most likely to purchase its merchandise. The Company updates its data base to include new customers and eliminate non-responders. The Company does not engage in unresearched, speculative mailings.
List Rental
The Company derives a small portion of its revenue from the rental of its data base to direct mail marketers and other organizations, and from the placement of advertisements for other companies' products in its outgoing packages.
Order Fulfillment and Distribution
Orders for merchandise are received by mail, telephone, fax, and via the Internet. Orders are received and processed at the Company's National Distribution Center in Virginia Beach, Virginia. Customer Service operations are also conducted at this facility. The Company also operated a temporary telephone order call center in New Rochelle, New York during its peak selling season. The Company receives telephone orders on a 24-hour basis, seven days a week, with orders generally entered directly into the computer. Mail orders are opened, compared to payments, batched and entered into computer terminals. The Company uses its own data processing personnel to enter mail and telephone orders, as well as service bureaus to enter telephone orders on an as-needed basis. During fiscal 1997, the Company continued upgrading its computer capacity to enable it to handle an increase in telephone orders.
All orders are processed, packed and shipped at the Company's National Distribution Center. Approximately 52% of customer orders are shipped by United Parcel Service, with nearly all other orders
being sent by the U.S. Postal Service. The Company also offers Federal Express delivery as an option to its customers, for an extra charge.
The Company's newly expanded National Distribution Center, an 821,000 square foot facility located in Virginia Beach, Virginia, is owned and operated by the Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc. All of the Company's distribution, and a majority of its warehousing activities, are conducted at this facility. The National Distribution Center is generally operated on a five-day-a-week basis, except during the Holiday season, when, depending upon demand, it may operate on a six or seven-day-a-week, three-shift basis. Personalization of products is done at the Company's National Distribution Center. The Company also owns a 154,000 square foot building in Virginia Beach used for additional distribution and warehousing space.
The Company continually assesses the need to upgrade the capacity of its distribution facilities. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations.")
Paper and Mailing Costs
The Company expends significant amounts on paper in the production of its catalogs. The Company also uses substantial amounts of packing supplies and corrugated paper for boxes in which it ships its products. In fiscal 1997, the Company spent approximately $31.2 million in total paper costs and approximately $53.3 million in mailing catalogs and packages to its customers. In recent years, the U.S. Postal Service has increased its rates for both the mailing of catalogs and packages. The last postage increase in January 1995, increased the postage rate paid by the Company by 14%. In July 1996, Postal Classification Reform was implemented, which resulted in the Company paying approximately 4% lower postal rates in fiscal 1997 as compared with the previous fiscal year. No assurance can be given that postal rates will not increase in the future. United Parcel Service has also increased its rates, with increases occurring in February of 1995, 1996 and 1997. The price of paper is dependent upon supply and demand in the marketplace. In fiscal 1996, the supply was extremely tight, and the price of paper rose significantly. The Company began fiscal 1997 with an inventory of paper which it had purchased earlier, at prices substantially higher than the then prevailing rate. This increased the Company's cost of doing business and caused the Company to strategically reduce catalog circulation in the first half of fiscal 1997. The Company experienced lower paper prices in the second half of the fiscal year and increased catalog circulation for its busy fall selling season. While the Company has been able to recover a portion of these cost increases through an increase in shipping and handling charges, a reduction in the dimensions and weight of the catalogs, circulation adjustments and improved efficiencies in shipping, the Company's fiscal 1996 and 1997 earnings have been negatively affected by the higher costs of
paper. While the Company cannot estimate the magnitude of future paper and postage increases or decreases, such changes may impact the Company's future earnings. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations.")
Merchandise Overstocks
The Company sells its overstocks to its customers at reduced prices, primarily through its Private Sale catalogs, its outlet stores and through special offers made to customers placing orders by telephone and online.
Seasonality
The Company's business is seasonal. Historically, a substantial portion of the Company's revenues and net income have been realized during its third and fourth fiscal quarters, which encompass the period September through February. Revenues and net income have been lower during its first and second fiscal quarters, comprising the period March through August. The Company believes this is the general pattern associated with the mail order and retail industries. Further discussion of the effect of seasonality upon revenues and income is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Government Regulations
The Company must comply with Federal, state and local laws affecting its business. In particular, the Company is subject to Federal Trade Commission regulations governing the Company's advertising and trade practices and Consumer Product Safety Commission regulations governing the standards its products, particularly toys, must meet. While the Company believes it is presently in compliance with such regulations, in the event of noncompliance, the Company may be subject to cease and desist orders, injunctive proceedings, civil fines and other penalties. To date, such governmental regulations have not had a material adverse effect on the Company. On occasion, products offered by the Company have been subject to voluntary recall; however, no such recall has had a material adverse effect on the Company.
The United States and the other countries in which the Company's products are manufactured may, from time to time, impose new or adjust existing quotas, duties, tariffs or other restrictions, with the result that the Company's operations and its ability to continue to import merchandise at required levels could be adversely affected. The Company cannot now predict the likelihood of any such events occurring or the effect on its business of any such event.
A number of the Company's products are purchased from sources located in Hong Kong. On July 1, 1997, Hong Kong's status as a
British Crown Colony will end, with its rule reverting to the Peoples' Republic of China. After assessing the situation, the Company does not anticipate any disruptions in its sourcing of merchandise; however, no assurance can be given that such change will not adversely affect the Company.
In the past, various states had taken action to require mail order retailers to collect sales tax from residents in their states, even if the only contact with such states is the mailing of catalogs into the states. On May 26, 1992, the Supreme Court ruled that state governments could not require out of state mail order companies to collect and remit sales and use taxes without Congressional authorization. Since that time, bills have periodically been introduced in Congress which would allow states to impose sales tax collection responsibility upon mail order companies. Management is unable to predict the likelihood of Congress passing such legislation, and whether the Company will, in the future, be required to collect sales and use taxes in the various states. The collection of sales tax by mail order companies could have an adverse effect on the Company's competitive position by increasing both its cost of doing business and the effective price of its products to its customers. Although the Company believes the aforementioned adverse effect will not be of a material nature, the Company is unable, at this time, to predict the impact of the collection of sales tax on its financial position and results of operations. The Company does not expect that the collection of sales tax would have a material effect on its liquidity.
Trademarks and Copyrights
The Company has federally registered service marks and/or logos for "Lillian Vernon" and many of its catalog titles. In the opinion of the management of the Company, the service mark "Lillian Vernon" is of significant value because of its market recognition as a result of many years of use and the significant quantity of catalogs circulated.
The Company also possesses numerous copyrights and/or trademarks on its products, none of which individually is material to the Company.
Employees
As of February 22, 1997, the Company and its subsidiaries employed approximately 1,350 employees. During the peak Holiday season, the Company employs approximately 4,000 employees including seasonal employees working in the telephone order, order processing and distribution areas. Employees are not covered by collective bargaining agreements. The Company considers its employee relations to be satisfactory.
Competition
The retail business in general, and mail order in particular, is highly competitive. The Company competes primarily with other mail order catalogs and secondarily with retail stores, including specialty shops and department stores, many of which have substantially greater financial resources than the Company. The Company competes on the basis of its product selection, personalization, its proprietary customer list, the quality of its customer service and its unconditional guarantee. Although the Company attempts to market products not available elsewhere, many products similar to those marketed by the Company can be purchased through other mail order catalogs or in retail stores.
Item 2.
Item 2. Properties
The Company's corporate headquarters and administrative offices are located in a 41,000 square foot building in New Rochelle, New York. This facility is leased from David C. and Fred P. Hochberg, under a net sub-lease expiring on July 30, 1998, with a present annual net rental of $429,788. David C. Hochberg is an officer, director and a principal stockholder of the Company. Fred P. Hochberg, a former officer and director, is a significant stockholder of the Company. The terms of such net lease provide that the Company is also responsible for the payment of all real estate taxes, insurance and other expenses associated with the operation and maintenance of the premises, including structural repairs.
In fiscal 1997, the Company expanded its National Distribution Center by an additional 335,000 square feet to 821,000 square feet. The facility is located on approximately 62 acres in Virginia Beach, Virginia. The facility, which became fully operational during the summer of 1988, is owned and operated by the Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc. The Company financed the construction and equipping of this expansion primarily through internally generated cash. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations").
All distribution and the majority of its warehousing activities, as well as mail order processing, customer service and telemarketing activities, are conducted at the Virginia Beach facility.
The Company also owns a 154,000 square foot building in Virginia Beach which it utilizes for additional distribution and warehousing space.
The Company leases, on a year-to-year basis, 11,000 square feet in an office building in New Rochelle, New York, which provides additional telephone order facilities for its peak selling season and administrative office space.
The Company leases twelve retail locations, which serve as outlet stores, in the states of Virginia, New York and Delaware. The typical retail store is approximately 3,000 square feet, with leases expiring from fiscal 1998 through fiscal 2003, and various renewal options through fiscal 2008.
The Company leases additional outlet store locations on a short-term basis, particularly during the holiday season.
The Company believes that its facilities are adequate and that its properties are in good condition.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the American Stock Exchange (symbol: LVC). The following table sets forth the high and low sales prices for each quarterly period for the two most recent years. The stock prices are rounded to the nearest 1/8 point.
Quarter Ended High Low - ------------- ---- --- May 27, 1995 22 1/4 17 1/4 August 26, 1995 20 3/4 16 3/8 November 25, 1995 17 1/8 13 1/8 February 24, 1996 14 3/4 12 7/8 May 25, 1996 15 1/4 12 5/8 August 24, 1996 14 5/8 10 3/8 November 23, 1996 13 1/2 10 7/8 February 22, 1997 13 11 1/4
As of May 15, 1997, there were 393 registered holders of the Company's Common Stock.
The Company has paid quarterly cash dividends on its common stock since an initial quarterly dividend of five cents ($.05) per share was paid in May of 1992. Since September 1, 1994, a quarterly dividend of seven cents ($.07) per share has been paid to stockholders. The Board of Directors intends to continue to declare and pay a quarterly cash dividend. The amount of any such dividends will depend on the Company's earnings, financial position, capital requirements and other relevant factors.
On October 10, 1995, the Board of Directors authorized the Company to purchase up to 1 million shares of its common stock in the open market from time to time, subject to market conditions. As of May 15, 1997, the Company has purchased 385,100 shares at a total cost of approximately $5.1 million.
Item 6.
Item 6. Selected Financial Data
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(1) Includes current installments and long-term portions of debt and capital lease obligations.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth, for the periods indicated, the results of operations as a percentage of revenues. The table reflects certain reclassifications made to conform to the current year's presentation.
