<PAGE>
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 August 29, 1998.
-----------------------------------------------
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)
N/A
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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:
9,134,071 Shares of Common Stock, $.01 par value, as of October 9, 1998.
<PAGE>
LILLIAN VERNON CORPORATION
--------------------------
Form 10-Q
August 29, 1998
Part I. Financial Information Page #
- ------------------------------ ------
Item 1.
Consolidated Balance Sheets as of
August 29, 1998, August 23, 1997
(unaudited) and February 28, 1998
(audited) 3
Consolidated Statements of Operations
for the quarter and six months
ended August 29, 1998 and August 23, 1997
(unaudited) 4
Consolidated Statements of Cash Flows
for the six months ended August
29, 1998 and August 23, 1997
(unaudited) 5
Notes to Consolidated Financial
Statements 6-7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-11
Part II. Other Information 12
- --------------------------
Signatures 13
Page 2 of 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 23, FEBRUARY 28,
ASSETS 1998 1997 1998
------------------- --------------- -------------------
(Unaudited) (Audited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $325 $3,239 $25,132
Accounts receivable 12,340 12,115 22,632
Merchandise inventories 56,164 52,400 36,935
Deferred income taxes -- -- 2,034
Prepayments and other current assets 27,470 21,311 10,173
------------------- --------------- -------------------
Total current assets 96,299 89,065 96,906
Property, plant and equipment, net (Note 1) 37,975 39,840 37,633
Deferred catalog costs 11,327 10,210 5,922
Other assets 3,823 2,554 3,206
------------------- --------------- -------------------
Total $149,424 $141,669 $143,667
------------------- --------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $19,641 $25,774 $16,331
Cash overdrafts $5,523 -- --
Customer deposits 543 374 147
Current portion of long-term debt and lease
obligations 635 1,508 1,394
Revolving debt 10,500 -- --
Income taxes payable -- -- 4,581
Deferred income taxes 335 -- --
------------------- --------------- --------------------
Total current liabilities 37,177 27,656 22,453
Long-term debt , less current portion -- 635 --
Capital lease obligations, less current portion -- -- --
Deferred compensation 3,384 3,464 3,426
Deferred income taxes 2,185 778 1,075
------------------- --------------- --------------------
Total liabilities 42,746 32,533 26,954
------------------- --------------- --------------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; issued -10,389,674 shares,
10,368,061 shares and 10,389,674 shares 104 104 104
Additional paid-in capital 31,148 30,846 31,160
Retained earnings 94,653 90,453 100,757
Unearned compensation -- (40) (6)
Treasury stock, at cost - 1,240,659 shares, 825,958
shares and 1,016,491 shares (19,227) (12,227) (15,302)
-------------------- ----------------- ---------------------
Total stockholders' equity 106,678 109,136 116,713
-------------------- ----------------- ---------------------
Total $149,424 $141,669 $143,667
-------------------- ------------------ ---------------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 13
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------ -------------------------
AUGUST 29, AUGUST 23, AUGUST 29, AUGUST 23,
1998 1997 1998 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $39,386 $37,257 $71,397 $65,005
Costs and expenses:
Product and delivery costs 20,478 19,388 35,990 33,685
Selling, general and administrative
expenses 21,809 18,588 42,607 35,852
---------- ----------- ----------- ------------
42,287 37,976 78,597 69,537
---------- ----------- ----------- ------------
Operating loss (2,901) (719) (7,200) (4,532)
Interest income 100 229 456 582
Interest expense (105) (90) (178) (183)
---------- ----------- ----------- ------------
Loss before income taxes (2,906) (580) (6,922) (4,133)
Provision for (benefit from) income taxes:
Current (3,870) (1,611) (5,833) (3,066)
Deferred 2,882 1,414 3,480 1,661
---------- ----------- ----------- ------------
(988) (197) (2,353) (1,405)
---------- ----------- ----------- ------------
Net loss ($1,918) ($383) ($4,569) ($2,728)
---------- ----------- ----------- ------------
Net loss per common share - Basic ($.21) ($.04) ($.49) ($.28)
---------- ----------- ----------- ------------
Net loss per common share - Diluted ($.21) ($.04) ($.49) ($.28)
---------- ----------- ----------- ------------
