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UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

ELFRIEDE GLANCY, on behalf of herself and ) CV ()I-V o l ds/(4)all others similarly situated, )

) CLASS ACTION COMPLAINT FORPlaintiff, ) VIOLATION OF THE FEDERAL

VS. ) SECURITIES LAWS)

DEPARTMENT 56, INC. and SUSAN ENGEL, )) JURY TRIAL DEMANDED

Defendants. )))

Plaintiff, by her attorneys, for her Class Action Complaint alleges the following

upon personal knowledge as to herself and her own acts, and upon information and

belief based upon the investigation of plaintiffs attorneys as to all other matters. Such

investigation included a thorough review and analysis of public statements, documents

publicly-filed on behalf of Department 56, Inc. ("Department 56" or the "Company"),

press releases, news articles and analyst reports.

SUMMARY OF THE ACTION

1. This is a securities class action brought on behalf of public

investors who purchased the common stock of Department 56 between February 24,

1999 and April 26, 2000 (the "Class Period"). This action seek remedies under the

Securities Exchange Act of 1934 (the "Exchange Act").

2. Department 56 designs, imports and distributes collectibles and

other giftware products sold through gift, home accessory and specialty retailers.

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3. On or about January 1, 1999, Department 56 implemented a new

enterprise-wide management information system. Defendants immediately learned,

however, that the new system was a complete failure, resulting in massive computer

failures in the taking of, processing of, shipping of and billing of orders. Defendants

only recently publicly-admitted the full extent of widespread pervasive failure of the

system throughout 1999 and 2000 when they announced a lawsuit against Arthur

Andersen Worldwide, the audit and consulting company that recommended, designed

and implemented the failed system. Throughout the Class Period, however,

defendants repeatedly disseminated financial results on behalf of the Company without

fully revealing that Department 56's enterprise-wide management information system

relating to all aspects of the Company — order taking, order processing, shipping and

billing — was in such utter disarray that defendants had no basis for disseminating the

financial results they did. In fact, the Company was forced on April 26, 2000, the last

day of the Class Period, to announce that Department 56 was experiencing a massive

accounts receivable problem as a result of the new computer system and had placed a

"high level" of orders on hold for customers with overdue bills. The Company also

announced that it was required to add $12 million to its bad debt and claims reserves

because it had already exhausted the $18 million previously reserved.

4. So shocking was the news to the investing market that Department

56's stock fell 40%, and traded at nearly eight times its three month daily average.

JURISDICTION AND VENUE

5. This action arises under §10(b) of the Exchange Act and Rule

10b-5 promulgated thereunder (17 C.F.R. §240.10b-5), §20(A) of the Exchange Act.

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The Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§§1331 and 1337, §27 of the Securities Exchange Act of 1934 (15 U.S.C. §78aa).

6. Venue is proper in this district pursuant to §27 of the Exchange Act.

At all times herein mentioned, Department 56's principal place of business was in this

district at Eden Prairie, MN, and the acts alleged herein, including the dissemination of

materially false and misleading information, occurred in this District.

7. In connection with the wrongs alleged herein, defendants directly or

indirectly used the instrumentalities of interstate commerce, including the United States

mails, interstate wire and telephone facilities, and the facilities of the national securities

markets.

THE PARTIES

8. Plaintiff Elfriede Glancy purchased shares of Department 56

common stock during the Class Period and were damaged thereby, as evidenced by

the attached Shareholder Certificate.

9. Defendant Department 56 designs, imports and distributes

collectibles and other giftware products sold through gift, home accessory and specialty

retailers. The Company's holiday and home decorative products are marketed under

the Original Snow Village Collection, the Heritage Village Collection and Snowbabies

names. Department 56's stock trades on the New York Stock Exchange under the

ticker symbol "DFS."

10. Defendant Susan Engel ("Engel") was at all times relevant hereto,

Department 56's Chief Executive Officer. Defendant Engel was quoted in and/or

responsible for the preparation, approval or release of each statement plaintiff alleges

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was false and misleading, including all press releases and regulatory filings. In

addition, by virtue of her position as Chief Executive Officer, Engel was under a

continuing duty to direct and control the operations of Department 56, to exercise due

care and diligence in those operations, and to oversee and review all corporate

operations, including the filing of documents with the SEC and the making of public

statements.

11. By virtue of her position as officers and/or directors of the

Company, defendant Engel had the authority and ability to and, in fact, controlled the

contents of the Company's annual and quarterly reports filed with the SEC and press

releases. Further, the actions of the defendant Engel during the Class Period caused

the material misstatements of the Company's financial condition and results alleged

herein. Defendant Engel was aware of the contents of the Company's publicly

disseminated reports and press releases alleged herein to be misleading prior to their

issuance and had the ability and opportunity to prevent their issuance or cause them to

be corrected, but failed to do so.

12. As officers, directors and/or controlling persons of a publicly-held

company whose common stock is registered with the SEC, traded on the New York

Stock Exchange and governed by provisions of the Exchange Act, defendants had a

duty to promptly disseminate accurate and truthful information with respect to the

Company's operations, business, markets, management, earnings and present and

future business prospects, to correct any previously issued statements from any source

that had become untrue, and to disclose any trends that would materially affect

earnings and the present and future financial operating results of Department 56, so

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that the market price of the Company's publicly-traded securities would be based upon

truthful and accurate information.

