FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 24, 1996
-----------------
OR
[ ] FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9637
LILLIAN VERNON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2529859
(STATE OF INCORPORATION) (I. R. S. EMPLOYER
IDENTIFICATION NO.)
543 MAIN STREET. NEW ROCHELLE, NEW YORK 10801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (914) 576-6400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 PER SHARE. AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (SECTION 229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY INFORMATION STATEMENT, INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE FOR THE VOTING STOCK HELD BY NON-AFFILIATES (BASED
UPON THE CLOSING PRICE) ON MAY 15, 1996 WAS APPROXIMATELY $77,033,188.
AS OF MAY 15, 1996, THERE WERE 9,617,366 SHARES OF COMMON STOCK, PAR VALUE
$.01 PER SHARE, OUTSTANDING.
PART III IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S PROXY STATEMENT
PURSUANT TO REGULATION 14A, COVERING THE ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD JULY 18, 1996.
THE INDEX TO EXHIBITS APPEARS ON PAGE 20.
<PAGE>
LILLIAN VERNON CORPORATION/
FISCAL 1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 8
ITEM 3. Legal Proceedings........................................... 9
ITEM 4. Submission of Matters to a Vote of
Security Holders............................................ 9
PART II
ITEM 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................. 10
ITEM 6. Selected Financial Data..................................... 11
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 12
ITEM 8. Financial Statements and Supplementary Data................. 17
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . ............... 17
PART III
ITEM 10. Directors and Executive Officers of the
Registrant.................................................. 18
ITEM 11. Executive Compensation...................................... 18
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 18
ITEM 13. Certain Relationships and Related Transactions.............. 18
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K......................................... 19
i
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PART I
ITEM 1. BUSINESS
General
Lillian Vernon Corporation (the "Company") is a direct mail
specialty catalog company concentrating on the marketing of gift, household,
gardening, kitchen, Christmas and children's products. The Company, a
predecessor of which was founded in 1951, seeks to provide customers with
reasonably priced products that can be differentiated from competitive products
either by design, price or personalization. In fiscal 1996, the Company
published 27 catalog editions, and mailed over 179,000,000 catalogs to past and
prospective customers.
The Company has developed a proprietary customer data base
containing information about its customers, including such data as order
frequency, size and date of last order, and type of 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
18,600,000 people, approximately 3,400,000 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.
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Fiscal Years Ended
------------------------------------------------------------
February February February February February
29, 1992(1) 27, 1993 26, 1994 25, 1995 24, 1996
-------- -------- -------- -------- --------
Number of
catalogs
mailed (000's)
(2) 137,949 140,999 150,846 179,424 179,539
Number of
catalog
editions 18 20 22 26 27
Number of
orders received
(000's) 4,286 4,405 4,602 4,940 4,903
Average revenue
per order
received (3) $39.01 $40.09 $42.86 $44.61 $49.31
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 and its
capacity to process and fill orders. In fiscal 1996, the Company
produced 27 different catalog editions.
- --------------------
(1) This fiscal year was comprised of 53 weeks.
(2) "Number of catalogs mailed" includes catalog circulation to the
extent that related orders are received in that fiscal year.
(3) "Average revenue per order received" is not reduced for refunds, nor
does it include shipping and handling or applicable state sales tax
remittance.
2
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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
Catalog-Spring 5 84-96 550-650
Lillian Vernon
Catalog-Fall 5 96-120 650-850
Private Sale 5 84-96 400-500
Lilly's Kids 4 44-80 200-400
Christmas Memories 3 48-64 250-350
Welcome To An
Organized Home 2 48-60 350
Lillian Vernon's
Kitchen 2 48 350
Personalized Gifts 1 48 450
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
items offered by the Company.
Private Sale catalogs are primarily used to sell merchandise
overstocks and deleted products, and are generally mailed only to customers on
the Company's data base.
The Company's Lilly's Kids catalogs feature toys, games, baby
products, room decor and fashion accessories for children.
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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 catalogs offer a variety
of home decor, organizational products and housewares.
The Company's Personalized Gifts catalogs primarily features 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.
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 1996 was approximately 4.4% of
revenues.
The Company purchases its products from approximately 1,000
suppliers. Approximately 77% 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 8% of its purchases through one Far Eastern
buying agent, which acts as the Company's representative in its dealings with
many different manufacturers in the Peoples' Republic of China and Hong Kong.
As a result of its reliance upon foreign suppliers, the Company is subject to
the risks of doing business abroad. To date, the Company has experienced no
material disruptions.
Marketing
The Company maintains a proprietary customer data base containing
information with respect to approximately 18,600,000 customers, gift
recipients and people who have requested its catalogs, approximately 3,400,000
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 179,000,000 catalogs were mailed in fiscal 1996, of which
approximately 78% were mailed to people whose names were in the Company's
proprietary data base and approximately 22% 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
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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. All 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 receives telephone credit
card 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 1996, 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 48% 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 National Distribution Center, a 486,000 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 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, and utilizes public warehouse space as needed.
5
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The Company is in the process of expanding its National Distribution
Center by approximately an additional 335,000 square feet, with completion of
the building expansion expected by the late summer of 1996. The Company
continually assesses the need to upgrade the capacity of its distribution
facilities. (See "Management's Discussion 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 1996,
the Company spent approximately $32.2 million in total paper costs and
approximately $56.8 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. In January 1995, the U. S. Postal Service
increased the postage rate paid by the Company by 14%. United Parcel Service
has also increased its rates, with increases occurring in February of 1994,
1995 and 1996. 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, increasing the Company's cost of doing business.
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 earnings have been
negatively affected by the higher costs of paper and postage. While the
Company cannot estimate the magnitude of future paper and postage increases or
decreases, it will impact the Company's future earnings. (See "Management's
Discussion 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 and, to a lesser extent, through
its outlet stores and through special offers made to customers placing orders
by telephone.
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".
6
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Government Regulations
The Company must comply with Federal, state and local laws affecting
its business. In particular, the Company is subject to Federal Trade
Commission regulations governing the Company's advertising and trade practices
and Consumer Product Safety Commission regulations governing the standards its
products, particularly toys, must meet. While the Company believes it is
presently in compliance with such regulations, in the event of noncompliance,
the Company may be subject to cease and desist orders, injunctive proceedings,
civil fines and other penalties. To date, such governmental regulations have
not had a material adverse effect on the Company. On occasion, products
offered by the Company have been subject to voluntary recall; however, no such
recall has had a material adverse effect on the Company.
The United States and the other countries in which the Company's
products are manufactured may, from time to time, impose new or adjust
existing quotas, duties, tariffs or other restrictions, with the result that
the Company's operations and its ability to continue to import merchandise at
required levels could be adversely affected. The Company cannot now predict
the likelihood of any such events occurring or the effect on its business of
any such event.
In the past, various states had taken action to require mail order
retailers to collect sales tax from residents in their states, even if the
only contact with such states is the mailing of catalogs into the states. On
May 26, 1992, the Supreme Court ruled 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 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 this or similar 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.
7
<PAGE>
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 24, 1996, the Company and its subsidiaries employed
approximately 1,350 employees. The Company also uses the services of various
consultants, service bureaus and freelance and temporary employees. During the
peak Holiday season, the Company employs approximately 3,500 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. 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 principal
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
8
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repairs.
