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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 2, 1999
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 13-3684956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
ONE VILLAGE PLACE 55344
6436 CITY WEST PARKWAY (Zip Code)
EDEN PRAIRIE, MN
(Address of principal executive
offices)
(612) 944-5600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 $548,024,131 as of March 26, 1999 (based on the
closing price of consolidated trading in the Common Stock on that date as
published in MICROSOFT INVESTOR). 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 26, 1999: 17,972,645
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the fiscal year
ended January 2, 1999 (the "1998 Annual Report") are incorporated by reference
in Parts II and IV. Portions of the Company's definitive Proxy Statement for the
1999 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission concurrently with this Form 10-K (the "1999 Proxy Statement") are
incorporated by reference in Part III.
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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.
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 winter scenes.
The Company introduces new lit pieces, limited edition pieces, figurines and
other accessories each year to complement 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.
The Company's Village Series products are comprised of two broad
collections: The Original Snow Village Collection and The Heritage Village
Collection. The Original Snow Village Collection, introduced in 1976, consists
of lit ceramic houses and accessories designed around a single "Main Street
U.S.A." theme. The Heritage Village Collection, introduced in 1984 and expanded
since that time, consists of lit porcelain houses and accessories designed
around several different village themes. By using porcelain for The Heritage
Village Collection products, the Company has been able to achieve a higher level
of detail, in a smaller scale product, than would have been possible by using
ceramic.
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 figurines, 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. 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 3,600 stock keeping units, of
which approximately 3,100 are General Giftware products.
2
CUSTOMERS
The Company's principal customers (accounting for approximately 90% of its
sales) are approximately 20,000 independent gift retailers across the United
States. These retailers include approximately 1,500 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 10% 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 1998. 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 1998.
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 eight independently operated
wholesale showrooms and six corporate showrooms which cover the major giftware
market areas in the United States and Canada. The Company's headquarters in Eden
Prairie, Minnesota has a 13,000 square-foot atrium showroom where all of its
products, including retired Village Series lighted pieces and Snowbabies
figurines, are displayed. The Company also has a corporate showroom of
approximately 13,000 square feet at the Atlanta, Georgia gift mart, a corporate
showroom of approximately 10,300 square feet at the New York, New York gift
mart, a corporate showroom of approximately 7,500 square feet at the Chicago,
Illinois gift mart, a corporate showroom of approximately 6,600 square feet at
the Los Angeles, California gift mart, and a corporate showroom of approximately
4,300 square feet at the Fairfax, Virginia gift mart. In addition, the Company
sells through giftware shows throughout the United States. Tests have been
conducted of product sales through home television shopping and through
corporate gift programs. In May 1999, the Company plans to open a retail store
in the Mall of America outside Minneapolis so as to build brand visibility and
cultivate consumer awareness. 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 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. 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 a quarterly magazine, which contains product-related
articles and description of its product lines, to consumers and retailers, 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.
3
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 and Poland). In fiscal 1998, the Company
imported products from approximately 150 independent manufacturing sources. The
Company's single largest manufacturing source represented approximately 10% of
the Company's imports in fiscal 1998. 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 Company's wholly owned indirect subsidiary, Department 56 Trading Co.,
Ltd., the principal operations of which are based in Taiwan, sources many of the
Company's products in the Pacific Rim, monitors and coordinates production and
assists in the export of the Company's products to the United States. The
Company believes that this overseas subsidiary provides the Company with greater
product and quality control, at a lower cost, than would be available from a
third party trading company. The Company also purchases products, to a limited
extent, from selected independent trading companies operating in particular
geographic regions.
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. 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 porcelain.
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. The Bloomington facility
is dedicated to the warehousing and distribution of Village Series lit pieces,
while the Eden Prairie facility handles all other products. Shipments from the
Company to its customers are handled by United Parcel Service or commercial
trucking lines. In January 1999, the Company entered into a letter of intent
with a design/build contractor to lease a proposed distribution center in
Minnesota. The Company plans to consolidate its distribution operations from the
existing two distribution centers and a storage facility into the proposed
distribution center by the end of 1999.
The Company utilizes Year-2000 compliant computer systems to maintain
efficient 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, uniform 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. The Company believes its
complex yet efficient software for the processing and shipment of orders from
its central warehouse allows it to better serve its retail customer base.
BACKLOG AND SEASONALITY
The Company receives products, pays its suppliers and ships products
throughout the year, although the majority of shipments occur 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 2, 1999, Department 56 had unfilled
wholesale orders of approximately $4.0
4
million, compared to $4.6 million at January 3, 1998. All of the backlog is
scheduled to be shipped to customers during the current fiscal year.
