-----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, MmKPp5B3zsWlkPE/5fOG+ioFzbfI0TNfZn2yzQv8sEB+PKVMh+vmnikfduw58FNb FBRXDhnEmg0o8pzybjyiBw== 0000950137-02-001652.txt : 20020415 0000950137-02-001652.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950137-02-001652 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09267 FILM NUMBER: 02589060 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-K 1 c67370e10-k.txt ANNUAL REPORT 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, 2001 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:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, par value $.125 New York Stock Exchange per share, together with the Pacific Exchange Associated Common Stock Purchase Rights ("Common Stock")
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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was $84,111,312 on March 1, 2002. The number of shares outstanding of the registrant's Common Stock as of March 1, 2002 was 13,788,350 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, 2001 (the "2001 Annual Report"). Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement, dated March 19, 2002 (the "Proxy Statement"), for its Annual Meeting of Stockholders to be held on April 25, 2002. P A R T I ITEM 1. BUSINESS. General We are a leading designer, importer and international distributor of creatively designed giftware items, including proprietary and licensed lines of collectibles and home decorative accents. We sell our giftware, collectibles and home decorative accents at wholesale to independent retailers, department stores, mass merchants, catalogers and other distributors. Our 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. Our products are primarily produced by independent manufacturers in the Far East. In many instances, a factory's total capacity is devoted exclusively to Enesco's product. Enesco was incorporated in Massachusetts in 1931 as Stanley Home Products and changed its name to Stanhome Inc. in 1982. In 1998, our stockholders voted to change the company's name from Stanhome Inc. to Enesco Group, Inc. To complete our transformation into a singularly focused international designer and distributor of branded gifts, collectibles and decorative home accents, at the beginning of 2000 we merged certain of our direct and indirect subsidiaries, including Enesco Corporation, into Enesco Group, Inc. Our corporate offices are located at 225 Windsor Drive, Itasca, Illinois 60143-1225. Our telephone number at that location is (630) 875-5300. Product Enesco's giftware, collectible and home and garden decorative product lines consist of approximately 24,000 items worldwide, including approximately 8,000 items sold in the United States. 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 - Walt Disney Company - Mary Engelbreit - John Deere - Mahogany Princess - Raggedy Anne & Andy - Country Living - Coca-Cola - Jim Shore - Kim Anderson's Pretty as a Picture - Powerpuff Girls - Julie Ueland - Wizard of Oz Enesco's best known proprietary product lines include: - Growing Up Girls - Lilliput Lane - Circle of Love - Border Fine Arts - Mary's Moo Moos For our collectible lines, including Precious Moments and Cherished Teddies, we introduce new items and limited edition pieces each year. To allow for these new introductions and to keep each line balanced, traditionally we have retired a number of the 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. We base our decision to retire a piece on a number of factors, including consumer demand, marketing and manufacturing considerations. Enesco offers a wide range of other giftware and home and garden decorative items to satisfy seasonal and non-seasonal consumer demand. In 2001, we introduced a line of everyday gift licensed products for our mass merchant accounts. The line offers everyday giftware product that is distinct from that being sold at our independent gift retailers. During 2002, we expect to expand this program to multiple mass accounts. Also during 2002, we plan to introduce a new home product line and merchandising system developed exclusively for Wal-Mart. Most of our products have suggested retail prices between $5 and $50. In an effort to expand the breadth of our product offerings, during 2001 we entered into a distribution arrangement with Lamplight Farms for Enesco to sell a line of candle products in the United States. Also, Enesco recently became the exclusive distributor in the United States for a line of plush animals and coordinating fashion accessories manufactured by NICI AG for the 'tween market. NICI AG is a leading line of plush animals and coordinating accessories in Europe. -2- Enesco plans to enter into more strategic alliances for new product distribution opportunities. During 2001, we undertook a comprehensive review of all products being sold and under development. Using an analysis based on profitability, we reduced the number of items in our product lines. We plan to continue this approach for all product lines going forward. We will continue to introduce new product offerings, on a selective basis, and will limit quantities of many items in our collectible lines. Customers Our core customers are approximately 27,000 independent gift retailers worldwide. In addition, we sell to national chains, mass merchants, department stores and catalogers, including Carlton Cards stores, Avon, Harry & David, Walgreens, CVS, Wal-Mart, K-Mart, Sears and Target. No single account represented more than 5% of Enesco's sales in 2001. Sales and Marketing Effective January 1, 2001, Enesco began utilizing an account management-focused sales team comprised of field sales employees, replacing its historical structure of card and gift channel independent contractor sales representatives based throughout the United States. The majority of the field sales organization is made up of former independent contractors, who received in-depth account management training as Enesco employees. Beginning in the fourth quarter of 2001, we added more field sales representatives, bringing the total to approximately 150, and as of January 2002 changed the compensation program for all field sales representatives to commission based from the salary plus bonus expense structure in effect for 2001. Smaller accounts in the card and gift channel in the United States and those that are geographically remote, are handled by Enesco's inside sales account managers. They are trained to sell on the telephone to retailers, including prospecting for new accounts and contacting customers who have not been contacted by the field sales team in the past few years. In addition, we continue to utilize a team of sales executives to manage our larger, national accounts. Commencing January 2002, Enesco's high end Milieu home decor line is being sold in the U.S. by 11 independent representative selling groups with the capacity of reaching customers not previously served by Enesco, such as The Great Indoors. The Canadian, French and the United Kingdom operations have their own employee sales organizations. Enesco also has agreements with foreign affiliates or distributors in Australia, Canada, Ecuador, France, Germany, Hong Kong, Japan, Malaysia, The Netherlands, New Zealand, Paraguay, Peru, Philippines, Singapore, South Korea, Taiwan, Thailand and the United Kingdom. In addition to selling various product lines in the U.K. and several other European countries, Enesco European Giftware Group Limited, a subsidiary of Enesco Group, Inc., with its headquarters located in Carlisle, Cumbria, England, oversees the operations of our affiliated company located in France. Enesco European Giftware Group also administers the collectors clubs that are based in the United Kingdom and Europe. Our Canadian