-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H87m7vb7UZxqV/YTM7Z4RjAGEP7bDfzi4TxgIgzfVJWllL3PvZjvoRQ2SCN35mWY 3jEwnoSFVvO5KtRgGqG2jA== 0000950137-00-001273.txt : 20000328 0000950137-00-001273.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950137-00-001273 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENESCO GROUP INC CENTRAL INDEX KEY: 0000093542 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 041864170 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09267 FILM NUMBER: 579152 BUSINESS ADDRESS: STREET 1: 333 WESTERN AVE CITY: WESTFIELD STATE: MA ZIP: 01085 BUSINESS PHONE: 4135623631 FORMER COMPANY: FORMER CONFORMED NAME: STANHOME INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STANLEY HOME PRODUCTS INC DATE OF NAME CHANGE: 19820513 10-K405 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 0-1349 ------------------------ ENESCO GROUP, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1864170 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 WINDSOR DRIVE, ITASCA, ILLINOIS 60143 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (630) 875-5300 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Common Stock, par value $.125 per share, together with the Associated Common Stock Purchase Rights ("Common Stock") Name of each exchange on which registered New York Stock Exchange Pacific Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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 $129,817,373 on January 31, 2000. The number of shares outstanding of the registrant's Common Stock as of March 17, 2000 was 13,510,897 shares. Parts I, II and IV of this Form 10-K incorporate by reference certain information from the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1999 (the "1999 Annual Report"). Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement, dated March 17, 2000 (the "Proxy Statement"), for its Annual Meeting of Stockholders to be held on April 27, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 P A R T I ITEM 1. BUSINESS. General Enesco Group, Inc. (including its direct and indirect subsidiaries, "Enesco" or the "Company") is a leading designer, importer and international distributor of creatively designed giftware items, including proprietary and licensed lines of collectibles and decorative accents. Enesco sells its branded gifts, collectibles and decorative accents at wholesale to independent retailers, mass marketers, catalogers and other distributors. Its products include diverse lines of branded porcelain bisque, cold cast and resin figurines, cottages, musicals, music boxes, ornaments, plush animals, waterballs, tableware and general home accessories. Enesco's product is primarily produced by independent manufacturers in the Far East, with a factory's total capacity devoted exclusively to Enesco's product in many instances. Enesco was incorporated in Massachusetts in 1931 as Stanley Home Products and changed its name to Stanhome Inc. in 1982. As part of a major corporate and operational restructuring in 1997, the Company sold its Hamilton Direct Response Group and Stanhome Direct Selling Group businesses. In 1998, the Company's stockholders voted to change the Company's name from Stanhome Inc. to Enesco Group, Inc. The Company also relocated its principal executive offices from Westfield, Massachusetts to Itasca, Illinois, where its principal operating subsidiary, Enesco Corporation, was located. To complete its transformation into a singularly focused international designer and marketer of branded gifts, collectibles and decorative home accents, at the end of 1999 the Company merged certain of its direct and indirect subsidiaries, including Enesco Corporation, into the Company. Product Enesco's giftware, collectible and decorative accent product lines consist of approximately 10,000 items. These product lines are based in part on Enesco's collection of proprietary designs and in part on licenses Enesco and its subsidiaries have obtained from independent creative designers. Among Enesco's best known licensed lines are: - - Precious Moments - Cherished Teddies - Pretty as a Picture - - Thomas Kinkade - Warner Brothers - Hasbro - - Mary Engelbreit - Country Living - Julie Ueland - - John Deere - Walt Disney Company - All that Jazz - - Steiff - Wizard of Oz - Coca-Cola - - Priscilla's Mouse Tales - Calico Kittens - My Blushing Bunnies - - Mahogany Princess - Beatrix Potter - David Winter Cottages - - Snow Folks - Down Petticoat Lane - Isabelle de Borchgrave - - Raggedy Anne & Andy - Funnybone Originals - Creatures of Delight Enesco's best known proprietary product lines include: - - Mary's Moo Moos - Growing Up Girls - Festivities - - Via Vermont - Friends of the Feather - Lilliput Lane For its collectible lines, including Precious Moments, Cherished Teddies, David Winter Cottages and Lilliput Lane, Enesco introduces new items and limited edition pieces each year. To allow for these new introductions and to keep each line balanced, traditionally Enesco has retired a number of its existing pieces from production each year. Retirement of an item usually increases the value of the item on the secondary market and supports the overall collectibility of the line. Management bases its decision to retire a piece on a number of factors, including consumer demand and marketing and manufacturing considerations. -2- 3 Enesco offers a wide range of other giftware and home accessory items to satisfy seasonal and non-seasonal consumer demand and to introduce new product designs that may develop into collectible product lines in the future. Mary's Moo Moos figurines, originally introduced in 1994, rapidly became a popular line and have achieved their own collectible status. Most of Enesco's products have suggested retail prices between $5 and $50. Customers Enesco's core customers are approximately 30,000 independent gift retailers worldwide. In addition, sales were made to national chains, mail order houses, television home shopping and department stores, including Carlton Cards stores, Avon, Fingerhut, QVC, Walgreens, CVS Drug stores, Wal-Mart, K-Mart and Sam's Clubs. No single account represented more than 4% of Enesco's sales in 1999. Sales and Marketing Enesco sells its product lines in the United States through a nationwide sales organization comprised of approximately 250 independent sales representatives and an in-house sales staff. Canada, France and the United Kingdom have employee sales organizations. The Company also has agreements with foreign affiliates or distributors in Australia, Brazil, Canada, Ecuador, France, Germany, Hong Kong, Indonesia, Japan, Lebanon, Mexico, The Netherlands, Paraguay, Peru, Philippines, Singapore, South Korea, Taiwan, Thailand, the United Kingdom and Vietnam. International sales comprised approximately 23% of the Company's sales in 1999, compared with approximately 19% in 1998 and 1997. Management believes that Enesco's general terms of sale are competitive in the giftware industry. Enesco provides volume and other discounts to its customers with respect to its product lines. Enesco supports the marketing efforts of its sales force with an active promotional program, including displays of its product lines in nine showrooms located throughout the United States, participation at trade and private shows held in major U.S. and foreign cities, trade and consumer advertising and annual catalogs. In addition, Enesco maintains an interactive consumer information Internet website at www.enesco.com and maintains toll-free telephone lines for customers and consumers. Enesco's collector's clubs are an important component of its marketing program for its collectible product lines. Consumers may subscribe for exclusive product offerings and newsletters from any of Enesco's clubs. During 1999, the number of active memberships for these clubs continued a downward trend. Design and Production Enesco has a continuous program of new product development. New items are added to the product line only if they can be produced and marketed on a basis that meets Enesco's profitability criteria. Enesco routinely utilizes market research and test marketing to evaluate customer reaction to its new products. Enesco also obtains information from its retail customers, sales force and product development staff on trends and consumer reaction. Management believes that its ability to design, produce and market large numbers of new products annually provide a competitive advantage in the giftware industry, since sales of Enesco's product are in part dependent on Enesco's ability to identify and respond quickly to changing trends and to utilize its design and production systems to bring new product to market. The products included in the Lilliput Lane and Border Fine Arts lines are supplied in large part by manufacturing plants owned by Enesco's subsidiaries operating in England and Scotland, respectively. Substantially all of Enesco's other product lines are produced by independent manufacturers in the Far East, under the supervision of personnel from Enesco's affiliate in Hong Kong, Enesco International (H.K.) Limited, and in the Philippines, Indonesia, Thailand, Europe and Canada. During 1999, Enesco's purchases from its two largest contract manufacturers accounted for approximately 33% and 30%, respectively, of its total purchases with no other single manufacturer accounting for more than 10% of Enesco's net sales. While Enesco believes that there are other manufacturing sources available for its product lines, any loss or substantial reduction of sourcing capability from one or more of its predominant manufacturing facilities could have a significant short-term adverse effect on its importing and distribution operations. -3- 4 During 1999, approximately 70% of Enesco's total product purchases came from manufacturing sources located in the People's Republic of China (P.R.C.), which currently enjoys most-favored nation status. Legislation has been proposed from time to time that would revoke the P.R.C.'s most-favored nation status (which is a designation determined annually by the President of the United States, subject to possible override by Congress), which if enacted would significantly increase the cost of importing product from the P.R.C. This could have a short-term adverse effect on Enesco's operations until it established alternative manufacturing arrangements. Enesco requires all manufacturing sources, whether affiliates or contract manufacturers, to comply with quality and labor standards established and enforced by Enesco and its subsidiaries. Distribution In order to serve Enesco's customers located in the United States, and to a certain extent international customers as well, product is shipped by ocean freight from abroad and then by rail or truck to Enesco's warehouse facilities and distribution facility, located in Elk Grove Village, Illinois. The main warehouse facility also serves as Enesco's distribution facility and main showroom. Shipments from Enesco to its customers are handled by United Parcel Service and other commercial carriers. Seasonality and Backlog In addition to its everyday gift products, Enesco produces specially designed product for holiday seasons, including Christmas, Valentine's Day, Easter, Mother's Day, Father's Day, Halloween and Thanksgiving. The pattern of Enesco's sales is influenced by the shipment of seasonal merchandise. During 1998 and 1999 Enesco's sales peaked in the second and third quarters. In order to improve customer deliveries, improve customer service and reduce working capital in the United States, Enesco will be changing its seasonal shipping patterns in 2000. Starting in 2000, new product introductions will be grouped by occasion and shipped to arrive in retail stores based on a predetermined shipping schedule. Generally, product will be purchased later and shipped to customers later allowing Enesco to reduce inventory and reduce the extended terms offered on the sale of seasonal product. This change will not materially impact Enesco's annual results of operations. However, the change will result in sales being deferred from the second to the third quarter. If this new shipping pattern had been in effect in 1999, it would have shifted approximately $20 million of sales from the second quarter of 1999 to the third quarter of 1999. The seasonal pattern of quarterly operating profit will follow the sales pattern and will be affected by the impact of fixed costs on the quarterly sales changes. At the end of 1999, Enesco had a backlog of orders totaling approximately $50 million, as compared to $59 million at the end of 1998. It is standard practice in the giftware industry, however, that orders are subject to amendment or cancellation by customers prior to shipment. Due to the many external factors that can impact the status of unshipped orders at any particular time, the comparison of backlog orders in any given year with those at the same date in a prior year is not necessarily indicative of sales performance for that year or for prospective sales results in future years. Backlog orders can also be affected by various programs employed by Enesco to provide incentive for its customers to place orders and accept shipments at specified times in the year. In addition, extended credit and payment terms have been and will continue to be key marketing tools. During 1999, however, Enesco continued to tighten its credit controls, which had a negative impact on sales results. Competition Competition in the giftware, collectibles and decorative accent industry in the United States, Canada, United Kingdom and Europe is highly fragmented among a number of companies and product categories. The principal factors affecting success in the marketplace are originality of product design, quality, price, marketing ability, customer service and sourcing. Enesco's main competitors in the United States are Hallmark, Department 56, Lladro, Cast Art, Midwest Imports, Boyd's Bears, Ty, Inc. and Russ Berrie, among others. -4- 5 Trademarks and Other Intellectual Property Intellectual property rights with respect to Enesco's licensed product lines are materially important to Enesco's sales, especially the Precious Moments (R) and Cherished Teddies (R) lines, which accounted for approximately 37% and 22%, respectively, of Enesco's consolidated revenue from continuing operations during 1999, compared to 38% and 20%, respectively, for 1998 and 36% and 20% for 1997. The internal development and licensing of new product is expected to lessen Enesco's dependency on existing trademarks and copyrighted designs. The Company enters into various license agreements relating to trademarks, copyrights, designs and products which enable the Company to market items compatible with its product lines. The Company's licenses are generally exclusive for specific products in specified territories. Royalties are paid on licensed items and, in many cases, advance royalties and minimum guarantees are required by these license agreements. Protection of all of Enesco's intellectual property, whether owned or licensed, is important to Enesco's business. Enesco has maintained an aggressive and visible program to identify and challenge companies and individuals worldwide who infringe its registered trademarks and copyrighted designs. Employees and Related Matters As of December 31, 1999, Enesco employed approximately 700 persons on a full-time basis in the United States. Enesco's U.S.-based warehouse personnel employed as of that date are represented by Local Union No. 781 of the Teamsters under a contract that expires on June 30, 2001. Enesco believes that its labor relations are good. As of the same date, Enesco's foreign subsidiaries employed approximately 850 persons on a full-time basis As of December 31, 1999, there were also approximately 250 independent contractor sales representatives engaged in selling Enesco's product lines in the United States. There has been a long-standing issue in the United States as to the appropriate classification of sales representatives as employees or independent contractors, with resulting tax and other legal consequences to the worker and company involved. The U.S. Internal Revenue Service and Congress have periodically expressed interest in this area in general, and some states have challenged from time to time the classification of positions within the Enesco sales organization. While Enesco has received determinations from the U.S. Equal Employment Opportunity Commission and the Internal Revenue Service confirming the independent contractor status of former Enesco sales representatives, several local government agencies are continuing to review this issue. Management expects increased attention on the status of independent sales representatives from both federal and state governments in the future. Financial and Other Information Information required by this item is set forth in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning at Page 16 of the Annual Report, and "Notes to Consolidated Financial Statements" beginning at Page 27 of the Annual Report, and is incorporated herein by reference. ITEM 2. PROPERTIES. The principal physical properties of Enesco in the United States, all of which are owned unless otherwise noted, consist of the following: Principal executive offices - 225 Windsor Drive, Itasca, Illinois; showroom, distribution and warehouse facilities for Enesco's giftware business in Elk Grove Village, Illinois. Enesco also leases showrooms in eight other major market locations in the U.S. for the display of its products and a warehouse in Wood Dale Village, Illinois. The former Corporate Headquarters property located in Westfield, Massachusetts was sold in March, 1999 as part of Enesco's worldwide restructuring. Most of the principal physical properties relating to the foreign subsidiaries of the Enesco Giftware Group are owned. These include Enesco European Giftware Group Limited, which owns manufacturing plants and warehouse facilities in Penrith, Workington, and Carlisle, Cumbria, England, and Langholm, Dumfriesshire, Scotland. These manufacturing facilities are generally operating at or near capacity. -5- 6 In July, 1999, Enesco sold its wholly owned Mexican subsidiary, Via Vermont, S.A. de C.V. to the General Manager of that company. Via Vermont was formed to produce glass giftware in Mexico for Enesco. As part of the sale, Enesco entered into a supply agreement with Via Vermont (which changed its name to Arvenco S.A. de C.V.), to assure the continued source of glass giftware products for the next five years. In August, 1999, Enesco sold its wholly owned Spanish manufacturing subsidiary, Cosmhogar, S.A. to Iberian Cosmetics Group, S.A. Cosmhogar had been a principal source of supply for the European marketing companies of Enesco's Direct Selling Group, which was sold in 1997. This transaction completed the divestiture of the Direct Selling Group begun in 1997. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of Enesco's business, there have arisen various legal proceedings pending against Enesco and its subsidiaries. While Enesco cannot predict the eventual outcome of these proceedings, it believes that none of these proceedings will have a material adverse impact upon the consolidated financial statements of Enesco. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ Date First Name Age Positions Elected - ---- --- --------- ------- Jeffrey A. Hutsell 46 Director 9/04/97 President 4/23/98 Chief Executive Officer 9/02/98 Member of the Executive Committee 4/23/98 Prior to Mr. Hutsell's elections as Director, President and Chief Executive Officer of the Company, he served both as Vice President of the Company from January, 1997 to January, 1998 and also as President of Enesco Corporation, a subsidiary of the Company, since January, 1997, Executive Vice President, Worldwide Creative from January, 1992 to January, 1997, Vice President, Creative from January, 1989 to December, 1991, Vice President, Art from April, 1986 to December, 1988, and Vice President, Product Development from August, 1985 to April, 1986. Eugene Freedman 75 Director 9/04/97 Founding Chairman 9/02/98 Member of the Executive Committee 9/04/97 Mr. Freedman previously served as Vice Chairman of the Company from October, 1997 to September, 1998, Executive Vice President of the Company from April, 1988 to September, 1998, and Vice President of the Company from January, 1984 to April, 1998. He also served for many years as Chairman, President and Chief Executive Officer of Enesco Corporation, a subsidiary of the Company, of which Mr. Freedman was a founder in 1959. Allan G. Keirstead 55 Director 4/25/85 Executive Vice President and Chief Administrative Officer 4/28/88 Chief Financial Officer 4/28/83 Chief Executive Officer of Enesco International Businesses 9/02/98 Controller 12/02/81 Member of the Executive Committee 4/25/85 -6- 7 Mr. Keirstead previously served as Vice Chairman of the Company from October, 1997 to September, 1998. Prior to Mr. Keirstead's election as Executive Vice President and Chief Administrative Officer, he served as Financial Vice President from January, 1983 to April, 1988. He served as Assistant Controller from April, 1977 to December, 1981. Thomson J. Hudson 53 Senior Vice President, U.S. Operations 9/30/98 Prior to Mr. Hudson joining the Company in September, 1998, he was the President of Decision Management, Inc., a Connecticut-based provider of management consulting services specializing in company turnarounds and entrepreneurial ventures, from 1990 to 1998. Robert J. Hipple 55 Clerk 10/15/99 Senior Vice President, General Counsel and Secretary Prior to Mr. Hipple's joining the Company in October 1999, he served as Executive Vice President, General Counsel and Chief Financial Officer of 3D Image Technology, Inc. in Atlanta from 1996 to 1999. Prior to that, he practiced corporate law as principal of an Atlanta law firm and previously was a professor of law at Emory University Law School. Jeffrey W. Lemajeur 38 Treasurer 3/03/99 Prior to Mr. Lemajeur's joining the Company in January, 1999, he was the Vice President of Finance, Chief Financial Officer and Treasurer of Binks Sames Corporation, a manufacturer of spray equipment located in Franklin Park, Illinois, from 1991 to 1998. Josette V. Goldberg 42 Vice President, Human Resources 6/02/99 Senior Vice President, Human Resources and Communications 1/19/00 Prior to Ms. Goldberg's joining the Company in February 1998, she was the Vice President of Human Resources for Household Finance Corporation, a consumer finance division of Household International. Previously, she spent 11 years with Balcor Company, a real estate and property management division of American Express where she held the position of Senior Vice President of Human Resources and Administration. NOTE: All officers are elected for the ensuing year and until their successors are duly elected and qualified. P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information required by this item is set forth in the Section entitled "Stock Market, Dividend and Shareholder Information" appearing on page 46 of the 1999 Annual Report and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. Information required by this item is set forth in the Section entitled "Financial Highlights Last Ten Years" appearing on pages 48 and 49 of the 1999 Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. Information required by this item is set forth in the Section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 16 through 21 of the 1999 Annual Report and is incorporated herein by reference. -7- 8 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information required by this item is set forth in Note 10 of the Financial Statements appearing on page 43 of the 1999 Annual Report and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information required by this item is set forth in the Financial Statements, together with the accompanying Notes and Report of Independent Public Accountants, appearing on pages 22 through 45 of the 1999 Annual Report and is incorporated herein by reference. Also incorporated herein by reference are the Quarterly Results (Unaudited) during 1999 and 1998 set forth on page 47 of the 1999 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. P A R T III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required by this item regarding the directors of the Company is set forth under the captions "Proposal 1: Election of Directors" and "Information as to Board of Directors and Nominees" in the Company's Proxy Statement and is incorporated herein by reference. Information required by this item regarding the executive officers of the Company is included under a separate caption in Part I hereof, and is incorporated herein by reference, in accordance with General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. Information required by this item regarding reporting compliance is included under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required by this item is set forth under the captions "Executive Compensation", "Compensation and Stock Option Committee Report on Executive Compensation", "Performance Graphs" and "Compensation of Non- Employee Directors" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security Ownership of Certain Beneficial Owners Information required by this item is set forth under the caption "Our Largest Stockholders" in the Company's Proxy Statement and is incorporated herein by reference. Security Ownership of Management Information required by this item is set forth under the caption "Shares Held by Our Directors and Executive Officers" in the Company's Proxy Statement and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this item is set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement and is incorporated herein by reference. -8- 9 P A R T IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2) Financial Statements and Schedules. The financial statements and schedules required by this item are listed in the Index to Financial Statements and Schedules of Enesco Group, Inc. on page 11 of this Form 10-K. (a)(3) Exhibits. The exhibits required by this item are listed in the Exhibit Index on pages 14 - 16 of this Form 10-K. The management contracts and compensatory plans or arrangements required to be filed as an exhibit to this Form 10-K are listed as Exhibits 10(a) to 10(bb) in the Exhibit Index. