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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 December 28, 1996
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)
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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)
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(612) 944-5600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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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
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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 /X/.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $356,980,932 as of March 19, 1997 (based on the
closing price of consolidated trading in the Common Stock on that date as
published in THE WALL STREET JOURNAL). 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 19, 1997: 21,267,729
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the fiscal year
ended December 28, 1996 (the "1996 Annual Report") are incorporated by reference
in Parts II and IV. Portions of the Company's definitive Proxy Statement for the
1997 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission concurrently with this Form 10-K (the "1997 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.
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 and manufacturing considerations.
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, musical tapes, 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 and Easter decorative items, tableware,
decorative tins, acrylics 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 3,100 stock keeping
units, of which approximately 2,500 are General Giftware products.
CUSTOMERS
The Company's principal customers (accounting for approximately 90% of its
sales) are approximately 19,000 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
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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. Occasionally, a particular product will be sold exclusively
through certain dealers. 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 1996. 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
approximately 1% of the Company's sales in fiscal 1996, and the Company does not
expect to materially increase international sales in fiscal 1997.
As part of the Company's strategy of selective distribution, only
approximately 6,000 retailers receive the Company's Village Series and
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
nine years and six 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 12 independently operated wholesale
showrooms (including showrooms in New York, Dallas and Los Angeles) and three
corporate showrooms which cover the major giftware market areas in the United
States. 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 also
has a corporate showroom of approximately 13,000 square feet at the Atlanta,
Georgia gift mart and a corporate showroom of approximately 7,500 square feet at
the Chicago, Illinois 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. 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 newsletter, which contains product-related
articles and description of its product lines, to subscriber groups and others,
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.
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 and Germany). In fiscal 1996, the Company
imported products from approximately 130 independent manufacturing sources. The
Company's single largest manufacturing source represented approximately 9% of
the Company's imports in fiscal 1996. The Company's emphasis on high quality
craftsmanship at affordable
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prices limits the sources from which the Company chooses to obtain products. The
Company has long-standing relationships with the majority of its manufacturers
(several 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 18 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 automated
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.
The Company utilizes 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 December 28, 1996, Department 56 had unfilled
wholesale orders of approximately $7.2 million, compared to $11.0 million at
December 30, 1995. All of the backlog is scheduled to be shipped to customers
during the current fiscal year. Approximately 5% to 7% of the Company's total
annual customer orders have been cancelled in each of the last three years for a
number of reasons, including customer credit considerations, inventory shortages
or customer cancellation requests.
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 71%
to 76% 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
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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 ten 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 2007, 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 Germany).
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,
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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 1996, approximately 50% (as compared to approximately 40% in
fiscal 1995) 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. The Company expects that the
proportion of its products manufactured in The People's Republic of China will
increase in the future. 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 December 28, 1996, the Company had 195 full-time employees in the
United States and 8 full-time employees in Taiwan. All of the Company's 72
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, 1997. The Company will begin the process of negotiating
a new contract in fiscal 1997. 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 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 64,800 square feet of the facility and leases the remaining 2,200
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 also leases a warehouse and distribution facility in
Bloomington, Minnesota of approximately 159,000 square feet, the lease for which
expires on February 28, 1999 and is extendible at the Company's option for an
additional three years. Nearby the Bloomington
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distribution facility is additional bulk storage warehouse space of
approximately 52,000 square feet, the Company's lease for which expires on
February 28, 1999 and is extendible at the Company's option for an additional
three years. The Company believes that its current facilities are adequate to
support its needs. However, the Company continuously evaluates its need for
additional facilities. The Company also leases a corporate showroom of
approximately 13,000 square feet in the Atlanta, Georgia gift mart and a
corporate showroom of approximately 7,500 square feet in the Chicago, Illinois
gift mart. These leases expire on December 31, 2006 and November 30, 1999,
respectively.
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 December 28, 1996.
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 D 56, Inc., the
Company's principal operating subsidiary, holds identical positions with the
Company as he or she does with D 56, Inc. Officers serve at the discretion of
the Board of Directors.
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NAME AGE POSITION(S) WITH THE COMPANY
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Edward R. Bazinet 53 Chairman of the Board
Susan E. Engel 50 President and Chief Executive Officer
Mark R. Kennedy 39 Senior Vice President and Chief Financial Officer
David H. Weiser 37 Senior Vice President -- Legal/Human Resources,
General Counsel and Secretary
David W. Dewey 39 Senior Vice President -- Overseas Operations
William E. Kirchner 49 Senior Vice President -- Product Development
Robert S. Rose 42 Vice President -- Distribution and Operations
Timothy J. Schugel 38 Vice President -- Finance and Principal Accounting
Officer
Joan M. Serena 43 Vice President -- Consumer & Dealer Marketing
Gregory G. Sorensen 34 Vice President -- Management Information Systems
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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:
Edward R. Bazinet has been Chairman of the Board of the Company and of D 56,
Inc. since April 22, 1993. He was Chief Executive Officer of the Company and of
D 56, Inc. from April 22, 1993 until November 13, 1996. Mr. Bazinet was the
founder of D 56, Inc. and was President of D 56, Inc. from 1984 until April 22,
1993.
Susan E. Engel has been Chief Executive Officer of the Company and of D 56,
Inc. since November 13, 1996, and President of the Company and of D 56, Inc.
since September 19, 1994. She was 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
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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.
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, and its Senior
Vice President and Chief Financial Officer from February 1992 to June 1993.
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 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. He was an associate in the law firm of Fried, Frank, Harris,
Shriver & Jacobson from 1986 until March 15, 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. Mr. Dewey was Vice President of Marketing of D 56, Inc. from
March 1990 until April 22, 1993.
William E. Kirchner has been Senior Vice President -- Product Development of
the Company and of D 56, Inc. since January 1, 1997. He was Vice President --
Product Development and Advertising of the Company and of D 56, Inc. from April
22, 1993 until January 1, 1997. Mr. Kirchner was Director of Advertising and New
Product Development of D 56, Inc. from May 1984 until April 22, 1993.
Robert S. Rose has been Vice President -- Distribution and Operations of the
Company and of D 56, Inc. since April 22, 1993. Mr. Rose was Vice President of
Operations of D 56, Inc. from September 1988 until 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 was a Senior Manager/Manager
with the public accounting firm of Deloitte & Touche LLP from 1986 until April
24, 1993.
Joan M. Serena has been Vice President -- Consumer & Dealer Marketing of the
Company and of D 56, Inc. since January 1, 1997. 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. Ms. Serena
was Vice President, Sales Services of D 56, Inc. from June 1992 until April 22,
1993. Ms. Serena was Divisional Product Merchandising Manager of the Home
Furnishing Division of Associated Merchandising Corporation (a product-sourcing
firm servicing department stores) from August 1988 through May 1992.
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.
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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 1996 Annual Report and Note 7 to Five Year Summary
on page 11 of the 1996 Annual Report, and such information is incorporated
herein by reference.
As of March 19, 1997, the number of holders of record of the Company's
Common Stock was 1,073.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included in Five Year Summary on page
11 of the 1996 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 22 to 27 and 12 to 17,
respectively, of the 1996 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 17 of the 1996 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 December 28, 1996, December 30,
1995 and December 31, 1994, the notes to the consolidated financial statements,
and the report of independent auditors thereon on pages 18 to 28 of the 1996
Annual Report, and in the Company's unaudited quarterly financial data for the
years ended December 28, 1996 and December 30, 1995 on page 14 of the 1996
Annual Report, incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None in 1996.
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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 1997 annual meeting of the
Company's stockholders is included in the 1997 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 7 and 8 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 1997 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.
The principal occupations and positions for the past five years, and in
certain cases prior years, of each of the current directors of the Company who
are not nominated for re-election at the 1997 annual meeting of stockholders are
as follows:
Nicholas C. Forstmann, age 50, has been a director of the Company since
October 1992. Mr. Forstmann has been a General Partner of FLC Partnership, L.P.,
the general partner of Forstmann Little & Co. (a private investment firm), since
he co-founded Forstmann Little & Co. in 1978. He is a director of General
Instrument Corporation ("General Instrument"), a maker of broadcast
transmission, distribution and access control technologies and power rectifying
components.
Stephen Fraidin, age 57, has been a director of the Company since December
14, 1992. Mr. Fraidin has been a partner in the law firm of Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations)
since 1971 and has been a Visiting Lecturer at Yale Law School since 1988.
Richard S. Friedland, age 46, has been a director of the Company since
December 14, 1992. Mr. Friedland has been President and Chief Operating Officer
and a director of General Instrument since October 1993, Chief Executive Officer
of General Instrument since August 1995 and Chairman of the Board of Directors
of General Instrument since December 1995. He was Chief Financial Officer of
General Instrument from March 1992 to January 1994 and Vice President, Finance
of General Instrument from May 1991 to October 1993. He was also Vice President
- -- Finance and Assistant Secretary of GI Corporation of Delaware, the principal
operating subsidiary of General Instrument ("GICD"), from October 1990 to
October 1993 and Vice President and Controller of GICD from November 1988 to
January 1994.
Arthur T. Shorin, age 61, has been a director of the Company since December
14, 1992. Mr. Shorin has been Chairman of the Board of Directors and Chief
Executive Officer of The Topps Company, Inc. (formerly Topps Chewing Gum,
Incorporated -- a distributor of celebrity trading cards, publications,
novelties and confections) since 1980 and of its predecessor, Topps Holding Co.,
Inc., since 1984.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the 1997 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.
10
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is included in the 1997 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
Information required by this Item is included in the 1997 Proxy Statement in
the section captioned "Certain Related Party Transactions," and such information
is incorporated herein by reference. See also, Note 9 to the consolidated
financial statements on page 26 of the 1996 Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
1996
FORM 10-K ANNUAL REPORT
(PAGE) (PAGE)
---------- -------------
<C> <S> <C> <C> <C> <C>
(a) 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 28, 1996 and December 30, 1995 18
For the years ended December 28, 1996, December 30, 1995 and December 31,
1994:
Consolidated Statements of Income 19
Consolidated Statements of Cash Flows 20
Consolidated Statements of Stockholders' Equity 21
Notes to Consolidated Financial Statements 22-27
Independent Auditors' Report for the years ended 28
December 28, 1996, December 30, 1995 and December 31, 1994
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report 12
I. Condensed financial information 13-15
II. Valuation and qualifying accounts 16
</TABLE>
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.
<TABLE>
<C> <S> <C> <C> <C> <C>
3. EXHIBITS
</TABLE>
The exhibits are listed in the accompanying Index to Exhibits on pages 19
and 20.
<TABLE>
<C> <S> <C> <C> <C> <C>
(b) Reports on Form 8-K
</TABLE>
A Current Report on Form 8-K, dated November 14, 1996, was filed reporting
in Items 5 and 7 thereof and containing no financial statements. A Current
Report on Form 8-K, dated December 11, 1996, was filed reporting in Items 5 and
7 thereof and containing no financial statements.