subsidiary, N.C. Cameron, also sells various product lines in Canada and administers the collectors clubs based in Canada. Net international sales in 2001 decreased 1% compared to 2000 and comprised approximately 29% of the Company's sales in 2001, compared with approximately 24% in 2000 and 23% in 1999. Local currency international sales were translated into U.S. dollars at lower exchange rates in 2001 versus 2000. If the 2001 local currency sales were translated into U.S. dollars at the 2000 exchange rates, international sales would have been greater by approximately 4% in 2001. See also Note 8 to Consolidated Financial Statements appearing on Page 30 of the 2001 Annual Report which is incorporated herein by reference. We believe that Enesco's general terms of sale are competitive in the giftware industry. During 2001, Enesco began offering dating programs in the U.S. to its retail customers in the card, gift and collectible channel. These programs extend the payment due date for products, providing the retailer the opportunity to sell the item prior to paying Enesco. -3- We support the marketing efforts of our sales force with promotional programs, including displays of our product lines in eight 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, we maintain an interactive consumer information Internet website at www.enesco.com and maintain toll-free telephone lines for retail customers and consumers. Enesco's collectors clubs are an important component of the marketing program for our collectible product lines. Consumers may subscribe for exclusive product offerings and newsletters from Enesco's clubs. During 2001, the number of active memberships for the collectors clubs continued a downward trend. Design and Production Enesco has a continuous product development program. New items are added to the product line only if they can be produced and marketed on a basis that meets our profitability criteria. We believe that our ability to design, produce and market new products provides a competitive advantage in the giftware industry, since product sales are in part dependent on our ability to identify and respond quickly to changing trends and to utilize our 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 part by manufacturing plants owned by Enesco's subsidiaries operating in England and Scotland, respectively. During 2001, one of our manufacturing plants in England was closed, shifting this production to the remaining United Kingdom sites or Asia. 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 2001, Enesco's purchases from its three largest contract manufacturers accounted for approximately 35%, 22% and 15%, respectively, of its total purchases with no other single manufacturer accounting for more than 10% of Enesco's net purchases. During 2001, approximately 70% of Enesco's total product purchases came from manufacturing sources located in the People's Republic of China (P.R.C.), which enjoys most-favored nation trade status. While we believe that there are other manufacturing sources available for our 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 Enesco's operations. In 2001, we renegotiated the payment terms to certain of our vendors, resulting in substantial cash flow improvement to Enesco. We also initiated a global procurement and new product development strategy, realizing volume discounts for our U.S. operations and foreign subsidiaries. We expect this global procurement approach to reduce our product costs in 2002. Enesco has a Vendor Certification Program that requires all manufacturing sources, whether affiliates or contract manufacturers, to agree to, and comply with, quality compliance and labor standards established and enforced by Enesco. Distribution In order to serve our 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 main warehouse and distribution facility, located in Elk Grove Village, Illinois. This warehouse facility also serves as Enesco's primary distribution facility and main showroom. Commencing in 2002, Enesco has begun to use a third party warehouse and distribution facility in Fort Mills, South Carolina to handle the distribution of certain product to mass merchants. Shipments from Enesco to its customers are handled by United Parcel Service and other commercial carriers. Outside of the United States, the main warehouse and distribution facility for Enesco European Giftware Group is located in Carlisle, Cumbria, England. There is also a smaller warehouse and distribution facility located in France. N.C. Cameron's main warehouse and distribution facility is located in Mississauga, Ontario, Canada. -4- Seasonality and Backlog In addition to our everyday gift products, we produce specially designed product for holiday seasons, including Christmas, Valentine's Day, Easter, Mother's Day, Father's Day, Halloween and Thanksgiving. The pattern of our sales is influenced by the shipment of seasonal merchandise. During 2001, our sales peaked in the third quarter. At the end of 2001, Enesco had a backlog of orders totaling approximately $28 million, as compared to $48 million at the end of 2000. 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 used by Enesco to provide an incentive for its customers to place orders and accept shipments at specified times in the year. 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, Boyd's Bears, Ty, Inc. and Russ Berrie, among others. Trademarks and Other Intellectual Property The intellectual property rights associated with Enesco's licensed product lines are materially important to our sales, especially the Precious Moments(R) and Cherished Teddies(R) lines, which accounted for approximately 39% and 13%, respectively, of Enesco's consolidated revenue during 2001, compared to 38% and 14%, respectively, for 2000 and 37% and 22% for 1999. The Precious Moments license currently has a term through December 31, 2007 and the Cherished Teddies license currently has a term through December 31, 2010. We continuously enter into various license agreements relating to trademarks, copyrights, designs and products which enables us to market new items compatible with our product lines. Our licenses are either non-exclusive or exclusive for specific products in specified channels and territories. Royalties are paid on licensed items and, in some cases, advance royalties or minimum guarantees are required by these license agreements. Protection of all of Enesco's intellectual property, whether owned or licensed, is important to our business. We maintain an aggressive and visible program to identify and challenge companies and individuals worldwide who infringe our registered trademarks and copyrighted designs. Employees and Related Matters As of December 31, 2001, Enesco employed 684 persons in the United States. This reflects the workforce reductions that occurred in 2001, eliminating approximately 170 positions in the United States. Enesco's U.S.