Fiscal Years Ended ------------------------------ February February February 22, 1997 24, 1996 25, 1995 -------- -------- -------- Revenues............................. 100.0% 100.0% 100.0%
Costs and expenses: Product and delivery costs.......... (46.0) (46.1) (44.2) Selling, general and administrative expenses............ (50.6) (50.3) (47.4) ------ ------ ------ Operating income.................... 3.4 3.6 8.4 Interest income...................... 0.2 0.6 0.5 Interest expense..................... (0.3) (0.3) (0.3) Merger-related expenses.............. - (0.4) - ------ ----- --- Income before income taxes.......... 3.3 3.5 8.6 Provision for income taxes........... (1.1) (1.1) (2.5) ------ ------ ------
Net income........................... 2.2% 2.4% 6.1% ------ ------ ------
Fiscal 1997 and Fiscal 1996
Revenues for fiscal 1997 were $240.1 million, an increase of $1.9 million, or 0.8% over fiscal 1996. Sales grew marginally, principally because catalog circulation for the year was reduced by about 2% compared to fiscal 1996. Circulation was reduced in the first half of the fiscal year because higher paper costs required the Company to more closely target its circulation to those customers whose purchases were expected to cover the higher costs of the catalogs. Average revenue per catalog rose by approximately 3%, driven by an increase in average order value of almost 7%. The volume of orders shipped decreased by approximately 5%.
Product and delivery costs include the cost of merchandise sold, the cost of receiving, filling and shipping orders, reduced by shipping and handling revenue collected from customers. These costs of $110.4 million increased $.5 million, or 0.4% in fiscal 1997 as compared to fiscal 1996. As a percentage of revenues, product and delivery costs decreased slightly from 46.1% in fiscal 1996 to 46.0% in fiscal 1997. Product profit margin improved significantly, principally because less inventory liquidation was needed. The Company's postage expense to customers was positively impacted by the expansion of the Company's National Distribution Center, which eliminated some capacity constraints of the prior year. These cost reductions were partially offset by less shipping and handling revenue, which was lower because less orders were shipped, and because of certain marketing promotions run by the Company.
Selling, general and administrative ("SG&A") expenses were $121.5 million in fiscal 1997, compared to $119.6 million in fiscal
1996, an increase of $1.9 million, or 1.6%. The largest component of these expenses are the costs of producing, printing and distributing the Company's catalogs. As a percentage of revenues, SG&A expenses increased from 50.3% in fiscal 1996 to 50.6% in fiscal 1997.
The ratio of catalog costs to revenues improved in fiscal 1997, even though the cost of producing an average catalog was slightly higher. The ratio improved because of a rise in average revenue per catalog. High paper costs continued to be reflected in the Company's catalog expense, particularly in the core catalogs, while the prices of its specialty catalog paper improved during the latter part of the fiscal year.
Paper prices have declined, and the Company has future commitments for paper at favorable prices. Postal costs to mail the Company's catalogs also declined in the second half of fiscal 1997 because of Postal Classification Reform regulations. The Company does not expect that any postal rate increases will have a significant impact on fiscal 1998 earnings. Lower paper and postage costs will enable the Company to reduce its cost structure, and to expand circulation in fiscal 1998.
Other elements of SG&A expense besides catalog costs rose, principally because the Company made investments in staff in the executive, merchandising and creative areas. In addition, growth in the Company's Special Markets division, which sells to other businesses, and an increase in the number of outlet stores, were major factors affecting this increase.
Interest income in fiscal 1997 was $.6 million, as compared to $1.3 million in fiscal 1996. The decrease of $.7 million was the result of a lower average investment balance, because of higher expenditures required for expansion of the Company's National Distribution Center. Interest expense increased by $.1 million in fiscal 1997 as compared to fiscal 1996 because of short term borrowings under the Company's revolving credit facility during fiscal 1997.
The Company's effective income tax rate in fiscal 1997 was 34.0% as compared to 32.0% in fiscal 1996, principally due to higher tax deductions for charitable contributions in fiscal 1996.
Fiscal 1996 and Fiscal 1995
Revenues for fiscal 1996 were $238.2 million, an increase of $16.0 million, or 7.2%, over fiscal 1995. The increase in revenues was primarily attributable to an increase of approximately 10.5% in the average revenue per order. The volume of orders shipped decreased by approximately 1%. Catalog circulation was approximately 1% higher than in fiscal 1995.
Product and delivery costs of $109.9 million increased $11.6 million, or 11.8% in fiscal 1996 as compared to fiscal 1995. As a percentage of revenues, these costs increased from 44.2% in fiscal 1995 to 46.1% in fiscal 1996. Gross margin percentage on products sold declined because a greater portion of sales came from lower margin sources. Also, the Company expanded its free gift promotion in fiscal 1996, which contributed to an increase in the cost of goods sold, and the decline in gross margin. Gross margin also declined in the Company's outlet stores due to more in-store promotions, and in the Special Markets division, which primarily sells to other businesses. The Company's cost of order fulfillment rose in fiscal 1996 principally because of increases in the costs of packaging materials, postal and UPS rates, as well as additional costs caused by physical constraints of the Company's Distribution Center. A backlog of unshipped orders resulted in additional costs for expedited delivery before Christmas, and for related customer service inquiries. An expansion of the Company's Distribution Center, which commenced in fiscal 1996, was completed in fiscal 1997. The increase in fulfillment costs was largely offset by an increase in the shipping and handling fees charged to customers. After the effect of these product and delivery cost increases, higher sales contributed $4.4 million more toward catalog costs and overhead, as compared to fiscal 1995.
Selling, general and administrative ("SG&A") expenses were $119.6 million in fiscal 1996, compared to $105.2 million in fiscal 1995, an increase of $14.4 million, or 13.7%. The largest component of these expenses are the costs of producing, printing and distributing the Company's catalogs. As a percentage of revenues, SG&A expenses increased from 47.4% in fiscal 1995 to 50.3% in fiscal 1996, driven by a rise in the ratio of catalog costs to revenues. Both the dollars and percentage of revenues rose principally because of higher paper prices and U.S. Postal rates. Although the Company employed a variety of techniques to reduce its costs, such as changes in circulation, page counts, and paper weight, higher paper and postal costs negatively impacted fiscal 1996 pretax earnings by approximately $12 million. The Company achieved higher revenue per catalog in fiscal 1996, which offset a portion of the increase as a percentage of revenues. Other elements of SG&A besides catalog costs declined as a percentage of revenues.
Interest income in fiscal 1996 was $1.3 million, as compared to $1.2 million in fiscal 1995. The increase of $.1 million was the result of higher interest rates. The average investment balance declined in fiscal 1996 principally because of higher expenditures required for catalog costs. Interest expense declined by $.1 million in fiscal 1996 as compared to fiscal 1995 because of scheduled debt repayments.
Fiscal 1996 earnings reflect a non-recurring pretax charge of $921,000 for the costs of a terminated merger agreement. See Note 11 to Financial Statements.
The Company's effective income tax rate in fiscal 1996 was 32.0% as compared to 28.8% in fiscal 1995. The fiscal 1995 effective tax rate was reduced by a favorable settlement of an outstanding tax matter, and the related reversal of tax reserves not ultimately needed. See Note 2 to Financial Statements.
Seasonality
The Company's business is seasonal. Historically, a substantial portion of the Company's revenue and net income has been realized during the third and fourth fiscal quarters, which encompass the period September through February. Revenue and net income have been lower during the first and second fiscal quarters, comprising the period March through August. The Company believes this is the general pattern associated with the mail order and retail industries.
Because of slower demand for its products in the first half of its fiscal year, the Company incurred a cumulative net loss during the first six months of fiscal 1997, 1996, and 1995. Due to these seasonal factors, management expects to incur a loss for the first half of fiscal 1998 as well.
Liquidity and Capital Resources
The Company's balance sheet and liquidity are strong. At the end of fiscal 1997, cash and cash equivalents totalled $22.7 million; the current ratio was 4.7:1; stockholders' equity totalled $114.3 million; and debt obligations (including current maturities) represented 2.5% of equity.
In fiscal 1997, the Company generated $13.0 million of cash from operating activities. A significant contributing factor to the Company's positive operating cash flow was the utilization of the large, higher-priced paper inventory from the prior year. The Company used $1.5 million of funds for long-term debt repayments, and generated $1.1 million from the sale of common stock through its employee stock option and purchase plans.
Capital spending in fiscal 1997 totalled $10.3 million. Expenditures of $8.5 million were made as part of the expansion of the Company's National Distribution Center. The expansion project, consisting principally of a 335,000 square foot addition to the building, and related warehousing, shipping and computer equipment, cost approximately $14 million (including the fiscal 1996 expenditures), and was completed in August of 1996. Although the Company may find it necessary to expand the capacity of the National Distribution Center in the future, the Company has made no significant commitments for capital spending in fiscal 1998. The other major capital expenditures in fiscal 1997 were made to upgrade the Company's computer equipment, and its distribution center machinery and equipment.
The Company entered into a $42 million four-year revolving credit facility in August 1996, which can be used to finance working capital needs, fixed assets, and up to $12 million of inventory letters of credit. At the Company's option, up to $20 million of the facility can be converted into term loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a fixed rate, at the Company's option. The credit facility is unsecured, and the Company is subject to financial covenants principally relating to its working capital, net worth, interest coverage ratio and capital spending restrictions. The new credit facility replaced previous facilities totaling $15 million which the Company had maintained with two banks.
The Company has paid quarterly cash dividends since May 1992, increased its quarterly dividend from $.05 to $.07 per share in September 1994, and anticipates continuing to pay cash dividends to its stockholders in the future. The amount of any such dividends will depend on the Company's earnings, financial position, capital requirements, and other relevant factors. Dividends in fiscal 1997 totalled $2.7 million, or $.28 per share.
On October 10, 1995, the Board of Directors authorized the Company to purchase up to 1 million shares of its common stock in the open market from time to time, subject to market conditions. During the fiscal year ended February 22, 1997, the Company purchased 259,700 shares at a total cost of $3.3 million. Shares repurchased under the plan from inception through February 22, 1997 total 384,500, at a cost of $5.1 million.
The Company believes that its cash flow from operations, current investment balance, and credit facilities will be sufficient to meet its operating needs.