11
<PAGE>
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 December 28, 1996 and December 30, 1995 and
the related consolidated statements of income, cash flows and stockholders'
equity for the years ended December 28, 1996, December 30, 1995 and December 31,
1994, and have issued our report thereon dated February 14, 1997 (included in
the Company's Annual Report to Stockholders for the year ended December 28, 1996
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
February 14, 1997
12
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
INVESTMENT IN SUBSIDIARY............................................................. $ 195,439 $ 148,993
RECEIVABLE FROM SUBSIDIARY........................................................... 1,543 1,563
------------ ------------
$ 196,982 $ 150,556
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued stock issuance costs....................................................... $ 225 $ 270
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION............................................... -- --
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
21,584 and 21,546 shares, respectively........................................... 216 215
Additional paid-in capital......................................................... 42,315 41,803
Unearned compensation on common stock options...................................... -- (14)
Retained earnings.................................................................. 154,226 108,282
------------ ------------
Total stockholders' equity....................................................... 196,757 150,286
------------ ------------
$ 196,982 $ 150,556
------------ ------------
------------ ------------
</TABLE>
- ------------------------
Note: Investment in subsidiary is accounted for under the equity method of
accounting.
See notes to consolidated financial statements included in the
1996 Annual Report, incorporated by reference.
13
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Equity in earnings of subsidiary...................................... $ 46,263 $ 49,435 $ 46,740
Interest expense...................................................... -- (955) (10,376)
General and administrative expenses................................... (319) (227) (265)
------------ ------------ ------------
Income before income taxes............................................ 45,944 48,253 36,099
Income taxes.......................................................... -- -- --
------------ ------------ ------------
Net income............................................................ $ 45,944 $ 48,253 $ 36,099
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements included in the
1996 Annual Report, incorporated by reference.
14
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 45,944 $ 48,253 $ 36,099
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Dividends received from subsidiaries.............................. -- 109,596 51,455
Equity in earnings of subsidiaries................................ (46,263) (49,435) (46,740)
Decrease in accrued interest payable.............................. -- (644) (226)
Decrease in payable to subsidiaries............................... -- -- (862)
(Increase) decrease in receivable from subsidiaries............... 28 (51) (15)
Payment of stock issuance costs................................... (45) (584) (752)
------------ ------------ ------------
Net cash provided by (used in) operating activities............. (336) 107,135 38,959
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options......................... 336 865 1,041
Principal payments on long-term debt................................ -- (108,000) (40,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities............. 336 (107,135) (38,959)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................... -- -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... -- -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements included in the
1996 Annual Report, incorporated by reference.
15
<PAGE>
DEPARTMENT 56, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN B COLUMN C -- ADDITIONS COLUMN E
----------- ------------------------------ -----------
COLUMN A BALANCE AT (1)CHARGED TO COLUMN D BALANCE AT
- ------------------------------------------------- BEGINNING COSTS AND (2)CHARGED TO ------------- END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------- ----------- ------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1996:
Allowance for doubtful accounts receivable..... $ 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
----------- ------------- ----- ------------- -----------
----------- ------------- ----- ------------- -----------
Year ended December 30, 1995:
Allowance for doubtful accounts receivable..... $ 3,592 $ 2,293 -- $ 1,556(a) $ 4,329
Allowance for obsolete and overstock
inventory.................................... 2,660 1,866 -- 922 3,604
Allowance for sales returns and credits........ 1,641 6,529 -- 5,615 2,555
----------- ------------- ----- ------------- -----------
$ 7,893 $ 10,688 -- $ 8,093 $ 10,488
----------- ------------- ----- ------------- -----------
----------- ------------- ----- ------------- -----------
Year ended December 31, 1994:
Allowance for doubtful accounts receivable..... $ 3,314 $ 1,107 -- $ 829(a) $ 3,592
Allowance for obsolete and overstock
inventory.................................... 2,413 539 -- 292 2,660
Allowance for sales returns and credits........ 1,470 4,593 -- 4,422 1,641
----------- ------------- ----- ------------- -----------
$ 7,197 $ 6,239 -- $ 5,543 $ 7,893
----------- ------------- ----- ------------- -----------
----------- ------------- ----- ------------- -----------
</TABLE>
- ------------------------
(a) Accounts determined to be uncollectible and charged against allowance
account, net of collections on accounts previously charged against
allowance account.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Department 56, Inc.
By: /s/ SUSAN E. ENGEL
-----------------------------------------
Susan E. Engel
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: March 27, 1997
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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- -------------------------------------------------------- ------------------------------------- -----------------
<C> <S> <C>
/s/ SUSAN E. ENGEL President, Chief Executive Officer March 27, 1997
-------------------------------------------- and Director
Susan E. Engel (Principal Executive Officer)
/s/ MARK R. KENNEDY Chief Financial Officer and March 27, 1997
-------------------------------------------- Senior Vice President
Mark R. Kennedy (Principal Financial Officer)
/s/ TIMOTHY J. SCHUGEL Vice President -- Finance and March 27, 1997
-------------------------------------------- Principal Accounting Officer
Timothy J. Schugel (Principal Accounting Officer)
/s/ TODD L. BACHMAN March 27, 1997
-------------------------------------------- Director
Todd L. Bachman
/s/ EDWARD R. BAZINET March 27, 1997
-------------------------------------------- Chairman of the Board and Director
Edward R. Bazinet
/s/ NICHOLAS C. FORSTMANN March 27, 1997
-------------------------------------------- Director
Nicholas C. Forstmann
/s/ STEPHEN FRAIDIN March 27, 1997
-------------------------------------------- Director
Stephen Fraidin
/s/ RICHARD S. FRIEDLAND March 27, 1997
-------------------------------------------- Director
Richard S. Friedland
/s/ SANDRA J. HORBACH March 27, 1997
-------------------------------------------- Director
Sandra J. Horbach
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- -------------------------------------------------------- ------------------------------------- -----------------
<C> <S> <C>
/s/ WM. BRIAN LITTLE March 27, 1997
-------------------------------------------- Director
Wm. Brian Little
/s/ STEVEN G. ROTHMEIER March 27, 1997
-------------------------------------------- Director
Steven G. Rothmeier
/s/ ARTHUR T. SHORIN March 27, 1997
-------------------------------------------- Director
Arthur T. Shorin
/s/ VIN WEBER March 27, 1997
-------------------------------------------- Director
Vin Weber
</TABLE>
18
<PAGE>
DEPARTMENT 56, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
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 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)
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 10.4 of
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 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)
10.6 Amended and Restated Credit Agreement, dated as of February 17, 1995, among D 56, Inc., the Banks parties
thereto, and Chemical Bank as agent, issuing bank and accepting bank. (Incorporated herein by reference
to Exhibit 10.1 of Registrant's Current Report on Form 8-K dated February 17, 1995. SEC File no. 1-11908)
10.7 Pledge Agreement, dated as of February 17, 1995, by the Company in favor of Chemical Bank. (Incorporated
herein by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K dated February 17, 1995.
SEC File no. 1-11908)
10.8 Guarantee, dated as of February 17, 1995, by the Company in favor of Chemical Bank. (Incorporated herein
by reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K dated February 17, 1995. SEC File
no. 1-11908)
10.9 Pledge Agreement, dated as of February 17, 1995, by D 56, Inc. in favor of Chemical Bank. (Incorporated
herein by reference to Exhibit 10.8 of Registrant's Current Report on Form 8-K dated February 17, 1995.
SEC File no. 1-11908)
10.10 Pledge Agreement, dated as of February 17, 1995, by FL 56 Intermediate Corp. in favor of Chemical Bank.
(Incorporated herein by reference to Exhibit 10.4 of Registrant's Current Report on Form 8-K dated
February 17, 1995. SEC File no. 1-11908)
10.11 Guarantee, dated as of February 17, 1995, by FL 56 Intermediate Corp. in favor of Chemical Bank.
(Incorporated herein by reference to Exhibit 10.5 of Registrant's Current Report on Form 8-K dated
February 17, 1995. SEC File no. 1-11908)
10.12 Pledge Agreement, dated as of February 17, 1995, by ed bazinet international, inc. in favor of Chemical
Bank. (Incorporated herein by reference to Exhibit 10.6 of Registrant's Current Report on Form 8-K dated
February 17, 1995. SEC File no. 1-11908)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
10.13 Guarantee, dated as of February 17, 1995, by ed bazinet international, inc. in favor of Chemical Bank.
(Incorporated herein by reference to Exhibit 10.7 of Registrant's Current Report on Form 8-K dated
February 17, 1995. SEC File no. 1-11908)
<C> <S>
10.14 Guarantee, dated as of February 17, 1995, by Department 56 Trading Co., Ltd. in favor of Chemical Bank.
(Incorporated herein by reference to Exhibit 10.9 of Registrant's Current Report on Form 8-K dated
February 17, 1995. SEC File no. 1-11908)
10.15 Registration Rights Agreement between the Company, Department 56 Partners, L.P. and Forstmann Little &
Co. Subordinated Debt and Equity Management Buyout Partnership-IV. (Incorporated herein by reference to
Exhibit 10.23 of Registrant's Registration Statement on Form S-1, No. 33-61514.)
10.16 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.)
10.17 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.)+
10.18 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)+
10.19 Form of Stock Option Agreement in connection with Department 56, Inc. 1993 Stock Incentive Plan and
Department 56, Inc. 1995 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)+
10.20 Aircraft Lease, dated as of April 15, 1994, between Fleet Credit Corporation, as Lessor, and D 56, Inc.,
as Lessee. (Incorporated herein by reference to Exhibit 10.27 of Registrant's Registration Statement on
Form S-1, No. 33-77278.)
10.21 Aircraft Management Agreement, dated February 10, 1994, between Department 56 Trading Co., Ltd.
(subsequently assigned to D 56, Inc.) and Lear Siegler Management Corp. (Incorporated herein by reference
to Exhibit 10.25 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994.
SEC File no. 1-11908)
10.22 Time Sharing Agreement, dated February 10, 1994, between Department 56 Trading Co., Ltd. (subsequently
assigned to D 56, Inc.) and Edward R. Bazinet. (Incorporated herein by reference to Exhibit 10.26 of
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. SEC File no. 1-11908)
10.23 Department 56, Inc. Annual Cash Incentive Program +*
11.1 Computation of Earnings Per Share.*
13.1 Excerpts from Annual Report to Stockholders for fiscal year ended December 28, 1996.*
21.1 Subsidiaries of the Company.*
23.1 Consent of Deloitte & Touche LLP*
27.1 Financial Data Schedule (accompanies EDGAR electronic format only)*
</TABLE>
- ------------------------
+ Management contract or compensatory plan
* Filed herewith
20
<PAGE>
DEPARTMENT 56, INC.
ANNUAL CASH INCENTIVE PROGRAM
- --------------------------------------------------------------------------------
1. PURPOSE
The purpose of the Annual Cash Incentive Program is to enhance Department
56, Inc.'s ability to attract, motivate, reward and retain employees, to
strengthen their commitment to the success of the Company and to align their
interests with those of the Company's stockholders by providing additional
compensation to designated employees of the Company based on the achievement of
performance objectives. To this end, the Annual Cash Incentive Program provides
a means of annually rewarding participants largely based on the performance of
the Company and, to a much lesser degree, based on exceptional instances of
personal performance.
2. DEFINITIONS
(a) "Award" shall mean the cash incentive award earned by a Participant
under the Program for any Performance Period.
(b) "Base Salary" shall mean the Participant's annual base salary, based
on the Company's latest Form CTN in effect for the Participant during the
Performance Period to which such Form CTN relates. Annual base salary (1) does
not include (i) Awards under the Program, (ii) profit sharing, 401(k) "match",
or other long-term incentive awards, (iii) imputed or actual income from stock
option exercises or such programs as life insurance or (iv) nonrecurring
earnings such as moving expenses, and (2) is based on salary earnings before
reductions for such items as contributions under Section 401(k) of the Internal
Revenue Code of 1986, as amended, and Company-sponsored deferred compensation
arrangements.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Business Program", for any Performance Period, shall mean the
Company's final financial plan for such Performance Period, submitted to and
approved by the Board before the earlier of (1) the ninety-first day of such
Performance Period or (2) the end of the first quarter of such Performance
Period.
