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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended January 3, 1998
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 $645,113,352 of March 20, 1998 (based on the
closing price of consolidated trading in the Common Stock on that date as
published in MICROSOFT INVESTOR). For purposes of this computation, shares held
by affiliates and by directors and officers of the registrant have been
excluded. Such exclusion of shares held by directors and officers is not
intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
Number of Shares of Common Stock, par value $.01 per share, outstanding as
of March 20, 1998: 19,149,160
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the fiscal year
ended January 3, 1998 (the "1997 Annual Report") are incorporated by reference
in Parts II and IV. Portions of the Company's definitive Proxy Statement for the
1998 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission concurrently with this Form 10-K (the "1998 Proxy Statement") are
incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Department 56, Inc. (including its direct and indirect subsidiaries,
"Department 56" or the "Company") is a leading designer, importer and
distributor of fine quality collectibles and other giftware products sold
through gift, home accessory and specialty retailers. The Company is best known
for its Village Series of collectible, handcrafted, lit ceramic and porcelain
houses, buildings and related accessories in the Original Snow Village
Collection and The Heritage Village Collection as well as its extensive line of
holiday and home decorative accessories, including its Snowbabies collectible
porcelain and pewter handpainted figurines.
The Company was incorporated in Delaware in 1992 to hold the equity of a
Minnesota corporation formed in 1984 under the name "Department 56, Inc.," which
has since changed its name to "D 56, Inc." and has continued as the Company's
principal operating subsidiary.
PRODUCTS
VILLAGE SERIES PRODUCTS. Department 56 is best known for its Village
Series, several series of collectible, handcrafted, lit ceramic and porcelain
houses, buildings and related accessories that depict nostalgic winter scenes.
The Company introduces new lit pieces, limited edition pieces, figurines and
other accessories each year to complement the collections. To allow for these
new introductions and to keep each series appropriately balanced, the Company
has traditionally retired a number of its existing pieces from production each
year. Retirement decisions are based on management's judgment as to, among other
things, expected consumer demand, whether a piece continues to fit the evolving
design characteristics of a series 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 3,300 stock keeping
units, of which approximately 2,800 are General Giftware products.
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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 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 1997. 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 1997, and the Company does not
expect to materially increase international sales in fiscal 1998.
As part of the Company's strategy of selective distribution, only
approximately 5,200 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
ten years and seven 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 10 independently operated wholesale
showrooms (including showrooms in New York and Dallas) and four corporate
showrooms which cover the major giftware market areas in the United States and
Canada. The Company's headquarters in Eden Prairie, Minnesota has a 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, a corporate showroom of approximately 7,500 square feet at
the Chicago, Illinois gift mart, and a corporate showroom of approximately 6,600
square feet at the Los Angeles, California 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 (including the establishment and
operation of retail stores so as to build consumer awareness).
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
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Company imports most of its products from the Pacific Rim, primarily The
People's Republic of China, Taiwan (Republic of China) and The Philippines. The
Company also imports a small percentage of its products from sources in India,
and occasionally from sources in Europe (primarily Italy, England and Poland).
In fiscal 1997, the Company imported products from approximately 150 independent
manufacturing sources. The Company's single largest manufacturing source
represented approximately 10% of the Company's imports in fiscal 1997. The
Company's emphasis on high quality craftsmanship at affordable prices limits the
sources from which the Company chooses to obtain products. The Company has long-
standing relationships with the majority of its manufacturers (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 January 3, 1998, Department 56 had unfilled
wholesale orders of approximately $4.6 million, compared to $7.2 million at
December 28, 1996. All of the backlog is scheduled to be shipped to customers
during the current fiscal year. Approximately 6% to 8% of the Company's total
annual customer orders have been cancelled in each of the last three years for a
number of reasons, including customer credit considerations, inventory shortages
or customer cancellation requests.
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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 66%
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
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 eleven U.S. trademark registrations and has pending U.S.
trademark applications with respect to certain of its logos and brandnames. In
addition, the Company from time to time registers selected trademarks in certain
foreign countries.
Department 56 regards its trademarks and other proprietary rights as
valuable assets and intends to maintain and renew its trademarks and their
registrations and vigorously defend against infringement. The U.S. registrations
for the Company's trademarks are currently scheduled to expire or be cancelled
at various times between 2002 and 2008, but can be maintained and renewed
provided that the marks are still in use for the goods and services covered by
such registrations.
COMPETITION
Department 56 competes generally for the disposable income of consumers and,
in particular, with other producers of fine quality collectibles, specialty
giftware and home decorative accessory products. The collectibles area, in
particular, is affected by changing consumer tastes and interests. The giftware
industry is highly competitive, with a large number of both large and small
participants. The Company's competitors distribute their products through
independent gift retailers, department stores, televised home shopping networks
and mail order houses or through direct response marketing. The Company believes
that the principal elements of competition in the specialty giftware industry
are product design and quality, product and brand-name loyalty, product display
and price. The Company believes that its competitive position is enhanced by a
variety of factors, including the innovativeness, quality and enduring themes of
the Company's products, its reputation among retailers and consumers, its
in-house design expertise, its sourcing and marketing capabilities and the
pricing of its products. Some of the Company's competitors, however, are part of
large, diversified companies having greater financial resources and a wider
range of products than the Company.
RESTRICTIONS ON IMPORTS
The Company does not own or operate any manufacturing facilities and imports
most of its products from manufacturers in the Pacific Rim, primarily The
People's Republic of China, Taiwan and The Philippines. The Company also imports
a small percentage of its products from sources in India, and occasionally from
sources in Europe (primarily Italy, England and Poland).
The Company's ability to import products and thereby satisfy customer orders
is affected by the availability of, and demand for, quality production capacity
abroad. The Company competes with other importers of specialty giftware products
for the limited number of foreign manufacturing sources which can produce
detailed, high-quality products at affordable prices. The Company is subject to
the following 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
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the currencies of other countries in which the Company sources product
appreciate significantly relative to the U.S. dollar.
Substantially all of the Company's products are subject to customs duties
and regulations pertaining to the importation of goods, including requirements
for the marking of certain information regarding the country of origin on the
Company's products. In the ordinary course of its business, from time to time,
the Company is involved in disputes with the U.S. Customs Service regarding the
amount of duty to be paid, the value of merchandise to be reported or other
customs regulations with respect to certain of the Company's imports, which may
result in the payment of additional duties and/or penalties, or which may result
in the refund of duties to the Company.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
charges or restrictions, or adjust presently prevailing quotas, duty or tariff
levels, which could adversely affect the Company's financial condition or
results of operations or its ability to continue to import products at current
or increased levels. In particular, the Company's costs may be increased, or the
mix of countries from which it sources its products may be changed, in the
future if countries which are currently accorded "Most Favored Nation" status by
the United States cease to have such status or the United States imposes
retaliatory duties against imports from such countries. The Company cannot
predict what regulatory changes may occur or the type or amount of any financial
impact on the Company which such changes may have in the future.
In fiscal 1997, approximately 65% (as compared to approximately 50% in
fiscal 1996) 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 January 3, 1998, the Company had 205 full-time employees in the United
States and 7 full-time employees in Taiwan. All of the Company's 65 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
expired on December 31, 1997. The Company is in the process of negotiating a new
contract. 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 66,400 square feet of the facility and leases the remaining 600
square feet to others.
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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 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, a corporate showroom of approximately 7,500 square feet in
the Chicago, Illinois gift mart, and a corporate showroom of approximately 6,600
square feet in the Los Angeles, California gift market. These leases expire on
December 31, 2006, November 30, 1999, and December 31, 2002, 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 January 3, 1998.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company as of the date
hereof. Unless otherwise indicated each executive officer of the Company holds
identical positions with D 56, Inc. Officers serve at the discretion of the
Board of Directors.
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NAME AGE POSITION(S) WITH THE COMPANY
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Susan E. Engel 51 Chairwoman of the Board and Chief Executive Officer
Mark R. Kennedy 40 Senior Vice President and Chief Financial Officer
David H. Weiser 38 Senior Vice President -- Legal/Human Resources,
General Counsel and Secretary
David W. Dewey 40 Executive Vice President -- Overseas Operations
Brett D. Heffes 30 Vice President -- Corporate Development
Robert S. Rose 43 Vice President -- Distribution and Operations
Timothy J. Schugel 39 Vice President -- Finance and Principal Accounting
Officer
Joan M. Serena 44 Vice President -- Consumer & Dealer Marketing
Kenneth J. Sobaski 42 Executive Vice President -- Sales and Marketing
Gregory G. Sorensen 35 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:
Susan E. Engel has been Chairwoman of the Board of the Company and of D 56,
Inc. since September 18, 1997 and Chief Executive Officer of the Company and of
D 56, Inc. since November 13, 1996. Ms. Engel was President of the Company and
of D 56, Inc. from September 19, 1994 until
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September 18, 1997, and Chief Operating Officer of the Company and of D 56, Inc.
from September 19, 1994 until November 13, 1996. Ms. Engel was a consultant to
retail and consumer goods companies from September 1993 until September 1994,
and Chief Executive Officer and President of Champion Products, Inc. (a
manufacturer of athletic and active sports apparel) from October 1991 to
September 1993.
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.
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.
Brett D. Heffes has been Vice President -- Corporate Development of the
Company and of D 56, Inc. since January 5, 1998. He was associated with Wessels,
Arnold & Henderson, a private investment bank, from May 1992 until January 1998,
most recently as Principal.
Robert S. Rose has been Vice President -- Distribution and Operations of the
Company and of D 56, Inc. since April 22, 1993. 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.
Kenneth J. Sobaski has been Executive Vice President -- Sales and Marketing
of the Company and of D 56, Inc. since November 3, 1997. From August 1997 to
November 1997, Mr. Sobaski was a private investor. He was Vice President, Sales
and Customer Service of The Pillsbury Company (food products) from March 1995 to
August 1997, its Vice President, General Manager, Refrigerated Baked Goods from
December 1993 to March 1995, and its Vice President, General Manager, Green
Giant from October 1992 to December 1993.
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 25 of the 1997 Annual Report and Note 6 to Five Year Summary
on page 7 of the 1997 Annual Report, and such information is incorporated herein
by reference.
As of March 20, 1998, the number of holders of record of the Company's
Common Stock was 1,031.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included in Five Year Summary on page 7
of the 1997 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 16 to 23 and 8 to 12 respectively,
of the 1997 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 8 to 12 of the 1997 Annual Report, incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is included in the consolidated financial
statements of the Company for the years ended January 3, 1998, December 28, 1996
and December 30, 1995, the notes to the consolidated financial statements, and
the report of independent auditors thereon on pages 13 to 24 of the 1997 Annual
Report, and in the Company's unaudited quarterly financial data for the years
ended January 3, 1998 and December 28, 1996 on page 10 of the 1997 Annual
Report, incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 1998 annual meeting of the
Company's stockholders is included in the 1998 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 1998 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 1998 annual meeting of stockholders are
as follows:
Todd L. Bachman, age 52, has been a director of the Company since October
1992. Mr. Bachman has been Chairman and Chief Executive Officer of Bachman's,
Inc. (a floral and nursery wholesaler and retailer), since November 1, 1994. Mr.
Bachman was Vice Chairman of the Board and President of the Company and of D 56,
Inc. from April 22, 1993 until September 19, 1994. Mr. Bachman was Chief
Executive Officer of D 56, Inc. from January 1992 until April 22, 1993.
Sandra J. Horbach, age 37, has been a director of the Company since October
1992. Ms. Horbach has been a General Partner of FLC Partnership, L.P., the
General Partner of Forstmann Little & Co. (a private investment firm), since
January 1993. She is a director of Gulfstream Aerospace Corp.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the 1998 Proxy Statement in
the section captioned "Further Information Concerning the Board of the Directors
and Committees -- Compensation Committee Interlocks and Insider Participation"
and "-- Director Compensation" and in the section captioned "Compensation of
Executive Officers" (other than the subsection thereof captioned "Compensation
Committee Report on Executive Compensation" and "Performance Graph"), and such
information (other than the subsections thereof captioned "Compensation
Committee Report on Executive Compensation" and "Performance Graph") is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is included in the 1998 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 1998 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 20 of the 1997 Annual Report.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
1997
FORM 10-K ANNUAL REPORT
(PAGE) (PAGE)
---------- -------------
<C> <S> <C> <C> <C> <C>
(a) 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 3, 1998 and December 28, 1996 13
For the years ended January 3, 1998, December 28, 1996 and December 30, 1995:
Consolidated Statements of Income 14
Consolidated Statements of Cash Flows 15
Consolidated Statements of Stockholders' Equity 16
Notes to Consolidated Financial Statements 16-23
Independent Auditors' Report for the years ended 24
January 3, 1998, December 28, 1996 and December 30, 1995
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>
None.
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 January 3, 1998 and December 28, 1996 and the
related consolidated statements of income, cash flows and stockholders' equity
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995,
and have issued our report thereon dated February 12, 1998 (included in the
Company's Annual Report to Stockholders for the year ended January 3, 1998 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 12, 1998
12
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
<S> <C> <C>
ASSETS
INVESTMENT IN SUBSIDIARIES............................................................. $ 184,420 $ 195,349
RECEIVABLE FROM SUBSIDIARIES........................................................... 2,510 1,543
---------- ------------
$ 186,930 $ 196,982
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES--
Accrued expenses..................................................................... $ 275 $ 225
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 20,000 shares; no shares issued.......... -- --
Common Stock, $.01 par value; authorized 100,000 shares; issued 21,765 and 21,584
shares, respectively............................................................... 218 216
Additional paid-in capital........................................................... 44,645 42,315
Treasury stock, at cost; 2,199 and 0 shares, respectively............................ (55,215) --
Retained earnings.................................................................... 197,007 154,226
---------- ------------
Total stockholders' equity......................................................... 186,655 196,757
---------- ------------
$ 186,930 $ 196,982
---------- ------------
---------- ------------
</TABLE>
- ------------------------
Note: Investment in subsidiary is accounted for under the equity method of
accounting.