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of 1999. 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, on the 27th day of March, 2000. ENESCO GROUP, INC. (Registrant) By: /s/ Jeffrey A. Hutsell ----------------------------- Jeffrey A. Hutsell President and Chief Executive Officer By: /s/ Allan G. Keirstead ---------------------- Allan G. Keirstead Executive Vice President, Chief Administrative and Financial Officer and Chief Executive Officer of Enesco International Businesses -9- 10 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 27th day of March, 2000 by the following persons on behalf of the registrant and in the capacities indicated. Signature Title - --------- ------ /s/ H. L. Tower * - ---------------------------- H. L. Tower Director /s/ Homer G. Perkins * - ---------------------------- Homer G. Perkins Director /s/ Allan G. Keirstead - ---------------------------- Allan G. Keirstead Executive Vice President, Chief Administrative and Financial Officer, Chief Executive Officer of Enesco International Businesses and Director /s/ John F. Cauley * - ---------------------------- John F. Cauley Chairman of the Board and Director /s/ Anne-Lee Verville * - ---------------------------- Anne-Lee Verville Director /s/ Judith R. Haberkorn * - ---------------------------- Judith R. Haberkorn Director /s/ Donna Brooks Lucas * - ---------------------------- Donna Brooks Lucas Director /s/ Charles W. Elliott * - ---------------------------- Charles W. Elliott Director /s/ Eugene Freedman * - ---------------------------- Eugene Freedman Founding Chairman and Director /s/ Jeffrey A. Hutsell Jeffrey A. Hutsell President, Chief Executive Officer and Director *By: /s/ Jeffrey A. Hutsell ---------------------- Jeffrey A. Hutsell Attorney-In-Fact -10- 11 ENESCO GROUP, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - Incorporated by reference to "Report of Independent Public Accountants" on page 45 of the Enesco Group, Inc. 1999 Annual Report to Stockholders. FINANCIAL STATEMENTS - All of which are incorporated by reference to the Enesco Group, Inc. 1999 Annual Report to Stockholders. Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Retained Earnings For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements as of December 31, 1999, 1998 and 1997 Quarterly Results (Unaudited) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE SCHEDULE SUPPORTING FINANCIAL STATEMENTS: Schedule Number Description - -------- ----------- II Valuation and Qualifying Accounts and Reserves For Each of the Three Years Ended December 31, 1999(a) NOTES: (a) All other schedules are not submitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto. (b) Individual financial statements of the Company have been omitted since (1) consolidated statements of the Company and its subsidiaries are filed and (2) the Company is primarily an operating company and all subsidiaries included in the consolidated financial statements filed are wholly-owned and do not have a material amount of debt to outside persons. -11- 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Enesco Group, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Enesco Group, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 22, 2000. Our audit was made for the purpose of forming an opinion of the consolidated financial statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Chicago, Illinois February 22, 2000 -12- 13 ENESCO GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1999
Column A Column B Column C Column D Column E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------- ---------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1997 Reserves which are deducted in the balance sheet from assets to which they apply- Reserves for uncollectible accounts $ 6,299,971 $ 3,073,309 $ - $ 1,102,584 $ 8,270,696 Reserves for returns and allowances (b) $ 3,590,828 $16,052,721 $ - $16,767,898 $ 2,875,651 Accumulated amortization of other assets $26,019,184 $ 3,479,053 $ - $ 2,653,172 $26,845,065 Reserve for downsizing corporate headquarters $ - $18,000,000 $ - $ 5,187,000 $ 2,813,000 Reserve for discontinued operations $ - $16,800,000 $ - $ 7,735,000 $ 9,065,000 FOR THE YEAR ENDED DECEMBER 31, 1998 (A) Reserves which are deducted in the balance sheet from assets to which they apply- Reserves for uncollectible accounts $ 8,270,696 $ 3,017,927 $ - $ 4,077,335 $ 7,211,288 Reserves for returns and allowances (b) $ 2,875,651 $12,217,896 $ - $13,004,365 $ 2,089,182 Accumulated amortization of other assets $26,845,065 $ 3,194,815 $ - $ 407,843 $29,632,037 Reserve for downsizing corporate headquarters $12,813,000 $ - $ - $ 2,261,000 $10,552,000 Reserve for discontinued operations $ 9,065,000 $ - $ - $ 6,233,000 $ 2,832,000 FOR THE YEAR ENDED DECEMBER 31, 1999 Reserves which are deducted in the balance sheet from assets to which they apply- Reserves for uncollectible accounts $ 7,211,288 $ 3,318,106 $ - $ 3,268,744 $ 7,260,650 Reserves for returns and allowances $ 2,089,182 $13,038,165 $ - $11,972,237 $ 3,155,110 Accumulated amortization of other assets $29,632,037 $ 2,224,491 $ - $ 15,025 $31,841,503 Reserve for downsizing corporate headquarters $10,552,000 $ - $ - $ 4,087,020 $ 6,464,980 Reserve for discontinued operations $ 2,832,000 $ - $ - $ 512,664 $ 2,319,336
(a) In 1998, the goodwill asset was written down by $46 million to fair value-this direct writedown of the asset is not reflected in this schedule. (b) 1997 and 1998 amounts restated to reflect all categories of sales returns, allowances and credits -13- 14 EXHIBIT INDEX Reg. S-K - -------- Item 601 EXHIBIT - -------- ------- 2 (a)* Agreement of Purchase and Sale dated April 22, 1997 by and among The Crestley Collection, Ltd., The Bradford Exchange, Ltd. (with respect to Section 12(p) therein only) and Stanhome Inc. (Exhibit 2.1 to Form 8-K filed on June 5, 1997 in Commission File No. 0-1349.) 2 (b)* Stock and Asset Purchase Agreement dated as of November 24, 1997 by and between Stanhome Inc. and Laboratoires De Biologie Vegetale Yves Rocher. (Exhibit 2.1 to Form 8-K filed on December 31, 1997 in Commission File No. 0-1349.) 3 (a)* Restated Articles of Organization as amended. (Exhibit 3(a) to Form 10-Q filed for the period ended March 31, 1998 in Commission File No. 0-1349.) 3 (b)* By-Laws as amended. (Exhibit 3 (b) to Form 10-Q filed for the period ended March 31, 1998 in Commission File No. 0-1349.) 4 (a)* Renewed Rights Agreement dated as of July 22, 1998 between Enesco Group, Inc. and ChaseMellon Shareholder Services, L.L.C. (Exhibit 4 to Form 8-K filed on July 23, 1998 in Commission File No. 0-1349.) 10 (a)* 1984 Stock Option Plan, as amended and restated through December 4, 1996. (Exhibit 10 (a) to Form 10-K filed for the period ended December 31, 1996 in Commission File No. 0-1349.) 10 (b)* 1991 Stock Option Plan, as amended and restated through December 4, 1996. (Exhibit 10 (b) to Form 10-K filed for the period ended December 31, 1996 in Commission File No. 0-1349.) 10 (c)* Special Interim Chief Executive Officer Stock Option Plan. (Exhibit 10(c) to Form 10-K filed for the period ended December 31, 1993 in Commission File No. 0-1349.) 10 (d)* 1996 Stock Option Plan, as amended and restated through January 20, 1999. (Exhibit 10(d) to Form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 10 (e)* 1997 President and Chief Executive Officer Stock Option Plan. (Exhibit 10(e) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (f)* 1998 Chairman Stock Option Plan. (Exhibit 10(f) to Form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 10 (g)* Non-Employee Director Stock Plan. (Exhibit 10 to Form 10-Q filed for the period ended March 31, 1995 in Commission File No. 0-1349.) 10 (h)* Enesco Group, Inc. 1999 Non-Employee Director Stock Plan. (Exhibit 10(h) to form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 10 (i)* Outline of Deferred Compensation Plan for Non-Employee Directors, as amended. (Exhibit 10(e) to Form 10-K filed for the period ended December 31, 1988 in Commission File No. 0-1349.) -14- 15 10 (j)* Management Incentive Plan, as amended and restated effective January 1, 1999. (Exhibit 10(j) to Form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 10 (k)* Supplemental Retirement Contract with Homer G. Perkins, as amended and restated through February 9, 1988. (Exhibit 10 (i) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (l)* Supplemental Retirement Contract with H. L. Tower, as amended and restated through June 5, 1997. (Exhibit 10 (j) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (m)* Amendment of Retirement Agreement with Allan G. Keirstead. (Exhibit 10 (k) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (n)* Supplemental Retirement Contract, as amended, with Allan G. Keirstead. (Exhibit 10 (1) to Form 10-K filed for the period ended December 31, 1994 in Commission File No. 0-1349.) 10 (o)* Amendment of Allan G. Keirstead Supplemental Retirement Contract. (Exhibit 10 (c) to Form 10-Q filed for the period ended June 30, 1997 in Commission File No. 0-1349.) 10 (p)* Description of Relocation Benefits for Allan G. Keirstead. (Exhibit 10 (n) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (q)* Description of Relocation Benefits for Peter R. Johnson. (Exhibit 10(q) to Form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 10 (r)* Severance Agreement with Allan G. Keirstead. (Exhibit 19(d) to Form 10-K filed for the period ended December 31, 1992 in Commission File No. 0-1349.) 10 (s)* Form of Retention Benefits Plan as described in the Estimated Termination Benefits Summary Letters dated June 16, 1997 and August 13, 1997 for Stanhome Inc. Corporate Headquarters Exempt Employees. Such letters exist with Allan G. Keirstead, and Peter R. Johnson. (Exhibit 10 (i) to Form 10-Q filed for the period ended June 30, 1997 in Commission File No. 0-1349.) 10 (t)* Jeffrey A. Hutsell Employment Agreement. (Exhibit 10 to Form 10-Q filed for the period ended June 30, 1999 in Commission File No. 0-1349.) 10 (u)* Peter R. Johnson Severance Agreement. (Exhibit 10 to Form 10-Q filed for the period ended September 30, 1999 in Commission File No. 0-1349.) 10 (v)* Form of Change in Control Agreement. (Exhibit 19(c) to Form 10-K filed for the period ended December 31, 1992 in Commission File No. 0-1349.) A substantially identical agreement exists with Allan G. Keirstead and Jeffrey A. Hutsell. 10 (w)* Form of Change in Control Agreement with certain executive officers and non-executive officers (Exhibit 19(c) to Form 10-K filed for the period ended December 31, 1991 in Commission File No. 0-1349.) Substantially identical agreements exist with Thomson J. Hudson, Robert J. Hipple, Josette V. Goldberg and Jeffrey W. Lemajeur. -15- 16 10 (x)* Second Amendment to Stanhome Inc. Supplemental Pension Plan, as amended and restated through December 16, 1996. (Exhibit 10 (s) to Form 10-K filed for the period ended December 31, 1996 and Exhibit 10 (j) to Form 10-Q filed for the period ended June 30, 1997 in Commission File No. 0-1349.) 10 (y)* Third Amendment to Stanhome Inc. Supplemental Pension Plan. (Exhibit 10 (cc) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (z)* Fourth Amendment to Stanhome Inc. Supplemental Pension Plan. Exhibit 10 (a) to Form 10-Q filed for the period ended March 31, 1998 in Commission File No. 0-1349.) 10 (aa)* Enesco Group, Inc. Supplemental Retirement Plan, as amended and restated, effective January 1, 1999. (Exhibit 10(y) to Form 10-K filed for the period December 31, 1998 in Commission File No. 0-1349.) 10 (bb)* Thomas E. Evangelista Release Agreement. (Exhibit 10(cc) to Form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 10 (cc)* License Agreement between Precious Moments, Inc. and Enesco Corporation. (Exhibit 10 to Form 10-Q filed for the period ended June 30, 1993 in Commission File No. 0-1349.) 10 (dd)* First Amendment to License Agreement between Precious Moments, Inc. and Enesco Corporation. (Exhibit 10(hh) to Form 10-K filed for the period ended December 31, 1997 in Commission File No. 0-1349.) 10 (ee)* Second Amendment to License Agreement between Precious Moments, Inc. and Enesco Corporation. (Exhibit 10(bb) to Form 10-K filed for the period ended December 31, 1998 in Commission File No. 0-1349.) 13 Portions of the 1999 Annual Report to the Stockholders of Enesco Group, Inc. 21 Subsidiaries of Enesco Group, Inc. 23 Consent of Arthur Andersen LLP 24 Power of Attorney 27 Financial Data Schedule *Incorporated By Reference -16- EX-13 2 1999 ANNUAL REPORT TO THE STOCKHOLDERS 1 Exhibit 13 1999 ANNUAL REPORT [ENESCO LOGO] Touching Lives With Beauty and Emotion 2 CORPORATE PROFILE For more than 40 years, Enesco Group, Inc. (NYSE: ENC) has been a global leader in the gift, collectible and home decor industries, offering products from such notable licenses as Cherished Teddies, Mary Engelbreit and Kim Anderson's Pretty as a Picture, among others. The Company's award-winning Precious Moments brand is one of the top lines of collectibles throughout the world. FINANCIAL HIGHLIGHTS
PERCENTAGE INCREASE (In millions, except per share amounts) 1999 1998 (DECREASE) - ------------------------------------------------------------------------------------------------------------------- Net sales $ 384 $ 451 (15%) Operating profit 24 49 (52%) Income (loss) before taxes 19 ( 3) Net income (loss) 27 (22) Working capital 42 75 (43%) Total assets 277 320 (13%) Shareholders' equity 114 151 (24%) Return on average shareholders' equity 20% (12%) Per share data: Net income (loss) diluted $ 1.87 ($ 1.38) Dividends declared $ 1.12 $ 1.12 Shareholders' equity at December 31 $ 8.49 $ 9.50 (11%) Average number of shares diluted 14.37 16.26 (12%) Number of shares outstanding at December 31 13.48 15.85 (15%)
CONTENTS 1 Letter from the CEO 4 Enesco Classics 7 Enesco Social Expressions 8 Home Gallery 10 Enesco Sales 12 Enesco Operations 14 International Businesses 3 LETTER FROM THE CEO February 22, 2000 Fellow Shareholders, Enesco is a company with a long history grounded in strong relationships and solid financial results. The past year was a challenge for us in the United States -- indeed for the entire collectibles industry. Domestic market demand continued to shift and distribution channels continued to evolve, while international demand improved. Our domestic financial results were, in part, the product of an industry-wide shift away from traditional sales in our core collectible, card and gift channels. Our most experienced and successful retailers reported that the slow down in demand for some collectible lines and a softer market for greeting cards have led to decreased retail foot traffic with the result of diminished sales. In light of these financial results and the fundamental change we are facing in the collectibles industry, there is one word that best describes what will make Enesco a leader. That word is focus -- focus on our products and what the future channels of distribution will be, focus on our customers and focus on our people. [PHOTO OF JEFF HUTSELL] FOCUS ON OUR PRODUCTS In 1999, we continued to strive to create quality products that touch a common chord and resonate with the consumer at very emotional and personal levels. As you know, Enesco's core brands have shown a strength and resilience unparalleled in the collectibles industry. In October, Precious Moments was named as the number one licensed artwork property in the world by License! magazine. And in December, Giftware Business magazine conducted its first "What's Selling?" survey, polling retailers on their best selling collectibles line for that month. Again, Precious Moments ranked number one. This past year, we focused on leveraging the strength of Precious Moments and our other licensed brands by "bringing the right product to the right consumer through the right channel at the right time." This meant, in addition to supplying Precious Moments figurines to traditional collectible, card and gift stores, we focused on creating and distributing line extensions so that consumers could find a broader array of Precious Moments gift items in places they shopped. Likewise, we continued to expand our offering of other world-class products derived from strategic partnerships with such branded leaders as John Deere, Steiff, Radio Flyer and even a unique new alliance for 2000 with Aspen Bay Candles, bringing Enesco into the growing candle and fragrance gift category. While distribution channels for our traditional products shifted, we continued to expand our home decor and home accent lines of business. In 1999, sales in this growing multi-billion dollar market reached a level for our company that warrants its own sales force to focus solely on our new home decor channel of distribution. FOCUS ON OUR CUSTOMERS At Enesco, we have always prided ourselves on our long-standing and mutually beneficial relationships with our valued retailers. This year we have taken steps to synchronize our sales and customer service departments. Rather than provide our traditional collectible and gift customers with two or more salespeople who manage portions of their account, we've continued 1 4 [PHOTO OF PRECIOUS MOMENTS FIGURINE] "You Color Our World with Loving, Caring and Sharing," honoring the 10th anniversary of the Precious Moments Chapel, was featured on QVC consolidated our efforts. We now provide them with one salesperson who manages our entire product offering and one customer service team member, each of whom is trained and empowered to handle all of their needs. Our customers depend on us to give them top-quality service -- and we delivered. In fact, further evidence of our success came in the January 1999 issue of GiftBeat magazine, where Enesco was ranked number one in customer service by our retailer customers for the second year in a row. Internally, our people are encouraged and rewarded by our new cross-functional channel team efforts -- and already we are seeing results. In early spring, we recorded our largest single order ever. CVS, a chain discount drug store, ordered $7.5 million worth of our Rudolph the Red-Nosed Reindeer Christmas ornaments. Working together, our internal teams successfully fulfilled this order in record time. In order to expand our reach to customers, we initiated partnerships in new marketplaces. In 1999, we enhanced our presence in the home shopping market by partnering with QVC to showcase Precious Moments products on this popular television program. We achieved new successes in the direct response channel with successful collectors' doll and plate programs in our ongoing alliance with industry leader, The Bradford Group. We also could be found in the direct selling category through our relationship with Avon, which continues to succeed with several of our gift and collectibles lines. We distributed our products via direct mail through affiliations with a broad array of consumer catalogues. Finally, Enesco products continued to achieve record sell-throughs in the mass market, as we partnered with such industry giants as Wal-Mart, Target and K-Mart to feature Enesco Christmas decorations and ornaments in their holiday trim departments. In November, we announced a joint venture with Hallmark, which made more than a thousand of our most popular gift and collectible items available to Hallmark dealers on an exclusive Web site. We were one of the first companies Hallmark turned to when launching its new business-to-business e-commerce site. This venture is one of our first forays into the world of electronic commerce -- and we look forward to a productive partnership. Reaching new consumers in the international marketplace took on greater significance in late 1999 when Enesco, through our European subsidiary, Enesco European Giftware Group Limited, entered into an agreement with Goebel Germany. Under this arrangement, Goebel will act as agent for the sale of Enesco products in Germany, Austria, Switzerland and Scandinavia. Goebel is one of the oldest and most famous names in European giftware, and we expect to gain market penetration in Europe that is unmatched in the industry. We had another successful strategic partnership in Europe when we teamed up with Applause, Inc. to provide Star Wars products to Enesco France earlier this year. FOCUS ON OUR PEOPLE Our financial success is dependent upon the hard work and creativity of our internal staff. We are focused on providing them with the support, resources, motivation and rewards that they need to meet and surpass their goals. Early in the year, a group of associates approached me with the idea of developing a center for creativity and innovation. This idea led to the launch of Blue Sky -- an initiative that encourages associates to express their creativity, whether through the design of new product lines or the development of solutions to business and process management issues. Blue Sky is not only a concept -- it's also a physical space. We've devoted an entire area to the project to enable our associates to get away from their desks and think freely, without constraints. Blue Sky is a cutting-edge program that adds value to our creative process. [PHOTO OF TEDDY BEAR] "Lavendar Bear," the limited edition porcelain figurine from the Steiff Collection by Enesco 2 5 [PHOTO OF EUGENE FREEDMAN] LEADING THE WAY Through a career that has spanned more than 50 years, Enesco's Founding Chairman Eugene Freedman