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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-K

(Mark One)

 
/x/
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended January 1, 2000
  OR
 
/ /
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from             to            .

Commission file number 1-11908

DEPARTMENT 56, INC.

(Exact name of registrant as specified in its charter)

 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
 
 
13-3684956
(I.R.S. Employer
Identification No.)
 
One Village Place
6436 City West Parkway
Eden Prairie, MN
(Address of principal executive offices)
 
 
 
55344
(Zip Code)

(612) 944-5600
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each class

 
 
 
Name of each exchange
on which registered

Common Stock, par value $.01 per share   New York 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 is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K / /.

    The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $207,950,546 as of March 21, 2000 (based on the closing price of consolidated trading in the Common Stock on that date as published in Yahoo! Finance). For purposes of this computation, shares held by affiliates and by directors and officers of the registrant have been excluded. Such exclusion of shares held by directors and officers is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

    Number of Shares of Common Stock, par value $.01 per share, outstanding as of March 21, 2000: 14,636,577

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders filed with the Securities and Exchange Commission concurrently with this Form 10-K (the "2000 Proxy Statement") are incorporated by reference in Part III.



FORM 10-K TABLE OF CONTENTS

 
   
  Page
Part I    
Item 1.   Business   1
Item 2.   Properties   7
Item 3.   Legal Proceedings   7
Item 4.   Submission of Matters to a Vote of Security Holders   7
 
Part II
 
 
 
 
Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters   8
Item 6.   Selected Financial Data   9
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   10
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   17
Item 8.   Financial Statements and Supplementary Data   17
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   17
 
Part III
 
 
 
 
Item 10.   Directors and Executive Officers of the Registrant   18
Item 11.   Executive Compensation   18
Item 12.   Security Ownership of Certain Beneficial Owners and Management   18
Item 13.   Certain Relationships and Related Transactions   18
 
Part IV
 
 
 
 
Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K   19
 
Signatures
 
 
 
21



PART I

Item 1. BUSINESS

General

Department 56, Inc. (including its direct and indirect subsidiaries, "Department 56" or the "Company") is a leading designer, importer and distributor of fine quality collectibles and other giftware products sold through gift, home accessory and specialty retailers. The Company is best known for its Village Series of collectible, handcrafted, lit ceramic and porcelain houses, buildings and related accessories in The Original Snow Village® Collection and The Heritage Village Collection® as well as its extensive line of holiday and home decorative accessories, including its Snowbabies™ collectible porcelain and pewter handpainted figurines.

The Company was incorporated in Delaware in 1992 to hold the equity of a Minnesota corporation formed in 1984 under the name "Department 56, Inc.," which has since changed its name to "D 56, Inc." and has continued as the Company's principal operating subsidiary.

The Company seeks complementary businesses that reinforce synergies, allow it to supplement its internal product development and accelerate its penetration into new markets and new channels. In this connection, in the first quarter of fiscal year 2000 the Company completed a $4 million strategic minority investment in 2-Day Designs, Inc., a manufacturer and marketer of high quality accent furniture and wooden accessories sold primarily through furniture, home furnishings, and catalog retailers. Ths Company's focused, multi-faceted strategy is intended to position Department 56 as the premier giftware and collectibles company for the future.

Products

Village Series Products.  Department 56 is best known for its Village Series, several series of collectible, handcrafted, lit ceramic and porcelain houses, buildings and related accessories that depict nostalgic scenes. The Company introduces new lit pieces, limited edition pieces, figurines and other accessories each year to complement and provide continuity to the collections. To allow for these new introductions and to keep each series appropriately balanced, the Company has traditionally retired a number of its existing pieces from production each year. Retirement decisions are based on management's judgment as to, among other things, expected consumer demand, whether a piece continues to fit the evolving design characteristics of a series, manufacturing considerations and importantly injecting an element of surprise.

Village Accessories.  Department 56 also produces a range of accessories for its villages, including figurines, vehicles, landscaping, lighting and other decorative items. The sale of accessories for its Village Series is an important part of the Company's strategy to encourage the continued purchase of its products. Accessories allow collectors to refresh their collections by changing their displays and by creating personalized settings. Many of the accessories can be used interchangeably between the various villages, although certain accessories are designed uniquely for specific villages.

General Giftware.  The Company offers a wide range of other decorative giftware and home accessory items, including the Company's Snowbabies and Snowbunnies® collectible figurines, Candle CrownTM candle extinguishers, Christmas, Easter, and non-seasonal decorative items, tableware, decorative tins, acrylics, "teddy bears" and other "plush" items, and gift bags. Department 56 develops these decorative giftware and home accessories both to satisfy specific consumer demand


and to introduce new product concepts that may develop into important product lines for the Company in the future. Snowbabies figurines, originally introduced in 1987 as part of the Company's general Christmas collection, rapidly became a popular product line and subsequently have achieved their own collectible status. Candle Crown candle extinguishers, introduced in January 2000, provide a new product category to the North American gift and collectible marketplace, and are composed of collections and coordinating accessories which enable continuity purchases. General Giftware products are generally offered as a line of products developed around a central design theme. The Company updates its product offerings twice a year and currently maintains an aggregate of approximately 3,700 stock keeping units, of which approximately 3,100 are General Giftware products.

Customers

The Company's principal customers (accounting for approximately 92% of its sales) are approximately 17,500 independent gift retailers across the United States. These retailers include approximately 1,800 independently owned Gold Key and Showcase Dealers, who receive special recognition and qualify for improved sales terms, and who must satisfy certain requirements, such as maintaining the Company's products on display in an attractive setting for at least six months. Approximately 8% of the Company's sales are made to department stores and mail order houses. No single account represented more than 3% of the Company's sales in fiscal 1999. The Company provides volume discounts to its customers with respect to most of its products. The Company has generally had only limited sales outside the United States. International sales were less than 3% of the Company's sales in fiscal 1999.

As part of the Company's strategy of selective distribution, only approximately 5,900 retailers receive the Company's Village Series and/or Snowbabies products. Certain of the Company's lit Village Series products and porcelain Snowbabies figurines have been sold on allocation for each of the last eleven years and eight years, respectively. The Company periodically evaluates and adjusts its distribution network, and reviews its dealership policies with a view of optimizing both the Company's distribution strategy and the store-level operations of its independent dealers.

Marketing and Advertising

Department 56 sells its products through 8 corporate showrooms and 2 independently operated wholesale showrooms which cover the major giftware market areas in the United States and Canada. The Company's headquarters in Eden Prairie, Minnesota has a 10,000 square-foot atrium showroom where all of its products, including retired Village Series lighted pieces and Snowbabies figurines, are displayed. The Company is also embarking on business to business extranet/e-commerce initiatives in order to develop greater operational efficiencies and merchandising effectiveness for the Company and its retailers in the future. In addition, the Company sells through giftware trade shows throughout the United States. In 1999, the Company opened a retail store in the Mall of America outside Minneapolis which has helped to increase the visibility of the brand and cultivated consumer awareness. The creation of an additional 1 or 2 corporately owned stores during 2000 is currently under consideration. Tests have been conducted of product sales through home television shopping, direct mail, Internet-based retailers and corporate gift programs. The Company intends to maintain flexibility in its marketing and distribution strategies in order to take advantage of opportunities that may develop in the future.


The Company advertises its products to retailers principally through trade journals, giftware trade shows and brochures, and provides merchandising and product information to its collectible product dealers through a periodical newsletter. It advertises to consumers through brochures, point of sale information and seasonal advertisements in magazines and newspapers, and booth presence at major collectibles expos. The Company has also expanded its consumer advertising through use of cooperative advertising with its Gold Key Dealers using various media formats. In addition, the Company publishes and sells Fifty-SixTM, a quarterly consumer-oriented magazine which contains product-related articles and description of its product lines, and maintains an interactive consumer information center on an Internet web site. Department 56 maintains a toll-free telephone line for collector questions and participates in collector conventions. The Company also operates a collectors' club to which consumers of its Snowbabies product line may subscribe for exclusive product offerings and information.

Design and Production

The Company has an ongoing program of new product development. Each year, the Company introduces new products in its existing product lines and also develops entirely new design concepts. The Company endeavors to develop new products which, although not necessarily similar to the products currently marketed by the Company, fit the Company's quality and pricing criteria and can be distributed through the Company's existing marketing and distribution system.