The Company's National Distribution Center, a 486,000 square foot
building, is located on approximately 52 acres in Virginia Beach, Virginia.
The facility, which became fully operational during the summer of 1988 and was
expanded in 1992, is owned and operated by the Company's wholly-owned
subsidiary, Lillian Vernon Fulfillment Services, Inc. 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 financed the construction and equipment for this
facility primarily through borrowings from various financial institutions. See
Note 6 to Financial Statements.
The Company is presently expanding its National Distribution
Center by an additional 335,000 square feet. It is expected that this building
expansion will be completed by the late summer of 1996. The Company is
financing the construction and equipment for this expansion primarily through
bank financing. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
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 eleven 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
1997 through fiscal 2003, and various renewal options through fiscal 2008.
The Company intends to lease additional outlet store locations on a
short-term basis, particularly during the holiday season.
The Company believes that its facilities are adequate and that its
properties are in good condition.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its business,
no legal proceedings to which the Company is a party, or to which any of its
properties are subject, are pending or are known to be contemplated, and the
Company knows of no material legal proceedings, pending or threatened, or
judgments entered against any Director or Officer of the Company in his or her
capacity as such. See "Government Regulations" for additional discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock
Exchange (symbol: LVC). The following table sets forth the high
and low sales prices for each quarterly period for the two most
recent years. The stock prices are rounded to the nearest 1/8
point.
Quarter Ended High Low
- ------------- ---- ---
May 28, 1994 22 5/8 17
August 27, 1994 20 1/4 17 1/4
November 26, 1994 20 1/4 15 5/8
February 25, 1995 18 1/8 14 1/2
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
As of May 15, 1996, there were 420 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, 1996, the Company
has purchased 247,000 shares at a total cost of approximately $3.4 million.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------------------
February February February February February
24, 1996 25, 1995 26, 1994 27, 1993 29,1992(1)
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Operating Results
(000's)
Revenues............. $238,192 $222,211 $196,331 $172,932 $162,397
Income before income
taxes.............. 8,425 19,134 19,495 16,323 14,319
Net income .......... 5,729 13,620 12,772 10,773 9,493
Per Share
Net income.......... $ .59 $ 1.38 $ 1.35 $ 1.15 $ 1.02
Book value.......... 11.75 11.44 10.22 9.07 8.10
Dividends........... .28 .26 .20 .20 ---
Financial Position At
Year End (000's)
Cash and cash
equivalents........ $ 25,771 $ 38,779 $ 52,880 $ 51,063 $ 43,540
Working capital ..... 76,721 79,068 72,665 59,698 56,475
Total assets......... 136,385 137,768 130,937 115,040 104,561
Long-term
obligations (2).... 4,335 5,755 7,150 8,525 12,505
Stockholders' equity 113,193 110,187 97,255 85,104 75,507
Average shares
outstanding
(000's) ............ 9,713 9,892 9,448 9,355 9,310
</TABLE>
- --------------------
(1) This fiscal year was comprised of 53 weeks.
(2) Includes current installments and long-term portions of debt and capital
lease obligations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
results of operations as a percentage of revenues. The table reflects certain
reclassifications made to conform to the current year's presentation.
Fiscal Years Ended
-------------------------------
February February February
24, 1996 25, 1995 26, 1994
Revenues............................. 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs.......... (46.1) (44.2) (42.8)
Selling, general and
administrative expenses............ (50.3) (47.4) (47.3)
------ ------ ------
Operating income................... 3.6 8.4 9.9
Interest income...................... 0.6 0.5 0.5
Interest expense..................... (0.3) (0.3) (0.5)
Merger-related expenses.............. (0.4) - -
------ ------ ------
Income before income taxes.......... 3.5 8.6 9.9
Provision for income taxes........... (1.1) (2.5) (3.4)
------ ------ ------
Net income........................... 2.4% 6.1% 6.5%
------ ------ ------
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. The Distribution Center
is presently being expanded. The increase in fulfillment costs was largely
offset by
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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.
While paper prices have begun to moderate and in some cases decline,
the Company expects that its earnings will be negatively affected by higher
paper prices through the first half of fiscal 1997 as compared to fiscal 1996,
due to the flow-through of paper inventory in both periods. U.S. Postal rates
are not expected to rise in fiscal 1997, and in fact, the Company expects to
experience a small reduction in postage costs in the second half of fiscal
1997 due to a recently-enacted postal reclassification regulation. The Company
will also continue to manage its circulation strategy, catalog page count, and
merchandise mix with a goal of achieving maximum revenue per catalog, thereby
improving the ratio of selling costs to 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
"Liquidity and Capital Resources".
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
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outstanding tax matter, and the related reversal of tax reserves not
ultimately needed. See Note 2 to Financial Statements.
Fiscal 1995 and Fiscal 1994
Revenues for fiscal 1995 were $222.2 million, an increase of $25.9
million, or 13.2%, over fiscal 1994. The increase in revenues was primarily
attributable to an increase of approximately 8% in the volume of orders
shipped and approximately 4% in the average revenue per order. Catalog
circulation was approximately 18% higher than in fiscal 1994.
Product and delivery costs of $98.3 million increased $14.2 million,
or 16.9%, in fiscal 1995 as compared to fiscal 1994. The increase was
primarily attributable to the higher volume of orders, as well as higher
telephone charges and labor costs from implementing a toll-free 800 telephone
number. As a percentage of revenues, these costs increased from 42.8% in
fiscal 1994 to 44.2% in fiscal 1995, principally due to the 800-number costs.
Gross profit on products sold declined slightly because a greater amount of
overstocked and discontinued merchandise was sold at discounted prices through
the Company's outlet stores and through promotions to customers.
Selling, general and administrative ("SG&A") expenses were $105.2
million in fiscal 1995, compared to $92.8 million in fiscal 1994, an increase
of $12.4 million, or 13.4%. The rise in SG&A costs in fiscal 1995 principally
reflected an 18% increase in catalog circulation. As a percentage of revenues,
SG&A expenses increased from 47.3% in fiscal 1994 to 47.4% in fiscal 1995,
driven by a rise in the ratio of catalog costs to revenues. This was partially
offset by the relatively fixed nature of SG&A costs compared to the higher
revenue level. While the Company's cost of producing and mailing one of its
catalogs remained relatively constant year-to-year, catalog costs rose as a
percentage of revenues in fiscal 1995 because of lower average revenue per
catalog mailed. The Company increased its catalog circulation to prospect for
new customers and to contact inactive customers, especially in view of a
January 1995 postal rate increase. These mailings included less active
segments of its customer data base, whose lower response reduced the overall
revenue per catalog.
Interest income in fiscal 1995 was $1.2 million, as compared to $.9
million in fiscal 1994. The increase of $.3 million was principally caused by
higher interest rates. Interest expense declined by $.1 million in fiscal 1995
as compared to fiscal 1994 because of scheduled debt repayments.
The Company's effective income tax rate in fiscal 1995 was 28.8% as
compared to 34.5% in fiscal 1994, principally due to the favorable settlement
of an outstanding tax matter, and the related reversal of tax reserves not
ultimately needed. See Note 2 to Financial Statements.
