LILLIAN VERNON CORP, 10-K/A, 1999-03-18

LILLIAN VERNON CORP
10-K/A, 1999-03-18
CATALOG & MAIL-ORDER HOUSES

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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark one)

[X] FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998

[ ] 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, NY 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. [X]

The aggregate market value for the Voting Stock held by non-affiliates
(based upon the closing price on May 15, 1998) was approximately $95,508,965.

As of May 15, 1998, there were 9,370,883 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 15, 1998.

-------------------

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LILLIAN VERNON CORPORATION
FISCAL 1998 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS

PAGE
----
PART II
ITEM 6. Selected Financial Data......................................... 3
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 4
ITEM 8. Financial Statements and Supplementary Data .................... 8

PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K ..................................................... 9

<PAGE>

RESTATED FORM 10-K

In connection with the planned relocation of its corporate headquarters
to Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in New Rochelle,
NY on February 28, 1998. The pre-tax charge previously reported was $1,330,000
($878,000 after-tax).

The Company subsequently realized that an error had been made over a
period of years in the calculation of its amortization of leasehold
improvements. The Company had assumed that the assets' useful life of fifteen
years was the appropriate amortization period, rather than the shorter
remaining life of the lease, which terminated in July 1998.

The Company has restated its annual and quarterly financial statements
for the years ended February 28, 1998, February 22, 1997, and February 24, 1996,
and for the quarters ended May 30, August 29, and November 28, 1998, to charge
the revised amortization expense to selling, general and administrative expenses
in each of those periods. The pre-tax write-off of $1.3 million previously
charged in fiscal 1998 has been reversed and reallocated to the appropriate
fiscal periods.

For further information, refer to Part II - Item 7 (Management's
Discussion and Analysis of Financial Condition and Results of Operations) and
Part IV - Item 14 (Footnote Nos. 1, 2, 5, 7, 9, and 10 to the Company's
Consolidated Financial Statements).

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PART II

ITEM 6. SELECTED FINANCIAL DATA

FISCAL YEARS ENDED
----------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24, FEBRUARY 25, FEBRUARY 26,
1998 (1) 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (000'S)
Revenues ............................. $258,224 $240,053 $238,192 $222,211 $196,331
Income before income taxes ........... 14,740 7,925 8,243 18,955 19,273
Net income ........................... 9,728 5,231 5,609 13,502 12,626
PER SHARE
Net income--Basic (3)................. $ 1.02 $ .54 $ .58 $ 1.42 $ 1.33
Net Income--Diluted (3) .............. 1.01 .54 .56 1.37 1.31
Book value ........................... 12.46 11.83 11.70 11.40 10.20
Dividends ............................ .29 .28 .28 .26 .20

FINANCIAL POSITION AT YEAR END (000'S)
Cash and cash equivalents ............ $ 26,136 $ 24,098 $ 25,771 $ 38,779 $ 52,880
Working capital ...................... 73,951 70,739 76,721 79,068 72,665
Total assets ......................... 144,359 138,955 135,626 137,191 130,539
Long-term obligations (2) ............ 1,394 2,883 4,335 5,755 7,150
Stockholders' equity.................. 116,839 113,702 112,692 109,806 96,992

AVERAGE SHARES OUTSTANDING (000'S)
Basic (3) ............................ 9,532 9,658 9,713 9,555 9,448
Diluted (3) .......................... 9,636 9,664 9,981 9,892 9,632
</TABLE>

- ------------
(1) Fiscal year 1998 contained 53 weeks.
(2) Includes current installments and long-term portions of debt and
capital lease obligations.
(3) Net income per share and average shares outstanding data have been
restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share".

3
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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 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues ...................................... 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs ................... (48.2) (46.0) (46.1)
Selling, general and administrative expenses (46.3) (50.7) (50.3)
----- ----- -----
Operating income ............................ 5.5 3.3 3.6
Interest income ............................... 0.4 0.2 0.6
Interest expense .............................. (0.2) (0.3) (0.3)
Merger-related expenses ....................... -- -- (0.4)
----- ----- -----
Income before income taxes ................... 5.7 3.2 3.5
Provision for income taxes ................... (1.9) (1.0) (1.1)
----- ----- -----
Net income .................................. 3.8% 2.2% 2.4%
----- ----- -----
</TABLE>

FISCAL 1998 AND FISCAL 1997

Revenues for fiscal 1998 were $258.2 million, an increase of $18.2
million, or 7.6%, over fiscal 1997. Average revenue per catalog rose by
approximately 7.4%, with increases in both response rate and average revenue
per order. Order volume rose by approximately 6.5%, including the effect of
an additional week in fiscal 1998 compared to 1997. While total catalog
circulation increased only about 2%, the Company added new Spring mailings of
its Lilly's Kids, Personalized Gift, and Neat Ideas catalogs. The Company
also introduced the Favorites catalog, featuring many strong-selling products
from its other catalogs.

Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs of $124.4 million
increased by $14.0 million, or 12.7% in fiscal 1998 compared to fiscal 1997,
partially because of the higher volume of orders shipped. As a percentage of
revenues, product and delivery costs increased from 46.0% in fiscal 1997 to
48.2% in fiscal 1998. The increase in the percentage of revenues was due both
to reduced profit margins on merchandise sold, as well as higher costs to
process orders in the Company's National Distribution Center. Some factors
affecting this ratio included offering merchandise at a broader range of
price points to increase sales, an increase in the percentage of personalized
products, with the related higher labor costs, an increase in government
tariffs on toll-free telephone calls, and higher package delivery costs due
to rate increases, heavier packages, and an increase in multiple shipments
per order. The Company believes that offering lower price points and more
personalized merchandise contributed favorably to achieving higher revenue
per catalog, although it increased costs relative to revenues.

Selling, general and administrative ("SG&A") expenses were $119.5 million
in fiscal 1998, compared to $121.7 million in fiscal 1997, a decrease of $2.2
million, or 1.8%. As a percentage of revenues, SG&A expenses also declined,
from 50.7% in fiscal 1997 to 46.3% in fiscal 1998. The largest component of
these expenses are the costs of producing, printing, and mailing the
Company's catalogs. Catalog circulation increased approximately 2% in fiscal
1998 compared to fiscal 1997. A lower ratio of catalog costs to revenues was
the principal reason for the improvement in SG&A expenses as a percentage of
revenues. The improvement came almost equally from lower paper costs and an
improvement in revenue generated per catalog.

The average cost of paper used in the Company's catalogs was approximately
25% lower in fiscal 1998 compared to fiscal 1997. Paper prices are expected
to rise in the upcoming fiscal year 1999. The Company

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has obtained commitments from its suppliers to provide the majority of its
expected paper needs at the then-prevailing market price for high-volume
purchasers. Postal rates to mail the Company's catalogs are expected to rise
by 3.0% to 3.5% in fiscal 1999, but the timing of the rate increase is not
known at this time. United Parcel Service rates for packages have also
increased in fiscal 1999. The Company expects that this rate increase will
raise its UPS shipping rates by 9.0% to 9.5%. U.S. Postal rates for packages
are also expected to rise in the latter part of the fiscal year. Management
continually implements strategies to attempt to increase product sales, and,
in May 1998, raised the fees for shipping and handling that are charged to
its customers. These strategies are expected to partially offset the cost
increases; however, management cannot assess the negative impact of these
factors on its future earnings.