Department 56 believes that its relationships with its manufacturers, and the quality of their craftsmanship, provide a competitive advantage and are a significant contributor to the Company's success. The Company imports most of its products from the Pacific Rim, primarily The People's Republic of China, Taiwan (Republic of China) and The Philippines. The Company also imports a small percentage of its products from sources in India, and occasionally from sources in Europe (primarily Italy, England, Poland and Czechoslovakia). In fiscal 1999, the Company imported products from approximately 150 independent manufacturing sources, some of which are represented by independent trading companies. The Company's single largest manufacturing source represented approximately 10% of the Company's imports in fiscal 1999. The Company's emphasis on high quality craftsmanship at affordable prices limits the sources from which the Company chooses to obtain products. The Company has long-standing relationships with the majority of its manufacturers (many for ten years or more) and often purchases (typically on a year-to-year basis) a manufacturer's entire output for a year. As a result of these relationships, the Company has experienced a low turnover of its manufacturing sources.

The design and manufacture of the Company's Village Series products are complex processes. The path from final conception of the design idea to market introduction typically takes approximately 12 months, although the Company has initiated processes intended to reduce this time substantially. Products other than the Company's collectibles lines can generally be introduced within a few months after a decision is made to produce the product. The Company's Village Series products are principally composed of ceramic and porcelain clays and the Company's other products are designed in a variety of media, including paper, ceramic and resin.

Distribution and Systems

The products sold by the Company in the United States are generally shipped by ocean freight from abroad and then by rail to the Company's two warehouse and distribution centers, each located within


10 miles of the other in the southwest quadrant of the Minneapolis/St. Paul metropolitan area. In April 2000, the Company plans to consolidate its distribution operations from the existing two distribution centers and a storage facility into a new distribution center. Shipments from the Company to its customers are handled by United Parcel Service or commercial trucking lines.

The Company utilizes Year 2000 compliant computer systems to maintain order processing from the time a product enters the Company's system through shipping and ultimate payment collection from its customers. The Company also uses handheld optical scanners and bar coded labels in accepting orders at wholesale showrooms throughout the United States. In addition, computer and communication software systems allow on-line information access between the Company's headquarters and its showrooms, and those systems generally provide direct linkage with the Company's field salesforce.

Backlog and Seasonality

The Company receives products, pays its suppliers and ships products throughout the year, although the majority of shipments historically have occurred in the second and third quarters of each year as retailers stock merchandise in anticipation of the winter holiday season. The Company continues to ship merchandise until mid-December each year. Accordingly, the Company's backlog typically is lowest at the beginning of January. As of January 1, 2000, Department 56 had unfilled wholesale orders of approximately $5.4 million, compared to $4.0 million at January 2, 1999. All of the backlog is scheduled to be shipped to customers during the current fiscal year. Approximately 7% to 8% of the Company's total annual customer orders have been cancelled in each of the last three years for a number of reasons, primarily including inventory shortages and customer credit considerations.

Department 56 experiences a significant seasonal pattern in its working capital requirements and operating results. During the first quarter of each of the last three years, the Company received approximately 65% of its annual orders for such year. The Company offers extended payment terms to many of its customers for seasonal merchandise. Accordingly, the Company collects a substantial portion of its accounts receivable in the fourth quarter. Due to the seasonal pattern of shipping and accounts receivable collection, the Company generally has had greater working capital needs in its second and third quarters and has experienced greater cash availability in its fourth quarter. The Company typically finances its operations through net cash and marketable securities balances, internally generated cash flow and short-term seasonal borrowings. As a result of the Company's sales pattern, the Company has historically recorded a substantial portion of its revenues in its second and third quarters.

Trademarks and other Proprietary Rights

The Company owns twenty-six U.S. trademark registrations and has pending U.S. trademark applications with respect to certain of its logos and brandnames. In addition, the Company from time to time registers selected trademarks in certain foreign countries.

Department 56 regards its trademarks and other proprietary rights as valuable assets and intends to maintain and renew its trademarks and their registrations and vigorously defend against infringement. The U.S. registrations for the Company's trademarks are currently scheduled to expire or be cancelled at various times between 2002 and 2009, but can be maintained and renewed provided that the marks are still in use for the goods and services covered by such registrations.


Competition

Department 56 competes generally for the disposable income of consumers and, in particular, with other producers of fine quality collectibles, specialty giftware and home decorative accessory products. The collectibles area, in particular, is affected by changing consumer tastes and interests. The giftware industry is highly competitive, with a large number of both large and small participants. The Company's competitors distribute their products through independent gift retailers, department stores, televised home shopping networks, internet commerce and mail order houses, or through direct response marketing. The Company believes that the principal elements of competition in the specialty giftware industry are product design and quality, product and brand-name loyalty, product display and price. These elements, as well as presence in large, category-leading retail chains, also apply in the home decor marketplace. The Company believes that its competitive position is enhanced by a variety of factors, including the innovativeness, quality and enduring themes of the Company's products, its reputation among retailers and consumers, its in-house design expertise, its sourcing and marketing capabilities and the pricing of its products. Some of the Company's competitors, however, have greater financial resources and a wider range of products than the Company.

Restrictions on Imports

The Company does not own or operate any manufacturing facilities and imports most of its products from manufacturers in the Pacific Rim, primarily The People's Republic of China, Taiwan and The Philippines. The Company also imports a small percentage of its products from sources in India, and occasionally from sources in Europe (primarily Italy, England, Poland and Czechoslovakia).

The Company's ability to import products and thereby satisfy customer orders is affected by the availability of, and demand for, quality production capacity abroad. The Company competes with other importers of specialty giftware products for the limited number of foreign manufacturing sources which can produce detailed, high-quality products at affordable prices. The Company is subject to the following risks inherent in foreign manufacturing: fluctuations in currency exchange rates; economic and political instability; cost fluctuations and delays in transportation; restrictive actions by foreign governments; nationalizations; the laws and policies of the U.S. affecting importation of goods (including duties, quotas and taxes); and foreign trade and tax laws. In particular, the Company's costs could be adversely affected if the currencies of other countries in which the Company sources product appreciate significantly relative to the U.S. dollar.

Substantially all of the Company's products are subject to customs duties and regulations pertaining to the importation of goods, including requirements for the marking of certain information regarding the country of origin on the Company's products. In the ordinary course of its business, from time to time, the Company is involved in disputes with the U.S. Customs Service regarding the amount of duty to be paid, the value of merchandise to be reported or other customs regulations with respect to certain of the Company's imports, which may result in the payment of additional duties and/or penalties, or which may result in the refund of duties to the Company.

The United States and the countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other charges or restrictions, or adjust presently prevailing quotas, duty or tariff levels, which could adversely affect the Company's financial condition or results of operations or its ability to continue to import products at current or increased levels. In particular, the Company's costs may be increased, or the mix of countries from which it sources its


products may be changed, in the future if countries which are currently accorded "Most Favored Nation" status by the United States cease to have such status or the United States imposes retaliatory duties against imports from such countries. The Company cannot predict what regulatory changes may occur or the type or amount of any financial impact on the Company which such changes may have in the future.

In fiscal 1999, approximately 76% (as compared to approximately 71% in fiscal 1998) of the Company's imports were manufactured in The People's Republic of China, which is accorded "Most Favored Nation" status on a currently temporary basis and generally is not subject to U.S. retaliatory duties. Various commercial and legal practices widespread in The People's Republic of China, including the handling of intellectual properties, as well as certain political and military actions taken or suggested by The People's Republic of China in relation to Taiwan, are under review by the United States government and, accordingly, the duty treatment of goods imported from The People's Republic of China is subject to political uncertainties. To the extent The People's Republic of China may cease to have "Most Favored Nation" status or its exports may be subject to political retaliation, the cost of importing products from such country would increase significantly, and the Company believes that there could be a short-term adverse effect on the Company until alternative manufacturing arrangements were obtained.

Employees

As of January 1, 2000, the Company had 315 full-time employees in the United States, 8 in Canada and 1 in Taiwan. Of the total workforce, approximately 90 are engaged in wholesale sales representation throughout North America and 12 are associated with the Company's corporate-owned retail properties. The Company's 77 U.S.-based warehouse, shipping and receiving personnel employed as of that date are represented by Local Union No. 638 of the Teamsters under a contract that expires on December 31, 2001. The Company believes that its labor relations are good and has never experienced a work stoppage.

Environmental Matters

The Company is subject to various Federal, state and local laws and regulations governing the use, discharge and disposal of hazardous materials. Compliance with current laws and regulations has not had and is not expected to have a material adverse effect on the Company's financial condition. It is possible, however, that environmental issues may arise in the future which the Company cannot now predict.