13. It is appropriate to treat defendants as a group for pleading

purposes under the federal securities laws and the Federal Rules of Civil Procedure

and to presume that the false and misleading information complained of herein was

disseminated through the collective actions of all defendants. Defendants were

involved in the drafting, producing, reviewing and/or disseminating of the false and

misleading information detailed herein, knew or recklessly disregarded that such

materially misleading statements were being issued by the Company and/or approved

or ratified these statements in violation of the federal securities laws. Defendants' false

and misleading statements and omissions of fact consequently had the effect of, both

on their own and in the aggregate, artificially inflating the price of the common stock of

Department 56 during the Class Period.

STATEMENTS IN ANALYST REPORTS

14. At least three securities firms and their analysts followed

Department 56 throughout the Class Period, including Goldman, Sachs & Co., ABN

Amro and William Blair & Co. Defendants are responsible and liable for materially false

and misleading representations made in the analyst reports disseminated throughout

the Class Period by these securities firms, some of which are described herein,

because those statements were either directly attributed to defendants or adopted

and/or ratified by defendants.

15. At all times relevant to this action, defendants directly met or

communicated with analysts and provided detailed and direct guidance to them

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regarding Department 56's business condition and future prospects. In addition,

defendants expressed comfort with the estimates contained in those analyst reports.

Defendants reaffirmed the expectations stated by those analysts, thus entangling

themselves in the contents of the recommendations, opinions, estimates and reports.

CLASS ACTION ALLEGATIONS

16. Plaintiff brings this action as a class action pursuant to Rules 23(a)

and 23(b)(3) of the Federal Rules of Civil Procedure, individually and on behalf of all

other persons or entities who purchased or acquired Department 56 stock during the

Class Period and were damaged thereby, excluding the defendants herein, their

affiliates and any officers or directors of Department 56 or its affiliates, and any

members of immediate families and their heirs, successors and assigns (the "Class").

17. The Class is so numerous that joinder of all the members of the

Class is impracticable. Plaintiff believes there are hundreds of record holders of the

Company's common stock located throughout the United States.

18. Plaintiff's claims are typical of the claims of absent Class members.

Members of the Class have sustained damages arising out of defendants' wrongful

conduct in violation of the federal securities laws in the same way as plaintiff sustained

damages from the unlawful conduct.

19. Plaintiff will fairly and adequately protect the interests of the Class.

Plaintiff has retained counsel competent and experienced in class and securities

litigation.

20. A class action is superior to other available methods for the fair and

efficient adjudication of the controversy. The Class is numerous and geographically

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dispersed. It would be impracticable for each member of the Class to bring a separate

action. The individual damages of any member of the Class may be relatively small

when measured against the potential costs of bringing this action, and thus make the

expense and burden of this litigation unjustifiable for individual actions. In this class

action, the Court can determine the rights of all members of the Class with judicial

economy. Plaintiff does not anticipate any difficulty in the managing this suit as a class

action.

21. Common questions of law and fact exist as to all members of the

Class and predominate over any questions affecting solely individual members of the

Class. These questions include, but are not limited to, the following;

a. whether defendants' conduct as alleged herein violated the

federal securities laws;

b. whether the SEC filings, press releases and statements

disseminated to the investing public during the Class Period misrepresented

Department 56's financial condition and results;

c. whether defendants acted knowingly or recklessly in omitting

and/or misrepresenting material facts;

d. whether the market price of Department 56 common stock

during the Class Period was artificially inflated; and

e. whether members of the Class have been damaged and, if

so, the proper measure thereof.

SUBSTANTIVE ALLEGATIONS

22. On February 24, 1999, the first day of the Class Period, defendants

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disseminated Department 56's financial results for the twelve months ended January 2,

1999. The accompanying press release stated in pertinent part:

DEPARTMENT 66 REPORTS RECORD EARNINGS PER SHARE FOR 1998SOLID OUTLOOK FOR 1999

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)—Feb. 24,1999--Department 56, Inc. (NYSE: DFS) today reported increasedrevenue and earnings for the twelve months ended January 2, 1999and record earnings per share for the year.

For the year, revenue was $243.4 million, 11 percenthigher than the $219.5 million reported in the prior year. Net incomewas $46.5 million or 13 percent greater than the $41.0 million reportedfor 1997, excluding the gain on sale of aircraft in 1997. The companyalso reported record diluted income per share of $2.45, 25 percenthigher than the $1.96 reported for 1997, excluding the gain on sale ofaircraft.

Eamings per share benefitted not only from gains inprofitability, but also from the Company's ongoing share repurchaseprogram. During 1998, the company returned $58 million toshareholders by repurchasing 1.7 million shares at an average price of$35 per share.

For the quarter, revenue was $52.9 million, compared to$53.6 million in the prior year. The slight decline in fourth quarter saleswas expected given the planned acceleration of shipments earlier in theyear. Net income for the quarter was $6.9 million or $0.38 per shareassuming dilution, compared to $6.8 million or $0.34 per share in theprior year, excluding the gain on sale of aircraft in last year's fourthquarter. This represents the sixth quarter in a row Department 56 hasreported growth in earnings per share.

"1998 was an excellent year for Department 56," saidSusan Engel, Chairwoman and CEO of the company. 'We reportedstrong revenues and earnings growth, and record earnings per share,as retailers and consumers alike continued to respond strongly acrossour collectible and giftware product lines."