In fiscal 1998, the Company decided to relocate its Corporate Headquarters
to a larger facility located in Rye, New York. The relocation will take place
at the end of the Company's existing lease, in July 1998. The move will allow
for continued growth. In connection with the planned relocation of its
corporate headquarters to Rye, NY in July 1998, the Company wrote-off the
unamortized portion of its leasehold improvements at its corporate headquarters
facility in New Rochelle, NY on February 28, 1998. The pre-tax charge
previously reported was $1,330,000 ($878,000 after-tax).

EPS Impact-
---------------
Fiscal Years Ended Pre-tax Amount After-tax Amount Basic Diluted
- ------------------ -------------- ---------------- ----- -------
1985 - 1995 ($577,000) ($381,000) Not Applicable
February 24, 1996 ($182,000) ($120,000) ($.01) ($.01)
February 22, 1997 ($187,000) ($124,000) ($.01) ($.01)
February 28, 1998 $1,136,000 $750,000 $.08 $.08
February 27, 1999 ($190,000) ($125,000) ($.01) ($.01)

Interest income in fiscal 1998 was $.9 million, compared to $.6 million in
fiscal 1997. The increase of $.3 million was the result of a higher average
investment balance, because of improved profitability and lower capital
expenditures. Interest expense declined by $.1 million, principally because
of the scheduled repayment of long-term debt.

The Company's effective income tax rate in fiscal 1998 was 34%, the same
as in fiscal 1997.

FISCAL 1997 AND FISCAL 1996

Revenues for fiscal 1997 were $240.1 million, an increase of $1.9 million,
or 0.8% over fiscal 1996. Sales grew marginally, principally because catalog
circulation for the year was reduced by about 2% compared to fiscal 1996.
Circulation was reduced in the first half of the fiscal year because higher
paper costs required the Company to more closely target its circulation to
those customers whose purchases were expected to cover the higher costs of
the catalogs. Average revenue per catalog rose by approximately 3%, driven by
an increase in average order value of almost 7%. The volume of orders shipped
decreased by approximately 5%.

Product and delivery costs of $110.4 million increased $.5 million, or
0.4% in fiscal 1997 as compared to fiscal 1996. As a percentage of revenues,
product and delivery costs decreased slightly from 46.1% in fiscal 1996 to
46.0% in fiscal 1997. Product profit margin improved significantly,
principally because less inventory liquidation was needed. The Company's
postage expense to customers was positively impacted by the expansion of the
Company's National Distribution Center, which eliminated some capacity
constraints of the prior year. These cost reductions were partially offset by
less shipping and handling revenue, which was lower because less orders were
shipped, and because of certain marketing promotions run by the Company.

Selling, general and administrative ("SG&A") expenses were $121.7 million
in fiscal 1997, compared to $119.8 million in fiscal 1996, an increase of
$1.9 million, or 1.6%. As a percentage of revenues,SG&A expenses increased
from 50.3% in fiscal 1996 to 50.7% in fiscal 1997. The ratio of catalog costs
to revenues improved in fiscal 1997, even though the cost of producing an
average catalog was slightly higher. The ratio improved because of a rise in
average revenue per catalog. High paper costs continued to be reflected in
the Company's catalog expense, particularly in the core catalogs, while the
prices of its specialty catalog paper improved during the latter part of the
fiscal year.

Paper prices have declined, and the Company has future commitments for
paper at favorable prices. Postal costs to mail the Company's catalogs also
declined in the second half of fiscal 1997 because of Postal Classification
Reform regulations.

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Other elements of SG&A expense besides catalog costs rose, principally
because the Company made investments in staff in the executive, merchandising
and creative areas. In addition, growth in the Company's Special Markets
division, which sells to other businesses, and an increase in the number of
outlet stores, were major factors affecting this increase.

5
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Fiscal 1996 earnings reflect a non-recurring pre-tax charge of $921,000
for the costs of a terminated merger agreement (see Note 11 to Financial
Statements).

Interest income in fiscal 1997 was $.6 million, as compared to $1.3
million in fiscal 1996. The decrease of $.7 million was the result of a lower
average investment balance, because of higher expenditures required for
expansion of the Company's National Distribution Center. Interest expense
increased by $.1 million in fiscal 1997 as compared to fiscal 1996 because of
short term borrowings under the Company's revolving credit facility during
fiscal 1997.

The Company's effective income tax rate in fiscal 1997 was 34.0% as
compared to 32.0% in fiscal 1996, principally due to higher tax deductions
for charitable contributions in fiscal 1996.

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, and because of added fixed costs to increase sales year-round and
invest in future growth, the Company incurred a cumulative net loss during
the first six months of fiscal 1998, 1997, and 1996. Due to these factors,
management expects to incur a loss for the first half of fiscal 1999 as well.

LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet and liquidity are strong. At the end of fiscal
1998, cash and cash equivalents totaled $26.1 million; the current ratio was
4.2:1; stockholders' equity totalled $116.8 million; and debt obligations
(including current maturities) represented 1.2% of equity.

In fiscal 1998, the Company generated $13.7 million of cash from operating
activities. Inventory rose by $6.5 million as of the end of fiscal 1998
compared to 1997, due to new product offerings, in anticipation of higher
sales, and to enable the Company to better service customers. Management
expects to be able to sell this inventory without significant gross margin
reductions. The Company used $1.5 million of funds for long-term debt
repayments, and generated $.4 million from the sale of common stock through
its employee stock option and purchase plans.

Capital spending in fiscal 1998 was $3.1 million. Capital expenditures in
fiscal 1997 totaled $10.3 million, of which $8.5 million related to the
expansion of the Company's National Distribution Center. The expansion
project, consisting principally of a 335,000 square foot addition to the
building, and related warehousing, shipping and computer equipment, cost
approximately $14 million (including fiscal 1996 expenditures), and was
completed in August of 1996. The fiscal 1998 major capital expenditures, as
well as the balance of the capital expenditures in fiscal 1997, were made to
upgrade the Company's computer equipment, and its distribution center
machinery and equipment. In fiscal 1999, the Company is planning to expand
the personalization area of its National Distribution Center to be able to
handle increased demand for personalized merchandise. The Company may
continue to find it necessary to expand the capacity of the National
Distribution Center in the future. The Company has committed to upgrade its
order entry system. In fiscal 1998, approximately $1.0 million was spent on
this project, and the Company expects to spend approximately $2.9 million on
hardware and software for the remainder of the project. In addition to
allowing the Company's telemarketing staff to enter orders more efficiently,
the new system will be Year 2000 compliant, and allow the Company to expand
certain marketing opportunities. The new system is expected to be operational
in April 1999.

The Company entered into a $42 million four-year revolving credit facility
in August 1996, which can be used to finance working capital needs, fixed
assets, and up to $12 million of inventory letters of credit. At the
Company's option, up to $20 million of the facility can be converted into
term loans, with maturity dates no later than 2003. Interest is payable at
LIBOR plus 50 basis points, prime rate, bankers'

6
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acceptance rate plus 50 basis points, or a fixed rate, at the Company's
option. The credit facility is unsecured, and the Company is subject to
financial covenants principally relating to its working capital, net worth,
interest coverage ratio and capital spending restrictions.