14
<PAGE>
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 1996, 1995, and 1994. Due to these seasonal factors, as well
as to the effect of higher paper costs that were discussed earlier, management
expects to incur a loss for the first half of fiscal 1997 as well.
Liquidity and Capital Resources
The Company's balance sheet and liquidity are strong. At the end of
fiscal 1996, cash and cash equivalents totalled $25.8 million; the current
ratio was 5.6:1; stockholders' equity totalled $113.2 million; and debt
obligations (including current maturities) represented 3.8% of equity.
In fiscal 1996, the Company utilized $1.2 million of cash for
operating activities, including a net cash outflow of $6.7 million principally
because of increases in prepaid catalog costs. The rise in prepaid catalog
costs was due to higher paper costs and a greater level of paper inventory as
of February 24, 1996. The Company used $1.4 million of funds for debt
repayments, and generated $1.4 million from the sale of common stock through
its employee stock option and purchase plans.
Capital spending in fiscal 1996 totalled $7.7 million. Expenditures
of $4.5 million were made as part of the expansion of the Company's National
Distribution Center. The first phase of the project, consisting principally of
a 335,000 square foot expansion of the building, and related warehouse,
shipping and computer equipment, is expected to cost approximately $16 million
(including the fiscal 1996 expenditures), and is anticipated to be completed
in the late summer of 1996. The Company will then assess the magnitude and
timing of further phases of the project to expand the capacity of the National
Distribution Center. The other major capital expenditures in fiscal 1996 were
made to upgrade the Company's computer equipment and its distribution center
machinery and equipment.
The Company has an agreement with Crestar Bank for a revolving
line of credit, convertible into a five year term loan, of up to
$10 million, bearing interest at the prime rate. The Company's
15
<PAGE>
total available credit facilities are currently $15 million. No amounts have
been drawn down under these agreements in fiscal 1995 or 1996.
The Company has received a commitment from Chemical Bank to provide a
$40 million four-year revolving credit facility, which can be used to finance
working capital needs, the expansion of the National Distribution Center, and up
to $10 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 will be 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 will be unsecured, and the
Company will be subject to financial covenants principally relating to its
working capital, net worth, interest coverage ratio and capital spending
restrictions. The Company expects to finalize this facility in June 1996, which
will replace the existing credit facilities described above.
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 1996 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. As of February 24, 1996, the
Company had purchased 124,800 shares at a total cost of $1.7 million.
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 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
16
<PAGE>
currency fluctuations in its selling prices. In addition, most foreign purchase
orders are denominated in U.S. dollars. Accordingly, the results of operations
for the periods discussed have not been significantly affected by these
factors.
Recently Issued Accounting Standards
In 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.
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 plans to
implement the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", in fiscal 1997
and retain its current accounting method for stock-based employee
compensation.
For its fiscal year ended February 1995, the Company adopted
Statement of Financial Accounting Standards No. 115 - "Accounting
for Certain Investments in Debt and Equity Securities". This
statement did not have a material effect on the Company's financial
statements.
The Company adopted Statement of Financial Accounting Standards No.
109 - "Accounting for Income Taxes", in the first quarter of fiscal 1994. The
provisions of this statement did not have a material effect on the Company's
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this
report on pages F-1 through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
<PAGE>
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.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted
as a separate section of this report on pages F-1 through F-16.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 24, 1996 and February 25, 1995. . . F- 2
- -Statements of Income for the three Fiscal Years ended
1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 1996, 1995 and 1994 . . . . . . . . . . . F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . F- 5
- -Notes to Financial Statements . . . . . . . . . . . . . . . . F- 6
- -Report of Independent Accountants . . . . . . . . . . . . . . F-16
(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).
19
<PAGE>
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,
20
<PAGE>
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)
21
<PAGE>
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 E-1
11.0 -Statement re Computation of Earnings
Per Share............................................ E-15
22 -Subsidiaries of registrant........................... E-16
24 -Consent of Coopers & Lybrand re:
incorporated reference to Form S-8................... E-17
27 -Financial Data Schedule.............................. E-18
- ------------------------------
(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.
22
<PAGE>
(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.
23
<PAGE>
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS,
SCHEDULES AND
REPORTS
F-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 24, FEBRUARY 25,
ASSETS 1996 1995
------ ------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $25,771 $38,779
Accounts receivable 21,435 21,482
Merchandise inventories 30,948 30,418
Deferred income taxes (Note 2) 923 331
Prepayments and other current assets (Note 4) 14,231 7,495
------------------- -------------------
Total current assets 93,308 98,505
Property, plant and equipment, net (Notes 5 and 7) 33,624 29,587
Deferred catalog costs 6,506 6,632
Other assets 2,947 3,044
------------------- -------------------
Total $136,385 $137,768
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable and accrued expenses (Note 4) $12,115 $14,056
Customer deposits 128 385
Current portion of long-term debt and lease obligations (Notes 6, 7) 1,452 1,420
Income taxes payable (Note 2) 2,892 3,576
------------------- -------------------
Total current liabilities 16,587 19,437
Long-term debt, less current portion (Note 6) 2,544 3,820
Capital lease obligations, less current portion (Note 7) 339 515
Deferred compensation (Note 8) 3,099 2,913
Deferred income taxes (Note 2) 623 896
------------------- -------------------
Total liabilities 23,192 27,581
------------------- -------------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; issued -9,993,643 shares in 1996 and
9,771,744 shares in 1995 100 98
Additional paid-in capital 27,026 23,300
Retained earnings 91,923 88,922
Unearned compensation -- (2)
Treasury stock, at cost -359,999 shares in 1996
and 139,892 shares in 1995 (5,856) (2,131)
------------------- -------------------
Total stockholders' equity 113,193 110,187
------------------- -------------------
Total $136,385 $137,768
------------------- -------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------------------------
FEBRUARY 24, FEBRUARY 25, FEBRUARY 26,
1996 1995 1994
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues $238,192 $222,211 $196,331
Costs and expenses:
Product and delivery costs 109,907 98,304 84,127
Selling, general and administrative expenses 119,643 105,229 92,780
-------------------- ------------------- -------------------
229,550 203,533 176,907
-------------------- ------------------- -------------------
Operating income 8,642 18,678 19,424
Interest income 1,314 1,189 946
Interest expense (610) (733) (875)
Merger-related expenses (Note 11) (921) -- --
-------------------- ------------------- -------------------
Income before income taxes 8,425 19,134 19,495
Provision for (benefit from) income taxes (Note 2):
Current 3,560 5,802 7,913
Deferred (864) (288) (1,190)
-------------------- ------------------- -------------------
2,696 5,514 6,723
-------------------- ------------------- -------------------
Net income $5,729 $13,620 $12,772
-------------------- ------------------- -------------------