"Based on orders received to date," Ms. Engel said "weexpect that the increase in our full first quarter orders will be consistent

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with achieving our goal of seven to nine percent sales growth andmid-teen earnings per share growth in 1999. Our confidence isunderscored by recent dealer feedback indicating that retail sales forour collectible products grew in 1998 and inventory turnover improved,"Ms. Engel said. "Dealers cited new collectors, attractive new products,continued collector interest and more marketing support as key reasonsfor their growth, and they expect retail sales to increase again in 1999."

23. The February 24, 1999 press release was, however, false and

misleading for failing to disclose that defendants had already discovered that the new

enterprise-wide management information system, implemented two months before, was

a failure with respect to all material aspects of Department 56's business, including

order taking, order processing, shipping and billing.

24. On April 28, 1999, defendants disseminated Department 56's

financial results for the Company's first fiscal quarter. The accompanying press release

stated in pertinent part:

DEPARTMENT 56 ANNOUNCES FIRST QUARTER ORDERSINCREASED BY NINE PERCENT

EDEN PRAIRIE, Minn.—(BUSINESS WIRE)--April 28, 1999—

Solid Outlook for 1999

Department 56 (NYSE: DFS) today reported increased•orders for the first quarter ended April 3, 1999, of $188.6 million, up

nine percent from the $173.7 million reported for the first quarter of lastyear.

Village orders increased by nine percent and Generalgiftware orders were up by seven percent in the first quarter reflectingboth increased demand for Department 56's ongoing products and apositive reception to the new Village line launched in January.

"The strong demand for our product bolsters our optimismfor achieving our 1999 goals of seven to nine percent sales growth andmid-teens earnings per share growth," said Susan Engel, Chairwoman

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and Chief Executive Officer. "While shipping began slowly, we did shipSpring merchandise on a timely basis and the delay in first quartershipment of Christmas product should have minimal impact on ourannual results." As previously noted, implementation of the company'snew enterprise-wide system led to a change in the timing of the receiptof orders from customers and product shipments.

Revenue was $33.6 million compared with $49.0 million inthe first quarter of 1998 leaving an order backlog at the end of the firstquarter of $156.8 million compared with $126.1 at the same time a yearago. Shipments to customers have accelerated since the end of thequarter and at April 28, sales for the year to date period wereapproximately $57 million compared to $61 million in the prior yearperiod. "We are pleased that we have been able to close the gap withlast year's sales levels from $15 million at the end of the first quarter to$4 million now," said Ms. Engel. 'We hope to eliminate that gap by theend of the second quarter."

Reflecting lower first quarter shipments, net income for thequarter was $3.3 million or $0.18 per share assuming dilution,compared to $9.2 million or $0.47 per share in the prior year.

25. The April 28, 1999 press release was, however, false and

misleading for failing to disclose that defendants had already discovered that the new

enterprise-wide management information system, implemented four months before,

was a failure with respect to all material aspects of Department 56's business, including

order taking, order processing, shipping and billing.

26. On July 27, 1999, defendants disseminated Department 56's

financial results for the Company's second fiscal quarter. The accompanying press

release stated in pertinent part:

DEPARTMENT 56 ANNOUNCES QUARTERLY RESULTS

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)—July 27,1999—Department 56 (NYSE: DFS) today reported increased ordersand strong sales and earnings for the second quarter ended July 3,1999.

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Through the second quarter of 1999, customer ordersincreased three percent to $230 million compared to $224 million for thesame period of 1998. Customer orders for Village Series productsincreased six percent through the second quarter of 1999 whilecustomer orders entered for General Giftware products decreased fourpercent.

Earnings for the quarter reached a record level $18.7million, or $1.04 per share assuming dilution, compared to $15.4 millionor $0.80 in the prior year's second quarter. Revenues for the quarterwere $82.7 million or 18% higher than the $69.9 million reported in thecomparable quarter of 1998. The strength of the quarterly results wasdue in part to shipments originally scheduled for the first quarter notbeing shipped until the second quarter because of earlier difficultiesfaced in the implementation of the company's new enterprise-widecomputer systems.

Earnings for the first half of the year were $22.1 million or$1.22 per share assuming dilution, compared to $24.6 million or $1.26per share in the prior year. Revenues for the year's first half were$116.4 million compared to $118.9 million in the first half of 1998.

Sales for the year-to-date period ended July 27, 1999 werethree percent higher than sales through the comparable period endedJuly 27, 1998.

In making the announcement, Susan Engel, Chairwomanand Chief Executive Officer, said 'We are encouraged by the strongdemand for our core Village product including our new Seasons Bayand Monopoly lines, the company's first new continuity gift lines in fiveyears. Looking to the balance of the year, we expect full year 1999sales and earnings per share to be higher than a year ago."

27. The July 27, 1999 press release was, however, false and

misleading for failing to disclose that the Company's new enterprise-wide management

information system was a complete failure with respect to all material aspects of

Department 56's business, including order taking, order processing, shipping and

billing.

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28. On October 26, 1999, defendants disseminated Department 56's

financial results for the Company's third fiscal quarter. The accompanying press

release stated in pertinent part:

DEPARTMENT 56 ANNOUNCES THIRD QUARTER RESULTS

EDEN PRAIRIE, Minn.—(BUSINESS WIRE)—Oct. 26, 1999--

Sales and Eamings Outlook is Moderated

Department 56 (NYSE: DFS) today reported results for thethird quarter ended October 2, 1999.