remains one of the most recognized entrepreneurs in the industry. In 1999, Mr. Freedman continued as a vital contributor in Enesco's new product development. He tirelessly serves as guardian of the Precious Moments brand, traveling the globe to meet collectors through the "Around the World with Gene Freedman" signing tour that honors Enesco's 40th anniversary. It was Mr. Freedman's vision five years ago to establish an Enesco division to develop and market home accent products. Today, Enesco's Home Gallery is the fastest-growing division of the company. His involvement includes product design and sourcing, working closely with Kathy Cook, Home Gallery vice president and general manager. Additionally, he spearheaded sales and distribution of Enesco products in Asia and South America, with a sales increase of more than 33 percent in 1999. Mr. Freedman also serves as steward of the company's philanthropic efforts. His dedication to those in need has been realized in Enesco's commitment to Easter Seals, the Boys and Girls Clubs of America, St. Jude Children's Research Hospital and others through cause-related marketing programs. In the year 2000, Enesco will likewise benefit NABCO, the National Alliance of Breast Cancer Organizations, and the Salvation Army. All Enesco associates believe that in this way we, as a company, truly demonstrate the Precious Moments spirit of "loving, caring and sharing." In 1999, we added several key members to our team. We were proud to announce the appointment of Robert J. Hipple as senior vice president and general counsel. Bob's extensive legal and corporate experience make him well qualified to provide corporate governance and legal counsel, as well as to manage our outside legal counsel relationships. Additionally, we appointed Rachel S. Perkal as our vice president and general manager for Enesco Classics (comprised of our two most successful brands, Precious Moments and Cherished Teddies); John Keiser, senior vice president of sales; and Eddie Lui, vice president and managing director in our Hong Kong office. Rachel is a proven industry expert in the collectibles field and joins us following a career at Hallmark and her own collectibles consulting company. John's Enesco experience and expertise in multiple sales forces and channel management teams and Eddie's experience in multiple channel supply chain fulfillment are each of significant advantage in our strategy of delivering the right product to the right consumer through the right channels. In October, we announced the election of Donna Brooks Lucas, president and CEO of DBL Multi-Media Group, to the company's Board of Directors. Already Donna's entrepreneurial character and extensive marketing experience have proven beneficial to the Board. We also wish to express our sincere thanks and gratitude to Charles Elliot, who is retiring after five years of service to our Board, most recently as Chair of our Audit Committee. His contributions will be missed. FOCUS ON THE FUTURE As the market continues to evolve and distribution channels continue to shift, Enesco, in order to maintain its position as the leading company in the gift and collectibles industry, must remain focused on two things: listening to what the market wants and providing the market with what it needs. As a company, we are blessed with a superb combination of creativity, relationships, talent and vision that will keep Enesco at the forefront of the industry. As always, I want to thank our associates, artists, vendors, sales representatives and licensors. It is their support, dedication and hard work that allows us to do our best to bring to our valued customers and loyal collectors the products that truly "touch lives with beauty and emotion." /s/ Jeff Hutsell Jeff Hutsell President & CEO Enesco Group, Inc. 3 6 "Our goal is to reach more people than ever before. We'll succeed by aligning ourselves with how and where people are shopping, while at the same time respecting the desires of our core collectors and retailers." ENESCO CLASSICS Enesco Classics, led by Vice President and General Manager Rachel S. Perkal, encompasses the heart of our business and includes some of the most treasured names in the world of collectibles. From Sam Butcher's Precious Moments to Cherished Teddies and other Priscilla Hillman properties such as Calico Kittens and Down Petticoat Lane, our Classics are beloved by millions. For us, these brands represent valuable capital due to their recognized presence across the globe. It is their solid brand equity that will support our efforts to adapt to the ever-changing market for gifts and collectibles. The strength of Enesco Classics was apparent in 1999, a year of transition for the gift and collectibles arena. The award-winning Precious Moments line continued to be an industry leader. Sales of Precious Moments Tender Tails plush were up over 1998. Cherished Teddies held its place with enthusiastic collectors, while other brands, including Calico Kittens and My Blushing Bunnies, continued to reach new consumers. No brand can be a success without meticulous attention to strategic brand management. Evidence of our focus on this was found in vigorous efforts to gather feedback from important audiences -- collectors, consumers and retailers. Using surveys, focus groups, one-on-one meetings and the Internet, we solicited opinions on our products, programs and events. We encouraged honest, unvarnished feedback, and received it. Our research proved insightful and useful. It helped us refocus on the needs of those who have been, and will continue to be, instrumental to our success. First, we focused on retailers' and collectors' desire to put the "hunt" back into collecting. Through the "Whale Watch," a promotion surrounding the introduction of a new Tender Tails collection in spring 1999, we drove sales by offering eight different colored whales in collectible, card and gift stores. But participating stores received only select colors -- thus, consumers searched many retail locations to complete their collections. Honoring both retailer and consumer requests, the Precious Moments Care-A-Van toured for a second year, carrying the message of "loving, caring and sharing" across the U.S. Collectors met the Care-A-Van at more than 80 locations, further cementing our bond. The Care-A-Van was a welcome event for retailers who appreciated the added foot traffic generated by its appearance. Another critical event was the redirection of the Precious Moments Collectors' Club. We listened to members' input and responded to what we heard. For example, Club kits are now available to members earlier, in December rather than at end of January or on the member's renewal date. Collectors said they saw this as tangible evidence of continued improvements to the brand. Another initiative was to further explore new distribution channels. We realize people are shopping differently today so we expanded our distribution, making it easier for new consumers to find our giftware and collectibles. Our ultimate goal, however, was more than increased exposure. We knew that if we managed the new channels wisely, they could help us expand our key customer group --collectors. Both research and demographics revealed that giftware purchases made today should generate follow-up sales of collectibles in the same brand, resulting in the simultaneous growth of two lines of business without eroding the integrity of the brand. Toward that end, we also forged strategic relationships that promise to bear fruit in 2000. In late spring, we will continue our partnership with QVC through a highly-rated special segment that will feature distinctive Precious Moments giftware and collectibles. We also fortified existing relationships with Avon for Cherished Teddies giftware and the Bradford Exchange for Precious Moments plates, ornaments and other gift items. In all, we expect the direct mail, direct response and direct selling channels to deliver thousands of products to customers all over the world, providing a tremendous opportunity for significant growth. Throughout 1999, we gained critical insight into how our business is changing and how we can remain flexible and adaptable in numerous new channel opportunities. And importantly, we learned the value of staying connected to the constituents whose success ensures our own. 4 7 [PHOTO OF RACHEL S. PERKAL] 5 8 [PHOTO OF HOWARD EIRINBERG] 6 9 "We built the retail sales network we have today one store at a time over 40 years. Now, as times change, our challenge is to align our brands with the proper distribution channels to reach the right customers with the right product." ENESCO SOCIAL EXPRESSIONS For 1999, achieving the balance between product and market, volume and growth was one of our biggest challenges. As stewards of different Enesco brands such as Kim Anderson's Pretty as a Picture, Mary's Moo Moos and Friends of the Feather, along with all new product line development, success for Social Expressions depends on several factors. Our first responsibility is to effectively market our established brands. The second is to the future, namely identifying and creating the next "must haves" in gifts and collectibles. For that reason, the Social Expressions strategy, led by Vice President and General Manager Howard Eirinberg, began with products. A careful look revealed that some of our leading brands were underexposed. The answer was to maximize product potential by carefully expanding giftable items into alternate channels of distribution. For some products that meant taking a closer look at the mass retailing channel, investigating the potential for branded products to find a home on shelves in retailers like Wal-Mart, Walgreens and Sam's Club. In other cases, the answer was a strategic alliance like the relationship we have with the Bradford Group, a leader in the direct response channel. Done right, further penetration into the giftware market through alternate channels of distribution presents long-term potential for a steady and significant revenue stream. We also found many opportunities outside the traditional retail environment. We looked at everything from catalogs and direct selling to electronic distribution, evaluating the pros and cons of each. We were careful to think, plan and then act, realizing the need to develop long-term growth plans. This past year we set the foundation for future successes in many alternate channels. In the new product category there were several success stories. One of the most promising was Signs of the Times, a giftable plaque collection. The low-cost, high volume product line was noteworthy not only for orders generated in the fourth quarter of 1999; it also played a critical role by reasserting our position in the highly profitable "re-order" giftware business. We see this market for economically priced, high-turn social expression gifts as a significant growth area for the future. Within existing lines, America's Favorites, a product line built on some of America's favorite brand names such as John Deere, Budweiser and Coca-Cola, also posted a strong year. Strong retailer sell-through results have led to excellent re-orders in this growing line. Additional licensing agreements created new dimensions in the Social Expressions line-up. Last year, we formed an alliance with Steiff, USA, L.P., a division of the internationally renowned Steiff Corporation, to develop a line of porcelain teddy bears based on popular Steiff plush. We see the Steiff agreement as evidence of our ability to use our position as an industry leader to create mutually beneficial relationships with other recognized brand leaders. Strong marketing programs were just as important for our in-house product lines in 1999. The combination of our popular Mary's Moo Moos line, from artist Mary Rhyner-Nadig, with the nationally acclaimed "Got Milk" campaign was an unqualified success. The end result of figurines and plush that sport the famous milk mustaches delivered strong sales with only three individual products. One of the most exciting product additions in 1999 was Creatures of Delight, a line of whimsical "rubber plush" dragons, dinosaurs and fish targeted specifically to the young collector. Designed with hangtag passwords that give the consumer access to a unique, interactive Web site, Creatures of Delight is more than just a new product. It acquaints collectible, card and gift retailers with the tremendous potential of the Internet. Although the Creatures' introduction was at year end, early signs point to a highly successful debut for both the rubber plush characters and the exclusive Web site for children. In many ways 1999 was a transition year for the Social Expressions group -- a year of identifying and testing product and marketing combinations. With our blueprint in place, we expect to leverage our new products, licenses and distribution systems to reach customers when and where they want us. 7 10 "We have a solid strategic plan in place with our people and resources carefully aligned behind it. Home Gallery is a rapidly growing business and is poised to become one of the strongest players in the home decor field." HOME GALLERY Enesco always has known the potential presented by home decor. Five years ago, Home Gallery was created to take advantage of the growing home accessories business. Our initial offerings represented a significant departure for Enesco, and we continually have challenged ourselves to respond to design trends, buying patterns and changing demographics. In 1999, developments in the marketplace indicated the time was right for us to enhance our position. And we did. Led by Vice President and General Manager Katherine Cook, we implemented a strategic plan focused on building relationships, developing new products and targeting the resources necessary to secure a long-term, leading position in the home decor industry. This plan began with our presence at High Point, the premier home furnishings show in North Carolina. Taking our place among 2,400 of the world's leading home furnishings manufacturers, Home Gallery debuted during the April market and returned in October for the autumn show. Featuring a broad range of decorative accessories, High Point established Home Gallery as a credible source for home accents. 1999 also was a year of significant agreements. Our alliance with European designer Isabelle de Borchgrave added breadth to our product selection with the addition of a new line of tabletop and decor items. Agreements with Guildmaster and designer Randy Ouzts' Garden Sense positioned us as a conduit, delivering respected industry names at affordable prices to our growing distribution base. In addition, our innovative partnership with Aspen Bay Candles gave us access to one of the fastest growing segments of today's home market. In addition to forging new relationships, we also expanded existing relationships. We extended our licensing agreement with Mary Engelbreit, and sales of the line doubled from the previous year. Our Julie Ueland products, based on the artist's trademark paint-spattered look, remained strong with the introduction of several new collections. Also, our licensing agreement with Country Living magazine produced a line of stoneware tabletop accessories for everyday use and holiday occasions that met with rave reviews by country decorating enthusiasts. On the new product front, we invested in Festivities, our Home Gallery holiday decor business. From ornaments to table accents, we delivered an extensive product line to our retailers. Thanks to careful inventory management and timely delivery, we turned this non-licensed product line into a profitable business that we believe will become one of Home Gallery's best performers. With powerful licensing agreements and new product potential, a critical question for us to resolve was the matter of market penetration. Interest among Enesco's core retailers was strong and growing with more than 40 percent of existing accounts purchasing Home Gallery items at our autumn retailer show, up from just 15 percent in 1998. Yet we also recognized the tremendous growth potential available through channels outside of our current distribution network. To capitalize on this opportunity, we are contracting with outside home decor sales representatives to reach new customers, such as interior design firms and home furnishings stores, in 2000. We expect that decision to significantly increase our future market penetration. Home Gallery experienced many noteworthy successes in 1999, from developing lucrative new product lines to winning key licensing partnerships. With a solid strategic plan in place that builds on these achievements, the time is right for our home decor division to take its position as a significant contributor to the overall growth of Enesco. 8 11 [PHOTO OF KATHERINE COOK] 9 12 "We view the sales process as an integrated one. If we align ourselves properly, we can plant the seed of the brand in large retail environments that then direct customers back into the collectibles channels." ENESCO SALES Our 1999 sales story was one of focus and integration. With John Keiser, senior vice president of sales, taking the helm, we aligned our resources to target, reach and deliver through key distribution channels. The first includes those retailers at the core of our business -- the collectible, card and gift stores that proudly have carried Enesco lines for decades. The second represents the new frontier, multi-service retailers with locations across the globe. [PHOTO OF JOHN KEISER] It is our belief that success generates momentum by engaging customers in one environment and then drawing them into another. Consequently, if we can establish a niche for ourselves with large, multi-dimensional retailers, we can direct business back into the collectible and gift channel. We believe that this two-pronged approach is the best way to address the current softness in the collectible retail sector. Toward that end, we integrated our sales efforts in 1999 by forging strategic relationships with some of the leading retailers in the U.S., including Wal-Mart, K-Mart, CVS Pharmacy and Walgreens, while continuing strong relationships with Avon and Bradford. We then built on the power of our most popular brands to create customized gift products targeted at specific retail audiences. Although the tests were limited, the results were encouraging. A specially designed Precious Moments piece commemorating Baby's First Christmas had a 100 percent sell-through at Wal-Mart. Other Precious Moments products posted strong finishes as well with a 90 percent sell-through for each item offered in all Wal-Mart locations. On the Home Shopping Network, we leveraged the popularity of Cherished Teddies to create special product offerings. We also used that same model to create a QVC segment for Precious Moments that was taped on location at the Precious Moments Chapel in Carthage, Missouri and hosted by our Founding Chairman Eugene Freedman. All told, the new products delivered through alternate channels represented a significant and growing portion of our business. In addition to working through large retailers, we also took the opportunity to further develop specialty channels. For the rapidly growing religious marketplace, we created a distinctive line of inspirational products, including Precious Moments. We expanded our presence in the profitable military market, again leveraging our Precious Moments brand to create specialized products representing the diversity of the military branches and their members. Whatever the opportunity, 1999 was a year when we looked at each new distribution channel as a chance to grow in more than just one market. For us, those channels also represented a way to rejuvenate existing markets, helping to identify and captivate the collectors of tomorrow. We view giftable, customized products as an entre to the collectibles we sell through the card and gift channel. That's why in addition to focusing our attention on 10 13 [PHOTO OF DISHES] The "Cherries Jubilee" collection from the Mary Engelbreit new distribution opportunities, we've been careful to continually consider the needs of the foundation of our business -- the card and gift retailer. This was evident in our renewed relationship with Hallmark and their nearly 5,000 Gold Crown retailers. Last year, we became a partner in Hallmark's first business-to-business e-commerce site for retailers called Hallmark Marketplace Information Exchange (MIX). It also was apparent in our relationship with the 700-plus Carlton Cards Retail, Inc. stores, the retail division of American Greetings. Carlton Cards doubled the footage devoted to Precious Moments and Cherished Teddies in their U.S. stores as part of a major collectibles emphasis in 1999. [PHOTO OF CAROUSEL] Rare Bear "Crystal," from the Cherished Teddies Carousel collection, was a hit on the Home Shopping Network in July 1999 Overall, we are concentrating on a combination of account development, market penetration and strong retailer partnerships to help us reestablish growth trends in the coming years. Thanks to rigorous inventory management, product backlogs have been reduced, leaving retailers receptive to new merchandise. We are optimistic that receptivity will yield an increase in demand, which will, in turn, lead to steady growth. Several key events occurred in 1999 that supported our strategic plan. Precious Moments claimed the title for the number one selling collectible in December through a retailer survey by Giftware Business magazine. Cherished Teddies was another strong performer, again delivering more than $100 million in U.S. retail sales in 1999. In addition, 1999 also saw the continued growth of our existing retail relationships as the penetration of our Home Gallery line into retail stores more than doubled from 1998 to 1999. Leading the way were our Mary Engelbreit collection and the Christmas Festivities line. The news also was good for America's Favorites, a relative newcomer, which continued to sell well in the card and gift store market, generating a 50 percent sales increase over prior year. Last year we saw clear signs that the strategic path we laid was our best course of action. The wins were still not enough to offset a disappointing collectibles market. But they were enough to let us know our strategy for future growth is on track. As a result, we're relying on our attentiveness to the plan and continued alignment of resources to deliver a stronger sales performance in the future. SUCCESS WITH NEW MARKETS, CUSTOM PRODUCTS The winter holidays are the strongest retail selling season for Enesco products, and 1999 was no exception. In fact, with more than $75 million in retail sales from holiday-related items in all lines of business, last year's season was among our best ever. One of the most compelling stories behind our strong numbers was the sale of an exclusive series of Rudolph the Red-Nosed Reindeer hanging ornaments to CVS Pharmacy. The $7.5 million CVS purchase of this twelve ornament series gave us access to the millions of customers who shop at one of the 4,500 CVS locations each day. It also represented the largest single sale in our history. Our relationship with CVS underscores the opportunity we have to grow our business through large, established distribution channels. For us, these channels present an immediate chance to reach millions of new customers without adding extensive overhead. The CVS/Enesco relationship... just one more way we've aligned ourselves for success. [PHOTO OF RUDOLPH THE REINDEER FIGURINE] 11 14 "This year we focused on aligning all of our processes, systems and associates behind one goal -- the delivery of smart, cost-effective customer service." ENESCO OPERATIONS Simple and effective. Those were the watchwords for our 1999 operational performance. Building on the progress