Weighted average number of common shares
Basic and Diluted 9,285 9,599 9,325 9,605
---------- ----------- ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 13
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------------
AUGUST 29, AUGUST 23,
1998 1997
------------------------ ---------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,569) ($2,728)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,211 1,332
Amortization 96 247
(Increase) decrease in accounts receivable 10,292 12,361
(Increase) decrease in merchandise inventories (19,229) (21,920)
(Increase) decrease in prepayments and other current assets (17,297) (10,873)
(Increase) decrease in deferred catalog costs (5,405) (4,070)
(Increase) decrease in other assets (707) (345)
Increase (decrease) in trade accounts payable and accrued expenses 3,310 11,289
Increase (decrease) in customer deposits 396 114
Increase (decrease) in income taxes payable (4,581) (2,715)
Increase (decrease) in deferred compensation (42) (36)
Increase (decrease) in deferred income taxes 3,479 1,946
------------------------ ------------------------
Net cash used in operating activities (33,046) (15,398)
------------------------ ------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,553) (853)
------------------------ ------------------------
Net cash used in investing activities (1,553) (853)
------------------------ ------------------------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (759) (740)
Proceeds from short term borrowings 10,500 --
Increase in cash overdrafts 5,523 --
Proceeds from issuance of common stock -- 63
Dividends paid (1,536) (1,372)
Payments to acquire treasury stock (5,280) (1,207)
Reissuance of treasury stock 1,355 --
Other (11) --
------------------------ ------------------------
Net cash provided by (used in) financing activities 9,792 (3,256)
------------------------ ------------------------
Net decrease in cash and cash equivalents (24,807) (19,507)
------------------------ ------------------------
Cash and cash equivalents at beginning of period 25,132 22,746
------------------------ ------------------------
Cash and cash equivalents at end of period $325 $3,239
------------------------ ------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $125 $157
Income taxes 4,642 2,857
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 13
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The year-end condensed balance sheet data 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 28, 1998.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
August 29, August 23, February 28,
1998 1997 1998
---------- ----------- ------------
<S> <C> <C> <C>
Land and buildings $31,897 $31,751 $31,778
Machinery and equipment 30,341 27,244 29,035
Furniture and fixtures 3,602 3,328 3,561
Leasehold improvements 996 3,787 909
Capital leases - 1,262 1,262
------- ------- -------
Total property, plant &
equipment, at cost 66,836 67,372 66,545
Less, accumulated depreciation
and amortization 28,861 27,532 28,912
------- ------- -------
Property, plant and equipment - net $37,975 $39,840 $37,633
------- ------- -------
</TABLE>
Page 6 of 13
<PAGE>
2. EARNINGS PER SHARE
------------------
Basic and Diluted loss per share were calculated in accordance with
Statement of Financial Accounting Standards No. 128 as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
---------------------- ---------------------
August 29, August 23, August 29, August 23,
1998 1997 1998 1997
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net Loss-Basic and Diluted $(1,918) $ (383) $(4,569) $(2,728)
-------- -------- -------- --------
Weighted average shares for
Basic EPS 9,285 9,599 9,325 9,605
Add: Incremental shares from
stock option exercises - - - -
------- ------ ----- -----
Weighted average shares for
Diluted EPS 9,285 9,599 9,325 9,605
------- ------ ----- -----
</TABLE>
For the second quarters ended August 29, 1998 and August 23, 1997, options on
144,000 and 142,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.
For the six months ended August 29, 1998 and August 23, 1997, options on
155,000 and 86,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.
Page 7 of 13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Quarter Ended August 29, 1998
Revenues for the quarter ended August 29, 1998 were $39.4 million, an increase
of $2.1 million, or 5.7% higher than the quarter ended August 23, 1997. The
increase in revenues was largely attributable to a 16% rise in catalog
circulation and, to a lesser extent, a 2.7% rise in average revenue per order.