-based warehouse personnel employed as of December 31, 2001 are represented by Local Union No. 781 of the Teamsters under a contract that expired on June 30, 2001. We have been in negotiation with union representatives over the terms of a new contract. Our warehouse employees have been working without a contract and we believe that overall labor relations are good. As of December 31, 2001, Enesco's foreign subsidiaries employed 718 persons. Effective January 1, 2001, Enesco began utilizing an account management-focused sales team comprised of field sales employees, replacing its historical structure of card and gift channel independent contractor sales representatives based throughout the United States. Beginning in the fourth quarter of 2001, additional field sales representatives were added, bringing the total number of field sales persons to approximately 150. The compensation program for field sales personnel also became commission based as of January 2002. Enesco continues to utilize inside sales employees to manage national accounts and smaller accounts on a telemarketing basis. -5- 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 10 of the Annual Report, and "Notes to Consolidated Financial Statements" beginning at Page 23 of the Annual Report, and is incorporated herein by reference. ITEM 2. PROPERTIES. Enesco owns its principal executive offices in the United States located at 225 Windsor Drive, Itasca, Illinois and its showroom, distribution and warehouse facilities in Elk Grove Village, Illinois. Both of these properties are subject to a mortgage. We also lease showrooms in seven other major market locations in the U.S. for the display of our products and a warehouse in West Chicago, Illinois. Most of the principal physical properties relating to the foreign subsidiaries of the Enesco Giftware Group are leased. These include Enesco European Giftware Group Limited, which leases 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. N.C. Cameron leases its office and distribution building in Mississauga, Ontario, Canada. 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 we cannot predict the eventual outcome of these proceedings, we believe 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 The following persons are Executive officers of Enesco as of March 1, 2002:
Name Age Positions Date First Elected - ---- --- --------- ------------------ Daniel DalleMolle 51 President and Chief Executive Officer 3/28/01
Prior to Mr. DalleMolle joining Enesco in March 2001, he was Group President of the Hardware and Tool Companies of Newell Rubbermaid, Inc. from 1999 until 2001. From 1998 until 1999, he was President and Chief Operating Officer of Intermatic, Inc., a low voltage lighting and timer manufacturer. From 1996 until 1998, he was President of Lee Rowan Company, a wire, plastic and wood manufacturer of storage products and from 1992 until 1996, he was President of Anchor Hocking Co., both wholly owned subsidiaries of Newell Rubbermaid. Eugene Freedman 77 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 Enesco from October, 1997 to September, 1998, Executive Vice President of Enesco from April, 1988 to September, 1998, and Vice President of Enesco 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 Enesco Group, Inc., of which Mr. Freedman was a founder in 1959. Jeffrey W. Lemajeur 40 Chief Financial Officer 2/01/01 Treasurer 3/03/99
-6- Prior to Mr. Lemajeur joining Enesco 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. Jeffrey S. Smith 45 Senior Vice President, Operations 9/06/01
Prior to Mr. Smith joining Enesco in June 2001, he was the Vice President of Supply Chain from 1997 until June 2001, at Rauch Industries, a manufacturer and distributor of Christmas merchandise, and a division of Syratech Corporation. From 1994 to 1997, he was Vice President of Operations of Ambrosia Industries, a manufacturer and marketer of glass giftware. Before joining Ambrosia, Mr. Smith held numerous positions with at Anchor Hocking Co., a wholly owned subsidiary of Newell Rubbermaid, Inc. Paul B. Perez 55 Senior Vice President, 9/6/01 Sales, Marketing and Product Development
Prior to Mr. Perez joining Enesco in June 2001, he was President of Kirsch, a manufacturer and distributor of window hardware and treatments and a wholly owned subsidiary of Newell Rubbermaid, Inc. from January 2001 until June 2001. Prior to joining Kirsch, Mr. Perez was President of Newell International, a global manufacturer and marketer of branded consumer goods, from December 1996 until December 2000. Before joining Newell Rubbermaid, Mr. Perez held marketing positions with Corning, Revlon, Platex and Lever Brothers. Josette V. Goldberg 44 Senior Vice President, Human Resources and Administration 1/17/01 Senior Vice President, Human Resources 1/19/00 Vice President, Human Resources 6/02/99
Prior to Ms. Goldberg joining Enesco in February 1998,she was the Vice President of Human Resources for Household Finance Corporation, a consumer finance division of Household International from 1996 to 1998. 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. M. Frances Durden 45 Clerk 3/01/01 Vice President, General Counsel and Secretary
Ms. Durden previously served as Corporate Counsel of Enesco from January, 1999 until February, 2001. Prior to Ms. Durden joining Enesco in January 1999, she served as Senior Vice President and General Counsel of Michael Anthony Jewelers, Inc. in Mt. Vernon, New York, from 1994 to January, 1999. Prior to that, she practiced corporate law with an Ohio law firm. Charles E. Sanders 53 Assistant Treasurer 2/28/01
Prior to Mr. Sanders joining Enesco in December, 2000, he served in various positions from 1971 to 2000, including Vice President, Treasurer and Corporate Secretary, with RDM Sports Group, Inc. or its predecessors in Atlanta, GA. NOTE: All officers are elected for the ensuing year and until their successors are duly elected and qualified. -7- 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 33 of the 2001 Annual Report and is incorporated herein by reference. Enesco did not declare any dividends in 2001. Future dividends and resumption of the stock repurchase program will depend on future financial results. ITEM 6. SELECTED FINANCIAL DATA. Information required by this item is set forth in the Section entitled "Financial Highlights Last Five Years" appearing on page 35 of the 2001 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 10 through 17 of the 2001 Annual Report and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information required by this item is set forth in the Section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk" appearing on page 16 of the 2001 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 18 through 32 of the 2001 Annual Report and is incorporated herein by reference. Also incorporated herein by reference are the Quarterly Results (Unaudited) during 2001 and 2000 set forth on page 34 of the 2001 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", "Compensation of Non-Employee Directors" and "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement and is incorporated herein by reference. -8- 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" and "Shares Held By Our Directors and Executive Officers" 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. 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 12 of this Form 10-K. (a)(3) Exhibits. The exhibits required by this item are listed in the Exhibit Index on pages 15 - 17 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(w) 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 2001. FORWARD LOOKING STATEMENTS This Form 10-K including all information incorporated by reference into this Form 10-K, contains certain forward-looking statements within the meaning of the Federal securities laws. These forward-looking statements may include the words "believe," "expect," "plans" or similar words and are based in part on Enesco's reasonable expectations and are subject to a number of factors and risks, many of which are beyond Enesco's control. Enesco's future results may differ materially from its current results and actual results could differ materially from those projected in the forward-looking statements contained in, and incorporated by reference into, this Form 10-K as a result of certain factors including, but not limited to, those set forth below. Readers should also carefully review any risk factors described in other documents that we file from time to time with the Securities and Exchange Commission. - Our ability to manufacture, increase capacity, source and ship new and continuing