Approximately 6% 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 customer credit considerations and inventory shortages.
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 orders ranging from approximately 65%
to 71% 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. The Company expects this seasonal sales pattern to
continue for the foreseeable future.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns twenty-two 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 2008, 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
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. 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, are part of
large, diversified companies having 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 and Poland).
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
5
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 1998, approximately 71% (as compared to approximately 65% in
fiscal 1997) of the Company's imports were manufactured in The People's Republic
of China, which is currently accorded "Most Favored Nation" status 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 and
residents of Hong Kong, 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 2, 1999, the Company had 261 full-time employees in the United
States and 7 full-time employees in Taiwan. All of 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.
6
ITEM 2. PROPERTIES
The Company owns a 67,000 square-foot facility in Eden Prairie, Minnesota,
which includes 57,000 square feet of office space. Its executive offices,
creative center and primary corporate showroom are located in this facility,
which is known as "One Village Place." The Company currently occupies
approximately 66,400 square feet of the facility and leases the remaining 600
square feet to others.
The Company leases a warehouse and distribution facility in Eden Prairie of
approximately 150,000 square feet. The current lease for this facility expires
on March 31, 2001 and is extendible at the Company's option for an additional
five years. The Company leases a warehouse and distribution facility in
Bloomington, Minnesota of approximately 159,000 square feet, the lease for which
expires on February 28, 2002. The Company also leases additional bulk storage
warehouse space of approximately 80,000 square feet in Eagan, Minnesota, the
lease for which expires on March 31, 2000 and is extendible at the Company's
option for an additional three months. However, the Company believes that one
distribution center would be more efficient and better support its growth
initiatives. Consequently, in January 1999, the Company entered into a letter of
intent with a design/build contractor to lease a proposed distribution center in
Minnesota. The Company plans to consolidate its distribution operations from the
existing two distribution centers and the storage facility into the proposed
distribution center by the end of 1999.
The Company also leases a corporate showroom of approximately 13,000 square
feet in the Atlanta, Georgia gift mart, a corporate showroom of approximately
10,300 square feet in the New York, New York gift mart, a corporate showroom of
approximately 7,500 square feet in the Chicago, Illinois gift mart, a corporate
showroom of approximately 6,600 square feet in the Los Angeles, California gift
mart and a corporate showroom of approximately 4,300 square feet in the Fairfax,
Virginia gift mart. These leases expire on December 31, 2006, December 31, 2005,
November 30, 1999, December 31, 2002, and December 31, 2003, respectively.
The Company leases approximately 10,200 square feet in the Mall of America
in Bloomington, Minnesota for a retail store planned to begin operations in May
1999. The lease for this space is slated to expire May 2009, but may be
terminated by the Company anytime after May 2002 in the event the Company
generally discontinues retail operations.
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 2, 1999.
7
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company as of the date
hereof. Unless otherwise indicated each executive officer of the Company holds
identical positions with D 56, Inc. Officers serve at the discretion of the
Board of Directors.
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------- --- ----------------------------------------------------
Susan E. Engel 52 Chairwoman of the Board and Chief Executive Officer
David W. Dewey 41 Executive Vice President -- Overseas Operations
Arete Passas 47 Executive Vice President -- Marketing
Mark R. Kennedy 41 Senior Vice President and Chief Financial Officer
David H. Weiser 39 Senior Vice President -- Legal/Human Resources,
General Counsel and Secretary
Brett D. Heffes 31 Vice President -- Corporate Development
Robert S. Rose 44 Vice President -- Distribution and Operations
Timothy J. Schugel 40 Vice President -- Finance and Sourcing Management,
and Principal Accounting Officer
Joan M. Serena 45 Senior Vice President -- Consumer & Dealer Marketing
Gregory G. Sorensen 36 Vice President -- Management Information Systems
The principal occupations and positions for the past five years, and in
certain cases prior years, of each of the executive officers of the Company are
as follows:
Susan E. Engel has been Chairwoman of the Board of the Company and of D 56,
Inc. since September 18, 1997 and Chief Executive Officer of the Company and of
D 56, Inc. since November 13, 1996. Ms. Engel was President of the Company and
of D 56, Inc. from September 19, 1994 until September 18, 1997, and Chief
Operating Officer of the Company and of D 56, Inc. from September 19, 1994 until
November 13, 1996. Ms. Engel was a consultant to retail and consumer goods
companies from September 1993 until September 1994, and Chief Executive Officer
and President of Champion Products, Inc. (a manufacturer of athletic and active
sports apparel) from October 1991 to September 1993.