The Company has paid quarterly cash dividends since May 1992, and has
increased its quarterly dividend from $.05 to $.07 per share in September
1994, and from $.07 to $.08 per share in March 1998. The Company 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
declared in fiscal 1998 totaled $2.8 million, or $.29 per share.

On October 10, 1995, the Board of Directors authorized the Company to
purchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. During the fiscal year ended
February 28, 1998, the Company purchased 270,700 shares at a total cost of
$4.4 million. Shares repurchased under the plan from inception through
February 28, 1998 total 655,200, at a cost of $9.5 million.

The Company believes that its cash flow from operations, current
investment balance, and credit facilities will be sufficient to meet its
operating needs.

YEAR 2000 COMPLIANCE

The Company is in the process of modifying its computer software
applications and systems to function properly with respect to dates in the
Year 2000 and thereafter. The Company expects to complete the necessary
changes by early calendar 1999, using both its in-house staff and outside
resources, at a cost of less than $1 million. An assessment of the readiness
of external entities with which the Company interfaces, such as its vendors,
is ongoing. The Company does not currently anticipate any material disruption
to its operations as a result of a failure to properly modify its own
systems. However, failure of third parties with which the Company does
business to properly modify their systems could have a material adverse
effect upon the Company.

EFFECTS OF INFLATION AND FOREIGN EXCHANGE

The Company is generally able to reflect cost increases and decreases
resulting from the effects of inflation and foreign currency fluctuations in
its selling prices. In addition, most foreign purchase orders are denominated
in U.S. dollars. Accordingly, the results of operations for the periods
discussed have not been significantly affected by these factors.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and
losses); and No. 131 "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations, or cash flows, and any effect will be limited to the form and
content of its disclosures. Both Statements are effective for fiscal years
beginning after December 15, 1997, and accordingly, the Company will adopt
them in fiscal 1999.

Effective in the fourth quarter of fiscal 1998, the Company adopted SFAS
No. 128, "Earnings Per Share ", which required the Company to state a dual
presentation of basic and diluted earnings per share in its financial
statements. The basic calculation replaces the calculation of primary
earnings per share, and did not have a material impact on reported earnings
per share.

FORWARD LOOKING STATEMENTS

Except for historical information contained herein, this Form 10-K
contains forward-looking statements which are based on the Company's current
expectations and assumptions. Various factors

<PAGE>

could cause actual results to differ materially from those set forth in such
statements. These factors include, but are not limited to, the potential for
changes in consumer spending, consumer preferences and general economic
conditions, increasing competition in the direct mail industry, changes in
government regulations, dependence on foreign suppliers, and possible future
increases in operating costs, including postage and paper costs.

ITEM 8. 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-17.

8
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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-17.

(a)(1) Consolidated Financial Statements

--Balance Sheets--February 28, 1998 and February 22, 1997............... F-2
--Statements of Income for the three Fiscal Years ended 1998, 1997
and 1996 ........................................................... F-3
--Statements of Stockholders' Equity for the three Fiscal Years ended
1998, 1997 and 1996................................................. F-4
--Statements of Cash Flows for the three Fiscal Years ended 1998,
1997 and 1996 ...................................................... F-5
--Notes to Financial Statements......................................... F-6
--Report of Independent Accountants..................................... F-17

(a)(2) Schedules

All schedules called for under Regulation S-X are not submitted because
they are not applicable or not required or because the required information
is not material or is included in the financial statements or notes thereto.

(b) Reports on Form 8-K.

No Form 8-K reports have been filed by the Registrant during the last
quarter of the period covered by this report.

(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).

EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----

2.1 --Plan and Agreement of Merger dated June 29, 1987 between
Lillian Vernon Corporation, a New York corporation, and the
Company.......................................................(1)

2.2 --Certificate of Ownership and Merger between Lillian Vernon
Corporation and the Company filed in Delaware.................(1)

2.3 --Certificate of Merger between Lillian Vernon Corporation and
the Company filed in New York.................................(2)

3.1 --Certificate of Incorporation with Amendments of Lillian
Vernon Corporation............................................(2)

3.2 --By-Laws of Lillian Vernon Corporation.........................(1)

10.1 --Amended and Restated Lillian Vernon Corporation Profit
Sharing Plan..................................................(16)

10.2 --Employees' Pension Plan.......................................(1)

10.3 --1987 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan...............................(1)

<PAGE>

EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----

10.4 --First Amendment to Employment Agreement with Lillian Vernon,
formerly Lillian M. Katz......................................(6)

10.5 --Executive Deferred Compensation Agreement and first amendment
thereto with Lillian Vernon, formerly Lillian M. Katz.........(7)

10.6 --Second Amendment to Deferred Compensation Agreement with Fred
P. Hochberg...................................................(8)

10.7 --Second Amendment to Deferred Compensation Agreement with
David C. Hochberg.............................................(9)

10.8 --Form of Indemnification Agreement with officers and
directors.....................................................(1)

10.9 --Lease for Company's facility at New Rochelle, New York........(1)

10.10 --Trademark Registrations for Lillian Vernon Corporation--
Service Mark and Logo.........................................(1)

10.11 --Loan Agreement with Crestar Bank and related documents........(3)

10.12 --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)

10.13 --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)

10.14 --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.(5)

10.15 --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...............(5)

10.16 --Sublease between Fred P. and David C. Hochberg and
Company--New Rochelle facility................................(8)

10.17 --Lillian Vernon Corporation 1993 Stock Option Plan for
Non-Employee Directors........................................(10)

10.18 --Employment Agreement with Larry Blum..........................(11)

10.19 --Employment Agreement with Howard Goldberg.....................(12)

10.20 --Employment Agreement with Robert S. Mednick...................(13)

10.21 --Revolving Credit Agreement, Letter of Credit and Bankers
Acceptance facility dated as of August 19, 1996 among Lillian
Vernon Corporation as Borrower, Lillian Vernon Fulfillment
Services, Inc., LVC Retail Corporation and Lillian Vernon
International Ltd. as Guarantors, the Banks named therein and
The Chase Manhattan Bank as agent.............................(14)

10.22 --1997 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan...............................(15)

10.23 --1997 Stock Option Plan for Non-Employee Directors.............(15)

10.24 --Form of Agreement re Change of Control with certain executive
officers......................................................E-1

10.25 --Agreement of Sublease dated January 30, 1998 between CVS New
York, Inc. and the Company and exhibits.......................E-16

22 --Subsidiaries of registrant....................................E-140

24 --Consent of PricewaterhouseCoopers LLP re: incorporated
reference to Form S-8.........................................E-

27 --Financial Data Schedules......................................E-

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(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 23,
1991 and incorporated by reference herein.
(6) Filed with Annual Report on Form 10-K for the year ended February 29,
1992 and incorporated by reference herein.
(7) Amendment filed with Quarterly Report on Form 10-Q for the quarter
ended May 30, 1992 and incorporated by reference herein. Original
deferred compensation agreement filed with Registration
Statement--see (1) above.
(8) Filed with Annual Report on Form 10-K for the year ended February 27,
1993 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement. See (1)
above.
(9) Filed with Quarterly Report on Form 10-Q for the quarter ended August
28, 1993 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement--see (1)
above.
(10) Filed with Registration Statement on Form S-8 (File No. 33-71250) and
incorporated by reference herein.
(11) Filed with Annual Report on Form 10-K for the year ended February 25,
1995, and incorporated by reference herein.
(12) Filed with Quarterly Report on Form 10-Q for the quarter ended May
27, 1995 and incorporated by reference herein.
(13) Filed with Quarterly Report on Form 10-Q for the quarter ended May
25, 1996 and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended August
24, 1996 and incorporated by reference herein.
(15) Filed with Registration Statement on Form S-8 on September 26, 1997
(File No. 333-36467) and incorporated by reference herein.
(16) Filed with Registration Statement on Form S-8 on March 31, 1998 (File
No. 333-48951) and incorporated by reference herein.