product in a timely manner and consumers' acceptance of those products at prices that will be sufficient to profitably recover development, manufacturing, marketing, royalty and other costs of the products; - economic conditions including retail sales, higher fuel prices, currency fluctuations and government regulation and other actions in the various markets in which we operate throughout the world; - the inventory policies of retailers, together with the increased reliance by retailers on quick response inventory management techniques, which increase the risk of underproduction of popular items, overproduction of less popular items and failure to achieve tight and compressed shipping schedules; -9- - the impact of competition on revenues, margins and other aspects of Enesco's business, including the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees. In light of these uncertainties and risks, there can be no assurance that the forward-looking statements in this Form 10-K will occur or continue in the future. Except for required, periodic filings under the Securities Exchange Act of 1934, Enesco undertakes no obligations to release publicly any revisions to these forward looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 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 26th day of March, 2002. ENESCO GROUP, INC. ------------------ (Registrant) By: /s/ Daniel DalleMolle ------------------------------- Daniel DalleMolle President and Chief Executive Officer By: /s/ Jeffrey W. Lemajeur ------------------------------- Jeffrey W. Lemajeur Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 26th day of March, 2002 by the following persons on behalf of the registrant and in the capacities indicated. Signature Title /s/ Daniel DalleMolle - ------------------------ Daniel DalleMolle Director, President and Chief Executive Officer /s/ Homer G. Perkins * - ------------------------ Homer G. Perkins Director /s/ John F. Cauley * - ------------------------ John F. Cauley Director /s/ Anne-Lee Verville * - ------------------------ Anne-Lee Verville Chairman of the Board, Director /s/ Judith R. Haberkorn * - ------------------------ Judith R. Haberkorn Director /s/ Donna Brooks Lucas * - ------------------------ Donna Brooks Lucas Director /s/ Eugene Freedman * - ------------------------ Eugene Freedman Founding Chairman and Director -10- /s/ George R. Ditomassi * - ------------------------ George R. Ditomassi Director /s/ Thane A. Pressman * - ------------------------ Thane A. Pressman Director /s/ Donald L. Krause * - ------------------------ Donald L. Krause Director *By: /s/ Daniel DalleMolle --------------------------- Daniel DalleMolle Attorney-In-Fact -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 32 of the Enesco Group, Inc. 2001 Annual Report to Stockholders. FINANCIAL STATEMENTS - All of which are incorporated by reference to the Enesco Group, Inc. 2001 Annual Report to Stockholders. Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Income For the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Retained Earnings For the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 Quarterly Results (Unaudited) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON PAGE 13 SCHEDULE SUPPORTING FINANCIAL STATEMENTS:
Schedule Number Description - --------- ----------- II Valuation and Qualifying Accounts and Reserves For Each of the Three Years Ended December 31, 2001(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. -12- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Enesco Group, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, 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 20, 2002. 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 20, 2002 -13- ENESCO GROUP, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2001
Column A Column B Column C Column D Column E Additions Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Period Expenses Accounts Deductions Period --------------------------------------------------------------------------------- Description 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 FOR THE YEAR ENDED DECEMBER 31, 2000 Reserves which are deducted in the balance sheet from assets to which they apply- Reserves for uncollectible accounts $ 7,260,650 $ 1,311,859 $ -- $ 4,355,146 $ 4,217,363 Reserves for returns and allowances $ 3,155,110 $ 9,988,091 $ -- $10,068,640 $ 3,074,561 Accumulated amortization of other assets $31,841,503 $ 2,658,267 $ -- $ 55,058 $34,444,712 Reserve for downsizing corporate headquarters $ 6,464,980 $ -- $ -- $ 3,086,284 $ 3,378,696 Reserve for discontinued operations $ 2,319,336 $ -- $ -- $ 1,994,735 $ 324,601 FOR THE YEAR ENDED DECEMBER 31, 2001 Reserves which are deducted in the balance sheet from assets to which they apply- Reserves for uncollectible accounts $ 4,217,363 $ 2,451,986 $ -- $ 3,810,399 $ 2,858,950 Reserves for returns and allowances $ 3,074,561 $ 7,396,676 $ -- $ 8,722,844 $ 1,748,393 Accumulated amortization of other assets $34,444,712 $ 1,950,987 $ -- $ 78,275 $36,317,424 Reserve for downsizing corporate headquarters $ 3,378,696 $ -- $ -- $ 2,116,551 $ 1,262,145 Reserve for discontinued operations $ 324,601 $ -- $ -- $ 58,614 $ 265,987
-14- EXHIBIT INDEX
Reg. S-K Item 601 EXHIBIT - -------- ------- 2 (a)* 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 Mellon Investor Services L.L.C. (Exhibit 4 to Form 8-K filed on July 23, 1998 in Commission File No. 0-1349.) 4 (b)* Warrant Agreement dated June 29, 2000 by and between Enesco Group, Inc. and Warner Bros. (Exhibit 4 to Form 10-Q filed for the period ended June 30, 2000 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)* 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 (f)* 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 (g)* 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 (h)* 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 (i)* Allan G. Keirstead Release Agreement. (Exhibit 10(j) to Form 10-K filed for the period ended December 31, 2000 in Commission File No. 0-1349.)
-15- 10 (j)* Jeffrey A. Hutsell Release Agreement. (Exhibit 10.2 to Form 10-Q filed for the period ended September 30, 2000 in Commission File No. 0-1349.) 10 (k)* 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 Daniel DalleMolle and Eugene Freedman. 10 (l)* 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 M. Frances Durden, Josette V. Goldberg, Jeffrey W. Lemajeur, Paul B. Perez and Jeffrey S. Smith. 10 (m)* 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 (n)* 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 (o)* 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 (p)* 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.) 10 (q)* Third Amendment to License Agreement between Precious Moments, Inc. and Enesco Group, Inc.(Exhibit 10.1) to Form 10-Q filed for the period ended September 30, 2001 in Commission File No. 0-1349.) 10 (r)* Amended and Restated Senior Revolving Credit Agreement dated August 23, 2000 by and between Enesco Group, Inc. and Fleet National Bank. (Exhibit 10.1 to Form 10-Q filed for the period ended September 30, 2000 in Commission File No. 0-1349.) 10 (s)* First Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit u) to Form 10-K filed for the period ended December 2000 in Commission file No. 0-1349.) 10 (t)* Second Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10(v) to Form 10-K filed for the period ended December 2000 in Commission File No. 0-1349.) 10 (u)* Third Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10(w) to Form 10-K filed for the period ended December 2000 in Commission File No. 0-1349.) 10 (v)* Fourth Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10.1 to Form 10-Q filed for the period ended March 31, 2001 in Commission File No. 0-1349.)
