UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
For the quarterly period ended: April 2, 2005
Commission file number: 1-11908
| Department 56, Inc. |
| (Exact name of registrant as specified in its charter) |
| Delaware |
13-3684956 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| One Village Place,
6436 City West Parkway, Eden Prairie, MN 55344 |
| (Address of principal
executive offices) (Zip Code) |
| (952) 944-5600 |
| (Registrant’s telephone number, including area code) |
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes X No
As of April 29, 2005, 13,774,967 shares of the registrant’s common stock, par value $.01 per share, were outstanding.
| ASSETS |
| APRIL 2, 2005 | JANUARY 1, 2005 | APRIL 3, 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 25,211 | $ | 33,756 | $ | 2,404 | |||||
| Short-term investments | 20,000 | 11,150 | 17,477 | ||||||||
| Accounts receivable, net | 21,022 | 28,488 | 15,532 | ||||||||
| Inventories | 18,364 | 15,998 | 13,052 | ||||||||
| Deferred taxes | 4,076 | 4,304 | 4,069 | ||||||||
| Income tax receivable | — | — | 2,152 | ||||||||
| Other current assets | 2,448 | 3,045 | 3,025 | ||||||||
| Total current assets | 91,121 | 96,741 | 57,711 | ||||||||
| PROPERTY AND EQUIPMENT, net | 15,112 | 15,933 | 17,061 | ||||||||
| GOODWILL | 37,074 | 37,074 | 37,074 | ||||||||
| TRADEMARKS AND OTHER INTANGIBLES, net | 14,382 | 14,417 | 14,522 | ||||||||
| MARKETABLE SECURITIES | 2,267 | 2,930 | 3,373 | ||||||||
| OTHER ASSETS | 424 | 293 | 424 | ||||||||
| $ | 160,380 | $ | 167,388 | $ | 130,165 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | 6,001 | $ | 6,858 | $ | 5,523 | |||||
| Accrued compensation and benefits payable | 2,498 | 5,339 | 3,490 | ||||||||
| Income tax payable | 312 | 1,547 | — | ||||||||
| Other current liabilities | 772 | 1,533 | 1,386 | ||||||||
| Total current liabilities | 9,583 | 15,277 | 10,399 | ||||||||
| DEFERRED COMPENSATION OBLIGATION | 2,263 | 2,929 | 3,382 | ||||||||
| DEFERRED TAXES | 5,571 | 5,425 | 4,596 | ||||||||
| STOCKHOLDERS’ EQUITY | 142,963 | 143,757 | 111,788 | ||||||||
| $ | 160,380 | $ | 167,388 | $ | 130,165 | ||||||
See notes to condensed consolidated financial statements.
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DEPARTMENT 56, INC. AND SUBSIDIARIES
| 13 WEEKS ENDED APRIL 2, 2005 | 13 WEEKS ENDED APRIL 3, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| NET SALES | $ | 20,040 | $ | 20,244 | ||||
| COST OF SALES | 11,134 | 9,700 | ||||||
| Gross profit | 8,906 | 10,544 | ||||||
| OPERATING EXPENSES - | ||||||||
| Selling, general, and administrative | 13,071 | 12,635 | ||||||
| OPERATING LOSS FROM CONTINUING OPERATIONS | (4,165 | ) | (2,091 | ) | ||||
| OTHER EXPENSE (INCOME): | ||||||||
| Interest expense | 99 | 116 | ||||||
| Other, net | (155 | ) | 82 | |||||
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (4,109 | ) | (2,289 | ) | ||||
| INCOME TAX BENEFIT | (1,479 | ) | (824 | ) | ||||
| LOSS FROM CONTINUING OPERATIONS | (2,630 | ) | (1,465 | ) | ||||
| LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX | — | (1,497 | ) | |||||
| NET LOSS | $ | (2,630 | ) | $ | (2,962 | ) | ||
| LOSS PER SHARE - BASIC: | ||||||||
| LOSS PER SHARE FROM CONTINUING OPERATIONS | $ | (0.19 | ) | $ | (0.11 | ) | ||
| LOSS PER SHARE FROM DISCONTINUED OPERATIONS | — | (0.11 | ) | |||||
| NET LOSS PER SHARE - BASIC | $ | (0.19 | ) | $ | (0.22 | ) | ||
| LOSS PER SHARE - ASSUMING DILUTION: | ||||||||
| LOSS PER SHARE FROM CONTINUING OPERATIONS | $ | (0.19 | ) | $ | (0.11 | ) | ||
| LOSS PER SHARE FROM DISCONTINUED OPERATIONS | — | (0.11 | ) | |||||
| NET LOSS PER SHARE - ASSUMING DILUTION | $ | (0.19 | ) | $ | (0.22 | ) | ||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||
| BASIC | 13,641 | 13,178 | ||||||
| ASSUMING DILUTION | 13,641 | 13,178 | ||||||
See notes to condensed consolidated financial statements.