(e) "Change of Control" shall mean the occurrence during the term of the
Program of:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any 'Person' (as
the term person is used for purposes of Section 13(d) or 14(d) of the Exchange
Act), immediately after which such Person has 'Beneficial Ownership' (within the
meaning of Rule 13d-3 promulgated
PAGE 1 OF 11
<PAGE>
under the Exchange Act) of fifty-one percent (51%) or more of the combined
voting power of the Company's then outstanding Voting Securities; provided,
however, in determining whether a Change of Control has occurred, Voting
Securities which are acquired in a 'Non-Control Acquisition' (as hereinafter
defined) shall not constitute an acquisition which would cause a Change of
Control. A 'Non-Control Acquisition' shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part thereof) maintained by (A) the
Company or (B) any corporation or other Person of which a majority of its voting
power or its voting equity securities or equity interest is owned, directly or
indirectly, by the Company (for purposes of this definition, a 'Subsidiary'),
(ii) the Company or its Subsidiaries, or (iii) any Person in connection with a
'Non-Control Transaction' (as hereinafter defined);
(ii) The individuals who, as of May 16, 1997, are members of the Board
(the "Incumbent Board"), cease for any reason to constitute at least two-thirds
of the members of the Board; provided, however, that if the election, or
nomination for election by the Company's common stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Program, be considered as a member
of the Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened 'Election Contest' (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization with or into the
Company or in which securities of the Company are issued, unless such merger,
consolidation or reorganization is a "Non-Control Transaction." A "Non-Control
Transaction" is a merger, consolidation or reorganization with or into the
Company or in which securities of the Company are issued where
(A) the stockholders of the Company, immediately before
such merger, consolidation or reorganization, own, directly or indirectly
immediately following such merger, consolidation or reorganization, at least
sixty percent (60%) of the combined voting power of the outstanding voting
securities of the corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the same
proportion as their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization,
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least two-thirds of the members of
the board of directors of the Surviving Corporation, or a corporation
beneficially owning a majority of
PAGE 2 OF 11
<PAGE>
the Voting Securities of the Surviving Corporation,
(C) no Person other than (1) the Company, (2) any
Subsidiary, (3) any employee benefit plan (or any trust forming a part thereof)
maintained immediately prior to such merger, consolidation or reorganization by
the Company or any Subsidiary, or (4) any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership of fifty-one
percent (51%) or more of the then outstanding Voting Securities owns, directly
or indirectly fifty-one percent (51%) or more of the combined voting power of
the Surviving Corporation's then outstanding voting securities;
(2) A complete liquidation or dissolution of the Company; or
(3) The sale or other disposition of all or substantially all of
the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change of Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Persons, provided that if a
Change of Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change of Control shall occur.
(f) "Company" shall mean Department 56, Inc., its successors and assigns.
(g) "Compensation Committee" shall mean the Compensation Committee of the
Board.
(h) "Consolidated EBIT", for any fiscal year or Performance Period, shall
mean the Consolidated Net Income ((i) including earnings and losses from
discontinued operations, except to the extent that any such losses represent
reserves for losses attributable to the planned disposition of material assets,
(ii) excluding extraordinary gains or losses, and gains and losses arising from
the sale of material assets, and (iii) including other non-recurring gains or
losses) of the Company and its Subsidiaries for such fiscal year or Performance
Period, PLUS to the extent reflected as a charge in the statement of
Consolidated Net Income for such fiscal year or Performance Period, the sum of
(a) net interest expense, amortization of debt discount and debt issuance costs
(including the write-off of such costs in connection with prepayments of debt)
and commissions,
PAGE 3 OF 11
<PAGE>
discounts and other fees and charges associated with letters of credit, (b)
taxes measured by income accrued as an expense during such fiscal year or
Performance Period, and (c) non-cash compensation expense resulting from the
accounting treatment applied, in accordance with GAAP, to management's equity
interest.
(i) "Consolidated Net Income": for any period, the net income or net loss
of the Company and its Subsidiaries for such period determined in accordance
with GAAP on a consolidated basis.
(j) "Current Year EBIT Target", for any Performance Period, shall mean the
Consolidated EBIT goal for such Performance Period, (i) as reflected as EBIT (or
Income From Operations in lieu thereof) in the Business Program or (ii) if such
Performance Period is not a fiscal year, as established by the Compensation
Committee.
(k) "Current Year Financial Target Earned", for any Performance Period,
shall mean the percentage based on the achievement of Current Year EBIT Target
as determined by the Compensation Committee.
(l) "Disability" shall mean permanent disability, as provided in the
Company's long-term disability plan.
(m) "Effective Date" shall mean the date that the Program is adopted by
the Board.
(n) "Employee" shall mean any person (including an officer) employed by
the Company or any of its Subsidiaries on a full-time basis except for any (i)
commissioned sales representative, (ii) non-exempt employee or seasonal or
temporary worker, (iii) employee represented in his or her employment
relationship by a collective bargaining unit or other labor union, guild or
association, or (iv) employee principally in a non-managerial position in any
operation of the Company or any Subsidiary located outside the United States of
America.
(o) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(p) "GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
(q) "Key Employee" shall mean any Employee so designated by the Management
HR Committee.
(r) "Management HR Committee" shall mean a committee composed of four
Company officers, being the Chief Executive Officer and the Company's senior
human resources officer (both of whom shall be standing members of the
Management HR
PAGE 4 OF 11
<PAGE>
Committee), and, on an annual rotating basis, two officers (Vice President
level or higher) of the Company selected by the standing members of the
Management HR Committee.
(s) "Participant", for any Performance Period, shall mean an Employee who
is eligible to participate in the Program for such Performance Period as
provided in Section 3 of the Program.
(t) "Performance Period" shall mean the fiscal year of the Company or any
other period designated by the Compensation Committee with respect to which an
Award is earned.
(u) "Program" shall mean this Department 56, Inc. Annual Cash Incentive
Program, as from time to time amended and in effect.
(v) "Retirement" shall mean retirement at or after age 65 or early
retirement with the prior written approval of the Company.
(w) "Subsidiary" shall mean a corporation as defined in Section 424(f) of
the Internal Revenue Code of 1986, as amended, with the Company being treated as
the employer corporation for purposes of this definition.
(x) "Target Award Percentage" for any Participant with respect to any
Performance Period, shall mean the percentage of the Participant's Base Salary
that the Participant would earn as an Award for that Performance Period if each
of the Current Year Financial Target Earned and Trend Financial Target Earned
for that Performance Period is 100%, and shall be as set forth on a schedule
adopted by the Compensation Committee with respect to officers who are
Participants and as set forth on a schedule adopted by the Management HR
Committee with respect to all other Participants, based on the Participant's
responsibility level or the position or positions held during the Performance
Period; PROVIDED, HOWEVER, that if any Participant held more than one position
during the Performance Period, then the Compensation Committee or Management HR
Committee, as applicable, may designate different Target Award Percentages with
respect to each position and the Award will be pro-rated to reflect the number
of days during which such Participant had each Target Award Percentage.
(y) "Trend EBIT Performance", for any fiscal year Performance Period,
shall mean the three-year rolling average annual change in Consolidated EBIT.
Trend EBIT Performance shall be calculated as a fraction (and expressed as a
percentage), the numerator of which is the sum of Trend EBIT Snapshot for such
fiscal year and Trend EBIT Snapshot for each of the two immediately preceding
fiscal years, and the denominator of which is three; PROVIDED, HOWEVER, that
Trend EBIT Performance for the 1997 fiscal year Performance Period shall equal
Trend EBIT Snapshot solely for the Company's 1997 fiscal year; and FURTHER
PROVIDED, that Trend EBIT Performance for the 1998 fiscal year
PAGE 5 OF 11
<PAGE>
Performance Period shall equal a fraction (expressed as a percentage), the
numerator of which is the sum of Trend EBIT Snapshot for each of the Company's
1997 and 1998 fiscal years, and the denominator of which is two.
(z) "Trend EBIT Snapshot", for any Company fiscal year shall mean the
percentage change in Consolidated EBIT for such fiscal year in relation to
Consolidated EBIT for the immediately preceding fiscal year.
(aa) "Trend Financial Target Earned", for any fiscal year Performance
Period, shall mean the percentage based on the achievement of Trend EBIT Target
as determined by the Compensation Committee.
(bb) "Trend EBIT Target", for any fiscal year Performance Period, shall
mean the Trend EBIT Performance goal for such year as established by the
Compensation Committee.
3. ELIGIBILITY
Participation in the Program for a Performance Period shall be limited to
those Employees who are eligible to participate as provided in this Section 3.
To be eligible to participate in the Program in any Performance Period, an
Employee shall have had a least three months active tenure during such
Performance Period and be actively employed by the Company on the Award payment
date. The Compensation Committee or Management HR Committee may approve, in
accordance with Sections 7 and 8 of this Program, exceptions for special
circumstances.
Employees shall participate in only one annual cash or sales incentive
program for any specific period in time. For example, an individual may not
participate in both the Program and the Company's sales commission or sales
incentive program at the same time. An individual may participate in two
programs sequentially during any Performance Period because of promotion or
reassignment, provided that participation in each such program is pro-rated
based on the number of days he or she participated in each program.
If an Employee becomes a Participant during a Performance Period, such
Participant's Award will be pro-rated based on the number of days that he or she
is a Participant.
4. ADMINISTRATION
The administration of the Program shall be consistent with the purpose and
the terms of the Program. The Program shall be administered by the Compensation
Committee with respect to officers and by the Management HR Committee with
respect to all other Participants. Each member of the Compensation Committee
shall be an "outside director" within the meaning of Treasury Regulations
under Section 162(m) of
PAGE 6 OF 11
<PAGE>
the Internal Revenue Code of 1986, as amended. The Compensation Committee and
the Management HR Committee, as the case may be, shall have full authority to
establish the rules and regulations relating to the Program, to interpret the
Program and those rules and regulations, to decide the facts in any case arising
under the Program, to reduce or eliminate any Participant's Award that would
otherwise be payable pursuant to the terms of the Program in the event the
Participant has demonstrated job performance below Company expectations or
otherwise in such committee's discretion, and to make all other determinations
and to take all other actions necessary or appropriate for the proper
administration of the Program, including the delegation of such authority or
power, where appropriate; PROVIDED, HOWEVER, that only the Compensation
Committee shall have authority to amend or terminate the Program. In addition,
the Management HR Committee shall have, with respect to non-officer Employees,
full authority to select such Participants in the Program and to determine each
such Participant's Target Award Percentage. Moreover, with respect to
Participants who are not officers or Key Employees, the Management HR Committee
shall have full authority to grant Awards in such amounts as it may determine in
any event that (i) no Awards to such Participants would otherwise be payable
pursuant to Section 5 of this Program or (ii) Awards to such Participants of
lesser amounts would otherwise be payable pursuant to Section 5 of this Program.
The Compensation Committee's and the Management HR Committee's administration of
the Program, including all such rules and regulations, interpretations,
selections, determinations, approvals, decisions, delegations, amendments,
terminations and other actions, shall be final and binding on the Company, the
Subsidiaries, their respective stockholders and all employees of the Company and
the Subsidiaries, including the Participants and their respective beneficiaries.