See notes to consolidated financial statements included in the
1997 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
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Equity in earnings of subsidiaries....................................... $ 43,216 $ 46,263 $ 49,435
Interest expense......................................................... -- -- (955)
General and administrative expenses...................................... (435) (319) (227)
----------- ------------ ------------
Net income............................................................... $ 42,781 $ 45,944 $ 48,253
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See notes to consolidated financial statements included in the
1997 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
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 42,781 $ 45,944 $ 48,253
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Dividends received from subsidiaries................................. 55,094 -- 109,596
Equity in earnings of subsidiaries................................... (43,216) (46,263) (49,435)
Decrease in accrued interest payable................................. -- -- (644)
(Increase) decrease in receivable from subsidiaries.................. (967) 28 (51)
Increase (decrease) in accrued expenses.............................. 50 (45) (584)
----------- ------------ ------------
Net cash provided by (used in) operating activities................ 53,742 (336) 107,135
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options..................... 1,473 336 865
Principal payments on long-term debt................................... -- -- (108,000)
Purchases of treasury stock............................................ (55,215) -- --
----------- ------------ ------------
Net cash provided by (used in) financing activities................ (53,742) 336 (107,135)
----------- ------------ ------------
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
1997 Annual Report, incorporated by reference.
15
<PAGE>
DEPARTMENT 56, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN B COLUMN C
----------- ------------- COLUMN E
COLUMN A BALANCE (1)CHARGED TO COLUMN D -----------
- ---------------------------------------------------------------- BEGINNING COSTS AND ------------- BALANCE END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------------------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended January 3, 1998:
Allowance for doubtful accounts............................... $ 5,014 $ 1,087 $ 941(a) $ 5,160
Allowance for obsolete and overstock inventory................ 2,942 3,447 2,004 4,385
Allowance for sales returns and credits....................... 5,249 8,752 6,104 7,897
----------- ------------- ------------- -----------
$ 13,205 $ 13,286 $ 9,049 $ 17,442
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Year ended December 28, 1996:
Allowance for doubtful accounts............................... $ 4,329 $ 2,014 $ 1,329(a) $ 5,014
Allowance for obsolete and overstock inventory................ 3,604 867 1,529 2,942
Allowance for sales returns and credits....................... 2,555 11,585 8,891 5,249
----------- ------------- ------------- -----------
10,488 $ 14,466 $ 11,749 $ 13,205
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Year ended December 30, 1995:
Allowance for doubtful accounts............................... $ 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
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</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
CHAIRWOMAN OF THE BOARD
Date: April 2, 1998 AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ---------------------------------------------------------- ------------------------------------- ---------------
<C> <S> <C>
/s/ SUSAN E. ENGEL Chairwoman of the Board, Chief April 2, 1998
---------------------------------------------- Executive Officer and Director
Susan E. Engel (Principal Executive Officer)
/s/ MARK R. KENNEDY Chief Financial Officer and April 2, 1998
---------------------------------------------- Senior Vice President
Mark R. Kennedy (Principal Financial Officer)
/s/ TIMOTHY J. SCHUGEL Vice President -- Finance and April 2, 1998
---------------------------------------------- Principal Accounting Officer
Timothy J. Schugel (Principal Accounting Officer)
/s/ TODD L. BACHMAN April 2, 1998
---------------------------------------------- Director
Todd L. Bachman
/s/ MAXINE CLARK April 2, 1998
---------------------------------------------- Director
Maxine Clark
/s/ SANDRA J. HORBACH April 2, 1998
---------------------------------------------- Director
Sandra J. Horbach
/s/ WM. BRIAN LITTLE April 2, 1998
---------------------------------------------- Director
Wm. Brian Little
/s/ GARY S. MATTHEWS April 2, 1998
---------------------------------------------- Director
Gary S. Matthews
/s/ STEVEN G. ROTHMEIER April 2, 1998
---------------------------------------------- Director
Steven G. Rothmeier
/s/ VIN WEBER April 2, 1998
---------------------------------------------- Director
Vin Weber
</TABLE>
17
<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 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of
the Company. (Incorporated herein by reference to Exhibit 1.1 of Registrant's Amendment No. 1, dated May
12, 1997, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
3.3 Restated By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 of Registrant's
Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2 of Registrant's Current Report
on Form 8-K dated February 15, 1996. SEC File no. 1-11908)
4.1 Specimen form of Company's Common Stock certificate. (Incorporated herein by reference to Exhibit 4.1 of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. SEC File no.
1-11908)
4.2 Rights Agreement (including Exhibits A, B and C thereto), dated as of April 23, 1997, between the Company
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to
Exhibit 1 of Registrant's Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
4.3 First Amendment, dated as of March 13, 1998, to Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 1 to
Registrant's Amendment No. 2, dated March 16, 1998, to Registration Statement on Form 8-A, dated April
23, 1997. SEC File no. 1-11908)
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.+*
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 First Amendment, dated as of November 25, 1996, to Amended and Restated Credit Agreement among D 56,
Inc., the Banks parties thereto, and The Chase Manhattan Bank (as successor to Chemical Bank), as agent
for the Banks.*
10.8 Second Amendment, dated as of September 30, 1997, to Amended and Restated Credit Agreement among D 56,
Inc., the Banks parties thereto, and The Chase Manhattan Bank (as successor to Chemical Bank), as agent
for the Banks.*
10.9 Third Amendment, dated as of December 16, 1997, to Amended and Restated Credit Agreement among D 56,
Inc., the Banks parties thereto, and The Chase Manhattan Bank (as successor to Chemical Bank), as agent
for the Banks.*
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
10.10 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)
<C> <S>
10.11 Amendment, dated as of December 30, 1997, to Pledge Agreement by the Company in favor of The Chase
Manhattan Bank (as successor to Chemical Bank).*
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 Subsidiaries Guarantee, dated as of December 30, 1997, by Department 56 Retail, Inc. and Department 56
Sales, Inc. in favor of The Chase Manhattan Bank.*
10.20 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.)
10.21 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.)+
10.22 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)+
10.23 Department 56, Inc. 1997 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 4.4 of
Registrant's Registration Statement on Form S-8, No. 333-41639.)+
10.24 Form of Stock Option Agreement in connection with Department 56, Inc. 1993 Stock Incentive Plan,
Department 56, Inc. 1995 Stock Incentive Plan, and Department 56, Inc. 1997 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1993. SEC File no. 1-11908)+
10.25 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 January 3, 1998.*
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of the Company.*
<C> <S>
23.1 Independent Auditors' Consent*
27.1 Financial Data Schedule (accompanies EDGAR electronic format only)*
</TABLE>
- ------------------------
+ Management contract or compensatory plan
* Filed herewith
20
<PAGE>
DEPARTMENT 56, INC. STOCK OPTION AGREEMENT (DIRECTOR OPTION)
OPTIONEE: DATE:
------------------------------------- ---------------------------
NUMBER OF SHARES SUBJECT TO THE OPTION: EXERCISE PRICE PER SHARE: $
------- -----
1. GENERAL.
1.1 The Company hereby grants to the Optionee, subject to the terms of
this Agreement and the Company's 199_ Stock Incentive Plan (the "Plan"), the
right and option (the "Option") to purchase, at the Exercise Price, the number
of Shares set forth above. The number of Shares and the Exercise Price are
subject to adjustment as provided in Section [12] [13] of the Plan, which is
made a part hereof as if fully set forth herein. Except as otherwise defined
herein, capitalized terms used in this Agreement shall have the same definitions
as set forth in the Plan.
1.2 This Option is not intended to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Code.
1.3 The Option shall be exercisable to the extent and in the manner
provided herein for a period of 10 years from the date hereof (the "Exercise
Term"); PROVIDED, HOWEVER, that the Option may be earlier terminated as provided
in Section 4 hereof.
2. EXERCISABILITY OF OPTIONS.
2.1 VESTING. Subject to the provisions of this Agreement and the Plan,
the Option shall become exercisable with respect to one-half of the total number
of Shares which may be purchased pursuant to the Option on the first business
day after each of the first and second annual meetings of stockholders of the
Company held after the date of this grant.
2.2 TIMING OF EXERCISE. The Optionee or the guardian, executor,
administrator or other legal representative (each a "Legal Representative") of
the Optionee (all references herein to "Optionee" being deemed to include the
Optionee's Legal Representative, if any, unless the context otherwise requires)
may exercise the Option, in whole or in part, at any time or from time to time,
but only to the extent the Option has become exercisable pursuant to Section 2.1
or 2.3 at the time of the proposed exercise.
2.3 EFFECT OF CHANGE IN CONTROL. Notwithstanding anything contained in
this Agreement to the contrary, in the event of a Change in Control, the Option
shall become immediately and fully exercisable.
3. MANNER OF EXERCISE AND PAYMENT.
3.1 Subject to the terms and conditions of this Agreement and the Plan,
the Option may be exercised by delivery of written notice, in person or by mail,
to the Secretary of the Company, at the Company's principal executive office (or
such other address as the Company may from time to time notify the Optionee of
in writing). Such notice shall state that the Optionee is electing to exercise
the Option and the number of Shares in respect of which the Option is being
exercised and shall be signed by the Optionee or, where applicable, by his Legal
Representative. The Company may require proof satisfactory to it as to the
right of the Legal Representative to exercise the Option.
3.2 The notice of exercise described in Section 3.1 hereof shall be
accompanied by the full purchase price for the Shares in respect of which the
Option is being exercised, such purchase price to be paid by check and/or the
transfer of Shares to the Company upon such terms and conditions as determined
by the Committee. Not less than 10 Shares may be purchased at any one time upon
an exercise of the Option, unless the number of Shares so purchased constitutes
the total number of Shares then purchasable under the Option.
3.3 The Optionee shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any Shares subject to the Option
until the conditions in Section 7.3 of the Plan have been satisfied.
<PAGE>
4. CERTAIN RESTRICTIONS.
4.1 NON-TRANSFERABILITY. The Option shall not be transferable by the
Optionee otherwise than by will or the laws of descent and distribution, and an
Option may be exercised during the lifetime of such Optionee only by the
Optionee or his or her Legal Representative. The terms of such Option shall be
final, binding and conclusive upon the beneficiaries, executors, administrators,
heirs and successors of the Optionee.
4.2 TERMINATION. (a) If the Optionee's service as a Director terminates
for any reason other than Cause, the Optionee may for a period of one (1) year
after such termination exercise the Option to the extent, and only to the
extent, that the Option or portion thereof is vested and exercisable as of the
date the Optionee's service as a Director is terminated, after which time the
Option shall automatically terminate in full.
(b) If the Optionee's service as a Director terminates for Cause, the
Option shall immediately terminate in full and no rights hereunder may be
exercised.
(c) If the Optionee dies while a Director or within the one (1) year
period after termination of his service as a Director as described in clause (a)
of this Section 4.2, the Option may be exercised at any time within twelve (12)
months after the Optionee's death by his Legal Representative, after which time
the Option shall terminate in full; PROVIDED, HOWEVER, that the Option may be
exercised to the extent, and only to the extent, that the Option or portion
thereof is exercisable on the date of death or earlier termination of the
Optionee's services as a Director.
5. ENTIRE AGREEMENT. This Agreement and the Plan constitute the entire
agreement, and supersede all prior agreements and understandings, oral and
written, between the parties hereto with respect to the subject matter hereof.
6. SPECIFIC PERFORMANCE. The parties hereto acknowledge that there will be no
adequate remedy at law for a violation of any of the provisions of this
Agreement and that, in addition to any other remedies which may be available,
all of the provisions of this Agreement shall be specifically enforceable in
accordance with their respective terms.
7. ACKNOWLEDGMENT. The Optionee hereby acknowledges prior receipt of a copy
of the Plan and agrees to be bound by all the terms and provisions thereof as
the same may be amended from time to time. The Optionee hereby acknowledges
that he has reviewed the Plan and this Agreement and understands his rights and
obligations thereunder and hereunder. The Optionee also acknowledges that he
has been provided with such information concerning the Company, the Plan and
this Agreement as he and his advisors have requested.
DEPARTMENT 56, INC.
By:
-----------------------------------
David H. Weiser
Senior Vice President
Legal and Human Resources
By:
-----------------------------------
Optionee:
<PAGE>
FIRST AMENDMENT
AMENDMENT dated as of November 25, 1996 (this
"Amendment") to the Amended and Restated Credit Agreement dated
as of February 17, 1995 (as in effect immediately prior to the
date hereof, the "Credit Agreement") among D 56, INC., a
Minnesota corporation (the "Company"), the several banks and
other financial institutions party thereto (the "Banks") and The
CHASE MANHATTAN BANK (as successor to Chemical Bank), a New York
banking corporation, as agent for the Banks (in such capacity,
the "Agent").
W I T N E S S E T H :
WHEREAS, the Company, the Banks, the Co-Agents named
therein and the Agent are parties to the Credit Agreement;
WHEREAS, the Company has requested that the Agent and
the Banks amend the Credit Agreement in certain respects; and
WHEREAS, the Agent and the Banks are willing to enter
into this Amendment on the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained, the parties hereto agree
as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein which are defined in the Credit
Agreement are used herein as so defined.
2. Amendment to Subsection 1.1. The definition of
"Excess Cash Flow" set forth in subsection 1.1 is amended by
deleting therefrom the following phrase that appears at the end
thereof: "subsection 8.11(a), 8.11(c) or 8.11 (d)" and
substituting in lieu thereof, the phrase "subsection 8.11(a) or
8.11(c)".
3. Amendment to Subsection 8.8. Subsection 8.8 is
amended by deleting said subsection in its entirety and
substituting, in lieu thereof, the following new subsection 8.8:
8.8 Consolidated Net Worth. Permit Consolidated Net
Worth as at the last day of any fiscal quarter to be less
than the sum of (i) $140,000,000 plus (ii) 50% of
Consolidated Net Income for each fiscal quarter (if
Consolidated Net Income for such fiscal quarter is positive)
ending on or prior to such day, commencing with the fiscal
quarter ending April 5, 1997.