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| 13 WEEKS ENDED APRIL 2, 2005 | 13 WEEKS ENDED APRIL 3, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES - | ||||||||
| Net cash used in operating activities | $ | (1,123 | ) | $ | (4,574 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | (68 | ) | (355 | ) | ||||
| Net purchases of available-for-sale securities | (8,850 | ) | (7,477 | ) | ||||
| Net cash used in investing activities | (8,918 | ) | (7,832 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from the exercise of common stock options | 1,496 | 355 | ||||||
| Purchases of treasury stock | — | (42 | ) | |||||
| Net cash provided by financing activities | 1,496 | 313 | ||||||
| Net cash provided by discontinued operations | — | 7,040 | ||||||
| NET DECREASE IN CASH AND | ||||||||
| CASH EQUIVALENTS | (8,545 | ) | (5,053 | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING | ||||||||
| OF PERIOD | 33,756 | 7,457 | ||||||
| CASH AND CASH EQUIVALENTS AT END | ||||||||
| OF PERIOD | $ | 25,211 | $ | 2,404 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH | ||||||||
| FLOW INFORMATION - | ||||||||
| Cash paid (received) for: | ||||||||
| Interest | $ | 85 | $ | 370 | ||||
| Income taxes | (858 | ) | 479 | |||||
See notes to condensed consolidated financial statements.
4
| 1. | Basis of Presentation |
The accompanying condensed consolidated balance sheet as of January 1, 2005 was derived from the audited consolidated balances as of that date. The remaining accompanying condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair presentation.
The results of operations for the quarter ended April 2, 2005 are not necessarily indicative of the results for the full fiscal year. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the 2004 Annual Report to Stockholders and Annual Report on Form 10-K as filed by Department 56, Inc. (the Company) with the Securities and Exchange Commission. Comprehensive income for the periods ended April 2, 2005 and April 3, 2004 was equivalent to reported net income.
Reclassifications – Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net income (loss) or retained earnings as presented. Auction rate securities, previously classified as cash and cash equivalents, are now classified as short-term investments for all periods presented. The Company classifies these short-term investments as “available for sale” securities under SFAS No. 115. As of April 2, 2005, January 1, 2005, and April 3, 2004, auction rate securities were $20.0 million, $11.2 million, and $17.5 million, respectively.
| 2. | Income (Loss) per Common Share |
Net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Net income (loss) per common share assuming dilution reflects per share amounts that would have resulted had the Company’s dilutive outstanding stock options been converted to common stock. Restricted stock is considered outstanding on the date the restrictions lapse when computing net income (loss) per common share – basic. Restricted stock is considered outstanding on the grant date when computing net income per common share – assuming dilution. All options and unvested restricted stock were considered anti – dilutive and excluded from the computation of common equivalent shares at April 2, 2005 and April 3, 2004 because the Company reported a net loss.
| 3. | Discontinued Operations |
In December 2003, the Company committed to a plan to cease operations of its Geppeddo seasonal kiosk business. Geppeddo ceased operations during the first quarter of 2004, and in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company has classified Geppeddo’s results in discontinued operations for all periods presented. Geppeddo’s sales for the first quarter of 2005 were $0, compared to $3,396 during the first quarter of 2004.