David W. Dewey has been Senior Vice President -- Overseas Operations of the
Company and of D 56, Inc. since January 1, 1997. He was Vice President --
Overseas Operations of the Company and of D 56, Inc. from April 22, 1993 until
January 1, 1997.
Arete Passas has been Executive Vice President -- Marketing of the Company
and of D 56, Inc. since September 14, 1998. She was Executive Vice President,
Marketing of Weekly Reader Corporation from November 1997 to September 1998. She
was a private consultant from May 1997 to November 1997. Ms. Passas was Vice
President, Games & Puzzles Division at Mattel, Inc. from October 1994 to April
1997. Prior to then she was Director of Marketing, Consumer Products Division at
James River Corporation from December 1992 through October 1994.
Mark R. Kennedy has been Senior Vice President of the Company and of D 56,
Inc. since January 1, 1997 and Chief Financial Officer of the Company and of D
56, Inc. since April 25, 1995. He was Vice President -- Administration of the
Company and of D 56, Inc. from April 25, 1995 until January 1, 1997. From
January 1995 until April 25, 1995, Mr. Kennedy was a private investor. Mr.
Kennedy was Senior Executive Vice President of Shopko Stores, Inc. (a "mass
market" department store chain) from June 1993 to January 1995.
David H. Weiser has been Senior Vice President -- Legal/Human Resources of
the Company and of D 56, Inc. since January 1, 1997. He has also been General
Counsel of the Company since April 22, 1993, General Counsel of D 56, Inc. since
March 15, 1993, and Secretary of the Company and of D 56, Inc. since
8
February 1993. Mr. Weiser was Vice President of the Company from April 22, 1993
until January 1, 1997 and Vice President of D 56, Inc. from March 15, 1993 until
January 1, 1997.
Brett D. Heffes has been Vice President -- Corporate Development of the
Company and of D 56, Inc. since January 5, 1998. He was with Wessels, Arnold &
Henderson, a private investment bank, from May 1992 until January 1998, most
recently as Principal.
Robert S. Rose has been Vice President -- Distribution and Operations of the
Company and of D 56, Inc. since April 22, 1993.
Timothy J. Schugel has been Vice President -- Finance of the Company and of
D56, Inc. since April 10, 1995, and was Controller of the Company and of D 56,
Inc. from April 26, 1993 until April 10, 1995. He has also been Vice
President--Sourcing Management since August 6, 1998.
Joan M. Serena has been Senior Vice President -- Consumer & Dealer Marketing
since August 6, 1998. She was Vice President -- Consumer & Dealer Marketing of
the Company and of D 56, Inc. from January 1, 1997 to August 6, 1998. She was
Vice President -- Consumer & Retail Marketing of the Company and of D 56, Inc.
from October 20, 1995 until January 1, 1997. She was Vice President -- Consumer
Services of the Company and of D 56, Inc. from April 22, 1993 until October 20,
1995.
Gregory G. Sorensen has been Vice President -- Management Information
Systems of the Company and of D 56, Inc. since July 22, 1996. He was Vice
President of Information Systems of Tsumura International, Inc. (a distributor
of consumer soaps and toiletries) from October 1991 until July 12, 1996, and a
consultant to D 56, Inc. from July 12, 1996 until July 22, 1996.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this Item is included in Corporate and Stockholder
Information on page 29 of the 1998 Annual Report and Note 5 to Five Year Summary
on page 11 of the 1998 Annual Report, and such information is incorporated
herein by reference.