Revenues per catalog mailed declined compared to last year because of an
unexpectedly weak retail environment, as well as a circulation increase to
prospective new customers who are generally less responsive than existing
customers. If the weak retail environment continues into the second half of
fiscal 1999, it could have a negative impact on the Company's revenues and
earnings.
Product and delivery costs increased by $1.1 million, or 5.6%, in the quarter
ended August 29, 1998, as compared to the second quarter of the prior year.
Product and delivery costs include the cost of merchandise sold, and the cost
of receiving, filling and shipping the Company's orders, reduced by shipping
and handling fees charged to customers. The increase in costs was principally
attributable to a 5.9% increase in orders received. These costs comprised
approximately the same percentage of revenues, 52.0% in both quarters, due to
improved gross margin on products sold, offset by an increase in the cost to
fill orders in the current quarter.
Selling, general and administrative (SG&A) expenses, the largest component of
which is the cost of producing, printing and distributing the Company's
catalogs, increased $3.2 million, or 17.3% in the current quarter. The increase
in expense is largely due to the 16% increase in catalog circulation, as well
as higher paper prices, and the cost of outside consultants working on the
Year 2000 project. As a percentage of revenues, SG&A costs increased from 49.9%
in the quarter ended August 23, 1997 to 55.4% in the quarter ended
August 29, 1998. The percentage of revenues rose principally because the cost
of producing and mailing additional catalogs exceeded the incremental revenue
generated in the current quarter.
Interest income for the quarter ended August 29, 1998 of $100,000 decreased by
$129,000 as compared to the second quarter of the prior year, due to a lower
investment balance. Interest expense for the quarter ended August 29, 1998 of
$105,000 was $15,000 higher than the same period last year, principally due to
higher seasonal borrowing.
The effective income tax rate was 34% for the current quarter, the same rate
as the second quarter of fiscal 1998.
Six Months Ended August 29, 1998
Revenues for the six months ended August 29, 1998 were $71.4 million, an
increase of $6.4 million, or 9.8% higher than the corresponding period of the
prior year. The increase in revenues was primarily attributable to 19% higher
catalog circulation, including the introduction of a new catalog, Lillian
Vernon Gardening, new Spring editions of the Lilly's Kids and Personalized
Gifts catalogs, and increased circulation of the same catalog editions mailed
in the first half last year. While
Page 8 of 13
<PAGE>
the weakness in the retail environment was not fully anticipated, which caused
revenues to fall below expectations, the additional circulation established
contact with more potential customers for the Company's busy Fall/holiday
season.
Product and delivery costs increased by $2.3 million, or 6.8% as compared to
the same period last year primarily because of 9.2% more orders received. These
costs declined as a percentage of revenues from 51.8% in the prior six month
period to 50.4% in the current period. The decline in the percentage was driven
by higher gross margin on merchandise sold. The margin improvement was
principally the result of higher markups, but also was affected by the mix of
the merchandise sold, which included more full-priced and higher margin product
lines as compared to the first six months last year.
Selling, general and administrative (SG&A) expenses increased $6.8 million, or
18.8%, for the current six months as compared to the same period last year, due
primarily to a 19% increase in catalog circulation, higher paper prices, and
additional labor costs of outside consultants working on the Year 2000 project.
As a percentage of revenues, SG&A costs increased from 55.2% for the six months
ended August 23, 1997 to 59.7% in the current six month period. The increase in
the percentage of revenues is mainly due to the lower revenue per catalog
generated in the current period, as well as higher paper prices.
Interest income for the current six months ended August 29, 1998 of $456,000
decreased by $126,000 as compared to the same period of the prior year, due to
a lower investment balance. Interest expense for the six months ended
August 29, 1998 of $178,000 was comparable with the same period last year.
The effective income tax rate was 34% for the six months ended August 29, 1998,
the same rate as in the six months ended August 23, 1997.