No member of the Compensation Committee or the Management HR Committee shall be
liable for any action, failure to act, determination or interpretation made in
good faith with respect to the Program or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross negligence or
reckless disregard of his or her own willful misfeasance, gross negligence or
reckless disregard of his or her duties. The Company hereby agrees to indemnify
each member of the Compensation Committee and each member of the Management HR
Committee for all costs and expenses and, to the extent permitted by applicable
law, any liability incurred in connection with defending against, responding to,
negotiating for the settlement of or otherwise dealing with any claim, cause of
action or dispute of any kind arising in connection with any actions in
administering the Program or in authorizing or denying authorization to any
transaction hereunder.
5. DETERMINATION OF DEFINED AWARDS
Prior to, or as soon as practicable following, the commencement of each
Performance Period, the Management HR Committee with respect to all non-officer
Participants shall then determine each such Participant's Target Award
Percentage. The Company shall then prepare schedules, which will be treated as
part of the Program for that Performance Period, setting forth (x) the
Participants during that Performance Period, (y) each Participant's Target Award
Percentage for that Performance Period and (z) the
PAGE 7 OF 11
<PAGE>
Current Year EBIT Target and the Trend EBIT Target for that Performance Period.
The Company shall notify each Participant of his or her Target Award Percentage
and the Current Year EBIT Target and the Trend EBIT Target for the Performance
Period. In addition to, and without limiting the generality of the foregoing,
the Company's officers shall also participate in the Program for every
Performance Period in accordance with Section 3 hereof, and the Target Award
Percentage of each officer shall be as set forth on a schedule adopted by the
Compensation Committee.
Generally, a Participant earns an Award for a Performance Period based on
(i) the Company's achievement of the Current Year EBIT Target and the Trend EBIT
Target, and (ii) as further described in Section 6 below, his or her achievement
of extraordinary personal quality performance. The portion of Awards based on
"COMPONENT A" set forth below will only be earned if the Company achieves 90% or
higher of the Current Year EBIT Target for such Performance Period. The portion
of Awards based on "COMPONENT B" set forth below will only be earned if the
Company achieves one-half or more of the Trend EBIT Target.
Awards shall be earned by Participants in accordance with the following
formula:
"COMPONENT A"
Current
Year
Target Financial
Award Base Target
Percentage x Salary x Earned
PLUS
"COMPONENT B"
Trend
Target Financial
Award Base Target
Percentage x Salary x Earned
6. DETERMINATION OF DISCRETIONARY AWARDS
There shall be a pool (not exceeding one hundred thousand dollars) created
each fiscal year Performance Period from which Awards may be granted to any
Participant solely in respect of such Participant's personal job performance and
without regard to the determination of defined Awards or achievement of
financial targets contemplated by Section 5 above; PROVIDED, HOWEVER, that no
such pool shall be created for a Performance Period unless the Business Program
for such Performance Period assumes and reflects the expense effect of full
utilization of the pool.
The Compensation Committee (with respect to any Participant) and the
PAGE 8 OF 11
<PAGE>
Management HR Committee (with respect to any non-officer Participant) shall each
have the authority to grant and pay Awards from any pool described in the
preceding paragraph at such times and in such amounts as such committee, in its
sole discretion, shall determine. Notwithstanding the proviso contained in the
preceding paragraph, there shall be no obligation of either the Compensation
Committee or the Management HR Committee to grant any Awards (or to continue or
repeat the granting of any Awards) to any Participant or Participants pursuant
to this Section 6.
Discretionary bonus pool amounts not utilized in a Performance Period
shall not be carried over or accumulated with any discretionary bonus pool
amounts permitted in any subsequent Performance Periods.
7. CHANGES TO TARGET AWARD PERCENTAGES
The Compensation Committee, with respect to officers who are Participants,
and the Management HR Committee, with respect to all other Participants, may at
any time prior to the final determination of Awards change the Target Award
Percentage of any Participant or assign a different Target Award Percentage to a
Participant to reflect any change in the Participant's responsibility level or
position during the course of the Performance Period.
The Compensation Committee, with respect to officers who are Participants,
and the Management HR Committee, with respect to all other Participants, may at
any time prior to the final determination of Awards change the Current Year EBIT
Target to reflect extraordinary events, accounting changes or a corporate
transaction, such as a merger, consolidation, separation, reorganization or
partial or complete liquidation.
8. PAYMENT OF DEFINED AWARDS
As soon as practicable after the close of a Performance Period (but not
before the Compensation has approved the corresponding audited financial
statements if such Performance Period is a fiscal year), the Compensation
Committee, with respect to officers who are Participants, and the Management HR
Committee, with respect to all other Participants, shall confirm the calculation
of each Participant's Award pursuant to Section 5. Subject to the provisions of
Section 9 of the Program, each Award to the extent earned pursuant to Section 5
shall be paid in a single lump sum cash payment, as soon as practicable after
the close of the Performance Period, but no later than 120 days after the close
of the Performance Period.
If a Change of Control occurs, the Company shall, within 60 days
thereafter, pay to each Participant in the Program immediately prior to the
Change of Control (regardless of whether the Participant remains employed after
the Change of Control) an Award under Section 5 which is calculated assuming
that Current Year EBIT Target and Trend EBIT Target for such Performance Period
are fully (100%) achieved, and such Award shall be
PAGE 9 OF 11
<PAGE>
prorated to the date of the Change of Control based on the number of days that
have elapsed during the Performance Period through the date of the Change of
Control.
9. LIMITATIONS ON RIGHTS TO PAYMENT OF AWARDS
No Participant shall have any right to receive payment of an Award under
Section 5 or Section 6 of the Program for a Performance Period unless the
Participant remains in the employ of the Company through the payment date of the
Award for such Performance Period, except as provided in the last paragraph of
Section 8 of the Program. However, if the Participant has active service with
the Company or the Subsidiary for at least three months during any Performance
Period, but, prior to payment of the Award for such Performance Period, a
Participant's employment with the Company terminates due to the Participant's
death, Disability or Retirement, the Participant (or, in the event of the
Participant's death, the Participant's estate, beneficiary or beneficiaries as
determined under Section 10 of the Program) shall remain eligible to receive any
earned Award, which in the case of any Award under Section 5 shall be prorated
to a portion based on the number of days that the Participant was actively
employed by the Company or a Subsidiary and performed services for it during
such Performance Period.
10. DESIGNATION OF BENEFICIARY
A Participant may designate a beneficiary or beneficiaries who, in the
event of the Participant's death prior to full payment of any Award hereunder,
shall receive payment of any Award due under the Program. Such designation
shall be made by the Participant on a form prescribed by the Management HR
Committee. The Participant may, at any time, change or revoke such designation.
A beneficiary designation, or revocation of a prior beneficiary designation,
will be effective only if it is made in writing on a form provided by the
Company, signed by the Participant and received by the Secretary of the Company.
If the Participant does not designate a beneficiary or the beneficiary dies
prior to receiving any payment of an Awards, Awards payable under the Program
shall be paid to the Participant's estate.
11. AMENDMENTS
The Compensation Committee may at any time amend (in whole or in part) this
Program. No such amendment which adversely affects any Participant's rights to
or interest in an Award earned prior to the date of the amendment shall be
effective unless the Participant shall have agreed thereto.
12. TERMINATION
PAGE 10 OF 11
<PAGE>
The Compensation Committee may terminate this Program (in whole or in part)
at any time. In the case of such termination of the Program, the following
provisions of this Section 12 shall apply notwithstanding any other provisions
of the Program to the contrary:
(i) The Compensation Committee shall promulgate administrative rules
applicable to Program termination, pursuant to which each affected Participant
shall receive, with respect to each Performance Period which has commenced on or
prior to the effective date of the Program termination (the "Termination Date")
and for which the Award under Section 5 has not yet been paid, the amount equal
to the amount his or her Award under Section 5 would have been had the Program
not been terminated (prorated for the Performance Period in which the
Termination Date occurred), subject to reduction in the discretion of the
Compensation Committee.
(ii) Each Award payable under this Section 12 shall be paid as soon as
practicable, but in no event later than 120 days after the end of the fiscal
year in which the Termination Date occurs.
13. MISCELLANEOUS PROVISIONS
(a) This Program is not a contract between the Company and the Employees
or the Participants. Neither the establishment of this Program, nor any action
taken hereunder, shall be construed as giving any Employee or any Participant
any right to be retained in the employ of the Company. The Company is under no
obligation to continue the Program.
(b) A Participant's right and interest under the Program may not be
assigned or transferred, except as provided in Section 10 of the Program, and
any attempted assignment or transfer shall be null and void and shall
extinguish, in the Company's sole discretion, the Company's obligation under the
Program to pay Awards with respect to the Participant.
(c) The Program shall be unfunded. The Company shall not be required to
establish any special or separate fund, or to make any other segregation of
assets, to assure payment of Awards.
(d) The Company shall have the right to deduct from Awards paid any
interest thereon, any taxes or other amounts required by law to be withheld.
(e) Nothing contained in the Program shall limit or affect in any manner
or degree the normal and usual powers of management, exercised by the officers
and the Board or committees thereof, to change the duties or the character of
employment of any employee of the Company or to remove the individual from the
employment of the Company at any time, all of which rights and powers are
expressly reserved.
PAGE 11 OF 11
<PAGE>
Exhibit 11.1
DEPARTMENT 56, INC.