4. Amendment to Subsection 8.11. Subsection 8.11 of
the Credit Agreement is hereby amended by deleting clause (d) in
its entirety and substituting therefor the following new clause (d):
<PAGE>
(d) so long as no Default or Event of Default has
occurred or would occur after giving effect to such
declaration or payment, the Company may, from time to time,
pay cash dividends to EBI and Intermediate Co., EBI may
declare and pay cash dividends to Intermediate Co. and
Intermediate Co. may declare and pay cash dividends to
Holding in an aggregate amount not to exceed the sum of (i)
$40,000,000 plus (ii) in any fiscal year ending on or after
January 2, 1999, an amount equal to the lesser of (A) 50%
(or, from and after the date of payment in full of the Term
Loans, 100%) of Excess Cash Flow for the immediately
preceding fiscal year and (B) 50% (or, from and after the
date of payment in full of the Term Loans, 75%) of
Consolidated Net Income for such immediately preceding
fiscal year; provided that, in each case, (x) the amount of
dividend availability determined for any fiscal year
pursuant to clause (ii) above that is not paid as dividends
thereunder during such fiscal year may be carried forward
and added to such availability in any subsequent fiscal
year, (y) no such dividend may be paid if the proceeds
thereof are used or are intended to be used to pay principal
of Indebtedness of Holding unless at the time of such
declaration or payment the aggregate outstanding amount of
the Revolving Credit Loans and Acceptance Obligations, other
than Revolving Credit Loans used solely to support foreign
currency hedges, is zero and (z) the Agent shall have
received, with a counterpart for each Bank, a certificate of
the chief financial officer of the Company setting forth a
calculation of the estimated Consolidated Net Income and
Excess Cash Flow for the immediately preceding fiscal year
of the Company and, if such dividend is paid in reliance on
Consolidated Net Income and Excess Cash Flow periods not
covered by audited financial statements of the Company
previously delivered to the Banks, stating that such
calculation constitutes a good faith reasonable estimate of
Consolidated Net Income and Excess Cash Flow for the period
not covered by such financial statements based on all facts
and circumstances then known.
5. Representations and Warranties. The Company hereby
confirms that, after giving effect to the amendments provided for
herein, the representations and warranties contained in Section 5
of the Credit Agreement are true and correct in all material
respects on and as of the date hereof and no Default or Event of
Default has occurred and is continuing.
6. No Other Amendments. Except as expressly amended
hereby, the Credit Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
7. Counterparts. This Amendment may be executed by
the parties hereto in any number of separate counterparts and all
of such counterparts taken together shall be deemed to constitute
one and the same instrument.
<PAGE>
8. Conditions to Effectiveness. This Amendment shall
become effective as of the date first written above when each of
the following conditions to effectiveness shall have been
satisfied:
(i) the Agent shall have received counterparts to this
Amendment, duly executed by the Company, the Required Banks
and the Agent; and
(ii) the Agent shall have received the Acknowledgement
and Consent, attached to each counterpart hereof, duly
executed by each of the Credit Parties (other than the
Company).
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and
duly authorized officers as of the date set forth above.
D 56, INC.
By: /s/ TIMOTHY SCHUGEL
Title: Vice President - Finance
THE CHASE MANHATTAN BANK, as Agent
and as a Bank
By: /s/ TIMOTHY STORMS
Title: Credit Executive
BANK OF AMERICA ILLINOIS
By: /s/ MARGARET H. CLAGGETT
Title: Vice President
FIRST BANK NATIONAL ASSOCIATION
By: /s/ DENNIS L. RUGGLES
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ JOHN M. DILLON
Title: Vice President
BANK OF NOVA SCOTIA
By: /s/ F.C.H. ASHBY
Title: Senior Manager Loan Operations
SUMITOMO BANK, LIMITED
By: /s/ BETH C. MCGINNIS
Title: Vice President
By: /s/ MICHAEL J. PHILIPPE
Title: Vice President
<PAGE>
DEUTSCHE BANK A.G. CHICAGO AND/OR
CAYMAN ISLAND BRANCHES
By: /s/ HANS RODERICH
Title: Associate
By: /s/ KRYS SZREMSKI
Title: Vice President
NATIONAL BANK OF DETROIT
By: /s/ MARGUERITE MULLINS
Title: Vice President
SOCIETE GENERALE
By: /s/ SUSAN HUMMEL
Title: Assistant Vice President
ABN-AMRO BANK N.V.
By: /s/ CHRISTINE HOLMES
Title: Vice President
By: /s/ THOMAS M. TOERPE
Title: Vice President
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By: /s/
Title: Deputy General Manager
ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned Credit Parties (as defined in
the Amended and Restated Credit Agreement dated as of February
17, 1995; as amended, supplemented and otherwise modified prior
to the execution and delivery of the Amendment, the "Credit
Agreement") among D 56, INC., a Minnesota corporation (the
"Company"), the banks and other financial institutions parties
thereto (collectively, the "Banks") and THE CHASE MANHATTAN BANK
(as successor to Chemical Bank), a New York banking corporation,
as agent for the Banks (in such capacity, the "Agent") hereby
acknowledges, and consents to, the execution and delivery of the
First Amendment dated as of November 25, 1996 to the Credit
Agreement, and agrees to remain bound by each Credit Document to
which it is a party.
DEPARTMENT 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
FL 56 INTERMEDIATE CORP.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
ed bazinet international, inc.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
<PAGE>
DEPARTMENT 56 TRADING CO., LTD.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
<PAGE>
SECOND AMENDMENT
SECOND AMENDMENT dated as of September 30, 1997 (this
"Amendment") to the Amended and Restated Credit Agreement dated
as of February 17, 1995 (as in effect immediately prior to the
date hereof, the "Credit Agreement") among D 56, INC., a
Minnesota corporation (the "Company"), the several banks and
other financial institutions party thereto (the "Banks") and The
CHASE MANHATTAN BANK (as successor to Chemical Bank), a New York
banking corporation, as agent for the Banks (in such capacity,
the "Agent").
W I T N E S S E T H :
WHEREAS, the Company, the Banks, the Co-Agents named
therein and the Agent are parties to the Credit Agreement;
WHEREAS, the Company has requested that the Agent and
the Banks amend the Credit Agreement in certain respects; and
WHEREAS, the Agent and the Banks are willing to enter
into this Amendment on the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained, the parties hereto agree
as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein which are defined in the Credit
Agreement are used herein as so defined.
2. Amendment to Subsection 1.1. (a) Subsection 1.1
of the Credit Agreement is hereby amended by inserting, at the
end of clause (a) of the definition of "Net Proceeds", the
following new proviso:
"provided, further, that for the purposes of this clause
(a), Net Proceeds will include amounts that would otherwise
constitute Net Proceeds received as described in clause (ii)
of the definition of Aircraft Resale Transaction only to the
extent that such amounts are received by the Company or its
Subsidiaries on a date that is more than 180 days after the
first date on which a payment described in clause (i) of
such definition is made;"
(b) Subsection 1.1 of the Credit Agreement is hereby
further amended by inserting therein, in appropriate alphabetical
order, the following new definition:
"'Aircraft Resale Transaction": the transaction
comprising (i) the payment by the Company and/or its
Subsidiaries of an aggregate amount not in excess of
$6,000,000 to terminate the lease and receive title in
<PAGE>
respect of the Gulfstream GII B S/N 257 and (ii) the
subsequent sale of such aircraft by the Company and/or its
Subsidiaries for net cash consideration of not less than the
amount of the payment referred to above."
3. Amendment to Subsection 8.5. Subsection 8.5 of the
Credit Agreement is hereby amended by (i) deleting the word "and"
appearing at the end of clause (e) thereof, (ii) replacing the
period at the end of clause (f) thereof with the phrase "; and"
and (iii) adding at the end of such subsection the following new
clause (g):
"(g) the Company and its Subsidiaries may consummate
the Aircraft Resale Transaction."
4. Amendment to Subsection 8.6. Subsection 8.6 of the
Credit Agreement is hereby amended by (i) deleting the word "and"
appearing at the end of clause (h) thereof, (ii) replacing the
period at the end of clause (i) thereof with the phrase "; and"
and (iii) adding at the end of such subsection the following new
clause (j):
"(j) the Company and its Subsidiaries may consummate
the Aircraft Resale Transaction."
5. Amendment to Subsection 8.8. Subsection 8.8 of the
Credit Agreement is hereby amended by deleting said subsection in
its entirety and substituting, in lieu thereof, the following new
subsection 8.8:
"8.8 Consolidated Net Worth. Permit Consolidated Net
Worth as at the last day of any fiscal quarter ending on or
after October 4, 1997 to be less than the sum of (i)
$130,000,000 plus (ii) 50% of Consolidated Net Income for
each fiscal quarter (if Consolidated Net Income for such
fiscal quarter is positive) that commences after January 3,
1998 and ends on or prior to such last day."
6. Amendment to Subsection 8.11. Subsection 8.11 of
the Credit Agreement is hereby amended by deleting clause (d) in
its entirety and substituting therefor the following new clause
(d):
"(d) so long as no Default or Event of Default has
occurred or would occur after giving effect to such
declaration or payment, the Company may, from time to time,
pay cash dividends to EBI and Intermediate Co., EBI may
declare and pay cash dividends to Intermediate Co. and
Intermediate Co. may declare and pay cash dividends to
Holding in an aggregate amount not to exceed the sum of (i)
$100,000,000 plus (ii) in any fiscal year ending on or after
January 2, 1999, an amount equal to the lesser of (A) 50%
(or, from and after the date of payment in full of the Term
Loans, 100%) of Excess Cash Flow for the immediately
preceding fiscal year and (B) 50% (or, from and after the
date of payment in full of the Term Loans, 75%) of
<PAGE>
Consolidated Net Income for such immediately preceding
fiscal year; provided that (x) the amount of dividend
availability determined for any fiscal year pursuant to
clause (ii) above that is not paid as dividends thereunder
during such fiscal year may be carried forward and added to
such availability in any subsequent fiscal year, (y) no such
dividend may be paid if the proceeds thereof are used or are
intended to be used to pay principal of Indebtedness of
Holding unless at the time of such declaration or payment
the aggregate outstanding amount of the Revolving Credit
Loans and Acceptance Obligations, other than Revolving
Credit Loans used solely to support foreign currency hedges,
is zero and (z) the Agent shall have received, with a
counterpart for each Bank, a certificate of the chief
financial officer of the Company setting forth a calculation
of the estimated Consolidated Net Income and Excess Cash
Flow for the immediately preceding fiscal year of the
Company and, if such dividend is paid in reliance on
Consolidated Net Income and Excess Cash Flow periods not
covered by audited financial statements of the Company
previously delivered to the Banks, stating that such
calculation constitutes a good faith reasonable estimate of
Consolidated Net Income and Excess Cash Flow for the period
not covered by such financial statements based on all facts
and circumstances then known."
7. Representations and Warranties. The Company hereby
confirms that, after giving effect to the amendments provided for
herein, the representations and warranties contained in Section 5
of the Credit Agreement are true and correct in all material
respects on and as of the date hereof and no Default or Event of
Default has occurred and is continuing.
8. No Other Amendments. Except as expressly amended
hereby, the Credit Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
9. Counterparts. This Amendment may be executed by
the parties hereto in any number of separate counterparts and all
of such counterparts taken together shall be deemed to constitute
one and the same instrument.
10. Conditions to Effectiveness. This Amendment shall
become effective as of the date first written above when each of
the following conditions to effectiveness shall have been
satisfied:
(i) the Agent shall have received counterparts to this
Amendment, duly executed by the Company, the Required Banks
and the Agent; and
(ii) the Agent shall have received the Acknowledgement
and Consent, attached to each counterpart hereof, duly
executed by each of the Credit Parties (other than the
Company).
<PAGE>
11. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and
duly authorized officers as of the date set forth above.
D 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
THE CHASE MANHATTAN BANK, as Agent
and as a Bank
By: /s/ JONATHAN TWICHELL
Title: Authorized Signatory
BANK OF AMERICA NT & SA
By: /s/ J. CASEY COSGROVE
Title: Assistant Vice President
FIRST BANK NATIONAL ASSOCIATION
By: /s/ MICHAEL RAYMANN
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ ANDREW T. CLAAR
Title: Authorized Signatory
BANK OF NOVA SCOTIA
By:
Title:
SUMITOMO BANK, LIMITED
By: /s/ JOHN W. HOWARD, JR.
Title: Vice President & Manager
By: /s/ DOUG PUDVAH
Title: Vice President
NBD BANK
By: /s/ MARGUERITE C. GORDY
Title: Vice President
SOCIETE GENERALE
By:
Title:
ABN-AMRO BANK N.V.
By: /s/ JAMES W. PIERPONT
Title: Managing Director and Group
Vice President
By: /s/ JOHN P. RICHARDSON
Title: Assistant Vice President
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By: /s/ BRADY S. SADEK
Title: Senior Vice President
ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned Credit Parties (as defined in
the Amended and Restated Credit Agreement dated as of February
17, 1995; as amended, supplemented and otherwise modified prior
to the execution and delivery of the Amendment, the "Credit
Agreement") among D 56, INC., a Minnesota corporation (the
"Company"), the banks and other financial institutions parties
thereto (collectively, the "Banks") and THE CHASE MANHATTAN BANK
(as successor to Chemical Bank), a New York banking corporation,
as agent for the Banks (in such capacity, the "Agent") hereby
acknowledges, and consents to, the execution and delivery of the
Second Amendment dated as of September 30, 1997 to the Credit
Agreement, and agrees to remain bound by each Credit Document to
which it is a party.
DEPARTMENT 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
FL 56 INTERMEDIATE CORP.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
ed bazinet international, inc.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
DEPARTMENT 56 TRADING CO., LTD.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
<PAGE>
THIRD AMENDMENT
THIRD AMENDMENT dated as of December 16, 1997 (this
"Amendment") to the Amended and Restated Credit Agreement dated
as of February 17, 1995 (as in effect immediately prior to the
date hereof, the "Credit Agreement") among D 56, INC., a
Minnesota corporation (the "Company"), the several banks and
other financial institutions party thereto (the "Banks") and The
CHASE MANHATTAN BANK (as successor to Chemical Bank), a New York
banking corporation, as agent for the Banks (in such capacity,
the "Agent").
W I T N E S S E T H :
WHEREAS, the Company, the Banks, the Co-Agents named
therein and the Agent are parties to the Credit Agreement;
WHEREAS, the Company has requested that the Agent and
the Banks amend the Credit Agreement and the Holding Guarantee
(as defined in the Credit Agreement) in certain respects in order
to permit Holding to create two new Subsidiaries and to permit
the Company and its Subsidiaries to enter into certain
transactions with such two new Subsidiaries; and
WHEREAS, the Agent and the Banks are willing to enter
into this Amendment on the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained, the parties hereto agree
as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein which are defined in the Credit
Agreement are used herein as so defined.