made in 1998, the operations team, led by Senior Vice President Tom Hudson, continued work on our infrastructure, trimming unnecessary costs, streamlining operations and instituting new policies and procedures. As well, we focused on having the right people to do the job right. Under the direction of Senior Vice President Josette Goldberg, we concentrated our efforts to attract, retain and develop top-notch associates. In both disciplines, the bar we set was high: We will always strive to be a world class organization, delivering the highest quality customer service in a cost-effective manner. Recognizing that Enesco's biggest asset is intellectual capital, we actively invested in targeted recruitment efforts, including a creative and marketing job fair to interest new talent in joining Enesco. We began the remodeling of our corporate learning and career development (see sidebar) programs. We then challenged our changing work force to adopt the business management model of Economic Value Added, or EVA, as a managing principle in the organization. Vice President and Controller Robert Thompson led a core team that developed the EVA training program being introduced to all Enesco associates in 2000. The use of EVA and the involvement of associates will pay dividends in terms of cost savings and improved productivity. In operations, we also built on the foundation laid in 1998. We continued to reduce our stockkeeping unit (SKU) count and adhere to a tighter credit policy. And we remained committed to strengthening customer service and reducing costs by linking our computer and telephone systems. This one systems improvement not only helps us monitor the number and origin of incoming calls, but will soon allow us to offer customers 24-hour access to account data. Retailers especially appreciate a new "call back" feature that automatically returns calls rather than expecting callers to wait in queue. Our commitment to our customers also was evident in the administration of our first comprehensive customer service survey. The 95-question survey supplied us with valuable feedback. We expect that input to sharpen our strategy for 2000 and serve as a benchmark for future measurement. The entire [PHOTO OF EXECUTIVES] From left, Robert Thompson, Vice President, Controller; Josette Goldberg, Senior Vice President, Human Resources and Communications; Robert Hipple, Senior Vice President, Secretary, Clerk and General Counsel; and Thomson Hudson, Senior Vice President, U.S. Operations 12 15 [PHOTO OF ENESCO GROUP HEADQUARTERS] Enesco Group, Inc. Headquarters process was so valuable we intend that to make the survey an annual event. Improvements in our product delivery process represent yet another example of how streamlining operations will enhance customer service. We laid the groundwork for a new system that categorizes retailer delivery schedules by "flights." In this system, retailers will receive product shipments in their stores in a timeframe that both addresses their desire for timely shipments and improves our inventory management process. In 1999, we also made strategic investments in technology. For example, we designed a new order entry system during the second half of the year that will simplify the order entry process and augment our ability to deliver product where and when it is needed. Another systems investment in a sophisticated demand forecasting tool will improve our order fulfillment capabilities. Both should be operational in 2000. Finally, we made sure our field sales representatives were prepared for the new millennium by equipping them with state-of-the-art laptop systems. By standardizing systems and improving field communications through updated computerization, we have created a common technological platform for us to build on in the future. On still another front, 1999 was a year of purposeful and productive actions aimed at preserving the value and integrity of our brands. Our legal department, headed by Senior Vice President and General Counsel Robert Hipple, engaged in legal action against those who have bought product from us and resold it to unauthorized dealers. Known as "transshipping," this action erodes our brands and hurts our retailers, and we remain committed to aggressively pursuing anyone who improperly resells Enesco products. From process alignment to systems investments, Enesco's infrastructure made significant progress in 1999, with each step supporting our mission to be a world-class organization. BLUE SKY, BRIGHT FUTURE Enesco is a product-driven company built on intellectual capital. It is for that reason that any discussion of operations always includes information about how we manage the creativity that is critical to our success. Individually, we take great care to support the gifted artists who create and deliver products filled with the beauty and emotion that is our hallmark. But there's more. Because we honor creativity and believe it drives our future, we also work hard to foster a strong creative spirit in all of our associates. It is from that dedication to creativity that the Blue Sky Center for Creativity and Innovation was born. Blue Sky was the brainchild of our associates. They asked for and received the resources needed to develop a place where creative thought is king. At Enesco, Blue Sky is a culture, and also a physical place where associates go to brainstorm, take classes and spark their creative thought process. It is a place to think rather than react. In the comfortable rooms of Blue Sky, associates can work through thorny business issues, develop new product lines and everything in between. We're proud of Blue Sky because it is a physical manifestation of our unwavering commitment to the value of creativity. 13 16 "Our international business is focused on delivering custom products to a diverse group of markets. Careful alignment of time and resources makes that possible." [PHOTO OF CRAIG CAMERON] Craig Cameron, President N.C. Cameron & Sons Limited (Canadian subsidiary) [PHOTO OF JOHN HAMMOND] John Hammond, Chairman & CEO Enesco European Giftware Group Limited INTERNATIONAL BUSINESSES Our international business met and then surpassed expectations in 1999. Overall sales grew to $89 million, a three percent increase over the prior year. Operating profit told another positive story at $6.8 million, a 95 percent increase over 1998. All geographic areas showed increases over the prior year. We conducted business in 38 countries, and our objective remained consistent in each region -- to be the premier gift and collectibles entity, providing top-notch product and expertise tailored to individual markets all over the world. A closer look at our international story for 1999 begins on the product side with mass customization. Last year, we looked at each market as a separate and distinct opportunity rather than just a product destination. That philosophical difference allowed us to identify and realize new product ideas and relationships. One outgrowth of that plan was the creation of a Precious Moments figurine for the Canadian market. Our introduction of a hockey player wearing a number 99 jersey coincided with the retirement of superstar Wayne Gretzsky. The figurine was a bestseller and is a prime example of Enesco's responsiveness to individual market needs. In addition to customized product development, we made a focused effort to develop key strategic partnerships. For example, we forged a relationship with Applause, Inc., a company recognized for products based on well-known brand name licenses such as Star Wars and Rugrats. Under the terms of the agreement, Enesco marketed and sold Applause product throughout France, which continues to widen our product portfolio in this country. Distribution agreements with well-known brands such as Disney's Classic Pooh, which begin in 2000, will offer us entre into some of the most successful entertainment and giftware retail centers in the world. Another new arrangement, with Euro Present Handels GmbH, a subsidiary of W. Goebel Porzellanfabrik GmbH, will strengthen our position in critical European markets. Euro Present Handels GmbH will act as our local agent selling Enesco products in Germany, Austria, Switzerland and Scandinavia. The Precious Moments hockey player figurine and our Applause, Inc. and Goebel affiliations are previews of how we plan to grow our global business. Done well, these market opportunities offer some of Enesco's greatest revenue potential in the years ahead. We also kept a close eye on operations, taking great pains to ensure our infrastructure was properly aligned. The successful installation of an enterprise resource system in Europe this past year is one example. The system streamlines business operations and tightens inventory control capabilities, enabling us to serve the entire Central European marketplace from one warehouse. This technology allows us to quickly expand our operations without sacrificing our "customized" philosophy. Our international business was the year's strongest success story, driving revenue into Enesco for 1999 and laying a strong foundation for continued expansion in 2000. [PHOTO OF ALLAN G. KEIRSTEAD] Allan G. Keirstead Executive Vice President, Chief Administrative and Financial Officer and Chief Executive Officer of Enesco International Businesses 14 17 CONSOLIDATED FINANCIAL STATEMENTS ENESCO GROUP, INC. 1999 ANNUAL REPORT FINANCIAL CONTENTS 16 Management's Discussion and Analysis 22 Consolidated Financial Statements 27 Notes to Consolidated Financial Statements 45 Auditor's Report 46 Stock Market, Dividend and Shareholder Information 47 Quarterly Results 48 Ten Year Financial Highlights 50 Corporate Data 15 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENESCO GROUP, INC. The following discussion gives more depth on Enesco Group, Inc. and subsidiaries' (the "Company's") financial condition and results of operations. You will probably find it helpful to have first read the financial statements, accompanying notes and financial highlights of recent years. As reported in the Company's Form 10-Q for the quarter ended March 31, 1998, at the Company's Annual Meeting on April 23, 1998, the shareholders approved a resolution authorizing the Company to change its name from Stanhome Inc. to Enesco Group, Inc., to reflect the Company's transformation into a singularly focused designer and marketer of branded gifts and collectibles. Commencing on May 1, 1998, shares of the Company's common stock traded on the New York Stock Exchange and Pacific Exchange under the symbol "ENC." 1999 COMPARED TO 1998 Sales decreased 15% due to lower sales in the United States. Net sales in the United States decreased 19% primarily in the Company's traditional collectible, card and gift channels due primarily to the following: - Starting 1999 with unfilled orders down approximately $28 million compared to the same period last year; - A significant year-on-year reduction of stock keeping units due to profitability analysis; - Reduction of closeout revenue due to better inventory management; - Continued reductions in dealer inventory levels; - Continued improvement in dealer service and deliveries, allowing dealers to order less in advance and shipping product when the dealer requests versus when the product is available; - Significant reduction in reorders from late May through December due to softness in the Company's collectible, card and gift channels and even more conservative dealer reorder patterns; and - Higher percentage of product returns and allowances. In the United States, sales from alternative channels of distribution increased. In order to further improve customer communications, relationships and service in the United States, during the second quarter this year the Company combined its two independent sales representative divisions into a single independent sales force representing all the Company's product lines in the collectible, card and gift channels. Net international sales in 1999 increased 3% compared to 1998 and represented approximately 23% of total 1999 sales compared to 19% in 1998. Local currency international sales were translated into United States dollars at lower exchange rates in 1999 versus 1998. If the year-to-date 1999 local currency sales were translated into United States dollars at the 1998 exchange rates, sales would have been approximately $1.9 million higher in 1999. The Precious Moments line represented approximately 37.2% of 1999 sales compared to 38% in 1998. The Cherished Teddies line represented 21.7% of 1999 sales compared to 20% in 1998. Compared to the same period last year-end, members of the Precious Moments collector clubs were down approximately 21% and the members of the Cherished Teddies collector club were down approximately 18%. Total Company unfilled orders as of year-end were down approximately $9 million or 15% compared to the same period last year. Net orders entered are orders received and approved by the Company, subject to cancellation for various reasons, including credit considerations, inventory shortages and customer requests. In order to improve customer deliveries, improve customer service and reduce working capital, the Company in the United States will be changing its seasonal shipping patterns in 2000. Starting in 2000, new product introductions will be grouped by occasion and shipped to arrive in retail stores based on a predetermined shipping schedule. Generally, product will be purchased later and shipped to customers later allowing the Company to reduce inventory and reduce the extended terms offered on the sale of seasonal product. This change will not materially impact the Company's annual results of operations. However, the change will result in sales being deferred from the second to the third quarter. If this new shipping pattern had been in effect in 1999, it would have shifted approximately $20 million of sales from the second quarter of 1999 to the third quarter of 1999. The seasonal pattern of quarterly operating profit will follow the sales pattern and will be affected by the impact of fixed costs on the quarterly sales changes. Gross profit decreased in 1999 following the sales decrease and due to a $9.6 million inventory writedown. In the fourth quarter of 1999, the Company wrote down the value of its United States inventory by $9.6 million to reflect the anticipated market value of products sold through its traditional collectible, card and gift channels. This channel has three years of sales decreases and is not expected to improve in the near term. Also, the members of the Company's collector clubs supporting this channel have declined. The Company has discontinued some of the collector clubs. These conditions have resulted in inventory supplies well in excess of demand. To reflect 16 19 these market conditions and preserve collectibility of its continuing product lines, the Company has written-down the value of inventories. The majority of the products will be destroyed. The Company's gross profit margin, expressed as a percentage of net sales was 46.0% of sales in 1999 (before the fourth quarter writedown of $9.6 million) compared to 46.3% in 1998. The decrease was due to lower margins in the United States due to product and channel sales mix as all products and channels do not have the same gross margins. International gross profit margins improved compared to 1998 due to sales mix and lower fixed costs. Selling, distribution, general and administrative expenses, which are largely fixed, decreased 10.3% in 1999 versus 1998 and represented 35.4% of sales in 1998 compared to 37.3% in 1999. The 1999 expenses were a higher percentage of sales principally due to the impact of lower sales on fixed costs. The 1999 reductions in expenses were from lower variable expenses (approximately 10% of sales) due to the lower sales volumes and reductions from cost controls and work force reductions compared to 1998. Due to the factors described above, 1999's operating profit decreased 51.8% in 1999 compared to 1998. All of the decrease in operating profit was from the United States. International operating profit increased compared to 1998. 1998 COMPARED TO 1997 Sales decreased 5% in 1998 with decreases in all geographic areas. Sales in the United States decreased 5% and international sales decreased 6%. International sales amounted to 19% of 1998 and 1997 sales. The sales decreases reflected lower retailer ordering, due in part to high retail inventory levels combined with the Company's initiatives of tighter credit policies, lower inventories and fewer stock keeping units. The tighter credit controls and improved customer service reduced returns and allowances by approximately 1% of sales in the United States. The Precious Moments line represented 38% of total 1998 sales, compared to 36% in 1997 and the Cherished Teddies line represented 20% of sales in 1998 and 1997. Year-end 1998 club members for the Precious Moments line decreased 8% compared to 1997 and club members for the Cherished Teddies line decreased 1% compared to 1997. In the United States, the Company in 1998 and 1999 was in the process of analyzing the total economic return for all of its product lines, with the objective to improve the supply chain economics from factory to customer and to phase out those product lines that do not have adequate returns. As these lines are phased out during the next year, the absence of sales from these lines will reduce sales volumes. This process was expanded to the international locations in 1999. Partly reflecting the reduction of product offerings and improved deliveries, total unfilled orders as of year-end 1998 were down approximately $28 million or 32% compared to 1997. This trend continued in 1999. Also, the reduction in unfilled orders was due to slowing retail demand due, in part, to high retail inventory levels of certain products and to changing buying practices of many retailers, reflecting, in part, the improved deliveries of products. In response to the high retail inventories, the number of new product introductions for the Precious Moments and Cherished Teddies lines has been reduced and promotions have been offered to assist retailers in moving inventories. The fourth quarter sales decrease of 12% was greater than the full year sales decrease due to the same factors mentioned above, including a weak retail environment during the fourth quarter of 1998 and the fact that the economic return analysis was further along. Gross profit decreased in 1998 following the sales decrease, but gross profit as a percentage of net sales improved to 46.3% in 1998 compared to 45.6% in 1997 due, primarily in the United States, to improved product sales mix reflecting the Company's efforts to eliminate low margin products and to manage and lower inventory levels. Selling, distribution, general and administrative expenses, excluding a third quarter 1997 $18 million pretax charge to downsize and move the Company's Westfield, Mass. corporate headquarters, decreased 5.2% in 1998 versus 1997 and amounted to 35.4% of sales for both years. The 1998 reduction in expenses was due primarily to lower general and administrative expenses in the United States. The reductions were from cost controls, the start of benefits from downsizing the Company's Westfield, Mass. corporate headquarters, and a reduction of compensation resulting from the expiration on December 31, 1997 of an executive officer's employment agreement. The reductions in expenses resulting from the corporate downsizing and the expiration of the executive officer's employment agreement were approximately $5 million. In 1998, the Company reduced the worldwide workforce by approximately 20%. In the United States, two warehouses were closed, the third warehouse shift was eliminated and a workforce reduction during the first quarter resulted in a $1 million pretax expense. In the United Kingdom, two small manufacturing operations were eliminated and expenses were incurred to further reduce fixed costs and improve margins. In the United Kingdom these expenses, combined with the impact of lower sales volumes on fixed costs, resulted in an operating loss for 1998. Expenses as a percentage of sales for the other international locations 17 20 increased and operating profit decreased due to the impact of lower sales on fixed costs. In the United States, expenses decreased as a percentage of sales and operating profit increased due to lower spending and cost controls. Due to the factors described above, operating profit increased in 1998, and represented 10.9% of sales compared to 10.2% in 1997, excluding the 1997 $18 million downsizing charge. Due to the same factors, fourth quarter operating profit increased on lower sales, and represented 7.0% of sales compared to 4.4% of sales in 1997, with increased operating profit in the United States more than offsetting international decreases. GOODWILL WRITEDOWN As a result of a 1998 analysis and assessment of all company assets and returns, it was determined that the goodwill component of the 1994 United Kingdom acquisitions did not reflect the current market value. During the fourth quarter of 1994, the Company purchased two United Kingdom Companies, Border Fine Arts, a maker of animal sculptures and figurines, and Lilliput Lane, a maker of miniature cottages. These acquisitions resulted in approximately $65 million of goodwill which was being amortized over forty years. The expected growth potential of these acquisitions worldwide never materialized and results have decreased since the acquisitions, with sales decreasing 10% in 1998. Additionally, the Company's plans did not project significant rapid growth of these businesses in the future. These circumstances triggered an asset impairment review in accordance with SFAS No. 121 "Accounting for the Impairment of the Long-lived Assets." After analyzing the expected future cash flows of these businesses, the Company determined that the fair value of the goodwill was $46 million dollars less than the carrying value as of December 31, 1998, and recorded a fourth quarter non-cash $46 million charge before and after tax amounting to $2.83 per diluted share. The remaining goodwill for the 1994 United Kingdom acquisitions as of December 31, 1999 is approximately $11.7 million and will be amortized over the next 20 years. INTEREST EXPENSE AND OTHER EXPENSE Interest expense, net of investment income, decreased slightly from 1998 from lower average loans despite slightly higher interest rates. Other income/expense, net in 1999 benefited from a net gain on the sale of assets in the first quarter of 1999 of approximately $350 thousand and a reduction in the amount of goodwill resulting from the lower amount of goodwill to be amortized due to the 1998 $46 million write-off. Interest expense, net of investment income, decreased in 1998 compared with 1997, from lower borrowing levels due to the utilization of cash proceeds from the sale of discontinued operations in 1997 and, in 1998, a reduction in accounts receivable and inventories. Other expense, net is principally the amortization of goodwill (excluding the $46 million writedown in 1998) and decreased in 1998 compared to 1997 due to certain categories being fully amortized. INCOME TAXES The 1999 tax provision includes a $15 million benefit related to prior year accruals for tax assessments which were no longer required due to completed tax audits and closed tax years for a number of taxing authorities worldwide. The 1999 effective tax rate (excluding the 1999 $15 million benefit) was 38% and lower compared to 45% in 1998 (excluding the impact of the $46 million goodwill writedown), due primarily to the impact of lower goodwill amortization in 1999 which does not receive a tax benefit, a change in mix between the United States and international earnings, and a United States tax benefit on the third quarter