Financial Condition
The Company's working capital ratio at August 29, 1998 was 2.59 to 1, as
compared to 4.32 to 1 at February 28, 1998 and 3.22 to 1 at August 23, 1997.
Due to the seasonality of the Company's business, the first half of the fiscal
year has historically been a loss period and a period of working capital demand
in preparation for the peak selling season. The Company builds up its inventory
and prepays substantial catalog costs during this period. It also collects its
year-end receivables from customers under its deferred billing program during
this period. For the six months ended August 29, 1998, the Company used $17.6
million more cash for working capital needs as compared to the corresponding
period last year. The major contributing factors were an increased loss, higher
catalog-related expenditures, and the timing of payments for inventory. As a
result of the higher cash demands in the current six month period as compared
to the same period last year, the Company drew down earlier on its revolving
credit facility. Inventory levels are 7.2% higher at the end of the second
quarter of fiscal 1999 compared to the same point last year. Management expects
to be able to sell this inventory without significant overall gross margin
reduction.
The Company expended capital of $1,553,000 during the six months ended Auqust
29,1998, compared to $853,000 last year. The Company paid dividends totaling
$1.5 million, $.2 million higher than the first half last year due to the
increase in quarterly dividend rate per share from $.07 to $.08 in March 1998.
Page 9 of 13
<PAGE>
During the six months ended August 29, 1998, the Company continued its open
market stock repurchase program, and acquired 314,000 shares of its common
stock at a total cost of $5.3 million. This compares to $1.2 million spent for
the first six months last year. As of September 3, 1998, the Company completed
its 1 million share stock repurchase program which was started in October 1995.
The total cost of the plan was $15.2 million.
On October 7, 1998, the Company's Board of Directors approved a new stock
repurchase program which authorizes management to repurchase up to 1 million
shares of its common stock in the open market from time to time.
Year 2000
Year 2000 Compliance Program
The Company's Year 2000 compliance program is directed primarily towards
ensuring that the Company will be able to continue to perform its critical
functions: (1) process sales orders from and ship goods to customers, (2) order
and receive merchandise from vendors, and (3) process payments to vendors and
employees.
The Company is in the process of modifying its internal computer software
applications and systems to function properly with respect to dates in the Year
2000 and thereafter. The Company is utilizing both in-house staff as well as
outside resources to modify its systems. This work is expected to be completed
by July 31, 1999. In addition to internal systems, the Company has established
procedures to determine that outside computer software vendors are either
already Year 2000 compliant or have timely dates when they intend to be
compliant. The Company is also reviewing all computer hardware such as
mid-range, mainframe and personal computers, networks, telephone switches,
voice mail systems, and timeclocks, as well as its distribution and warehouse
equipment, to ensure Year 2000 compliance. The Company has also contacted its
various merchandise vendors to inquire as to their Year 2000 readiness, and is
following up with those vendors who have not responded to-date.
Costs
The Company presently anticipates that the cost of modifying its computer
software applications and systems to be Year 2000 compliant will be
approximately $1.2 million, of which approximately $500,000 has been spent to
date. These amounts are expected to be funded from operating cash flow.
Risks
The variety and complexity of the Year 2000 issues identified and the
proposed solutions, the Company's dependence on the technical skills of
employees and independent contractors, and especially the representations and
readiness of third parties are among the factors that could cause the Company's
efforts to be less than
Page 10 of 13
<PAGE>
fully effective. In addition, Year 2000 issues present a number of risks that
are beyond the Company's reasonable control, such as continued service from
outside parties such as utility companies, financial institutions, and
transportation and delivery companies (such as the US Postal Service and United
Parcel Service).
The Company's peak selling season runs from September through mid-December;
therefore, disruption of its business at the beginning of Year 2000 would be
less significant than if it happened during its peak season. The Company
expects to have adequate inventory on hand to service its customers, and the
Company can shift its customer delivery operations to alternative carriers, if
necessary. The Company does not rely on any supplier for a significant portion
of its products, and the majority of its vendors do not rely on computerized
manufacturing systems. The Company has computerized telephone systems which
process customer phone orders; any interruption in service by major telephone
carriers could have a detrimental impact on the Company's ability to receive
orders and service its customers.