Revenues for the third quarter were $75.1 million,compared to $71.5 million reported for the third quarter of 1998. For thefirst nine months, revenues were $191.5 million compared to $190.5million for the first nine months of 1998. Although greater than a yearago, sales for the third quarter were negatively impacted by a rate ofproduct returns higher than in recent years.

Earnings for the quarter were $15.0 million, or $.87 pershare assuming dilution, compared to $15.0 million or $0.81 in the prioryear's third quarter. For the first nine months of 1999, earnings were$37.0 million or $2.08 per share assuming dilution, compared to $39.6million or $2.06 per share in the prior year period.

Total customer orders through the first nine monthsincreased three percent to $269.9 million compared to $260.8 million forthe same period of 1998. Customer orders for Village Series productsincreased six percent through the third quarter of 1999 while customerorders entered for General Giftware products decreased one percent.However, due primarily to a higher customer return rate, 1999 full yearrevenues are not likely to meet management expectations. In makingthe announcement, Susan Engel, Chairwoman and Chief ExecutiveOfficer, said, "The quarter's results as well as our outlook for 1999continue to be hampered by this year's implementation of a newenterprise-wide computer system." Ms. Engel noted that systemproblems encountered throughout the year have been a source offrustration for the company and its retailers, whose rate of productreturns had tapered down over the prior three years. "As part of ourefforts to address these issues, in September we appointed an

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experienced Chief Information Officer to direct all the systems needs ofour business and we continued to build additional resources into our ITteam."

Looking to the balance of 1999, Ms. Engel said, 'Wecurrently expect full year sales to slightly exceed 1998 results, andearnings per share to approximate those reported for last year." Shealso noted that full year net margins will be under pressure because ofhigher than normal operating expense and costs related to certaincorporate activities. "Orders for our products, especially our Januaryand mid-year introductions, have been encouraging, as we continue toreap our investments in marketing," said Ms. Engel. 'While we stronglybelieve that Department 56 will continue to benefit from our enhancedmarketing efforts in 2000, we are cautious about next year and areworking for sales growth of three to five percent."

29. The October 26, 1999 press release was, however, false and

misleading for failing to disclose that the Company's new enterprise-wide management

information system was a complete failure with respect to all material aspects of

Department 56's business, including order taking, order processing, shipping and

billing.

30. On December 22, 1999 1 defendants disseminated a press release

touting the Company's success with the numerous changes recently made to

Department 56's business processes and systems, which press release stated in

pertinent part:

DEPARTMENT 56 PROVIDES UPDATE ON PROGRESS OFEDP SYSTEM IMPLEMENTATION

EDEN PRAIRIE, MN—(BUSINESS WIRE)—December 22,1999—Department 56 (NYSE: DFS) today commented that during thepast several months the company has successfully instituted numerouschanges to its business processes and systems in order to addressproblems encountered with the implementation of a new EDP system inJanuary of this year. After undertaking a robust testing cycle, thecompany is confident that its systems are prepared to support the

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selling process during the critical first quarter when the majority ofcustomer orders are received.

Chairwoman and Chief Executive Officer Susan Engel said:"Our primary focus with respect to system and operational changes hasbeen to ensure that all aspects of our business that impact ourcustomers are in good working order by January 1, 2000. Criticalcustomer documentation, including order acknowledgements, invoicesand shipping documents are now being produced in a timely andaccurate manner."

During the fourth quarter to date, claims and accountsreceivable collection are tracking in line with managementexpectations. Claims for returned product, while continuing at rateshigher than last year, have moderated during the fourth quarter. Basedupon analysis of the claims processed to-date, the company believesthat the primary reason for the increase in retumed product is due toduplicate and overage shipments that occurred earlier in the year.Management is confident that a combination of business processand system changes has addressed the majority of the shipmentaccuracy problems. As previously disclosed, collection of accountsreceivable continues to trail the previous year by a significant amount,primarily as a result of delayed invoicing and customer documentationissues that occurred earlier during the year. The company has recentlymade arrangements to provide account reconciliation services to thosedealers that need assistance with the matching of orders, invoices andpacking lists.

"As we have indicated in recent months, we see 2000 as arebuilding year in terms of our dealer relationships," said Ms. Engel."One of the key strengths of Department 56 has been, and will continueto be, the tremendous support we receive from our dealers.Accordingly, we want to reward them for supporting us during this pastyears' system and operational difficulties. In initiating a special one-timediscount program for certain product categories during the first andsecond quarters, we are offering to returning accounts a tangibledemonstration of our commitment to the success of our dealers."

Ms. Engel continued: 'We are excited about our newproduct introductions for January and increasingly confident in ourability to execute. I am encouraged by the opportunities we have forsales growth and look forward to profitability increases in 2001 whensystems implementation and distribution consolidation costs are behind

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us." As indicated in late October, Department 56 is targeting FY2000net sales growth of 3%-5% over FY1999 levels.

31. The December 22, 1999 press release was, however, false and

misleading for failing to disclose that the Company's new enterprise-wide management

information system was a complete failure with respect to all material aspects of

Department 56's business, including order taking, order processing, shipping and

billing.

32. On February 23, 2000, defendants disseminated Department 56's

financial results for the Company's fourth fiscal quarter and twelve months ended

January 1, 2000. The accompanying press release stated in pertinent part:

DEPARTMENT 56 REPORTS 1999 RESULTS AND YTD ORDERS

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)--Feb. 23,2000—Department 56 (NYSE:DFS) today reported results for the fourthquarter and twelve months ended January 1, 2000.