sale of the Company's Mexican assembly and packaging subsidiary. The effective tax rate in 1998 (excluding the impact of the $46 million goodwill writedown which did not receive a tax benefit) was 45% and was lower than the 1997 effective tax rate due primarily to a higher percentage of total before tax income from the United States, which has a lower effective tax rate. INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS Although the Company's operations are affected by general economic trends, inflation and changing prices did not have a material impact on 1999 and 1998 income statement results compared to prior years. International operations were unfavorably affected in 1999 by the currency translation of local currencies into United States dollars. International operations in total were not materially impacted by currency translation for 1998. The value of the U.S. dollar versus international currencies where the Company conducts business will continue to impact the future results of these businesses. In addition to the currency risks, the Company's international operations, including sources of imported products, are subject to the risks of doing business abroad, including reliance on third party overseas manufacturers, import or export restrictions 18 21 and changes in economic and political climates. The fluctuations in net sales and operating profit margins from quarter to quarter are partially due to the seasonal characteristics of the Company's business. FINANCIAL CONDITION The Company historically has satisfied its capital requirements with internally generated funds and short-term loans. Working capital requirements fluctuate during the year and are generally greatest during the third quarter and lowest at the beginning of the first quarter. The 1999 major sources of funds from operating activities for continuing operations were from net income, depreciation, amortization, lower net accounts receivable and inventories. Accounts receivable decreased due to lower fourth quarter sales compared to the prior year. Inventories decreased due to the Company's efforts to eliminate low margin products, to manage and lower inventory levels and to a $9.6 million inventory writedown to reflect market conditions in the Company's United States collectible, card and gift channels. The source of funds in 1999 from other assets primarily represents the sale of the Company's Spanish manufacturing subsidiary. The 1999 major use of funds from continuing operations was lower accounts payable, accrued expenses and income taxes payable. Accounts payable, accrued expenses and retirement benefits decreased due to timing of payments and to the payment of amounts due from the provision to downsize corporate headquarters and for payments due relating to the 1997 sale of discontinued operations. The balances remaining to be paid for the corporate downsizing and the 1997 sale of discontinued operations are $6.5 million and $2.3 million, respectively. The majority of the corporate downsizing balance is expected to be paid through 2001. The majority of the balance for discontinued operations will be paid and/or settled in 2000. In addition to timing effects, the 1999 taxes payable decreased $15 million due to the reversal of tax accruals no longer required. The changes in deferred taxes reflect changes in timing of payments and changes in reserves. Note 9 to the Financial Statements provides a detailed summary of taxes. The Company has filed and continues to file tax returns with a number of taxing authorities worldwide. While the Company believes such filings have been and are in compliance with applicable laws, regulations and interpretations, positions taken are subject to challenge by the taxing authorities often for an extended number of years after the filing dates. The Company has established accruals for tax assessments. These accruals are included in current income taxes payable since it is uncertain as to when assessments may be made and paid. Based upon the Company's current liquid asset position and credit facilities, the Company believes it has adequate resources to fund any such assessments. To the extent accruals differ from actual assessments, the accruals will be adjusted through the provision for income taxes. In 1999, the adjustment was a tax benefit of $15 million. The majority of the open tax years become closed for assessments at the end of December for the particular open year. The 1998 major sources of funds from operating activities for continuing operations were from net income, depreciation, amortization, lower net accounts receivable and inventories. Accounts receivable decreased primarily due to lower 1998 fourth quarter sales and days sales outstanding versus 1997. Inventories decreased due to the Company's efforts to eliminate low margin products and to manage and lower inventory levels. The $46 million goodwill non-cash writedown and the normal goodwill amortization accounts for the reduction in other assets. The 1998 major use of funds from continuing operations was lower accounts payable, accrued expenses and income taxes payable. Accounts payable and accrued taxes decreased due to timing of payments and to the payment of amounts due from the provision to downsize corporate headquarters and for payments due relating to the 1997 sale of discontinued operations. Taxes payable decreased in 1998 due to the timing of payments compared to 1997 and payments related to the 1997 sale of discontinued operations. A major use of cash in investing activities has been for capital expenditures for information systems, equipment and office replacements. The sources of funds for all such expenditures were from cash and investments. Capital expenditures of $7 million are planned for 2000. Proceeds from the sale of discontinued operations are from the sale of the Hamilton United States Direct Response businesses and the sale of the majority of the operations of the Worldwide Direct Selling business. Part of the proceeds of the sales are being held in escrow, with up to $3.8 million payable to the Company on or after May 23, 2000, subject to certain conditions. Proceeds from the sales of property, plant and equipment in 1999 primarily represents the sale of the Company's former Westfield, Mass. corporate headquarters. During the third quarter, the Company sold the shares in its Mexican assembly and packaging subsidiary for its net book carrying value. The assets sold were primarily accounts receivable of $284,000, inventories of $1,004,000 and property, plant and equipment of $458,000, net of liabilities of $206,000. Also, during the third quarter, the Company sold the shares in its Spanish manufacturing subsidiary (Cosmhogar), formerly part of its discontinued direct selling group, for a nominal value. The 19 22 net investment in the subsidiary had been recorded in other non-current assets. The major uses of cash in financing activities were for dividends to shareholders and purchases of common stock. Purchases of common stock included shares repurchased by the Company and shares received from optionees to pay for the exercise price of options. Note 5 to the Financial Statements provides a detailed summary of Treasury Stock activity. The Company has an authorized program to purchase shares of common stock for the Company depending on market and business conditions, and may utilize funds for this purpose in the future. As of December 31, 1999, 1.05 million shares remained available for purchase under the program. The Company's earnings, cash flow, and available debt capacity have made and make stock repurchases, in the Company's view, one of its best investment alternatives. The 1999 increase in notes and loans payable was used for the purchases of common stock. Annually, the Company makes provisions to record its obligation to pay, in the future, insurance premiums for postretirement benefits to eligible employees, and severance allowances to eligible employees of certain subsidiaries upon their voluntary or involuntary separation. These obligations are not funded because there is not a financial benefit to fund them. The service cost component of net periodic pension expense increased in 1997, due principally to the addition of executives to the non-qualified plans in 1997 and the termination of a chief executive officer in 1997 (since his service ceased and full benefit was expensed). In addition, plan enhancements were made in 1997 that were, in some cases, recognized immediately for executives who terminated in 1997. The Company has various non-qualified supplemental retirement plans. Benefits from these supplemental plans will be paid from the Company's assets. The Company has established grantor trusts to provide assets for some of these non-qualified plans. The assets are subject to the claims of creditors and, therefore, they are not considered plan assets and are excluded from pension computations. In August 1995, the Company entered into a five-year $200 million multicurrency revolving credit agreement with various banks, which can be used for working capital, investing and financing activities. In April of 1999, at the Company's election, the size of the credit facility was reduced to $150 million lowering the associated fees. The agreement has an annual facility and agency fee as well as a margin supplement for Eurocurrency rate loans where more than one-third of the commitment is utilized. The agreement contains financial covenants that include requirements, as defined, for minimum net worth, interest coverage and maximum borrowings. None of these covenants are expected to have an adverse effect on the Company's ability to operate in the future. One of the covenants limits the maximum borrowings under the agreement to the level of shareholders' equity, which amounted to $114.4 million as of December 31, 1999. The principal sources of the Company's liquidity are its available cash balances, cash from operations and available financing alternatives. The Company is not aware of any trends, events, demands, commitments or uncertainties which reasonably can be expected to have a material effect on the liquidity of the Company and its ability to meet anticipated requirements for working capital, dividends, capital expenditures and the stock repurchase program. Fluctuations in the value of the U.S. dollar versus international currencies affect the U.S. dollar translation value of international currency denominated balance sheet items. The changes in the balance sheet dollar values due to international currency translation fluctuations are recorded as a component of shareholders' equity. DISCONTINUED OPERATIONS On May 22, 1997, the Company completed the previously announced sale of the Company's United States Hamilton Direct Response businesses to The Crestley Collection, Ltd., an affiliate of The Bradford Group, for approximately $48.3 million, including repayment of $30.8 million of intercompany debt, subject to certain conditions. In connection with the sale, the Company recorded in the first quarter of 1997 a $35 million after tax charge consisting mainly of the writedown of goodwill, current assets and associated transaction and severance costs. Under the sale agreement, until May 22, 2000, in most cases, the Company agreed to indemnify Bradford for damages (up to a maximum of $10 million) suffered by Bradford resulting from certain breaches by the Company and any unpaid taxes for which no applicable financial reserve existed. As part of the transaction, Bradford and the Company entered into two license agreements pursuant to which the Company will license certain proprietary and licensed lines of products to Bradford for an initial five-year period. On December 18, 1997, the Company completed the previously announced sale of the majority of the operations comprising its Worldwide Direct Selling Group to Laboratoires de Biologie Vegetale Yves Rocher of France. Subject to certain conditions, the sale price was approximately $68.4 million in cash ($44 million 20 23 after taxes and transaction fees) for the stock and assets sold in connection with the sale. The Company recorded in the fourth quarter of 1997 a $6 million after-tax charge, primarily to write down assets that were not part of the sale. Under the sale agreement, until December 18, 2000, in most cases, the Company agreed to indemnify Yves Rocher for damages (in amounts up to $19.2 million) suffered by Yves Rocher resulting from certain breaches by the Company. As part of the transaction, the Company's manufacturing subsidiary, Cosmhogar S.A., located in Spain, entered into a supply agreement and related license agreement with Yves Rocher for terms of one year for cosmetics and personal care products and five years for household care products. The Cosmhogar facility was sold in 1999. Also, as part of the agreement, the Stanhome name was sold with the business of the Worldwide Direct Selling Group. In July 1998, the Company paid Yves Rocher, the purchaser of the Direct Selling business, $1.875 million ($1.125 million after taxes) from previously established reserves to settle and compromise certain asserted claims relating to the sale of the Direct Selling business. Accordingly, the applicable financial statements and related notes have been reclassified to present these two divested business segments as discontinued operations. Therefore, the operating results of these two divested segments have been segregated and reported as discontinued operations in the statements of income and statements of cash flows. Note 2, Discontinued Operations, to the consolidated Financial Statements provides additional information on the two discontinued operations. YEAR 2000 COMPLIANCE PROGRAM A Company-wide program initiated by management in early 1997 to update all necessary information technology and non-technology systems to achieve Year 2000 Compliance was completed for all internal systems in November 1999. This was accomplished by internal correction or the replacement of existing systems, computer software and hardware. The capital and operating cost of addressing Year 2000 issues was approximately $1,150,000 (excluding internal labor costs) and were within the budget established with approximately 70% capital and 30% expense. No additional expenses are planned or expected and the Year 2000 Project is considered closed. Most Year 2000 project work was accomplished with the use of internal resources. While this effort was substantial, it was combined with other planned systems improvement, replacement and maintenance projects. Thus the Year 2000 work did not adversely affect planned improvements in the Company's systems, computer applications and hardware environment. The Company is not aware of the occurrence of any Year 2000 internal or external (customer or supplier) faults but continues to monitor all aspects. EURO CURRENCY Effective January 1, 1999, 11 of the 15 countries that are members of the European Union introduced a new, single currency unit, the euro. Prior to full implementation for the new currency for the participating countries on January 1, 2002, there will be a three-year transition period during which parties may use either the existing currencies or the euro. However, during the transition period, all exchanges between currencies of the participating countries are required to be first converted through the euro. After a thorough review, the Company anticipates that there will be minimal impact on its operations during the transition period. The Company is preparing to meet the requirements of critical suppliers and customers during this period and expects to be ready for the full conversion by January 1, 2001, one year ahead of the mandatory conversion date. The Company does not expect the introduction of the euro to have a material impact on its earnings or consolidated financial position. STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 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. The statements contained in the Company's periodic press releases or throughout this annual report concerning matters that are not historical financial results of the Company are "forward-looking" statements that involve risks and uncertainties and are not guarantees of future performance. Actual results of the Company may differ materially from the estimates and other projections contained in the Company's forward-looking statements and the assumptions on which they are based. A description of some of the important factors that could cause such material differences is set forth in the Company's Form 10-K for the year ended December 31, 1999, filed under the Securities Exchange Act of 1934. The Company undertakes no obligation to update or publish in the future any forward-looking information. 21 24 CONSOLIDATED BALANCE SHEETS Enesco Group, Inc. December 31, 1999 and 1998
ASSETS (In thousands) 1999 1998 CURRENT ASSETS: Cash and certificates of deposit (including interest bearing demand deposits) $10,819 $17,905 Accounts receivable, net 81,553 86,171 Inventories 62,317 81,740 Prepaid expenses 3,763 4,672 Taxes on income 12,680 15,199 ------ ------ Total current assets 171,132 205,687 ------- ------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Land and improvements 3,960 4,355 Buildings and improvements 36,224 38,231 Machinery and equipment 12,514 13,262 Furniture and fixtures 29,049 28,634 Transportation equipment 497 506 ---- ---- 82,244 84,988 Less - accumulated depreciation and amortization (51,251) (51,375) ------- ------- Property, plant and equipment, net 30,993 33,613 ------ ------ OTHER ASSETS: Goodwill and other intangibles, net 38,410 40,816 Other 25,438 27,287 Deferred income taxes 11,394 12,546 ------ ------ Total other assets 75,242 80,649 ------ ------ $277,367 $319,949 ======== ========
The accompanying notes are an integral part of these financial statements. 22 25
Liabilities And Shareholders' Equity (In thousands) 1999 1998 CURRENT LIABILITIES: Notes and loans payable $28,178 $7,900 Accounts payable 21,296 25,373 Taxes on income 43,196 56,614 Accrued expenses - Payroll and commissions 5,337 5,385 Royalties 6,565 6,826 Postretirement benefits 4,740 5,280 Other 19,386 23,453 ------ ------ Total current liabilities 128,698 130,831 ======= ======= LONG-TERM LIABILITIES: Postretirement benefits 28,273 31,494 Deferred income taxes 5,964 7,043 ----- ----- Total long-term liabilities 34,237 38,537 ====== ====== COMMITMENTS AND CONTINGENCIES (NOTE 11) SHAREHOLDERS' EQUITY: Common stock, par value $.125 - Authorized 80,000 shares Issued 25,228 shares 3,154 3,154 Capital in excess of par value 48,754 48,506 Retained earnings 326,305 315,335 Accumulated other comprehensive income (2,843) (2,258) ------- ------- 375,370 364,737 Less - Shares held in treasury, at cost - Common stock, 11,753 shares in 1999 and 9,377 in 1998 (260,938) (214,156) ------- ------- Total shareholders' equity 114,432 150,581 ------- ------- $277,367 $319,949 ======== ========
23 26 Consolidated Statements of Income Enesco Group, Inc. For the Years Ended December 31, 1999, 1998 and 1997
(In thousands, except per share amounts) 1999 1998 1997 Net sales $384,044 $451,040 $476,183 Cost of sales 217,006 242,166 259,097 -------- -------- -------- Gross profit 167,038 208,874 217,086 Selling, distribution, general and administrative expenses 143,387 159,766 186,468 -------- -------- -------- Operating profit 23,651 49,108 30,618 Interest expense (3,330) (3,575) (6,783) Goodwill writedown - (46,000) - Other expense, net (1,036) (2,828) (3,005) --------- -------- -------- Income (loss) before income taxes from continuing 19,285 (3,295) 20,830 operations Income taxes (benefit) (7,591) 19,148 10,285 -------- --------- --------- Income (loss) of continuing operations, net of taxes 26,876 (22,443) 10,545 Income of discontinued operations, net of taxes - - 2,158 Net loss on sale of discontinued operations - - (41,000) -------- -------- -------- Net income (loss) $ 26,876 $(22,443) $(28,297) ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE: BASIC: Continuing operations $1.88 $(1.38) $(.60) Discontinued operations - - (.12) Sale of discontinued operations - - (2.33) -------- -------- -------- Total $1.88 $(1.38) $(1.61) ===== ======== ======== DILUTED: Continuing operations $1.87 ($1.38) $(.60) Discontinued operations - - (.12) Sale of discontinued operations - - (2.32) -------- -------- -------- Total $1.87 $(1.38) $(1.60) ======== ======== ========
The accompanying notes are an integral part of these financial statements. 24 27 Consolidated Statements of Retained Earnings Enesco Group, Inc. For the Years Ended December 31, 1999, 1998 and 1997
(In thousands, except per share amounts) 1999 1998 1997 Balance, beginning of year $315,335 $355,806 $403,805 Net income (loss) 26,876 (22,443) (28,297) Cash dividends, $1.12 per share in 1999, 1998 and 1997 (15,906) (18,028) (19,702) ------- ------- ------- Balance, end of year $326,305 $315,335 $355,806 ======== ======== ========
Consolidated Statements of Comprehensive Income Enesco Group, Inc. For the Years Ended December 31, 1999, 1998 and 1997
(In thousands) 1999 1998 1997 Net income (loss) $26,876 ($22,443) ($28,297) Other comprehensive income: Cumulative translation adjustments (no tax effects) (585) (,739) 19,602 Total other comprehensive income (585) (,739) 19,602 ----- ----- ------ Comprehensive income (loss) $26,291 ($23,182) ($8,695) ======= ======== =======
The accompanying notes are an integral part of these financial statements. 25 28 Consolidated Statements of Cash Flows Enesco Group, Inc. For the Years Ended December 31, 1999, 1998 and 1997