Effects of Inflation and Foreign Exchange
The Company is generally able to reflect cost increases and decreases resulting from the effects of inflation and foreign currency fluctuations in its selling prices. In addition, most foreign purchase orders are denominated in U.S. dollars. Accordingly, the results of operations for the periods discussed have not been significantly affected by these factors.
Recently Issued Accounting Standards
The Company follows the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for stock-based compensation arrangements. Under the guidelines of Opinion 25, compensation cost for stock-based employee compensation plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The Company has
implemented the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" in fiscal 1997, but has retained its current accounting method.
In the first quarter of fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 107 - "Disclosures about Fair Value of Financial Instruments". The fair value of the Company's financial instruments does not materially differ from their carrying values.
Effective in the fourth quarter of fiscal 1998, the Company will be required to adopt Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which will require the Company to state a dual presentation of basic and diluted earnings per share on its Statements of Income. The basic calculation replaces the calculation of primary earnings per share, and is not expected to have a material impact on reported earnings per share.
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FORWARD LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-K contains forward-looking statements which are based on the Company's current expectations and assumptions. Various factors could cause actual results to differ materially from those set forth in such statements. These factors include, but are not limited to, the potential for changes in consumer spending, consumer preferences and general economic conditions, increasing competition in the direct mail industry, changes in government regulations, dependence on foreign suppliers, and possible future increases in operating costs, including postage and paper costs.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this report on pages through.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant, Executive Compensation, Security Ownership of Certain Beneficial Owners and Management, and Certain Relationships and Related Transactions.
The information required by these Items is omitted because the Company will file a definitive proxy statement pursuant to Regulation 14A with the Commission, not later than 120 days after the end of the fiscal year, which information is herein incorporated by reference as if set out in full.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a separate section of this report on pages through.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 22, 1997 and February 24, 1996. . . F- 2 - -Statements of Income for the three Fiscal Years ended 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . F- 3 - -Statements of Stockholders' Equity for the three Fiscal Years ended 1997, 1996 and 1995. . . . . . . . . . . .F- 4 - -Statements of Cash Flows for the three Fiscal Years ended 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . F- 5 - -Notes to Financial Statements . . . . . . . . . . . . . . . . F- 6 - -Report of Independent Accountants . . . . . . . . . . . . . .
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during the last quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. Description Page - ----------- ----------- ---- 2.1 -Plan and Agreement of Merger dated June 29, 1987 between Lillian Vernon Corporation, a New York corporation, and the Company...................................... (1) 2.2 -Certificate of Ownership and Merger between Lillian Vernon Corporation and the Company filed in Delaware.................... (1) 2.3 -Certificate of Merger between Lillian Vernon Corporation and the Company filed in New York.................................... (2) 3.1 -Certificate of Incorporation with Amendments of Lillian Vernon Corporation.......................................... (2) 3.2 -By-Laws of Lillian Vernon Corporation................ (1) 4.3 -Right of First Refusal Agreement among Lillian M. Katz, Fred P. Hochberg, David C. Hochberg and the Company.................... (1) 10.1 -Amended and Restated Lillian Vernon Corporation Profit Sharing Plan ..................... (12) 10.2 -Employees' Pension Plan.............................. (1) 10.3 -1987 Performance Unit, Restricted Stock, Non-Qualified Option and Incentive Stock Option Plan.......................... (1) 10.4 -Employee Stock Purchase Plan ........................ (1) 10.5 -First Amendment to Employment Agreement with Lillian Vernon, formerly Lillian M. Katz...................................... (7) 10.6 -Executive Deferred Compensation Agreement and first amendment thereto with Lillian Vernon, formerly Lillian M. Katz............................. (8) 10.7 -Employment Agreement with Fred P. Hochberg............................................. (1) 10.8 -Second Amendment to Deferred Compensation Agreement with Fred P. Hochberg............................................. (9) 10.9 -Second Amendment to Deferred Compensation Agreement with David C. Hochberg.................................... (10) 10.10 -Industrial Development Bond and Guaranty among the New Rochelle Industrial Development Agency, Bankers Trust, Fred P. Hochberg, David C. Hochberg, the Company and others............................................... (1) 10.11 -Industrial Development Bond, Series B, Acknowledgment of Assignment of Interest in the Lease and Guaranty and Sale Agreement among the Port Chester Industrial Development Agency,
Bankers Trust, Fred P. Hochberg, David C. Hochberg, the Company and others................. (1) 10.12 -Form of Indemnification Agreement with officers and directors.............................. (1) 10.13 -Hochbergs' Release of Company re: Port Chester Distribution Center.................... (1) 10.14 -Lease for Company's facility at New Rochelle, New York.............................. (1) 10.15 -Lease for Company's facility at Port Chester, New York.............................. (1) 10.16 -Lease for Company's facility at Elmsford, New York.................................. (1) 10.17 -Trademark Registrations for Lillian Vernon Corporation - Service Mark and Logo............................................ (1) 10.18 -Loan Agreement with Crestar Bank and related documents............................... (3) 10.19 -Note Purchase Agreement between the Company and Northwestern National Life Insurance Co., Farm Bureau Life Insurance Co. of Michigan, FB Annuity Corp., and Farm Bureau Mutual Insurance Co. of Michigan and related Promissory Notes dated September 9, 1988....................... (4) 10.20 -Note Purchase Agreement between the Company and Northern Life Insurance Co., Commercial Union Life Insurance Co. of America, Life Insurance Co. of Georgia and Texas Life Insurance Co. and related Promissory Notes dated October 28, 1988.................................... (4) 10.21 -Sublease between the Company and the United States Postal Service........................ (4) 10.22 -Termination of Elmsford Lease (500 Saw Mill River Road)................................ (5) 10.23 -Letter Amendment dated November 30, 1990 to Note Purchase Agreement between the Company and Northwestern National Life Insurance Co., Farm Bureau Life Insurance Co. of Michigan, FB Annuity Corp., and Farm Bureau Mutual Insurance Co. of Michigan and related Promissory Notes dated September 9, 1988............................. (6) 10.24 -Letter Amendment dated November 30, 1990 to Note Purchase Agreement between the Company and Northern Life Insurance Co., Commercial Union Life Insurance Co. of America, Life Insurance Co. of Georgia and Texas Life Insurance Co. and related Promissory Notes dated October 28, 1988.................................... (6)
10.25 -Sublease between Fred P. and David C. Hochberg and Company - New Rochelle facility............................................. (9) 10.26 -Consulting Agreement with Fred P. Hochberg............................................. (9) 10.27 -Employment Agreement with Stephen S. Marks................................................ (10) 10.28 -Lillian Vernon Corporation 1993 Stock Option Plan for Non-Employee Directors ........................................... (11) 10.29 -Employment Agreement with Larry Blum................. (13) 10.30 -Agreement with Andrew Gregor......................... (13) 10.31 -Resignation and General Release Agreement with Stephen S. Marks................................ (14) 10.32 -Employment Agreement with Howard Goldberg (15) 10.33 -Employment Agreement with Robert S. Mednick (16) 10.34 -Revolving Credit Agreement, Letter of Credit and Bankers Acceptance facility dated as of August 19 1996 among Lillian Vernon Corporation as Borrower, Lillian Vernon Fulfillment Services, Inc., LVC Retail Corporation and Lillian Vernon International Ltd. as Guarantors, the Banks named therein and The Chase Manhattan Bank as agent ....................................... (17) 11.0 -Statement re Computation of Earnings Per Share............................................ E-1 22 -Subsidiaries of registrant........................... E-2 24 -Consent of Coopers & Lybrand re: incorporated reference to Form S-8................... E-3 27 -Financial Data Schedule . . . . . . . ............... E-4
- -----------------------
(1) Filed with Registration Statement on Form S-1 (File No. 33-15430) and incorporated by reference herein.
(2) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28, 1987 and incorporated by reference herein.
(3) Filed with Annual Report on Form 10-K for the year ended February 26, 1988 and incorporated by reference herein.
(4) Filed with Annual Report on Form 10-K for the year ended February 24, 1989 and incorporated by reference herein.
(5) Filed with Annual Report on Form 10-K for the year ended February 24, 1990 and incorporated by reference herein.
(6) Filed with Annual Report on Form 10-K for the year ended February 23, 1991 and incorporated by reference herein.
(7) Filed with Annual Report on Form 10-K for the year ended
February 29, 1992 and incorporated by reference herein.
(8) Amendment filed with Quarterly Report on Form 10-Q for the quarter ended May 30, 1992 and incorporated by reference herein. Original agreement filed with Registration Statement - see (1) above.
(9) Filed with Annual Report on Form 10-K for the year ended February 27, 1993 and incorporated by reference herein.
(10) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28, 1993 and incorporated by reference herein. Exhibit 10.9 - Original deferred compensation agreement filed with Registration Statement - see (1) above.
(11) Filed with Registration Statement on Form S-8 (File No. 33- 71250) and incorporated by reference herein.
(12) Filed with Annual Report on Form 10-K for the year ended February 26, 1994 and incorporated by reference herein.
(13) Filed with Annual Report on Form 10-K for the year ended February 25, 1995, and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended May 27, 1995 and incorporated by reference herein.
(15) Filed with Annual Report on Form 10-K for the year ended February 24, 1996 and incorporated by reference herein.
(16) Filed with Quarterly Report on Form 10-Q for the quarter ended May 25, 1996 and incorporated by reference herein.
(17) Filed with Quarterly Report on Form 10-Q for the quarter ended August 24, 1996 and incorporated by reference herein.
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Supplemental disclosure of noncash financing activities -see Note 13
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Lillian Vernon Corporation is a direct mail specialty catalog company, concentrating on the marketing of gift, household, gardening, kitchen, Christmas and children's products.
The consolidated financial statements include the accounts of Lillian Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon Fulfillment Services, Inc., Lillian Vernon International, Ltd., and LVC Retail Corporation (the "Company"). All material intercompany balances and transactions have been eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on the last Saturday in February. Under this policy, fiscal 1997, 1996 and 1995 consisted of 52 weeks.
Cash Equivalents Cash equivalents, for purposes of the Statements of Cash Flows, consist principally of municipal securities, U.S. Treasury securities and commercial paper, with remaining maturities at acquisition of less than three months. In the first quarter of fiscal 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115 - "Accounting for Certain Investments in Debt and Equity Securities". Under SFAS No. 115, the Company's investments, totalling $23.3 million as of February 22, 1997, are classified as held-to-maturity securities, and as such, are stated at amortized cost, which approximates market value. The adoption of SFAS No. 115 did not have a material effect on the Company's financial statements.
Merchandise Inventories Merchandise inventories are principally stated at the lower of average cost or market, determined by the retail inventory method.