COMPUTATION OF NET INCOME AND INCOME BEFORE EXTRAORDINARY ITEM PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 28,1994
----------------- ----------------- ----------------
<S> <C> <C> <C>
PRIMARY:
Income Before Extraordinary Item $45,944 $49,565 $36,099
------- ------- -------
------- ------- -------
Net Income $45,944 $48,253 $36,099
------- ------- -------
------- ------- -------
Weighted average number of common
shares outstanding 21,560 21,519 21,419
The number of shares resulting from the assumed
exercise of stock options reduced by the number
of shares which could have been purchased with
the proceeds from such exercise, using the average
market price during the period 199 228 230
------- ------- -------
Weighted average number of common and common
equivalent shares 21,759 21,747 21,649
------- ------- -------
------- ------- -------
Income Before Extraordinary Item per Common and
Common Equivalent Share $2.11 $2.28 $1.67
------- ------- -------
------- ------- -------
Net Income per Common and Common Equivalent Share $2.11 $2.22 $1.67
------- ------- -------
------- ------- -------
FULLY DILUTED:
Income Before Extraordinary Item $45,944 $49,565 $36,099
------- ------- -------
------- ------- -------
Net Income $45,944 $48,253 $36,099
------- ------- -------
------- ------- -------
Weighted average number of common shares outstanding 21,560 21,519 21,419
The number of shares resulting from the assumed
exercise of stock options reduced by the number
of shares which could have been purchased with
the proceeds from such exercise, using the greater
of average market price during the period or
period-end market price 199 228 245
------- ------- -------
Weighted average number of common and common
equivalent shares 21,759 21,747 21,664
------- ------- -------
------- ------- -------
Fully Diluted Income Before Extraordinary Item per
Common and Common Equivalent Share $2.11 $2.28 $1.67
------- ------- -------
------- ------- -------
Fully Diluted Net Income per Common and
Common Equivalent Share $2.11 $2.22 $1.67
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
Predecessor
Company Company
------------------------------------------------------------------------------ --------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCT. 4, 1992- DEC. 29, 1991-
(IN THOUSANDS, EXCEPT DEC. 28, DEC. 30, DEC. 31, JAN. 1, JAN. 2, JAN. 2, OCT.3,
PER SHARE AMOUNTS) 1996 (1) 1995 (1) 1994 (1) 1994 (1) 1993 (1,2) 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS (PRO FORMA
FOR THE
ACQUISITION)
Net sales $228,775 $252,047 $217,865 $184,359 $150,754 $ 24,600 $125,713
Cost of sales 95,190 110,008 98,480 87,331 74,958 12,967 62,485
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 133,585 142,039 119,385 97,028 75,796 11,633 63,228
Operating expenses:
Selling, general and
administrative 48,306 47,889 41,831 34,670 29,151 7,537 20,678
Performance bonuses(3) -- -- -- -- 450 -- 6,658
Amortization of goodwill
and trademarks 4,577 4,577 4,577 4,575 4,568 1,150 --
Nonrecurring charges(4) -- -- -- -- -- -- 28,350
Recovery of import duties(5) (453) (2,872) -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 52,430 49,594 46,408 39,245 34,169 8,687 55,686
- -------------------------------------------------------------------------------------------------------------------------------
Income from operations 81,155 92,445 72,977 57,783 41,627 2,946 7,542
Other expense (income):
Interest expense 6,063 9,582 12,629 16,143 16,339 4,341 790
Other, net (648) (439) (837) (1,030) (1,044) (304) (503)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item 75,740 83,302 61,185 42,670 26,332 (1,091) 7,255
Provision (benefit) for
income taxes 29,796 33,737 25,086 17,673 11,168 (24) 6,887
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
extraordinary item 45,944 49,565 36,099 24,997 15,164 (1,067) 368
Extraordinary charge due
to refinancing of debt(6) -- 1,312 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 45,944 $ 48,253 $ 36,099 $ 24,997 $ 15,164 $ (1,067) $ 368
--------------------------------------------------------------------------- -----------
Income (loss) before extra--
ordinary item per share $ 2.11 $ 2.28 $ 1.67 $ 1.16 $ .70 $ (.05) --
--------------------------------------------------------------------------- -----------
Net income (loss) per share $ 2.11 $ 2.22 $ 1.67 $ 1.16 $ .70 $ (.05) --
--------------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<CAPTION>
DEC. 28, DEC. 30, DEC. 31, JAN. 1, JAN. 2,
1996 1995 1994 1994 1993
- -------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 67,997 $ 36,015 $ 13,362 $ 26,392 $ 61,697
Total assets 285,733 259,085 239,680 234,893 275,370
Long-term debt, including
current maturities 60,000 80,000 113,000 148,000 213,000
Total stockholders' equity(7) 196,757 150,286 100,305 61,731 37,158
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) THE YEARS ENDED JANUARY 1, 1994, DECEMBER 31, 1994, DECEMBER 30, 1995 AND
DECEMBER 28, 1996 WERE 52-WEEK PERIODS AND THE YEAR ENDED JANUARY 2, 1993 WAS
A 53-WEEK PERIOD.
(2) IN OCTOBER 1992, D 56, INC. (THE PREDECESSOR COMPANY) WAS ACQUIRED BY
CORPORATIONS FORMED BY AFFILIATES OF FORSTMANN LITTLE & CO. (THE
ACQUISITION).THE PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 2,
1993 IS BASED ON THE ASSUMPTION THAT THE ACQUISITION HAD OCCURRED ON
DECEMBER 29, 1991. THE PRO FORMA DATA INCLUDES THE EFFECTS OF ADJUSTMENTS TO
HISTORICAL ASSET VALUES AS REQUIRED BY THE PURCHASE ACCOUNTING METHOD,
ADJUSTMENTS TO INTEREST EXPENSE TO REFLECT FINANCING COSTS OF THE
ACQUISITION, AMORTIZATION OF INTANGIBLES RELATED TO THE ACQUISITION,
ADJUSTMENTS TO ELIMINATE PERFORMANCE BONUS PAYMENTS RELATED TO PREDECESSOR
COMPANY EMPLOYMENT CONTRACTS THAT WERE TERMINATED IN CONNECTION WITH THE
ACQUISITION, ADJUSTMENTS FOR NONRECURRING COSTS INCURRED BY THE PREDECESSOR
COMPANY AND THE RELATED INCOME TAX EFFECT OF THE PRECEDING ITEMS.
(3) REFLECTS PERFORMANCE BONUSES THAT THE PREDECESSOR COMPANY PAID IN
CONNECTION WITH EMPLOYMENT AGREEMENTS IT HAD WITH CERTAIN OFFICERS, WHICH
AGREEMENTS WERE TERMINATED IN CONNECTION WITH THE ACQUISITION.
(4) NONRECURRING CHARGES INCLUDE PAYMENTS TO TERMINATE EMPLOYMENT CONTRACTS,
SPECIAL BONUSES AND COSTS INCURRED BY THE PREDECESSOR COMPANY IN CONNECTION
WITH THE ACQUISITION.
(5) REFLECTS REFUNDS OF CUSTOM DUTIES AND INTEREST THAT THE COMPANY RECEIVED
RELATED TO CERTAIN MERCHANDISE IMPORTED INTO THE UNITED STATES FROM 1989 TO
1994.(SEE NOTE 8 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
(6) REFLECTS AN EXTRAORDINARY CHARGE THE COMPANY INCURRED IN CONNECTION WITH
ITS REFINANCING OF DEBT. (SEE NOTE 4 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.)
(7) SINCE THE ACQUISITION, 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. THE REVOLVING CREDIT AGREEMENT OF D 56, INC. PERMITS
IT TO DECLARE AND PAY CASH DIVIDENDS (SUBJECT TO CERTAIN LIMITATIONS) TO THE
COMPANY WHICH MAY THEN BE DECLARED AND PAID TO HOLDERS OF COMMON STOCK.
Department 56, Inc. 11 1996 Annual Report
<PAGE>
Management's Discussion and Analysis
RESULTS OF OPERATIONS
- ------------------------------------------
COMPARISON OF RESULTS
OF OPERATIONS 1996 TO 1995
NET SALES Net sales decreased $23.3 million, or 9%, from $252.0 million in
1995 to $228.8 million in 1996. This decrease was due principally to a
decrease in volume. Sales of Village Series products decreased 12% from 1995
to 1996, while General Giftware product sales decreased 3% during the same
period. Village Series products continued to account for the most significant
portion of the Company's sales, 67% in 1996 versus 69% in 1995.
GROSS PROFIT Gross Profit decreased $8.5 million, or 6%, between 1995 and
1996. Gross profit as a percentage of sales increased from approximately 56%
in 1995 to approximately 58% in 1996, principally due to increased
manufacturing efficiencies and lower volume discounts as a percent of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased $.4 million, or 1%, between 1995 and 1996
principally due to an 18% increase in marketing expense and inflationary
increases in administrative expenses, offset by a 7% decrease in commission
expense. Selling, general and administrative expenses as a percentage of
sales increased from approximately 19% in 1995 to approximately 21% in 1996.
RECOVERY OF IMPORT DUTIES, NET The Company received net refunds of $.5
million and $2.9 million in custom duties and related interest during 1996
and 1995, respectively. The duties pertained to certain merchandise imported
into the United States from 1989 to 1994.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) DOLLARS NET SALES DOLLARS NET SALES DOLLARS NET SALES
- ------------------------------------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $228.8 100% $252.0 100% $217.9 100%
Gross profit 133.6 58 142.0 56 119.4 55
Selling, general and administrative expenses 48.3 21 47.9 19 41.8 19
Amortization of goodwill and trademarks 4.6 2 4.6 2 4.6 2
Recovery of import duties (.5) -- (2.9) (1) -- --
Income from operations 81.2 35 92.4 37 73.0 33
Interest expense 6.1 3 9.6 4 12.6 6
Other, net (.6) -- (.4) -- (.8) --
Income before income taxes and extraordinary item 75.7 33 83.3 33 61.2 28
Provision for income taxes 29.8 13 33.7 13 25.1 12
Income before extraordinary item 45.9 20 49.6 20 36.1 17
Extraordinary charge due to refinancing of debt -- -- 1.3 1 -- --
Net income 45.9 20 48.3 19 36.1 17
Income before extraordinary item per share 2.11 2.28 1.67
Net income per share 2.11 2.22 1.67
Operating cash flow(1) 88.1 99.1 79.7
</TABLE>
(1) EARNINGS BEFORE INTEREST, INCOME TAX, DEPRECIATION AND AMORTIZATION
EXPENSES.
Department 56, Inc. 12 1996 Annual Report
<PAGE>
Management's Discussion and Analysis
INCOME FROM OPERATIONS Income from operations decreased $11.3 million, or
12%, from 1995 to 1996 due to the factors described above. Operating margins
decreased from 37% of net sales in 1995 to 35% of net sales in 1996.
INTEREST EXPENSE Interest expense decreased $3.5 million, or 37%, between
1995 and 1996 principally due to the prepayment of $33 million of debt during
1995, decreased interest rates in 1996 and reduced borrowings under the
revolving line of credit in 1996.
PROVISION FOR INCOME TAXES The effective income tax rate was 40.5% and 39.3%
during 1995 and 1996, respectively.
COMPARISON OF RESULTS
OF OPERATIONS 1995 TO 1994
NET SALES Net sales increased $34.2 million, or 16%, from $217.9 million in
1994 to $252.0 million in 1995. This increase was due principally to an
increase in volume. Sales of Village Series products increased 17% from 1994
to 1995, while General Giftware product sales increased 12% during the same
period. Village Series products accounted for 69% of the Company's sales in
both 1995 and 1994.
The increase in the sales volume of Village Series products during 1995
resulted from continued strong customer demand which was supported by the
introduction of new lighted pieces.
In General Giftware products, sales increased at a lower rate than the
Company's overall sales due principally to a reduction in the growth rate of
the Company's Christmas Trim products.
GROSS PROFIT Gross Profit increased $22.7 million, or 19%, between 1994 and
1995. Gross profit as a percentage of sales increased from approximately 55%
in 1994 to approximately 56% in 1995, principally as a result of reduced
import duties resulting from the United States' implementation of GATT,
effective January 1, 1995 and certain manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased $6.1 million, or 14%, between 1994 and
1995, and remained relatively constant at 19% of sales in both periods. The
increase in expenses was primarily due to higher sales and marketing
expenses, including commissions, on the Company's higher sales volume. These
expenses typically vary in proportion to the Company's sales.
RECOVERY OF IMPORT DUTIES, NET The Company received a net refund of $2.9
million in custom duties and related interest during 1995. The duties
pertained to certain merchandise imported into the United States from 1989 to
1994.
INCOME FROM OPERATIONS Income from operations increased $19.5 million, or
27%, from 1994 to 1995 due to the factors described above. Operating margins
increased from 33% of net sales in 1994 to 37% of net sales in 1995.
INTEREST EXPENSE Interest expense decreased $3.0 million, or 24%, between
1994 and 1995 due to the prepayment of $40 million of long-term debt on
December 31, 1994.
PROVISION FOR INCOME TAXES The effective income tax rate was 41.0% and
40.5% during 1994 and 1995, respectively.
EXTRAORDINARY CHARGE DUE TO REFINANCING OF DEBT The Company refinanced its
long-term debt in February, 1995. In connection therewith, the Company
recorded an extraordinary charge of $1.3 million, net of a tax benefit of
$0.9 million, or $0.06 per share.