(In thousands) 1999 1998 1997 OPERATING ACTIVITIES: Net income (loss) $26,876 ($22,443) ($8,297) Less - Net income discontinued operations - - (2,158) - Net loss on sale of discontinued operations - - 41,000 Adjustments to reconcile continuing operations net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 5,285 5,649 5,701 Allowance for (gains) losses on accounts receivable 1,116 (1,846) 1,255 Deferred income taxes 3,392 3,385 (11,195) Amortization of other assets 2,224 3,195 3,479 Goodwill writedown - 46,000 - (Gains) losses on sale of capital assets (526) (3) 1 Changes in assets and liabilities: Notes and accounts receivable 3,205 17,256 24,871 Inventories 18,940 25,964 (25,171) Prepaid expenses 863 (2,182) 994 Other assets 1,847 164 (8,820) Accounts payable and accrued expenses (8,401) (18,113) (1,709) Taxes on income (14,296) (9,602) 33,281 Long-term postretirement benefits (3,221) (5,229) 22,339 Operating activities of discontinued operations - - (5,072) ------ ------ ------ Net cash provided by operating activities 37,304 42,195 50,499 ------ ------ ------ INVESTING ACTIVITIES: Purchase of property, plant and equipment (5,058) (4,520) (4,944) Proceeds from sale of discontinued operations - - 85,939 Proceeds from sales of property, plant and equipment 2,713 848 759 Investing activities of discontinued operations - - (1,181) ------ ------ ------ Net cash provided (used) by investing activities (2,345) (3,672) 80,573 ------ ------ ------ FINANCING ACTIVITIES: Cash dividends (15,906) (18,028) (19,702) Exchanges and purchases of common stock (47,198) (39,841) (23,906) Notes and loans payable 20,607 (394) (69,737) Exercise of stock options - 2,307 2,144 Other common stock issuance 664 411 245 Financing activities of discontinued operations - - 6,071 ------- ------- -------- Net cash used by financing activities (41,833) (55,545) (104,885) ------- ------- -------- Effect of exchange rate changes on cash and cash equivalents ( 212) ( 797) ( 769) ------- ------- -------- Increase (decrease) in cash and cash equivalents (7,086) (17,819) 25,418 Cash and cash equivalents, beginning of year 17,905 35,724 10,306 ------ ------ ------ Cash and cash equivalents, end of year $10,819 $17,905 $35,724 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 26 29 Notes To Consolidated Financial Statements December 31, 1999, 1998 and 1997 1. ACCOUNTING POLICIES: The accompanying consolidated financial statements include the accounts of Enesco Group, Inc. and its subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in the consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principals requires the use of management's estimates. Actual results could differ from those estimates. Certain reclassifications have been made in the 1997 and 1998 financial statements to conform to the 1999 presentation, which reflects certain operations that were discontinued in 1997 and are described in Note 2. The continuing operations, which operate in a single industry, design, and manufacture primarily through third parties located in the Pacific Rim, and market a wide variety of licensed and proprietary branded gifts and collectibles to retail stores primarily throughout the United States, Canada and Europe. Assets and liabilities of the Company's foreign subsidiaries are translated at the exchange rate on the balance sheet date, while statement of income items are translated at the average exchange rates for the year. Translation gains and losses are reported as a component of accumulated other comprehensive income in shareholders' equity. Transaction gains and losses are reported in the consolidated statements of income. The carrying amount of cash and certificates of deposit and notes and loans payable approximate fair value. The Company considers all highly liquid securities, including certificates of deposit, with maturities of three months or less, when purchased to be cash equivalents. Advertising costs are expensed in the year incurred. Advertising expense was $3,525,000 in 1999, $5,250,000 in 1998 and $2,950,000 in 1997. The Company recognizes revenue as merchandise is turned over to the shipper and a provision for anticipated merchandise returns and allowances is recorded based upon historical experience. Amounts billed to customers for shipping and handling orders and collector club subscriptions are netted against the associated costs. License and royalty fees received by the Company are recognized as revenue. Accounts receivable was net of reserves for uncollectible accounts, returns and allowances of $10,416,000 and $9,300,000 at December 31, 1999 and 1998, respectively. Inventories are valued at the lower of cost or market. Cost components include labor, manufacturing overhead and amounts paid to suppliers of materials and products. The Company values all inventories utilizing the first-in, first-out method. 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. The major classes of inventories were as follows (in thousands):
1999 1998 Raw materials and supplies $736 $1,185 Work in process 94 396 Finished goods in transit 13,221 12,202 Finished goods 48,266 67,957 ------ ------ $62,317 $81,740 ====== ======
Concentration of risk for the Company exists in revenue from major product lines, sources of supply of inventory, markets and geographic areas, and trade receivables. The majority of product sales are under licensed rights from third parties. The two largest licensed lines represented approximately 59% of the Company's total sales for 1999, 58% of total sales for 1998 and 56% of total sales for 1997. A large portion of acquired inventory is sourced from the Far East, principally China. A significant portion of the Company's operations is located in Europe. Extended credit terms are offered to customers. The Company continually monitors and manages the risks associated with all these activities. 27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998, and 1997 Depreciation is provided over the estimated useful lives of the assets utilizing straight-line and declining balance methods. The methods for financial statement and income tax purposes differ in some circumstances, resulting in deferred income taxes. The estimated useful lives of the various classes of assets are:
RANGE IN YEARS Land improvements 10-15 Buildings and improvements 15-40 Machinery and equipment 5-12 Furniture and fixtures 5-10 Computer equipment 5 Transportation equipment 3-8
Intangible assets, primarily goodwill, result from the allocation of the excess cost of acquisitions over the value of net tangible assets acquired. Intangible assets are amortized using the straight-line method principally over 20 to 40 years. The Company periodically evaluates whether events or circumstances have occurred indicating that the net book value of goodwill has been impaired. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the acquired business' undiscounted future net cash flows compared to the carrying value of goodwill to determine if a writedown is necessary. The results of a year-end 1998 goodwill evaluation are addressed in Note 7. Intangible assets were net of accumulated amortization of $31,842,000 and $29,632,000 at December 31, 1999 and 1998, respectively. Basic earnings per common share are based on the average number of common shares outstanding during the year. Diluted earnings per common share assumes, in addition to the above, the dilutive effect of common share equivalents during the year. Common share equivalents represent dilutive stock options using the treasury stock method. The number of shares used in the earnings per common share computation for 1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997 Basic Average common shares outstanding 14,329 16,208 17,577 Diluted Stock options 42 50 84 ------ ------ ------ Average shares diluted 14,371 16,258 17,661 ====== ====== ======
In June 1997, the Financial Accounting Standards Board ("FASB") adopted a new standard on reporting comprehensive income, Statement of Financial Accounting Standards ("SFAS") No. 130, which established standards for reporting and display of comprehensive income (net income [loss] together with other non-owner changes in equity) and its components in a full set of general purpose financial statements. The standard became effective for the Company in 1998 and required reclassification of comparative financial statements for prior years. The other comprehensive income contained in these accompanying consolidated statements consists only of cumulative translation adjustments. At its annual meeting in April 1998, the Company's shareholders approved a proposal to change its corporate name to "Enesco Group, Inc.", to reflect the Company's transformation into a singularly focused designer and marketer of branded gifts and collectibles. The Stanhome Inc. name was sold as part of the December 1997 agreement to sell the majority of the business of the Direct Selling discontinued operation, as described in Note 2. 28 31 2. DISCONTINUED OPERATIONS: In May 1997, the Company completed the sale of the Company's United States Hamilton Direct Response business to The Crestley Collection, Ltd., an affiliate of The Bradford Group, for approximately $48.3 million, including the repayment of $30.8 million of intercompany debt, subject to certain potential indemnification obligations. $3.8 million of the sale proceeds are being held in escrow in other assets, and are recoverable with interest on May 23, 2000, subject to certain potential indemnification obligations. In connection with the sale, the Company recorded in the first quarter of 1997 a $35 million after tax charge consisting mainly of the writedown of goodwill, current assets and associated transaction and severance costs. The Company has closed Hamilton's foreign operations. Under the sales agreement, until May 22, 2000, in most cases, the Company agreed to indemnify Bradford for damages (in amounts exceeding $500 thousand up to a maximum of $10 million) suffered by Bradford resulting from certain breaches by the Company of its representations, warranties or covenants contained in that agreement and any unpaid taxes for which no applicable financial reserve existed. Except with respect to breaches by the Company of its representations regarding title to assets, taxes and certain covenants in the agreement regarding tax matters, Crestley has no right to indemnification from the Company for claims made after May 22, 2000. To date, no breaches of the agreement have been asserted by Crestley, and the Company is not independently aware that it has breached or may have breached the agreement. In addition, no unpaid, unreserved taxes have been identified. At the time of the closing of the sale, a judgmental reserve was established by the Company for any losses which might be suffered by the Company for any breaches of the agreement or unpaid, unreserved taxes. As part of the agreement, Bradford and the Company entered into two license agreements pursuant to which the Company will license certain proprietary and licensed lines of products to Bradford for an initial five-year period. In December 1997, the Company completed the sale of the majority of the operations comprising its Worldwide Direct Selling Group to Laboratoires de Biologie de Vegatale Yves Rocher of France. Subject to certain potential indemnification obligations, the sale price was approximately $68.4 million in cash ($44 million after taxes and transaction fees) for the businesses and assets sold in connection with the sale. The Company recorded in the fourth quarter of 1997 a $6 million after tax charge, primarily to write down assets that were not part of the sale. Under the sale agreement, until December 18, 2000, in most cases, the Company agreed to indemnify Yves Rocher for damages (in the amounts exceeding FF 2.5 million up to a maximum of FF 125 million or $19.2 million) suffered by Yves Rocher resulting from certain breaches by the Company of that agreement. Except with respect to breaches by the Company for any of its representations in the agreement regarding taxes, Yves Rocher has no right to indemnification from the Company for claims made after December 18, 2000. At the time of the closing of the sale, a judgmental reserve was established by the Company for any losses which might be suffered by the Company for any future breaches of the agreement. On March 28, 1998, the Company received from Yves Rocher a claim notice asserting various breaches under the purchase and sale agreement. Without admitting any breach of the agreement or otherwise addressing the merits of Yves Rocher's claims (and in order to avoid the further expenses and distractions of arbitration and litigation), the Company agreed to settle and compromise certain asserted claims of Yves Rocher in a Settlement Agreement with Yves Rocher dated as of July 10, 1998. The Settlement Agreement required, among other things, the payment of $1.875 million to Yves Rocher from certain funds escrowed at the closing under the purchase and sale agreement. Management of the Company will assess the probability of any breach of the purchase and sale agreements with Crestley and Yves Rocher on a continuing basis during the respective indemnification periods. Other than in connection with the Settlement Agreement with Yves Rocher, management has not identified or been informed by the other parties of any alleged breach of either agreement or unpaid, unreserved taxes under the Crestley purchase and sale agreement requiring an accrual of any amounts in excess of the previously established judgmental reserves. 29 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 Accordingly, the applicable financial statements and related notes have been reclassified to present these two divested business segments as discontinued operations. Therefore, the operating results of these two divested business segments have been segregated and reported as discontinued operations in the consolidated statements of income and statements of cash flows. During 1999 and 1998, there have not been any significant changes in the loss provisions for closing costs and any other loss provisions previously established in connection with the discontinued operations. The approximate components of the 1997 discontinued operations charge were as follows (in thousands):
DIRECT RESPONSE: Loss on sale - Hamilton U.S. (principally the writedown of goodwill) ($23,500) Provision for closing costs (principally international operations) and termination benefits (8,500) Writedown of international current assets due to anticipated proceeds being less than carrying value (3,000) Transaction fees (2,000) ------- Before tax charge (37,000) Anticipated tax benefit 2,000 --------- After tax charge ($35,000) ========
The anticipated income tax benefits are limited, since most of the international closing costs and writedown of assets are not expected to receive a tax benefit and the United States capital loss is limited due to loss disallowance rules.
DIRECT SELLING: Gain on sale of Direct Selling operations $24,300 Writedown of assets of remaining Direct Selling operations due to anticipated net proceeds being less than carrying value (6,000) Provision for disposition costs of remaining operations including severance (2,300) Transaction fees (4,000) ------ Before tax gain 12,000 Anticipated tax provision (18,000) ------- After tax loss ($6,000) =======
The anticipated taxes are higher than the gain since most of the disposition costs and writedown of assets are not expected to receive a tax benefit, the benefit in the United States of utilizing foreign taxes due on the sale is limited, and the United States tax basis of the companies sold was less than book value. The above charges reflect the Company's best estimate at this time of the value of remaining assets and anticipated closing costs. The amounts that the Company will ultimately realize could differ materially. 30 33 The 1997 operating results of discontinued operations include three months of Direct Response and nine months of Direct Selling. These 1997 operating results are summarized as follows (in thousands):
Net sales of discontinued operations $151,128 ======== Income before income taxes from discontinued operations $4,632 Income taxes 2,474 --------- Net income of discontinued operations $2,158 ======== Loss on sale of discontinued operations before income taxes ($25,000) Income tax charge (16,000) ------- Net loss on sale of discontinued operations ($41,000) ========
Cash flows from (for) 1997 discontinued operations as shown in the consolidated statements of cash flows are comprised of the following (in thousands):
OPERATING ACTIVITIES: Net income from operations of discontinued segments $2,158 Net loss on sale of discontinued segments (41,000) Depreciation and amortization, losses on accounts receivable and losses on sale of capital assets 2,837 Increase in operating activities 30,933 ------ Net cash for operating activities of discontinued operations ($5,072) =======
INVESTING ACTIVITIES: Purchase of property, plant and equipment ($1,407) Proceeds from sale of property, plant and equipment 226 ------- ANet cash for investing activities of discontinued operations ($1,181) =======
FINANCING ACTIVITIES: Notes and loans payable $6,071 ------ Net cash from financing activities of discontinued operations $6,071 ======
3. NOTES AND LOANS PAYABLE: Notes and loans payable and weighted-average interest rates at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 BALANCE INTEREST RATE BALANCE INTEREST RATE Notes under uncommitted bank lines $13,178 5.0% $7,900 5.4% Notes under committed bank lines 15,000 6.3% - - ------- --- ------ --- Total $28,178 5.7% $7,900 5.4% ======= === ====== ===
Total interest paid was $3,200,000 in 1999; $4,198,000 in 1998 and $6,475,000 in 1997. 31 34 Notes To Consolidated Financial Statements December 31, 1999, 1998 and 1997 In August 1995, the Company entered into a five-year, $200 million multicurrency revolving credit agreement with various banks, which can be used for working capital, investing and financing activities. In April 1999, at the Company's election, the revolving credit agreement was reduced to $150 million. The revolving credit agreement includes restrictions as to, among other things, the amount of indebtedness, liens and other contingent obligations. The revolving credit agreement also requires maintenance of minimum levels of interest coverage and consolidated indebtedness. Under the revolving credit agreement, the Company's consolidated indebtedness is limited to 50% of the total capitalization of the Company. As a result, at December 31, 1999, the Company's consolidated indebtedness is limited to $114 million. The revolving credit agreement has an annual facility fee of .10% per annum, an agency fee and margin supplement for Eurocurrency rate loans where more than one-third of the commitment is utilized. The revolving credit agreement has two interest rate options: The Alternate Base Rate (as defined) and the Eurocurrency Advance Rate (as defined) plus an applicable margin. At December 31, 1999, borrowings under the revolving credit agreement amounted to $15 million. At December 31, 1999, the Company had formal and informal unused lines of credit of approximately $316 million, including the $150 million multicurrency revolving credit line described above. The informal lines are bank lines that have no commitment fees. At December 31, 1999, all open borrowings were demand notes with a weighted-average interest rate of approximately 5.0%. 4. EMPLOYEE BENEFIT PLANS: As part of the downsizing of the corporate headquarters, the Company's employee defined benefit plan was terminated on November 15, 1998. The Company has various non-qualified supplemental retirement plans. Benefits from these supplemental plans will be paid from the Company's assets. The Company has established grantor trusts to provide funding for some of these non-qualified plans. The trusts are irrevocable and assets contributed are subject to the claims of creditors and, therefore, they are not considered plan assets reportable as a funding component under paragraph 19 of SFAS No. 87. The assets held in these trusts at December 31, 1999 and 1998, consist of fixed income securities accounted for at the lower of cost or market and amounted to $19.4 million and $19.0 million, respectively. These assets are included in other assets in the accompanying consolidated balance sheets. The service cost component of net periodic pension expense increased in 1997, due principally to the addition of executives to the non-qualified plans in 1997 and the termination of the chief executive officer in 1997 (since his service ceased and the full benefit was expensed). In addition, plan enhancements were made in 1997 that were, in some cases, recognized immediately for executives who terminated in 1997. It is the Company's policy to recognize costs over the remaining service life based on the earliest possible date that the benefit could be payable. In 1998, the service cost was reduced as a result of retirements and terminations in 1997, as discussed above. The interest cost and expected return on plan assets in 1998 were reduced as a result of settlement of 97% of the defined benefit plan's liabilities in 1997, in accordance with SFAS No. 88. This settlement also eliminated the amortization expenses in 1998. The remaining liability of $855,000 was settled in 1998. In February 1998, the FASB adopted SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." This standard became effective for the Company at year-end 1998 and required restatement of pension and other postretirement benefit disclosures for prior years. 32 35 The following tables set forth the domestic plans' funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1999 and 1998 (in thousands):
1999 1998 CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $19,992 $20,042 Service cost 370 375 Interest cost 1,000 424 Benefits paid (1,053) (964) Actuarial loss (gain) (639) 115 ------- ------- Benefit obligation at end of year $19,670 $19,992 ======= ======= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $8 $855 Actual return on plan assets, net of expenses (8) 1 Employer contributions - 587 Annuity contract true-up - (471) Settlement payments - (776) Benefits paid - (188) ------- ------- Fair value of plan assets at end of year $- $8 ======= ======= FUNDED STATUS: Prepaid (accrued) benefit cost ($19,670) ($19,984) ========= ========= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $- $8 Accrued benefit liability (19,670) (19,992) ------- ------- Net amount recognized at end of year ($19,670) ($19,984) ======= ======= ADDITIONAL YEAR-END INFORMATION FOR PENSION PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS: Projected benefit obligation $19,670 $19,992 Accumulated benefit obligation $19,670 $16,606 Fair value of assets - -
33 36 Notes To Consolidated Financial Statements December 31, 1999, 1998 and 1997
1999 1998 1997 COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 370 $ 375 $ 5,356 Interest cost 1,000 424 2,696 Expected return on plan assets -- (37) (2,327) Amortization of prior service cost -- -- 187 Amortization of transitional (asset) or obligation -- -- 21 ----- ------ ----- 1,370 762 5,933 Additional SFAS No. 88 charge (gain) recognized due to: Curtailment -- -- 1,065 Settlement/actuarial (gain) (639) 617 (229) ----- ----- ----- Net periodic benefit cost $ 731 $ 1,379 $ 6,769 ===== ===== =====
The above schedules for all years presented include various non-qualified supplemental retirement plans. The weighted-average discount rate used to measure the projected benefit obligation and the rate of increase in future compensation levels both range from 5-7% and the expected long-term rate of return on assets is 5-9%. The qualified pension plan was terminated for all participants on November 15, 1998, and an annuity was purchased from Hartford Life Insurance Company as a settlement under SFAS No. 88. The 1999 projected benefit obligation equals the accumulated benefit obligation in 1999, since all the participants are vested and with the exception of one employee, all are no longer employees and no future compensation increases are planned for participants in the plan. In addition to providing pension benefits, the Company had sponsored a defined benefit postretirement health care and life insurance plan. Employees became eligible for the benefits under this plan when they reached allowable retirement age while working for the Company. Those benefits are provided principally through insurance companies whose premiums are based on the anticipated benefits to be paid. The total costs for such retired employee benefits were principally accrued during their active employment. All of the benefits for these plans are vested and virtually all the participants are no longer employees. The benefits to participants are either fixed dollar amounts per year or a percentage of insurance premiums paid per year. The following table sets forth the funded status of the plan reconciled with the amount shown in the Company's consolidated balance sheets at December 31, 1999 and 1998 (in thousands):
1999 1998 CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $3,303 $3,139 Service cost - 175 Interest cost 115 50 Actuarial (gain) loss 207 (61) Benefits paid (370) - ------- ------- Benefit obligation at end of year 3,255 3,303 ------- ------- FUNDED STATUS: Prepaid (accrued) benefit cost ($3,255) ($3,303) ======= =======
34 37 Net periodic postretirement benefit expense includes the following components (in thousands):
1999 1998 1997 Service cost $ - $175 $85 Interest cost 115 50 55 Recognized actuarial (gain) loss 207 (61) (453) --- ---- ----- Net periodic benefit cost $322 $164 $(313) ==== ==== =====