11
<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 10-K/A report to be
signed on its behalf by the undersigned, duly authorized.

LILLIAN VERNON CORPORATION

Dated March 16, 1999 By: /s/ Richard P. Randall
-------------------------------
Richard P. Randall
Senior Vice President-
Chief Financial Officer

12
<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)

FEBRUARY 28, 1998 FEBRUARY 22, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 26,136 $ 24,098
Accounts receivable, net.............................................. 22,632 24,476
Merchandise inventories............................................... 36,935 30,480
Deferred income taxes (Note 2)........................................ 1,532 1,548
Prepayments and other current assets (Note 4)......................... 10,173 10,438
-------- --------
Total current assets................................................. 97,408 91,040
Property, plant and equipment, net (Notes 5 and 7)..................... 37,823 39,373
Deferred catalog costs................................................. 5,922 6,140
Other assets........................................................... 3,206 2,402
-------- --------
Total................................................................ $144,359 $138,955
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses (Note 4).................. $ 16,331 $ 14,485
Cash overdrafts ...................................................... 1,004 1,352
Customer deposits..................................................... 147 260
Current portion of long-term debt and lease obligations (Notes 6, 7) 1,394 1,489
Income taxes payable (Note 2)......................................... 4,581 2,715
-------- --------
Total current liabilities............................................ 23,457 20,301
Long-term debt, less current portion (Note 6).......................... -- 1,270
Capital lease obligations, less current portion (Note 7) .............. -- 124
Deferred compensation (Note 8)......................................... 3,426 3,500
Deferred income taxes (Note 2)......................................... 637 58
-------- --------
Total liabilities.................................................... 27,520 25,253
-------- --------
Commitments & Contingencies (Note 7)
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 in 1998 and 10,363,320 shares in 1997 ..... 104 104
Additional paid-in capital............................................ 31,160 30,783
Retained earnings..................................................... 100,883 93,929
Unearned compensation................................................. (6) (94)
Treasury stock, at cost--1,016,491 shares in 1998 and
753,458 shares in 1997 (Note 12)..................................... (15,302) (11,020)
-------- --------
Total stockholders' equity........................................... 116,839 113,702
-------- --------
Total................................................................ $144,359 $138,955
-------- --------
</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)

FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................... $258,224 $240,053 $238,192
Costs and expenses:
Product and delivery costs........................ 124,419 110,374 109,915
Selling, general and administrative expenses .... 119,471 121,717 119,817
-------- -------- --------
243,890 232,091 229,732
-------- -------- --------
Operating income................................. 14,334 7,962 8,460
Interest income.................................... 910 614 1,314
Interest expense................................... (504) (651) (610)
Merger-related expenses (Note 11).................. -- -- (921)
-------- -------- --------
Income before income taxes....................... 14,740 7,925 8,243
Provision for (benefit from) income taxes (Note
2):
Current........................................... 4,566 3,622 3,560
Deferred.......................................... 446 (928) (926)
-------- -------- --------
5,012 2,694 2,634
-------- -------- --------
Net income....................................... $ 9,728 $ 5,231 $ 5,609
-------- -------- --------
Net income per common share--Basic................. $ 1.02 $ .54 $ .58
-------- -------- --------
Net income per common share--Diluted............... $ 1.01 $ .54 $ .56
-------- -------- --------
Weighted average number of common shares--Basic ... 9,532 9,658 9,713
Weighted average number of common shares and
common share equivalents--Diluted................. 9,636 9,664 9,981
</TABLE>

See Notes to Consolidated Financial Statements

F-3
<PAGE>

LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

COMMON STOCK TREASURY STOCK
------------------ PAID-IN RETAINED UNEARNED --------------------
TOTAL SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES AMOUNT
----- ------ ------ ------- -------- ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 25, 1995............. $109,806 9,771,744 $ 98 $23,300 $ 88,541 ($2) (139,892) ($2,131)
Exercise of non-qualified stock
options............................... 1,262 214,000 2 3,253 (95,307) (1,993)
Amortization of unearned compensation . 2 2
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 106 7,899 -- 106
Purchase of treasury stock............. (1,732) (124,800) (1,732)
Dividends ($.28 per share)............. (2,728) (2,728)
Other.................................. 367 367
Net income............................. 5,609 5,609
-------- ---------- ---- ------- -------- --- ---------- --------
BALANCE, FEBRUARY 24, 1996............. 112,692 9,993,643 100 27,026 91,422 0 (359,999) (5,856)
Shares issued to employees at $.01 per
share pursuant to Restricted
Stock Plan............................ -- 15,000 -- 197 (197)
Exercise of non-qualified stock
options............................... 893 337,000 4 2,720 (133,759) (1,831)
Amortization of unearned compensation . 103 103
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ..... 184 17,677 -- 184
Purchase of treasury stock............. (3,333) (259,700) (3,333)
Dividends ($.28 per share)............. (2,724) (2,724)
Other.................................. 656 656
Net income............................. 5,231 5,231
-------- ---------- ---- ------- -------- --- ---------- --------
BALANCE, FEBRUARY 22, 1997............. 113,702 10,363,320 104 30,783 93,929 (94) (753,458) (11,020)
Exercise of non-qualified stock
options............................... 297 16,000 -- 200 (17) 7,667 114
Amortization of unearned compensation . 88 88
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 140 10,354 -- 140
Purchase of treasury stock............. (4,396) (270,700) (4,396)
Dividends ($.29 per share)............. (2,757) (2,757)
Other.................................. 37 37
Net income............................. 9,728 9,728
-------- ---------- ---- ------- -------- --- ---------- --------
BALANCE, FEBRUARY 28, 1998............. $116,839 10,389,674 $104 $31,160 $100,883 ($6) (1,016,491) ($15,302)
-------- ---------- ---- ------- -------- --- ---------- --------
</TABLE>