2. Amendments to Subsection 1.1. (a) Subsection
1.1 of the Credit Agreement is hereby amended by inserting the
following new definitions:
"Retail Subsidiary": Department 56 Retail, Inc., a
Minnesota corporation, or any other direct wholly-owned
Subsidiary of Holding created principally to make retail
sales of the Company's inventory;
"Sales Subsidiary": Department 56 Sales, Inc., a
Minnesota corporation, or any other direct wholly-owned
Subsidiary of Holding created principally to employ sales
representatives for the Company's inventory.
(b) Subsection 1.1 of the Credit Agreement is hereby
further amended by deleting the phrase "its Debt Ratio and its
Fixed Charge Coverage Ratio" each time it appears in the
definition of "Applicable Level" and substituting therefor each
<PAGE>
such time the phrase "the Debt Ratio and the Fixed Charge
Coverage Ratio".
(c) Subsection 1.1 of the Credit Agreement is hereby
further amended by deleting from the definitions of "Applicable
Level", "Capital Expenditures", " Consolidated Current Assets",
"Consolidated Current Liabilities", Consolidated EBITDA",
"Consolidated Net Income", "Consolidated Net Worth", "Debt
Ratio", "Excess Cash Flow", "Fixed Charge Coverage Ratio",
"Indebtedness", "Lease Obligations", "Net Interest Expense", "Net
Proceeds" and "Working Capital", the phrase "the Company" each
time it appears therein and substituting therefor each such time
the phrase "Holding".
(d) Subsection 1.1 of the Credit Agreement is hereby
further amended by deleting from the definition of "Fixed Charge
Coverage Ratio" the phrase ",plus, for any period, Holding Net
Interest Expense".
(e) Subsection 1.1 of the Credit Agreement is hereby
further amended by deleting therefrom the definition of "Holding
Net Interest Expense".
(f) Subsection 1.1 of the Credit Agreement is hereby
amended by deleting from paragraph (b) of the definition of "Net
Proceeds" the word "Borrower" and substituting therefor the word
"Company".
(g) Subsection 1.1 of the Credit Agreement is hereby
further amended by inserting, at the end of the definition of
"Subsidiary", the following phrase:
, and Retail Subsidiary and Sales Subsidiary shall be deemed
to be Subsidiaries of the Company for purposes of the Credit
Documents (except for purposes of computing the Borrowing
Base).
3. Amendment to Subsection 7.1. Subsection 7.1 of the
Credit Agreement is hereby amended by adding the phrase "each of
Holding and its Subsidiaries and" immediately before the phrase
"the Company and its Subsidiaries" each time such latter phrase
appears.
4. Amendment to Subsection 7.2. Subsection 7.2 of the
Credit Agreement is hereby amended by deleting each reference to
"the Company" (except for references therein to officers of the
Company) and substituting therefor each such time a reference to
"Holding".
5. Amendment to Subsection 7.9. Subsection 7.9 of the
Credit Agreement is hereby amended by deleting each reference to
"the Company" (except for references therein to officers of the
Company) and substituting therefor each such time a reference to
"Holding".
6. Amendment to Subsection 8.5. Subsection 8.5 of the
<PAGE>
Credit Agreement is hereby amended by (i) deleting the word "and"
appearing at the end of clause (f) thereof, (ii) replacing the
period at the end of clause (g) thereof with the phrase "; and"
and (iii) adding at the end of such subsection the following new
clause (h):
(h) the Company and its Subsidiaries may transfer
assets to Retail Subsidiary and Sales Subsidiary of the type
and having values as set forth on Schedule I to the Third
Amendment to this Agreement dated as of December 16, 1997.
7. Amendment to Subsection 8.6. Subsection 8.6 of the
Credit Agreement is hereby amended by adding at the end of clause
(b) the following:
and provided further that the Company and its Subsidiaries
may also transfer assets to Retail Subsidiary and Sales
Subsidiary in accordance with subsection 8.5(h).
8. Amendment to Subsection 8.11. Subsection 8.11 of
the Credit Agreement is hereby amended by (i) deleting the word
"and" appearing at the end of clause (c) thereof, (ii) replacing
the period at the end of clause (d) thereof with the phrase ";
and" and (iii) adding at the end of such subsection the following
new clause (e):
(e) the Company may declare and pay dividends to EBI
and Intermediate Co., EBI may declare and pay dividends to
Intermediate Co. and Intermediate Co. may declare and pay
dividends to Holding, in each case consisting of assets
which the Company is permitted to transfer to Retail
Subsidiary and Sales Subsidiary pursuant to subsection
8.5(h).
9. Amendment to Section 9. Section 9 of the Credit
Agreement is hereby amended by adding at the end the proviso
clause in clause (j) the following:
and (iii) create and own Retail Subsidiary and Sales
Subsidiary as its direct Subsidiaries and permit Retail
Subsidiary to engage in the business of retail sales of the
inventory of the Company and activities related thereto and
the Sales Subsidiary to engage in the business of the
employment of sales representatives for the Company's
inventory and activities related thereto and make
investments in Retail Subsidiary and Sale Subsidiary
consisting of (a) assets permitted to be transferred to
Retail Subsidiary and Sales Subsidiary pursuant to
subsection 8.5(h) and (b) capital contributions of up to
$1,000,000 in the aggregate in Retail Subsidiary and Sales
Subsidiary;
10. Amendment to Holding Guarantee. Section 10 of the
Holding Guarantee is hereby amended by adding immediately before
the phrase "; provided that . . ." the following:
<PAGE>
and (iii) create and own Retail Subsidiary and Sales
Subsidiary as its direct Subsidiaries and permit Retail
Subsidiary to engage in the business of retail sales of the
inventory of the Company and activities related thereto and
the Sales Subsidiary to engage in the business of the
employment of sales representatives for the Company's
inventory and activities related thereto and make
investments in Retail Subsidiary and Sale Subsidiary
consisting of (a) assets permitted to be transferred to
Retail Subsidiary and Sales Subsidiary pursuant to
subsection 8.5(h) and (b) capital contributions of up to
$1,000,000 in the aggregate in Retail Subsidiary and Sales
Subsidiary;
11. Special Provisions Relating to Retail Subsidiary
and Sales Subsidiary. Notwithstanding any provisions to the
contrary set forth in the Credit Documents (a) Holding and the
Company will cause Retail Subsidiary and Sales Subsidiary to be
owned as direct wholly-owned Subsidiaries of Holding, and the
capital stock of such Subsidiaries shall be free of Liens; (b)
Retail Subsidiary and Sales Subsidiary shall not be permitted to
make any investment of the type permitted by clauses (h) or (i)
of subsection 8.6; (c) for purposes of the Credit Documents,
Subsidiaries of the Company shall include Retail Subsidiary and
Sales Subsidiary except for purposes of computing the Borrowing
Base; and (d) Retail Subsidiary and Sales Subsidiary shall not be
permitted to create, incur, assume or suffer to exist any
Indebtedness of the type permitted by clause (f) of subsection
8.1, any Liens of the type permitted by clause (h) of subsection
8.2 to secure Indebtedness permitted by clause (f) of subsection
8.1 or any Liens of the type permitted by clause (k) of
subsection 8.2.
12. Representations and Warranties. The Company
hereby confirms that, after giving effect to the amendments
provided for herein, the representations and warranties contained
in Section 5 of the Credit Agreement are true and correct in all
material respects on and as of the date hereof and no Default or
Event of Default has occurred and is continuing.
13. No Other Amendments. Except as expressly amended
hereby, the Credit Documents shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
14. Counterparts. This Amendment may be executed by
the parties hereto in any number of separate counterparts and all
of such counterparts taken together shall be deemed to constitute
one and the same instrument.
15. Conditions to Effectiveness. This Amendment shall
become effective as of the date first written above when each of
the following conditions to effectiveness shall have been
satisfied:
(i) the Agent shall have received counterparts to this
Amendment, duly executed by the Company, the Required Banks
<PAGE>
and the Agent;
(ii) the Agent shall have received the Acknowledgement
and Consent, attached to each counterpart hereof, duly
executed by each of the Credit Parties (other than the
Company);
(iii) the Agent shall have received an amendment to the
Holding Pledge Agreement, satisfactory in form and substance
to the Agent, which has the effect of pledging the capital
stock of each of Retail Subsidiary and Sales Subsidiary to
the Agent thereunder, accompanied by the share certificates
evidencing such capital stock and duly executed stock powers
therefor;
(iv) the Agent shall have received a Subsidiary
Guarantee, duly executed by each of Retail Subsidiary and
Sales Subsidiary; and
(v) the Agent shall have received an opinion from
counsel to the Company with respect to the amendment to the
Holding Pledge Agreement delivered pursuant to clause (iii)
above and the Subsidiary Guarantee delivered pursuant to
clause (iv) above, such opinion to be in form and substance
satisfactory to the Agent.
16. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and
duly authorized officers as of the date set forth above.
D 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
THE CHASE MANHATTAN BANK, as Agent
and as a Bank
By: /s/ LENARD WEINER
Title: Managing Director
BANK OF AMERICA ILLINOIS
By: /s/ THOMAS SULLIVAN
Title: Vice President
FIRST BANK NATIONAL ASSOCIATION
By: /s/ MICHAEL RAYMANN
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ ANDREW T. CLAAR
Title: Authorized Signatory
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. ASHBY
Title: Senior Manager Loan Operations
SUMITOMO BANK, LIMITED
By: /s/ DOUG PUDVAH
Title: Vice President
By: /s/ JOHN W. HOWARD, JR.
Title: Vice President & Manager
NBD BANK
By: /s/ MARGUERITE GORDY
Title: Authorized Signatory
SOCIETE GENERALE
By:
Title:
ABN-AMRO BANK N.V.
By: /s/ JAMES PIERPONT
Title: Authorized Signatory
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By: /s/ ARMUND J. SCHOEN, JR.
Title: Authorized Signatory
ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned Credit Parties (as defined in
the Amended and Restated Credit Agreement dated as of February
17, 1995; as amended, supplemented and otherwise modified prior
to the execution and delivery of the Amendment, the "Credit
Agreement") among D 56, INC., a Minnesota corporation (the
"Company"), the banks and other financial institutions parties
thereto (collectively, the "Banks") and THE CHASE MANHATTAN BANK
(as successor to Chemical Bank), a New York banking corporation,
as agent for the Banks (in such capacity, the "Agent") hereby
acknowledges, and consents to, the execution and delivery of the
Second Amendment dated as of December 16, 1997 to the Credit
Agreement, and agrees to remain bound by each Credit Document to
which it is a party.
DEPARTMENT 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
FL 56 INTERMEDIATE CORP.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
ed bazinet international, inc.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
<PAGE>
DEPARTMENT 56 TRADING CO., LTD.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
<PAGE>
AMENDMENT TO PLEDGE AGREEMENT
AMENDMENT dated as of December 30, 1997 (this
"Amendment") to the Pledge Agreement dated as of February 17,
1995 (as in effect immediately prior to the date hereof, the
"Pledge Agreement") among DEPARTMENT 56, INC., a Delaware
corporation (the "Pledgor"), in favor of THE CHASE MANHATTAN BANK
(as successor to Chemical Bank), a New York banking corporation,
as agent for the Banks referred to below (in such capacity, the
"Agent").
W I T N E S S E T H :
WHEREAS, D 56, Inc. (the "Company"), certain lenders
(the "Banks") and co-agents (the "Co-Agents") and the Agent are
parties to the Amended and Restated Credit Agreement dated as of
February 17, 1995 (as amended, the "Credit Agreement"); and
WHEREAS, it is a condition precedent to the
effectiveness of the Third Amendment dated as of December 17,
1997 that the Pledge Agreement be amended as set forth herein in
order to include as Pledged Stock thereunder all of the shares of
capital stock of Department 56 Retail, Inc., a Minnesota
corporation, and Department 56 Sales, Inc., a Minnesota
corporation (collectively, the "New Pledged Subsidiaries"), each
of which is a wholly-owned subsidiary of the Pledgor;
NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained, the parties hereto agree
as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein which are defined in the Credit
Agreement or the Pledge Agreement are used herein as so defined.
2. Amendments to Pledge Agreement. (a) All
references in the Pledge Agreement to the "Issuer" shall be
deemed to be a reference to each of FL 56 Intermediate Corp., a
Delaware corporation, and the New Pledged Subsidiaries;
(b) All references in the Pledge Agreement to the
"Pledged Stock" shall be deemed to be a reference to all of the
capital stock of each of FL 56 Intermediate Corp., a Delaware
corporation, and the New Pledged Subsidiaries;
(c) Schedule I to the Pledge Agreement is hereby
supplemented by adding thereto the information set forth on
Schedule I to this Amendment; and
(d) The address of each Issuer shall be the same
address as for the Company under the Credit Agreement.
3. Pledge of Capital Stock of Department 56 Retail,
<PAGE>
Inc. and Department 56 Sales, Inc. Upon the effectiveness of
this Amendment, the Pledgor will deliver to the Agent, for the
ratable benefit of the Banks, all of the Pledgor's right, title
and interest in the capital stock of each of Department 56
Retail, Inc. and Department 56 Sales, Inc. and thereby transfer
and grant to the Agent, for the ratable benefit of the Banks, a
first security interest in all of the Pledgor's right, title and
interest in such capital stock, as collateral security for the
prompt and complete payment and performance when due (whether at
the stated maturity, by acceleration or otherwise) of the
Guarantee Obligations. The Pledgor will execute and deliver
stock powers to the Agent with respect to such capital stock as
required by Section 3 of the Pledge Agreement.
4. No Other Amendments. Except as expressly amended
hereby, the Pledge Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
Without limitation of the foregoing, the security interest in the
Collateral created by the Pledge Agreement prior to the
effectiveness of this Amendment shall remain in full force and
effect having the same perfected status and priority, and this
Amendment shall not affect the perfection or priority of any such
security interest.
5. Counterparts. This Amendment may be executed by
the parties hereto in any number of separate counterparts and all
of such counterparts taken together shall be deemed to constitute
one and the same instrument.
6. Conditions to Effectiveness. This Amendment shall
become effective as of the date first written above when each of
the following conditions to effectiveness shall have been
satisfied:
(i) the Agent shall have received counterparts to this
Amendment, duly executed by the Pledgor and the Agent; and
(ii) the Agent shall have received the Acknowledgement
and Consent, attached to the Pledge Agreement, duly executed
by each of the New Pledged Subsidiaries.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and
duly authorized officers as of the date set forth above.