Net income per common and common
equivalent share $ .59 $1.38 $1.35
-------------------- ------------------- -------------------
Net income per common and common
equivalent share - assuming full dilution $ .59 $1.38 $1.35
-------------------- ------------------- -------------------
Weighted average number of common
and common equivalent shares (Note 1) 9,713 9,892 9,448
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
LILLIAN VERNON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PAID -IN RETAINED UNEARNED TREASURY STOCK
--------------------- -------------------
TOTAL SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES AMOUNT
------- -------- -------- ---------- ---------- -------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 27, 1993 $85,104 9,384,878 $94 $18,153 $66,913 ($9) (3,350) ($47)
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan -- 10,000 -- 136 (136)
Exercise of non-qualified
stock options 621 200,500 2 1,846 (89,424) (1,227)
Amortization of unearned
compensation 114 114
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 131 11,059 -- 131
Dividends Paid ($.20 per share) (1,893) (1,893)
Other 406 406
Net income 12,772 12,772
-------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 26, 1994 97,255 9,606,437 96 20,672 77,792 (31) (92,774) (1,274)
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan -- 2,500 -- 46 (46)
Exercise of non-qualified
stock options 1,322 147,500 2 2,177 (47,118) (857)
Amortization of unearned
compensation 75 75
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 234 15,307 -- 234
Dividends Paid ($.26 per share) (2,490) (2,490)
Other 171 171
Net income 13,620 13,620
-----------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 25, 1995 110,187 9,771,744 98 23,300 88,922 (2) (139,892) (2,131)
Exercise of non-qualified
stock options 1,262 214,000 2 3,253 (95,307) (1,993)
Amortization of unearned
compensation 2 2
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 106 7,899 -- 106
Purchase of treasury stock (1,732) (124,800) (1,732)
Dividends paid ($.28 per share) (2,728) (2,728)
Other 367 367
Net income 5,729 5,729
-------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 24, 1996 $113,193 9,993,643 $100 $27,026 $91,923 $0 (359,999) ($5,856)
-------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------- -------------- --------------
FEBRUARY 24, FEBRUARY 25, FEBRUARY 26,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,729 $13,620 $12,772
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 3,586 3,366 3,101
Amortization 395 525 1,033
(Gain) loss on sale of assets (6) (9) 53
(Increase) decrease in accounts receivable 47 (10,257) (6,860)
(Increase) decrease in merchandise inventories (530) (3,079) (7,402)
(Increase) decrease in prepayments and other current assets (6,736) (2,522) (1,610)
(Increase) decrease in deferred catalog costs 126 (2,401) 612
(Increase) decrease in other assets (296) (387) (609)
Increase (decrease) in trade accounts payable and accrued expenses (1,941) (4,413) 5,503
Increase (decrease) in customer deposits (257) 156 (346)
Increase (decrease) in income taxes payable (684) (615) 1,012
Increase (decrease) in deferred compensation 186 600 600
Increase (decrease) in deferred income taxes (865) (234) (2,179)
-------------- -------------- --------------
Net cash provided by (used in) operating activities (1,246) (5,650) 5,680
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property, plant and equipment (7,712) (6,305) (1,761)
Proceeds from sale of assets 95 12 8
-------------- -------------- --------------
Net cash used in investing activities (7,617) (6,293) (1,753)
-------------- -------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,420) (1,395) (1,375)
Proceeds from issuance of common stock 1,368 1,556 752
Dividends paid (2,728) (2,490) (1,893)
Payments to acquire treasury stock (1,732) -- --
Other 367 171 406
-------------- -------------- --------------
Net cash used in financing activities (4,145) (2,158) (2,110)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (13,008) (14,101) 1,817
-------------- -------------- --------------
Cash and cash equivalents at beginning of period 38,779 52,880 51,063
-------------- -------------- --------------
Cash and cash equivalents at end of period $25,771 $38,779 $52,880
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $599 $752 $901
Income taxes 3,971 6,863 6,215
</TABLE>
Supplemental disclosure of noncash financing activities -see Note 9
See Notes to Consolidated Financial Statements
F-5
<PAGE>
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 1996, 1995 and 1994
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 $28.0 million as of February 24, 1996, 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 $378,000 in fiscal 1996, $435,000 in fiscal 1995, and $902,000
in fiscal 1994.
Capitalized software costs, net of accumulated amortization, are
F-6
<PAGE>
included in other assets, and amounted to $681,000 and $919,000 at February
24, 1996 and February 25, 1995, 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.
Effective February 28, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 - "Accounting for Income Taxes". The
Statement requires the Company to compute deferred income taxes on the
difference between the financial statement and tax basis of the assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Financial statements for prior years have
not been restated and the cumulative effect of the accounting change was not
material.
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 24, 1996 and February 26, 1994, 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 Statements 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
F-7
<PAGE>
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Stock-Based Employee Compensation
The Company follows the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company plans to
implement the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," in fiscal 1997
and retain its current accounting method for stock-based employee
compensation.
Reclassifications
Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 1996 presentation.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 24, February 25, February 26,
1996 1995 1994
------------ ------------ ------------
Federal $ 3,206 $ 5,202 $ 7,189
State 354 600 724
------------ ------------ ------------
$ 3,560 $ 5,802 $ 7,913
------------ ------------ ------------
The deferred income tax provision (benefit) consists of (dollars in
thousands):
Fiscal Years Ended
------------------------------------------
February 24, February 25, February 26,
1996 1995 1994
------------ ------------ ------------
Charitable contributions $ (499) $ (668) $ (364)
Depreciation (192) (169) (79)
Capitalized software development
costs (50) (77) (255)
Catalog costs (40) 1,023 (275)
Other, net (83) (397) (217)
------------ ------------ ------------
$ (864) $ (288) $ (1,190)
------------ ------------ ------------
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 $367,000, $171,000, and $406,000 for fiscal
1996, 1995, and 1994, respectively.
F-8
<PAGE>
The Company's effective income tax rate is reconciled to the U.S.
federal statutory tax rate as follows:
Fiscal Years Ended
------------------------------------------
February 24, February 25, February 26,
1996 1995 1994
------------ ------------ ------------
Federal statutory tax rate 34.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 2.8 2.0 2.0
Charitable contributions of
merchandise (6.7) (3.2) (2.6)
Reversal of tax provisions of
prior years - (2.8) -
Expired charitable contribution
carryforwards 4.9% - -
Other, net (3.0) (2.2) 0.1
------- ------- ------
32.0% 28.8% 34.5%
------- ------- ------
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 24, 1996 February 25, 1995
---------------------- ----------------------
Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Catalog deferrals $ - $ 2,577 $ - $2,616
Charitable contributions 1,936 - 1,437 -
Inventory capitalization 801 - 791 -
Accrued expenses 690 - 557 -
Other 147 74 268 106
Valuation allowance - - - -
-------- -------- ------- ------
Total current 3,574 2,651 3,053 2,722
-------- -------- ------- ------
Non-current:
Depreciation - 1,753 - 1,943
Amortization 122 175 148 225
Deferred compensation 1,183 - 1,124 -
-------- -------- ------- ------
Total non-current 1,305 1,928 1,272 2,168
-------- -------- ------- ------
Total $ 4,879 $ 4,579 $4,325 $4,890
======== ======== ======= ======
As of February 24, 1996, the Company has $5,017,000 of charitable
contribution carryforwards for Federal income tax purposes, which expire from
fiscal 1999 to 2001.