Catalog Costs Catalog costs are deferred and amortized over the estimated productive life of the catalog, generally three months. Such deferred costs are considered direct-response advertising in accordance with AICPA Statement of Position No. 93-7, "Reporting on Advertising Costs", and are reflected as long-term assets in the accompanying Balance Sheets.
Capitalized Software Costs Direct costs of developing new software applications are capitalized and are being amortized over five years. Amortization of capitalized software costs totalled $320,000 in fiscal 1997, $378,000 in fiscal 1996, and $435,000 in fiscal 1995.
Capitalized software costs, net of accumulated amortization, are included in other assets, and amounted to $429,000 and $681,000 at February 22, 1997 and February 24, 1996, respectively.
Depreciation and Amortization Depreciation is provided on the straight line method for assets placed in service over estimated useful lives of approximately 30 and 8 years for buildings and building improvements, respectively, and for other property, over estimated useful lives ranging from 3 to 10 years. Leasehold improvements and assets under capital leases are amortized over approximately 15 years.
Income Taxes Deferred income taxes arise from differences in the timing of income and expense recognition for financial and income tax reporting purposes. Deferred income taxes are computed on the differences between the financial statement and tax bases of the assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
Per Share Data Net income per common share is computed by dividing the net income for the period by the sum of the weighted average number of outstanding shares and share equivalents (if the addition of such share equivalents has a materially dilutive effect). The Company's common share equivalents consist of stock options issued to key employees and directors. For the years ended February 22, 1997 and February 24, 1996, the number of common share equivalents outstanding did not result in a materially dilutive effect on the net income per share computation. For fiscal 1995, however, such common share equivalents did result in material dilution, and therefore were reflected in the net income per share calculation on the Statement of Income.
Fair Value of Financial Instruments In the first quarter of fiscal 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial Instruments." The fair value of the Company's financial instruments does not materially differ from their carrying values.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation The Company follows the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for stock-based compensation arrangements. Under these guidelines, compensation cost for stock-based employee compensation plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The Company implemented the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in fiscal 1997, but will continue its current accounting method for stock-based employee compensation, as permitted by the Statement. See Note 9.
Reclassifications Certain reclassifications have been made in the prior year financial statements to conform with the fiscal 1997 presentation.
New Accounting Standards In fiscal 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of SFAS 121 did not have a material effect on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The standard revises the computation and presentation of earnings per share and will be adopted by the Company in the fourth quarter of fiscal 1998. The Company does not expect the adoption of this statement to have a material impact on reported earnings per share.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended ----------------------------------------- February 22, February 24, February 25, 1997 1996 1995 ------------- ------------ ------------ Federal $ 3,314 $ 3,206 $ 5,202 State 308 354 600 ------------- ------------ ------------ $ 3,622 $ 3,560 $ 5,802 ------------- ------------ ------------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended ----------------------------------------- February 22, February 24, February 25, 1997 1996 1995 ------------- ------------ ------------ Charitable contributions $ (216) $ (499) $ (668) Depreciation (63) (192) (169) Capitalized software development costs (74) (50) (77) Catalog costs (204) (40) 1,023 Other, net (307) (83) (397) ------------ --------- ---------- $ (864) $ (864) $ (288) ------------ --------- ----------
The exercise of non-qualified stock options and the vesting of restricted stock (see Note 9) result in a tax deduction to the Company equivalent to the taxable compensation recognized by the individuals. For accounting purposes, the tax benefit of these deductions is credited directly to additional paid-in capital. These amounts totalled $656,000, $367,000, and $171,000 for fiscal 1997, 1996, and 1995, respectively.
The Company's effective income tax rate is reconciled to the U.S. federal statutory tax rate as follows:
Fiscal Years Ended ----------------------------------------- February 22, February 24, February 25, 1997 1996 1995 ------------- ------------ ------------ Federal statutory tax rate 34.0% 34.0% 35.0% State income taxes, net of federal tax benefit 2.5 2.8 2.0 Charitable contributions of merchandise (3.5) (6.7) (3.2) Reversal of tax provisions of prior years - - (2.8) Expired charitable contribution carryforwards - 4.9 - Other, net 1.0 (3.0) (2.2) ------ ------- ------ 34.0% 32.0% 28.8% ------- ------- ------
During fiscal 1996, expired charitable contribution carryforwards of $1,079,000 resulted in a reduction in deferred tax assets of $416,000. During the fourth quarter of fiscal 1995, the Company favorably settled an outstanding tax matter that resulted in a one-time reduction in income tax expense of $740,000, including the reversal of excess tax reserves.
The deferred tax assets and deferred tax liabilities recorded on the balance sheets are as follows (dollars in thousands):
February 22, 1997 February 24, 1996 --------------------- ------------------ Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Current: Catalog deferrals $ - $ 2,373 $ - $2,577 Charitable contributions 2,152 - 1,936 - Inventory capitalization 807 - 801 - Accrued expenses 607 - 690 - Other 363 8 147 74 Valuation allowance - - - - -------- -------- ------- ------ Total current 3,929 2,381 3,574 2,651 -------- -------- ------- ------ Non-current: Depreciation - 1,688 - 1,753 Amortization 84 101 122 175 Deferred compensation 1,325 - 1,183 - -------- -------- ----- ------ Total non-current 1,409 1,789 1,305 1,928 ------- ------- ------- ------ Total $ 5,338 $ 4,170 $4,879 $4,579 ======== ======== ======= ======
As of February 22, 1997, the Company has $5,571,000 of charitable contribution carryforwards for Federal income tax purposes, which expire from fiscal 1999 to 2002.
3. CREDIT FACILITIES
The Company entered into a $42 million four-year revolving credit facility in August 1996 with two banks. This credit facility can be used for general corporate purposes, including working capital needs, capital expenditures, and up to $12 million of inventory letters of credit. At the Company's option, up to $20 million of the facility can be converted into term loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a fixed rate, at the Company's option. The credit facility is unsecured, and the Company is subject to various financial covenants principally relating to its working capital, net worth, interest coverage ratio and capital spending restrictions. The new credit facility replaced previous unused credit facilities totalling $15 million, which were in effect in fiscal 1996 and fiscal 1995, bearing interest at the prime rate.
In fiscal 1997, the Company incurred commitment fees on the new credit facility ranging from 5 basis points on the letters of credit to 20 basis points on the available revolving credit line. In fiscal 1996 and fiscal 1995, the Company incurred commitment fees of approximately 20 and 25 basis points, respectively. During the year, the maximum amount outstanding under the new revolving credit agreement was $12.5 million (excluding letters of credit). Interest expense related to these borrowings was approximately $143,000. No amounts were outstanding under the Company's credit facilities as of February 22, 1997 and February 24, 1996.
The Company had outstanding letters of credit approximating $4,773,000 and $5,227,000 as of February 22, 1997 and February 24, 1996, respectively, for the purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of $7,851,800 and $11,586,000 as of February 22, 1997, and February 24, 1996, respectively (See Note 1).
Trade accounts payable and accrued expenses consist of (dollars in thousands): February 22, February 24, 1997 1996 ------------ ------------ Trade accounts payable $ 6,061 $ 4,557 Catalog costs 1,696 1,485 Salaries and compensation 1,566 1,471 Other 5,162 4,602 ------------ -------- $ 14,485 $ 12,115 ------------ --------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in thousands):
February 22, February 24, 1997 1996 ------------ ------------ Land and buildings $ 31,656 $ 25,578 Machinery and equipment 26,512 21,894 Furniture and fixtures 3,313 3,240 Leasehold improvements 3,776 3,777 Capital leases 1,262 1,262 ------------ -------- Total property, plant & equipment, at cost 66,519 55,751 Less, accumulated depreciation & amortization 26,200 22,127 ------------ -------- Property, plant & equipment, net $ 40,319 $ 33,624 ------------ --------
6. LONG-TERM DEBT Long-term debt consists of the following (dollars in thousands):
February 22, February 24, 1997 1996 ------------ ------------ Senior Notes due September 1998, payable in semi-annual installments of $300,000 with interest at 10.09% ......... $ 1,200 $ 1,800 Senior Notes due October 1998, payable in semi-annual installments of $335,000 with interest at 10.0% ............. 1,340 2,010 Industrial Revenue Bond of the City of New Rochelle Industrial Development Agency, payable in quarterly installments of $1,500 with interest at prime rate (February 1997 = 8.25%, February 1996 = 8.25%) through October 1997 ........................ 4 10
------------- ------- $ 2,544 $ 3,820 Less, current portion ..................... 1,274 1,276 ------------- ------- $ 1,270 $ 2,544 ------------- -------
The Company's long-term debt agreements require that the Company meet certain financial covenants, principally related to working capital and tangible net worth, both as defined in the agreements.
Long-term debt as of February 22, 1997 matures as follows (dollars in thousands):
Fiscal Year ----------- 1998 .................................... $ 1,274 1999 .................................... 1,270 ------- $ 2,544 ------- 7. LEASES
The Company leases its New Rochelle, New York corporate headquarters under a capital lease arrangement with a partnership, Port Chester Properties, the partners of which are stockholders of the Company. The leased asset consists of land and a building with a cost of $1,262,000 and accumulated
amortization of $1,144,000 as of February 22, 1997. The lease expires July 30, 1998 and provides for the payment by the Company of an annual rent of $430,000, and all real estate taxes, insurance, and certain other costs.
The Company has operating lease agreements for certain computer and other equipment used in its operations and for its outlet store locations, with existing lease terms ranging from fiscal 1998 through fiscal 2003, and various renewal options through fiscal 2008. Most of the store leases also provide for payment of common charges such as maintenance and real estate taxes. Seven stores require the payment of additional rent based upon a percentage of sales. Minimum rental payments required under these agreements are as follows (dollars in thousands):
Fiscal Year ----------- 1998 ...................................... $1,221 1999 ...................................... 1,157 2000 ...................................... 1,055 2001 ...................................... 611 2002 ...................................... 265 Thereafter ................................. 94 ------ $4,403 ------
Rent expense for fiscal 1997, 1996 and 1995 amounted to $2,171,000, $1,840,000, and $2,363,000, respectively, which included $14,000, $20,000 and $11,000 in fiscal 1997, 1996 and 1995, respectively, for contingent rentals based upon a percentage of outlet store sales.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for the benefit of all employees who meet certain minimum service requirements. The Company's profit sharing contribution is discretionary, as determined by the Board of Directors. Employees fully vest in their profit sharing account balance after seven years. The authorized profit sharing contributions for fiscal 1997, 1996, and 1995 were $500,000, $450,000, and $500,000, respectively.