For the year, revenues increased one percent to $245.9million compared to $243.4 million in the prior year. Net income was$42.7 million or $2.45 per share assuming dilution, compared to $46.5million or $2.45 per share in the prior year. For the fourth quarter,revenues were $54.4 million, compared to $52.9 million in the prioryear's fourth quarter. Net income for the quarter was $5.6 million or$0.35 per share assuming dilution, compared to $6.9 million or $0.38per share in the prior year.

"1999 was a challenging year for Department 56," saidSusan Engel, Chairwoman and Chief Executive Officer. "Dealers andconsumers continued to respond strongly to our creative collectible andgiftware lines, but results were impacted by the difficult implementationof our new enterprise-wide computer system."

Fourth quarter and fiscal year 1999 earnings per sharewere impacted by a decline in net margins due to additional reserves oncustomer balances and higher operating expenses associated with theCompany's implementation of its new computer system and the one

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time write-off of certain acquisition related investigatory costs and costsassociated with its distribution facility consolidation, as reportedpreviously. This was offset by the Company's ongoing share repurchaseprogram. During 1999, the Company repurchased 2.9 million shares ata total cost of $70 million, or an average price of $24 per share.

Fiscal 2000 Outlook

"We continue to see this year as a rebuilding year with ourdealers," said Ms. Engel. Dealer orders through February 19 were downapproximately 8% against the comparable period in the prior year.Year-to-date Village orders were approximately 10% behind thecomparable period in the prior year, while General Giftware orders weredown approximately 3%. The Company stated that excluding the impactof the special one-time Customer Appreciation Discount that it hasoffered on early orders for most product categories, as announced inDecember 1999, dealer orders would be down only approximately 4%.

Commenting on these initial results, Ms. Engel added:"While we are disappointed with the pace of our current orders, many ofour customers have expressed confidence that we will be able to ship ina more timely fashion, enabling them to reorder more frequently. Ourown successful initiative to, for the first time, have actual samples for allof our Village lines at the early gift shows, coupled with earlier productavailability, may support or reinforce this belief of our dealers. Thispotential change in our historical order pattern, combined with otheranalyses, suggests that the gap in our order trends may close as weprogress through the year. It is important to keep in mind that, as historyhas shown, where we are in terms of orders at this point in the year isnot necessarily indicative of where we will end up at the end of the firstquarter or even the year."

The Company expects certain costs that impacted its 1999results to continue in fiscal 2000, primarily related to the ongoinginformation systems implementation and distribution facilityconsolidation costs. In addition, continued strategic investments in theCompany's infrastructure, including business-to-business e-commerceinitiatives, are expected to result in higher costs in fiscal 2000 in orderto position greater operational efficiencies and merchandisingeffectiveness for the Company and its dealers in the future. As a result,the Company believes that fiscal 2000 earnings per share will be belowthat of fiscal 1999 results, excluding the impact of its stock repurchaseinitiatives, as discussed below.

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"I am pleased to report that our systems have performedwell during the gift shows and that our shipping and invoicing operationsare back to normal. Feedback from our dealers suggests that they viewour current product offering as one of the strongest ever," Ms. Engelcontinued. 'We continue to be excited about the quality and breadth ofour product development capabilities."

"We maintain our belief that investment in our infrastructureis necessary to sustain our industry leadership, maximize long-termgrowth and create value for our shareholders. Therefore, we remaincommitted to investing in programs that insure the success of ourcurrent dealer base. At the same time, we will continue to look towardother avenues that will allow us to leverage our current skills andachieve our growth objectives."

33. The February 23, 2000 press release was, however, false and

misleading for failing to disclose that the Company's new enterprise-wide management

information system was a complete failure with respect to all material aspects of

Department 56's business, including order taking, order processing, shipping and

billing.

34. On April 26, 2000, defendants disseminated Department 56's

financial results for the Company's first fiscal quarter and finally disclosed that

Department 56 was experiencing a massive accounts receivable problem as a result of

the new computer system and had placed a "high level" of orders on hold for customers

with overdue bills. The Company also announced that it was required to add $12

million to its bad debt and claims reserves because it had already exhausted the $18

million previously reserved. The accompanying press release stated in pertinent part:

DEPARTMENT 56 REPORTS FIRST QUARTER 2000 RESULTS

EDEN PRAIRIE, Minn.—(BUSINESS WIRE)—April 26,2000—Department 56 (NYSE: DFS) today reported revenues of $40.4million for the quarter ended April 1, 2000, compared with $33.6 million

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for the same period in the prior year. The increased revenues reflectedunusually low shipments in the first quarter of 1999, and were reducedby additional reserves for claims in the current year first quarter, asdiscussed below. "While our operations and systems continue toperform well in 2000, the results for the first quarter suffered from theimpact that our systems problems of last year have had on ourcollections process," said Susan Engel, Chairwoman and ChiefExecutive Officer.

Reflecting the additional reserve accruals discussed below,the first quarter resulted in a net loss of $3.2 million or $0.21 per shareassuming dilution, compared to net income of $3.3 million or $0.18 pershare in the prior year. First quarter 2000 profitability was also impactedby the expected higher costs related to the ongoing systemsimplementation and distribution facility consolidation, as previouslyreported.