Item 2. PROPERTIES

The Company owns or leases buildings that contain approximately 777,000 square feet of floor space. The Company's primary corporate showroom, executive offices and creative center are located in Eden Prairie, Minnesota. The Company entered into a lease agreement in April 1999 for a new warehouse and distribution facility in Rogers, Minnesota. The office building in Eden Prairie, Minnesota is owned by the Company and the remainder of the Company's facilities are leased. The following table identifies each of the facilities utilized by the Company's operations.

Facility

  Location
  Lease Expiration Date
  Approximate Number of Square Feet
Executive Offices, Creative Center and Primary Corporate Showroom   Eden Prairie, MN   Company owned facility   66,400
Warehouse and Distribution Facility   Rogers, MN   6-30-2010   333,700
Warehouse and Distribution Facility   Eden Prairie, MN   3-31-2001   150,000
Warehouse and Distribution Facility   Bloomington, MN   2-28-2002   159,000
Showroom   Atlanta, GA   12-31-2006   12,946
Showroom   Chicago, IL   11-30-2006   7,480
Showroom   Dallas, TX   1-31-2007   9,143
Showroom   Los Angeles, CA   12-31-2002   6,600
Retail store   Bloomington, MN   4-30-2009   10,200
Showroom   Minnetonka, MN   10-31-2007   5,144
Showroom   New York, NY   12-31-2005   10,300
Showroom   Fairfax, VA   12-31-2003   4,300
Showroom   Bedford, MA   6-30-2004   1,800

Item 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings, claims and governmental audits in the ordinary course of its business. In the opinion of the Company's management, the ultimate disposition of these proceedings, claims and audits will not have a material adverse effect on the financial position or results of operations of the Company.


Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during the last quarter of the year ended January 1, 2000.



PART II


Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Department 56's common stock is currently traded on the New York Stock Exchange ("NYSE") under the symbol "DFS." The table below sets forth the high and low sales prices as reported by the NYSE.

 
  High
  Low
Fiscal 1999        
First quarter   37.88   29.44
Second quarter   33.31   24.50
Third quarter   29.00   23.63
Fourth quarter   24.81   18.31
 
Fiscal 1998
 
 
 
 
 
 
 
 
First quarter   39.00   26.63
Second quarter   39.31   32.19
Third quarter   36.75   26.25
Fourth quarter   37.63   22.94

The Company has not declared or paid dividends on its Common Stock. The Company does not anticipate paying dividends in the foreseeable future. As a holding company, the ability of the Company to pay cash dividends will depend upon the receipt of dividends or other payments from its subsidiaries.

As of March 21, 2000, the number of holders of record of the Company's Common Stock was 880.



Item 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data for the years ended January 1, 2000, January 2, 1999, January 3, 1998, December 28, 1996, and December 30, 1995 should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and related Notes thereto, included elsewhere herein.

 
  January 1,
20001

  January 2,
19991

  January 3,
19981

  December 28,
19961

  December 30,
19951

 
 
  (In thousands, except per share amounts)

 
STATEMENTS OF INCOME                                
Net sales   $ 245,856   $ 243,365   $ 219,496   $ 228,775   $ 252,047  
Cost of sales     103,803     100,782     94,040     95,190     110,008  
   
 
 
 
 
 
Gross profit     142,053     142,583     125,456     133,585     142,039  
Operating expenses:                                
Selling, general and administrative2     61,542     56,648     49,772     47,853     45,017  
Amortization of goodwill, trademarks and other intangibles     5,145     4,926     4,577     4,577     4,577  
   
 
 
 
 
 
Total operating expenses     66,687     61,574     54,349     52,430     49,594  
   
 
 
 
 
 
Income from operations     75,366     81,009     71,107     81,155     92,445  
Other expense (income):                                
Interest expense     6,719     4,817     4,362     6,063     9,582  
Gain on sale of aircraft3             (2,882 )        
Other, net     (153 )   (397 )   (1,086 )   (648 )   (439 )
   
 
 
 
 
 
Income before income taxes and extraordinary item     68,800     76,589     70,713     75,740     83,302  
Provision for income taxes     26,144     30,073     27,932     29,796     33,737  
   
 
 
 
 
 
Income before extraordinary item     42,656     46,516     42,781     45,944     49,565  
Extraordinary charge due to refinancing of debt4                     1,312  
   
 
 
 
 
 
Net income   $ 42,656   $ 46,516   $ 42,781   $ 45,944   $ 48,253  
Income before extraordinary item per common share assuming dilution   $ 2.45   $ 2.45   $ 2.05   $ 2.11   $ 2.28  
Net income per common share assuming dilution   $ 2.45   $ 2.45   $ 2.05   $ 2.11   $ 2.22  
 
BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Working capital   $ 32,289   $ 29,276   $ 40,857   $ 67,997   $ 36,015  
Total assets     287,108     233,283     259,695     285,733     259,085  
Total debt     102,500     20,000     40,000     60,000     80,000  
Total stockholders' equity5     152,924     178,735     186,655     196,757     150,286  
1
The years ended December 30, 1995, December 28, 1996, January 2, 1999 and January 1, 2000 were 52-week periods, and the year ended January 3, 1998, was a 53-week period.

2
Selling, general and administrative expenses for the year ended December 30, 1995 included $2,872 of net customs duties refunds and related interest. The refunds pertained principally to certain merchandise imported into the United States from 1989 to 1994.

3
See Note 6 to the Consolidated Financial Statements.

4
During February 1995, the Company entered into a credit agreement and recorded an extraordinary charge of $1,312, net of income taxes, to write-off deferred financing costs.

5
The Company has not declared or paid dividends on its Common Stock. The Company does not anticipate paying dividends in the foreseeable future. As a holding company, the ability of the Company to pay cash dividends will depend upon the receipt of dividends or other payments from its subsidiaries.



Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the results of operations and financial condition should be read in conjunction with the Department 56, Inc. Consolidated Financial Statements and related Notes thereto, included elsewhere herein.

 
  1999
  1998
  1997
 
 
  (In millions, except per share amounts)

 
 
  Dollars
  Percent of
Net Sales

  Dollars
  Percent of
Net Sales

  Dollars
  Percent of
Net Sales

 
Net sales   $ 245.9   100 % $ 243.4   100 % $ 219.5   100 %
Gross profit     142.1   58     142.6   59     125.5   57  
Selling, general and administrative expenses     61.5   25     56.6   23     49.8   23  
Amortization of goodwill, trademarks and other intangibles     5.2   2     4.9   2     4.6   2  
Income from operations     75.4   31     81.0   33     71.1   32  
Interest expense     6.7   3     4.8   2     4.4   2  
Gain on sale of aircraft                 (2.9)   (1 )
Other, net     (.2)       (.4)       (1.1)   (1 )
Income before income taxes     68.8   28     76.6   31     70.7   32  
Provision for income taxes     26.1   11     30.1   12     27.9   13  
Net income     42.7   17     46.5   19     42.8   19  
Net income per common share assuming dilution     2.45         2.45         2.05      
Operating cash flow1     84.9         88.7         81.7      
1
Operating cash flow represents earnings before interest, income taxes, depreciation and amortization. Operating cash flow is used by management and certain investors as an indicator of a company's historical ability to service debt. However, operating cash flow is not intended to represent cash flow from operations for the period, nor has it been presented as an alternative to either (i) operating income (as determined by GAAP) as an indicator of operating performance or (ii) cash flow from operating, investing and financing activities (as determined by GAAP). Operating cash flow is, therefore, susceptible to varying calculations and, as presented, may not be comparable to other similarly titled measures of other companies.

COMPARISON OF RESULTS OF OPERATIONS 1999 TO 1998

Net Sales—Net sales increased $2.5 million, or 1%, from $243.4 million in 1998 to $245.9 million in 1999. The increase in sales was principally due to an increase in sales volume, offset partially by an increase in the amount provided for returned product. Sales of Village Series products increased 5% from 1998 to 1999, while General Giftware product sales decreased 6% during the same period. Village Series products continued to account for the most significant portion of the Company's sales, 67% in 1999 versus 65% in 1998.