The Company's profit sharing plan includes an employee contribution and employer matching contribution (401k) feature. Under the 401k feature of the plan, eligible employees may make pre-tax contributions up to 10% of their annual compensation. Employee contributions of up to 6% of compensation are currently matched by the Company at a rate of 50%. The matching contribution is made with Company stock. Employees are 100% vested in their pre-tax contributions at all times, and become fully vested in the employer matching contribution after two years of service. The Company's matching contributions to the plan for fiscal 1997, 1996, and 1995 were $425,000, $398,000, and $355,000 respectively.
The Company has deferred compensation agreements to provide additional retirement benefits for certain principal stockholders of the Company. The deferred compensation agreements also provide for death benefits to be paid to each party's beneficiary. The Company has purchased life insurance policies to fund, in part, the payment of these benefits. Amounts expensed in connection with these agreements were $366,000 in fiscal 1997, $150,000 in fiscal 1996 and $600,000 in fiscal 1995.
9. STOCK COMPENSATION PLANS
At February 22, 1997, the Company had three stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock compensation plans. Accordingly, no compensation cost has been recognized for its non-qualified stock options granted and for shares issued through its employee stock purchase plan. Compensation cost has been charged against income for the issuance of restricted stock during Fiscal 1997; net income was reduced by approximately $68,000. If compensation cost for the Company's non-qualified stock options issued and shares purchased through its stock purchase plan had been determined based on the fair value at the grant dates for awards under those plans consistent with the requirements of Statement of Financial Accounting Standards No. 123, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below:
Fiscal Years Ended ---------------------------- Feb. 22, 1997 Feb. 24, 1996 ------------- ------------- Net Income As reported $5,354,000 $5,729,000 Pro forma $5,112,000 $5,662,000
Primary earnings per share As reported $.55 $.59 Pro forma $.52 $.58
Fully diluted earnings As reported $.55 $.59 per share Pro forma $.52 $.58
The Company has a Performance Unit, Restricted Stock, Non-Qualified Option and Incentive Stock Option Plan, and a total of 2,000,000 shares of common stock have been reserved for issuance thereunder. The Company has granted and sold shares of restricted stock to certain executives at a nominal price per share. In connection with the issuance of restricted stock, unearned compensation is recorded ($197,400 in fiscal 1997) and amortized over the respective vesting periods. In fiscal 1997, restricted shares were granted, and vest as follows:
Date Number Date Granted Of Shares Vested ------- --------- ------ March 1996 5,000 March 1997 March 1996 5,000 March 1998 June 1996 5,000 June 1997
The Company has also granted non-qualified stock options to employees. Such options have been granted at market value, vest within three years from the date of grant and expire within ten years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 2.0%, expected volatility of 29.1%, risk-free interest rate of 6.3%, expected option term of five years, and a forfeiture rate of 25%.
A summary of the Company's non-qualified stock option activity and weighted average exercise prices for the three years ended February 22, 1997 follows:
Fiscal Years Ended ---------------------------------------------------------- February 25, 1995 February 24, 1996 February 22, 1997 ------------------- ------------------- ----------------- Number Weighted Number Weighted Number Weighted Of Average Of Average Of Average Shares Exer.Price Shares Exer.Price Shares Exer.Price ------ ---------- ------ ---------- ------ ---------- Outstanding at beginning of year 1,135,500 $12.43 1,253,500 $13.36 1,057,000 $12.59 Granted 278,000 $18.17 187,500 $13.38 262,500 $13.15 Exercised (145,000) $14.81 (214,000) $15.21 (337,000) $ 8.08 Forfeited (15,000) $18.50 (170,000) $15.82 (104,000) $15.07 --------- -------- -------- Outstanding at end of yr. 1,253,500 $13.36 1,057,000 $12.59 878,500 $14.20 ========== ========= =========
Options exercisable at year-end 737,500 695,667 472,833
Weighted-avg. fair value of options granted during the year N/A $2.43 $2.38
The following table summarizes information about stock options outstanding at February 22, 1997.
Options Outstanding Options Exercisable ------------------------------------ ------------------------- Weighted Average Remaining Weighted Weighted Range of Shares Contractual Average Shares Average Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price - ----------- ----------- ----------- ---------- ----------- ---------- $12.25-18.13 878,500 7.5 Yrs. $14.20 472,833 $14.61
The Company also has a Stock Option Plan for Non-Employee Directors, and has reserved a total of 100,000 shares of common stock for issuance thereunder. The Company has granted non-qualified stock options to its non-employee Directors. These options are granted at market value, vest one year from the date of grant and expire within ten years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 2.0%, expected volatility of 29.1%, risk-free interest rate of 6.3%, expected term of five years, and a forfeiture rate of 6%.
A summary of the Company's stock option activity under the Non- Employee Directors Plan for the three years ended February 22, 1997 follows:
Fiscal Years Ended ---------------------------------------------------------- February 25, 1995 February 24, 1996 February 22, 1997 ------------------- ------------------ ----------------- Number Weighted Number Weighted Number Weighted Of Average Of Average Of Average Shares Exer.Price Shares Exer.Price Shares Exer.Price ------ ---------- ------ ---------- ------ ---------- Outstanding at beginning of year 12,500 $12.50 20,000 $15.25 30,000 $14.79 Granted 12,500 $18.00 10,000 $13.88 10,000 $12.38 Exercised (2,500) $12.50 0 - 0 - Forfeited (2,500) $18.00 0 - 0 - ------ ------ ------ Outstanding at end of yr. 20,000 $15.25 30,000 $14.79 40,000 $14.19 ====== ====== ======
Options exercisable at year-end 10,000 20,000 30,000
Weighted-avg. fair value of options granted during the year N/A $4.02 $3.61
The following table summarizes information about stock options outstanding under the Non-Employee Directors Plan at February 22, 1997:
Options Outstanding Options Exercisable ------------------------------------ ----------------------- Weighted Average Remaining Weighted Weighted Range of Shares Contractual Average Shares Average Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price - ----------- ----------- ----------- ---------- ----------- ----------- $12.38-18.00 40,000 8.0 Yrs. $14.19 30,000 $14.79
The Company also has an Employee Stock Purchase Plan, with a total of 150,000 shares reserved for issuance. Under the Employee Stock Purchase Plan, eligible employees can purchase shares of the Company at the end of each fiscal quarter, at a price equal to 85% of the average price of the stock on the last trading day of the fiscal quarter. A maximum of 450 shares may be purchased by an eligible employee in each fiscal year. Under the Plan, employees elected to purchase 13,809 shares, 9,878 shares, and 15,022 shares in fiscal 1997, 1996, and 1995, respectively. Pro forma compensation cost equal to the 15% discount received by employees who purchased shares was approximately $24,000 in fiscal 1997, and $21,000 in fiscal 1996.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended ----------------------------------------------------- May 25, August 24, November 23, February 22, Fiscal 1997 1996 1996 1996 1997 - ----------- ------- ---------- ------------ ------------ Revenues $ 26,313 $ 32,970 $100,343 $ 80,428 Income (loss) before income taxes (5,419) (3,128) 13,059 3,599 Net income (loss) (3,631) (2,096) 8,677 2,403 Net income (loss) per common share (.38) (.22) .90 .25 Market price of shares outstanding - -market high 15 1/4 14 5/8 13 1/2 13 - -market low 12 5/8 10 3/8 10 7/8 11 1/4
Fiscal Quarters Ended ----------------------------------------------------- May 27, August 26, November 25, February 24, Fiscal 1996 1995 1995 1995 1996 - ----------- ------- --------- ----------- ------------
Revenues $ 29,614 $ 36,920 $ 97,450 $ 74,207 Income (loss) before income taxes (4,218) (743) 12,576 809 Net income (loss) (2,826) (498) 8,426 626 Net income (loss) per common share (.29) (.05) .86 .06 Market price of shares outstanding - market high 22 1/4 20 3/4 17 1/8 14 3/4 - market low 17 1/4 16 3/8 13 1/8 12 7/8
11. TERMINATED MERGER AGREEMENT
On June 13, 1995, the Company entered into a Merger Agreement with an affiliate of Freeman Spogli & Co., Incorporated. Pursuant to the Agreement, the Company would have been recapitalized through a merger transaction in which all of the shares of common stock of the Company, other than certain shares held by Lillian Vernon and David Hochberg, would have been converted into the right to receive $19 per share in cash. The Merger Agreement was terminated on September 18, 1995 when it was determined that financing for the transaction at the $19 per share price could not be obtained. The costs of the terminated merger of $921,000 have been recorded in the fiscal 1996 financial statements. These costs consisted principally of legal, accounting and filing fees.
12. STOCK REPURCHASE PROGRAM
On October 10, 1995, the Board of Directors authorized the Company to purchase up to 1 million shares of its common stock in the open market from time to time, subject to market conditions. As of February 22, 1997, the Company had purchased 384,500 shares at a total cost of $5,065,000.
13. NONCASH FINANCING ACTIVITIES
During fiscal 1995, 1996, and 1997, certain non-qualified stock options were exercised by stock plan participants using non-cash consideration. The Company has received shares of its Common Stock in consideration for the exercise price and for income taxes required to be withheld. Such stock is reported as Treasury Stock on the Balance Sheets. The number of Treasury Stock shares accepted as consideration for such stock option exercises was determined by the market price of the Company's common stock on the exercise dates. These transactions, for purposes of the Statements of Cash Flows, are deemed to be non-cash financing activities and, as such, have not been reflected on the Statements.