-16- 10 (w)* Daniel DalleMolle Employment Agreement. (Exhibit 10.2 to Form 10-Q filed for the period ended March 31, 2001 in Commission File No. 0-1349.) 10 (x)* Fifth Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10.1 to Form 10-Q filed for the period ended June 30, 2001 in Commission File No. 0-1349.) 10 (y)* Borrower Note-LaSalle Bank. (Exhibit 10.2 to Form 10-Q filed for the period ended June 30, 2001 in Commission File No. 0-1349.) 10 (z)* Back-up L/C and B/A Demand Note - Fleet National Bank. (Exhibit 10.3 to Form 10-Q filed for the period ended June 30, 2001 in Commission File No. 0-1349.) 10 (aa)* Mortgage, Assignment of Leases and Rents, and Security Agreement - Fleet National Bank. (Exhibit 10.4 to Form 10-Q filed for the period ended June 30, 2001 in Commission File No. 0-1349.) 10 (bb)* Sixth Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10.5 to Form 10-Q filed for the period ended June 30, 2001 in Commission File No. 0-1349.) 10 (cc)* Seventh Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10.2 to Form 10-Q filed for the period ended September 30, 2001 in Commission File No. 0-1349.) 10 (dd)* First Amendment to Security Agreement with Fleet National Bank. (Exhibit 10.3 to Form 10-Q filed for the period ended September 30, 2001 in Commission File No. 0-1349.) 10 (ee)* Amended and Restated Note - LaSalle Bank National Association. (Exhibit 10.4 to Form 10-Q filed for the period ended September 30, 2001 in Commission File No. 0-1349.) 13 Portions of the 2001 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 99 Audit by Arthur Andersen LLP *Incorporated By Reference
-17- EX-13 3 c67370ex13.txt PORTIONS OF THE 2001 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENESCO GROUP, INC. The following discussion provides more depth on the financial condition and results of operations of Enesco Group, Inc. and subsidiaries ("Enesco"). You will probably find it helpful to have first read the financial statements, accompanying notes and financial highlights of recent years. RESULTS OF OPERATIONS 2001 COMPARED TO 2000 Net revenues decreased $56 million, or 17%, in 2001 due to lower product sales in the United States. Net sales in the United States decreased 22%, primarily in the traditional collectible, card and gift channel, continuing a trend in recent years. The biggest single piece of the decrease was sales of Harry Potter merchandise, which were $10 million less in 2001 compared to 2000. Net international sales decreased 1% in 2001 compared to 2000 and represented approximately 29% of total 2001 sales compared to 24% in 2000. Local currency international sales were translated into United States dollars at lower exchange rates in 2001 versus 2000. If the 2001 local currency sales were translated into United States dollars at the 2000 exchange rates, international sales would have been greater by approximately $3.3 million, or 4%, in 2001. Enesco's Precious Moments lines represented approximately 39% of 2001 sales compared to 38% in 2000. The Cherished Teddies lines represented 13% of 2001 sales compared to 14% in 2000. The number of members in the Precious Moments collector clubs was down approximately 5% and the number of members in the Cherished Teddies collector clubs was down approximately 24% at December 31, 2001, compared to December 31, 2000. As of January 1, 2001, in the U.S., Enesco began utilizing a salary-based employee sales force, replacing its historical independent contractor sales force for the collectible, card and gift, and home decor channels. Throughout 2001, Enesco serviced these channels with this sales organization but did not achieve the cost efficiencies, market penetration or customer service levels expected. Therefore, as of January 1, 2002 numerous changes were initiated aimed at improving sales, market penetration and customer service levels. The U.S. employee-based field sales force was increased and their compensation plan was changed to a variable commission-based format versus a salary plus bonus format. Additionally, this sales force has been refocused to serve only the collectible, card and gift channels. The U.S. home decor channel will be serviced by 11 independent representative selling groups with the capability of reaching customers not currently served by Enesco. Along with these changes in Enesco's U.S. sales force, new domestic programs have been initiated providing Enesco customers better value, including dating terms on seasonal products, more flexible shipping schedules and improved product availability. Total unfilled orders (backlog) as of year end were down approximately $20 million, or 42%, compared to the same period last year. Contributing to this decrease is a decline in orders for Harry Potter products in 2001 versus 2000 and cancellation of future orders for Harry Potter products in early 2001 after slow sell through during the 2000 Christmas selling season. Net open orders are orders received and approved by Enesco, subject to cancellation for various reasons, including credit considerations, product availability and customer requests. Gross profit decreased $32 million, or 23%, in 2001 largely as a result of the sales decrease. Results for 2001 include a non-cash charge of $8.7 million in the fourth quarter to write down inventory values as part of Enesco's product rationalization program. In August, based on a product profitability analysis, we discontinued about 3,000 domestic SKUs. From September through December, we offered these items at a discount to our list price but still above our cost. The resulting sales were less than expected and diverted our sales forces' attention from more profitable sales efforts. The one-time write-down values these inventories at our expected recovery in the closeout channel where we can liquidate these items much faster, improving our cash flow. The 2000 results included a one-time non-cash charge of $2.9 million recorded in the second quarter related to Precious Moments product that was to be used as part of the consideration for the agreement to purchase certain assets of Precious Moments, Inc. The proposed acquisition was terminated, and the inventory was written down to reflect market conditions and to preserve collectibility of continuing product lines. Enesco's gross profit margin, expressed as a percentage of net sales, was 43% of sales in 2001 (exclusive of the $8.7 million charge) compared to 44% in 2000 (exclusive of the $2.9 million charge). Enesco recently negotiated lower pricing structures with major suppliers. We expect the results of these negotiations to have a positive impact on margins in the second half of 2002. Selling, distribution, general and administrative expenses ("SD&A"), decreased $15.3 million, or 12%, in 2001 versus 2000 and represented 43% of sales in 2001 compared to 40% in 2000. Results for 2001 included one-time charges totaling $3.2 million, comprised of $2.3 million for the January 2001 U.S. sales force reorganization (recorded in the first and second quarter) and $930 thousand for severance provisions ($500 thousand in the second quarter, $360 thousand in the third quarter and $70 thousand in the fourth quarter). The January 2001 U.S. sales force reorganization costs were primarily commissions paid in 2001 to former independent contractors for orders placed before January 1, 2001, but shipped during 2001. Commissions are expensed when orders are shipped. All of the January 2001 sales force reorganization costs were expensed as incurred. The January 2002 sales force changes (referenced above) relating to the change in compensation structure and addition of U.S. field and home decor sales representatives are separate from the January 2001 sales reorganization. The January 2002 sales force changes did not generate any one-time charges. The 2000 results included one-time charges of $2.2 million for termination of the Precious Moments acquisition and $2.8 million for executive severance, offset by a gain of $3.0 million on the termination of supplemental retirement plans. Exclusive of one-time items, SD&A costs for 2001 were down $16.7 million, or 13%, from 2000. The decrease from 2000 reflects numerous cost reductions partially offset by higher domestic bad debt expense early in 2001. SD&A costs, excluding one-time items, were 42% of sales for 2001, compared to 40% for 2000. Enesco expects to report continued reductions in recurring operating expenses going forward. Enesco initiated