Department 56, Inc. 13 1996 Annual Report
<PAGE>
Management's Discussion and Analysis
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 71% and 76% of its total
annual customer orders for 1996 and 1995, respectively, during the first
quarter of each of those years. Cancellations of total annual customer orders
were approximately 6% and 7% in 1996 and 1995, respectively. The Company's
backlog was $7.2 million and $11.0 million at December 28, 1996 and December
30, 1995, respectively.
The Company shipped and recorded as net sales approximately 92% and 91% of
its annual customer orders in 1996 and 1995, respectively. Orders not
ship-ped in a particular year, net of cancellations, returns, allowances and
cash discounts, are carried into backlog for the following year and have
historically been orders for Spring and Easter products.
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 objectives
which are consistent with the Company's business strategy.
<TABLE>
<CAPTION>
1996 1995
(IN MILLIONS, EXCEPT ---------------------------------------------- ----------------------------------------------
PER SHARE AMOUNTS) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
- ----------------------------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customer orders entered1 $177.5 $35.3 $28.3 $7.7 $248.8 $209.9 $30.0 $27.3 $8.6 $275.8
Net sales 59.0 75.3 60.2 34.3 228.8 53.0 74.8 77.0 47.2 252.0
Gross profit 33.8 44.3 34.8 20.7 133.6 29.7 42.4 43.6 26.3 142.0
Selling, general and
administrative expenses 11.5 13.0 11.7 12.1 48.3 10.0 12.2 11.8 13.9 47.9
Amortization of goodwill
and trademarks 1.1 1.1 1.2 1.2 4.6 1.1 1.1 1.2 1.2 4.6
Recovery of import duties, net (.2) -- (.3) -- (.5) -- -- (2.8) (.1) (2.9)
Income from operations 21.4 30.2 22.2 7.4 81.2 18.5 29.1 33.4 11.4 92.4
Income before
extraordinary item 12.2 17.3 12.3 4.1 45.9 9.9 15.9 18.2 5.6 49.6
Net income 12.2 17.3 12.3 4.1 45.9 8.6 15.9 18.2 5.6 48.3
Income before extraordinary
item per share 0.56 0.79 0.57 0.19 2.11 0.46 0.73 0.84 0.25 2.28
Net income per share 0.56 0.79 0.57 0.19 2.11 0.40 0.73 0.84 0.25 2.22
</TABLE>
(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.
Department 56, Inc. 14 1996 Annual Report
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In February 1995, the Company entered into a new credit agreement providing a
$100 million term loan and a revolving line of credit. In connection
therewith, the Company recorded an extraordinary charge of $1,312,000, net of
tax, to write off deferred financing costs during the first quarter of 1995.
The Company used the proceeds of the term loan combined with $8 million of
the revolving line of credit to refinance its subordinated debt. The term
loan is due and payable in installments of $20 million, payable in December
of each year. At December 28, 1996, the term loan outstanding was $60 million.
The Company believes that its internally generated cash flow and seasonal
borrowings under the revolving line of credit will be adequate to fund
operations, capital expenditures, and required principal payments on its term
loan for the next twelve months.
The revolving line of credit provides for borrowings of up to $90 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, entering into any transaction to acquire or merge
with any entity or making certain other fundamental changes, selling
property, incurring capital expenditures and paying dividends. In addition,
D 56, Inc., the Company's principal operating subsidiary, is required to
satisfy consolidated net worth, interest coverage ratio and current ratio
tests, in each case at the end of each fiscal quarter. The available
borrowings under the revolving line of credit were $87,615,000 at December
28, 1996.
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 bad debt experience relating to these accounts receivable has not
been material.
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. Cash and cash equivalents balances increased from $7.8 million
at December 30, 1995 to $46.4 million at December 28, 1996 principally due to
the increase in net cash provided by operating activities and a decrease in
net principal payments on long-term debt in 1996 as compared to 1995.
Accounts receivable increased from $34.3 million at December 30, 1995 to
$35.6 million at December 28, 1996 principally due to a higher percentage of
1996 sales qualifying for extended terms.
During 1996, the Company reduced its inventory levels as a result of the
decrease in sales volume in 1996 as compared to 1995 and took a more cautious
approach to inventory purchases. Inventories decre-ased from $29.1 million at
December 30, 1995 to $20.5 million at December 28, 1996.
Capital expenditures were $1.5 million, $1.6 million and $2.6 million for
1996, 1995 and 1994, respectively.
Operating cash flow, defined as earnings before interest, income tax,
depreciation and amortization expenses, decreased $11.0 million, or 11%, from
$99.1 million in 1995 to $88.1 million in 1996. The decrease was principally
due to the decrease in income from operations.
On December 10, 1996, the Board of Directors of the Company authorized a
stock repurchase program. The program allows the repurchase in the open
market of up to 1.5 million shares through the end of June 1998. The timing,
prices and number of shares repurchased will be determined at the discretion
of the Company's management based on its view of prevailing economic and
market conditions.
Department 56, Inc. 15 1996 Annual Report
<PAGE>
Management's Discussion and Analysis
FOREIGN EXCHANGE
The dollar value of the Company's assets abroad is not significant. The
Company's sales are denom-inated 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.
Subsequent to December 28, 1996, the Company entered into $15.0 million of
foreign exchange contracts to hedge 1997 New Taiwan dollar denominated
inventory purchases. These contracts mature from January 1997 through
December 1997 at a rate of approximately 27.50 NT$/US$.
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 20, 1997, the Company issued a press release stating, in relevant
part: " `During [1996] we took some tough, but necessary steps to strengthen
and protect our unique collectible brands by responding to excess retail
inventory levels. Although substantial efforts were taken in 1996 to reduce
inventory at retail, 1997 will continue to be a year of transition, as
retailers work to further reduce their inventory,'
[said Susan Engel, President and CEO of Department 56].
As a result, dealer orders through February 15, 1997, are down 11% against
the comparable period last year. While orders for new product introductions
continue to be strong, first quarter reorders of existing products are down
as dealer inventory levels are sufficient for many items. Also, the company
purposely introduced fewer new Village pieces in January in order to balance
the emphasis at retail between new and existing pieces with the goal of
advancing the inventory reduction process. `We attribute the decline in
orders to date primarily to a necessary and healthy correction in retail
inventory levels,' Engel commented.
In addition, Engel said, `independent research suggests continuing growth in
underlying consumer demand, as well as progress already made toward retail
inventory reduction, supporting our confidence in the future.' Engel cited
five findings:
- Retail sales of Department 56 collectible lines grew in 1996;
- Dealers expect continued retail sales growth in 1997;
- Dealers cite new collectors as an important reason for their growth;
- Existing collectors continue to show enthusiasm for Department 56
collectible lines;
- Dealers experienced a reduction in their retail inventory levels of
current product."
Department 56, Inc. 16 1996 Annual Report
<PAGE>
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
"safe harbor" status to certain statements that go beyond historical
information and which may provide an indication of future results. The press
release further stated: "The statements in this press release relating to
matters that are not historical facts are `forward-looking statements' that
involve risks and uncertainties. Among other assumptions, the forward-looking
statements regarding retail inventory levels and consumer demand are based on
market research conducted for the Company and assume that consumer demand and
retail inventory levels will follow the findings of, and dealer statements
made in, this research. Moreover, these forward-looking statements are also
based on retail inventory reports from certain dealers of the Company's
products and assume that such reports were correct when made and are
reflective of the market as a whole. General and giftware industry economic
conditions are also assumed to remain stable.
Actual results may vary from these forward-looking statements and the
assumptions on which they are based. The forward-looking statements in this
press release speak as of this date only. The Company undertakes no
obligation to update such forward-looking statements or publish any
forward-looking statements in the future."
Department 56, Inc. 17 1996 Annual Report
<PAGE>
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT DECEMBER 28, DECEMBER 30,
PER SHARE AMOUNTS) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 46,405 $7,805
Accounts receivable, net of allowances of
$10,264 and $6,884, respectively 35,603 34,271
Inventories 20,526 29,059
Deferred taxes 5,048 4,476
Other current assets 1,721 2,068
- -----------------------------------------------------------------------------
Total current assets 109,303 77,679
Property and equipment, net 12,318 12,445
Goodwill, net of accumulated amortization of
$17,554 and $13,425, respectively 147,620 151,749
Trademarks, net of accumulated amortization of
$1,902 and $1,454, respectively 15,998 16,446
Other assets 494 766
- -----------------------------------------------------------------------------
$285,733 $259,085
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 20,000 $ 20,000
Accounts payable 7,618 6,599
Commissions payable 4,683 4,471
Other current liabilities 9,005 10,594
- -----------------------------------------------------------------------------
Total current liabilities 41,306 41,664
Deferred taxes 7,670 7,135
Long-term debt 40,000 60,000
Commitments (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 21,584 and 21,546 shares, respectively 216 215
Additional paid-in capital 42,315 41,803
Unearned compensation on common stock options -- (14)
Retained earnings 154,226 108,282
- -----------------------------------------------------------------------------
Total stockholders' equity 196,757 150,286
- -----------------------------------------------------------------------------
$285,733 $259,085
-------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 18 1996 Annual Report
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT YEAR ENDED YEAR ENDED YEAR ENDED
PER SHARE AMOUNTS) DECEMBER 28, 1996 DECEMBER 30, 1995 DECEMBER 31, 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $228,775 $252,047 $217,865
Cost of sales 95,190 110,008 98,480
- -----------------------------------------------------------------------------------------------------------
Gross profit 133,585 142,039 119,385
Operating expenses:
Selling, general and administrative 48,306 47,889 41,831
Amortization of goodwill and trademarks 4,577 4,577 4,577
Recovery of import duties (453) (2,872) --
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 52,430 49,594 46,408
- -----------------------------------------------------------------------------------------------------------
Income from operations 81,155 92,445 72,977
Other expense (income):
Interest expense 6,063 9,582 12,629
Other, net (648) (439) (837)
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 75,740 83,302 61,185
Provision for income taxes 29,796 33,737 25,086
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary item 45,944 49,565 36,099
Extraordinary charge due to refinancing of debt -- 1,312 --
- -----------------------------------------------------------------------------------------------------------
Net income $ 45,944 $ 48,253 $ 36,099
--------------------------------------------------
Income before extraordinary item per share $ 2.11 $ 2.28 $ 1.67
--------------------------------------------------
Net income per share $ 2.11 $ 2.22 $ 1.67
--------------------------------------------------
Weighted average common and common
equivalent shares outstanding 21,759 21,747 21,649
--------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 19 1996 Annual Report
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,944 $ 48,253 $ 36,099
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary charge -- 1,312 --
Depreciation 1,721 1,609 1,296
Amortization of goodwill, trademarks and
other assets 4,577 4,577 5,254
Provision for uncollectible accounts receivable 2,014 2,293 1,107
Compensation expense - common stock options 14 169 498
Deferred taxes (37) (1,528) 203
Changes in assets and liabilities:
Accounts receivable (3,349) (12,605) (11,511)
Inventories 8,533 (8,693) (2,971)
Other assets 502 520 (361)
Accounts payable 1,019 1,442 11
Commissions payable 212 262 590
Other current liabilities (1,379) 1,766 1,179
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 59,771 39,377 31,394
- -----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (1,507) (1,617) (2,621)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options 336 865 1,041
Borrowings on revolving credit agreement 34,338 36,500 97,577
Principal payments on revolving credit agreement (34,338) (41,500) (92,577)
Proceeds from issuance of long-term debt -- 100,000 --
Principal payments on long-term debt (20,000) (128,000) (40,000)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (19,664) (32,135) (33,959)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 38,600 5,625 (5,186)
Cash and cash equivalents at beginning of period 7,805 2,180 7,366
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 46,405 $ 7,805 $ 2,180
--------------------------------------
</TABLE>
See notes to consolidated financial statements.