A summary of activity follows:
Consideration ----------------------------------- Fiscal Options Exercise Lillian Vernon Corp. Year Exercised Price Cash(Loan) Common Stock - ------ --------- -------- --------- --------------------- 1995 78,000 shares $1,147,800 $376,947 47,118 shares 1996 112,500 shares $1,766,550 ($117,393) 95,307 shares 1997 180,000 shares $1,440,000 - 133,759 shares
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Lillian Vernon Corporation:
We have audited the accompanying consolidated balance sheets of Lillian Vernon Corporation and Subsidiaries as of February 22, 1997 and February 24, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended February 22, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lillian Vernon Corporation and Subsidiaries as of February 22, 1997 and February 24, 1996 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 22, 1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P. Stamford, Connecticut April 11, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
LILLIAN VERNON CORPORATION
Dated May 20, 1997 By: /s/ Lillian Vernon ------------------ Lillian Vernon, Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Lillian Vernon Lillian Vernon Chairman of the Board May 20, 1997 of Directors (Principal Executive Officer)
/s/ Robert S. Mednick Robert S. Mednick Vice President- May 20, 1997 Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Howard P. Goldberg Howard P. Goldberg President, Chief May 20, 1997 Operating Officer and Director
/s/ David C. Hochberg David C. Hochberg Vice President - Public May 20, 1997 Affairs and Director
/s/ Lilyan H. Affinito Lilyan H. Affinito Director May 20, 1997
/s/ Leo Salon Leo Salon Director May 20, 1997
/s/ William E. Phillips William E. Phillips Director May 20, 1997
/s/ Bert W. Wasserman Bert W. Wasserman Director May 20, 1997
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a separate section of this report on pages through.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 22, 1997 and February 24, 1996. . . F- 2 - -Statements of Income for the three Fiscal Years ended 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . F- 3 - -Statements of Stockholders' Equity for the three Fiscal Years ended 1997, 1996 and 1995. . . . . . . . . . . .F- 4 - -Statements of Cash Flows for the three Fiscal Years ended 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . F- 5 - -Notes to Financial Statements . . . . . . . . . . . . . . . . F- 6 - -Report of Independent Accountants . . . . . . . . . . . . . .
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during the last quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. Description Page - ----------- ----------- ---- 2.1 -Plan and Agreement of Merger dated June 29, 1987 between Lillian Vernon Corporation, a New York corporation, and the Company...................................... (1) 2.2 -Certificate of Ownership and Merger between Lillian Vernon Corporation and the Company filed in Delaware.................... (1) 2.3 -Certificate of Merger between Lillian Vernon Corporation and the Company filed in New York.................................... (2) 3.1 -Certificate of Incorporation with Amendments of Lillian Vernon Corporation.......................................... (2) 3.2 -By-Laws of Lillian Vernon Corporation................ (1) 4.3 -Right of First Refusal Agreement among Lillian M. Katz, Fred P. Hochberg, David C. Hochberg and the Company.................... (1) 10.1 -Amended and Restated Lillian Vernon Corporation Profit Sharing Plan ..................... (12) 10.2 -Employees' Pension Plan.............................. (1) 10.3 -1987 Performance Unit, Restricted Stock, Non-Qualified Option and Incentive Stock Option Plan.......................... (1) 10.4 -Employee Stock Purchase Plan ........................ (1) 10.5 -First Amendment to Employment Agreement with Lillian Vernon, formerly Lillian M. Katz...................................... (7) 10.6 -Executive Deferred Compensation Agreement and first amendment thereto with Lillian Vernon, formerly Lillian M. Katz............................. (8) 10.7 -Employment Agreement with Fred P. Hochberg............................................. (1) 10.8 -Second Amendment to Deferred Compensation Agreement with Fred P. Hochberg............................................. (9) 10.9 -Second Amendment to Deferred Compensation Agreement with David C. Hochberg.................................... (10) 10.10 -Industrial Development Bond and Guaranty among the New Rochelle Industrial Development Agency, Bankers Trust, Fred P. Hochberg, David C. Hochberg, the Company and others............................................... (1) 10.11 -Industrial Development Bond, Series B, Acknowledgment of Assignment of Interest in the Lease and Guaranty and Sale Agreement among the Port Chester Industrial Development Agency,
Bankers Trust, Fred P. Hochberg, David C. Hochberg, the Company and others................. (1) 10.12 -Form of Indemnification Agreement with officers and directors.............................. (1) 10.13 -Hochbergs' Release of Company re: Port Chester Distribution Center.................... (1) 10.14 -Lease for Company's facility at New Rochelle, New York.............................. (1) 10.15 -Lease for Company's facility at Port Chester, New York.............................. (1) 10.16 -Lease for Company's facility at Elmsford, New York.................................. (1) 10.17 -Trademark Registrations for Lillian Vernon Corporation - Service Mark and Logo............................................ (1) 10.18 -Loan Agreement with Crestar Bank and related documents............................... (3) 10.19 -Note Purchase Agreement between the Company and Northwestern National Life Insurance Co., Farm Bureau Life Insurance Co. of Michigan, FB Annuity Corp., and Farm Bureau Mutual Insurance Co. of Michigan and related Promissory Notes dated September 9, 1988....................... (4) 10.20 -Note Purchase Agreement between the Company and Northern Life Insurance Co., Commercial Union Life Insurance Co. of America, Life Insurance Co. of Georgia and Texas Life Insurance Co. and related Promissory Notes dated October 28, 1988.................................... (4) 10.21 -Sublease between the Company and the United States Postal Service........................ (4) 10.22 -Termination of Elmsford Lease (500 Saw Mill River Road)................................ (5) 10.23 -Letter Amendment dated November 30, 1990 to Note Purchase Agreement between the Company and Northwestern National Life Insurance Co., Farm Bureau Life Insurance Co. of Michigan, FB Annuity Corp., and Farm Bureau Mutual Insurance Co. of Michigan and related Promissory Notes dated September 9, 1988............................. (6) 10.24 -Letter Amendment dated November 30, 1990 to Note Purchase Agreement between the Company and Northern Life Insurance Co., Commercial Union Life Insurance Co. of America, Life Insurance Co. of Georgia and Texas Life Insurance Co. and related Promissory Notes dated October 28, 1988.................................... (6)
10.25 -Sublease between Fred P. and David C. Hochberg and Company - New Rochelle facility............................................. (9) 10.26 -Consulting Agreement with Fred P. Hochberg............................................. (9) 10.27 -Employment Agreement with Stephen S. Marks................................................ (10) 10.28 -Lillian Vernon Corporation 1993 Stock Option Plan for Non-Employee Directors ........................................... (11) 10.29 -Employment Agreement with Larry Blum................. (13) 10.30 -Agreement with Andrew Gregor......................... (13) 10.31 -Resignation and General Release Agreement with Stephen S. Marks................................ (14) 10.32 -Employment Agreement with Howard Goldberg (15) 10.33 -Employment Agreement with Robert S. Mednick (16) 10.34 -Revolving Credit Agreement, Letter of Credit and Bankers Acceptance facility dated as of August 19 1996 among Lillian Vernon Corporation as Borrower, Lillian Vernon Fulfillment Services, Inc., LVC Retail Corporation and Lillian Vernon International Ltd. as Guarantors, the Banks named therein and The Chase Manhattan Bank as agent ....................................... (17) 11.0 -Statement re Computation of Earnings Per Share............................................ E-1 22 -Subsidiaries of registrant........................... E-2 24 -Consent of Coopers & Lybrand re: incorporated reference to Form S-8................... E-3 27 -Financial Data Schedule . . . . . . . ............... E-4
- -----------------------
(1) Filed with Registration Statement on Form S-1 (File No. 33-15430) and incorporated by reference herein.
(2) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28, 1987 and incorporated by reference herein.
(3) Filed with Annual Report on Form 10-K for the year ended February 26, 1988 and incorporated by reference herein.
(4) Filed with Annual Report on Form 10-K for the year ended February 24, 1989 and incorporated by reference herein.
(5) Filed with Annual Report on Form 10-K for the year ended February 24, 1990 and incorporated by reference herein.
(6) Filed with Annual Report on Form 10-K for the year ended February 23, 1991 and incorporated by reference herein.
(7) Filed with Annual Report on Form 10-K for the year ended
February 29, 1992 and incorporated by reference herein.
(8) Amendment filed with Quarterly Report on Form 10-Q for the quarter ended May 30, 1992 and incorporated by reference herein. Original agreement filed with Registration Statement - see (1) above.
(9) Filed with Annual Report on Form 10-K for the year ended February 27, 1993 and incorporated by reference herein.
(10) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28, 1993 and incorporated by reference herein. Exhibit 10.9 - Original deferred compensation agreement filed with Registration Statement - see (1) above.
(11) Filed with Registration Statement on Form S-8 (File No. 33- 71250) and incorporated by reference herein.
(12) Filed with Annual Report on Form 10-K for the year ended February 26, 1994 and incorporated by reference herein.
(13) Filed with Annual Report on Form 10-K for the year ended February 25, 1995, and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended May 27, 1995 and incorporated by reference herein.
(15) Filed with Annual Report on Form 10-K for the year ended February 24, 1996 and incorporated by reference herein.
(16) Filed with Quarterly Report on Form 10-Q for the quarter ended May 25, 1996 and incorporated by reference herein.
(17) Filed with Quarterly Report on Form 10-Q for the quarter ended August 24, 1996 and incorporated by reference herein.
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Supplemental disclosure of noncash financing activities -see Note 13
See Notes to Consolidated Financial Statements
LILLIAN VERNON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Lillian Vernon Corporation is a direct mail specialty catalog company, concentrating on the marketing of gift, household, gardening, kitchen, Christmas and children's products.
The consolidated financial statements include the accounts of Lillian Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon Fulfillment Services, Inc., Lillian Vernon International, Ltd., and LVC Retail Corporation (the "Company"). All material intercompany balances and transactions have been eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on the last Saturday in February. Under this policy, fiscal 1997, 1996 and 1995 consisted of 52 weeks.
Cash Equivalents Cash equivalents, for purposes of the Statements of Cash Flows, consist principally of municipal securities, U.S. Treasury securities and commercial paper, with remaining maturities at acquisition of less than three months. In the first quarter of fiscal 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115 - "Accounting for Certain Investments in Debt and Equity Securities". Under SFAS No. 115, the Company's investments, totalling $23.3 million as of February 22, 1997, are classified as held-to-maturity securities, and as such, are stated at amortized cost, which approximates market value. The adoption of SFAS No. 115 did not have a material effect on the Company's financial statements.
Merchandise Inventories Merchandise inventories are principally stated at the lower of average cost or market, determined by the retail inventory method.
Catalog Costs Catalog costs are deferred and amortized over the estimated productive life of the catalog, generally three months. Such deferred costs are considered direct-response advertising in accordance with AICPA Statement of Position No. 93-7, "Reporting on Advertising Costs", and are reflected as long-term assets in the accompanying Balance Sheets.
Capitalized Software Costs Direct costs of developing new software applications are capitalized and are being amortized over five years. Amortization of capitalized software costs totalled $320,000 in fiscal 1997, $378,000 in fiscal 1996, and $435,000 in fiscal 1995.
Capitalized software costs, net of accumulated amortization, are included in other assets, and amounted to $429,000 and $681,000 at February 22, 1997 and February 24, 1996, respectively.