As of March 26, 1999, the number of holders of record of the Company's
Common Stock was 910.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included in Five Year Summary on page
11 of the 1998 Annual Report, and such information is incorporated herein by
reference. See also the notes to the consolidated financial statements and
Management's Discussion and Analysis on pages 20 to 27 and 12 to 16
respectively, of the 1998 Annual Report, and such information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this Item is included in Management's Discussion and
Analysis on pages 12 to 16 of the 1998 Annual Report, incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this Item is included in Management's Discussion and
Analysis on page 15 of the 1998 Annual Report, and Note 1 to the consolidated
financial statements on page 21 of the 1998 Annual Report, incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is included in the consolidated financial
statements of the Company for the years ended January 2, 1999, January 3, 1998
and December 28, 1996, the notes to the consolidated financial statements, and
the report of independent auditors thereon on pages 17 to 28 of the 1998 Annual
Report, and in the Company's unaudited quarterly financial data for the years
ended January 2, 1999 and January 3, 1998 on page 13 of the 1998 Annual Report,
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning directors of the Company who
are nominated by the Company for re-election at the 1999 annual meeting of the
Company's stockholders is included in the 1999 Proxy Statement in the section
captioned "Item 1 -- Election of Directors," and such information is
incorporated herein by reference. Information required by this Item concerning
the executive officers of the Company is included in Part I, pages 8 and 9 of
this Annual Report on Form 10-K as permitted by General Instruction G(3) to Form
10-K. Information required by this Item concerning compliance with Section 16(a)
of the Securities Exchange Act of 1934 is included in the 1999 Proxy Statement
in the last paragraph of the section captioned "Security Ownership of Certain
Beneficial Owners and Management," and such information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the 1999 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 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 1999 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 25 of the 1998
Annual Report.
11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1998
FORM 10-K ANNUAL REPORT
(PAGE) (PAGE)
---------- -------------
(a) 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 2, 1999 and January 3, 1998 17
For the years ended January 2, 1999, January 3, 1998 and December 28, 1996:
Consolidated Statements of Income 18
Consolidated Statements of Cash Flows 19
Consolidated Statements of Stockholders' Equity 20
Notes to Consolidated Financial Statements 20-27
Independent Auditors' Report for the years ended 28
January 2, 1999, January 3, 1998 and December 28, 1996
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report 13
I. Condensed financial information 14-16
II. Valuation and qualifying accounts 17
All other schedules have been omitted because they are not applicable, not
required or the information required is included in the consolidated financial
statements or notes thereto.
3. EXHIBITS
The exhibits are listed in the accompanying Index to Exhibits on pages 19
and 20.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated October 22, 1998, was filed reporting in
Item 5 thereof and containing no financial statements.
12
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 2, 1999 and January 3, 1998 and the
related consolidated statements of income, cash flows and stockholders' equity
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, and
have issued our report thereon dated February 12, 1999, except for Note 4
thereto, as to which the date is March 19, 1999 (included in the Company's
Annual Report to Stockholders for the year ended January 2, 1999 and
incorporated herein by reference). Our audits also included the financial
statement schedules for the aforementioned periods listed in Item 14 of Form
10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 19, 1999
13
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(IN THOUSANDS)
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
ASSETS
INVESTMENT IN SUBSIDIARIES................................................................ $ 173,427 $ 184,420
RECEIVABLE FROM SUBSIDIARIES.............................................................. 5,464 2,510
---------- ----------
$ 178,891 $ 186,930
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES--
Accrued expenses........................................................................ $ 156 $ 275
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 21,900
and 21,765 shares, respectively....................................................... 219 218
Additional paid-in capital.............................................................. 48,295 44,645
Treasury stock, at cost; 3,876 and 2,199 shares, respectively........................... (113,302) (55,215)
Retained earnings....................................................................... 243,523 197,007
---------- ----------
Total stockholders' equity............................................................ 178,735 186,655
---------- ----------
$ 178,891 $ 186,930
---------- ----------
---------- ----------
- ------------------------
Note: Investment in subsidiary is accounted for under the equity method of
accounting.
See notes to consolidated financial statements included in the
1998 Annual Report, incorporated by reference.
14
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR
YEAR ENDED YEAR ENDED ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
----------- ----------- ------------
Equity in earnings of subsidiaries......................................... $ 46,516 $ 43,216 $ 46,263
General and administrative expenses........................................ -- (435) (319)
----------- ----------- ------------
Net income................................................................. $ 46,516 $ 42,781 $ 45,944
----------- ----------- ------------
----------- ----------- ------------
See notes to consolidated financial statements included in the
1998 Annual Report, incorporated by reference.
15
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR
YEAR ENDED YEAR ENDED ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 46,516 $ 42,781 $ 45,944
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries..................................... (46,516) (43,216) (46,263)
(Increase) decrease in receivable from subsidiaries.................... (2,954) (967) 28
Increase (decrease) in accrued expenses................................ (119) 50 (45)
Other.................................................................. 108 -- --
----------- ----------- ------------
Net cash used in operating activities................................ (2,965) (1,352) (336)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries............................................... (967) -- --
Dividends received from subsidiaries..................................... 59,173 55,094 --
----------- ----------- ------------
Net cash provided by investing activities.............................. 58,206 55,094 --
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options....................... 2,846 1,473 336
Purchases of treasury stock.............................................. (58,087) (55,215) --
----------- ----------- ------------
Net cash provided by (used in) financing activities.................. (55,241) (53,742) 336
----------- ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................... -- -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... -- -- --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ -- $ -- $ --