See Notes to Consolidated Financial Statements

F-4
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 9,728 $ 5,231 $ 5,609
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation..................................................... 4,672 4,279 3,768
Amortization..................................................... 324 454 395
(Gain) loss on sale of assets.................................... (7) (8) (6)
(Increase) decrease in accounts receivable....................... 1,844 (3,041) 47
(Increase) decrease in merchandise inventories................... (6,455) 468 (530)
(Increase) decrease in prepayments and other current assets ..... 265 3,793 (6,736)
(Increase) decrease in deferred catalog costs.................... 218 366 126
(Increase) decrease in other assets.............................. (1,040) (309) (296)
Increase (decrease) in trade accounts payable and accrued
expenses ....................................................... 1,846 2,370 (1,941)
Increase (decrease) in customer deposits......................... (113) 132 (257)
Increase (decrease) in income taxes payable...................... 1,866 (177) (684)
Increase (decrease) in deferred compensation..................... (74) 401 186
Increase (decrease) in deferred income taxes..................... 595 (932) (927)
------- -------- --------
Net cash provided by (used in) operating activities ............ 13,669 13,027 (1,246)
------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment........................ (3,122) (10,284) (7,712)
Proceeds from sale of assets...................................... 7 8 95
------- -------- --------
Net cash used in investing activities........................... (3,115) (10,276) (7,617)
------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease
obligations...................................................... (1,489) (1,452) (1,420)
Proceeds from issuance of common stock............................ 437 1,077 1,368
Increase (decrease) in cash overdrafts ........................... (348) 1,352 --
Dividends paid.................................................... (2,757) (2,724) (2,728)
Payments to acquire treasury stock................................ (4,396) (3,333) (1,732)
Other............................................................. 37 656 367
------- -------- --------
Net cash used in financing activities........................... (8,516) (4,424) (4,145)
------- -------- --------
Net increase (decrease) in cash and cash equivalents ........... 2,038 (1,673) (13,008)
------- -------- --------
Cash and cash equivalents at beginning of period................... 24,098 25,771 38,779
------- -------- --------
Cash and cash equivalents at end of period......................... $26,136 $ 24,098 $ 25,771
------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 347 $ 582 $ 599
Income taxes..................................................... 2,646 3,028 3,971

Supplemental disclosure of noncash financing activities--see Note 13
</TABLE>

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 1998 consisted of 53
weeks, and fiscal 1997 and fiscal 1996 each consisted of 52 weeks.

Cash Equivalents

Cash equivalents, for purposes of the Statements of Cash Flows, consist
principally of commercial paper, municipal securities and U.S. Treasury
securities, with remaining maturities at acquisition of less than three
months. Under Statement of Financial Accounting Standards (SFAS) No.
115--"Accounting for Certain Investments in Debt and Equity Securities", the
Company's investments, totaling $25.7 million and $23.3 million as of
February 28, 1998 and February 22, 1997, respectively, are classified as
held-to-maturity securities, and as such, are stated at amortized cost, which
approximates market value.

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 totaled $188,000 in fiscal 1998, $320,000 in fiscal 1997, and $378,000
in fiscal 1996.

Capitalized software costs, net of accumulated amortization, are included
in other assets, and amounted to $1,275,000 and $429,000 at February 28, 1998
and February 22, 1997, 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, or the term of the applicable lease, whichever is shorter.

Income Taxes

Deferred income taxes arise from differences in the timing of income and
expense recognition for financial and income tax reporting purposes.
Statement of Financial Accounting Standards No. 109 requires the company to
compute deferred income taxes on the differences between the financial
statement and tax bases of the assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.

F-6
<PAGE>

Per Share Data

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". The standard revises the computation and presentation of earnings per
share and was adopted by the Company in the fourth quarter of fiscal 1998.
Earnings per share is computed and reported on a dual presentation basis.
Basic earnings per share is computed by dividing net income by the weighted
average number of outstanding shares for the period. Diluted earnings per
share is computed by dividing net income by the sum of the weighted average
number of outstanding shares and share equivalents computed. The Company's
common share equivalents consist of stock options issued to key employees and
Directors. As required by SFAS 128, all prior periods' reported earnings per
share computations were restated to reflect the new calculation methods. The
change in reported earnings per share was not material.

Basic and diluted earnings per share were calculated as follows (amounts
in thousands):

FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Income--Basic and Diluted...................... $9,728 $5,231 $5,609
------ ------ ------
Weighted average shares for Basic EPS.............. 9,532 9,658 9,713
Add: incremental shares from stock option
exercises......................................... 104 6 268
------ ------ ------
Weighted average shares for Diluted EPS............ 9,636 9,664 9,981
------ ------ ------
</TABLE>

In fiscal 1998, 1997, and 1996, options on 369,000, 813,500, and 212,000
shares of common stock, respectively, were not included in the calculation of
weighted average shares for diluted EPS because their effects were
antidilutive.

Fair Value of Financial Instruments

The fair value of the Company's financial instruments does not materially
differ from their carrying values.

Revenue Recognition

The Company records revenue at the time of shipment for catalog sales, and
at point of sale for retail stores.

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,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Stock-Based Employee Compensation

The Company follows the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under 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 implemented the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in
fiscal 1997, but continued its current accounting for stock-based employee
compensation, under APB Opinion No. 25 (see Note 9).

New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which establishes standards for

F-7
<PAGE>

reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses); and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations, or cash flows, and
any effect will be limited to the form and content of its disclosures. Both
Statements are effective for fiscal years beginning after December 15, 1997,
and, accordingly, the Company will adopt them in fiscal 1999.

In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The adoption of SFAS 121 did not have a material effect on the Company's
financial statements.

2. INCOME TAXES

The current income tax provision consists of (dollars in thousands):

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Federal... $4,198 $3,314 $3,206
State..... 368 308 354
------ ------ ------
$4,566 $3,622 $3,560
====== ====== ======
</TABLE>

The deferred income tax provision (benefit) consists of (dollars in
thousands):

FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Charitable
contributions........... $ 124 $(216) $(499)
Depreciation............. 245 (127) (254)
Catalog costs............ (96) (204) (40)
Other, net............... 173 (381) (133)
----- ----- -----
$ 446 $(928) $(926)
===== ===== =====
</TABLE>

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 totaled $37,000, $656,000, and $367,000 for
fiscal 1998, 1997, and 1996, respectively.

The Company's effective income tax rate is reconciled to the U.S. Federal
statutory tax rate as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Federal statutory tax rate..................... 34.0% 34.0% 34.0%
State income taxes, net of Federal tax
benefit....................................... 1.9 2.5 2.8
Charitable contributions of merchandise ....... (1.2) (3.5) (6.7)
Expired charitable contribution carry
forwards...................................... -- -- 4.9
Other, net..................................... (0.7) 1.0 (3.0)
---- ---- ----
34.0% 34.0% 32.0%
==== ==== ====
</TABLE>

F-8
<PAGE>

During fiscal 1996, expired charitable contribution carry forwards of
$1,079,000 resulted in a reduction in deferred tax assets of $416,000.