Depreciation and Amortization Depreciation is provided on the straight line method for assets placed in service over estimated useful lives of approximately 30 and 8 years for buildings and building improvements, respectively, and for other property, over estimated useful lives ranging from 3 to 10 years. Leasehold improvements and assets under capital leases are amortized over approximately 15 years.
Income Taxes Deferred income taxes arise from differences in the timing of income and expense recognition for financial and income tax reporting purposes. Deferred income taxes are computed on the differences between the financial statement and tax bases of the assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
Per Share Data Net income per common share is computed by dividing the net income for the period by the sum of the weighted average number of outstanding shares and share equivalents (if the addition of such share equivalents has a materially dilutive effect). The Company's common share equivalents consist of stock options issued to key employees and directors. For the years ended February 22, 1997 and February 24, 1996, the number of common share equivalents outstanding did not result in a materially dilutive effect on the net income per share computation. For fiscal 1995, however, such common share equivalents did result in material dilution, and therefore were reflected in the net income per share calculation on the Statement of Income.
Fair Value of Financial Instruments In the first quarter of fiscal 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial Instruments." The fair value of the Company's financial instruments does not materially differ from their carrying values.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation The Company follows the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for stock-based compensation arrangements. Under these guidelines, compensation cost for stock-based employee compensation plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The Company implemented the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in fiscal 1997, but will continue its current accounting method for stock-based employee compensation, as permitted by the Statement. See Note 9.
Reclassifications Certain reclassifications have been made in the prior year financial statements to conform with the fiscal 1997 presentation.
New Accounting Standards In fiscal 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of SFAS 121 did not have a material effect on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The standard revises the computation and presentation of earnings per share and will be adopted by the Company in the fourth quarter of fiscal 1998. The Company does not expect the adoption of this statement to have a material impact on reported earnings per share.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended ----------------------------------------- February 22, February 24, February 25, 1997 1996 1995 ------------- ------------ ------------ Federal $ 3,314 $ 3,206 $ 5,202 State 308 354 600 ------------- ------------ ------------ $ 3,622 $ 3,560 $ 5,802 ------------- ------------ ------------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended ----------------------------------------- February 22, February 24, February 25, 1997 1996 1995 ------------- ------------ ------------ Charitable contributions $ (216) $ (499) $ (668) Depreciation (63) (192) (169) Capitalized software development costs (74) (50) (77) Catalog costs (204) (40) 1,023 Other, net (307) (83) (397) ------------ --------- ---------- $ (864) $ (864) $ (288) ------------ --------- ----------
The exercise of non-qualified stock options and the vesting of restricted stock (see Note 9) result in a tax deduction to the Company equivalent to the taxable compensation recognized by the individuals. For accounting purposes, the tax benefit of these deductions is credited directly to additional paid-in capital. These amounts totalled $656,000, $367,000, and $171,000 for fiscal 1997, 1996, and 1995, respectively.
The Company's effective income tax rate is reconciled to the U.S. federal statutory tax rate as follows:
Fiscal Years Ended ----------------------------------------- February 22, February 24, February 25, 1997 1996 1995 ------------- ------------ ------------ Federal statutory tax rate 34.0% 34.0% 35.0% State income taxes, net of federal tax benefit 2.5 2.8 2.0 Charitable contributions of merchandise (3.5) (6.7) (3.2) Reversal of tax provisions of prior years - - (2.8) Expired charitable contribution carryforwards - 4.9 - Other, net 1.0 (3.0) (2.2) ------ ------- ------ 34.0% 32.0% 28.8% ------- ------- ------
During fiscal 1996, expired charitable contribution carryforwards of $1,079,000 resulted in a reduction in deferred tax assets of $416,000. During the fourth quarter of fiscal 1995, the Company favorably settled an outstanding tax matter that resulted in a one-time reduction in income tax expense of $740,000, including the reversal of excess tax reserves.
The deferred tax assets and deferred tax liabilities recorded on the balance sheets are as follows (dollars in thousands):
February 22, 1997 February 24, 1996 --------------------- ------------------ Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Current: Catalog deferrals $ - $ 2,373 $ - $2,577 Charitable contributions 2,152 - 1,936 - Inventory capitalization 807 - 801 - Accrued expenses 607 - 690 - Other 363 8 147 74 Valuation allowance - - - - -------- -------- ------- ------ Total current 3,929 2,381 3,574 2,651 -------- -------- ------- ------ Non-current: Depreciation - 1,688 - 1,753 Amortization 84 101 122 175 Deferred compensation 1,325 - 1,183 - -------- -------- ----- ------ Total non-current 1,409 1,789 1,305 1,928 ------- ------- ------- ------ Total $ 5,338 $ 4,170 $4,879 $4,579 ======== ======== ======= ======
As of February 22, 1997, the Company has $5,571,000 of charitable contribution carryforwards for Federal income tax purposes, which expire from fiscal 1999 to 2002.
3. CREDIT FACILITIES
The Company entered into a $42 million four-year revolving credit facility in August 1996 with two banks. This credit facility can be used for general corporate purposes, including working capital needs, capital expenditures, and up to $12 million of inventory letters of credit. At the Company's option, up to $20 million of the facility can be converted into term loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a fixed rate, at the Company's option. The credit facility is unsecured, and the Company is subject to various financial covenants principally relating to its working capital, net worth, interest coverage ratio and capital spending restrictions. The new credit facility replaced previous unused credit facilities totalling $15 million, which were in effect in fiscal 1996 and fiscal 1995, bearing interest at the prime rate.
In fiscal 1997, the Company incurred commitment fees on the new credit facility ranging from 5 basis points on the letters of credit to 20 basis points on the available revolving credit line. In fiscal 1996 and fiscal 1995, the Company incurred commitment fees of approximately 20 and 25 basis points, respectively. During the year, the maximum amount outstanding under the new revolving credit agreement was $12.5 million (excluding letters of credit). Interest expense related to these borrowings was approximately $143,000. No amounts were outstanding under the Company's credit facilities as of February 22, 1997 and February 24, 1996.
The Company had outstanding letters of credit approximating $4,773,000 and $5,227,000 as of February 22, 1997 and February 24, 1996, respectively, for the purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of $7,851,800 and $11,586,000 as of February 22, 1997, and February 24, 1996, respectively (See Note 1).
Trade accounts payable and accrued expenses consist of (dollars in thousands): February 22, February 24, 1997 1996 ------------ ------------ Trade accounts payable $ 6,061 $ 4,557 Catalog costs 1,696 1,485 Salaries and compensation 1,566 1,471 Other 5,162 4,602 ------------ -------- $ 14,485 $ 12,115 ------------ --------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in thousands):
February 22, February 24, 1997 1996 ------------ ------------ Land and buildings $ 31,656 $ 25,578 Machinery and equipment 26,512 21,894 Furniture and fixtures 3,313 3,240 Leasehold improvements 3,776 3,777 Capital leases 1,262 1,262 ------------ -------- Total property, plant & equipment, at cost 66,519 55,751 Less, accumulated depreciation & amortization 26,200 22,127 ------------ -------- Property, plant & equipment, net $ 40,319 $ 33,624 ------------ --------
6. LONG-TERM DEBT Long-term debt consists of the following (dollars in thousands):
February 22, February 24, 1997 1996 ------------ ------------ Senior Notes due September 1998, payable in semi-annual installments of $300,000 with interest at 10.09% ......... $ 1,200 $ 1,800 Senior Notes due October 1998, payable in semi-annual installments of $335,000 with interest at 10.0% ............. 1,340 2,010 Industrial Revenue Bond of the City of New Rochelle Industrial Development Agency, payable in quarterly installments of $1,500 with interest at prime rate (February 1997 = 8.25%, February 1996 = 8.25%) through October 1997 ........................ 4 10
------------- ------- $ 2,544 $ 3,820 Less, current portion ..................... 1,274 1,276 ------------- ------- $ 1,270 $ 2,544 ------------- -------
The Company's long-term debt agreements require that the Company meet certain financial covenants, principally related to working capital and tangible net worth, both as defined in the agreements.
Long-term debt as of February 22, 1997 matures as follows (dollars in thousands):
Fiscal Year ----------- 1998 .................................... $ 1,274 1999 .................................... 1,270 ------- $ 2,544 ------- 7. LEASES
The Company leases its New Rochelle, New York corporate headquarters under a capital lease arrangement with a partnership, Port Chester Properties, the partners of which are stockholders of the Company. The leased asset consists of land and a building with a cost of $1,262,000 and accumulated
amortization of $1,144,000 as of February 22, 1997. The lease expires July 30, 1998 and provides for the payment by the Company of an annual rent of $430,000, and all real estate taxes, insurance, and certain other costs.
The Company has operating lease agreements for certain computer and other equipment used in its operations and for its outlet store locations, with existing lease terms ranging from fiscal 1998 through fiscal 2003, and various renewal options through fiscal 2008. Most of the store leases also provide for payment of common charges such as maintenance and real estate taxes. Seven stores require the payment of additional rent based upon a percentage of sales. Minimum rental payments required under these agreements are as follows (dollars in thousands):
Fiscal Year ----------- 1998 ...................................... $1,221 1999 ...................................... 1,157 2000 ...................................... 1,055 2001 ...................................... 611 2002 ...................................... 265 Thereafter ................................. 94 ------ $4,403 ------
Rent expense for fiscal 1997, 1996 and 1995 amounted to $2,171,000, $1,840,000, and $2,363,000, respectively, which included $14,000, $20,000 and $11,000 in fiscal 1997, 1996 and 1995, respectively, for contingent rentals based upon a percentage of outlet store sales.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for the benefit of all employees who meet certain minimum service requirements. The Company's profit sharing contribution is discretionary, as determined by the Board of Directors. Employees fully vest in their profit sharing account balance after seven years. The authorized profit sharing contributions for fiscal 1997, 1996, and 1995 were $500,000, $450,000, and $500,000, respectively.
The Company's profit sharing plan includes an employee contribution and employer matching contribution (401k) feature. Under the 401k feature of the plan, eligible employees may make pre-tax contributions up to 10% of their annual compensation. Employee contributions of up to 6% of compensation are currently matched by the Company at a rate of 50%. The matching contribution is made with Company stock. Employees are 100% vested in their pre-tax contributions at all times, and become fully vested in the employer matching contribution after two years of service. The Company's matching contributions to the plan for fiscal 1997, 1996, and 1995 were $425,000, $398,000, and $355,000 respectively.