Gross Profit—Gross Profit decreased $.5 million, or less than 1%, between 1998 and 1999. Gross profit as a percentage of sales decreased from 58.6% in 1998 to 57.8% in 1999, principally due to an increase in the amount provided for returned product.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $4.9 million, or 9%, between 1998 and 1999. The increase is principally due to a 31% increase in distribution expenses, a 12% increase in marketing expenses and a 2% increase in administrative expenses. The increase in distribution expense was principally due to a $.9 million charge related to the Company's consolidation of its two current distribution centers and a storage facility into one new distribution center in 2000, and a 63% increase in temporary labor due to the shipping difficulties


experienced as a result of the implementation of the Company's new integrated computer system. The increase in administrative expenses is principally due to an increase in bad debt expense, the write-off of failed acquisition costs, an increase in showroom expense as a result of the Company's acquisition of showrooms during 1999 and 1998, an increase in depreciation expense associated with the implementation of the integrated computer system, and expenses associated with the operation of the Company's first retail store. These increases were principally offset by a decrease in commission expense due to the acquisition of showrooms, a decrease in bonus expense and a decrease in other administrative expenses. Selling, general and administrative expenses as a percentage of sales was 23% and 25% during 1998 and 1999, respectively.

Income from Operations—Income from operations decreased $5.6 million, or 7%, from 1998 to 1999 due to the factors described above. Operating margins decreased from 33% of net sales in 1998 to 31% of net sales in 1999.

Interest Expense—Interest expense increased $1.9 million, or 40%, between 1998 and 1999 principally due to increased borrowings under the revolving credit agreement. Additional borrowings were required as a result of slower cash collections which were impacted by the timing and manner in which invoices, shipping documents and statements were mailed to customers as a result of the implementation of the new integrated computer system. Additional borrowings were also required due to increased capital expenditures.

Provision for Income Taxes—The effective income tax rate was 39.3% and 38.0% during 1998 and 1999, respectively.


COMPARISON OF RESULTS OF OPERATIONS 1998 TO 1997

Net Sales—Net sales increased $23.9 million, or 11%, from $219.5 million in 1997 to $243.4 million in 1998. This increase was due principally to an increase in volume. Sales of Village Series products increased 13% from 1997 to 1998, while General Giftware product sales increased 7% during the same period. Village Series products continued to account for the most significant portion of the Company's sales, 65% in 1998 versus 64% in 1997.

Gross Profit—Gross Profit increased $17.1 million, or 14%, between 1997 and 1998. Gross profit as a percentage of sales increased from 57.2% in 1997 to 58.6% in 1998, principally due to a change in the mix of product shipped during 1998 as compared to 1997 and the benefit derived from selling directly to the Canadian market.

Selling, General and Administrative Expenses—Selling, general and administrative expenses increased $6.9 million, or 14%, between 1997 and 1998 principally due to a 45% increase in marketing expenses, a 19% increase in distribution expenses, and a 6% increase in administrative expense. Selling, general and administrative expenses as a percentage of sales was 23% in both 1997 and 1998.

Income from Operations—Income from operations increased $9.9 million, or 14%, from 1997 to 1998 due to the factors described above. Operating margins increased from 32% of net sales in 1997 to 33% of net sales in 1998.

Interest Expense—Interest expense increased $.5 million, or 10%, between 1997 and 1998 principally due to increased borrowings under the revolving credit agreement, offset by a decrease in interest


expense from the repayment of $20 million of debt in December 1997. Borrowings under the revolving credit agreement increased as a result of the timing of stock repurchases and the increase in capital expenditures and acquisitions.

Provision for Income Taxes—The effective income tax rate was 39.5% and 39.3% during 1997 and 1998, respectively.


SEASONALITY

Historically, principally due to the timing of wholesale trade shows early in the calendar year and the limited supply of the Company's products, the Company has received the majority of its total annual customer orders during the first quarter of each year. The Company entered 65% of its total annual customer orders for both 1999 and 1998, during the first quarter of each of those years. Cancellations of total annual customer orders were approximately 8% and 7% in 1999 and 1998, respectively.

The Company shipped and recorded as net sales (net of returns, allowances and cash discounts), approximately 87% and 91% of its annual customer orders in 1999 and 1998, respectively. Orders not shipped in a particular year, net of cancellations, are carried into backlog for the following year and have historically been orders for Spring and Easter products. The Company's backlog was $5.4 million and $4.0 million at January 1, 2000 and January 2, 1999, respectively.

The Company receives products, pays its suppliers and ships products throughout the year, although historically the majority of shipments occur in the second and third quarters as retailers stock merchandise in anticipation of the holiday season. As a result of this seasonal pattern, the Company generally records its highest sales during the second and third quarters of each year. The Company expects this seasonal pattern to continue for the foreseeable future. The Company can experience fluctuations in quarterly sales growth and related net income compared with the prior year due to the timing of receipt of product from suppliers and subsequent shipment of product from the Company to customers, as well as the timing of orders placed by customers. The Company is not managed to maximize quarter-to-quarter results, but rather to achieve broader, long-term annual growth consistent with the Company's business strategy.

 
  1999
  1998
 
 
 
 
 
1st Qtr.

 
 
 
2nd Qtr.

 
 
 
3rd Qtr.

 
 
 
4th Qtr.

 
 
 
Total

 
 
 
1st Qtr.

 
 
 
2nd Qtr.

 
 
 
3rd Qtr.

 
 
 
4th Qtr.

 
 
 
Total

Customer orders entered1   $ 182.3   $ 47.7   $ 39.9   $ 11.4   $ 281.3   $ 173.7   $ 50.0   $ 37.1   $ 7.7   $ 268.5
Net sales     33.7     82.7     75.1     54.4     245.9     49.0     69.9     71.5     52.9     243.4
Gross profit     19.9     49.2     44.1     28.8     142.1     28.4     41.2     41.7     31.2     142.6
Selling, general and administrative expenses     12.5     16.5     16.5     16.1     61.5     11.6     13.6     14.3     17.1     56.6
Amortization of goodwill, trademarks and other intangibles     1.3     1.3     1.3     1.3     5.2     1.2     1.3     1.3     1.3     4.9
Income from operations     6.2     31.5     26.3     11.4     75.4     15.7     26.3     26.1     12.9     81.0
Net income     3.3     18.7     15.0     5.6     42.7     9.2     15.4     15.0     6.9     46.5
Net income per common share assuming dilution2     0.18     1.04     0.87     0.35     2.45     0.47     0.80     0.81     0.38     2.45
1
Customer orders entered are orders received and approved by the Company, subject to cancellation for various reasons including credit considerations, inventory shortages, and customer requests.

2
See Note 11 to the Consolidated Financial Statements.



LIQUIDITY AND CAPITAL RESOURCES

In March 1999, the Company entered into a new credit agreement providing a $100 million revolving credit facility and a $150 million revolver/term loan. The $150 million revolver/term loan converts to a four-year term loan after one year.

The Company used the proceeds of the revolver/term loan to refinance the remaining $20 million term loan under its former credit agreement. In connection therewith, the Company recorded $1.7 million in deferred financing fees, which are being amortized over the life of the credit agreement.

The revolving credit facility provides for borrowings of up to $100 million including letters of credit. The letters of credit are issued primarily in connection with inventory purchases. The credit agreement contains numerous financial and operating covenants, including restrictions on incurring indebtedness and liens, selling property and paying dividends. In addition, the Company is required to satisfy consolidated net worth, interest coverage ratio and leverage ratio tests, in each case at the end of each fiscal quarter. None of these restrictions are expected to have a material adverse effect on the Company's ability to operate in the future.

During the first quarter of 2000, the Company borrowed an additional $90 million of term debt under its current credit facility. As of March 17, 2000, the total term debt outstanding is $150 million. All term debt is four-year term debt which requires annual amortization payments of 15%, 20%, 25%, and 40% due March 2001, 2002, 2003, and 2004, respectively. The proceeds will be used primarily to fund the Company's share repurchase program, other strategic initiatives, and general corporate purposes.

The Company believes that its internally generated cash flow and seasonal borrowings under the revolving credit facility will be adequate to fund operations and capital expenditures for the next 12 months.

Consistent with customary practice in the giftware industry, the Company offers extended accounts receivable terms to many of its customers. This practice has typically created significant working capital requirements in the second and third quarters which the Company has generally financed with available cash, internally generated cash flow and seasonal borrowings. The Company's cash and cash equivalents balances peak in December, following the collection in November and December of accounts receivable with extended payment terms.

Accounts receivable increased from $26.2 million at January 2, 1999 to $65.6 million at January 1, 2000. The increase in accounts receivable was principally due to lower cash collections which were impacted by the timing and manner in which invoices, shipping documents and statements were mailed to customers as a result of the implementation of the Company's integrated computer system. As of March 18, 2000, the Company's accounts receivable were $69.1 million, as compared to a comparable historical balance of less than $40 million. Management believes there is adequate provision for any doubtful accounts receivable and sales returns that may arise.