----------- ----------- ------------
----------- ----------- ------------
See notes to consolidated financial statements included in the
1998 Annual Report, incorporated by reference.
16
DEPARTMENT 56, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN B COLUMN C
----------- ------------- COLUMN E
COLUMN A BALANCE CHARGED TO COLUMN D -----------
- ---------------------------------------------------------------- BEGINNING COSTS AND ------------- BALANCE END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------------------------- ----------- ------------- ------------- -----------
Year ended January 2, 1999:
Allowance for doubtful accounts............................... $ 5,160 $ 888 $ 869(a) $ 5,179
Allowance for obsolete and overstock inventory................ 4,385 2,907 2,463 4,829
Allowance for sales returns and credits....................... 7,897 8,657 8,825 7,729
----------- ------------- ------------- -----------
$ 17,442 $ 12,452 $ 12,157 $ 17,737
Year ended January 3, 1998:
Allowance for doubtful accounts............................... $ 5,014 $ 1,087 $ 941(a) $ 5,160
Allowance for obsolete and overstock inventory................ 2,942 3,447 2,004 4,385
Allowance for sales returns and credits....................... 5,249 8,752 6,104 7,897
----------- ------------- ------------- -----------
$ 13,205 $ 13,286 $ 9,049 $ 17,442
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Year ended December 28, 1996:
Allowance for doubtful accounts............................... $ 4,329 $ 2,014 $ 1,329(a) $ 5,014
Allowance for obsolete and overstock inventory................ 3,604 867 1,529 2,942
Allowance for sales returns and credits....................... 2,555 11,585 8,891 5,249
----------- ------------- ------------- -----------
$ 10,488 $ 14,466 $ 11,749 $ 13,205
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
- ------------------------
(a) Accounts determined to be uncollectible and charged against allowance
account, net of collections on accounts previously charged against
allowance account.
17
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.
By: /s/ SUSAN E. ENGEL
-----------------------------------------
Susan E. Engel
CHAIRWOMAN OF THE BOARD
Date: April 2, 1999 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 Chairwoman of the Board, Chief April 2, 1999
---------------------------------------------- Executive Officer and Director
Susan E. Engel (Principal Executive Officer)
/s/ MARK R. KENNEDY Chief Financial Officer and April 2, 1999
---------------------------------------------- Senior Vice President
Mark R. Kennedy (Principal Financial Officer)
/s/ TIMOTHY J. SCHUGEL Vice President -- Finance and April 2, 1999
---------------------------------------------- Sourcing Management
Timothy J. Schugel Principal Accounting Officer
(Principal Accounting Officer)
/s/ JAY CHIAT April 2, 1999
---------------------------------------------- Director
Jay Chiat
/s/ MAXINE CLARK April 2, 1999
---------------------------------------------- Director
Maxine Clark
/s/ WM. BRIAN LITTLE April 2, 1999
---------------------------------------------- Director
Wm. Brian Little
/s/ GARY S. MATTHEWS April 2, 1999
---------------------------------------------- Director
Gary S. Matthews
/s/ STEVEN G. ROTHMEIER April 2, 1999
---------------------------------------------- Director
Steven G. Rothmeier
/s/ VIN WEBER April 2, 1999
---------------------------------------------- Director
Vin Weber
18
DEPARTMENT 56, INC.
INDEX TO EXHIBITS
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, dated April 1, 1989, as amended, between Hoyt Properties, Inc. and the Company for the Eden
Prairie warehouse. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Registration
Statement on Form S-1, No. 33-61514.)
10.5 Lease, dated December 8, 1993 as amended August 25, 1994, between Grantor Retained Income Trust of Robert
L. Johnson and the Company for the Bloomington warehouse. (Incorporated herein by reference to Exhibit
10.5 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. SEC File no.
1-11908), and Second Lease Amendment dated August 27, 1998.*
10.6 Letter of Intent, dated January 20, 1999, between the Company and Ryan Companies US, Inc., pertaining to
build-to-suit of proposed distribution center.*
10.7 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.*
19
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
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.*
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 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.
(Incorporated herein by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1993. SEC File no. 1-11908)+
10.14 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)+
11.1 Computation of Earnings Per Share.*
13.1 Excerpts from Annual Report to Stockholders for fiscal year ended January 2, 1999.*
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
20