The Company has deferred compensation agreements to provide additional retirement benefits for certain principal stockholders of the Company. The deferred compensation agreements also provide for death benefits to be paid to each party's beneficiary. The Company has purchased life insurance policies to fund, in part, the payment of these benefits. Amounts expensed in connection with these agreements were $366,000 in fiscal 1997, $150,000 in fiscal 1996 and $600,000 in fiscal 1995.
9. STOCK COMPENSATION PLANS
At February 22, 1997, the Company had three stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock compensation plans. Accordingly, no compensation cost has been recognized for its non-qualified stock options granted and for shares issued through its employee stock purchase plan. Compensation cost has been charged against income for the issuance of restricted stock during Fiscal 1997; net income was reduced by approximately $68,000. If compensation cost for the Company's non-qualified stock options issued and shares purchased through its stock purchase plan had been determined based on the fair value at the grant dates for awards under those plans consistent with the requirements of Statement of Financial Accounting Standards No. 123, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below:
Fiscal Years Ended ---------------------------- Feb. 22, 1997 Feb. 24, 1996 ------------- ------------- Net Income As reported $5,354,000 $5,729,000 Pro forma $5,112,000 $5,662,000
Primary earnings per share As reported $.55 $.59 Pro forma $.52 $.58
Fully diluted earnings As reported $.55 $.59 per share Pro forma $.52 $.58
The Company has a Performance Unit, Restricted Stock, Non-Qualified Option and Incentive Stock Option Plan, and a total of 2,000,000 shares of common stock have been reserved for issuance thereunder. The Company has granted and sold shares of restricted stock to certain executives at a nominal price per share. In connection with the issuance of restricted stock, unearned compensation is recorded ($197,400 in fiscal 1997) and amortized over the respective vesting periods. In fiscal 1997, restricted shares were granted, and vest as follows:
Date Number Date Granted Of Shares Vested ------- --------- ------ March 1996 5,000 March 1997 March 1996 5,000 March 1998 June 1996 5,000 June 1997
The Company has also granted non-qualified stock options to employees. Such options have been granted at market value, vest within three years from the date of grant and expire within ten years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 2.0%, expected volatility of 29.1%, risk-free interest rate of 6.3%, expected option term of five years, and a forfeiture rate of 25%.
A summary of the Company's non-qualified stock option activity and weighted average exercise prices for the three years ended February 22, 1997 follows:
Fiscal Years Ended ---------------------------------------------------------- February 25, 1995 February 24, 1996 February 22, 1997 ------------------- ------------------- ----------------- Number Weighted Number Weighted Number Weighted Of Average Of Average Of Average Shares Exer.Price Shares Exer.Price Shares Exer.Price ------ ---------- ------ ---------- ------ ---------- Outstanding at beginning of year 1,135,500 $12.43 1,253,500 $13.36 1,057,000 $12.59 Granted 278,000 $18.17 187,500 $13.38 262,500 $13.15 Exercised (145,000) $14.81 (214,000) $15.21 (337,000) $ 8.08 Forfeited (15,000) $18.50 (170,000) $15.82 (104,000) $15.07 --------- -------- -------- Outstanding at end of yr. 1,253,500 $13.36 1,057,000 $12.59 878,500 $14.20 ========== ========= =========
Options exercisable at year-end 737,500 695,667 472,833
Weighted-avg. fair value of options granted during the year N/A $2.43 $2.38
The following table summarizes information about stock options outstanding at February 22, 1997.
Options Outstanding Options Exercisable ------------------------------------ ------------------------- Weighted Average Remaining Weighted Weighted Range of Shares Contractual Average Shares Average Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price - ----------- ----------- ----------- ---------- ----------- ---------- $12.25-18.13 878,500 7.5 Yrs. $14.20 472,833 $14.61
The Company also has a Stock Option Plan for Non-Employee Directors, and has reserved a total of 100,000 shares of common stock for issuance thereunder. The Company has granted non-qualified stock options to its non-employee Directors. These options are granted at market value, vest one year from the date of grant and expire within ten years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 2.0%, expected volatility of 29.1%, risk-free interest rate of 6.3%, expected term of five years, and a forfeiture rate of 6%.
A summary of the Company's stock option activity under the Non- Employee Directors Plan for the three years ended February 22, 1997 follows:
Fiscal Years Ended ---------------------------------------------------------- February 25, 1995 February 24, 1996 February 22, 1997 ------------------- ------------------ ----------------- Number Weighted Number Weighted Number Weighted Of Average Of Average Of Average Shares Exer.Price Shares Exer.Price Shares Exer.Price ------ ---------- ------ ---------- ------ ---------- Outstanding at beginning of year 12,500 $12.50 20,000 $15.25 30,000 $14.79 Granted 12,500 $18.00 10,000 $13.88 10,000 $12.38 Exercised (2,500) $12.50 0 - 0 - Forfeited (2,500) $18.00 0 - 0 - ------ ------ ------ Outstanding at end of yr. 20,000 $15.25 30,000 $14.79 40,000 $14.19 ====== ====== ======
Options exercisable at year-end 10,000 20,000 30,000
Weighted-avg. fair value of options granted during the year N/A $4.02 $3.61
The following table summarizes information about stock options outstanding under the Non-Employee Directors Plan at February 22, 1997:
Options Outstanding Options Exercisable ------------------------------------ ----------------------- Weighted Average Remaining Weighted Weighted Range of Shares Contractual Average Shares Average Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price - ----------- ----------- ----------- ---------- ----------- ----------- $12.38-18.00 40,000 8.0 Yrs. $14.19 30,000 $14.79
The Company also has an Employee Stock Purchase Plan, with a total of 150,000 shares reserved for issuance. Under the Employee Stock Purchase Plan, eligible employees can purchase shares of the Company at the end of each fiscal quarter, at a price equal to 85% of the average price of the stock on the last trading day of the fiscal quarter. A maximum of 450 shares may be purchased by an eligible employee in each fiscal year. Under the Plan, employees elected to purchase 13,809 shares, 9,878 shares, and 15,022 shares in fiscal 1997, 1996, and 1995, respectively. Pro forma compensation cost equal to the 15% discount received by employees who purchased shares was approximately $24,000 in fiscal 1997, and $21,000 in fiscal 1996.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended ----------------------------------------------------- May 25, August 24, November 23, February 22, Fiscal 1997 1996 1996 1996 1997 - ----------- ------- ---------- ------------ ------------ Revenues $ 26,313 $ 32,970 $100,343 $ 80,428 Income (loss) before income taxes (5,419) (3,128) 13,059 3,599 Net income (loss) (3,631) (2,096) 8,677 2,403 Net income (loss) per common share (.38) (.22) .90 .25 Market price of shares outstanding - -market high 15 1/4 14 5/8 13 1/2 13 - -market low 12 5/8 10 3/8 10 7/8 11 1/4
Fiscal Quarters Ended ----------------------------------------------------- May 27, August 26, November 25, February 24, Fiscal 1996 1995 1995 1995 1996 - ----------- ------- --------- ----------- ------------
Revenues $ 29,614 $ 36,920 $ 97,450 $ 74,207 Income (loss) before income taxes (4,218) (743) 12,576 809 Net income (loss) (2,826) (498) 8,426 626 Net income (loss) per common share (.29) (.05) .86 .06 Market price of shares outstanding - market high 22 1/4 20 3/4 17 1/8 14 3/4 - market low 17 1/4 16 3/8 13 1/8 12 7/8
11. TERMINATED MERGER AGREEMENT
On June 13, 1995, the Company entered into a Merger Agreement with an affiliate of Freeman Spogli & Co., Incorporated. Pursuant to the Agreement, the Company would have been recapitalized through a merger transaction in which all of the shares of common stock of the Company, other than certain shares held by Lillian Vernon and David Hochberg, would have been converted into the right to receive $19 per share in cash. The Merger Agreement was terminated on September 18, 1995 when it was determined that financing for the transaction at the $19 per share price could not be obtained. The costs of the terminated merger of $921,000 have been recorded in the fiscal 1996 financial statements. These costs consisted principally of legal, accounting and filing fees.
12. STOCK REPURCHASE PROGRAM
On October 10, 1995, the Board of Directors authorized the Company to purchase up to 1 million shares of its common stock in the open market from time to time, subject to market conditions. As of February 22, 1997, the Company had purchased 384,500 shares at a total cost of $5,065,000.
13. NONCASH FINANCING ACTIVITIES
During fiscal 1995, 1996, and 1997, certain non-qualified stock options were exercised by stock plan participants using non-cash consideration. The Company has received shares of its Common Stock in consideration for the exercise price and for income taxes required to be withheld. Such stock is reported as Treasury Stock on the Balance Sheets. The number of Treasury Stock shares accepted as consideration for such stock option exercises was determined by the market price of the Company's common stock on the exercise dates. These transactions, for purposes of the Statements of Cash Flows, are deemed to be non-cash financing activities and, as such, have not been reflected on the Statements.
A summary of activity follows:
Consideration ----------------------------------- Fiscal Options Exercise Lillian Vernon Corp. Year Exercised Price Cash(Loan) Common Stock - ------ --------- -------- --------- --------------------- 1995 78,000 shares $1,147,800 $376,947 47,118 shares 1996 112,500 shares $1,766,550 ($117,393) 95,307 shares 1997 180,000 shares $1,440,000 - 133,759 shares
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Lillian Vernon Corporation:
We have audited the accompanying consolidated balance sheets of Lillian Vernon Corporation and Subsidiaries as of February 22, 1997 and February 24, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended February 22, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lillian Vernon Corporation and Subsidiaries as of February 22, 1997 and February 24, 1996 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 22, 1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P. Stamford, Connecticut April 11, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
LILLIAN VERNON CORPORATION
Dated May 20, 1997 By: /s/ Lillian Vernon ------------------ Lillian Vernon, Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Lillian Vernon Lillian Vernon Chairman of the Board May 20, 1997 of Directors (Principal Executive Officer)
/s/ Robert S. Mednick Robert S. Mednick Vice President- May 20, 1997 Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Howard P. Goldberg Howard P. Goldberg President, Chief May 20, 1997 Operating Officer and Director
/s/ David C. Hochberg David C. Hochberg Vice President - Public May 20, 1997 Affairs and Director
/s/ Lilyan H. Affinito Lilyan H. Affinito Director May 20, 1997
/s/ Leo Salon Leo Salon Director May 20, 1997
/s/ William E. Phillips William E. Phillips Director May 20, 1997
/s/ Bert W. Wasserman Bert W. Wasserman Director May 20, 1997