DEPARTMENT 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
THE CHASE MANHATTAN BANK, as Agent
By: /s/ JOHATHAN TWITCHELL
Title: Authorized Signatory
<PAGE>
Schedule I
INFORMATION ON NEW PLEDGED SUBSIDIARIES TO BE ADDED
TO SCHEDULE I OF THE PLEDGE AGREEMENT
<TABLE>
<CAPTION>
Stock Percentage
Class of Certificate No. of of
Issuer Stock No. Shares Issued
Shares
<S> <C> <C> <C> <C>
Department 56 Common 1 100,000 100%
Retail, Inc.
Department 56 Common 5 100,000 100%
Sales, Inc.
</TABLE>
<PAGE>
SUBSIDIARIES GUARANTEE
GUARANTEE dated as of December 30, 1997 made by the
undersigned parties hereto, (the "Subsidiaries" or the
"Guarantors"), in favor of THE CHASE MANHATTAN BANK, as agent
(the "Agent") for the lenders (the "Banks") parties to the
Amended and Restated Credit Agreement dated as of February 17,
1995 (the "Credit Agreement") among D 56, Inc., a Minnesota
corporation (the "Company"), the Agent, the Banks and the co-
agents named therein.
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement, the Banks
have severally agreed to make loans to, the Issuing Bank has
agreed to issue certain letters of credit for the account of, and
the Accepting Bank has agreed to create certain acceptances for,
the Company upon the terms and subject to the conditions set
forth therein; and
WHEREAS, it is a condition precedent to the
effectiveness of the Third Amendment dated as of December 16,
1997 (the "Third Amendment") to the Credit Agreement that each
Guarantor shall have executed and delivered this Guarantee to the
Agent for the ratable benefit of the Banks;
NOW, THEREFORE, in consideration of the premises and to
induce the Agent and the Banks to consent to the Third Amendment
and to induce the Banks to make their respective loans to, the
Issuing Bank to issue certain letters of credit for the account
of, and the Accepting Bank to create certain acceptances for, the
Company under the Credit Agreement, each Guarantor hereby agrees
with the Agent, for the ratable benefit of the Banks, as follows:
1. Defined Terms. Unless otherwise defined herein,
terms which are defined in the Credit Agreement and used herein
are so used as so defined and as used herein the following terms
shall have the following meanings:
"Guarantee": this Guarantee, as amended, supplemented
or otherwise modified from time to time.
"Material Adverse Effect": a material adverse effect
on the business, financial condition, assets, liabilities,
net assets, properties, results of operations, value or
prospects of Holding and its Subsidiaries taken as a whole
or the Company and its Subsidiaries taken as a whole.
"Obligations": the unpaid principal of and interest on
(including, without limitation, interest accruing after the
maturity of the Loans, the Acceptances and reimbursement
obligations in connection with the Letters of Credit, and
interest accruing after the filing of any petition in
<PAGE>
bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Company,
whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding) the Notes, all
obligations and liabilities of the Company with respect to
the Letters of Credit, all Acceptance Obligations and all
other obligations and liabilities of the Company to the
Agent or the Banks, whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter
incurred, which may arise under, out of, or in connection
with, this Agreement, the Notes, the other Credit Documents,
any Letter of Credit or L/C Application, any Acceptance, any
agreements between the Company and any Bank relating to
interest rate, currency or similar swap and hedging
arrangements or any other document made, delivered or given
in connection therewith, whether on account of principal,
interest, reimbursement obligations, fees, indemnities,
costs, expenses (including, without limitation, all fees and
disbursements of counsel to the Agent or any Bank) or
otherwise.
2. Guarantee. Each Guarantor hereby unconditionally
and irrevocably guarantees to the Agent, for the ratable benefit
of the Banks, the prompt and complete payment and performance by
the Company when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations. Such Guarantor
further agrees to pay any and all expenses (including, without
limitation, all fees and disbursements of counsel) which may be
paid or incurred by the Agent and the Banks in enforcing, or
obtaining advice of counsel in respect of, any of their rights
under this Guarantee. This Guarantee constitutes a guarantee of
payment when due and not of collection, and such Guarantor
specifically agrees that it shall not be necessary or required
that the Agent or any Bank exercise any right, assert any claim
or demand or enforce any remedy whatsoever against the Company
(or any other Person) before or as a condition to the obligations
of such Guarantor hereunder. This Guarantee shall remain in full
force and effect until the Obligations are paid in full, no
Letters of Credit or Acceptance Obligations are outstanding and
the Commitments are terminated, notwithstanding that from time to
time prior thereto the Company may be free from any Obligations.
Each Guarantor agrees that whenever, at any time, or
from time to time, it shall make any payment to the Agent or any
Bank on account of its liability hereunder, it will notify the
Agent or such Bank in writing that such payment is made under
this Guarantee for such purpose. No payment or payments made by
the Company or any other Person or received or collected by the
Agent or any Bank from the Company or any other Person by virtue
of any action or proceeding or any set-off or appropriation or
application, at any time or from time to time, in reduction of or
in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of such Guarantor
hereunder which shall, notwithstanding any such payment or
payments, remain liable for the amount of the Obligations until
the Obligations are paid in full and the Commitments are
<PAGE>
terminated.
Anything herein or in any of the Credit Documents to
the contrary notwithstanding, the maximum liability of each
Guarantor hereunder and under the other Credit Documents shall in
no event exceed the amount which can be guaranteed by such
Guarantor under applicable federal and state laws relating to the
insolvency of debtors.
3. Right of Setoff. Upon the occurrence and during
the continuance of any Event of Default specified in the Credit
Agreement, the Agent and each Bank are hereby irrevocably
authorized at any time and from time to time without notice to
each Guarantor, any such notice being hereby waived by such
Guarantor, to set off and appropriate and apply any and all
deposits (general or special, time or demand, provisional or
final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect,
absolute or contingent, matured or unmatured, at any time held or
owing by the Agent or such Bank to or for the credit or the
account of such Guarantor, or any part thereof in such amounts as
the Agent or such Bank may elect, on account of the liabilities
of such Guarantor hereunder and claims of every nature and
description of the Agent or such Bank against such Guarantor, in
any currency, whether arising hereunder, under the Credit
Agreement, the Notes, any other Credit Document, any Letter of
Credit, any Acceptance or otherwise, as the Agent or such Bank
may elect, whether or not the Agent or such Bank has made any
demand for payment and although such liabilities and claims may
be contingent or unmatured. The Agent and each Bank shall notify
such Guarantor against which setoff has been made promptly of any
such setoff made by it and the application made by it of the
proceeds thereof, provided that the failure to give such notice
shall not affect the validity of such setoff and application.
The rights of the Agent and each Bank under this paragraph are in
addition to other rights and remedies (including, without
limitation, other rights of setoff) which the Agent and such Bank
may have.
4. Subrogation, etc.. Notwithstanding any payment or
payments made by the Guarantor hereunder or any set-off or
application of funds of the Guarantor by any Bank, the Guarantor
shall not exercise any of the rights of the Agent or any Bank
which the Guarantor may acquire by way of subrogation, by any
payment made hereunder, by reason of such set-off or application
of funds or otherwise, against the Company or any collateral
security or guarantee or right of offset held by any Bank for the
payment of the Obligations, and the Guarantor shall not seek or
be entitled to seek any contribution or reimbursement from the
Company in respect of payments made by the Guarantor hereunder,
until all amounts owing to the Agent and the Banks by the Company
on account of the Obligations are paid in full, no Letters of
Credit are outstanding and the Commitments are terminated. If
any amount shall be paid to the Guarantor on account of such
subrogation rights at any time when all of the Obligations shall
not have been paid in full, any Letter of Credit shall be
<PAGE>
outstanding or the Commitments shall not have been terminated,
such amount shall be held by the Guarantor in trust for the Agent
and the Banks, segregated from other funds of the Guarantor, and
shall, forthwith upon receipt by the Guarantor, be turned over to
the Agent in the exact form received by the Guarantor (duly
indorsed by the Guarantor to the Agent, if required), to be
applied against the Obligations, whether matured or unmatured, in
such order as required by the applicable Credit Documents.
5. Amendments, etc. with Respect to the Obligations.
Each Guarantor shall remain obligated hereunder notwithstanding
that, without any reservation of rights against such Guarantor,
and without notice to or further assent by such Guarantor, any
demand for payment of any of the Obligations made by the Agent or
any Bank may be rescinded by the Agent or such Bank, and any of
the Obligations continued, and the Obligations, or the liability
of any other Person upon or for any part thereof, or any
collateral security or guarantee therefor or right of offset with
respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified, accelerated, compromised,
waived, surrendered or released by the Agent or any Bank, and the
Credit Agreement, any Note, any other Credit Document, any Letter
of Credit, any Acceptance and any other documents executed and
delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or in part, as the Banks (or
the Required Banks, as the case may be) may deem advisable from
time to time, and any collateral security, guarantee or right of
offset at any time held by the Agent or any Bank for the payment
of the Obligations may be sold, exchanged, waived, surrendered or
released. Neither the Agent nor any Bank shall have any
obligation to protect, secure, perfect or insure any Lien at any
time held by it as security for the Obligations or for this
Guarantee or any property subject thereto.
6. Guarantee Absolute and Unconditional. Each
Guarantor waives any and all notice of the creation, renewal,
extension or accrual of any of the Obligations and notice of or
proof of reliance by the Agent or any Bank upon this Guarantee or
acceptance of this Guarantee; the Obligations, and any of them,
shall conclusively be deemed to have been created, contracted or
incurred in reliance upon this Guarantee; and all dealings
between the Company or any Guarantor, on the one hand, and the
Agent or the Banks, on the other, shall likewise be conclusively
presumed to have been had or consummated in reliance upon this
Guarantee. Such Guarantor waives diligence, presentment,
protest, demand for payment and notice of default or nonpayment
to or upon the Company or such Guarantor with respect to the
Obligations. This Guarantee shall be construed as a continuing,
absolute and unconditional guarantee of payment without regard to
(a) the validity or enforceability of the Credit Agreement, any
Note, any other Credit Document, any Letter of Credit, any
Acceptance, any of the Obligations or any collateral security
therefor or guarantee or right of offset with respect thereto at
any time or from time to time held by the Agent or any Bank, (b)
any defense, setoff or counterclaim (other than a defense of
payment or performance) which may at any time be available to or
<PAGE>
be asserted by the Company against the Agent or any Bank, or (c)
any other circumstance whatsoever (with or without notice to or
knowledge of the Company or such Guarantor) which constitutes, or
might be construed to constitute, an equitable or legal discharge
of the Company for the Obligations, or of such Guarantor under
this Guarantee, in bankruptcy or in any other instance. When the
Agent is pursuing its rights and remedies hereunder against such
Guarantor, the Agent or any Bank may, but shall be under no
obligation to, pursue such rights and remedies as it may have
against the Company or any other Person or against any collateral
security or guarantee for the Obligations or any right of offset
with respect thereto, and any failure by the Agent or any Bank,
or any release of the Company or any such other Person or of any
such collateral security, guarantee or right of offset, shall not
relieve any such Guarantor of any liability hereunder, and shall
not impair or affect the rights and remedies, whether express,
implied or available as a matter of law, of the Agent and the
Banks against such Guarantor.
7. Reinstatement. This Guarantee shall continue to
be effective, or be reinstated, as the case may be, if at any
time payment, or any part thereof, of any of the Obligations is
rescinded or must otherwise be restored or returned by the Agent
or any Bank, upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Company or any Guarantor or
upon or as a result of the appointment of a receiver, intervenor
or conservator of, or trustee or similar officer for, the Company
or any Guarantor or any substantial part of its property, or
otherwise, all as though such payments had not been made.
8. Payments. Each Guarantor hereby agrees that the
Obligations will be paid to the Agent without setoff or
counterclaim in U.S. Dollars and immediately available funds at
the office of the Agent located at 270 Park Avenue, New York, New
York 10017.
9. Representations and Warranties. Each Guarantor
hereby represents and warrants that:
(a) it is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Minnesota and has the corporate power and authority and the
legal right to own and operate its property, to lease the
property it operates and to conduct the business in which it
is currently engaged, except to the extent that the failure
to possess such corporate power and authority and such legal
right would not, in the aggregate, have a Material Adverse
Effect;
(b) it has the corporate power and authority and the
legal right to execute and deliver, and to perform its
obligations under, this Guarantee and has taken all
necessary corporate action to authorize its execution,
delivery and performance of this Guarantee;
(c) this Guarantee constitutes a legal, valid and
<PAGE>
binding obligation of such Guarantor enforceable in
accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of
equity (regardless of whether enforcement is sought in a
proceeding in equity or at law);
(d) the execution, delivery and performance of this
Guarantee will not violate any provision of any Requirement
of Law or Contractual Obligation of such Guarantor and will
not result in or require the creation or imposition of any
Lien on any of the properties or revenues of such Guarantor
pursuant to any Requirement of Law or Contractual Obligation
of such Guarantor;
(e) no consent or authorization of, filing with, or
other act by or in respect of, any arbitrator or
Governmental Authority and no consent of any other Person
(including, without limitation, any stockholder or creditor
of such Guarantor) is required in connection with the
execution, delivery, performance, validity or enforceability
of this Guarantee;
(f) no litigation, investigation or proceeding of or
before any arbitrator or Governmental Authority is pending
or, to the knowledge of such Guarantor, threatened by or
against such Guarantor or against any of its properties or
revenues (i) with respect to this Guarantee or (ii) which
would have a Material Adverse Effect;
(g) it has good record and marketable title in fee
simple to or valid leasehold interests in all its material
real property, and good title to all its other material
property, and none of such property is subject to any Lien
of any nature whatsoever; and
(h) it has filed or caused to be filed or has timely
requested an extension to file or has received an approved
extension to file all tax returns required to be filed by
it, and has paid all taxes due on said returns or extension
requests or on any assessments made against it (other than
those being contested in good faith by appropriate
proceedings for which reserves in conformity with GAAP have
been provided on its books), except any such filings or
taxes, fees or other charges, the making or payment of
which, or the failure to make or pay, would not have a
Material Adverse Affect.
Each Guarantor agrees that the foregoing
representations and warranties shall be deemed to have been made
by it on each Borrowing Date by the Company under the Credit
Agreement on and as of such Borrowing Date as though made
hereunder on and as of such Borrowing Date.
10. Severability. Any provision of this Guarantee
<PAGE>
which is prohibited or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
11. Paragraph Headings. The paragraph headings used
in this Guarantee are for convenience of reference only and are
not to affect the construction hereof or be taken into
consideration in the interpretation hereof.