Fiscal 2000 Outlook

The Company's overdue accounts receivable, particularlythose from 1999, remain higher than had been initially expected. Theseoverdue accounts receivable balances are primarily a result of theproblems the Company experienced during the implementation of itsnew enterprise-wide computer system beginning in early 1999. Invoicingand shipping problems, especially during the first half of 1999, led tosubstantially higher than normal receivables at year-end that carriedover into 2000 as customers have had difficulty in reconciling theirinvoices and shipments.

At the end of 1999, the Company had overdue accountsreceivable in excess of prior years' levels; therefore the Companyincreased its bad debt and claims reserves in the fourth quarter of 1999by $4 million. Throughout the first quarter of 2000, the Company wasable to reduce the overdue receivables in line with its expectationsestablished at the beginning of the year. However, based upon recenttrends and the current level of orders on hold due to overduereceivables, the Company has now determined that it is necessary tofurther increase its bad debt and claims reserves by $12 million. Thesereserve accruals have been made through pretax charges ofapproximately $6.5 million to net sales and $5.5 million to expense,both items reflected in the first quarter 2000 results.

As noted above, the overdue receivables have led to a highlevel of current-year orders being placed on hold. "We intend tocontinue to vigorously pursue the collection of these receivables over

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the next several months to put this problem behind us. We will workwith our dealers to accelerate this resolution in order to release ordersbefore their busy selling season begins; however, we have already andwill terminate some long standing dealer relationships if our differencescannot be resolved quickly and fairly," said Ms. Engel.

Consequently, as a result of the high level of orders on holdand the charges for overdue receivables, the Company expects aweakening of its sales for fiscal 2000. In recognition of the softyear-to-date order rate and the potential for reduced sales, theCompany has identified $3-4 million in current year SG&A reductions(annualized $5 million), which it is in the process of implementing.

35. On March 2, 2001, after the close of the Class Period, defendants

publicly-admitted the full extent of the problems suffered by Department 56 as a result

of the failed management information system. The magnitude and pervasiveness of

the impact of the problems remained, for the most part, concealed throughout the Class

Period. As stated in pertinent part in the Company's press release:

DEPARTMENT 56 SUES ARTHUR ANDERSEN WORLDWIDEOVER FAILED SYSTEMS PROJECT

EDEN PRAIRIE, Minn.—(BUSINESS WIRE)—March 2,2001—Department 56 (NYSE:DFS), a leading collectibles and specialtygiftware maker, announced that it has filed a lawsuit in a Baltimore,Maryland court against Arthur Andersen Worldwide. According toSusan Engel, Chairwoman and Chief Executive Officer of Department56, the lawsuit, filed yesterday, seeks damages stemming from theaudit and consulting firm's bungling of a complex system projectthat crippled Department 56's ability to fulfill nearly everymission-critical operation in its business.

As a result of the failed systems project, Department 56suffered significant damages, including much higher system costs thanoriginally projected by Arthur Andersen; substantial out-of-pocketexpenses to correct operating mishaps driven by the system; reducedsales stemming from customer frustration and basic system errors; andextraordinary earnings charges from accounts receivable andcustomer claims. The company also includes in its basis for damagesthe loss in its market capitalization, which has declined substantially

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since the time when Arthur Andersen recommended that the companyactivate the new system, and the frustration of its ability to proceed withits business expansion strategy.

In January 1999, after proceeding with ArthurAndersen's plan to replace Department 56's enterprise-wideoperating systems, the company activated the new system only tofind that it did not work. Two years of capital expenditures andthousands of man-hours in systems preparation were reduced tocomputer failures in taking, processing, shipping and billingorders. The company's focus throughout 1999 dealt with servingoperations and customer relationships that were severelyimpacted by the system breakdown. In 2000, the company continuedto suffer the impact of Arthur Andersen's systems design andimplementation as customers were hesitant to order new goods and thecompany had a huge account receivables carryover from 1999 resultingfrom the inability of thousands of customers to reconcile receipts andinvoices, according to Ms. Engel.

FALSE AND MISLEADING INFORMATIONUNDISCLOSED DURING THE CLASS PERIOD

36. During the Class Period, defendants materially misled the investing

public, thereby inflating the price of Department 56 stock, by publicly issuing false and

misleading statements and omitting material facts necessary to make defendants'

statements, as set forth herein, truthful. Said statements and omissions were materially

false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about the Company. Specifically, throughout the Class Period

defendants failed to disclose that the Company's new enterprise-wide management

information system was a complete failure with respect to all material aspects of

Department 56's business, including order taking, order processing, shipping and

billing.

37. During the Class Period, defendant Engel occupied a position that

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made her privy to non-public information conceming Department 56. Because of this

access, she knew that the adverse facts specified herein were concealed and that the

public statements made by the Company were false.

38. The market for Department 56's securities was open, well-

developed and efficient at all relevant times. As a result of the foregoing materially

false and misleading statements and failures to disclose the full truth about Department

56 and its business, earnings momentum and future prospects, Department 56's

common stock traded at artificially inflated prices during the entire Class Period,

reaching a Class Period high of approximately $32 per share, until the time the adverse

information described above was finally provided to and digested by the securities

markets. Plaintiff and other members of the Class purchased or otherwise acquired

Department 56 stock relying upon the integrity of the market price of Department 56

stock and market information relating to Department 56, or in the alternative, upon

defendants' false and misleading statements, and in ignorance of the adverse,

undisclosed information known to defendants, and have been damaged thereby.

