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Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended May 25, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

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 or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)

1 Theall Road, Rye, New York 10580
---------------------------------------------------
(Address of principal executive offices) (Zip Code)

914-925-1200
----------------------------------------------------
(Registrant's telephone number, including area code)

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 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 ____

Number of shares outstanding of each of the issuer's classes of common stock:
8,324,429 Shares of Common Stock, $.01 par value, as of July 2, 2002.





LILLIAN VERNON CORPORATION

Form 10-Q

May 25, 2002


Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Condensed Consolidated Balance Sheets
as of May 25, 2002, May 26, 2001
and February 23, 2002 (unaudited) 3

Consolidated Statements of Operations
for the quarters ended May 25,
2002 and May 26, 2001 (unaudited) 4

Consolidated Statements of Cash Flows
for the quarters ended May 25, 2002
and May 26, 2001 (unaudited) 5

Notes to Consolidated Financial
Statements (unaudited) 6-9

Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-12

Item 3.
Quantitative and Qualitative Disclosures
About Market Risk 12

Part II. Other Information 13
- --------------------------

Signatures 13


Page 2 of 13



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)




May 25, May 26, February 23,
ASSETS 2002 2001 2002
------ --------- --------- ---------

Current assets:
Cash and cash equivalents ................................. $ 27,000 $ 32,109 $ 24,894
Accounts receivable, net of allowances of $290, $383,
and $534, respectively ....................... 6,643 8,507 14,956
Merchandise inventories ................................... 24,717 31,138 26,618
Deferred income taxes ..................................... 268 599 293
Prepayments and other current assets ...................... 8,012 7,475 8,081
--------- --------- ---------
Total current assets ......................... 66,640 79,828 74,842

Property, plant and equipment, net ............................ 30,458 33,368 30,798
Deferred catalog costs ........................................ 5,152 6,471 6,445
Deferred income taxes ......................................... 3,714 -- 1,113
Other assets .................................................. 7,037 5,934 7,559
--------- --------- ---------
Total ........................................ $ 113,001 $ 125,601 $ 120,757
--------- --------- ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Trade accounts payable and accrued expenses ............... $ 15,260 $ 16,497 $ 19,176
Cash overdrafts ........................................... 1,150 1,065 489
Customer deposits ......................................... 1,837 2,721 2,897
--------- --------- ---------
Total current liabilities .................... 18,247 20,283 22,562

Deferred income taxes ......................................... -- 854 --
Other liabilities ............................................. 8,015 3,239 6,782
--------- --------- ---------
Total liabilities ............................ 26,262 24,376 29,344
--------- --------- ---------

Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding . -- -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; issued - 10,389,674 shares ...... 104 104 104
Additional paid-in capital ................................ 31,332 31,332 31,332
Retained earnings ......................................... 82,400 94,574 87,387
Accumulated other comprehensive losses, net of taxes ...... (1,458) -- (1,500)
Treasury stock, at cost - 2,067,052 shares, 1,903,334 shares
and 2,088,731 shares, respectively ........... (25,639) (24,785) (25,910)
--------- --------- ---------
Total stockholders' equity ................... 86,739 101,225 91,413
--------- --------- ---------
Total ........................................ $ 113,001 $ 125,601 $ 120,757
--------- --------- ---------



See Notes to Consolidated Financial Statements
Page 3 of 13



LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

Fiscal Quarters Ended
--------------------
May 25, May 26,
2002 2001
-------- --------

Revenues ....................................... $ 36,889 $ 39,693

Costs and expenses:
Product and delivery costs ................. 22,026 23,378
Selling, general and administrative expenses 21,057 22,927
Restructuring credit (Note 3) .............. (387) --
-------- --------
42,696 46,305
-------- --------
Operating loss ........................ (5,807) (6,612)
Interest income ................................ 124 402
Financing expense (Note 4) ..................... (1,563) (85)
-------- --------
Loss before benefit from
income taxes ..................... (7,246) (6,295)

Provision for (benefit from) income taxes:
Current .................................... 116 (2,144)
Deferred ................................... (2,507) (248)
-------- --------
(2,391) (2,392)

Net loss .............................. (4,855) (3,903)
-------- --------

Net loss per common share - Basic and Diluted .. $ (.58) $ (.46)
-------- --------
Weighted average number of common shares -
Basic and Diluted .............................. 8,315 8,558
-------- --------


See Notes to Consolidated Financial Statements.
Page 4 of 13



LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)




Fiscal Quarters Ended
--------------------
May 25, May 26,
2002 2001
-------- --------