A 13% annual rate of increase after the year 2000 in per capita cost of covered health care benefits was assumed. Participants with fixed dollar benefits are included at actual cost. Increasing the assumed health care expense trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1999 by $120,000 and the interest cost components of the net postretirement benefit expense for the year then ended by $6,000. The weighted-average discount rate used in determining the accumulated postretirement benefit was 5%. In addition, certain subsidiaries have established funded profit sharing and defined contribution retirement plans. Total consolidated pension, profit sharing and retirement plan expense amounted to $1,700,000 in 1999, $3,455,000 in 1998 and $9,700,000 in 1997. 5. SHAREHOLDERS' EQUITY: Pursuant to action by the Company's Board of Directors (the "Board") on July 22, 1998, effective with the expiration on September 19, 1998 of the stock purchase rights then existing under the Company's Stockholder Rights Plan, one new right for each outstanding share of the Company's common stock ("common stock") was issued (a "New Right") under a Renewed Rights Agreement. Each New Right initially represents the right to purchase one share of common stock for $125. The New Rights will only become exercisable, or separately transferable, promptly after the Company announces that a person has acquired or tendered for 15% or more, or promptly after a tender offer commences that could result in ownership of 15% or more, of the common stock then outstanding. If the New Rights become exercisable after any person acquired or tenders for 15% or more of the common stock then outstanding (except through an offer for all common stock that has been approved by the Board), each New Right not owned by that person or related parties will enable its holder to purchase, at the New Right's exercise price, common stock (or other securities or assets, or a combination thereof) having double the value of the exercise price. In the event of certain merger or asset sale transactions with another party, similar terms would apply to the purchase of that party's common stock. The New Rights, which have no voting power, expire on July 22, 2008, subject to extension. Upon approval by the Board, the New Rights may be redeemed for $.01 each under certain conditions. In 1996, the shareholders approved a new Stock Option Plan previously adopted by the Board of Directors which provides for both incentive and non-qualified stock options. Options for up to 1,500,000 shares of common stock may be granted under the 1996 Plan. The 1996 Plan, as amended by the Board in 1998, provides that non-qualified options for 1,500 shares of common stock granted annually from 1996 through 1999 to each non-employee Director then serving. The Company also has 1991 and 1984 Stock Option Plans, which provide for both incentive and non-qualified stock options, under which options for up to 2,000,000 and 3,000,000 shares of common stock, respectively, may be granted. No further options may be granted under the 1984 Plan. All three Plans provide for the granting to selected key employees, and non-employee Directors in the case of the 1996 and 1991 Plans, of options to acquire shares of common stock at a price not less than their fair market value at 35 38 Notes To Consolidated Financial Statements December 31, 1999, 1998 and 1997 the time of grant. Other option terms are determined at the time of grant, but normally under the 1984 and 1991 Plans, options have been exercisable only after a one-year waiting period with vesting in four equal annual installments, and expire ten years from the date of grant. Under the 1996 Plan, options become exercisable only after a six-month waiting period and upon the Company's achievement of certain stock value performance criteria at any time during the first eight years after the date of the grant. On the eighth anniversary of the grant, all outstanding options granted under the 1996 Plan will become exercisable. Options granted under the 1996 Plan will expire ten years from the date of grant. In 1998, the Board approved a special 1998 Chairman Stock Option Plan which provided for a one-time grant of 14,000 non-qualified stock options to the Company's Chairman of the Board. The options become exercisable six months from date of grant and expire ten years from the date of grant. In 1993 and 1997, the Board approved a Special Interim Chief Executive Officer Stock Option Plan and a 1997 President and Chief Executive Officer Stock Option Plan, respectively, which provided for special grants of non-qualified stock options to the Company's then Chief Executive Officer. The 1993 options vested fully in increments of 10,000 shares during each of the three months in which he served in that capacity. The 1997 grant of 100,000 options vested fully in increments of 12,500 shares each month from November 1997 through June 1998. Both the 1993 and 1997 options become exercisable six months from the date of grant and expire ten years from the date of grant. At December 31, 1999, the Company has six stock-based compensation (fixed option) plans, which are described above. The Company applies the intrinsic value based method allowed under APB Opinion No. 25 and related Interpretations in accounting for its fixed stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for option grants since 1994 under the Company's six stock-based compensation plans been determined applying the fair value based method provided for in SFAS No. 123, which became effective in 1996, the Company's net income and earnings per common share for 1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
1999 1998 1997 Net income (loss) As reported $26,876 ($22,443) ($28,297) Pro forma $25,983 ($23,886) ($29,181) Earnings (loss) per common share diluted As reported $1.87 ($1.38) ($1.60) Pro forma $1.81 ($1.47) ($1.65)
The options granted in 1999 and 1998 were under the 1998 Chairman Stock Option Plan and the 1996 Plan. The options granted in 1997 were under the 1997 President and Chief Executive Officer Plan, the 1996 Plan and the 1991 Plan. The fair value of each option grant in 1999, 1998 and 1997 was estimated at the time of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1999 1998 1997 Dividend yield yearly 4.5% 4.0% 4.0% Expected volatility 45.0% 25.0% 25.0% Risk-free interest rate 5.0% 5.6% 6.0% Expected life (years) 8.0 7.6 6.8 Weighted-average grant-date fair value of options granted during the year, per share $5.66 $6.55 $6.63
36 39 Stock option status and activity under the Company's six stock-based compensation (fixed option) plans is summarized as follows:
WEIGHTED-AVERAGE FIXED OPTIONS SHARES (000S) EXERCISE PRICE Outstanding at December 31, 1996 2,815 $ 30.33 Granted 566 28.81 Exercised (84) 23.40 Forfeited (116) 30.46 ------ ----- Outstanding at December 31, 1997 3,181 30.23 Granted 150 28.17 Exercised (87) 24.00 Forfeited (231) 31.83 ------ ----- Outstanding at December 31, 1998 3,013 30.18 Granted 590 16.78 Forfeited (285) 27.01 ------ ----- Outstanding at December 31, 1999 3,318 $ 28.07 ====== =========
1999 SHARES 1998 SHARES 1997 SHARES (000s) (000s) (000s) FIXED OPTIONS Options exercisable at year-end 2,278 2,013 1,787
A summary of information about fixed stock options outstanding at December 31, 1999 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED- NUMBER AVERAGE NUMBER OUTSTANDING REMAINING WEIGHTED- EXERCISABLE WEIGHTED- RANGE OF AT 12/31/99 CONTRACTUAL AVERAGE AT 12/31/99 AVERAGE EXERCISE PRICES (000s) LIFE EXERCISE PRICE (000s) EXERCISE PRICE $15 to $26 583 9.3 $ 17.19 272 $ 16.98 $26 to $36 2,735 4.8 $ 30.39 2,006 $ 30.79 $15 to $36 3,318 5.6 $ 28.07 2,278 $ 29.14
37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 An analysis of treasury stock transactions for the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands):
COMMON STOCK SHARES COST Balance December 31, 1996 7,325 $151,872 Purchases 793 23,830 Stock option exchanges 2 76 Exercise of stock options (84) (354) Issue of PAYSOP shares (6) (26) Investment Savings Plan - 401(k) issues (1) (6) Non-employee Director Stock Plan issues (2) (7) ----- --------- Balance, December 31, 1997 8,027 175,385 Purchases 1,424 38,982 Stock option exchanges 27 858 Exercise of stock options (87) (988) Issue of PAYSOP shares (12) (68) Investment Savings Plan - 401(k) issues (1) (6) Non-employee Director Stock Plan issues (1) (7) ----- --------- Balance, December 31, 1998 9,377 214,156 Purchases 2,413 47,198 Issue of PAYSOP shares (7) (77) Investment Savings Plan - 401(k) issues (25) (277) Non-employee Director Stock Plan issues (5) (62) ----- --------- Balance, December 31, 1999 11,753 $260,938 ====== ========
In 1985, the Company approved a Payroll-Based Stock Ownership Plan ("PAYSOP") which provides common stock to eligible employees and allows the Company a Federal income tax deduction equal to the market value of the issued stock. In 1987, the Company introduced an Investment Savings Plan in accordance with Section 401(k) of the Internal Revenue Code. One of the features of this retirement savings plan provides common stock to eligible employees and allows the Company a Federal income tax deduction equal to the market value of the issued stock. In 1995, the shareholders approved the Non-Employee Director Stock Plan previously recommended by the Board which provides for an annual grant of 200 shares of common stock to each then serving non-employee director over a five year period ending December 31, 1999. The maximum number of shares reserved for this plan is 15,000. The change in capital in excess of par value resulted from the exercise of stock options, including the related income tax benefit ($1,319,000 in 1998 and $1,790,000 in 1997, respectively), issuance of PAYSOP shares ($30,000 in 1999, $286,000 in 1998 and $136,000 in 1997, respectively) issuance of 401(k) Plan shares ($172,000 in 1999, $12,000 in 1998 and $29,000 in 1997, respectively) and issuance of Non-Employee Director Stock Plan shares ($46,000 in 1999, $31,000 in 1998 and $41,000 in 1997), as noted above. 38 41 6. OTHER INCOME (EXPENSE), NET: Other income (expense), net consists of the following (in thousands):
1999 1998 1997 Investment income $ 579 $ 795 $1,456 Other assets amortization (2,224) (3,195) (3,479) Other items, net 609 (428) (982) ------- ------- ------- ($1,036) ($2,828) ($3,005) ======= ======= =======
7. IMPAIRMENT OF LONG-LIVED ASSETS: In the fourth quarter of 1994, the Company purchased two United Kingdom companies, Border Fine Arts, a maker of animal sculptures and figurines, and Lilliput Lane, a maker of miniature cottages. These acquisitions resulted in approximately $65 million of goodwill which was being amortized over 40 years. The expected growth potential of these acquisitions worldwide never materialized and results have decreased since the acquisitions, with sales decreasing 10% in 1998. Additionally, the Company's plans did not project significant rapid growth of these businesses in the future. These circumstances triggered an asset impairment review in accordance with SFAS No. 121 "Accounting for the Impairment of Long-lived Assets" in 1998. The application of this statement requires the Company to evaluate facts and circumstances that indicate the costs of certain property, plant, and equipment and intangible assets may be impaired. The evaluation is based upon the estimated future net cash flows (undiscounted and without interest charges) associated with the property, plant, and equipment and intangible assets compared to the carrying value of the asset to determine whether a writedown to fair value is required. Based upon the Company's undiscounted cash flow projections of these businesses, the Company determined it would not be able to recover the associated goodwill. After analyzing the expected future discounted cash flows and market value of these businesses, the Company determined that the fair value of the goodwill was $46 million less than the carrying value as of December 31, 1998, and recorded a fourth quarter non-cash $46 million charge before and after tax, which is included in other expense, net in the accompanying consolidated statements of income. The remaining goodwill as of December 31, 1999 is approximately $11.7 million and will be amortized over the next 20 years. 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 8. GEOGRAPHIC OPERATING SEGMENTS (IN THOUSANDS): The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" as of December 31, 1998. The Company operates in one industry segment, predominately in two major geographic areas (United States and Europe). This statement established new disclosure requirements related to operating and geographic segments as presented in the following tables:
GEOGRAPHIC AREAS 1999 1998 1997 NET SALES United States $297,475 $369,221 $388,879 United States inter-company (2,539) (4,637) (4,897) International 92,522 90,987 96,929 International inter-company (3,414) (4,531) (4,728) ------- ------- ------ Total consolidated $384,044 $451,040 $476,183 ======== ======== ======== OPERATING PROFIT United States $16,860 $45,630 $24,054 International 6,791 3,478 6,564 ----- ----- ----- Total consolidated $23,651 $49,108 $30,618 ======= ======= ======= LONG-LIVED ASSETS United States $83,258 $86,545 $90,710 International 22,977 27,717 76,563 ------ ------ ------ Total consolidated $106,235 $114,262 $167,273 ======== ======== ======== CAPITAL EXPENDITURES United States $2,437 $2,486 $2,982 International 2,621 2,034 1,962 ----- ----- ----- Total consolidated $5,058 $4,520 $4,944 ====== ====== ====== DEPRECIATION AND AMORTIZATION United States $5,545 $5,067 $5,904 International 1,964 49,777 3,276 ----- ------ ----- Total consolidated $7,509 $54,844 $9,180 ====== ======= ======
Total sales for the United Kingdom for 1999, 1998 and 1997 were in millions $45.7, $47.7 and $49.3, respectively. Total long-lived assets of the United Kingdom for 1999, 1998, and 1997 were in millions $17.4, $17.6 and $65.0, respectively. Transfers between geographic areas are made at the market value of the merchandise transferred. No single customer accounted for 10% or more of consolidated net sales. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales. 40 43 9. INCOME TAXES (IN THOUSANDS): The domestic and foreign components of the current and deferred tax assets (liabilities) on income consist of the following:
CURRENT TAX ASSETS 1999 1998 United States Federal - Inventory reserve $ 4,921 $3,706 Bad debt reserve 1,554 1,632 Returns and allowances reserve 721 676 Deferred compensation - 617 Other items, net 3,000 5,124 ----- ----- 10,196 11,755 ------- ------ State - Inventory reserve 1,098 897 Bad debt reserve 329 401 Returns and allowances reserve 179 159 Deferred compensation - 133 Other items, net 401 1,132 ------- ------ 2,007 2,722 ------- ------ Foreign - Other items, net 477 722 ----- ----- Total $12,680 $15,199 ======= ======= DEFERRED TAX ASSETS United States Federal - Postretirement benefits $ 9,320 $10,251 State - Postretirement benefits 2,011 2,205 Foreign - Other items, net 63 90 ----- ----- Total $11,394 $12,546 ======= ======= DEFERRED TAX LIABILITIES United States Federal - Acquisition step-up amortization adjustment $3,979 $3,992 Accelerated depreciation 798 1,248 --- ----- 4,777 5,240 ----- ----- State - Acquisition step-up amortization adjustment 989 992 Accelerated depreciation 198 307 --- --- 1,187 1,299 ----- ----- Foreign - Accelerated depreciation - 504 ----- ----- Total $ 5,964 $7,043 ======= ======
41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 The United States net current and deferred tax assets are expected to become realizable in future years with future United States taxable income exclusive of reversing temporary differences, consistent with the Company's history. The domestic and foreign components of income (loss) before income taxes from continuing operations are as follows:
1999 1998 1997 Domestic $ 6,751 $ 34,017 $11,581 Foreign 12,534 (37,312) 9,249 -------- -------- ------- $ 19,285 ($ 3,295) $20,830 ======== ======== =======
The provision for (benefit from) continuing operations income taxes consists of the following:
1999 1998 1997 CURRENTLY PAYABLE: United States Federal ($12,000) $ 9,579 $ 13,633 United States State (446) 2,917 3,575 Foreign 2,263 3,267 4,272 -------- -------- -------- (10,183) 15,763 21,480 ======== ======== ======== DEFERRED: United States Federal 2,027 2,714 (8,889) United States State 797 638 (2,005) Foreign (232) 33 (301) -------- -------- -------- 2,592 3,385 (11,195) ($ 7,591) $ 19,148 $ 10,285 ======== ======== ========
A reconciliation of the total effective income tax rate to the statutory Federal income tax rate is as follows:
1999 1998 1997 Statutory income tax rate 35.0% 35.0% 35.0% State taxes, net of federal income tax effect 1.2 5.4 4.9 Impact of foreign tax rates and credits (0.3) 0.2 2.8 Foreign subsidiaries in loss position receiving little or no tax benefit -- 0.8 -- Impact of nondeductible expenses 2.5 3.4 6.7 ----- ----- ----- Subtotal effective income tax rate 38.4% 44.8% 49.4% Goodwill writedown -- (625.9) -- Prior year tax benefit (77.8) -- -- ===== ====== ===== Total effective income tax rate (39.4%) (581.1%) 49.4% ====== ======= =====
The tax benefit relates primarily to $15,000,000 of prior year accruals for tax assessments which were no longer required due to completed tax audits and closed tax years for a number of taxing authorities worldwide. The Company made income tax payments of $3,200,000 in 1999, $25,394,000 in 1998 and $6,477,000 in 1997. 42 45 10. FINANCIAL INSTRUMENTS: The Company operates globally with various manufacturing and distribution facilities and product sourcing locations around the world. The Company may reduce its exposure to fluctuations in foreign interest rates and exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes. The notional amount of forward exchange contracts and options is the amount of foreign currency bought or sold at maturity. The notional amount of interest rate swaps is the underlying principal amount used in determining the interest payments exchanged over the life of the swap. The notional amounts are not a direct measure of the Company's exposure through its use of derivatives. The Company periodically uses interest rate swaps to hedge portions of interest payable on debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. In October 1996, the Company entered into a three-year interest rate swap with a notional amount of $50 million to effectively convert variable interest on debt to a fixed rate of 6.12%. The Company did not renew the interest rate swap agreement upon its expiration in October 1999. The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments, contractual foreign currency cash flows or obligations, including third-party and intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of underlying exposures. The Company enters into various short-term foreign exchange agreements during the year. The purpose of the Company's foreign currency hedging activities is to protect the company from risk that the eventual settlement of foreign currency transactions will be adversely affected by changes in exchange rates. The Company's various subsidiaries import products in foreign currencies and from time to time will enter into agreements or build foreign currency deposits as a partial hedge against currency fluctuations on inventory purchases. Gains and losses on these agreements are deferred and recorded as a component of cost of sales when the related inventory is sold. At December 31, 1999, deferred amounts were not material. The Company makes short-term foreign currency intercompany loans to various international subsidiaries and utilizes agreements to fully hedge these transactions against currency fluctuations. The cost of these agreements is included in the interest charged to the subsidiaries and expensed monthly as the interest is accrued. The intercompany interest eliminates upon consolidation and any gains and losses on the agreements are recorded as a component of other income. The Company receives dividends, technical service fees, royalties and other payments from its subsidiaries and licensees. From time to time, the Company will enter into foreign currency forward agreements as a partial hedge against currency fluctuations on these current receivables. Gains and losses are recognized or the credit or debit offsets the foreign currency payables. As of December 31, 1999, net deferred amounts on outstanding agreements were not material. The outstanding agreement amounts (notional value) at December 31, 1999 are $9.0 million (U.S. dollars). In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Management does not believe that SFAS No. 133, when adopted by the Company on January 1, 2001 will have a material impact on the consolidated financial condition or results of operations of the Company. 43 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 11. COMMITMENTS AND CONTINGENCIES: The Company incurred rental expense under operating leases of $5,200,000 in 1999, $6,048,000 in 1998 and $6,480,000 in 1997. The minimum rental commitments under noncancelable operating leases as of December 31, 1999 are as follows (in thousands):
AGGREGATE PERIOD AMOUNT 2000 $4,300 2001 3,100 2002 1,700 2003 1,300 2004 1,100 Later years 1,500 ------ Total minimum future rentals $13,000 =======
The Company has entered into various licensing agreements requiring royalty payments ranging from 1.5% to 18% of specified product sales. Royalty expenses which are charged to cost of sales under these licensing agreements totaled $27,000,000 in 1999, $31,700,000 in 1998 and $32,600,000 in 1997. Pursuant to the various licensing agreements, the future minimum guaranteed royalty payments are $16,300,000 in 2000, $15,500,000 in 2001 and $15,500,000 in 2002. There are various legal proceedings pending against the Company which have arisen during the normal course of business. Management does not believe that the ultimate outcome of those legal proceedings will have a material adverse impact on the consolidated financial condition or results of operations of the Company. 44 47 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Enesco Group, Inc.: We have audited the accompanying consolidated balance sheets of Enesco Group, Inc., (a Massachusetts corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, retained earnings, comprehensive income and cash flows for each of the three years in the period ended December 31, 1999. 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 principals 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, the financial statements referred to above present fairly, in all material respects, the financial position of Enesco Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois February 22, 2000 45 48 STOCK MARKET, DIVIDEND AND SHAREHOLDER INFORMATION
1999 1998 MARKET PRICE MARKET PRICE QUARTER DIVIDEND HIGH LOW QUARTER DIVIDEND HIGH LOW First $ 0.28 $ 24.75 $ 12.94 First $ 0.28 $ 29.06 $ 24.63 Second 0.28 24.50 17.75 Second 0.28 35.00 25.19 Third 0.28 22.31 14.13 Third 0.28 32.50 24.00 Fourth 0.28 17.13 9.50 Fourth 0.28 26.00 19.19
Enesco Group, Inc.'s Common Stock is traded on the New York and Pacific stock exchanges (Symbol: ENC). The table shows, for the indicated periods, dividends paid and the high and low price range. (Source: New York Stock Exchange Composite Tape.) As of December 31, 1999, there were 2,707 record holders of the Common Stock. 46 49 QUARTERLY RESULTS (UNAUDITED): Enesco Group, Inc. The following tables set forth information with respect to the consolidated quarterly results of operations for 1999 and 1998. The amounts are unaudited, but in the opinion of management include all adjustments necessary to present fairly the results of operations for the periods indicated. In the fourth quarter of 1999, the Company wrote down the value of U.S. inventory by $9.6 million and recognized a $15 million tax benefit for prior year tax accruals that were no longer required. In the fourth quarter of 1998, the Company recorded a non-cash $46 million charge to writedown goodwill associated with two 1994 United Kingdom acquisitions as described in Note 7.