numerous cost savings programs in 2001 aimed at increasing margins, lowering operating costs, and increasing efficiencies including: - - Enesco reduced its U.S. workforce by 14% (120 positions) in May 2001 generating annual savings of approximately $8 million. - - In August 2001, a further domestic workforce reduction eliminated approximately 45 positions generating an additional estimated $3.5 million of annual savings. - - A U.K. manufacturing site was closed in September 2001 eliminating 45 positions which should generate annual savings of $700 thousand. - - Enesco is restructuring its Operations, Marketing and Creative departments to generate efficiencies in the supply chain and product development cycle as well as improving customer service. - - Operating costs are being more closely scrutinized, unnecessary expenditures are being eliminated, and all incremental spending must be cost-justified prior to being incurred. Amortization of goodwill decreased $700 thousand, or 27%, in 2001 versus 2000 due to the completion of an asset's amortization period at the end of 2000. Enesco historically had classified amortization expense as a non-operating item and has reclassified amortization expense as an operating expense. In 2002 amortization of goodwill will cease in accordance with FAS 142. All periods presented have been reclassified to conform with the current presentation. Due to the factors described above, 2001 operating profit decreased $16.0 million compared to 2000. Operating profit in the United States was down $16.0 million and international operating profit was flat compared to 2000. 2000 COMPARED TO 1999 Net revenues decreased $67 million, or 17%, in 2000 due mainly to lower sales in the United States. Net sales in the United States decreased 19%, primarily in the traditional collectible, card and gift channels, continuing a trend in recent years. Domestic sales initiatives in 2000 were focused on expansion of accounts in other retail venues such as direct selling, catalogs, department stores, chain drug stores and the mass market. In most cases, the products sold in these alternate channels are designed specifically for those channels and are different from products offered to our traditional core channel. Net international sales in 2000 decreased 12% compared to 1999 and represented approximately 24% of total 2000 sales compared to 23% in 1999. Local currency international sales were translated into United States dollars at lower exchange rates in 2000 versus 1999. If the 2000 local currency sales were translated into United States dollars at the 1999 exchange rates, international sales would have been greater by approximately $4.3 million, or 5%, in 2000. The Precious Moments lines represented approximately 38% of 2000 sales compared to 37% in 1999. The Cherished Teddies lines represented 14% of 2000 sales compared to 22% in 1999. The number of members in the Precious Moments collector clubs was down approximately 4%, and the number of members in the Cherished Teddies collector clubs was down approximately 12% at December 31, 2000 versus December 31, 1999. Total unfilled orders (backlog) as of year-end 2000 were down approximately $2 million, or 4%, compared to December 31, 1999. Net open orders are orders received and approved by Enesco, subject to cancellation for various reasons, including credit considerations, product availability and customer requests. Gross profit decreased $27 million, or 16%, in 2000 following the sales decrease and due to the one-time non-cash charge of $2.9 million recorded in the second quarter of 2000. The second quarter 2000 $2.9 million inventory write-down related to Precious Moments product that was to be used as part of the consideration for the agreement to purchase certain assets of Precious Moments, Inc. The proposed acquisition was terminated, and the inventory was written down to reflect market conditions and to preserve collectibility of continuing product lines. Enesco's gross profit margin, expressed as a percentage of net sales, was 44% of sales in 2000 (before the second quarter charge of $2.9 million) compared to 45% in 1999 (before the 1999 fourth quarter inventory write-down of $9.6 million). The percentage decrease was due to lower margins in the United States due to product and channel sales mix. Additionally, Enesco incurred expenses in the fourth quarter of 2000 to meet Christmas shipping deadlines. International gross profit margins improved slightly compared to 1999 due to sales mix and lower fixed costs. Selling, distribution, general and administrative expenses decreased $12.5 million, or 9%, in 2000 versus 1999 and represented 40% of sales in 2000 compared to 37% in 1999. The 2000 expenses were a higher percentage of sales principally due to the impact of lower sales on fixed costs. The 2000 reductions in expenses of $12.5 million were from lower variable expenses (approximately 10% of sales) due to the lower sales volumes, reductions from cost controls initiated in 1999 and 2000, and $1.1 million of actuarial gains relating to post-retirement benefits. Selling, distribution, general and administrative expenses for 2000 included one-time items of $2.2 million for costs related to the termination of the Precious Moments acquisition, $2.8 million for executive severance and a $3.0 million settlement gain resulting from the termination of supplemental retirement plans. Excluding the one-time items, the year-on-year decrease would have been $14.3 million, or 10%. Due to the factors described above, 2000 operating profit decreased $15.0 million, or 70%, compared to 1999. Operating profit in the United States was down $14.5 million, or 94%, and international operating profit decreased $500 thousand, or 8%, compared to 1999. INTEREST EXPENSE, INTEREST INCOME AND OTHER EXPENSE, NET Interest expense for 2001 was lower by $1.7 million, or 52%, from 2000 due to lower average borrowings and lower interest rates. Lower interest income in 2001 is due to a non-recurring $675 thousand second quarter 2000 gain related to an expired warranty term and lower interest rates. Other expense, net, for 2001 are higher due to a non-recurring $625 thousand gain on an expired warranty term recorded in the second quarter of 2000. Interest expense in 2000 increased slightly from 1999 due to higher interest rates despite lower average borrowings. Interest income increased in 2000 from 1999 due to a non-recurring second quarter 2000 gain related to an expired warranty term. Other expense, net, in 2000 benefited from a $625 thousand gain on the expiration of a warranty term. Other expense, net, in 1999 benefited from a net gain on the sale of assets of $350 thousand. INCOME TAXES The 2001 tax provision includes a $9.4 million benefit, primarily related to prior year tax accruals which were no longer required due to completed tax audits and closed tax years for a number of taxing authorities worldwide. The 2001 effective tax rate (excluding the 2001 $9.4 million benefit) was 31.1% compared to 40.0% in 2000 (excluding a 2000 $12 million benefit). The difference from the effective rate for 2000 reflects the geographical mix of earnings and the impact of non-deductible goodwill amortization. The actual effective income tax rates are dependent upon numerous factors and actual results may vary. The 2000 tax provision includes a $12 million benefit primarily related to prior year tax accruals which were no longer required due to completed tax audits and closed tax years for a number of taxing authorities worldwide. The 2000 effective tax rate (excluding the 2000 $12 million benefit) was 40.0% compared to 38.4% in 1999 (excluding a 1999 $15 million benefit), due to the geographical mix of earnings and the 1999 United States tax benefit on the sale of Enesco's Mexican assembly and packaging subsidiary. LIQUIDITY AND CAPITAL RESOURCES Enesco historically had satisfied its capital requirements with internally generated funds and short-term loans. Working capital requirements fluctuate during the year and are generally greatest early in the fourth quarter and lowest early in the first quarter. Operating cash flows are a function of our earnings plus non-cash expenses such as depreciation and amortization and our ability to manage working capital. Operating cash flows in 2001 were $13.2 million versus $13.9 million in the prior year. The major sources of funds from changes in working capital include lower accounts