The Company intends to develop a contingency plan after its risk assessment
is completed, in the event that any unresolved issues are identified.
Although the Company believes that its Year 2000 compliance program is
designed to appropriately identify and address those Year 2000 issues that are
subject to the Company's reasonable control, there can be no assurance that the
Company's efforts in this regard will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Forward Looking Statements
- -------------------------
Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements which are based on the Company's current
expectations and assumptions. Various factors could cause actual results to
differ materially from those set forth in such statements. These factors
include, but are not limited to, the potential for changes in consumer
spending, consumer preferences and general economic conditions, increasing
competition in the direct mail industry, changes in government regulations,
dependence on foreign suppliers, possible future increases in operating costs,
including postage and paper costs, as well as a delay or inability to become
Year 2000 compliant. For further information, see Part I of Form 10-K for the
fiscal year ended February 28, 1998.
Page 11 of 13
<PAGE>
PART II.
OTHER INFORMATION
-----------------
Items 1, 2, 3, and 5 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------
On July 15, 1998, the Company held its Annual Meeting of Stockholders.
The matters voted upon at the meeting and the results with respect to
each such matter are summarized below:
1. Election of two Directors for a three year term expiring at
the 2001 Annual Meeting of Stockholders.
For Withheld
--- --------
Bert W. Wasserman 8,051,747 301,906
Richard A. Berman 8,051,747 301,906
2. Approval of the appointment of PricewaterhouseCoopers LLP, as
the independent auditors of the Company for the year ending
February 27, 1999.
For Against Abstained
--- ------- ---------
8,105,812 1,021 246,820
3. Approval of the Company's Employee Stock Purchase Plan which
reserves 100,000 shares of common stock for issuance
thereunder.
For Against Abstained
--- ------- ---------
8,049,463 275,925 28,265
4. Approval of the Company's Amended 1997 Stock Option Plan for
Non-Employee Directors which reserves an additional 50,000
shares of common stock for issuance thereunder.
For Against Abstained
--- ------- ---------
8,010,485 314,197 28,971
Item 6. Exhibits and Reports on Form 8-K.
- ------
Exhibit 10.1 - Employment Agreement with Richard P. Randall.
Reports on Form 8-K: None.
Page 12 of 13
<PAGE>
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
--------------------------
(Registrant)
Date: October 12, 1998 By: /s/ Richard P. Randall
----------------------------
Richard P. Randall
Senior Vice President-Chief Financial Officer
Page 13 of 13
<PAGE>
[LILLIAN VERNON CORPORATION LETTERHEAD]
August 11, 1998
Mr. Richard P. Randall
363 East 76th Street
New York, NY 10021
Dear Mr. Randall,
It is my pleasure to extend an offer of employment to you for the position of
Senior Vice President and Chief Financial Officer of the Lillian Vernon
Corporation. Your salary will be $9,230.77 bi-weekly, which is $240,000.00
annualized. In this position, you will report to the Chairman and Chief
Executive Officer. You will work in the Company's Corporate Offices, currently
located in Rye, New York, or within thirty (30) miles of the current location
should the Corporate Offices move at anytime in the future.
You will participate in the Company's Executive Bonus Performance Unit Plan.
You will be eligible to receive an annual bonus based upon your annual base
salary for the bonus plan guidelines that are in effect for the fiscal year. As
currently structured, you would be eligible to receive an annual bonus of up to
forty percent (40%) of your annual base salary, prorated for one-half the
current fiscal year, based upon Corporate and individual goals being met for
the fiscal year. The Compensation Committee is currently in the process of
making revisions to the bonus plan guidelines for this fiscal year.