Capital expenditures were $16.4 million, $6.8 million, and $7.8 million for 1999, 1998 and 1997, respectively. Included in 1999 and 1998 capital expenditures is $7.7 million and $4.1 million, respectively, incurred in connection with the Company's implementation of its integrated computer system. The new integrated system significantly updates the Company's predecessor information system capabilities and eliminated the Year 2000 issues for the Company's primary business systems. During 1999, capital expenditures related to the Company's new distribution facility and the


Company's first retail store totaled $5.7 million and $2.0 million, respectively. Included in 1997 capital expenditures is $4.9 million in connection with the Company's exercise of a purchase option under its aircraft lease agreement. See Note 6 to the Consolidated Financial Statements.

During 1999, the Company acquired substantially all of the assets of the independent sales representative organizations that represented the Company's products in Massachusetts and several other eastern states, Minnesota and several other midwestern states and Texas and several surrounding southern states. The cost of these acquisitions was $4.0 million.

During 1998, the Company acquired substantially all of the assets of the independent sales representative organizations that represented the Company's products in California and several surrounding western states and New York and several surrounding eastern states. Also during 1998, the Company acquired the inventory and certain other assets of its Canadian distributor. The cost of these acquisitions was $4.7 million.

In April 1999, the Company executed a lease for a new distribution center in Minnesota. The lease provides for a 10-year term, with options to renew the lease, as well as to expand and/or acquire the facility. During 2000, the Company will consolidate its two current distribution centers and storage facility into the new distribution center. Estimated costs of $.9 million (pre-tax) were recorded in 1999 related to noncancelable lease contracts associated with the existing rented facilities.

Operating cash flow, defined as earnings before interest, income tax, depreciation, and amortization expenses, decreased $3.8 million, or 4%, from $88.7 million in 1998 to $84.9 million in 1999. The decrease was principally due to the decrease in net income.

The Company has a stock repurchase program. On May 10, 1999, the Board of Directors of the Company authorized the repurchase in open market and privately negotiated transactions of up to an additional 3.0 million shares valid through the end of the Company's 2000 fiscal year. On December 15, 1999, the Board of Directors approved an additional $75 million authorization valid through the end of the Company's 2000 fiscal year. The timing, prices and amounts of shares repurchased will be determined at the discretion of the Company's management and subject to continued compliance with the Company's credit facilities. Under the program, the Company repurchased in the open market 2.9 million shares during 1999 at a weighted average price of $24 per share. The Company is authorized to repurchase an additional 0.7 million shares, in addition to the $75 million authorization, through the end of 2000.


YEAR 2000

On January 3, 1999, the Company substantially implemented a new integrated computer system, which replaced its primary operating and financial computing systems and allowed the Company to substantially address Year 2000 requirements. While the implementation did negatively impact the Company in fiscal 1999 and is expected to present increased expense in fiscal 2000, as of March 21, 2000, the Company has not experienced and does not anticipate any adverse effects on the Company's systems and operations as a result solely of Year 2000 compliance issues. Further, as of March 21, 2000, the Company has not experienced any operating problems or product failures as a result of Year 2000 compliance issues with its vendors, service providers, or customers.


Total expenditures for implementation of the integrated computer system were approximately $12 million, of which, approximately $8 million and $4 million were incurred during 1999 and 1998, respectively. Hardware, software, internal labor costs, and certain project costs were capitalized and will be amortized over their useful lives. All other costs were expensed as incurred.


FOREIGN EXCHANGE

The dollar value of the Company's assets abroad is not significant. Substantially all of the Company's sales are denominated in U.S. dollars and, as a result, are not subject to changes in exchange rates.

The Company imports its product from manufacturers located in the Pacific Rim, primarily China, Taiwan (Republic of China), and The Philippines. These transactions are principally denominated in U.S. dollars, except for imports from Taiwan which are principally denominated in New Taiwan dollars. The Company, from time to time, will enter into foreign exchange contracts or build foreign currency deposits as a partial hedge against currency fluctuations. The Company intends to manage foreign exchange risks to the extent possible and take appropriate action where warranted. The Company's costs could be adversely affected if the currencies of the Countries in which the manufacturers operate appreciate significantly relative to the U.S. dollar.

EFFECT OF INFLATION

The Company continually attempts to minimize any effect of inflation on earnings by controlling its operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a material impact on the Company's results of operations.

RECENT DEVELOPMENTS

On February 23, 2000, the Company issued a press release stating in relevant part: "We continue to see this year as a rebuilding year with our dealers... Dealer orders through February 19 were down approximately 8% against the comparable period in the prior year. Year-to-date Village orders were approximately 10% behind the comparable period in the prior year, while General Giftware orders were down approximately 3%. The Company stated that excluding the impact of the special one-time Customer Appreciation Discount that it has offered on early orders for most product categories, as announced in December 1999, dealer orders would be down only approximately 4%." The press release also noted, "While we are disappointed with the pace of our current orders, many of our customers have expressed confidence that we will be able to ship in a more timely fashion, enabling them to reorder more frequently. Our own successful initiative to, for the first time, have actual samples for all of our Village lines at the early gift shows, coupled with earlier product availability, may support or reinforce this belief of our dealers. This potential change in our historical order pattern, combined with other analyses, suggests that the gap in our order trends may close as we progress through the year. It is important to keep in mind that, as history has shown, where we are in terms of orders at this point in the year is not necessarily indicative of where we will end up at the end of the first quarter or even the year."

The press release further stated: "The Company expects certain costs that impacted its 1999 results to continue in fiscal 2000, primarily related to the ongoing information systems implementation and distribution facility consolidation costs. In addition, continued strategic investments in the Company's infrastructure, including business-to-business e-commerce initiatives, are expected to result in higher costs in fiscal 2000 in order to position greater operational efficiencies and


merchandising effectiveness for the Company and its dealers in the future. As a result, the Company believes that fiscal 2000 earnings per share will be below that of fiscal 1999 results, excluding the impact of its stock repurchase initiatives..."

"I am pleased to report that our systems have performed well during the gift shows and that our shipping and invoicing operations are back to normal. Feedback from our dealers suggests that they view our current product offering as one of the strongest ever," Ms. Engel continued. "We continue to be excited about the quality and breadth of our product development capabilities."

"We maintain our belief that investment in our infrastructure is necessary to sustain our industry leadership, maximize long-term growth and create value for our shareholders. Therefore, we remain committed to investing in programs that insure the success of our current dealer base. At the same time, we will continue to look toward other avenues that will allow us to leverage our current skills and achieve our growth objectives."

Additionally, the Company announced it completed a $4 million strategic minority investment in 2-Day Designs, Inc., a manufacturer and marketer of high quality accent furniture and wooden accessories sold primarily through furniture, home furnishings, and catalog retailers. "We are excited about the opportunity that we have to partner with an organization that possesses a creative skill set much like ours. The management of 2-Day has proven success in marketing differentiated products, and we are excited about the access to new channels that this investment creates," said Ms. Engel. The terms of the transaction were not disclosed.

On Form 8-K dated February 25, 2000, the Company stated: "In addition to the statements contained in the press release, the Company expects that its fiscal 2000 Gross Margin Rate (i.e., the amount that Gross Profit represents as a percentage of Net Sales) will approximate or slightly exceed its fiscal 1999 Gross Margin Rate. The Company expects that its fiscal 2000 Selling, General & Administrative expenses (SG&A) will reflect approximately $7 million in infrastructure and strategic initiative expenses in addition to the Company's usual and customary SG&A expenses. The expected incremental infrastructure and strategic initiative expenses are attributable primarily to costs associated with the Company's ongoing information systems implementation, distribution facility consolidation and direct retail initiatives, as well as a new business-to-business e-commerce initiative. The Company also notes that a reduced base of Net Sales for fiscal 2000 would imply a current year deleveraging of its total SG&A expenses."

The federal securities laws provide "safe harbor" status to certain statements that go beyond historical information and which may provide an indication of future results. Any conclusions or expectations expressed in, or drawn from, the statements in the press release or the Form 8-K or throughout this annual report concerning matters that are not historical corporate financial results are "forward-looking statements" that involve risks and uncertainties.