receivable, lower inventories and increase accounts payable. The major uses of funds from operating activities in 2001 were deferred and current income taxes and lower post-retirement benefits. The lower accounts receivable is a function of lower sales and faster collections being offset partially by dating programs. To stimulate sales, Enesco began offering domestic dating programs to its retailers in the third quarter of 2001. The marginal impact of the dating programs is that as sales increase, accounts receivable increase and days sales outstanding also increase. Inventory decreased due to the fourth quarter inventory write-down of $8.7 million. Accounts payable increased due to the implementation of extended payment terms to Far East vendors in the second quarter of 2001. Accrued expenses decreased due to the timing of payments and the impact of lower sales volumes. Deferred income tax assets were created relating to the $8.7 million inventory write-down and the 2001 domestic NOL being carried forward. Current income tax liabilities were reduced by the $9.4 million reversal of prior year accruals which were no longer required. The corporate headquarters closing reserve (Note 10) at December 31, 2001, totaled $1.2 million, a decrease of $2.2 million from year-end 2000, relating to payments made. Due to the duration and timing of severance provisions and related benefits, the reserve will not be fully utilized until the first quarter of 2004. The reserve is expected to be utilized as follows: $700 thousand in 2002, $400 thousand in 2003 and $100 thousand in 2004. Enesco has filed and continues to file tax returns with a number of taxing authorities worldwide. While we believe 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. Enesco 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 Enesco's current liquid asset position and credit facilities, Enesco believes it has adequate resources to fund any such assessments. To the extent accruals differ from actual assessments or when the open tax years are closed, the accruals will be adjusted through the provision for income taxes. In 2001, the adjustment was a tax benefit of $9.4 million. The majority of the open tax years become closed at the end of December for the particular open year. The major use of cash in investing activities in 2001 was for capital expenditures. Capital expenditures for 2001 totaled $2.7 million. The major use of cash in financing activities in 2001 was for the repayment of debt. Enesco did not declare any dividends in 2001. Any future dividends and resumption of the stock repurchase program will depend on improved future financial results. Note 4 to the Financial Statements provides a detailed summary of Treasury Stock activity. Enesco has an authorized program to purchase shares of its common stock depending on market and business conditions, and may utilize funds for this purpose in the future. As of December 31, 2001, one million shares remained available for purchase under the program. No shares were purchased in 2000 or 2001. Enesco makes provisions to record its future payment obligations relating to insurance premiums for post-retirement benefits and severance allowances. These obligations are not funded because there is no financial benefit to fund them. Enesco has various non-qualified supplemental retirement plans. Benefits from these supplemental plans will be paid from Enesco's assets. Enesco 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 2000, Enesco entered into a $50 million revolving credit facility with Fleet National Bank ("Fleet") to replace an existing credit facility. The Fleet credit agreement contains financial and operating covenants including restrictions on indebtedness and liens, selling property, repurchasing our stock and paying dividends. In addition, Enesco is required to satisfy fixed charge coverage ratio and leverage ratio tests at the end of each quarter. As of December 31, 2001, Enesco was in compliance with or has obtained a waiver for all covenants in the revolving credit facility. In March 2001, Enesco agreed to modify its credit agreement with Fleet, which included modification of the financial covenants. Enesco further agreed, in April 2001, to modify the Fleet credit agreement to reduce the commitment to $25 million and to grant Fleet a security interest in inventory and accounts receivable. Enesco further amended the credit agreement with Fleet in June 2001 and August 2001. The amended agreement included an increased revolving credit commitment to $35 million, increased credit capacity to $50 million including a letter of credit facility of $15 million, an extension of the facility termination date and mortgages on two parcels of domestic real estate. In September 2001, Enesco's credit facility with Fleet was further amended to extend the termination date to May 2002 and certain financial covenants were also modified. The size of the credit facility remains at $50 million. However, the revolving credit commitment was increased to $40 million and the letter of credit facility was lowered to $10 million. These modifications are not expected to have a material effect on Enesco's liquidity or the ability to meet working capital requirements. Enesco currently is pursuing various options to meet capital and operating needs after the Fleet agreement expires. Enesco believes it has access to a wide variety of financing arrangements based on our credit rating and modest leverage. Enesco is not aware of any trends, events, demands, commitments or uncertainties which reasonably can be expected to have a material effect on liquidity and the ability to meet anticipated requirements for working capital and capital expenditures. The principal sources of Enesco's liquidity are its available cash balances, cash from operations and available financing alternatives. At December 31, 2001, Enesco had formal and informal unused lines of credit of approximately $50 million. The informal lines are bank lines that have no commitment fees. At December 31, 2001, all open borrowings were notes with a weighted-average interest rate of approximately 3.6%. 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. A summary of significant contractual obligations is as follows (in thousands): PAYMENTS DUE BY PERIOD
Less than 1 After 5 Contractual Obligations Total year 1-3 years 4-5 years years ----- ----------- --------- --------- ------- Short term borrowings $ 6,749 $ 6,749 $ -- $ -- $ -- Letters of credit 7,460 7,460 -- -- -- Operating leases 8,300 2,900 4,700 700 -- License guarantees 92,900 17,100 45,800 30,000 -- -------- ------- ------- ------- ------ Total Contractual Cash Obligations $115,409 $34,209 $50,500 $30,700 $ -- -------- ------- ------- ------- ------
CRITICAL ACCOUNTING POLICIES In December 2001, the SEC requested that all registrants list their three to five most "critical accounting policies" in MD&A. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that our following accounting policies fit this definition: Accounts receivable are reported net of reserves for uncollectible accounts as well as reserves for returns and allowances. Reserves for uncollectible accounts are determined using aging data and the related historical recovery of amounts in the various aging categories. Accounts in bankruptcy are fully reserved. Subsequent recoveries are adjusted through the provision for doubtful accounts. Reserves for returns and allowances are determined using specific claims data from customers as well as an estimate for incurred but not reported claims determined using historical claims data. Inventories are valued at the lower of cost or market. Reserves are established to value excess and obsolete inventory at its net realizable value based on historical recoveries for discontinued merchandise. Discontinued merchandise is a result of market trends and the level of success for Enesco's product introductions. Also, inventory values are written down where Enesco's right to sell licensed merchandise has expired or will expire in the near future. Enesco has established accruals for taxes payable and tax assessments. The accruals are included in current income taxes payable since it is uncertain as to when assessments may be made and paid. Enesco has filed and continues to file tax returns with a number of taxing authorities worldwide. While Enesco 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. To the extent accruals differ from