The Company will grant to you, on the date of the commencement of your
employment, non-qualified stock options for twenty-five thousand (25,000)
shares of common stock which will vest and become exercisable over a three year
period, one-third on each annual anniversary date of your employment. The
exercise price shall be the closing price of the stock on the American Stock
Exchange on the date of the commencement of your employment. This grant shall
be made pursuant to the Company's Performance Unit, Restricted Stock,
Non-Qualified Option and Incentive Stock Option Plan (the "Incentive
Compensation Plan"). You shall be eligible to receive further grants of options
and stock under the Incentive Compensation Plan, as appropriate for your
position, as determined by the Compensation Committee of the Board of
Directors.
<PAGE>
Page 2
The Company will reimburse you for a leased automobile for business and
personal use, in an amount not to exceed $5,000.00 per year. You will be
provided with a gas credit card, and will be reimbursed for maintenance repairs
on this car. You will also be provided with appropriate automobile insurance,
if the automobile is Company leased. You will receive a Supplemental Form W-2
at the end of the year for the use of this automobile, as required by
applicable Internal Revenue Service regulations.
Your next salary review will be March 1, 2000, eighteen months from your start
date and in line with the Vice Presidents' eighteen month review cycle.
You will be eligible to receive vacation, holidays and paid personal days in
line with the Company's policies and practices. You will earn vacation at the
rate of five days for each four months of service, during your first one and
one-half years of service. As of January 1, 2000, you will be eligible for
three weeks of vacation at the beginning of that year. In addition to eight
defined holidays, you will receive two "floating holidays" each year.
Subject to management approval, you are also eligible for paid personal days
off for as needed, non-recurring situations.
You will be able to participate in all of the Company's employee benefit plans,
now existing or hereinafter established, that are available generally to
executives of the Company (including the Company's Profit Sharing Plan).
Attached is a copy of a Benefits Summary and a Change of Control Agreement for
your review.
You will be eligible to receive term life insurance coverage provided by the
Company in the amount of $500,000.00.
Should the Company determine that it wishes to terminate your employment
without cause, the Company will provide you notice of such action in writing,
at least sixty (60) days prior to the effective date of separation. In this
event, you would be covered by the Company Severance Policy. Briefly stated the
policy is if a Vice President separates from the Company for any reason other
than cause, resignation, retirement or death, he/she would receive severance
equal to a maximum of six (6) months pay plus one week's pay for each year of
service, provided he/she has not secured other employment including
compensation as a consultant. It is understood that he/she shall in good faith
seek other employment. If employment is secured at a lower salary, the
difference would be paid for the eligible period of time.
<PAGE>
Page 3
Based upon our conversations with you, your starting date will be around
September 8, 1998.
This offer is valid provided it is accepted on or before August 14, 1998. If
not accepted by said date, offer shall be deemed to be withdrawn.
If you have any questions regarding anything outlined in this letter, please
call Walter Krieger at (201) 261-6851 or fax him at (201) 986-9862. We look
forward to your joining the Lillian Vernon Corporation.
Sincerely,
Lillian Vernon
Chairman and Chief Executive Officer
WLS/pdm
<PAGE>
Page 4
The undersigned represents he is not presently bound by any agreement which
would prevent him from accepting employment with the Company. By signing below
the undersigned accepts employment with the Company beginning on or about
September 8, 1998 under the conditions spelled out above. In the event of a
breach of the foregoing, the undersigned agrees to hold the Company harmless,
and will indemnify the Company with respect to damages, including legal fees,
that the Company may incur.
Dated: 8/13/98
-------------
Accepted and Agreed to: /s/ Richard P. Randall
------------------------------------
Richard P. Randall
The annexed letter sets forth the terms and conditions of your employment with
the Company but is not to be construed as a contract of employment for a fixed
period of time, nor is it intended to modify any term or provision of any
Company policy or practice.
Dated at Rye, New York , this 14th day of August , 1998.
------------------ -------------- ------------
Location
LILLIAN VERNON CORPORATION
/s/ Richard P. Randall By: /s/ Lillian Vernon
- ----------------------------- ------------------------------------
Employee Signature Authorized Representative
Richard P. Randall Chairman and Chief Executive Officer
- ----------------------------- ------------------------------------
Print Name Title
8/13/98
- -----------------------------
Date
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