12. No Waiver; Cumulative Remedies. Neither the Agent
nor any Bank shall by any act (except by a written instrument
pursuant to paragraph 13 hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder
or to have acquiesced in any Default or Event of Default or in
any breach of any of the covenants, terms, or conditions hereof.
No failure to exercise, nor any delay in exercising, on the part
of the Agent or any Bank, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise
of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Agent or any Bank or
any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Agent or such
Bank would otherwise have on any future occasion. The rights and
remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any rights or remedies
provided by law.
13. Waivers and Amendments; Successors and Assigns;
Governing Law. None of the terms or provisions of this Guarantee
may be waived, amended, supplemented or otherwise modified except
by a written instrument executed by each Guarantor and the Agent,
provided that any provision of this Guarantee may be waived by
the Agent in a letter or agreement executed by the Agent or by
telex or facsimile transmission from the Agent. This Guarantee
shall be binding upon the successors and assigns of the such
Guarantor and shall inure to the benefit of the Agent and the
Bank and their successors and assigns. THIS GUARANTEE SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
14. Notices. All notices, requests and demands to or
upon any Guarantor or the Agent or any Bank to be effective shall
be in writing or by telecopy or telex and, unless otherwise
expressly provided herein, shall be deemed to have been duly
given or made when delivered by hand, or, in the case of mail,
three Business Days after deposit in the postal system, first
class postage prepaid, or, in the case of telecopy notice, when
sent, confirmation of receipt received, or, in the case of telex
or facsimile notices, when sent, answerback received, addressed,
in the case of the Agent or any Bank, at the address provided for
such party in subsection 11.2 of the Credit Agreement or, in the
case of such Guarantor, at the addresses provided on the
<PAGE>
signature page hereto, as the case may be.
15. Authority of Agent. Each Guarantor acknowledges
that the rights and responsibilities of the Agent under this
Guarantee with respect to any action taken by the Agent or the
exercise or non-exercise by the Agent of any option, right,
request, judgment or other right or remedy provided for herein or
resulting or arising out of this Guarantee shall, as between the
Agent or the Banks, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time
to time among them, but, as between the Agent and such Guarantor,
the Agent shall be conclusively presumed to be acting as agent
for the Banks with full and valid authority so to act or refrain
from acting, and such Guarantor shall not be under any
obligation, or entitlement, to make any inquiry respecting such
authority.
16. Integration; Acknowledgements. Each Guarantor
hereby confirms its agreement with subsections 11.9 and 11.12 of
the Credit Agreement.
17. SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH
GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:
(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS GUARANTEE AND EACH
OTHER CREDIT DOCUMENT TO WHICH IT IS A PARTY OR, OR FOR
RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND
APPELLATE COURTS FROM ANY THEREOF;
(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY
BE BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES
NOT TO PLEAD OR CLAIM THE SAME;
(iii) AGREES THAT SERVICE OR PROCESS IN ANY SUCH
ACTION OR PROCEEDING MAY BE AFFECTED BY MAILING A COPY
THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO
SUCH GUARANTOR AT ITS ADDRESS SET FORTH UNDER ITS SIGNATURE
BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE AGENT SHALL HAVE
BEEN NOTIFIED PURSUANT TO PARAGRAPH 14; AND
(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE
RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY
OTHER JURISDICTION.
(b) EACH OF THE AGENT, EACH BANK AND EACH GUARANTOR
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
<PAGE>
PROCEEDING REFERRED TO IN PARAGRAPH (a) ABOVE.
IN WITNESS WHEREOF, the undersigned has caused this
Guarantee to be duly executed and delivered as of the date first
above written.
DEPARTMENT 56 RETAIL, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
Address:
1 Village Place
6436 City West Parkway
Eden Prairie, Minnesota 55344
Attention: Chief Financial Officer
DEPARTMENT 56 SALES, INC.
By: /s/ TIMOTHY J. SCHUGEL
Title: Vice President
Address:
1 Village Place
6436 City West Parkway
Eden Prairie, Minnesota 55344
Attention: Chief Financial Officer
<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 rate,
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
rate (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
rate 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.
(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, (iv) employee principally in a non-managerial position in any
operation of the Company or any Subsidiary located outside the United States
of America, or (v) employee of a Subsidiary (other than D56, Inc.) which the
Compensation Committee or the Management HR Committee, as the case may be,
designates in such committee's discretion as being ineligible to participate
in the Program.
(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; PROVIDED,
HOWEVER, that Trend EBIT Snapshot for the 1997 fiscal year shall be deemed to
equal zero for purposes of calculating Trend EBIT Performance for the 1997,
1998 and 1999 fiscal year Performance Periods and for all other purposes
under the Program.
(aa) "Trend Financial Target Earned", for any fiscal year Performance
Period, shall mean the percentage based on the achievement of Trend EBIT
Target.
(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 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.
PAGE 7 OF 11
<PAGE>
The Company shall notify each Participant of his or her Target Award
Percentage 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
determined 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 Audit Committee of the Board has approved the corresponding
audited financial statements if such Performance Period is a fiscal year),
the Management HR Committee 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 December 31 of
the fiscal year 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. The
Participant may, at any time, change or revoke his or her express written
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 or any Subsidiary
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 or any Subsidiary. 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 any Subsidiary or
to remove the individual from the employment of the Company or any Subsidiary
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 Year Year
Ended Ended Ended
January 3, December 28, December 30,
1998 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC:
Income Before Extraordinary Item $42,781 $45,944 $49,565
------- ------- -------
------- ------- -------
Net Income $42,781 $45,944 $48,253
------- ------- -------
------- ------- -------
Weighted average number of common shares outstanding 20,744 21,560 21,519
Income Before Extraordinary Item per
Common Share $ 2.06 $ 2.13 $ 2.30
------- ------- -------
------- ------- -------
Net Income per Common Share $ 2.06 $ 2.13 $ 2.24
------- ------- -------
------- ------- -------
ASSUMING DILUTION:
Income Before Extraordinary Item $42,781 $45,944 $49,565
------- ------- -------
------- ------- -------
Net Income $42,781 $45,944 $48,253
------- ------- -------
------- ------- -------
Weighted average number of common shares outstanding 20,744 21,560 21,519
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 152 199 228
------- ------- -------
Weighted average number of common and
common equivalent shares 20,896 21,759 21,747
------- ------- -------
------- ------- -------
Income Before Extraordinary Item per
Common Share Assuming Dilution $ 2.05 $ 2.11 $ 2.28
------- ------- -------
------- ------- -------
Net Income per Common Share Assuming Dilution $ 2.05 $ 2.11 $ 2.22
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JAN. 3, DEC. 28, DEC. 30, DEC. 31, JAN. 1,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998(1) 1996(1) 1995(1) 1994(1) 1994(1)
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
<S> <C> <C> <C> <C> <C>
Net sales $219,496 $228,775 $252,047 $217,865 $184,359
Cost of sales 94,040 95,190 110,008 98,480 87,331
Gross profit 125,456 133,585 142,039 119,385 97,028
Operating expenses:
Selling, general and
administrative 50,142 48,306 47,889 41,831 34,670
Amortization of goodwill
and trademarks 4,577 4,577 4,577 4,577 4,575
Recovery of import duties(2) (370) (453) (2,872) -- --
Total operating expenses 54,349 52,430 49,594 46,408 39,245
Income from operations 71,107 81,155 92,445 72,977 57,783
Other expense (income):
Interest expense 4,362 6,063 9,582 12,629 16,143
Gain on sale of aircraft(3) (2,882) -- -- -- --
Other, net (1,086) (648) (439) (837) (1,030)
Income before income taxes
and extraordinary item 70,713 75,740 83,302 61,185 42,670
Provision for income taxes 27,932 29,796 33,737 25,086 17,673
Income before extraordinary item 42,781 45,944 49,565 36,099 24,997
Extraordinary charge due
to refinancing of debt(4) -- -- 1,312 -- --
Net income $ 42,781 $ 45,944 $ 48,253 $ 36,099 $ 24,997
--------------------------------------------------------------------------------
Income before extraordinary item
per common share assuming dilution(5) $ 2.05 $ 2.11 $ 2.28 $ 1.67 $ 1.16
--------------------------------------------------------------------------------
Net income per common share
assuming dilution(5) $ 2.05 $ 2.11 $ 2.22 $ 1.67 $ 1.16
--------------------------------------------------------------------------------
<CAPTION>
JAN. 3, 1998 DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994 JAN. 1, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 40,857 $ 67,997 $ 36,015 $ 13,362 $ 26,392
Total assets 259,695 285,733 259,085 239,680 234,893
Long-term debt, including
current maturities 40,000 60,000 80,000 113,000 148,000
Total stockholders' equity(6) 186,655 196,757 150,286 100,305 61,731
</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 3, 1998
WAS A 53-WEEK PERIOD.
(2) SEE NOTE 8 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(3) SEE NOTE 6 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(4) SEE NOTE 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(5) SEE NOTE 11 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(6) 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. (THE COMPANY'S
PRINCIPAL OPERATING SUBSIDIARY) 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. 7 1997 Annual Report
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS 1997 TO 1996
NET SALES Net sales decreased $9.3 million, or 4%, from $228.8 million in
1996 to $219.5 million in 1997. This decrease was due principally to a decrease
in volume. Sales of Village Series products decreased 9% from 1996 to 1997,
while General Giftware product sales increased 7% during the same period.
Village Series products continued to account for the most significant portion of
the Company's sales, 64% in 1997 versus 67% in 1996.
GROSS PROFIT Gross Profit decreased $8.1 million, or 6%, between 1996 and
1997. Gross profit as a percentage of sales decreased from 58.4% in 1996 to
57.2% in 1997, principally due to a change in the mix of product shipped during
1997 as compared to 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased $1.8 million, or 4%, between 1996 and 1997
principally due to a 20% increase in marketing expense and a 6% increase in
administrative expense, offset by a 7% decrease in commission expense. Selling,
general and administrative expenses as a percentage of sales increased from
approximately 21% in 1996 to approximately
23% in 1997.
RECOVERY OF IMPORT DUTIES, NET The Company received net refunds of $.4 million
and $.5 million in custom duties and related interest during 1997 and 1996,
respectively. The duties pertained principally to certain merchandise imported
into the United States from 1989 to 1994.
<TABLE>
<CAPTION>
1997 1996 1995
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 $219.5 100% $228.8 100% $252.0 100%
Gross profit 125.5 57 133.6 58 142.0 56
Selling, general and
administrative expenses 50.1 23 48.3 21 47.9 19
Amortization of goodwill
and trademarks 4.6 2 4.6 2 4.6 2
Recovery of import duties (.4) -- (.5) -- (2.9) (1)
Income from operations 71.1 32 81.2 35 92.4 37
Interest expense 4.4 2 6.1 3 9.6 4
Gain on sale of aircraft (2.9) (1) -- -- -- --
Other, net (1.1) (1) (.6) -- (.4) --
Income before income taxes
and extraordinary item 70.7 32 75.7 33 83.3 33
Provision for income taxes 27.9 13 29.8 13 33.7 13
Income before extraordinary item 42.8 19 45.9 20 49.6 20
Extraordinary charge due to
refinancing of debt -- -- -- -- 1.3 1
Net income 42.8 19 45.9 20 48.3 19
Income before extraordinary item
per common share assuming dilution 2.05 2.11 2.28
Net income per common share
assuming dilution 2.05 2.11 2.22
Operating cash flow(1) 81.7 88.1 99.1
</TABLE>
(1) EARNINGS BEFORE INTEREST, INCOME TAX, DEPRECIATION AND AMORTIZATION EXPENSES
Department 56, Inc. 8 1997 Annual Report
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
INCOME FROM OPERATIONS Income from operations decreased $10.0 million, or 12%,
from 1996 to 1997 due to the factors described above. Operating margins
decreased from 35% of net sales in 1996 to 32% of net sales in 1997.
INTEREST EXPENSE Interest expense decreased $1.7 million, or 28%, between 1996
and 1997 principally due to the repayment of $20 million of debt in December
1996.
GAIN ON SALE OF AIRCRAFT During December 1997, the Company exercised its
purchase option under an aircraft lease agreement and subsequently sold the
aircraft to a former officer of the Company for $8.6 million, its appraised
value, recognizing a gain of $2.9 million.
PROVISION FOR INCOME TAXES The effective income tax rate was 39.3% and 39.5%
during 1996 and 1997, respectively.
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 56.4% in 1995
to approximately 58.4% 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.
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.
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
Department 56, Inc. 9 1997 Annual Report
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
each year. The Company entered 66% and 71% of its total annual customer orders
for 1997 and 1996, respectively, during the first quarter of each of those
years. Cancellations of total annual customer orders were approximately 8% and
6% in 1997 and 1996, respectively. The Company's backlog was $4.6 million and
$7.2 million at January 3, 1998 and December 28, 1996, respectively.
The Company shipped and recorded as net sales approximately 90% and 92% of
its annual customer orders in 1997 and 1996, respectively. Orders not shipped 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>
1997 1996
(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 entered(1) $160.6 $43.8 $34.3 $6.2 $244.9 $177.5 $35.3 $28.3 $7.7 $248.8
Net sales 45.7 58.6 61.6 53.6 219.5 59.0 75.3 60.2 34.3 228.8
Gross profit 26.6 33.9 35.8 29.2 125.5 33.8 44.3 34.8 20.7 133.6
Selling, general and
administrative expenses 11.1 11.4 12.1 15.5 50.1 11.5 13.0 11.7 12.1 48.3
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 (.4) -- -- -- (.4) (.2) -- (.3) -- (.5)
Income from operations 14.7 21.3 22.5 12.6 71.1 21.4 30.2 22.2 7.4 81.2
Net income 8.7 12.4 13.1 8.6 42.8 12.2 17.3 12.3 4.1 45.9
Net income per common
share assuming dilution(2) 0.40 0.59 0.63 0.42 2.05 0.56 0.79 0.57 0.19 2.11
</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.
(2) SEE FOOTNOTE 11 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 10 1997 Annual Report
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
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 January 3, 1998, the term loan outstanding was $40
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, the Company
and its principal operating subsidiary, D 56, Inc., are 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 $85 million at January 3, 1998.