3. CREDIT FACILITIES
The Company maintained credit facilities with two banks that provided
for total borrowings of up to $15,000,000 in fiscal 1996, and $12,000,000 in
fiscal 1995, bearing interest at the
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<PAGE>
prime rate. The Company has an agreement which allows $10,000,000 to be
converted by the Company into a five year term loan. The Company incurred
quarterly commitment fees of approximately 1/5% per annum in fiscal 1996, and
1/4% per annum in both fiscal 1995 and 1994. No amounts were outstanding under
the Company's credit facilities as of February 24, 1996 and February 25, 1995.
The Company had outstanding letters of credit approximating
$5,227,000 and $3,930,000 as of February 24, 1996 and February 25, 1995, for
the purchase of inventory in the normal course of business.
The Company is negotiating with a bank to receive a $40 million, four-
year revolving credit facility, which can be used to finance working capital
needs, the expansion of the Company's National Distribution Center, and up to
$10 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 no later
than 2003. The Company expects to finalize this facility in June 1996, which
will replace the existing credit facilities described above.
4. OTHER
Prepayments and other current assets include prepaid catalog costs of
$11,586,000 and $5,463,000 as of February 24, 1996, and February 25, 1995,
respectively (See Note 1).
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
February 24, February 25,
1996 1995
----------- ------------
Trade accounts payable $ 4,557 $ 5,006
Catalog costs 1,485 2,266
Bonus and profit sharing 450 1,575
Salaries and compensation 1,471 1,441
Other 4,152 3,768
----------- ------------
$ 12,115 $ 14,056
----------- ------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
February 24, February 25,
1996 1995
------------ ------------
Land and buildings $ 25,578 $ 19,985
Machinery and equipment 21,894 21,840
Furniture and fixtures 3,240 3,033
Leasehold improvements 3,777 3,575
Capital leases 1,262 1,262
------------ ------------
Total property, plant & equipment, at cost 55,751 49,695
Less, accumulated depreciation & amortization 22,127 20,108
------------ ------------
Property, plant & equipment, net $ 33,624 $ 29,587
------------ ------------
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<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
February 24, February 25,
1996 1995
------------ ------------
Senior Notes due September 1998,
payable in semi-annual installments
of $300,000 with interest at 10.09% ......... $ 1,800 $ 2,400
Senior Notes due October 1998, payable
in semi-annual installments of
$335,000 with interest at 10.0% ............. 2,010 2,680
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 1996 = 8.25%; February
1995 = 8.5%) through October 1997 ........... 10 16
------------- ------------
$ 3,820 $ 5,096
Less, current portion ..................... 1,276 1,276
------------- ------------
$ 2,544 $ 3,820
------------- ------------
The Company's 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 24, 1996 matures as follows (dollars in
thousands):
Fiscal Year
1997 .................................... $ 1,276
1998 .................................... 1,276
1999 .................................... 1,268
-------
$ 3,820
-------
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 $1,065,000 as of February 24, 1996. 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 1997 through fiscal 2003, and
various renewal options through fiscal 2008. Most of the store leases also
provide for
F-11
<PAGE>
payment of common charges such as maintenance and real estate taxes. Six
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
-----------
1997 ...................................... $1,023
1998 ...................................... 926
1999 ...................................... 861
2000 ...................................... 675
2001 ...................................... 292
Thereafter ................................. 311
------
$4,088
------
Rent expense for fiscal 1996, 1995 and 1994 amounted to $1,840,000,
$2,363,000, and $2,726,000, respectively, which included $20,000, $11,000 and
$4,000 in fiscal 1996, 1995 and 1994 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 1996,
1995, and 1994 were $450,000, $500,000, and $500,000, respectively.
Effective October 1, 1993, the Company amended its profit sharing
plan to include 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 1996,
1995, and 1994 were $398,000, $355,000, and $124,000 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 $150,000 in fiscal 1996, and
$600,000 in both fiscal 1995 and 1994.
F-12
<PAGE>
9. EMPLOYEE STOCK OWNERSHIP PLANS
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 and amortized
over the respective vesting periods.
Restricted shares were granted, and vested as follows:
Number of
Date Granted Shares Date Vested
------------ --------- -----------
August 1987 60,000 February 1989
March 1989 22,500 11,250 in April 1992
11,250 in April 1993
March 1992 5,000 March 1993
March 1993 5,000 February 1994
August 1993 5,000 August 1994
March 1994 2,500 March 1995
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. Non-qualified stock option activity has been as follows:
Number of Option
Shares Price Per Share
--------- ---------------
Balance at February 27, 1993 1,245,000 $ 7.09 to $16.38
Granted 265,500 $12.50 to $13.63
Cancelled (174,500) $ 8.00 to $15.83
Exercised (200,500) $ 7.09 to $14.25
Expired 0
---------
Balance at February 26, 1994 1,135,500 $ 8.00 to $16.38
Granted 278,000 $18.13 to $18.50
Cancelled (15,000) $18.50
Exercised (145,000) $ 8.00 to $15.83
Expired 0
---------
Balance at February 25, 1995 1,253,500 $ 8.00 to $18.50
---------
Granted 187,500 $13.38
Cancelled (170,000) $12.50 to $18.50
Exercised (214,000) $ 8.00 to $18.50
Expired 0
---------
Balance at February 24, 1996 1,057,000 $ 8.00 to $18.13
---------
As of February 24, 1996, non-qualified options totalling 695,667 shares
are exercisable. The remaining options are exercisable at dates ranging from
July 1996 to October 1998. As of February 24, 1996 and February 25, 1995,
222,500 and 240,000 shares, respectively, were available for grant under the
Performance Unit, Restricted Stock, Non-Qualified Option and Incentive Stock
Option Plan.
F-13
<PAGE>
During fiscal 1996, non-qualified stock options totalling 112,500
shares were exercised by two plan participants, with an aggregate exercise
price of $1,766,550. As consideration for the exercise price and for income
taxes required to be withheld, the Company received 87,807 shares of Lillian
Vernon Common Stock, and granted a loan to a plan participant in the amount of
$117,393. The loan was partially repaid during fiscal 1996, with 7,500 shares
of Lillian Vernon Common Stock. These shares received by the Company are
reported as Treasury Stock on the Balance Sheet. During fiscal 1995,
non-qualified stock options totalling 78,000 shares were exercised by three
plan participants, with an aggregate exercise price of $1,147,800. As
consideration for the exercise price and for income taxes required to be
withheld, the Company received cash totalling $376,947 and an aggregate of
47,118 shares of Lillian Vernon Common Stock, which are reported as Treasury
Stock on the Balance Sheet. In fiscal 1994, the Company received 89,424 shares
of Treasury Stock as consideration for stock option exercises aggregating
130,000 shares. The number of Treasury Stock shares accepted as consideration
for stock option exercises was determined by the market price of the Company's
common stock on the exercise dates. These transactions, for purposes of the
Statements of Cash Flows, are deemed to be noncash financing activities and,
as such, have not been reflected on the Statements.