DEFENDANTS' SCIENTER

39. Defendants' false representations and material omissions during

the Class Period were made with scienter in that defendants (1) knew or recklessly

disregarded that the public documents and statements issued or disseminated by

Department 56 were materially false and misleading, as described above; (2) knew or

were reckless in not knowing that the false financial results would be issued or

disseminated to the investing public; and (3) knowingly and substantially participated in

the preparation and/or issuance or dissemination of such statements or documents

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during the Class Period.

40. During the Class Period, defendant Engel, as a senior executive

and/or director of Department 56, was privy to confidential and proprietary information

concerning Department 56, its operations, its finances, its financial condition, and its

present and future business prospects, including that the Company's new enterprise-

wide management information system was failing and that there was no reasonable

basis for the financial results reported throughout the Class Period.

41. Defendant Engel was provided with copies of Department 56's

management reports, press releases and SEC filings alleged herein to be misleading

prior to, or shortly after issuance. Defendant Engel, moreover, had the ability and

opportunity to prevent issuance of the materially misleading press releases and/or SEC

filings, or cause them to be corrected.

42. During the Class Period, defendants directly and indirectly engaged

and participated in a continuous course of conduct to misrepresent the results of

Department 56's operations and to conceal adverse material information regarding the

Company's finances, financial condition and results of operations, as specified herein.

Defendants employed devices, schemes and artifices to defraud and engaged in acts,

practices and a course of conduct, as alleged herein, in an effort to increase and

maintain an artificially high market price for the Company's common stock. Defendants'

wrongful conduct included the formulation, making and/or participation in the making of

untrue statements of material fact and the omission of material facts necessary in order

to make the statements made, in light of the circumstances under which they were

made, not misleading, which operated as a fraud and deceit upon plaintiff and the

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•, • ,

Class.

43. Defendants are liable, jointly and severally, as direct participants in

the wrongs complained of herein. Defendants had a duty to promptly disseminate

accurate and truthful information with respect to Department 56's operations, financial

condition and future business prospects or to cause and direct that such information be

disseminated so that the market price of Department 56 stock would be based on

truthful and accurate information.

44. As officers, directors and/or controlling persons of a publicly-held

company whose common stock is registered with the SEC under the Exchange Act,

traded on the NYSE and governed by provisions of the Exchange Act, defendants had

a duty to promptly disseminate accurate and truthful information with respect to the

Company's operations, business, markets, management, earnings and present and

future business prospects; to correct any previously issued statements from any source

that had become untrue; and to disclose any trends that would materially affect

earnings and the present and future financial operating results of Department 56, so

that the market price of the Company's publicly traded securities would be based upon

truthful and accurate information.

45. Since at least January 1999, defendant Engel was aware of the

failure of the Company's enterprise-wide management information system and/or

recklessly disregarded her obligation to implement an adequate system to ensure that

the Company reported financial results which were based in fact. The representations

made by defendants in Department 56's financial statements and in other financial

disclosures to the public were the representations of Department 56's management.

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MOTIVE AND OPPORTUNITY

46. Each defendant had the requisite motive and opportunity to commit

the acts alleged herein. By virtue of their positions with Department 56 and because of

the significant reputational and monetary benefits they stood to gain from a positive

public perception of Department 56, and as a result of artificially inflated stock prices,

defendants had both the motive and opportunity to commit the acts alleged herein.

Defendants knew of Department 56's true financial condition, yet recklessly disregarded

the Company's limitations. The air of accomplishment and success created as a result

of defendants' material misrepresentations made Department 56 more attractive to

potential investors, and served to maintain the Company's stock at artificial levels.

47. Defendant Engel had the motive to commit and participate in the

fraud in order to gain pecuniary benefits.

48. Defendant Engel also had the opportunity to commit and participate

in the fraud. Defendant Engel was a senior officer of Department 56, and controlled

press releases, corporate reports, communications with analysts, public filings, and the

reporting of the Company's financial information. Defendant Engel thus controlled

public dissemination of Department 56's false and misleading statements to the

investing public, as alleged herein, which misleading statements operated to artificially

inflate the price of Department 56's stock during the Class Period.

49. Each defendant also had motive and opportunity to commit and

participate in the fraud through the use of securities analysts. Analysts employed by

securities firms prepare written reports and make recommendations about public

companies such as Department 56. At least three such securities firms and their

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•. • • .

analysts followed Department 56, including Goldman, Sachs & Co., ABN Amro and

William Blair & Co. Certain of Department 56's senior officers, including defendant

Engel, communicated regularly with analysts and institutional investors about

Department 56's business, operations and business results.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

50. The statutory safe harbor relating to forward-looking statements

under certain circumstances does not apply to any of the allegedly false statements

pleaded in this complaint. Many of the statements pleaded herein were not specifically

identified as "forward-looking statements" when made. To the extent there were any

forward looking statements, there were no meaningful cautionary statements identifying

the important then-present factors that could and did cause actual results to differ

materially from those in the purportedly forward-looking statements. Alternatively, to

the extent that the statutory safe harbor does apply to any forward-looking statements

pleaded herein, defendants are liable for those false forward-looking statements

because at the time each of those forward-looking statements was made, the particular

speaker knew that the particular forward-looking statement was false or misleading,

and/or the forward-looking statement was authorized and/or approved by an executive

officer of Department 56 who knew that those statements were false when made.