The deferred tax assets and deferred tax liabilities recorded on the
balance sheets are as follows (dollars in thousands):

FEBRUARY 28, 1998 FEBRUARY 22, 1997
----------------------- ----------------------
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Current:
Catalog deferrals....... $ -- $2,270 $ -- $2,373
Charitable
contributions.......... 2,042 -- 2,152 --
Inventory
capitalization......... 848 -- 807 --
Accrued expenses........ 660 -- 607 --
Other................... 261 9 363 8
------ ------ ------ ------
Total current......... 3,811 2,279 3,929 2,381
------ ------ ------ ------
Non-current:
Depreciation............ -- 1,770 -- 1,366
Amortization............ 33 183 84 101
Deferred compensation .. 1,283 -- 1,325 --
------ ------ ------ ------
Total non-current...... 1,316 1,953 1,409 1,467
------ ------ ------ ------
Total................. $5,127 $4,232 $5,338 $3,848
====== ====== ====== ======
</TABLE>

As of February 28, 1998, the Company has $5,246,000 of charitable
contribution carry forwards for Federal income tax purposes, which expire
from fiscal 1999 to 2002.

3. CREDIT FACILITIES

The Company entered into a $42 million four-year revolving credit facility
in August 1996 with two banks. This credit facility can be used for general
corporate purposes, including working capital needs, capital expenditures,
and up to $12 million of inventory letters of credit. At the Company's
option, up to $20 million of the facility can be converted into term loans,
with maturity dates no later than 2003. Interest is payable at LIBOR plus 50
basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a
fixed rate, at the Company's option. The credit facility is unsecured, and
the Company is subject to various financial covenants principally relating to
its working capital, net worth, interest coverage ratio and capital spending
restrictions. The new credit facility replaced previous unused credit
facilities totaling $15 million, which were in effect in fiscal 1996, bearing
interest at the prime rate.

In fiscal 1998 and fiscal 1997, the Company incurred commitment fees on
the new credit facility ranging from 5 basis points on the letters of credit
to 20 basis points on the available revolving credit line. In fiscal 1996,
the Company incurred commitment fees of approximately 20 basis points.

During fiscal 1998, the maximum amount outstanding under the new revolving
credit agreement was $11.5 million (excluding letters of credit). Interest
expense related to these borrowings was approximately $75,000. No amounts
were outstanding under the Company's credit facilities as of February 28,
1998 and February 22, 1997.

The Company had outstanding letters of credit approximating $7,324,000 and
$4,773,000 as of February 28, 1998 and February 22, 1997, respectively, for
the purchase of inventory in the normal course of business.

4. OTHER

Prepayments and other current assets include prepaid catalog costs of
$7,365,300 and $7,851,800 as of February 28, 1998 and February 22, 1997,
respectively (see Note 1).

F-9
<PAGE>

Trade accounts payable and accrued expenses consist of (dollars in
thousands):

<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 22,
1998 1997
------------ ------------
<S> <C> <C>
Trade accounts payable ... $ 8,644 $ 6,061
Catalog costs............. 1,892 1,696
Salaries and
compensation............. 1,264 1,566
Other..................... 4,531 5,162
------- -------
$16,331 $14,485
======= =======
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (dollars in
thousands):

FEBRUARY 28, FEBRUARY 22,
1998 1997
------------ ------------
<S> <C> <C>
Land and buildings............................ $31,778 $31,656
Machinery and equipment....................... 29,035 26,512
Furniture and fixtures........................ 3,561 3,313
Leasehold improvements........................ 3,989 3,776
Capital leases................................ 1,262 1,262
------- -------
Total property, plant & equipment, at cost .. 69,625 66,519
Less, accumulated depreciation &
amortization................................. 31,802 27,146
------- -------
Property, plant & equipment, net............. $37,823 $39,373
======= =======
</TABLE>

6. LONG-TERM DEBT

Long-term debt consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 22,
1998 1997
------------ ------------
<S> <C> <C>
Senior Notes due September 1998, payable in semi-annual
installments of $300,000 with interest at 10.09%............. $ 600 $1,200
Senior Notes due October 1998, payable in semi-annual
installments of $335,000 with interest at 10.0%.............. 670 1,340
Industrial Revenue Bond of the City of New Rochelle
Industrial Development Agency, payable in quarterly
installments of $1,500 with interest at prime rate (February
1997--8.25%) through October 1997............................ -- 4
------ ------
$1,270 $2,544
Less, current portion....................................... 1,270 1,274
------ ------
$ -- $1,270
====== ======
</TABLE>

The Company's long-term debt agreements require that the Company meet
certain financial covenants, principally related to working capital and
tangible net worth, both as defined in the agreements. The Company was in full
compliance with all debt covenants during the fiscal years ended February 28,
1998 and February 22, 1997.

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 41,000 square foot building with a cost of $1,262,000 and
accumulated amortization of $1,223,000 as of February 28, 1998 and $1,144,000
as of February 22, 1997.

F-10
<PAGE>
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 (total lease and related costs are approximately $580,000
or $14.00 per square foot).

The Company will relocate its corporate headquarters in July 1998 to a
65,000 square foot building in Rye, New York. This facility is leased from
CVS New York, Inc. under a sublease agreement expiring on January 30, 2005.
This operating lease will have an annual rent of $1,153,000 ($17.75 per
square foot), plus increases in real estate taxes and operating costs over
the initial lease year base costs. The Company has the right to renew the
lease, for 2 five-year periods, with the building owner upon expiration of
the sublease.

In connection with the planned relocation of its corporate headquarters to
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in New Rochelle,
NY on February 28, 1998. The pre-tax charge previously reported was $1,330,000
($878,000 after-tax).

The Company subsequently realized that an error had been made over a period
of years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.

The Company has restated its annual and quarterly financial statements for
the years ended February 28, 1998, February 22, 1997, and February 24, 1996,
and for the quarters ended May 30, August 29, and November 28, 1998, to charge
the revised amortization expense to selling, general and administrative
expenses in each of those periods. The pre-tax write-off of $1.3 million
previously charged in fiscal 1998 has been reversed and reallocated as income
(expense) to the appropriate fiscal years as follows:

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 1999 through fiscal 2004, and
various renewal options through fiscal 2009. Most of the store leases also
provide for payment of common charges such as maintenance and real estate
taxes. Twelve stores require the payment of additional rent based upon a
percentage of sales. Minimum rental payments required under these agreements,
as well as the new Corporate Headquarters Sublease, are as follows (dollars
in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999............................................................... $ 2,549
2000............................................................... 2,934
2001............................................................... 2,703
2002............................................................... 2,566
2003............................................................... 2,127
Thereafter......................................................... 2,319
-------
$15,198
=======
</TABLE>

Rent expense for fiscal 1998, 1997 and 1996 amounted to $2,612,000,
$2,171,000, and $1,840,000, respectively, which included $30,000, $14,000 and
$20,000 in fiscal 1998, 1997 and 1996, 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 become fully vested in their profit sharing account
balance after seven years. The authorized profit sharing contributions for
fiscal 1998, 1997, and 1996 were $480,000, $500,000, and $450,000,
respectively.

The Company's profit sharing plan includes an employee contribution and
employer matching contribution (401k) feature. Under the 401k feature of the
plan, eligible employees may make pre-tax contributions up to 10% of their
annual compensation. Employee contributions of up to 6% of compensation are
currently matched by the Company at a rate of 50%. The matching contribution
is made with Company stock. Employees are 100% vested in their pre-tax
contributions at all times, and become fully vested in the employer matching
contribution after two years of service. The Company's matching contributions
to the plan for fiscal 1998, 1997, and 1996 were $460,000, $425,000, and
$398,000 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 $353,000 in fiscal 1998, $366,000 in
fiscal 1997 and $150,000 in fiscal 1996.

