June 2002. The Company intends to recover a portion of this increase by raising the shipping
and handling charges to its customers beginning in July 2002.
Selling, general and administrative ("SG&A") expenses were $118.9 million in fiscal 2002
compared to $123.4 million in fiscal 2001, a decrease of $4.5 million, or 3.7%. The principal
reasons for the decline in these expenses were a 6% reduction in catalog circulation, and a
salary and workforce reduction plan that was implemented by the Company to cut costs (see
Note 15 to Consolidated Financial Statements). As a percentage of revenue, SG&A increased
from 43.0% in fiscal 2001 to 45.8% in fiscal 2002 primarily because of weaker response to the
Company's catalogs. Specifically, the Company's mailings generated 5% less revenue per catalog
in fiscal 2002 than fiscal 2001. Additionally, the continuing investment in Lillian Vernon Online
led to an increase in Internet development costs.
The cost of producing, printing and mailing the Company's catalogs represent the single largest
component of SG&A expenses. The Company's paper cost per page decreased by
approximately 12% in fiscal 2002 compared to fiscal 2001, and is expected to be lower again for
fiscal 2003 due to a softer paper market. Postal rates, however, continue to rise. A postal rate
increase of 9% in January 2001 was followed by a further increase in July 2001 of 1.6%, and
there is another postal rate increase of approximately 7.5% expected in June 2002. To mitigate
the impact of the postal rate increases, the Company takes steps such as reducing the weight of
the catalogs, making adjustments to catalog page counts, and increasing the density of the
photographs. Overall, the Company's average cost to produce and mail a catalog is expected to
be slightly higher in fiscal 2003 compared to 2002.
The Company continually monitors the paper market and periodically meets with its paper
suppliers in order to react to changes in the paper supply market. In addition, the Company
entered into a collar hedge contract to provide price protection in the form of a floor and ceiling
in purchasing certain of its paper requirements. (See Item 7(A) -- "Quantitative and Qualitative
Disclosure About Market Risk" for further discussion). FAS No. 133 requires that all derivative
financial instruments be recorded on the balance sheet as either assets or liabilities at fair value.
Changes in the fair value of derivatives are recorded each period in earnings or other
comprehensive earnings (losses), depending on whether a derivative is designated and effective
as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in other comprehensive earnings (losses) are reclassified to
earnings in the periods in which earnings are affected by the hedged item. The collar hedge
contract had been designated as and was effective as a hedge through November 2001. During
the nine months ended November 24, 2001, the ineffectiveness related to the collar hedge
contract was not significant. In view of Enron's financial situation, the Company discontinued
hedge accounting during the fourth quarter. As a result, amounts previously recorded in
accumulated other comprehensive losses under hedge accounting of $1.736 million (net of taxes
of $1.064 million) through November 24, 2001 will continue to be reclassified to earnings in the
period in which earnings are affected by the paper costs. Further, any changes in the fair value
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