Department 56, Inc. 20 1996 Annual Report
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
UNEARNED
COMMON STOCK ADDITIONAL COMPENSATION TOTAL
---------------------- PAID-IN ON COMMON RETAINED STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT CAPITAL STOCK OPTIONS EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 21,343 $213 $38,269 $(681) $ 23,930 $ 61,731
Net income -- -- -- -- 36,099 36,099
Shares issued upon the exercise
of common stock options 132 2 1,975 -- -- 1,977
Common stock options vested -- -- -- 498 -- 498
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1994 21,475 215 40,244 (183) 60,029 100,305
Net income -- -- -- -- 48,253 48,253
Shares issued upon the exercise
of common stock options 71 -- 1,559 -- -- 1,559
Common stock options vested -- -- -- 169 -- 169
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of December 30, 1995 21,546 215 41,803 (14) 108,282 150,286
Net income -- -- -- -- 45,944 45,944
Shares issued upon the exercise
of common stock options 38 1 512 -- -- 513
Common stock options vested -- -- -- 14 -- 14
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of December 28, 1996 21,584 $216 $42,315 $ -- $154,226 $196,757
---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 21 1996 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Company is engaged in the original design, importation, and
wholesale distribution of specialty giftware products. The majority of the
Company's products are developed and designed by the Company's in-house
creative team and are manufactured for the Company by independently owned
foreign manufacturers located primarily in the Pacific Rim. The Company's
customer base and accounts receivable are primarily comprised of, and are due
from, retail stores of various sizes located throughout the United States.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements of the Company include the accounts of the Company and its
subsidiaries, which include D 56, Inc., Browndale Tanley Limited and
Department 56 Trading Co., Ltd., all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR END The Company's policy is to end its fiscal year on the
Saturday closest to December 31. The years ended December 31, 1994, December
30, 1995 and December 28, 1996 include 52 weeks.
CASH AND CASH EQUIVALENTS All highly liquid debt instruments with original
maturities of three months or less are considered to be cash equivalents and
are reported as cash and cash equivalents on the consolidated balance sheets.
INVENTORIES Inventories consist of finished goods and are stated at the lower
of average cost, which approximates first-in, first-out cost, or market
value. The Company records inventory at the date of taking title, which at
certain times during the year results in significant in-transit quantities,
as inventory is sourced primarily from China, Taiwan and other Pacific Rim
countries. Each period the Company provides for identified, unsaleable and
slow-moving inventory.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation is computed on a straight-line method over the estimated useful
lives of the assets, ranging from two to forty-five years.
Major improvements and replacements of property are capitalized. Maintenance,
repairs and minor improvements are expensed. Upon retirement or other
disposition of property, applicable cost and accumulated depreciation are
removed from the accounts. Any gains or losses are included in income.
GOODWILL Goodwill represents the excess of cost over the fair value of
acquired net assets of the Company at the acquisition date and is being
amortized on a straight-line basis over 40 years. The Company periodically
evaluates the recoverability of goodwill based on an analysis of estimated
future undiscounted cash flows.
TRADEMARKS Trademarks acquired are being amortized on a straight-line basis
over 40 years. The Company periodically evaluates the recoverability of
trademarks based on an analysis of estimated future undiscounted cash flows.
REVENUE RECOGNITION Revenues are recognized when products are shipped, net of
an allowance for returns.
INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
FOREIGN CURRENCY TRANSLATION The Company uses the United States dollar as the
functional
Department 56, Inc. 22 1996 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
currency of its foreign operations. Accordingly, translation
gains and losses resulting from the remeasurement of foreign operations'
financial statements are reflected in the accompanying statements of income.
FOREIGN EXCHANGE CONTRACTS The Company imports certain product from Taiwan.
To hedge its foreign exchange exposure, the Company may enter into foreign
exchange contracts. The foreign exchange contracts reduce the Company's
overall exposure to exchange rate movements, since the gains and losses on
these contracts offset gains and losses on the transaction being hedged.
Subsequent to December 28, 1996, the Company entered into nondeliverable
Taiwan currency forward contracts with a notional amount of $15,000 which
mature from January 1997 to December 1997. Gains or losses on these contracts
will be recognized and included in cost of sales at the time the related
inventory is sold. The Company is exposed to credit risk to the extent of
nonperformance by a counterparty to the foreign currency contracts. However,
the Company believes it uses a strong financial counterparty in these
transactions and that the resulting credit risk under these hedging
strategies is not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, and commissions payable
approximates fair value because of the short-term nature of these
instruments. Based on the borrowing rates currently available to the Company
for bank loans with similar terms and maturities, the Company also believes
the carrying amount of long-term debt approximates fair value. The fair value
of the Company's forward currency contracts is determined using the current
spot rate. The fair value and carrying amount of such contracts were $(77)
and $0 at December 30, 1995. There were no forward currency contracts
outstanding at December 28, 1996.
NET INCOME PER SHARE Net income per share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of the Company's common stock issuable upon
exercise of common stock options, determined using the treasury stock method.
MANAGEMENT ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2 PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT IS COMPRISED OF THE FOLLOWING:
DEC. 28, DEC. 30,
1996 1995
- -----------------------------------------------------------------------------
Leasehold improvements $ 2,156 $ 2,020
Furniture and fixtures 4,025 2,983
Equipment 4,756 4,518
Building 5,882 5,882
Land 906 906
- -----------------------------------------------------------------------------
17,725 16,309
Less accumulated depreciation 5,407 3,864
- -----------------------------------------------------------------------------
Property and equipment, net $12,318 $12,445
---------------------
3 OTHER CURRENT LIABILITIES
OTHER CURRENT LIABILITIES ARE COMPRISED OF THE FOLLOWING:
DEC. 28, DEC. 30,
1996 1995
- -----------------------------------------------------------------------------
Accrued compensation
and benefits $1,281 $ 1,370
Income taxes payable 5,893 6,917
Accrued royalty fees 593 1,245
Other 1,238 1,062
- -----------------------------------------------------------------------------
$9,005 $10,594
---------------------
Department 56, Inc. 23 1996 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
4 CREDIT AGREEMENT
LONG-TERM DEBT IS COMPRISED OF THE FOLLOWING:
DEC. 28, DEC. 30,
1996 1995
- -----------------------------------------------------------------------------
Term loan $60,000 $80,000
Less current portion 20,000 20,000
- -----------------------------------------------------------------------------
$40,000 $60,000
----------------------
During February 1995, the principal operating subsidiary of the Company,
D 56, Inc., entered into a credit agreement providing a $100,000 term loan and
a revolving line of credit. In connection therewith, the Company recorded an
extraordinary charge of $1,312, net of tax, to write off deferred financing
costs during the first quarter of 1995. The term loan is due and payable in
annual installments of $20,000, payable in December of each year.
The revolving line of credit provides for borrowings of up to $90,000, which
may be in the form of letters of credit, banker's acceptances, and revolving
credit loans. The sum of the Company's revolving credit loans and bankers
acceptances may not exceed an aggregate of $20,000 during any one
30-consecutive-day period each calendar year. Borrowings under the credit
agreement are subject to certain borrowing base limitations (as defined). The
revolving line of credit provides for commitment fees of 1/4% to 3/8% per
annum on the daily average of the unused commitment. The available borrowings
under the revolving line of credit were $87,615 at December 28, 1996.
The credit agreement allows the Company to choose between two interest rate
options in connection with its term loan and revolving credit loans. The
interest rate options are the Alternate Base Rate (as defined) or the
Eurodollar Rate (as defined) plus an applicable margin. The applicable margin
ranges from 1/2% to 11/4% for Eurodollar loans. The credit agreement expires
December 31, 1999.
The credit agreement includes restrictions as to, among other things, the
amount of additional indebtedness, liens, contingent obligations,
investments, capital expenditures and dividends. The credit agreement also
requires maintenance of minimum levels of interest coverage, net worth and
liquidity.
None of these restrictions are expected to have a material adverse effect on
the Company's ability to operate in the future. The Company has pledged the
common stock of its subsidiaries, direct and indirect, as collateral under
the credit agreement and the Company and its subsidiaries, direct and
indirect, have guaranteed repayment of amounts borrowed under the credit
agreement.
The Company paid interest of $6,129, $10,086 and $12,182 during
the years ended December 28, 1996, December 30, 1995 and December 31, 1994,
respectively.
5 INCOME TAXES
THE PROVISION FOR INCOME TAXES, EXCLUDING THE $893 TAX BENEFIT FROM
THE EXTRAORDINARY CHARGE DUE TO THE REFINANCING OF DEBT IN 1995,
CONSISTED OF THE FOLLOWING:
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------
Current:
Federal $27,376 $30,560 $22,339
State 2,347 2,619 2,298
Foreign 110 272 246
Deferred (37) 286 203
- -----------------------------------------------------------------------------
$29,796 $33,737 $25,086
-------------------------------------
THE RECONCILIATION BETWEEN INCOME TAX EXPENSE BASED ON STATUTORY INCOME TAX
RATES AND THE PROVISION FOR INCOME TAXES PER THE CONSOLIDATED STATEMENTS OF
INCOME IS AS FOLLOWS:
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------
Income taxes at federal
statutory rate $26,509 $29,156 $21,414
State income taxes, net of
federal income tax 1,893 2,566 1,929
Amortization of goodwill 1,448 1,448 1,448
Other (54) 567 295
- -----------------------------------------------------------------------------
Provision for income taxes $29,796 $33,737 $25,086
----------------------------------
Department 56, Inc. 24 1996 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
THE COMPONENTS OF THE NET DEFERRED TAX LIABILITY WERE AS FOLLOWS:
DEC. 28, 1996 DEC. 30, 1995
- -----------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable
valuation allowances $3,516 $2,704
Inventory valuation allowances 1,118 1,369
Compensation expense -
common stock options 331 366
Accrued liabilities 354 620
Other 263 310
- -----------------------------------------------------------------------------
Total deferred tax assets 5,582 5,369
Deferred tax liabilities:
Trademarks (6,079) (6,249)
Property and equipment (1,986) (1,626)
Other (139) (153)
- -----------------------------------------------------------------------------
Total deferred tax liabilities (8,204) (8,028)
- -----------------------------------------------------------------------------
$(2,622) $(2,659)
----------------------------
The $2,622 net deferred tax liability at December 28, 1996 is presented as a
net deferred current asset of $5,048 and a net deferred noncurrent liability
of $7,670. The $2,659 net deferred tax liability at December 30, 1995 is
presented as a net deferred current asset of $4,476 and a net deferred
noncurrent liability of $7,135.
The Company paid income taxes of $28,943, $31,855 and $23,677 during the
years ended December 28, 1996, December 30, 1995 and December 31, 1994,
respectively.
6 COMMITMENTS
OPERATING LEASES The Company leases an aircraft, warehouse and office space,
equipment, and showroom display facilities under renewable operating leases
ranging from three to twelve years in duration. In addition to the base rent,
the Company pays its proportionate share of taxes and special assessments and
operating expenses of the warehouse and showroom display facilities.