In July 1993, the stockholders of the Company approved the Lillian
Vernon Corporation Stock Option Plan for Non-Employee Directors and reserved
100,000 shares of common stock for issuance thereunder. These options are
non-qualified stock 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
Company has granted options totalling 10,000 shares in November 1995, and
12,500 shares in both July 1994 and July 1993 to its eligible non-employee
directors. In fiscal 1995, 2,500 option shares were exercised and 2,500 option
shares were cancelled. The balance of options outstanding as of February 24,
1996 is 30,000 shares, of which 20,000 are exercisable as of that date. The
remaining options are exercisable beginning in November 1996. As of February 24,
1996, 67,500 shares are available for grant under this plan.
The Company also has an Employee Stock Purchase Plan. 150,000 shares
of common stock were reserved for issuance, of which 120,618 shares have been
issued.
F-14
<PAGE>
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended
-----------------------------------------------------
Fiscal 1996 May 27, August 26, November 25, February 24,
- ----------- 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
Fiscal Quarters Ended
-----------------------------------------------------
May 28, August 27, November 26, February 25,
FISCAL 1995 1994 1994 1994 1995
- ----------- ------- --------- ----------- ------------
Revenues $ 26,002 $ 33,659 $ 91,923 $ 70,627
Income (loss) before
income taxes (1,522) 1,191 14,439 5,026
Net income (loss) (989) 774 9,667 4,168
Net income (loss) per
common share (.10) .08 .98 .42
Market price of shares
outstanding
- market high 22 5/8 20 1/4 20 1/4 18 1/8
- market low 17 17 1/4 15 5/8 14 1/2
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 24, 1996, the
Company had purchased 124,800 shares at a total cost of $1,732,000, which are
recorded as Tresuary Stock on the Balance Sheet.
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Lillian Vernon
Corporation:
We have audited the accompanying consolidated balance sheets of Lillian Vernon
Corporation and Subsidiaries as of February 24, 1996 and February 25, 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended February 24,
1996. 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 24, 1996 and February 25, 1995,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended February 24, 1996, in conformity
with generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Stamford, Connecticut
April 19, 1996
F-16
<PAGE>
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 22, 1996 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 22, 1996
of Directors (Principal
Executive Officer)
/s/ Susan N. Cortazzo
- ------------------------
Susan N. Cortazzo Vice President- May 22, 1996
Controller
(Principal Financial
and Accounting Officer)
/s/ Howard Goldberg
- ------------------------
Howard Goldberg President, Chief May 22, 1996
Operating Officer and
Director
/s/ David C. Hochberg
- ------------------------
David C. Hochberg Vice President - Public May 22, 1996
Affairs and Director
/s/ Lilyan H. Affinito
- ------------------------
Lilyan H. Affinito Director May 22, 1996
/s/ Leo Salon
- ------------------------
Leo Salon Director May 22, 1996
/s/ William E. Phillips
- ------------------------
William E. Phillips Director May 22, 1996
/s/ Bert W. Wasserman
- ------------------------
Bert W. Wasserman Director May 22, 1996
<PAGE>
LILLIAN VERNON CORPORATION
Form 10-K
Exhibits
Exhibit 10.32
AGREEMENT made this 13th day of March, 1996, by and between
LILLIAN VERNON CORPORATION ("Company"), a Delaware corporation with offices at
543 Main Street, New Rochelle, New York 10801 and HOWARD GOLDBERG
("Executive") residing at .
R E C I T A L S
WHEREAS:
A. The Company desires to employ Executive; and
B. The Company is willing to provide certain benefits to
Executive subject to Executive faithfully fulfilling certain obligations, all
as described below.
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT.
(a) The Company employs the Executive as President and Chief
Operating Officer of the Company, and the Executive accepts such employment
upon the terms and conditions hereinafter set forth.
(b) Executive shall be appointed as a Director of the Company at the
next Board of Directors meeting of the Company. Executive agrees to submit his
resignation as a director of the Company upon expiration or termination of
this Agreement for any reason whatsoever. Executive shall serve as a Director
without additional compensation.
(c) Executive shall be subject to such policies and directions as
may be established or given by the Company's Chief Executive Officer or the
Company's Board of Directors from time to time not inconsistent with this
Agreement and his position with the Company. The Executive shall report to the
Chief
E-1
<PAGE>
Executive Officer of the Company. The Executive shall devote his entire
business time to the business and affairs of the Company.
Notwithstanding the foregoing, however, the Executive may, from time
to time, upon the express approval of the Board of Directors of the Company,
serve and continue to serve on the Board of Directors of and hold any other
offices or positions in, companies or organizations, which, in the Company's
Board's judgment, will not present any conflict of interest with the Company,
or any of its subsidiaries or affiliates or divisions, as may now be in
existence or may hereafter be in existence, or materially affect the
performance by the Executive of his duties under this Agreement. Such activity
by the Executive, however, shall at all times be subject to the limitations
imposed upon the Executive pursuant to Section 5 hereof.
(d) In connection with his employment hereunder, the Executive will
perform such duties for the Company's subsidiaries and affiliates consistent
with his position as the Company's Chief Executive Officer or the Board of
Directors of the Company may from time to time direct, all without further
compensation hereunder or from any such subsidiary or affiliate.
2. TERM.
(a) Subject to earlier termination by the Company as hereinafter
provided in Section 4 hereof, the employment term of this Agreement shall be
for a period of three (3) years commencing on March 29, 1996 and terminating
March 28, 1999 ("Initial Employment Period").
(b) After the expiration of the Initial Employment
Period, this Agreement shall continue at will terminable on
E-2
<PAGE>
ninety (90) days' prior written notice by either party to the other, which
notice may be given at any time provided the effective date of termination set
forth in such notice is on or after the end of the Initial Employment Period.
(The entire period of employment is hereinafter referred to as the "Employment
Period").
3. COMPENSATION; OTHER BENEFITS.
(a) As compensation for the services to be rendered by Executive
hereunder during the Employment Period, the Company shall pay to the
Executive, and the Executive shall accept a base salary of Three Hundred Fifty
Thousand ($350,000) Dollars per annum. Such salary shall be payable in
accordance with customary payroll practices, subject to any deductions or
withholding required by applicable law.
(b) In addition to Executive's base salary set forth in Section 3(a)
above, Executive shall be entitled to receive a bonus pursuant to the
Company's bonus policy of up to fifty (50%) percent of Executive's base
salary. The bonus earned shall be such amount as is determined by the
Compensation Committee of the Board of Directors of the Company consistent
with the Company's bonus policy. It has been agreed, however, that for the
fiscal year ending on or about February 22, 1997, the Executive's bonus shall
be no less than Seventy Five Thousand ($75,000) Dollars.
(c) The Company shall grant the Executive, on the date of the
commencement of Executive's employment, Non-Qualified Stock Options for
Seventy-Five Thousand (75,000) shares of common stock which will vest and
become exercisable over a three-year period - one-third (1/3) on each annual
anniversary date of the
E-3
<PAGE>
Executive's employment. The exercise price shall be the closing price of the
stock on the American Stock Exchange on the date of the commencement of the
Executive's employment. The Company shall also grant the Executive ten
thousand (10,000) shares of Restricted Stock at par value, which will vest
over a two (2) year period - one-half (1/2) on the first anniversary date of
Executive's employment with the Company and the balance on the second
anniversary date of Executive's employment with the Company. The above grants
shall be made pursuant to the Company's Performance Unit, Restricted Stock,
Non-Qualified Option and Incentive Stock Option Plan, as amended.