(In thousands, except per share amounts) FOR THE THREE MONTHS ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1999 1999 1999 1999 Net sales $ 93,925 $ 94,933 $ 107,405 $ 87,781 Cost of sales 47,793 50,205 60,584 58,424 ---------- ---------- ---------- ----------- Gross profit 46,132 44,728 46,821 29,357 Selling, distribution, general and administrative expenses 38,570 34,089 35,134 35,594 ---------- ---------- ---------- ----------- Operating profit (loss) $ 7,562 $ 10,639 $ 11,687 ($ 6,237) ========== ========== ========== =========== Net income $ 4,338 $ 5,620 $ 6,609 $ 10,309 ========== ========== ========== =========== Earnings per common share: Basic and diluted $ 0.28 $ 0.39 $ 0.48 $ 0.76 ========== ========== ========== ===========
FOR THE THREE MONTHS ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 Net sales $ 108,220 $ 137,169 $ 110,170 $ 95,481 Cost of sales 57,452 72,207 60,645 51,862 ---------- ---------- ---------- ----------- Gross profit 50,768 64,962 49,525 43,619 Selling, distribution, general and administrative expenses 43,317 42,920 36,614 36,915 ---------- ---------- ---------- ----------- Operating profit $ 7,451 $ 22,042 $ 12,911 $ 6,704 ========== ========== ========== =========== Net income (loss) $ 3,506 $ 11,764 $ 6,284 ($ 43,997) ========== ========== ========== =========== Earnings (loss) per common share: Basic and diluted $ 0.21 $ 0.72 $ 0.39 ($ 2.77) ========== ========== ========== ===========
47 50 FINANCIAL HIGHLIGHTS LAST TEN YEARS Enesco Group, Inc. The financial data set forth below should be read in connection with the financial statements, accompanying notes and Management's Discussion and Analysis on the preceding pages.
(In thousands, except per share amounts) 1999 1998 1997 Net sales $ 384,044 $ 451,040 $ 476,183 Cost of sales(1) 217,006 242,166 259,097 --------- --------- --------- Gross profit 167,038 208,874 217,086 Selling, distribution, general and administrative expenses 143,387 159,766 186,468 --------- --------- --------- Operating profit 23,651 49,108 30,618 Interest expense (3,330) (3,575) (6,783) Other income (expense), net(2) (1,036) (48,828) (3,005) --------- --------- --------- Income (loss) before income taxes from continuing operations $ 19,285 (3,295) 20,830 Income taxes(3) (7,591) 19,148 10,285 --------- --------- --------- Income (loss) of continuing operations, net of taxes 26,876 (22,443) 10,545 Income of discontinued operations, net of taxes -- -- 2,158 Net loss on sale of discontinued operations -- -- (41,000) --------- --------- --------- Net income (loss) $ 26,876 ($ 22,443) ($ 28,297) ========= ========= ========= Earnings (loss) per common share: Basic: Continuing operations ($ 1.88) ($ 1.38) $ .60 Discontinued operations -- -- .12 Sale of discontinued operations -- -- (2.33) --------- --------- --------- Total ($ 1.88) ($ 1.38) ($ 1.61) ========= ========= ========= Diluted: Continuing operations ($ 1.87) ($ 1.38) ($ .60 Discontinued operations -- -- .12 Sale of discontinued operations -- -- (2.32) --------- --------- --------- Total ($ 1.87) ($ 1.38) ($ 1.60) ========= ========= ========= Average shares of common stock outstanding 14,329 16,208 17,577 Average shares of common stock diluted 14,371 16,258 17,661 Shares of common stock outstanding at year end 13,476 15,852 17,201 Market value per common share at year end $ 11.06 $ 23.25 $ 25.69 Cash dividends paid or provided for $ 15,906 $ 18,028 $ 19,702 Dividends per common share $ 1.12 $ 1.12 $ 1.12 Capital expenditures $ 5,058 $ 4,520 $ 4,944 Depreciation $ 5,285 $ 5,649 $ 5,701 Working capital $ 42,434 $ 74,856 $ 105,449 Total assets $ 277,367 $ 319,949 $ 431,574 Total long-term liabilities $ 34,237 $ 38,537 $ 43,808 Shareholders' equity $ 114,432 $ 150,581 $ 228,914 Book value per common share $ 8.49 $ 9.50 $ 13.31 Return on average shareholders' equity 20% (12%) (11%)
(1)Cost of sales includes a non-cash charge of $9.6 million in 1999. (2)Other income (expense), net includes a non-cash $46 million goodwill writedown in 1998. (3)The provision for income taxes in 1999 includes a $15 million benefit related to reversal of prior year tax accruals. 48 51
1996 1995 1994 1993 1992 1991 1990 $ 515,448 $ 491,196 $ 417,685 $ 367,531 $ 349,250 $ 329,527 $ 302,497 272,180 255,282 216,743 188,196 176,025 162,843 145,597 --------- --------- --------- --------- --------- --------- ------------- 243,268 235,914 200,942 179,335 173,225 166,684 156,900 173,556 166,821 144,124 133,237 127,705 124,066 114,565 --------- --------- --------- --------- --------- --------- ------------- 69,712 69,093 56,818 46,098 45,520 42,618 42,335 (8,196) (7,302) (1,736) (1,145) (1,903) (3,343) (3,807) (3,274) (1,273) 736 (55) (797) (957) (193) --------- --------- --------- --------- --------- --------- ------------- 58,242 60,518 55,818 44,898 42,820 38,318 38,335 25,626 26,628 24,560 21,102 18,413 16,477 16,484 --------- --------- --------- --------- --------- --------- ------------- 32,616 33,890 31,258 23,796 24,407 21,841 21,851 5,821 8,010 12,798 9,337 22,309 23,212 29,216 -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- ------------- $38,437 $ 41,900 $ 44,056 $ 33,133 $ 46,716 $ 45,053 $ 51,067 ========= ========= ========= ========= ========= ========= ============= $ 1.81 $ 1.81 $ 1.62 $ 1.21 $ 1.24 $ 1.11 $ 1.12 .32 .42 .66 .48 1.13 1.18 1.50 -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- ------------- $ 2.13 $ 2.23 $ 2.28 $ 1.69 $ 2.37 $ 2.29 $ 2.62 ========= ========= ========= ========= ========= ========= ============= $ 1.80 $ 1.80 $ 1.60 $ 1.21 $ 1.21 $ 1.08 $ 1.09 .32 .42 .66 .47 1.11 1.14 1.46 -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- ------------- $ 2.12 $ 2.22 $ 2.26 $ 1.68 $ 2.32 $ 2.22 $ 2.55 ========= ========= ========= ========= ========= ========= ============= 18,080 18,773 19,323 19,634 19,753 19,681 19,459 18,092 18,851 19,525 19,749 20,152 20,295 20,040 17,904 18,330 19,151 19,392 19,774 19,791 19,550 $ 26.50 $ 29.13 $ 31.63 $ 33.88 $ 34.75 $ 37.00 $ 33.75 $ 19,640 $ 19,838 $ 19,863 $ 19,620 $ 18,950 $ 18,134 $ 16,172 $ 1.09 $ 1.06 $ 1.03 $ 1.00 $ .96 $ .92 $ .83 $ 5,095 $ 9,829 $ 12,238 $ 2,619 $ 2,810 $ 3,575 $ 4,859 $ 5,744 $ 5,288 $ 3,479 $ 3,450 $ 3,726 $ 3,140 $ 2,968 $ 42,252 $ 36,172 $ 55,630 $ 110,032 $ 105,820 $ 85,769 $ 69,681 $ 498,800 $ 468,537 $ 429,627 $ 354,493 $ 318,759 $ 309,428 $ 287,293 $ 21,583 $ 19,807 $ 16,021 $ 14,111 $ 6,714 $ 5,887 $ 4,981 $ 278,828 $ 266,790 $ 269,396 $ 254,366 $ 256,956 $ 241,074 $ 211,457 $ 15.57 $ 14.55 $ 14.07 $ 13.12 $ 12.99 $ 12.18 $ 10.82 15% 16% 17% 13% 19% 20% 27%
49 52 CORPORATE DATA ENESCO GROUP, INC. CORPORATE HEADQUARTERS Enesco Group, Inc. 225 Windsor Drive Itasca, Illinois 60143 Telephone: 630-875-5300 Fax: 630-875-5350 Web address: www.enesco.com ANNUAL MEETING The 2000 Annual Meeting of Shareholders will be held at the Enesco showroom theater, One Enesco Plaza, Elk Grove Village, Illinois on Thursday, April 27, 2000 at 9:30 a.m. TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 Call toll-free nationwide 1-800-288-9541 or on the Internet at www.chasemellon.com Telecommunications devices for the hearing impaired (TDD) are available nationwide at 1-800-231-5469. STOCK EXCHANGE Enesco Group, Inc. stock is listed on the New York Stock Exchange and the Pacific Exchange under the symbol ENC. AUDITORS Arthur Andersen LLP Chicago, Illinois SHAREHOLDER INQUIRIES If you have questions concerning your account as a shareholder, such as name or address changes, how to enroll in the Dividend Reinvestment Plan or Direct Deposit Service, inquiries regarding dividend checks, stock certificates and Dividend Reinvestment Plan statements or if you need tax information regarding your account, please contact the Transfer Agent. SEC FORM 10-K Shareholders may obtain, free of charge, a copy of Form 10-K by making a written request to Corporate Headquarters, Attention Investor Relations. DIVIDEND POLICY Dividends are declared by the Board of Directors and are normally paid on or around the first of January, April, July and October. DIRECT DEPOSIT OF DIVIDENDS Registered shareholders may have quarterly dividends paid on Enesco Group, Inc.'s common stock electronically deposited to their checking or savings accounts free of charge. If you wish to have your dividends electronically deposited, please contact the Transfer Agent or call toll-free at 1-800-288-9541. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Shareholders may elect to automatically reinvest their dividends and invest additional cash in Enesco Group, Inc. common stock. Purchase fees and commissions are paid by Enesco Group, Inc. when shares are acquired through this program. A brochure describing the plan, including an enrollment form, is available by calling the Transfer Agent at 1-800-288-9541 or by writing Corporate Headquarters, Attention Investor Relations. INVESTOR RELATIONS Enesco Group, Inc.'s shareholders of record receive an Annual Report and proxy material. If you have any questions or require additional information, write to: Investor Relations, Enesco Group, Inc., 225 Windsor Drive, Itasca, Illinois 60143, call our investor information line 630-875-5856 or e-mail us at www.enesco.com. TRADEMARKS Italicized words identifying products in this report are trademarks or service marks of Enesco Group, Inc., its subsidiaries, affiliates or licensors. ================================================================================ UNITED STATES LOCATIONS ENESCO GROUP, INC. Itasca, Illinois Enesco Showrooms: Atlanta, Georgia Columbus, Ohio Dallas, Texas Elk Grove Village, Illinois Los Angeles, California Minneapolis, Minnesota New York, New York Overland Park, Kansas Seattle, Washington INTERNATIONAL SUBSIDIARIES ENESCO EUROPEAN GIFTWARE GROUP LIMITED Carlisle, Cumbria, England Divisions and Affiliates: Lilliput Lane Border Fine Arts Enesco U.K. Enesco France, S.A. Enesco Import GmbH ENESCO INTERNATIONAL (H.K.) LIMITED Hong Kong, S.A.R. N.C. CAMERON & SONS LIMITED Mississauga, Ontario, Canada 50 53 BOARD OF DIRECTORS ENESCO GROUP, INC. JOHN F. CAULEY *# Chairman of the Board, Retired President, Friendly Ice Cream Corporation (Restaurants and Food Products) EUGENE FREEDMAN * Founding Chairman JUDITH R. HABERKORN # President - Consumer Sales and Service, Bell Atlantic Corp. (Telecommunication Services) JEFFREY A. HUTSELL * President and Chief Executive Officer ALLAN G. KEIRSTEAD * Executive Vice President, Chief Administrative and Financial Officer and Chief Executive Officer of Enesco International Businesses HOMER G. PERKINS # Retired Chairman of the Board, Enesco Group, Inc. H.L. TOWER *# Retired Chairman, President and Chief Executive Officer, Enesco Group, Inc. ANNE-LEE VERVILLE *# Retired General Manager, Worldwide Education Industry of International Business Machines Corporation (Advanced Information Technologies) DONNA BROOKS LUCAS # President and Chief Executive Officer, DBL Multi-Media Group (Communications Consulting) OFFICERS ENESCO GROUP, INC. JEFFREY A. HUTSELL President and Chief Executive Officer EUGENE FREEDMAN Founding Chairman ALLAN G. KEIRSTEAD Executive Vice President, Chief Administrative and Financial Officer and Chief Executive Officer of Enesco International Businesses THOMSON J. HUDSON Senior Vice President, U.S. Operations JEFFREY W. LEMAJEUR Treasurer JOSETTE V. GOLDBERG Senior Vice President, Human Resources and Communications ROBERT J. HIPPLE Senior Vice President, Secretary, Clerk and General Counsel * Member of Executive Committee # Member of Audit Committee 54 [ENESCO LOGO] Enesco Group, Inc. International Headquarters 225 Windsor Drive Itasca, Illinois 60143-1225 www.enesco.com EX-21 3 SUBSIDIARIES OF ENESCO GROUP, INC. 1 Exhibit 21 SUBSIDIARIES OF ENESCO GROUP, INC. Jurisdiction Name of Organization --------------- Enesco European Giftware Group Limited England Enesco France, S.A. France Enesco Import GmbH Germany Enesco International Ltd. Delaware Enesco International (H.K) Limited Hong Kong N.C. Cameron & Sons Limited Ontario, Canada Stanhome European Development Center, S.A. Spain Enesco plc England All of the above-listed subsidiaries are included in the Company's consolidated financial statements for all of both 1998 and 1999. EX-23 4 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 22, 2000 incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements File No. 2-97934, No. 33-11415, No. 33-42974, No. 33-50723, No. 33-58633 and No. 333-11501 No. 333-48957, No. 333-68289 and No. 333-69087. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1999, or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Chicago, Illinois March 27, 2000 EX-24 5 POWER OF ATTORNEY 1 Exhibit 24 POWER OF ATTORNEY Each of the undersigned Directors of Enesco Group, Inc. whose signature appears below constitutes and appoints Jeffrey A. Hutsell, Allan G. Keirstead and Robert J. Hipple, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign an annual report on Form 10-K for the fiscal year ended December 31, 1999 with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. March 27, 2000 By: /s/ J.F. Cauley ------------------------------- J. F. Cauley Chairman of the Board and Director March 27, 2000 By: /s/ Homer G. Perkins ------------------------------- Homer G. Perkins Director March 27, 2000 By: /s/ H.L. Tower ------------------------------- H. L. Tower Director March 27, 2000 By: /s/ Allan G. Keirstead ------------------------------- Allan G. Keirstead Executive Vice President, Chief Administrative and Financial Officer, Chief Executive Officer of Enesco International Businesses and Director March 27, 2000 By: /s/ Anne-Lee Verville ------------------------------- Anne-Lee Verville Director 2 March 27, 2000 By: /s/ Judith R. Haberkorn ------------------------------- Judith R. Haberkorn Director March 27, 2000 By: /s/ Donna Brooks Lucas ------------------------------- Donna Brooks Lucas Director March 27, 2000 By: /s/ Charles W. Elliott ------------------------------- Charles W. Elliott Director March 27, 2000 By: /s/ Eugene Freedman ------------------------------- Eugene Freedman Founding Chairman and Director March 27, 2000 By: /s/ Jeffrey A. Hutsell ------------------------------- Jeffrey A. Hutsell President and Chief Executive Officer and Director EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 10,819 17,905 0 0 91,969 95,471 10,416 9,300 62,317 81,740 171,132 205,687 82,244 84,988 51,251 51,375 277,367 319,949 128,698 130,831 0 0 0 0 0 0 3,154 3,154 111,278 147,427 277,367 319,949 384,044 451,040 384,044 451,040 217,006 242,166 217,006 242,166 142,271 161,612 1,116 (1,846) 3,330 3,575 19,285 (3,295) (7,591) 19,148 26,876 (22,443) 0 0 0 0 0 0 26,876 (22,443) 1.88 (1.38) 1.87 (1.38)
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