THE FOLLOWING IS A SCHEDULE OF FUTURE ANNUAL MINIMUM LEASE PAYMENTS FOR
NONCANCELABLE OPERATING LEASES AS OF DECEMBER 28, 1996:
- -------------------------------------
1997 $2,704
- -------------------------------------
1998 2,623
- -------------------------------------
1999 2,119
- -------------------------------------
2000 2,469
- -------------------------------------
2001 2,719
- -------------------------------------
Thereafter 2,107
- -------------------------------------
$14,741
-------
The Company's rental expense was $3,238, $2,875 and $2,359 for the years
ended December 28, 1996, December 30, 1995 and December 31, 1994,
respectively.
LETTERS OF CREDIT The Company had outstanding standby and commercial
letters of credit amounting to $2,385 at December 28, 1996 relating primarily
to purchase commitments issued to foreign suppliers and vendors.
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.
7 RETIREMENT PLAN
The Company has a profit sharing plan covering substantially all employees.
Contributions to this plan are at the discretion of the Board of Directors,
subject to certain limitations. The Company's total profit sharing
contributions were $750, $975 and $819 for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994, respectively.
8 RECOVERY OF IMPORT DUTIES
During the years ended December 28, 1996 and December 30, 1995, the Company
received net refunds of custom duties and related interest
Department 56, Inc. 25 1996 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
of $453 and $2,872, respectively. The refunds pertained to certain
merchandise imported into the United States from 1989 to 1994.
9 RELATED-PARTY TRANSACTIONS
In the ordinary course of business, the Company sells product to a floral and
nursery wholesaler and retailer, of which a director of the Company is an
officer, director and stockholder. The Company had sales to this floral and
nursery business during the years ended December 28, 1996, December 30, 1995
and December 31, 1994 of $1,305, $1,893 and $1,494, respectively.
During the years ended December 28, 1996, December 30, 1995 and December 31,
1994, the Company paid Forstmann Little & Co. (FL & Co.), a shareholder, and
its affiliates $2,116, $2,537 and $1,549, respectively, for aircraft
management, transportation and other expenses.
In February, 1994 the Company entered into an agreement with an affiliate of
FL & Co. to purchase a corporate aircraft for $6,650. The Company assigned
the purchase agreement to an unaffiliated third party and entered into an
operating lease of the aircraft from such third party following the
assignment.
10 STOCK-BASED
COMPENSATION PLANS
At December 28, 1996, the Company had three stock-based compensation
plans.Under the 1992, 1993 and 1995 stock option plans, the Company may grant
options to its directors, officers, employees, consultants and advisors of
the Company for up to 292,500, 1,000,000 and 600,000 shares of common stock,
respectively. All options granted after the initial public offering have an
exercise price equal to the market value of the common stock at the date of
grant, generally have a term of 10 years, and generally are exercisable in
equal installments on each of the first, second and third anniversaries of
the date of the grant.
A summary of the status of the Company's three stock option plans as of
December 28, 1996, December 30, 1995 and December 31, 1994, and changes
during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,072,773 $31.73 702,755 $26.32 404,556 $10.30
Granted 433,350 20.48 448,660 37.13 424,700 36.28
Exercised (33,500) 9.36 (70,742) 12.23 (122,401) 8.23
Forfeited (180,715) 39.09 (7,900) 31.26 (4,100) 18.00
--------- --------- ----- --------
Outstanding at end of year 1,291,908 27.51 1,072,773 31.73 702,755 26.32
Options exercisable at end of year 536,583 224,271 32,955
--------- --------- --------
Weighted average fair value
of options granted during the year $10.75 $16.07
--------- ---------
</TABLE>
The Company applies Accounting Principle's Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for options
granted since the initial public offering. Had
Department 56, Inc. 26 1996 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
compensation cost been determined based on the fair value of the 1995 and
1996 stock option grants consistent with the method of Statement of
Finan-cial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123), the Company's income before extraordinary item, net
income, income before extraordinary item per share and net income per share
would have been reduced to the pro forma amounts indicated below:
YEAR ENDED YEAR ENDED
DEC. 28, 1996 DEC. 30, 1995
- --------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM
As reported $45,944 $49,565
Pro forma $43,410 $48,885
NET INCOME
As reported $45,944 $48,253
Pro forma $43,410 $47,573
INCOME BEFORE EXTRAORDINARY ITEM PER SHARE
As reported $2.11 $2.28
Pro forma $2.00 $2.25
NET INCOME PER SHARE
As reported $2.11 $2.22
Pro forma $2.00 $2.19
In determining the preceding pro forma amounts under SFAS 123, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: expected
volatility of 46% and 32%, risk-free interest rates of 5.8% and 6.0%,
expected option lives of 6 years and no expected dividends. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. SFAS 123 does not apply to awards prior to 1995, and additional
awards are anticipated.
The following table summarizes information about the CompanyOs stock option
plans at December 28, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT DEC. 28, 1996 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 28, 1996 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.33 81,013 6.1 years $ 3.33 81,013 $ 3.33
18.00-20.50 517,815 8.7 20.05 90,500 18.00
34.63-37.75 693,080 8.1 35.91 365,070 36.08
--------- -------
1,291,908 536,583
--------- -------
</TABLE>
In addition to stock options granted under the Company's stock option plans,
the Company granted options to purchase 30,000 shares of Common Stock to each
of four members of the Company's Board of Directors in December 1992. During
February 1993, the Company granted options to purchase 30,000 shares of
Common Stock to one member of the Board of Directors. These options are not
subject to a stock option plan. Such options are exercisable, have a term of
ten years, and have an exercise price of $3.33 per share. Shares purchased
under these options are subject to director stockholder agreements which
limit the transferability of the shares. At December 28, 1996, directors'
options to purchase 135,000 shares of Common Stock were exercisable at $3.33
per share.
Department 56, Inc. 27 1996 Annual Report
<PAGE>
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 December 28, 1996 and
December 30, 1995 and the related consolidated statements of
income, cash flows and stockholders' equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 28, 1996 and December 30, 1995 and the results
of its operations and its cash flows for the years ended December
28, 1996, December 30, 1995 and December 31, 1994 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 14, 1997
<PAGE>
CORPORATE AND STOCKHOLDER INFORMATION
BOARD OF DIRECTORS
Edward R. Bazinet 1 Sandra J. Horbach 1, 3
CHAIRMAN OF THE BOARD GENERAL PARTNER
Department 56, Inc. Forstmann Little & Co.
Todd L. Bachman 2 Wm. Brian Little 1
CHAIRMAN OF THE BOARD PRIVATE INVESTOR
AND CHIEF EXECUTIVE OFFICER
Bachman's, Inc. Steven G. Rothmeier 2
CHAIRMAN OF THE BOARD
Susan E. Engel AND CHIEF EXECUTIVE OFFICER
PRESIDENT AND Great Northern Capital
CHIEF EXECUTIVE OFFICER
Department 56, Inc. Arthur T. Shorin 3
CHAIRMAN OF THE BOARD
Nicholas C. Forstmann 1, 3 AND CHIEF EXECUTIVE OFFICER
GENERAL PARTNER The Topps Co., Inc.
Forstmann Little & Co.
Vin Weber
Stephen Fraidin PARTNER
PARTNER Clark & Weinstock, Inc.
Fried, Frank, Harris,
Shriver & Jacobson
Richard S. Friedland 2
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER 1 MEMBER OF EXECUTIVE COMMITTEE
General Instrument 2 MEMBER OF AUDIT COMMITTEE
Corporation 3 MEMBER OF COMPENSATION COMMITTEE
OFFICERS
Edward R. Bazinet
CHAIRMAN OF THE BOARD
Susan E. Engel
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
David W. Dewey Timothy J. Schugel
SENIOR VICE PRESIDENT - VICE PRESIDENT - FINANCE
OVERSEAS OPERATIONS
Joan M. Serena
Mark R. Kennedy VICE PRESIDENT - CONSUMER
SENIOR VICE PRESIDENT & DEALER MARKETING
AND CHIEF FINANCIAL OFFICER
Gregory G. Sorensen
William E. Kirchner VICE PRESIDENT - MANAGEMENT
SENIOR VICE PRESIDENT - INFORMATION SYSTEMS
PRODUCT DEVELOPMENT
David H. Weiser
Robert S. Rose SENIOR VICE PRESIDENT -
VICE PRESIDENT - DISTRIBUTION LEGAL/HUMAN RESOURCES
AND OPERATIONS AND SECRETARY
STOCKHOLDER INFORMATION
CORPORATE OFFICES INDEPENDENT AUDITORS
One Village Place Deloitte & Touche LLP
6436 City West Parkway
Eden Prairie, MN 55344 STOCK LISTING
New York Stock Exchange
TRANSFER AGENT Symbol "DFS"
Chase Mellon
Shareholder Services ANNUAL MEETING
450 West 33rd Street 1:00 p.m.
New York, NY 10001 May 15, 1997
Chase Manhattan Bank
270 Park Avenue
New York, NY
Department 56, Inc. Market Price (PER SHARE)
1996 High Low
- -------------------------------------------------
First Quarter $41 7/8 $20
- -------------------------------------------------
Second Quarter $26 1/8 $20
- -------------------------------------------------
Third Quarter $25 3/8 $19 1/2
- -------------------------------------------------
Fourth Quarter $25 3/4 $21 3/8
- -------------------------------------------------
1995 High Low
- -------------------------------------------------
First Quarter $40 5/8 $33 3/4
- -------------------------------------------------
Second Quarter $42 $35 5/8
- -------------------------------------------------
Third Quarter $47 1/4 $37 5/8
- -------------------------------------------------
Fourth Quarter $48 $32 5/8
- -------------------------------------------------
Copies of Department 56's annual report to the Securities and
Exchange Commission on Form 10-K may be obtained without charge by
contacting Investor Relations, Department 56, Inc., (612) 944-5600.
As of February 18, 1997, there were 1,067 record holders of the
Company's common stock.
CONSUMER INFORMATION
The dealer nearest you can be identified by calling our consumer
information line at 1-800-LIT-TOWN (1-800-548-8696) or by accessing
our Web site at www.D56.com. Our Web site also includes other
consumer information.
<PAGE>
SUBSIDIARIES OF THE COMPANY
Name of Subsidiary Jurisdiction
------------------ ------------
FL56 Intermediate Corp. Delaware
ed bazinet international, inc. Minnesota
D 56, Inc. Minnesota
Department 56 Trading Co., Ltd. Delaware
Browndale Tanley Limited Hong Kong
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-95704 and No. 33-79960 of Department 56, Inc. on Form S-8 of our reports
dated February 14, 1997, included in and incorporated by reference in this
Annual Report of Department 56, Inc. on Form 10-K for the year ended December
28, 1996.
Deloitte & Touche, LLP
Minneapolis, Minnesota
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 46,405
<SECURITIES> 0
<RECEIVABLES> 35,603
<ALLOWANCES> 0
<INVENTORY> 20,526
<CURRENT-ASSETS> 109,303
<PP&E> 12,318
<DEPRECIATION> 0
<TOTAL-ASSETS> 285,733
<CURRENT-LIABILITIES> 41,306
<BONDS> 40,000
0
0
<COMMON> 216
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 285,733
<SALES> 228,775
<TOTAL-REVENUES> 228,775
<CGS> 95,190
<TOTAL-COSTS> 95,190
<OTHER-EXPENSES> 52,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,063
<INCOME-PRETAX> 75,740
<INCOME-TAX> 29,796
<INCOME-CONTINUING> 45,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,944
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
</TABLE>