Cash flows from operating activities:
Net loss ............................................................................ ($ 4,855) ($ 3,903)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Financing expense for paper collar contract, net of amount classified as current 1,265 --
Depreciation ................................................................... 563 642
Amortization ................................................................... 586 218
Decrease in accounts receivable ................................................ 8,313 10,976
Decrease in merchandise inventories ............................................ 1,901 806
(Increase) decrease in prepayments and other current assets .................... 69 (1,893)
Decrease in deferred catalog costs ............................................. 1,293 2,326
Increase in other assets ....................................................... (21) (492)
Decrease in trade accounts payable and accrued expenses ........................ (3,916) (6,347)
Decrease in customer deposits .................................................. (1,060) (1,862)
Decrease in other liabilities .................................................. (32) (43)
Increase in deferred income taxes .............................................. (2,576) (249)
-------- --------
Net cash provided by operating activities .................................. 1,530 179
-------- --------

Cash flows from investing activities:
Purchases of property, plant and equipment .......................................... (223) (169)
-------- --------
Net cash used in investing activities ...................................... (223) (169)
-------- --------

Cash flows from financing activities:
Increase (decrease) in cash overdrafts .............................................. 661 (236)
Dividends paid ...................................................................... -- (682)
Payments to acquire treasury stock .................................................. (3) (1,340)
Reissuance of treasury stock for stock options and employee benefit plans ........... 141 177
-------- --------
Net cash provided by (used in) financing activities ........................ 799 (2,081)
-------- --------

Net increase (decrease) in cash and cash equivalents ....................... 2,106 (2,071)
-------- --------

Cash and cash equivalents at beginning of period ....................................... 24,894 34,180
-------- --------
Cash and cash equivalents at end of period ............................................. $ 27,000 $ 32,109
-------- --------


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes ................................................................... $ 109 $ 518
-------- --------



See Notes to Consolidated Financial Statements.
Page 5 of 13



LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. The year-end condensed
balance sheet data as of February 23, 2002 was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The interim financial statements furnished with this
report reflect all adjustments, consisting only of items of a normal recurring
nature, which are, in the opinion of management, necessary for the fair
statement of the consolidated financial condition and consolidated results of
operations for the interim periods presented. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended February 23, 2002.


1. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows (in thousands):

May 25, May 26, February 23,
2002 2001 2002
------- ------- -------
Land and buildings ............... $33,006 $32,884 $32,975
Machinery and equipment .......... 30,403 32,768 30,284
Furniture and fixtures ........... 4,210 4,147 4,162
Leasehold improvements ........... 1,002 1,162 977
------- ------- -------
Total property, plant &
equipment, at cost ........... 68,621 70,961 68,398

Less: accumulated depreciation
and amortization ........ 38,163 37,593 37,600
------- ------- -------
Property, plant and equipment, net $30,458 $33,368 $30,798
------- ------- -------



Page 6 of 13



2. LOSS PER SHARE

Basic and diluted loss per share was calculated as follows (amounts in
thousands):

Fiscal Quarter Ended
--------------------------
May 25, 2002 May 26, 2001
------------ ------------
Net loss - Basic and Diluted ... ($4,855) ($3,903)
Weighted average shares for
Basic and Diluted EPS .......... 8,315 8,558

For the fiscal periods ended May 25, 2002 and May 26, 2001, options on
1,748,000 and 1,797,000 shares of common stock, respectively, were not included
in the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.

3. RESTRUCTURING AND OTHER CHARGES (CREDITS)

During fiscal 2001, the Company recorded pretax restructuring and other
charges aggregating $2,050,000, which included severance pay for a former
officer ($360,000), and for a restructuring plan ($1,690,000) to streamline
operations and reduce costs in light of decreased consumer spending and an
uncertain economy ("the Plan"). Under the Plan, the Company eliminated
approximately 12% of its salaried workforce and consolidated its Las Vegas Call
Center into its National Distribution Center located in Virginia Beach. Changes
in the accrued balance for Plan costs through May 25, 2002 were as follows
(dollars in thousands):




Initial
Plan Asset Write-offs Balance as of
Cost & Expenditures Adjustments May 25, 2002
------- ---------------- ----------- -------------

Severance and related benefits $ 687 ($ 687) -- $ --
Write-off of leasehold
improvements and equipment 317 (204) ($ 113) --
Lease termination costs ...... 686 (299) (387) --
------- ------- ------- ----
$ 1,690 ($1,190) ($ 500) $ --


In the second quarter ended August 25, 2001, a $113,000 restructuring
credit was recorded due to the favorable disposition of certain fixed assets.