(d) Executive shall be paid a signing bonus of Fifty Thousand
($50,000) Dollars (subject to any deductions or withholding required
by applicable law) upon the commencement of his employment with the Company.
(e) The Company shall provide Executive with an automobile suitable
to Executive's status in the Company and shall reimburse him for any
insurance, maintenance, oil and gas costs incurred by him. Executive will be
chargeable with W-2 compensation for personal use of said automobile as
required by applicable Internal Revenue Service regulations.
(f) The Executive shall be entitled to an annual paid vacation of
not less than four (4) weeks. Such vacation shall be taken at such time or
times during the year as shall be consistent with the requirements of the
Company and the Executive.
(g) During the Employment Period, Executive shall be furnished with
such benefits (including but not limited to any
E-4
<PAGE>
health, disability and life insurance benefits and profit sharing plans,
automobile privileges and the like) as are made available to other senior
executives of the Company subject, however, to such eligibility requirements,
restrictions and limitations as may be generally provided with regard to any
such benefits and plans and subject always to the Company's right to amend or
terminate such benefits or plans for its employees generally or its senior
executives.
(h) If this Agreement is terminated by the Company by reason of
Executive's disability pursuant to the provisions of Section 4 hereof, then
the Company agrees to continue to pay to Executive his base salary (less sums
paid to him under any of the disability insurance policies paid for by the
Company) for a period of ninety (90) days following the date of such
termination.
(i) The Company further agrees to furnish Executive with a private
office and such other assistance and accommodations as shall be suitable to
the character of Executive's position with the Company and adequate
performance of his duties hereunder.
(j) On or before the eighteen month anniversary date of this
Agreement, Executive's compensation package as set forth above, the term of
this Agreement and the termination provisions of this Agreement shall be
reviewed by the Company; provided, however, that the Company shall be under no
obligation to increase any of such benefits or extend the term of this
Agreement and provided, further, however, that the Company may in
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<PAGE>
no event decrease such benefits or shorten the term of this
Agreement.
4.TERMINATION.
(a) The Company shall be entitled, in accordance with the procedures
set forth below, to terminate this Agreement and to discharge the Executive
for "cause" without further obligation or liability on the part of the Company
under the terms of this Agreement or otherwise relating to his employment
except for accrued compensation and benefits. The term "cause" shall be
limited to the following grounds:
(i) The Executive shall fail to remedy any intentional material
breach of his obligations to the Company within fifteen (15) business days
after he has received written notice from the Company specifying such breach
in reasonable detail, or if such breach cannot be reasonably remedied within
fifteen (15) business day period, the Executive shall have commenced diligent
efforts to remedy such breach within such fifteen (15) business day period and
shall have remedied such breach within sixty (60) days after Executive has
received written notice as aforesaid;
(ii) The Executive shall intentionally materially breach any such
obligation on a second occasion after he has received written notice of such
breach as provided in subsection 4(a)(i) above;
(iii) Conviction of a felony crime;
(iv) The crime of theft or misappropriation of the Company's
property;
E-6
<PAGE>
(v) Intentionally making a material false written statement to the
Company's Board of Directors regarding the affairs of the Company; and
(vi) Executive shall become disabled.
For purposes of this Agreement, "disability" shall mean an
illness, disability or other incapacity (whether physical or mental) which has
prevented Executive from performing his regular duties on a full-time basis
for ninety five (95) consecutive days, or ninety five (95) days in any
consecutive twelve (12) month period. In the event Executive disputes that he
is disabled and provides to the Company a written opinion of a licensed
physician of the State of New York (the "Executive's Physician") to that
effect, then he agrees to submit to a physical examination by a licensed
physician of the State of New York chosen by the Company (the "Company's
Physician"). If the Company's Physician issues a written opinion to the effect
that Executive is disabled, then such dispute shall be submitted to a third
physician chosen jointly by the Executive and the Company (the "Neutral
Physician"). If the Executive and the Company cannot agree on the Neutral
Physician within ten (10) days after the issuance of the Company's Physician's
opinion, then either party may apply to the American Arbitration Association
for the appointment of the Neutral Physician. The determination of the Neutral
Physician shall be final and binding upon the parties hereto.
(b) (i) In the event the Company terminates Executive's employment
without "cause" during the Initial Employment Period (i.e., not pursuant to
the provisions of
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<PAGE>
Section 4(a) above), then the Company shall pay to Executive in accordance
with its then customary payroll practices one hundred (100%) percent of his
base salary in effect on the date of such termination until (the "Severance
Period") the earlier of (x) March 28, 1999 and (y) the date which is twenty
four (24) months after the date of such termination and (z) the date Executive
becomes employed by or becomes a consultant to a Competitor, as defined in
Section 5(a). Executive shall not be obligated to mitigate damages. Executive
shall not be considered an employee of the Company during the Severance Period
for vesting or any other purpose whatsoever.
(ii) The above provisions are intended to fully compensate
Executive for a termination by the Company without "cause" and Executive shall
have no other or further claim against the Company for wrongful discharge.
(c) The term of employment of Executive hereunder shall terminate
in the event of the death of Executive without further obligation or liability
on the part of the Company under the terms of this Agreement or otherwise
relating to his employment, except that his salary shall continue until the
end of the month following the month in which his death occurs.
5. RESTRICTIVE COVENANT; IDEAS AND INVENTIONS; AND CONFIDENTIALITY.
(a) Executive agrees that he will not during the Employment Period
directly or indirectly compete with the Company or any of its subsidiaries or
render advice or services to or be employed by or represent or be an agent for
or participate as a stockholder, partner or joint venturer or have any direct
or
E-8
<PAGE>
indirect interest in any person, firm or corporation whose business in whole
or in part directly or indirectly competes with the business of the Company (a
"Competitor"). The foregoing shall not be construed to prevent Executive from
owning less than a two (2%) percent interest in any publicly held corporation
even if such corporation competes with the Company. In the event the Company
terminates this Agreement for cause, then the foregoing restrictive covenant
shall continue in effect for the balance of the Initial Employment Period. In
all other cases the foregoing restrictive covenant shall terminate upon
termination of Executive's employment hereunder.
(b) (i) Executive does hereby recognize as the exclusive property of
and assigns, transfers and conveys to the Company, its successors and assigns,
without further consideration, all of his right, title and interest in each
and every idea, invention, discovery or improvement (whether or not patentable
or copyrightable) relating to any subject matter with which Executive's work
for the Company is or may be concerned and which is made, conceived or
developed by Executive, either solely or jointly with others, during the
period of Executive's employment with the Company or with the use of the
Company's personnel, material or facilities ("Ideas", "Systems" and/or
"Inventions").
(ii) Executive agrees without charge to the Company, but at its
expense, to execute, acknowledge and deliver all such papers, including
applications for patents or copyrights, as may be necessary to obtain patents
or convey rights for Ideas, Systems or Inventions in any and all countries
E-9
<PAGE>
and to vest title thereto in the Company, its successors or assigns or
otherwise vest in the Company full and complete ownership of any such
Inventions, copyrights or other protections for intellectual property.