F-11
<PAGE>

9. STOCK COMPENSATION PLANS

At February 28, 1998, the Company had three stock-based compensation
plans, which are described below. The Company applies APB Opinion 25 and
related Interpretations in accounting for its stock compensation plans.
Accordingly, no compensation cost has been recognized for its non-qualified
stock options granted and for shares issued through its Employee Stock
Purchase Plan. Compensation cost has been charged against income for the
issuance of restricted stock during fiscal 1997; net income was reduced by
approximately $68,000 in fiscal 1997, and by approximately $58,000 in fiscal
1998. If compensation cost for the Company's non-qualified stock options
issued and shares purchased through its stock purchase plan had been
determined based on the fair value at the grant dates for awards under those
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, the Company's net income and earnings per share would have
been reduced to the proforma amounts indicated below (dollars in thousands,
except per share amounts):

FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 28, FEBRUARY 22, FEBRUARY 24,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Income................. As reported $9,728 $5,231 $5,609
Pro forma $9,367 $4,989 $5,542
Basic earnings per share .. As reported $1.02 $.54 $.58
Pro forma $.98 $.51 $.57
Diluted earnings per
share..................... As reported $1.01 $.54 $.56
Pro forma $.97 $.51 $.55
</TABLE>

The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan, and a total of 525,000 shares of
common stock have been reserved for issuance thereunder. Prior to adoption of
the 1997 Plan, the Company's 1987 Plan, which expired during the fiscal year,
had a total of 2,000,000 shares reserved for issuance. The Company has
granted and sold shares of restricted stock to certain executives at a
nominal price per share. In connection with the issuance of restricted stock,
unearned compensation is recorded ($197,400 in fiscal 1997) and amortized
over the respective vesting periods. Restricted shares were granted, and vest
as follows:

<TABLE>
<CAPTION>
DATE GRANTED NUMBER OF SHARES DATE VESTED
------------ ---------------- -----------
<S> <C> <C>
March 1996..... 5,000 March 1997
March 1996..... 5,000 March 1998
June 1996...... 5,000 June 1997
</TABLE>

The Company has also granted non-qualified stock options to employees.
Such options have been granted at market value, vest within three years from
the date of grant and expire within ten years from the date of grant. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for fiscal
years ended February 24, 1996 and February 22, 1997: dividend yield of 2.0%,
expected volatility of 29.1%, risk-free interest rate of 6.3%, expected
option term of five years, and a forfeiture rate of 25%; for fiscal year
ended February 28, 1998: dividend yield of 2.0%, expected volatility of
29.0%, risk-free interest rate of 5.7%, expected term of five years, and a
forfeiture rate of 25%.

F-12
<PAGE>

A summary of the Company's non-qualified stock option activity and
weighted average exercise prices for the three years ended February 28, 1998
follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------------------------------
FEBRUARY 24, 1996 FEBRUARY 22, 1997 FEBRUARY 28, 1998
-------------------------- -------------------------- -------------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 1,253,500 $13.36 1,057,000 $12.59 878,500 $14.20
Granted.................. 187,500 $13.38 262,500 $13.15 209,500 $16.29
Exercised................ (214,000) $15.21 (337,000) $8.08 (23,667) $12.62
Forfeited................ (170,000) $15.82 (104,000) $15.07 (10,000) $14.25
--------- --------- ---------
Outstanding at end of
year.................... 1,057,000 $12.59 878,500 $14.20 1,054,333 $14.72
========= ========= =========
Options exercisable at
year-end................ 695,667 472,833 628,165
Weighted-avg. fair value
of options granted
during the year......... $2.43 $2.38 $2.85
</TABLE>

The following table summarizes information about stock options outstanding
at February 28, 1998.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED AVG.
REMAINING WEIGHTED WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
RANGE OF EXER. PRICES OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- --------------------- ----------- ---- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$12.25-$18.13......... 1,054,333 7.1 YRS. $14.72 628,165 $14.71
</TABLE>

The Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 50,000 shares of common stock for issuance
thereunder. Prior to the adoption of the 1997 Plan, the Company's 1993 Plan,
which expired during the fiscal year, had a total of 100,000 shares reserved
for issuance. The Company has granted non-qualified stock options to its
non-employee Directors both pursuant to the Plan and outside of the Plan.
These options are granted at market value, vest one year from the date of
grant and expire within ten years from the date of grant. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for fiscal years ended
February 24, 1996 and February 22, 1997: dividend yield of 2.0%, expected
volatility of 29.1%, risk-free interest rate of 6.3%, expected term of five
years, and a forfeiture rate of 6%; for the fiscal year ended February 28,
1998; dividend yield of 2.0%, expected volatility of 29.0%, risk-free
interest rate of 5.7%, expected term of five years, and a forfeiture rate of
6%.

F-13
<PAGE>

A summary of the Company's stock option activity under the Non-Employee
Director Plan, and options granted to non-employee Directors outside the
Plan, for the three years ended February 28, 1998 follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------------------------------
FEBRUARY 24, 1996 FEBRUARY 22, 1997 FEBRUARY 28, 1998
----------------------- ----------------------- ----------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 20,000 $15.25 30,000 $14.79 40,000 $14.19
Granted.................. 10,000 $13.88 10,000 $12.38 20,000 $16.38
Exercised................ 0 -- 0 -- 0 --
Forfeited................ 0 -- 0 -- 0 --
------ ------ ------ ------ ------ ------
Outstanding at end of
year.................... 30,000 $14.79 40,000 $14.19 60,000 $14.92
====== ====== ======
Options exercisable at
year-end................ 20,000 30,000 40,000
Weighted-avg. fair value
of options granted
during the year......... $4.02 $3.61 $4.59
</TABLE>

The following table summarizes information about stock options outstanding
under the Non-Employee Directors Plan, and options granted to non-employee
Directors outside the Plan, at February 28, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
RANGE OF EXER. PRICES OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- --------------------- ----------- ---- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$12.38-$18.00......... 60,000 8.0 YRS. $14.92 40,000 $14.19
</TABLE>

The Company also has an Employee Stock Purchase Plan, with a total of
150,000 shares reserved for issuance. Under the Employee Stock Purchase Plan,
eligible employees can purchase shares of the Company at the end of each
fiscal quarter, at a price equal to 85% of the average price of the stock on
the last trading day of the fiscal quarter. A maximum of 450 shares may be
purchased by an eligible employee in each fiscal year. Under the Plan,
employees elected to purchase 9,450 shares, 13,809 shares, and 9,878 shares
in fiscal 1998, 1997, and 1996, respectively. Pro forma compensation cost
equal to the 15% discount received by employees who purchased shares was
approximately $23,000 in fiscal 1998, $24,000 in fiscal 1997, and $21,000 in
fiscal 1996.