The Company's expectations regarding 2000 earnings per share are based on the Company's 2000 expectations for sales and operating margin. The Company's sales expectations for 2000 are based on the Company's current forecast of dealer orders and planned sales through its retail arm, and is further dependent on the timing and extent of promotional and marketing efforts undertaken by the Company as well as the timing and extent of product receipts and shipments, the efficiency of information systems developed to collect, compile and execute customer orders, and retailer and consumer demand. Dealer orders have principally been dependent on the amount, quality and market acceptance of the new product introductions and retailer demand, but order patterns have


historically varied in number, mix and timing, and there can be no assurance that the year-to-date order levels or trends will not deteriorate, or that they will exhibit levels or trends supportive of a shift toward greater orders later in the year. Moreover, the Company's order forecasting model is dependent on assumptions concerning retail inventory levels, consumer demand, and dealer expectations. The Company's operating margin may be impacted by, amongst other factors, shifts in product mix and/or gross margin, exchange rate fluctuations with countries the Company imports from, changes in freight rates and changes in the Company's historical selling, general and administrative expense rate, including bad debts.

If not otherwise mentioned, other factors, including consumer acceptance of new products; product development efforts; identification and retention of sculpting and other talent; completion of third party product manufacturing; dealer reorders and order cancellations; control of operating expenses; corporate cash flow application, including share repurchases; cost of debt capital; functionality of information, operating and distribution systems; identification, completion and results of acquisitions, investments, and other strategic business initiatives; capital expenditures and depreciation, and the timing thereof; grants of stock options or other equity equivalents; actual or deemed exercises of stock options; and industry, general economic, regulatory, transportation, and international trade and monetary conditions, can significantly impact the Company's sales, earnings and earnings per share. Actual results may vary materially from forward-looking statements and the assumptions on which they are based. The Company undertakes no obligation to update or publish in the future any forward-looking statements.


Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is included in Management's Discussion and Analysis on page 10, and Note 1 to the Consolidated Financial Statements.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements on page F-1 herein.


Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.



PART III


Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item is included in the 2000 Proxy Statement in the sections captioned "Item 1 — Election of Directors — Nominees for Terms Ending at the 2001 Annual Meeting of Stockholders" and "Biographical Information Regarding Executive Officers," and such information is incorporated herein by reference.


Item 11. EXECUTIVE COMPENSATION

Information required by this Item is included in the 2000 Proxy Statement in the section captioned "Further Information Concerning the Board of the Directors and Committees — Compensation Committee Interlocks and Insider Participation" and "— Director Compensation" and in the section captioned "Compensation of Executive Officers" (other than the subsection thereof captioned "Compensation Committee and Stock Incentive Committee Report on Executive Compensation" and "Performance Graph"), and such information (other than the subsections thereof captioned "Compensation Committee Report on Executive Compensation" and "Performance Graph") is incorporated herein by reference.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item is included in the 2000 Proxy Statement in the section captioned "Security Ownership of Certain Beneficial Owners and Management," and such information is incorporated herein by reference.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Note 9 to the Consolidated Financial Statements on page F-13.



PART IV


Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The Exhibits, and other documents filed as part of this Annual Report on Form 10-K, including those exhibits which are incorporated by reference herein, are:

 
 
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Page

(a)   1.   Financial Statements.    
 
 
 
 
 
 
 
 
 
Management's Responsibility for Financial Reporting
 
 
 
F-1
 
 
 
 
 
 
 
 
 
Independent Auditors' Report
 
 
 
F-2
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of January 1, 2000 and January 2, 1999
 
 
 
F-3
 
 
 
 
 
 
 
 
 
For the years ended January 1, 2000, January 2, 1999 and January 3, 1998:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income
 
 
 
F-4
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows
 
 
 
F-5
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Stockholders' Equity
 
 
 
F-6
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
F-7
 
 
 
 
 
2.
 
 
 
Financial Statement Schedule
 
 
 
 
 
 
 
 
 
 
 
 
 
II.
 
 
 
Valuation and Qualifying Accounts
 
 
 
S-1

    All other schedules have been omitted because they are not applicable.

 
 
 
 
 
3.
 
 
 
Exhibits
 
 
 
 
 
 
 
 

    Exhibits required in connection with this Annual Report on Form 10-K are listed below.

 
Exhibit
 
 
 
Description

3.1   Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. SEC File no.  1-11908)
 
3.2
 
 
 
Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company. (Incorporated herein by reference to Exhibit 1.1 of Registrant's Amendment No. 1, dated May 12, 1997, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
 
3.3
 
 
 
Restated By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 of Registrant's Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2 of Registrant's Current Report on Form 8-K dated February  15, 1996. SEC File no. 1-11908)
 
4.1
 
 
 
Specimen form of Company's Common Stock certificate. (Incorporated herein by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. SEC File no. 1-11908)
 
4.2
 
 
 
Rights Agreement (including Exhibits A, B and C thereto), dated as of April 23, 1997, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 1 of Registrant's Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
 
4.3
 
 
 
First Amendment, dated as of March 13, 1998, to Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 1 to Registrant's Amendment No. 2, dated March 16, 1998, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
 
 
 
 
 
 


 
4.4
 
 
 
Amendment No. 2 to Rights Agreement, dated as of February 25, 1999, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 99.2 of Registrant's Current Report on Form 8-K dated February 26, 1999, SEC File No. 1-11908)
 
10.1
 
 
 
Department 56, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of Registrant's Registration Statement on Form S-1, No. 33-61514.)†
 
10.2
 
 
 
Form of Stock Option Agreement in connection with the 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-1, No. 33-61514.)†
 
10.3
 
 
 
Form of Outside Directors Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. SEC File no. 1-11908)†
 
10.4
 
 
 
Lease Agreement dated April 14, 1999 between D 56, Inc. and Ryan Companies US, Inc. pertaining to the Rogers warehouse and distribution facility.*
 
10.5
 
 
 
Guaranty of Lease dated April 14, 1999 between the Company and Ryan Companies US, Inc. pertaining to the Rogers warehouse and distribution facility.*
 
10.6
 
 
 
Credit Agreement, dated as of March 19, 1999 among the Company, the Banks parties thereto, ABN Amro Bank N.V. and The First National Bank of Chicago, as documentation agents, U.S. Bank National Association, as managing agent, and The Chase Manhattan Bank, as administrative agent. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. SEC File No. 1-11908)
 
10.7
 
 
 
First Amendment to the Credit Agreement, dated as of January 27, 2000 among the Company, the Banks parties thereto, ABN Amro Bank N.V. and Bank One NA, as documentation agents, U.S. Bank National Association, as managing agent, and The Chase Manhattan Bank, as administrative agent.*
 
10.8
 
 
 
Guarantee and Collateral Assignment, dated as of March 19, 1999, by the Company and certain of its direct or indirect subsidiaries in favor of The Chase Manhattan Bank. (Incorporated herein by reference to Exhibit 10.8 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. SEC File No. 1-11908)
 
10.9
 
 
 
Form of Indemnification Agreement between the Company and its directors and executive officers. (Incorporated herein by reference to Exhibit 10.24 of Registrant's Registration Statement on Form S-1, No. 33-61514.)
 
10.10
 
 
 
Department 56, Inc. 1993 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.25 of Registrant's Registration Statement on Form S-1, No. 33-61514.)†
 
10.11
 
 
 
Department 56, Inc. 1995 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.18 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. SEC File no. 1-11908)†
 
10.12
 
 
 
Department 56, Inc. 1997 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 4.4 of Registrant's Registration Statement on Form S-8, No. 333-41639.)†
 
10.13
 
 
 
Form of Executive Stock Option Agreement in connection with Department 56, Inc. 1993 Stock Incentive Plan, Department 56, Inc. 1995 Stock Incentive Plan, and Department 56, Inc. 1997 Stock Incentive Plan.*†
 
10.14
 
 
 
Form of Executive Performance Share Agreement in connection with Department 56, Inc. 1993, 1995 and 1997 Stock Incentive Plans.*†
 
10.15
 
 
 
Department 56, Inc. Annual Cash Incentive Program. (Incorporated herein by reference to Exhibit 10.25 of Registrant's Annual Report on Form 10-K for the year ended January 3, 1998. SEC File no. 1-11908)†
 
21.1
 
 
 
Subsidiaries of the Company.*
 
23.1
 
 
 
Independent Auditors' Consent.*
 
 
 
 
 
 


 
27.1
 
 
 
Financial Data Schedule. (accompanies EDGAR electronic format only)*

† Management contract or compensatory plan

* Filed herewith

 
(b)
 
 
 
Reports on Form 8-K
 
 
 
 
 
 
 
 

    No reports on Form 8-K were filed during the fourth quarter of the year ended January 1, 2000.



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    Department 56, Inc.
 