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| 4. | Stock-Based Compensation |
The Company accounts for its stock option plans using the intrinsic value method and has adopted the “disclosure only” provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Accordingly, no compensation cost has been recognized for stock options granted. Had compensation cost been determined based upon fair value (using the Black-Scholes option-pricing method) at the grant date for awards under these plans, the Company’s net loss and loss per share would have been increased as follows:
| 13 WEEKS ENDED APRIL 2, 2005 | 13 WEEKS ENDED APRIL 3, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Net loss: | ||||||||
| As reported | $ | (2,630 | ) | $ | (2,962 | ) | ||
| Stock-based compensation, net of related tax effects | (664 | ) | (303 | ) | ||||
| Pro forma | $ | (3,294 | ) | $ | (3,265 | ) | ||
| Net loss per common share - basic: | ||||||||
| As reported | $ | (0.19 | ) | $ | (0.22 | ) | ||
| Pro forma | (0.24 | ) | (0.25 | ) | ||||
| Net loss per common share - assuming dilution: | ||||||||
| As reported | $ | (0.19 | ) | $ | (0.22 | ) | ||
| Pro forma | (0.24 | ) | (0.25 | ) | ||||
| 5. | Goodwill and Other Intangible Assets |
The Company accounts for its goodwill and other intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. The Company has determined that its trademarks are indefinite-lived intangible assets.
In accordance with SFAS No. 142, the Company will continue to amortize its finite-lived intangible assets, which currently consist of non-compete agreements. Amortization of non-compete agreements was $35 during the first quarters of both 2004 and 2005. Expected annual amortization expense for non-compete agreements recorded as of January 1, 2005 is as follows:
| 2005 | $ | 140 | |||
| 2006 | 140 | ||||
| 2007 | 140 | ||||
| 2008 | 140 | ||||
| 2009 | 96 | ||||
| Thereafter | — | ||||
| $ | 656 | ||||
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The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events.
Included in Goodwill and Trademarks and Other Intangibles on the Company’s condensed consolidated balance sheets as of April 2, 2005 and April 3, 2004, are the following acquired intangible assets for the wholesale segment (net of accumulated amortization). Accumulated amortization of non-compete agreements was $2,084, $2,049 and $1,944 as of April 2, 2005, January 1, 2005 and April 3, 2004, respectively.
| APRIL 2, 2005 | JANUARY 1, 2005 | APRIL 3, 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Goodwill | $ | 37,074 | $ | 37,074 | $ | 37,074 | |||||
| Trademarks | 13,761 | 13,761 | 13,761 | ||||||||
| Non-compete agreements | 621 | 656 | 761 | ||||||||
| $ | 51,456 | $ | 51,491 | $ | 51,596 | ||||||
| 6. | Segments of the Company and Related Information |
The Company has two reportable segments – Wholesale and Retail. Although the product produced and sold for each segment is similar, the type of customer for the product and the method used to distribute the product are different. The segmentation of these operations also reflects how the Company’s chief executive officer (the CEO) currently reviews the results of these operations. Operating income (loss) from continuing operations for each operating segment includes specifically identifiable operating costs such as cost of sales and selling expenses. General and administrative expenses are generally not allocated to specific operating segments and are therefore reflected in the corporate category. Other components of the statement of operations, which are classified below operating income (loss) from continuing operations, are also not allocated by segment. In addition, the Company does not account for or report assets, capital expenditures or depreciation and amortization by segment. All transactions between operating segments have been eliminated and are not included in the following table.
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| (In thousands) | 13 WEEKS | 13 WEEKS | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ENDED | ENDED | ||||||||||||||
| APRIL 2, 2005 | % of Net Sales | APRIL 3, 2004 | % of Net Sales | ||||||||||||
| WHOLESALE: | |||||||||||||||
| Village sales | $ | 10,194 | 56 | % | $ | 9,733 | 52 | % | |||||||
| Giftware sales | 8,081 | 44 | 9,014 | 48 | |||||||||||
| Net sales | $ | 18,275 | 100 | $ | 18,747 | 100 | |||||||||
| Gross Margin | 8,032 | 44 | 9,643 | 51 | |||||||||||
| Selling expenses | 3,158 | 17 | 2,980 | 16 | |||||||||||
| Operating income from continuing operations | 4,874 | 27 | 6,663 | 36 | |||||||||||
| RETAIL: | |||||||||||||||
| Net sales | $ | 1,765 | 100 | $ | 1,497 | 100 | |||||||||
| Gross Margin | 874 | 50 | 901 | 60 | |||||||||||
| Selling expenses | 2,057 | 117 | 1,795 | 120 | |||||||||||
| Operating loss from continuing operations | (1,183 | ) | (67 | ) | (894 | ) | (60 | ) | |||||||
| CORPORATE - | |||||||||||||||
| Unallocated general and administrative expenses | $ | (7,856 | ) | $ | (7,860 | ) | |||||||||
| CONSOLIDATED: | |||||||||||||||