The Company has attempted to sublease the Las Vegas Call Center, but has
been unable to do so. On April 24, 2002, the Company decided to reactivate the
facility as a seasonal call center for the upcoming peak holiday selling season.
As a result of this decision, the remaining accrual of $387,000 for the lease
termination costs for this facility was reversed in the first quarter of fiscal
2003.

4. PAPER HEDGE CONTRACT

The Company's earnings are impacted by fluctuating paper prices. In order
to partially mitigate this risk the Company entered into a collar hedge contract
in 1999.


Page 7 of 13



This contract covers certain grades of paper used by the Company to produce its
catalogs. There is a floor and ceiling on paper prices within the contract. If
paper prices remain within the range of the contract, there would be no payment
to either party to the contract. If paper prices exceed the established ceiling
the Company is entitled to be reimbursed by the counterparty for the excess.
Conversely, if paper prices fall below the established floor the Company must
pay the counterparty. The Company did not pay a premium at the inception of the
contract. The contract has an expiration date of August 2005.

Financial Accounting Standard ("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,
ineffectiveness related to the collar hedge contract was not significant.

In view of the financial situation of Enron North America Corporation
("Enron"), the counterparty, the Company discontinued hedge accounting during
the fourth quarter of fiscal 2002. As a result, amounts previously recorded in
Accumulated Other Comprehensive Losses under hedge accounting of $1,736,000 (net
of taxes of $1,064,000) through November 24, 2001 will continue to be
reclassified to earnings as a component of selling, general and administrative
expenses in the period in which earnings are affected by the paper costs.
Further, any changes in the fair value of the contract subsequent to November
24, 2001 will be recorded in earnings as financing expense. The change in the
fair market value of the contract for the first quarter of fiscal 2003 was
$1,495,000. The fair value of the contract at May 25, 2002 was $ 4,085,000,
which is included in other liabilities in the accompanying balance sheet. Total
amounts expensed for the first quarter of fiscal 2003 approximated $1,850,000 on
a pre-tax basis.

Enron filed for bankruptcy in the fourth quarter of fiscal 2002. To date,
the Company has not been entitled to receive any payments from Enron under the
paper price collar agreement. Although the Company does not know what effect
Enron's bankruptcy will ultimately have upon the paper price collar contract,
amounts recorded on the accompanying balance sheet are appropriate with respect
to management's current estimate of the liability. The Company's management and
legal counsel are currently exploring the status of the contract.

Hedging activity affected Accumulated Other Comprehensive Losses, net of
income taxes, during the quarter ended May 25, 2002 as follows (dollars in
thousands):

Balance as of February 23, 2002 ................... $1,500
Derivative losses transferred to earnings ......... (42)
------
Balance as of May 25, 2002 ........................ $1,458


Page 8 of 13



5. RECENT ACCOUNTING STANDARD


Effective February 24, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets". FAS No. 142 primarily addresses the accounting that
must be applied to goodwill and intangible assets subsequent to acquisition and
requires an annual review of goodwill for potential impairment. The adoption of
FAS No. 142 for fiscal 2003 does not have a material impact on the Company's
financial statements. Goodwill amortization included in the net loss for the
quarter ended May 26, 2001 was not material.


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended May 25, 2002

The net loss for the first quarter of fiscal 2003 was ($4.9) million, or
($.58) per share, compared to ($3.9) million, or ($.46) per share for the same
period last year. The net loss for the first quarter of fiscal 2003 included a
financing charge of $1.0 million after taxes, ($.12 per share) to record the
change in the fair market value of the Company's paper price collar contract.
Exclusive of this charge, loss per share was equivalent to the comparable period
last year. The Company's business is seasonal. Net losses are generally incurred
during the first and second fiscal quarters.

Revenues for the quarter ended May 25, 2002 decreased 7.1% to $36.9 million
compared to $39.7 million last year, primarily due to a planned reduction of
approximately 16% in the number of catalogs mailed during the quarter.
Specifically, the Company's Neat Ideas catalog was consolidated into its other
catalogs and the Sales and Bargains catalog was not mailed in the current
quarter. Revenue per catalog increased by 13.3% compared to the same period last
year due to more targeted circulation, positive customer response to new product
offerings and value priced merchandise. Internet orders represented
approximately 19% of the Company's total orders processed in the first quarter
of fiscal 2003, compared to approximately 10% in the first quarter last year.