Date: March 29, 2000
 
 
 
By:
 
/s/ 
SUSAN E. ENGEL   
Susan E. Engel
Chairwoman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 
Signature

 
 
 
Capacity in which signed

 
 
 
Date

 
 
 
 
 
 
 
 
 
 
/s/ SUSAN E. ENGEL   
Susan E. Engel
  Chairwoman of the Board, Chief Executive Officer and Director
(Principal Executive Officer)
  March 29, 2000
 
/s/ 
PERCY C. TOMLINSON, JR.   
Percy C. Tomlinson, Jr.
 
 
 
Chief Financial Officer and
Executive Vice President (Principal Financial Officer)
 
 
 
March 29, 2000
 
/s/ 
GREGG A. PETERS   
Gregg A. Peters
 
 
 
Director — Finance and
Principal Accounting Officer
(Principal Accounting Officer)
 
 
 
March 29, 2000
 
/s/ 
PETER K. BARKER   
Peter K. Barker
 
 
 
Director
 
 
 
March 29, 2000
 
/s/ 
JAY CHIAT   
Jay Chiat
 
 
 
Director
 
 
 
March 29, 2000
 
/s/ 
MAXINE CLARK   
Maxine Clark
 
 
 
Director
 
 
 
March 29, 2000
 
/s/ 
WM. BRIAN LITTLE   
Wm. Brian Little
 
 
 
Director
 
 
 
March 29, 2000
 
/s/ 
GARY S. MATTHEWS   
Gary S. Matthews
 
 
 
Director
 
 
 
March 29, 2000
 
/s/ 
STEVEN G. ROTHMEIER   
Steven G. Rothmeier
 
 
 
Director
 
 
 
March 29, 2000
 
/s/ 
VIN WEBER   
Vin Weber
 
 
 
Director
 
 
 
March 29, 2000



MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

Management is responsible for the preparation and accuracy of the consolidated financial statements and other information included in this report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles using, where appropriate, management's best estimates and judgements.

The Company maintains a system of internal control that is adequate to provide reasonable assurance that the assets are safeguarded from loss or unauthorized use. This system produces records adequate for preparation of financial information. We believe the Company's internal control system is effective, and the cost of the internal control system does not exceed the benefits obtained.

The Board of Directors reviews the financial statements and reporting practices of the Company through its Audit Committee, which is composed entirely of directors who are not officers or employees of the Company. The Audit Committee meets with the independent auditors and management to discuss audit scope and results and to consider internal control and financial reporting matters. The independent auditors have direct unrestricted access to the Audit Committee. The entire Board of Directors reviews the Company's financial performance and financial plan.

Susan E. Engel
Chairwoman and Chief Executive Officer
Department 56, Inc.



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  Department 56, Inc.:

We have audited the consolidated balance sheets of Department 56, Inc. and subsidiaries (the Company) as of January 1, 2000, and January 2, 1999 and the related consolidated statements of income, cash flows, and stockholders' equity for the years ended January 1, 2000, January 2, 1999, and January 3, 1998. Our audit also included the financial statement schedule listed in the Index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2000 and January 2, 1999 and the results of its operations and its cash flows for the years ended January 1, 2000, January 2, 1999, and January 3, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Deloitte & Touche LLP

Minneapolis, Minnesota
March 17, 2000


DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
AS OF JANUARY 1, 2000 AND JANUARY 2, 1999

 
  1999
  1998
 
               
ASSETS              
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents   $ 3,962   $ 2,783  
Accounts receivable, net of allowances of $18,287 and $12,908, respectively     65,580     26,170  
Inventories     15,901     18,287  
Deferred taxes     9,448     6,704  
Other current assets     4,751     3,957  
   
 
 
Total current assets     99,642     57,901  
 
PROPERTY AND EQUIPMENT, net
 
 
 
 
 
29,857
 
 
 
 
 
17,722
 
 
 
GOODWILL, net of accumulated amortization of $30,096 and $25,862,
respectively
 
 
 
 
 
139,340
 
 
 
 
 
141,528
 
 
 
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $4,009 and $3,097, respectively
 
 
 
 
 
16,596
 
 
 
 
 
16,003
 
 
 
OTHER ASSETS
 
 
 
 
 
1,673
 
 
 
 
 
129
 
 
   
 
 
    $ 287,108   $ 233,283  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings on revolving credit agreement   $ 42,500        
Accounts payable     9,709   $ 11,100  
Commissions payable     513     3,062  
Other current liabilities     14,631     14,463  
   
 
 
Total current liabilities     67,353     28,625  
 
DEFERRED TAXES
 
 
 
 
 
6,831
 
 
 
 
 
5,923
 
 
 
LONG-TERM DEBT
 
 
 
 
 
60,000
 
 
 
 
 
20,000
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $.01 par value; authorized 20,000 shares; no shares issued              
Common stock, $.01 par value; authorized 100,000 shares; issued and outstanding 21,964 and 21,900 shares, respectively     220     219  
Additional paid-in capital     49,845     48,295  
Treasury stock, at cost; 6,802 and 3,876 shares, respectively     (183,320 )   (113,302 )
Retained earnings     286,179     243,523  
   
 
 
Total stockholders' equity     152,924     178,735  
   
 
 
    $ 287,108   $ 233,283  
   
 
 

See notes to consolidated financial statements.


DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999, AND JANUARY 3, 1998

 
  1999
  1998
  1997
 
                     
NET SALES   $ 245,856   $ 243,365   $ 219,496  
 
COST OF SALES
 
 
 
 
 
103,803
 
 
 
 
 
100,782
 
 
 
 
 
94,040
 
 
   
 
 
 
Gross profit     142,053     142,583     125,456  
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative     61,542     56,648     49,772  
Amortization of goodwill, trademarks and other intangibles     5,145     4,926     4,577  
   
 
 
 
Total operating expenses     66,687     61,574     54,349  
   
 
 
 
INCOME FROM OPERATIONS     75,366     81,009     71,107  
 
OTHER EXPENSE (INCOME):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense     6,719     4,817     4,362  
Gain on sale of aircraft             (2,882 )
Other, net     (153 )   (397 )   (1,086 )
   
 
 
 
INCOME BEFORE INCOME TAXES     68,800     76,589     70,713  
 
PROVISION FOR INCOME TAXES
 
 
 
 
 
26,144
 
 
 
 
 
30,073
 
 
 
 
 
27,932
 
 
   
 
 
 
NET INCOME   $ 42,656   $ 46,516   $ 42,781  
   
 
 
 
NET INCOME PER COMMON SHARE   $ 2.48   $ 2.49   $ 2.06  
   
 
 
 
NET INCOME PER COMMON SHARE ASSUMING DILUTION   $ 2.45   $ 2.45   $ 2.05  
   
 
 
 

See notes to consolidated financial statements.


DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999, AND JANUARY 3, 1998

 
  1999
  1998
  1997
 
                     
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Net income   $ 42,656   $ 46,516   $ 42,781  
Adjustments to reconcile net income to net cash provided by operating activities:                    
Depreciation     4,189     2,385     2,031  
Amortization of goodwill, trademarks and other intangibles     5,145     4,926     4,577  
Amortization of deferred financing fees     269          
Provision for uncollectible accounts receivable     3,276     888     1,087  
Gain on sale of aircraft             (2,882 )
Deferred taxes     (1,836 )   (629 )   (2,774 )
Changes in assets and liabilities:                    
Accounts receivable     (42,686 )   (4,054 )   11,512  
Inventories     2,386     186     2,456  
Other assets     (2,607 )   (961 )   (1,337 )
Accounts payable     (1,391 )   1,127     2,355  
Commissions payable     (2,549 )   (893 )   (728 )
Other current liabilities     990     2,582     4,882  
   
 
 
 
Net cash provided by operating activities     7,842     52,073     63,960  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment     (16,345 )   (6,750 )   (7,829 )
Proceeds from sale of aircraft             8,567  
Acquisitions     (3,970 )   (4,660 )    
   
 
 
 
Net cash (used in) provided by investing activities     (20,315 )   (11,410 )   738  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from the exercise of common stock options     1,170     2,846     1,473  
Borrowings on revolving credit agreement     94,500     75,500     17,985  
Principal payments on revolving credit agreement     (52,000 )   (75,500 )   (17,985 )
Purchases of treasury stock     (70,018 )   (58,087 )   (55,215 )
Proceeds from issuance of long-term debt     40,000          
Principal payments on long-term debt         (20,000 )   (20,000 )
   
 
 
 
Net cash provided by (used in) financing activities     13,652     (75,241 )   (73,742 )
   
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 
 
 
 
1,179
 
 
 
 
 
(34,578
 
)
 
 
 
(9,044
 
)
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
 
 
 
 
2,783
 
 
 
 
 
37,361
 
 
 
 
 
46,405
 
 
   
 
 
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
 
 
$
 
3,962
 
 
 
$
 
2,783
 
 
 
$
 
37,361
 
 
   
 
 
 

See notes to consolidated financial statements.


DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999, AND JANUARY 3, 1998

 
  Common Stock
   
   
   
   
 
 
  Additional Paid-in Capital
  Treasury Stock
  Retained Earnings
  Total Stockholders' Equity
 
 
  Shares
  Amount
 
                                     
BALANCE AS OF DECEMBER 28, 1996   21,584   $ 216   $ 42,315         $ 154,226   $ 196,757  
Net income                           42,781     42,781  
Shares issued upon the exercise of common stock options   181     2     2,330                 2,332  
Shares repurchased   (2,199 )             $ (55,215 )         (55,215 )
   
 
 
 
 
 
 
BALANCE AS OF JANUARY 3, 1998   19,566     218     44,645     (55,215 )   197,007     186,655  
Net income                           46,516     46,516  
Shares issued upon the exercise of common stock options   131     1     3,541                 3,542  
Shares repurchased   (1,677 )               (58,087 )         (58,087 )
Other   3           109                 109  
   
 
 
 
 
 
 
BALANCE AS OF JANUARY 2, 1999   18,023     219     48,295     (113,302 )   243,523     178,735  
Net income                           42,656     42,656  
Shares issued upon the exercise of common stock options   60     1     1,439                 1,440  
Shares repurchased   (2,925 )               (70,018 )         (70,018 )
Other   4           111                 111  
   
 
 
 
 
 
 
BALANCE AS OF JANUARY 1, 2000   15,162   $ 220   $ 49,845   $ (183,320 ) $ 286,179   $ 152,924  
   
 
 
 
 
 
 

See notes to consolidated financial statements.


DEPARTMENT 56, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



2.   PROPERTY AND EQUIPMENT

 
  1999
  1998
             
Leasehold improvements   $ 6,519   $ 3,026
Furniture and fixtures     4,239     2,585
Computer equipment     15,560     8,495
Other equipment     8,735     5,175
Building     6,896     6,764
Land     906     906
   
 
      42,855     26,951
Less accumulated depreciation     12,998     9,229
   
 
Property and equipment, net   $ 29,857   $ 17,722
   
 

3.   OTHER CURRENT LIABILITIES

 
  1999
  1998
             
Accrued compensation and benefits   $ 3,581   $ 4,698
Income taxes payable     8,411     7,768
Deferred revenue     694     754
Accrued royalty fees     818     578
Other     1,127     665
   
 
    $ 14,631   $ 14,463
   
 


4.   CREDIT AGREEMENT

 
  1999
  1998
             
Total debt   $ 102,500   $ 20,000
Less borrowings classified as current     42,500    
   
 
    $ 60,000   $ 20,000
   
 


5.   INCOME TAXES

 
  1999
  1998
  1997
 
                     
Current:                    
Federal   $ 25,427   $ 28,188   $ 28,225  
State     2,180     2,416     2,419  
Foreign     373     98     62  
Deferred     (1,836 )   (629 )   (2,774 )
   
 
 
 
    $ 26,144   $ 30,073   $ 27,932  
   
 
 
 
 
  1999
  1998
  1997
 
                     
Income taxes at federal statutory rate   $ 24,080   $ 26,806   $ 24,750  
State income taxes, net of federal income tax     1,033     1,915     1,768  
Amortization of goodwill     1,448     1,448     1,448  
Other     (417 )   (96 )   (34 )
   
 
 
 
Provision for income taxes   $ 26,144   $ 30,073   $ 27,932  
   
 
 
 
 
  1999
  1998
 
               
DEFERRED TAX ASSETS:              
Asset valuation allowances   $ 8,416   $ 6,431  
Compensation expense — common stock options     286     121  
Accrued liabilities     730     400  
Other     564     172  
   
 
 
Total deferred tax assets     9,996     7,124  
 
DEFERRED TAX LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks     (5,569 )   (5,739 )
Property and equipment     (1,667 )   (379 )
Other     (143 )   (225 )
   
 
 
Total deferred tax liabilities     (7,379 )   (6,343 )
   
 
 
    $ 2,617   $ 781  
   
 
 


6.   COMMITMENTS AND CONTINGENCIES

       
2000   $ 3,453
2001     2,996
2002     3,040
2003     2,839
2004     2,850
Thereafter     9,849
   
    $ 25,027
   

7.   RETIREMENT PLAN


8.   ACQUISITIONS

9.   RELATED-PARTY TRANSACTIONS

10.  STOCKHOLDERS' EQUITY


 
  1999
  1998
  1997
 
  Shares
  Weighted Average Exercise Price
  Shares
  Weighted Average Exercise Price
  Shares
  Weighted Average Exercise Price
                                     
Outstanding at beginning of year     1,724,357   $ 26.80     1,983,578   $ 26.25     1,291,908   $ 27.51
Granted     458,300     25.42     97,000     31.87     806,000     23.07
Exercised     (56,482 )   20.52     (129,625 )   21.90     (85,415 )   13.53
Forfeited     (31,864 )   24.77     (226,596 )   26.94     (28,915 )   31.93
   
       
       
     
Outstanding at end of year     2,094,311     26.70     1,724,357     26.80     1,983,578     26.25
   
       
       
     
Options exercisable at end of year     1,446,272     27.63     1,085,026     28.95     798,258     30.43
Weighted average fair value of options granted during the year   $ 12.33         $ 14.89         $ 10.96      
 
  1999
  1998
  1997
                   
Net Income:                  
As reported   $ 42,656   $ 46,516   $ 42,781
Pro forma     40,647     44,223     40,245
 
Net Income per Common Share
Assuming Dilution:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reported   $ 2.45   $ 2.45   $ 2.05
Pro forma     2.34     2.33     1.93


Range of Exercise Prices
  Number Outstanding at January 1, 2000
  Weighted Average Remaining Contractual Life
  Weighted Average Exercise Price
  Number Exercisable at January 1, 2000
  Weighted Average Exercise Price
                           
$ 3.33   40,500   2.1 years   $ 3.33   40,500   $ 3.33
  18.00-21.47   983,117   7.3     20.75   662,249     20.84
  21.48-37.75   1,070,694   6.8     33.04   743,523     34.99
     
           
     
      2,094,311             1,446,272      
     
           
     


11.  INCOME PER COMMON SHARE

 
  1999
  1998
  1997
                   
Net income   $ 42,656   $ 46,516   $ 42,781
Weighted average number of shares outstanding     17,214,000     18,676,000     20,744,000
Net income per common share   $ 2.48   $ 2.49   $ 2.06
 
Net income
 
 
 
$
 
42,656
 
 
 
$
 
46,516
 
 
 
$
 
42,781
Weighted average number of shares outstanding     17,214,000     18,676,000     20,744,000
Dilutive impact of options outstanding     174,000     284,000     152,000
   
 
 
Weighted average number of shares and potential dilutive shares outstanding     17,388,000     18,960,000     20,896,000
Net income per common share assuming dilution   $ 2.45   $ 2.45   $ 2.05

12.  SUBSEQUENT EVENTS


DEPARTMENT 56, INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Column A

  Column B
  Column C
  Column D
  Column E
Description

  Balance Beginning of Period
  Charged to Costs and Expenses
  Deductions
  Balance End of Period
Year ended January 1, 2000:                        
Allowance for doubtful accounts   $ 5,179   $ 3,276   $ 796 (a) $ 7,659
Allowance for sales returns and credits     7,729     12,737     9,838     10,628
   
 
 
 
    $ 12,908   $ 16,013   $ 10,634   $ 18,287
   
 
 
 
Year ended January 2, 1999:                        
Allowance for doubtful accounts   $ 5,160   $ 888   $ 869 (a) $ 5,179
Allowance for sales returns and credits     7,897     8,657     8,825     7,729
   
 
 
 
    $ 13,057   $ 9,545   $ 9,694   $ 12,908
   
 
 
 
Year ended January 3, 1998:                        
Allowance for doubtful accounts   $ 5,014   $ 1,087   $ 941 (a) $ 5,160
Allowance for sales returns and credits     5,249     8,752     6,104     7,897
   
 
 
 
    $ 10,263   $ 9,839   $ 7,045   $ 13,057
   
 
 
 

(a)
Accounts determined to be uncollectible and charged against allowance account, net of collections on accounts previously charged against allowance account.



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FORM 10-K TABLE OF CONTENTS
PART I
PART II
PART III
PART IV
SIGNATURES