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 decreased from $46.4
million at December 28, 1996 to $37.4 million at January 3, 1998 principally due
to the repurchase of $55.2 million of stock and the repayment of $20.0 million
of debt during 1997, offset by the increase in net cash provided by operating
activities.
Accounts receivable decreased from $35.6 million at December 28, 1996 to
$23.0 million at January 3, 1998, principally due to six days of additional cash
collections in 1997 resulting from the timing of the Company's fiscal year end.
Capital expenditures were $7.8 million, $1.5 million and $1.6 million for
1997, 1996 and 1995, respectively. Included in 1997 capital expenditures is
$4.9 million in connection with the Company's exercise of a purchase option
under its aircraft lease agreement. See Note 6 to the consolidated financial
statements. In addition, the Company is currently in the process of implementing
a new information system. The new information system will significantly update
the Company's current information system capabilities and is expected to
eliminate the year 2000 issues for the Company's primary information systems.
The Company plans to have the new information system substantially implemented
by the first quarter of 1999. The new information system is expected to cost
approximately $4 million.
Operating cash flow, defined as earnings before interest, income tax,
depreciation and amortization expenses, decreased $6.4 million, or 7%, from
$88.1 million in 1996 to $81.7 million in 1997. The decrease was principally due
to the decrease in income from operations.
Department 56, Inc. 11 1997 Annual Report
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
The Company has a stock repurchase program. Under this program, the Company
repurchased in the open market 2.2 million shares during 1997 at a weighted
average price of $25 per share. The Company is authorized to repurchase an
additional 0.8 million shares through the end of 1999. The timing, prices and
amounts of shares repurchased will be determined at the discretion of the
Company's management based on its view of prevailing economic and market
conditions.
FOREIGN EXCHANGE
The dollar value of the Company's assets abroad is not significant. The
Company's sales are principally denominated in U.S. dollars and, as a result,
are not subject to changes in exchange rates.
The Company imports its product from manufacturers located in the Pacific
Rim, primarily China, Taiwan (Republic of China) and the Philippines. These
transactions are principally denominated in U.S. dollars, except for imports
from Taiwan which are principally denominated in New Taiwan dollars. The
Company, from time to time, will enter into foreign exchange contracts or build
foreign currency deposits as a partial hedge against currency fluctuations. The
Company intends to manage foreign exchange risks to the extent possible and take
appropriate action where warranted. The Company's costs could be adversely
affected if the currencies of the Countries in which the manufacturers operate
appreciate significantly relative to the U.S. dollar.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on earnings
by controlling its operating costs and selling prices. During the past few
years, the rate of inflation has been low and has not had a material impact on
the Company's results of operations.
RECENT DEVELOPMENTS
On February 23, 1998, the Company issued a press release stating in relevant
part: "Dealer orders through February 14 [1998] were 8% higher than the
comparable period in the prior year. Year-to-date Village orders were 8% higher
than the comparable period in the prior year, while year-to-date orders for
General Giftware were tracking 5% ahead." The press release also stated: "'We
are pleased with [1997's revenue and earnings] given the need at the beginning
of the year to further address retail inventories,' said Susan Engel, Chairwoman
and CEO of Department 56. 'Data collected from a broad spectrum of dealers
indicated a reduction in average retail inventory level in 1997, which was both
significant and more substantial than in 1996.'"
The federal securities laws provide "safe harbor" status to certain statements
that go beyond historical information and which may provide an indication of
future results. Any conclusions or expectations drawn from the statements in the
press release or throughout this annual report concerning matters that are not
historical corporate financial results are 'forward-looking statements' that
involve risks and uncertainties.
Dealer orders are principally dependent on the amount, quality and market
acceptance of the new product introductions and retailer demand. Dealer order
patterns have historically varied in number, mix and timing, and there can be no
assurance that the order trend experienced from January 4, 1998 through February
14, 1998 will continue. Moreover, the statements in the press release or
throughout this annual report concerning retail inventory levels, consumer
demand, and dealer expectations are based on statistical research conducted by
or for the Company, and assume that such findings are correct and representative
of market conditions as a whole.
Other factors, including product development efforts, completion of third party
product manufacturing, dealer reorders and order cancellations, control of
operating expenses, corporate cash flow application, and industry, general
economic, regulatory and international trade conditions, can significantly
impact the Company's sales and earnings. Actual results may vary materially from
forward-looking statements and the assumptions on which they are based. The
Company undertakes no obligation to update or publish in the future any forward-
looking statements.
Department 56, Inc. 12 1997 Annual Report
<PAGE>
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JANUARY 3, 1998 DECEMBER 28, 1996
- --------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $37,361 $46,405
Accounts receivable, net of allowances of $13,057
and $10,264, respectively 23,004 35,603
Inventories 18,070 20,526
Deferred taxes 6,303 5,048
Other current assets 3,008 1,721
Total current assets 87,746 109,303
Property and equipment, net 12,753 12,318
Goodwill, net of accumulated amortization of
$21,683 and $17,554, respectively 143,491 147,620
Trademarks, net of accumulated amortization of
$2,349 and $1,902, respectively 15,551 15,998
Other assets 154 494
$259,695 $285,733
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $20,000 $ 20,000
Accounts payable 9,973 7,618
Commissions payable 3,955 4,683
Other current liabilities 12,961 9,005
Total current liabilities 46,889 41,306
Deferred taxes 6,151 7,670
Long-term debt 20,000 40,000
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
20,000 shares; no shares issued -- --
Common stock, $.01 par value; authorized
100,000 shares; issued and
outstanding 21,765 and 21,584 shares, respectively 218 216
Additional paid-in capital 44,645 42,315
Treasury stock, at cost; 2,199 and 0 shares,
respectively (55,215) --
Retained earnings 197,007 154,226
Total stockholders' equity 186,655 196,757
$259,695 $285,733
----------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 13 1997 Annual Report
<PAGE>
CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JANUARY 3, 1998 DECEMBER 28, 1996 DECEMBER 30, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $219,496 $228,775 $252,047
Cost of sales 94,040 95,190 110,008
Gross profit 125,456 133,585 142,039
Operating expenses:
Selling, general and administrative 50,142 48,306 47,889
Amortization of goodwill and trademarks 4,577 4,577 4,577
Recovery of import duties (370) (453) (2,872)
Total operating expenses 54,349 52,430 49,594
Income from operations 71,107 81,155 92,445
Other expense (income):
Interest expense 4,362 6,063 9,582
Gain on sale of aircraft (2,882) -- --
Other, net (1,086) (648) (439)
Income before income taxes and extraordinary item 70,713 75,740 83,302
Provision for income taxes 27,932 29,796 33,737
Income before extraordinary item 42,781 45,944 49,565
Extraordinary charge due to refinancing of debt -- -- 1,312
Net income $ 42,781 $ 45,944 $ 48,253
-----------------------------------------------------
Income before extraordinary item per common share $ 2.06 $ 2.13 $ 2.30
----------------------------------------------------
Income before extraordinary item
per common share assuming dilution $ 2.05 $ 2.11 $ 2.28
----------------------------------------------------
Net income per common share $ 2.06 $ 2.13 $ 2.24
----------------------------------------------------
Net income per common share
assuming dilution $ 2.05 $ 2.11 $ 2.22
----------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 14 1997 Annual Report
<PAGE>
CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(IN THOUSANDS) JANUARY 3, 1998 DECEMBER 28, 1996 DECEMBER 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 42,781 $ 45,944 $ 48,253
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary charge -- -- 1,312
Depreciation 2,031 1,721 1,609
Amortization of goodwill and trademarks 4,577 4,577 4,577
Provision for uncollectible accounts receivable 1,087 2,014 2,293
Gain on sale of aircraft (2,882) -- --
Compensation expense - common stock options -- 14 169
Deferred taxes (2,774) (37) (1,528)
Changes in assets and liabilities:
Accounts receivable 11,512 (3,349) (12,605)
Inventories 2,456 8,533 (8,693)
Other assets (1,337) 502 520
Accounts payable 2,355 1,019 1,442
Commissions payable (728) 212 262
Other current liabilities 4,882 (1,379) 1,766
Net cash provided by operating activities 63,960 59,771 39,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,829) (1,507) (1,617)
Proceeds from sale of aircraft 8,567 -- --
Net cash provided by (used in) investing activities 738 (1,507) (1,617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options 1,473 336 865
Borrowings on revolving credit agreement 17,985 34,338 36,500
Principal payments on revolving credit agreement (17,985) (34,338) (41,500)
Purchases of treasury stock (55,215) -- --
Proceeds from issuance of long-term debt -- -- 100,000
Principal payments on long-term debt (20,000) (20,000) (128,000)
Net cash used in financing activities (73,742) (19,664) (32,135)
Net increase (decrease) in cash and cash equivalents (9,044) 38,600 5,625
Cash and cash equivalents at beginning of period 46,405 7,805 2,180
Cash and cash equivalents at end of period $ 37,361 $ 46,405 $ 7,805
----------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Department 56, Inc. 15 1997 Annual Report
<PAGE>
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED
COMMON STOCK ADDITIONAL COMPENSATION TOTAL
PAID-IN ON COMMON TREASURY RETAINED STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT CAPITAL STOCK OPTIONS STOCK EARNINGS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income -- -- -- -- -- 42,781 42,781
Shares issued upon the exercise
Of common stock options 181 2 2,330 -- -- -- 2,332
Shares repurchased (2,199) -- -- -- (55,215) -- (55,215)
Balance as of January 3, 1998 19,566 $218 $44,645 $ -- $(55,215) $197,007 $186,655
-------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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. 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 30, 1995 and December 28, 1996
include 52 weeks and the year ended January 3, 1998 includes 53 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.
Department 56, Inc. 16 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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, unsalable 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 45 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 earnings.
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 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. 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 deter mined using the current spot rate. There
were no forward currency contracts outstanding at December 28, 1996 and January
3, 1998.
Department 56, Inc. 17 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NET INCOME PER COMMON SHARE Net income per common share is calculated by
dividing net income by the weighted average number of shares outstanding during
the period. Net income per common share assuming dilution reflects per share
amounts that would have resulted had the Company's outstanding stock options
been converted to common stock. See note 11.
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.
<TABLE>
<CAPTION>
2 PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT IS COMPRISED OF THE FOLLOWING:
JAN. 3, 1998 DEC. 28, 1996
<S> <C> <C>
Leasehold Improvements $ 1,253 $ 2,156
Furniture and Fixtures 1,758 1,485
Computer Equipment 4,646 2,540
Other Equipment 4,804 4,756
Building 6,288 5,882
Land 906 906
19,655 17,725
Less accumulated depreciation 6,902 5,407
Property and Equipment, Net $12,753 $12,318
---------------------------
</TABLE>
3 OTHER CURRENT LIABILITIES
OTHER CURRENT LIABILITIES ARE COMPRISED OF THE FOLLOWING:
<TABLE>
<CAPTION>
JAN. 3, 1998 DEC. 28, 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation
and benefits $ 3,377 $ 1,281
Income taxes payable 7,644 5,893
Deferred revenue 679 517
Accrued royalty fees 570 593
Other 691 721
$ 12,961 $ 9,005
----------------------------
</TABLE>
4 CREDIT AGREEMENT
LONG-TERM DEBT IS COMPRISED OF THE FOLLOWING:
<TABLE>
<CAPTION>
JAN. 3, 1998 DEC. 28, 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
TERM LOAN $40,000 $60,000
Less current portion 20,000 20,000
$20,000 $40,000
---------------------------
</TABLE>
The Company's credit agreement consists of a term loan and a revolving line of
credit. 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, bankers acceptances, and
1309revolving 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 $85,341 at January 3, 1998.
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
Department 56, Inc. 18 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Rate (as defined) plus an applicable margin. The applicable margin ranges from
1/2% to 1 1/4% 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 $4,400, $6,129 and $10,086 during the years
ended January 3, 1998, December 28, 1996 and December 30, 1995, respectively.
During February 1995, the Company entered into its existing credit
agreement and recorded an extraordinary charge of $1,312, net of income taxes,
to write off deferred financing costs.
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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JAN. 3, 1998 DEC. 28, 1996 DEC. 30, 1995
CURRENT:
<S> <C> <C> <C>
Federal $28,225 $27,376 $30,560
State 2,419 2,347 2,619
Foreign 62 110 272
Deferred (2,774) (37) 286
$27,932 $29,796 $33,737
-----------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JAN. 3, 1998 DEC. 28, 1996 DEC. 30, 1995
<S> <C> <C> <C>
Income taxes at federal
statutory rate $24,750 $26,509 $29,156
State income taxes, net of
federal income tax 1,768 1,893 2,566
Amortization of goodwill 1,448 1,448 1,448
Other (34) (54) 567
Provision for income taxes $27,932 $29,796 $33,737
-----------------------------------------------
</TABLE>
THE COMPONENTS OF THE NET DEFERRED TAX ASSET (LIABILITY) WERE AS FOLLOWS:
<TABLE>
<CAPTION>
JAN. 3, 1998 DEC. 28, 1996
<S> <C> <C>
Deferred tax assets:
Accounts Receivable
Valuation allowances $4,660 $3,516
Inventory valuation allowances 1,469 1,118
Compensation expense -
Common stock options 141 331
Accrued liabilities 264 354
Other 220 263
Total Deferred tax assets 6,754 5,582
Deferred tax liabilities:
Trademarks (5,909) (6,079)
Property and equipment (440) (1,986)
Other (253) (139)
Total deferred tax liabilities (6,602) (8,204)
$152 $(2,622)
</TABLE>
The $152 net deferred tax asset at january 3, 1998 is presented as a net
deferred current asset of $6,303 and a net deferred noncurrent liability of
$6,151. 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 company paid income taxes of $28,134, $28,943 and $31,855 during the
years ended January 3, 1998, December 28, 1996 and December 30, 1995,
respectively.
Department 56, Inc. 19 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES The Company leases 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 JANUARY 3, 1998:
<TABLE>
<S> <C>
1998 $1,863
1999 1,325
2000 1,075
2001 518
2002 536
Thereafter 1,704
$7,021
</TABLE>
The Company's rental expense was $2,934, $3,238 and $2,875 for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995, respectively.
During December 1997, the company exercised its purchase option under an
aircraft lease agreement and subsequently sold the aircraft at its appraised
value to a former officer of the Company for $8,567, recognizing a gain of
$2,882.
LETTERS OF CREDIT The Company had outstanding standby and commercial letters of
credit amounting to $4,659 at January 3, 1998 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 $1,136, $750 and $975 for the years ended January 3, 1998, December 28,
1996 and December 30, 1995, respectively.