Product and delivery costs of $22.0 million in the first quarter of fiscal
2003 decreased 5.8% from $23.4 million for the comparable period last year,
principally because of a decline in the volume of orders processed as a result
of the planned circulation reduction. Product and delivery costs include the
cost of merchandise sold, and the cost of receiving, personalizing, and filling
orders for the Company's customers. There was an increase in the Company's
product gross profit margin in the current quarter, (67.4% vs. 67.1% in the
comparable quarter of the prior year) principally due to the cancellation of the
Sales and Bargains catalog which features discounted merchandise. However, this
was offset by higher order fulfillment costs. Specifically, personalization
costs increased approximately 28% from the comparable period last year due to an
increase in the number of personalized items sold. In the current quarter
personalized


Page 9 of 13



products represented 26% of products sold vs. 22% in the comparable prior years'
quarter. In addition, the fixed costs of the Company's National Distribution
Center comprised a higher percentage of the reduced sales volume in the current
fiscal quarter.

Selling, general and administrative (SG&A) expenses were $21.1 million in
the first quarter of fiscal 2003 compared to $22.9 million in the first quarter
of fiscal 2002, a decrease of $1.9 million or 8.2%. The cost of producing,
printing, and mailing the Company's catalogs represents the single largest
component of SG&A expenses. These costs declined principally because of a
decrease in the number of catalogs and total pages circulated in the current
quarter as well as a 14% decline in the cost of paper per million pages
circulated. As a percentage of revenue, SG&A expenses decreased from 57.8% in
the first quarter of fiscal 2002 to 57.1% in the first quarter of fiscal 2003
primarily because of a positive customer response to the Company's offerings
which caused an increase in revenue per catalog. Partially offsetting the
favorable trend in catalog costs, SG&A expenses reflect higher software
amortization costs related to the Company's enhanced website which was launched
last Fall. These costs are being amortized over a 24 month period.

The restructuring credit of $.4 million in the first quarter of fiscal 2003
represents a reversal of an accrual that was previously recorded for lease
termination costs for the Las Vegas Call Center. The Company attempted to
sublease the facility but has been unable to do so. During the first quarter of
fiscal 2003, the Company decided to reactivate the facility as a seasonal call
center for the upcoming peak holiday selling season.

Interest income for the first quarter of fiscal 2003 was $.1 million
compared to $.4 million for the first quarter of fiscal 2002. The decrease was
due primarily to lower interest rates on the Company's cash investments.

Financing expense for the first quarter of fiscal 2003 was $1.6 million
compared to $.1 million for the first quarter of fiscal 2002. The current
quarter includes a financing charge of $1.5 million to record the change in the
fair value of the Company's paper price collar contract. The Company cannot
predict what effect changes in paper prices will have on its earnings for the
balance of fiscal 2003.

The Company's effective tax benefit rate in the first quarter of fiscal
2003 was 33%, compared to 38% for the first quarter of fiscal 2002. The lower
effective tax benefit rate, principally relating to state and local taxes,
reflects the Company's estimated full year effective tax benefit for fiscal
2003.

Financial Condition

The Company's balance sheet and liquidity remain strong. Cash and cash
equivalents were $27.0 million as of May 25, 2002. The current ratio was 3.7:1
as of May 25, 2002, compared to 3.9:1 as of May 26, 2001. The reduction in the
current ratio was due principally to lower accounts receivable and inventory as
of May 25, 2002 compared to the same period last year. The Company's working
capital needs were met with funds on hand and generated from operations.


Page 10 of 13



The Company generated $1.5 million of cash from operating activities for
the current quarter, compared to $.2 million in the first quarter last year. The
increase was due principally to reduced funds needed for trade accounts payable
and accrued expenses. Although the Company had a greater net loss in the current
fiscal quarter, the increase was largely attributable to a non-cash financing
charge of $1.5 million ($1.0 million after taxes) which did not negatively
affect cash in the current quarter. Inventory at the end of the first quarter of
fiscal 2003 decreased by $6.4 million or 20.6% as compared to the first quarter
of fiscal 2002, reflecting the Company's successful efforts to reduce inventory
levels and enhance cash flow.

Capital spending of $.2 million for the three months ended May 25, 2002 was
the same as the comparable period last year. These expenditures were made
principally to upgrade the Company's computer equipment and distribution
machinery and equipment. For the remainder of fiscal 2003, the Company is not
planning any major capital projects and will continue to implement tight
controls on capital expenditures and make commitments for items that have a
positive return on investment.

The Company generated $.1 million of cash from the issuance of common stock
through its employee benefit plans during the first quarter ended May 25, 2002,
as compared to $.2 million for the same period last year. At its February 28,
2002 meeting, the Board of Directors voted to discontinue the regular quarterly
cash dividend to conserve cash for reinvestment in the business. The Company
will evaluate its dividend policy on an ongoing basis in view of its earnings,
financial position, capital requirements, and other relevant factors.