51. Any warnings contained in the press releases and the financial

statements quoted herein were generic statements of the kind of risks that affect any

products company and misleadingly contained no specific factual disclosure of any

specific problems with Department 56 which placed the Company's profitability and

growth at risk.

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•

COUNT I

VIOLATIONS OF §10(b) OF THE EXCHANGE ACTAND RULE 10b-5 PROMULGATED THEREUNDER

AGAINST ALL DEFENDANTS

52. Plaintiff repeats and realleges each and every allegation contained

in the foregoing paragraphs as if fully set forth herein.

53. At all relevant times, the defendants, individually and in concert,

directly and indirectly, by the use and means of instrumentalities of interstate commerce

and/or of the mails, engaged and participated in a continuous course of conduct

whereby they knowingly and/or recklessly made and/or failed to correct public

representations which were or had become materially false and misleading regarding

Department 56's financial results and operations. This continuous course of conduct

resulted in the defendants causing Department 56 to publish public statements which

they knew, or were reckless in not knowing, were materially false and misleading, in

order to artificially inflate the market price of Department 56 stock and which operated

as a fraud and deceit upon members of the Class.

54. Defendants are liable as direct participants in and as controlling

persons of the wrongs complained of herein. By virtue of her position of control and

authority as an officer and director of Department 56, defendant Engel was able to and

did, directly or indirectly, control the content of the aforesaid statements relating to the

Company, and/or the failure to correct those statements in a timely fashion once she

knew or was reckless in not knowing that those statements were no longer true or

accurate. Defendant Engel caused or controlled the preparation and/or issuance of

public statements and the failure to correct such public statements containing

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•

misstatements and omissions of material facts as alleged herein.

55. Defendant Engel had actual knowledge of the facts making the

material statements false and misleading, or acted with reckless disregard for the truth

in that she failed to ascertain and to disclose such facts, even though the same were

available to her.

56. In ignorance of the adverse facts concerning Department 56's

business operations and earnings, and in reliance on the integrity of the market, plaintiff

and the Class acquired Department 56 common stock at artificially inflated prices and

were damaged thereby.

57. Had plaintiff and the Class known of the materially adverse

information not disclosed by defendants, they would not have purchased Department

56 common stock, or at least not at the inflated prices paid.

58. By virtue of the foregoing, defendants violated §10(b) of the 1934

Act and Rule 10b-5 promulgated thereunder.

COUNT II

VIOLATION OF §20(a) OF THE EXCHANGE ACTAGAINST DEFENDANT ENGEL

59. Plaintiff repeats and realleges each and every allegation contained

in the foregoing paragraphs as if fully set forth herein.

60. This count is asserted against defendant Engel and is based upon

§20(a) of the 1934 Act.

61. Defendant Engel, by virtue of her office, directorship, stock

ownership and specific acts was, at the time of the wrongs alleged herein and as set

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•, . .

forth in Count I, a controlling person of Department 56 within the meaning of §20(a) of

the 1934 Act. Defendant Engel had the power and influence and exercised the same to

cause Department 56 to engage in the illegal conduct and practices complained of

herein by causing the Company to disseminate the false and misleading information

referred to above.

62. Defendant Engels positions made her privy to and provided her

with actual knowledge of the material facts concealed from plaintiff and the Class.

63. By virtue of the conduct alleged in Count I, defendant Engel is

liable for the aforesaid wrongful conduct and are liable to plaintiff and the Class for

damages suffered.

JURY DEMAND

Plaintiff hereby demands a trial by jury.

PRAYER FOR RELIEF

WHEREFORE, plaintiff demands judgment:

1. Determining that the instant action is a proper class action

maintainable under Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory damages and/or rescission as

appropriate against defendants, in favor of plaintiff and all members of the Class for

damages sustained as a result of defendants' wrongdoing;

3. Awarding plaintiff and the Class the costs and

disbursements of this suit, including reasonable attomeys', accountants' and experts'

fees; and

4. Awarding such other and further relief as the Court may

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. . • ,•

deem just and proper, including imposition of a constructive trust upon the proceeds of

defendants' insider trading, pursuant to Fed. R. Civ. Proc., Rules 64 and 65.

Dated: March 5, 2001 REINHARDT & ANDERSON

By I laMark R- -inhaGarrett D. Blanchfie , ., #209855332 Minnesota Street, Suite E-1000St. Paul, MN 55101Phone: (651) 227-9900Fax: (651) 297-6543

Liaison Counsel for Plaintiff

LAW OFFICES OF LIONEL Z. GLANCYLionel Z. GlancyTracy L. Thrower1801 Avenue of the Stars #311Los Angeles, CA 90067Phone: (310) 201-9150Fax: (310) 201-9160

E. Powell MillerMantese Miller and Mantese, P.L.L.C.2855 Coolidge Hwy. Suite 107Troy, MI 48084Phone: (248) 649-1300Fax: (248) 267-9551

ROBERT C. SUSSER, P.C.Robert C. Susser6 East 43rd Street, Suite 1900New York, NY 10017-4609Phone: (212) 808-0298Fax: (212) 949-0966

Brian P. MurrayRabin & Peckel LLP275 Madison Avenue, 34th FloorNew York, NY 10016Phone: (212) 682-1818Fax: (212) 682-1892

Counsel for Plaintiff

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