8 RECOVERY OF IMPORT DUTIES
During the years ended January 3, 1998, December 28, 1996 and December 30,
1995 the Company received net refunds in custom duties and related interest of
$370, $453, and $2,872 respectively. The refunds pertained principally 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 January 3, 1998, December 28, 1996 and
December 30, 1995 of $1,323, $1,305 and $1,893, respectively.
During the years ended January 3, 1998, December 28, 1996 and December 30,
1995, the Company paid $1,343, $2,116 and $2,537 respectively, for aircraft
management, transportation and other expenses to an affiliate of a director of
the Company.
During 1997, the Company was reimbursed $467 by a former director and
officer of the corporation for use of the Company's aircraft.
On November 10, 1997, the Company purchased 250,000 shares of its common
stock from a former director and officer of the Company at a price per share
equal to the closing price in consolidated trading on that day.
Department 56, Inc. 20 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10 STOCKHOLDERS' EQUITY
STOCK-BASED COMPENSATION PLANS At January 3, 1998, the Company had four
stock-based compensation plans. Under the 1992, 1993, 1995 and 1997 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, 600,000
and 1,500,000 shares of common stock, respectively. All employee 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 four stock option plans as of
January 3, 1998, December 28, 1996 and December 30, 1995, and changes during the
years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
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 1,291,908 $27.51 1,072,773 $31.73 702,755 $26.32
Granted 806,000 23.07 433,350 20.48 448,660 37.13
Exercised (85,415) 13.53 (33,500) 9.36 (70,742) 12.23
Forfeited (28,915) 31.93 (180,715) 39.09 (7,900) 31.26
Outstanding at end of year 1,983,578 26.25 1,291,908 27.51 1,072,773 31.73
Options exercisable at end of year 798,258 30.43 536,583 28.09 224,271 26.57
Weighted average fair value
of options granted during the year $10.96 $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 compensation cost been determined based
on the fair value of the 1995, 1996 and 1997 stock option grants consistent with
the method of Statement of Financial 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 common
share assuming dilution and net income per share common share assuming dilution
would have been reduced to the pro forma amounts indicated to the right:
<TABLE>
<CAPTION>
1997 1996 1995
INCOME BEFORE EXTRAORDINARY ITEM
<S> <C> <C> <C>
As reported $42,781 $45,944 $49,565
Pro forma $40,245 $43,410 $48,885
NET INCOME
As reported $42,781 $45,944 $48,253
Pro forma $40,245 $43,410 $47,573
INCOME BEFORE EXTRAORDINARY ITEM
PER COMMON SHARE ASSUMING DILUTION
As reported $2.05 $2.11 $2.28
Pro forma $1.93 $2.00 $2.25
NET INCOME PER COMMON SHARE
ASSUMING DILUTION
As reported $2.05 $2.11 $2.22
Pro forma $1.93 $2.00 $2.19
</TABLE>
Department 56, Inc. 21 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 1997, 1996 and 1995, respectively: expected volatility of 38, 46 and
32 percent, risk-free interest rates of 6.2 percent, 5.8 percent and 6.0
percent, expected lives of 6 years and no expected dividends. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
compensation costs. SFAS 123 does not apply to awards prior to 1995, and
additional awards are anticipated.
The following table summarizes information about the Company's stock option
plans at January 3, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT JAN. 3, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT JAN. 3, 1998 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$3.33 52,013 4.1 years $3.33 52,013 $3.33
18.00-21.47 1,052,971 8.8 20.87 171,009 19.73
21.48-37.75 878,594 7.8 34.04 575,236 36.06
1,983,578 798,258
</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 from
the date of grant, and have an exercise price of $3.33 per share. During 1997,
members of the Board of Directors exercised 95,000 options. At January 3, 1998,
directors options to purchase 40,000 shares of Common Stock were exercisable at
$3.33 per share.
SHAREHOLDER RIGHTS PLAN In April 1997, the Company adopted a shareholder rights
plan. Under the shareholder rights plan, each shareholder received a dividend of
one preferred share purchase right for each share held of the Company's common
stock. Each right entitles the holder to purchase one one-thousandth of a share
of Series A Participating Preferred Stock at an exercise price of $100, subject
to adjustment, or at the discretion of the Board of Directors of the Company,
the right to purchase common stock of the Company at a 50% discount. The rights
become exercisable only upon the occurrence of certain events involving a buyer
acquiring 181/2% or greater beneficial ownership in the Company's common stock
or the announcement of a tender offer or exchange offer which, if consummated,
would give the buyer beneficial ownership of an 181/2% or greater position in
the Company. Preferred share purchase rights owned by the buyer become null and
void following this occurrence. The rights will expire April 2007, and the
Company may redeem the rights at any time (prior to the occurrence of a
specified event) at a price of one cent per right, except in certain
circumstance where there is a change in the majority of the Board of Directors.
If the Company is acquired in a merger or similar transaction after such an
occurrence, all rights holders, except the buyer, will have the right to
purchase stock in the buyer at a 50% discount.
Department 56, Inc. 22 1997 Annual Report
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11 INCOME PER COMMON SHARE
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Income per
common share amounts presented for 1996 and 1995 have been restated for the
adoption of SFAS No. 128. The following tables reconcile income before
extraordinary item per common share and income before extraordinary item per
common share assuming dilution:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income before extraordinary item $ 42,781 $ 45,944 $ 49,565
Weighted average number
of shares outstanding 20,744,000 21,560,000 21,519,000
Income before extraordinary item
per common share $ 2.06 $ 2.13 $ 2.30
<CAPTION>
1997 1996 1995
Income before extraordinary item $ 42,781 $ 45,944 $ 49,565
Weighted average number
of shares outstanding 20,744,000 21,560,000 21,519,000
Dilutive impact of options outstanding 152,000 199,000 228,000
Weighted average number of shares and
and potential dilutive shares outstanding 20,896,000 21,759,000 21,747,000
Income before extraordinary item
per common share assuming dilution $ 2.05 $ 2.11 $ 2.28
</TABLE>
Options to purchase 879,000 shares of common stock at exercise prices between
$27 and $38 per share were outstanding at January 3, 1998 but were not included
in the computation of income before extraordinary item per common share assuming
dilution because the option exercise prices were greater than the average market
price of the common stock.
Department 56, Inc. 23 1997 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 January 3, 1998 and December 28, 1996 and the
related consolidated statements of income, cash flows and stockholders' equity
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at January 3, 1998
and December 28, 1996 and the results of its operations and its cash flows for
the years ended January 3, 1998, December 28, 1996 and December 30, 1995 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -----------------------------
Minneapolis, Minnesota
February 12, 1998
Department 56, Inc. 24 1997 Annual Report
<PAGE>
CORPORATE AND STOCKHOLDER INFORMATION
BOARD OF DIRECTORS
SUSAN E. ENGEL (1)
CHAIRWOMAN AND CHIEF EXECUTIVE OFFICER
Department 56, Inc.
TODD L. BACHMAN (2)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Bachman's Inc.
MAXINE CLARK
FOUNDER AND CHIEF EXECUTIVE OFFICER
Build-A-Bear Workshop
SANDRA J. HORBACH (1), (3)
GENERAL PARTNER
Forstmann Little & Co.
WM. BRIAN LITTLE (1), (3), (5)
PRIVATE INVESTOR
GARY S. MATTHEWS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Guinness Import Company
STEVEN G. ROTHMEIER (2), (3), (4)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Great Northern Capital
VIN WEBER (3), (4), (5)
PARTNER
Clark & Weinstock Inc.
(1) MEMBER OF EXECUTIVE COMMITTEE
(2) MEMBER OF AUDIT COMMITTEE
(3) MEMBER OF COMPENSATION COMMITTEE
(4) MEMBER OF STOCK INCENTIVE COMMITTEE
(5) MEMBER OF NOMINATING COMMITTEE
OFFICERS
SUSAN E. ENGEL
CHAIRWOMAN AND CHIEF EXECUTIVE OFFICER
DAVID W. DEWEY
EXECUTIVE VICE PRESIDENT - OVERSEAS OPERATIONS
BRETT D. HEFFES
VICE PRESIDENT - CORPORATE DEVELOPMENT
MARK R. KENNEDY
SENIOR VICE PRESDENT AND CHIEF FINANCIAL OFFICER
YEH-HUANG LIN
VICE PRESIDENT - D 56 TRADING
ROBERT S. ROSE
VICE PRESIDENT - DISTRIBUTION AND OPERATIONS
TIMOTHY J. SCHUGEL
VICE PRESIDENT - FINANCE
JOAN M. SERENA
VICE PRESIDENT - CONSUMER AND DEALER MARKETING
KENNETH J. SOBASKI
EXECUTIVE VICE PRESIDENT - SALES AND MARKETING
GREGORY G. SORENSEN
VICE PRESIDENT - MANAGEMENT INFORMATION SYSTEMS
DAVID H. WEISER
SENIOR VICE PRESIDENT - LEGAL/HUMAN RESOURCES AND SECRETARY
BRUCE R. WOLLAK
VICE PRESIDENT - D 56 SALES
STOCKHOLDER INFORMATION
CORPORATE OFFICES
One Village Place
6436 City West Parkway
Eden Prairie, MN 55344
TRANSFER AGENT
Chase Mellon
Shareholder Services
450 West 33rd Street
New York, NY 10001
INDEPENDENT AUDITORS
Deloitte & Touche LLP
STOCK LISTING
New York Stock Exchange Symbol "DFS"
ANNUAL MEETING
1:00 p.m.
May 14, 1998
Marriott Southwest Hotel
5801 Opus Parkway
Minnetonka, MN
Department 56, Inc. Market Price (PER SHARE)
<TABLE>
<CAPTION>
1997 High Low
<S> <C> <C>
......................................................................
First Quarter $24 3/4 $16 7/8
......................................................................
Second Quarter $23 $17 1/4
......................................................................
Third Quarter $29 13/16 $21
......................................................................
Fourth Quarter $31 3/4 $27 7/16
......................................................................
<CAPTION>
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
......................................................................
</TABLE>
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 19, 1998, there were 1,049 record holders of the Company's
common stock.
"HARLEY-DAVIDSON" TRADEMARK OF H-D MICHIGAN, INC.
"MCDONALD'S" AND RESTAURANT DESIGN TRADEMARKS OF MCDONALD'S CORPORATION.
"HERSHEY" TRADEMARK OF HERSHEY FOODS CORPORATION.
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>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
Name of Subsidiary Jurisdiction
------------------ ------------
Department 56 Retail, Inc. Minnesota
Department 56 Sales, Inc. Minnesota
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>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-95704, No. 33-79960, and No. 333-41639 of Department 56, Inc. and
subsidiaries on Form S-8 of our reports dated February 12, 1998, appearing in
and incorporated by reference in this Annual Report on Form 10-K of Department
56, Inc. and subsidiaries for the year ended January 3, 1998.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 37,361
<SECURITIES> 0
<RECEIVABLES> 23,004
<ALLOWANCES> 0
<INVENTORY> 18,070
<CURRENT-ASSETS> 87,746
<PP&E> 12,753
<DEPRECIATION> 0
<TOTAL-ASSETS> 259,695
<CURRENT-LIABILITIES> 46,889
<BONDS> 20,000
0
0
<COMMON> 218
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 259,695
<SALES> 219,496
<TOTAL-REVENUES> 219,496
<CGS> 94,040
<TOTAL-COSTS> 94,040
<OTHER-EXPENSES> 54,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,362
<INCOME-PRETAX> 70,713
<INCOME-TAX> 27,932
<INCOME-CONTINUING> 42,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,781
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-28-1996 DEC-28-1996
<PERIOD-END> DEC-28-1996 JUN-29-1996 SEP-28-1996
<CASH> 46,405 2,810 3,724
<SECURITIES> 0 0 0
<RECEIVABLES> 35,603 107,161 127,971
<ALLOWANCES> 0 0 0
<INVENTORY> 20,526 25,363 21,733
<CURRENT-ASSETS> 109,303 142,507 160,947
<PP&E> 12,318 12,119 12,195
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 285,733 321,105 338,479
<CURRENT-LIABILITIES> 41,306 73,799 78,644
<BONDS> 40,000 60,000 60,000
0 0 0
0 0 0
<COMMON> 216 216 216
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 285,733 321,105 338,479
<SALES> 228,775 134,273 194,483
<TOTAL-REVENUES> 228,775 134,273 194,483
<CGS> 95,190 56,151 81,559
<TOTAL-COSTS> 95,190 56,151 81,559
<OTHER-EXPENSES> 52,430 26,559 39,163
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 6,063 2,846 4,590
<INCOME-PRETAX> 75,740 49,049 69,543
<INCOME-TAX> 29,796 19,620 27,817
<INCOME-CONTINUING> 45,944 29,429 41,726
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 45,944 29,429 41,726
<EPS-PRIMARY> 2.13 1.37 1.94
<EPS-DILUTED> 2.11 1.35 1.92
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-03-1998 JAN-03-1998 JAN-03-1998
<PERIOD-END> APR-05-1997 JUL-05-1997 OCT-04-1997
<CASH> 48,613 17,895 2,714
<SECURITIES> 0 0 0
<RECEIVABLES> 34,740 73,174 100,014
<ALLOWANCES> 0 0 0
<INVENTORY> 20,149 21,195 23,833
<CURRENT-ASSETS> 110,318 120,072 135,255
<PP&E> 12,120 12,061 12,067
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 285,409 293,800 307,818
<CURRENT-LIABILITIES> 43,979 43,255 50,538
<BONDS> 40,000 40,000 40,000
0 0 0
0 0 0
<COMMON> 216 216 217
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 285,409 293,800 307,818
<SALES> 45,729 104,293 165,895
<TOTAL-REVENUES> 45,729 104,293 165,895
<CGS> 19,112 43,816 69,660
<TOTAL-COSTS> 19,112 43,816 69,660
<OTHER-EXPENSES> 11,868 24,412 37,630
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,075 2,170 3,240
<INCOME-PRETAX> 14,418 34,913 56,524
<INCOME-TAX> 5,695 13,791 22,327
<INCOME-CONTINUING> 8,723 21,122 34,197
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,723 21,122 34,197
<EPS-PRIMARY> .41 1.00 1.63
<EPS-DILUTED> .40 .99 1.62
</TABLE>