(c) Executive acknowledges that the Company's trade secrets and
know-how form a valuable part of its assets. These trade secrets include,
but are not limited to the following:
Acquisition and Development Plans
Marketing Plans
Sources of Supply
Methods of Operations
Processes, Methods and Specifications
Machine and Apparatus Design
Customer Lists
Credit Information
Prices
Scheduling
Inventory Information
Mailing Lists
Billing Information
Information Systems
Computer Programs.
Executive agrees that he will not disclose any information
relating to these or any other trade secrets of the Company during or
subsequent to his employment for a period of three (3) years and indefinitely
for processes, methods and systems identified to Executive as confidential in
writing within ninety (90) days after the termination of his employment with
the Company except as authorized in writing by the Company, and Executive
further agrees that upon termination of his employment by the Company,
Executive shall return all Company files, letters and data which may be in his
possession.
E-10
<PAGE>
6. GENERAL PROVISIONS.
(a) This Agreement shall be governed, interpreted and enforced in
accordance with the laws of the State of New York without regard to its
conflicts of laws rules.
(b) This Agreement contains the entire agreement of the parties and
it supersedes all prior agreements made between the parties hereto relating to
the subject matter hereof and may not be altered, amended, terminated (except
as otherwise specifically provided in Sections 2 and 4 hereof) or modified,
except in a writing signed by the parties hereto or by the party who may be
affected by such alteration, amendment, termination or modification, and this
provision may not be waived, except in writing, and may not be deemed waived
orally or by implication.
(c) This Agreement is binding upon the respective parties hereto,
their respective heirs, executors, administrators, distributees, successors
and assigns.
(d) Except as hereinafter provided with respect to injunctive
relief, the parties agree to arbitrate any and all claims, controversies or
disputes arising under or out of this Agreement or relating in any way
thereto. All such claims, controversies or disputes shall be submitted to
arbitration in the City of New York, State of New York, to arbitrators
designated under and pursuant to the Rules of the American Arbitration
Association, and the arbitration shall be had under the auspices of said
Association and subject to its rules. The parties consent to the jurisdiction
of the Supreme Court of the State of New York and of any United States
District Court sitting in the State of New York with respect to any and all
proceedings
E-11
<PAGE>
relating to any such arbitration, and the parties further agree that any and
all process and notices of motions or applications in relation to any such
arbitration may be served upon a party personally or by registered or
certified mail, return receipt requested. Such service may be accomplished
either within or without the State of New York, and such notice shall be given
of all applications and hearings as is provided by the laws of the State of
New York. The award of the arbitrators shall be final and binding upon the
parties and judgment thereon may be entered as provided by the laws of the
State of New York. Executive acknowledges that the Company's remedy at law for
breach by Executive of the provisions of Section 5(a) during the Initial
Employment Period or the provisions of Sections 5(b) and 5(c) at any time is
inadequate. Accordingly, Executive agrees that in addition to all other rights
and remedies which the Company may have, the Company shall have the right to
apply for injunctive relief in the Supreme Court of the State of New York or
the United States District Courts sitting in the State of New York (or any
other court of competent jurisdiction) and Executive consents to the in
personam jurisdiction of the Supreme Court of the State of New York or the
United States District Courts sitting in the State of New York whether or not
he is then residing in the State of New York.
(e) Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any
E-12
<PAGE>
jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction. Should any provision of this Agreement be so held to
be unenforceable, such provision, if permitted by law, shall be considered to
have been superseded by a legally permissible and enforceable clause which
corresponds most closely to the intent of the parties as evidenced by the
provision held to be unenforceable.
(f) Except for his employment agreement with Federated Department
Stores, Inc. which is the subject matter of Section 7 below, Executive
represents and warrants that he is not contractually bound to perform services
for any person and that he is not restricted from performing his obligations
hereunder by reason of a restrictive covenant agreement or otherwise.
(g) Notices or communications to be provided under this Agreement
shall be either personally delivered or sent by prepaid certified mail to the
parties at their respective address set forth above or such other address as a
party may designated in a notice.
7. CONDITION PRECEDENT. This Agreement shall be deemed
void ab initio unless Executive delivers to the Company on or
before March 29, 1996 a duly executed release from Federated
Department Stores, Inc. of his obligations to it and its
affiliates under his current employment agreement.
E-13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
LILLIAN VERNON CORPORATION
By:/s/ Lillian Vernon
-------------------------------
Lillian Vernon, CEO
/s/ Howard Goldberg
----------------------------------
Howard Goldberg, Executive
E-14
Exhibit 11
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
FOR THE FISCAL YEARS 1996, 1995 AND 1994
COMPUTATION OF EARNINGS PER SHARE ASSUMING PRIMARY AND FULL DILUTION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 24, 1996 FEBRUARY 25, 1995 FEBRUARY 26, 1994
---------------------------- ---------------------------- ---------------------------
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
--------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net income $5,729 $5,729 $13,620 $13,620 $12,772 $12,772
--------- --------------- --------- --------------- --------- ---------------
Common Shares:
Average number of
shares outstanding 9,713 9,713 9,555 9,555 9,448 9,448
Assumed exercise
of stock options 268 268 337 337 184 310
--------- -------------- --------- --------------- --------- ---------------
9,981 9,981 9,892 9,892 9,632 9,758
--------- -------------- --------- --------------- --------- ---------------
Diluted Earnings Per Share $0.57 $0.57 $1.38 $1.38 $1.33 $1.31
--------- ------------- ---------- ---------------- --------- ---------------
</TABLE>
E-15
EXHIBIT 22
SUBSIDIARIES OF REGISTRANT
Lillian Vernon International, Ltd.
Lillian Vernon Fulfillment Services, Inc.
LVC Retail Corporation
E-16
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Lillian Vernon Corporation:
We consent to the incorporation by reference in the registration statement of
Lillian Vernon Corporation on Form S-8 (File Nos. 33-18849, 33-37694, 33-71250
and 33-71252) of our report dated April 19, 1996, on our audits of the
consolidated financial statements of Lillian Vernon Corporation and Subsidiaries
as of February 24, 1996 and February 25, 1995, and for each of the three fiscal
years in the period ended February 24, 1996, which report is included in this
Annual Report on Form 10-K.
Coopers & Lybrand, L.L.P.
Stamford, Connecticut
April 19, 1996
E-17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> FEB-24-1996
<PERIOD-END> FEB-24-1996
<PERIOD-TYPE> YEAR
<CASH> 25,771
<SECURITIES> 0
<RECEIVABLES> 21,435
<ALLOWANCES> 0
<INVENTORY> 30,948
<CURRENT-ASSETS> 93,308
<PP&E> 55,751
<DEPRECIATION> 22,127
<TOTAL-ASSETS> 136,385
<CURRENT-LIABILITIES> 16,587
<BONDS> 2,883
0
0
<COMMON> 100
<OTHER-SE> 113,093
<TOTAL-LIABILITY-AND-EQUITY> 136,385
<SALES> 238,192
<TOTAL-REVENUES> 238,192
<CGS> 109,907
<TOTAL-COSTS> 229,550
<OTHER-EXPENSES> 921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 610
<INCOME-PRETAX> 8,425
<INCOME-TAX> 2,696
<INCOME-CONTINUING> 5,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,729
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
