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L I L L I A N V E R N O N
operates a seasonal telephone order call center to handle peak season order volume. The
Company receives telephone and Internet orders on a 24-hour basis, seven days a week, with
orders entered directly into the computer. Orders received by mail are opened, compared to
payments, batched and entered into computer terminals.
The Company's telephone representatives conduct upselling and cross-selling, in which
customers are offered merchandise at special prices, or a substitute product if the product they
ordered is unavailable or an additional product related to the one ordered by the customer.
The majority of orders are processed, packed and shipped at the Company's National
Distribution Center. Some products are drop-shipped from vendors directly to customers when
this is the most cost-effective way of satisfying the customer. Approximately 90% of customer
orders were shipped by the U.S. Postal Service in fiscal 2002. The Company also ships orders via
UPS Second Day Air delivery as an option to its customers, for an extra charge. In addition, the
Company ships orders via UPS Next Day Air as an option to Internet customers for an extra
charge.
The Company's National Distribution Center, an 821,000 square foot facility located in Virginia
Beach, Virginia, is owned and operated by the Company's wholly-owned subsidiary, Lillian
Vernon Fulfillment Services, Inc. Almost all of the Company's distribution, and a majority of its
warehousing activities, are conducted at this facility. The National Distribution Center is
generally operated on a five-day-a-week basis, except during the holiday season, when,
depending upon demand, it may operate on a six or seven-day-a-week, three-shift basis.
Personalization of products is also done at the Company's National Distribution Center. The
Company believes that its ability to personalize many types of products using a variety of
personalization techniques, generally within several days' processing time, gives it a unique
niche in the retail marketplace. The Company also owns a 154,000 square foot building in
Virginia Beach used for additional distribution and warehousing space.
The Company continually assesses the need to upgrade the capacity of its telemarketing and
distribution facilities. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
Paper and Mailing Costs
The Company expends significant amounts on paper in the production of its catalogs. The
Company also uses substantial amounts of packing supplies and corrugated boxes to ship its
products. In fiscal 2002, the Company spent approximately $20.6 million in total paper costs and
also spent approximately $54.1 million in mailing catalogs and packages to its customers.
In recent years, the U.S. Postal Service has increased its rates for both the mailing of catalogs and
packages. There have been postal rate increases of 9.1% in late fiscal 2001 and 1.6% in July of
2001. Another increase of approximately 7.5% is scheduled to occur in June 2002. No assurance
can be given that postal rates will not continue to increase in the future. The Company also