As of May 25, 2002, the Company had repurchased 1,178,442 shares at a total
cost of approximately $11.4 million under its current 1.5 million share open
market stock repurchase program, which was authorized by the Board of Directors
on October 7, 1998 and September 28, 1999.

Recent Accounting Standard

Effective February 24, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets". FAS No. 142 primarily addresses the accounting that
must be applied to goodwill and intangible assets subsequent to acquisition and
requires an annual review of goodwill for potential impairment. The adoption of
FAS No. 142 for fiscal 2003 does not have a material impact on the Company's
financial statements. Goodwill amortization included in the net loss for the
quarter ended May 26, 2001 was not material.

Forward Looking Statements

Except for historical information contained herein, statements included in
this Form 10-Q may constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to
the Company's future performance, including, without limitation, statements with
respect to the Company's anticipated results of operations, revenues, cash flows
and/or level of business. Such statements represent the Company's current
expectations only and are subject to certain risks, assumptions and
uncertainties. Should one or more of these risks


Page 11 of 13



or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated or projected. Among
the factors that could cause actual results to materially differ include the
overall strength of the economy, the level of consumer confidence and spending,
customer preferences, circulation changes and other initiatives, increased
competition in the direct mail industry and from the growing Internet market,
changes in government regulations, risks associated with the social, political,
economic and other conditions affecting foreign sourcing, including possible
disruptions caused by the current global situation, and possible future
increases in operating costs including postage and paper costs. For further
information, see Part I of Form 10-K for the fiscal year ended February 23,
2002.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's earnings are impacted by fluctuating paper prices. In order to
partially mitigate this risk, the Company entered into a collar hedge contract
in 1999. This contract covers certain grades of paper used by the Company to
produce its catalogs. There is a floor and ceiling on paper prices within the
contract. If paper prices remain within the range of the contract there would be
no payment to either party to the contract. If paper prices exceed the
established ceiling the Company is entitled to be reimbursed by the counterparty
for the excess. Conversely, if paper prices fall below the established floor,
the Company must pay the counterparty. The Company did not pay a premium at the
inception of the contract. The contract has an expiration date of August 2005.

The paper price collar contract had been designated as, and was effective
as, a hedge through November 2001. During the nine months ended November 24,
2001, ineffectiveness related to the paper price collar contract was not
significant. Enron filed for bankruptcy in the fourth quarter of fiscal 2002. In
view of Enron's financial situation the Company discontinued hedge accounting
during the fourth quarter of fiscal 2002. As a result, amounts previously
recorded in Accumulated Other Comprehensive Losses under hedge accounting of
$1,736,000 (net of taxes of $1,064,000 ) through November 24, 2001 will continue
to be reclassified to earnings as a component of selling, general and
administrative expenses in the period in which earnings are affected by the
paper costs. Such amount is expected to be approximately $1 million of expense
(net of taxes) for fiscal 2003. Further, any changes in the fair value of the
contract subsequent to November 24, 2001 will be recorded in earnings as
financing expense. The fair value of the contract at May 25, 2002 was
$4,085,000, which is included in other liabilities in the accompanying balance
sheet. Total amounts expensed for the first quarter of fiscal 2003 approximated
$1,850,000. Changes in future paper prices will result in changes in the fair
market value of the contract. The Company cannot predict what, if any, financing
expenses under the contract may be incurred for the balance of fiscal 2003.

To date, the Company has not been entitled to receive any payments from
Enron under the paper price collar agreement. Although the Company does not know
what effect Enron's bankruptcy will ultimately have upon the paper price collar
contract, amounts recorded on the accompanying balance sheet are appropriate
with respect to management's current estimate of the liability. The Company's
management and legal counsel are currently exploring the status of the contract.


Page 12 of 13



PART II. OTHER INFORMATION

Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.

Item 6. Exhibits and Reports on Form 8-K.

Exhibit No. 10.21 - Seventh Amendment to the Amended Revolving Credit Agreement,
Letter of Credit and Bankers Acceptance facility dated as of
August 19, 1996 among Lillian Vernon Corporation as
Borrower, Lillian Vernon Fullfillment Services, Inc., LVC
Retail Corporation and Lillian Vernon International Ltd. as
Guarantors, the Banks named therein and the J.P. Morgan
Chase Bank as agent.

Reports on Form 8-K: None.


SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



Lillian Vernon Corporation



Date: July 3, 2002 By: /s/ RICHARD P. RANDALL
------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer


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