F-14
<PAGE>

10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

FISCAL QUARTERS ENDED
------------------------------------------------------
MAY 24, AUGUST 23, NOVEMBER 22, FEBRUARY 28,
FISCAL 1998 1997 1997 1997 1998
- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................................ $27,748 $37,257 $106,305 $86,914
Income (loss) before income taxes............... (3,602) (629) 14,427 4,544(1)
Net income (loss)............................... (2,377) (415) 9,522 2,998(1)
Net income (loss) per common share--Basic (1) .. (.25) (.04) 1.00 .32(1)
Net income (loss) per common share--Diluted (1). (.25) (.04) .99 .32(1)
Market price of shares outstanding
--market high.................................. 15 15/16 17 1/4 17 1/2 18 5/8
--market low................................... 12 1/2 15 1/2 14 7/8 14 1/8
</TABLE>

FISCAL QUARTERS ENDED
------------------------------------------------------
MAY 25, AUGUST 24, NOVEMBER 23, FEBRUARY 22,
FISCAL 1997 1996 1996 1996 1997
- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................................ $26,313 $32,970 $100,343 $80,428
Income (loss) before income taxes............... (5,466) (3,175) 13,012 3,554
Net income (loss)............................... (3,662) (2,127) 8,646 2,374
Net income (loss) per common share--Basic (1) .. (.38) (.22) .90 .25
Net income (loss) per common share--Diluted (1). (.38) (.22) .90 .25
Market price of shares outstanding
--market high.................................. 15 1/4 14 5/8 13 1/2 13
--market low................................... 12 5/8 10 3/8 10 7/8 11 1/4
</TABLE>
- --------------
(1) Net income (loss) per common share has been restated to comply with
SFAS No. 128 (see Note 1 to the Consolidated Financial Statements).

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
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of February 28, 1998, the
Company had purchased 655,200 shares at a total cost of $9,461,000. The
shares are used by the Company to make the matching contribution to its
Profit Sharing/401(k) Plan, and to issue shares under its 1997 Performance
Unit, Restricted Stock, Non-Qualified and Incentive Stock Option Plan.

F-15
<PAGE>

13. NONCASH FINANCING ACTIVITIES

During fiscal 1996 and 1997, certain non-qualified stock options were
exercised by stock plan participants using noncash consideration. The Company
has received shares of its Common Stock in consideration for the exercise
price and for income taxes required to be withheld. Such stock is reported as
Treasury Stock on the Balance Sheets. The number of Treasury Stock shares
accepted as consideration for such stock option exercises was determined by
the market price of the Company's Common Stock on the exercise dates. These
transactions, for purposes of the Statements of Cash Flows, are deemed to be
noncash financing activities and, as such, have not been reflected on the
Statements.

A summary of activity follows:

<TABLE>
<CAPTION>
CONSIDERATION
--------------------------------
FISCAL OPTIONS EXERCISE LILLIAN VERNON CORP.
YEAR EXERCISED PRICE LOAN COMMON STOCK
---- --------- ----- ---- ------------
<S> <C> <C> <C> <C>
1996..... 112,500 shares $1,766,550 $117,393 95,307 shares
1997..... 180,000 shares $1,440,000 -- 133,759 shares
</TABLE>

14. RECLASSIFICATIONS

Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 1998 presentation.

15. SUBSEQUENT EVENT -- WRITE-OFF -- COMPUTER PROJECT

During the third quarter of fiscal 1999, the Company had a non-recurring
charge related to the termination of the installation of a computer software
package for a new order entry system and wrote off its investment of $1.4
million on a pre-tax basis ($920,000 after-tax). The Company had spent
approximately $1.0 million on the project as of February 28, 1998. The Company
has decided to internally upgrade its existing order entry system; the upgrade
is scheduled to be completed in mid 1999, at a substantially lower cost than
originally anticipated.

F-16
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To 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 28, 1998 and February 22,
1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
February 28, 1998. 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, after the
restatement described in Note 7, present fairly, in all material respects, the
consolidated financial position of Lillian Vernon Corporation and Subsidiaries
as of February 28, 1998 and February 22, 1997, and the consolidated results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 28, 1998, in conformity with generally accepted accounting
principles.

/s/ PricewaterhouseCoopers LLP

New York, New York
April 15, 1998, except for
Notes 7, 14 and 15, as to which the date
is March 10, 1999

F-17

<PAGE>

EXHIBIT 24

CONSENT OF INDEPENDENT ACCOUNTANTS

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,
33-71252, 333-36467, 333-48951, 333-62283 and 333-63559) of our report dated
April 15, 1998, except as to Notes 7, 14 and 15, as to which the date is March
10, 1999, on our audits of the consolidated financial statements of Lillian
Vernon Corporation and Subsidiaries as of February 28, 1998 and February 22,
1997, and for each of the three fiscal years in the period ended February 28,
1998, which report is included in this Annual Report on Form 10-K/A.

/s/ PricewaterhouseCoopers LLP

New York, New York
March 16, 1999

<PAGE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<CASH> 26,136
<SECURITIES> 0
<RECEIVABLES> 22,632
<ALLOWANCES> 0
<INVENTORY> 36,935
<CURRENT-ASSETS> 97,408
<PP&E> 69,625
<DEPRECIATION> 31,802
<TOTAL-ASSETS> 144,359
<CURRENT-LIABILITIES> 23,457
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 116,735
<TOTAL-LIABILITY-AND-EQUITY> 144,359
<SALES> 258,224
<TOTAL-REVENUES> 258,224
<CGS> 124,419
<TOTAL-COSTS> 243,890
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504
<INCOME-PRETAX> 14,740
<INCOME-TAX> 5,012
<INCOME-CONTINUING> 9,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,728
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01

</TABLE>

<PAGE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-22-1997
<PERIOD-END> FEB-22-1997
<CASH> 24,098
<SECURITIES> 0
<RECEIVABLES> 24,476
<ALLOWANCES> 0
<INVENTORY> 30,480
<CURRENT-ASSETS> 91,040
<PP&E> 66,519
<DEPRECIATION> 27,146
<TOTAL-ASSETS> 138,955
<CURRENT-LIABILITIES> 20,301
<BONDS> 1,394
0
0
<COMMON> 104
<OTHER-SE> 113,598
<TOTAL-LIABILITY-AND-EQUITY> 138,955
<SALES> 240,053
<TOTAL-REVENUES> 240,053
<CGS> 110,374
<TOTAL-COSTS> 232,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 651
<INCOME-PRETAX> 7,925
<INCOME-TAX> 2,694
<INCOME-CONTINUING> 5,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,231
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54

</TABLE>

<PAGE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-24-1996
<PERIOD-END> FEB-24-1996
<CASH> 25,771
<SECURITIES> 0
<RECEIVABLES> 21,435
<ALLOWANCES> 0
<INVENTORY> 30,948
<CURRENT-ASSETS> 93,308
<PP&E> 55,751
<DEPRECIATION> 22,886
<TOTAL-ASSETS> 135,626
<CURRENT-LIABILITIES> 16,587
<BONDS> 2,883
0
0
<COMMON> 100
<OTHER-SE> 112,592
<TOTAL-LIABILITY-AND-EQUITY> 135,626
<SALES> 238,192
<TOTAL-REVENUES> 238,192
<CGS> 109,915
<TOTAL-COSTS> 229,732
<OTHER-EXPENSES> 921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 610
<INCOME-PRETAX> 8,243
<INCOME-TAX> 2,634
<INCOME-CONTINUING> 5,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,609
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.56

</TABLE>