assessments or when the open tax years are closed the accruals are adjusted through the provision for income taxes. The majority of open tax years become closed for assessments at the end of December for the particular open year. The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. See our audited Consolidated Financial Statements and Notes thereto in this Annual Report which contain accounting policies and other disclosures required by generally accepted accounting principles. EURO CURRENCY Effective January 1, 1999, 11 of the 15 countries that are members of the European Economic and Monetary Union introduced a single currency unit, the euro. Prior to full implementation for the new currency for the participating countries on January 1, 2002, there was a transition period during which parties could use either the existing currencies or the euro. During the transition period all exchanges between currencies of the participating countries were required to be first converted through the euro. Enesco did not experience any impact on its operations during the transition period or on full implementation of the Euro on January 1, 2002. MARKET RISK Enesco operates globally with various manufacturing and distribution facilities and product sourcing locations around the world. As such, Enesco is exposed to foreign exchange risk since purchases and sales are made in foreign currencies. In addition, Enesco is subject to interest rate risk on outstanding borrowings. Enesco may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. Enesco currently does not use derivative financial instruments for trading or speculative purposes. Enesco regularly monitors its foreign currency exposures and ensures that the hedge contract amounts do not exceed the amounts of the underlying exposures. To manage foreign currency risk, as of December 31, 2001, Enesco had entered into forward exchange agreements with a notional value of $17.0 million that will mature within 90 days. These contracts include sales of British pounds sterling and the purchase of U.S. dollars at an average exchange rate of 1.44 and a sale of U.S. dollars and the purchases of British pounds sterling at an average exchange rate of 1.45. The fair value of these contracts is not significant. As of December 31, 2001, Enesco had $6.7 million outstanding of interest bearing debt with interest rates ranging from 3.25% to 4.75% and maturities within 31 days. The fair value approximates the carrying value of these debt instruments. Enesco currently has not hedged the interest rate risk on any of its outstanding borrowings. ACCOUNTING CHANGES Adoption of SAB 101 "Revenue Recognition" in the fourth quarter of 2000 did not affect Enesco's accounting and reporting policies. In accordance with EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" (which also was adopted in the fourth quarter of 2000), Enesco classifies shipping and handling costs billed to customers as revenue, and the related costs are classified as cost of sales. Revenue and cost of sales for 1999 were restated to include $7.8 million of shipping and handling costs billed to customers. FAS 133, "Accounting for Derivative Instruments and Hedging Activities," establishes the accounting and reporting standards for derivatives. Adopted on January 1, 2001, FAS 133 did not have a material impact on Enesco's consolidated financial position or results of operations. Adoption of EITF 00-22 "Accounting for Points and Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future" in the first quarter of 2001 did not affect Enesco's accounting and reporting policies. Financial Accounting Standards (FAS) 141 "Business Combinations" and FAS 142 "Goodwill and Intangible Assets" and FAS 143 "Accounting for Asset Retirement Obligations" were finalized on June 30, 2001. FAS 144 "Accounting for the Impairment of or Disposal of Long-Lived Assets" was issued in August of 2001. FAS 141 is not expected to have any impact on the historical financial statements of Enesco. Under FAS 142, goodwill and intangible assets that have indefinite useful lives will not be amortized, but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. As required, Enesco will adopt FAS 142 as of January 1, 2002, and will cease amortization of goodwill. The annual impact of ceasing amortization of goodwill is $1.95 million. Enesco has not yet determined if the net book value of its existing goodwill of $33.4 million will be impaired. FAS 143 and 144 are not expected to have a material impact on the financial statements of Enesco when adopted. EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor Income Statement Characterization of Consideration from a Vendor to Retailer" became effective this year. Enesco has determined that EITF 00-14 will not materially impact its results of operations and financial condition. The impact of EITF 00-25, while not expected to have a material impact is currently under review. STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Annual Report, including all information incorporated by reference into this Annual Report, contains certain forward-looking statements within the meaning of the Federal securities laws. These forward-looking statements may include the words "believe," "expect," "plans" or similar words and are based in part on Enesco's reasonable expectations and are subject to a number of factors and risks, many of which are beyond Enesco's control. Enesco's future results may differ materially from its current results, and actual results could differ materially from those projected in the forward-looking statements contained in, and incorporated by reference into, this Annual Report as a result of certain factors including, but not limited to, those set forth below. Readers should also carefully review any risk factors described in other documents that we file from time to time with the Securities and Exchange Commission. - - Our ability to manufacture, increase capacity, source and ship new and continuing product in a timely manner and consumers' acceptance of those products at prices that will be sufficient to profitably recover development, manufacturing, marketing, royalty and other costs of the products; - - Economic conditions including retail sales, higher fuel prices, currency fluctuations and government regulation and other actions in the various markets in which we operate throughout the world; - - The inventory policies of retailers, together with the increased reliance by retailers on quick response inventory management techniques, which increase the risk of underproduction of popular items, overproduction of less popular items and failure to achieve tight and compressed shipping schedules; - - The impact of competition on revenues, margins and other aspects of Enesco's business, including the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees. In light of these uncertainties and risks, there can be no assurance that the forward-looking statements in this Annual Report will occur or continue in the future. Except for required, periodic filings under the Securities Exchange Act of 1934, Enesco undertakes no obligations to release publicly any revisions to these forward looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. CONSOLIDATED BALANCE SHEETS ENESCO GROUP, INC. December 31, 2001 and 2000
ASSETS (In thousands) 2001 2000 CURRENT ASSETS: Cash and certificates of deposit (including interest bearing demand deposits) $ 7,932 $ 4,006 Accounts receivable, net 58,582 72,923 Inventories 56,437 60,491 Prepaid expenses 2,622 3,640 Current tax assets 13,052 12,095 --------- --------- Total current assets 138,625 153,155 --------- --------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Land and improvements 3,710 3,960 Buildings and improvements 34,739 36,624 Machinery and equipment 6,603 12,487 Office furniture and equipment 22,689 31,919 Transportation equipment 458 515 --------- --------- 68,199 85,505 Less - accumulated depreciation and amortization (41,617) (56,256) --------- --------- Property, plant and equipment, net 26,582 29,249 --------- --------- OTHER ASSETS: Goodwill and other intangibles, net 33,423 35,564 Other 1,141 947 Deferred income taxes 19,780 12,564 --------- --------- Total other assets 54,344 49,075 --------- --------- $ 219,551 $ 231,479 ========= =========
The accompanying notes are an integral part of these financial statements. LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
2001 2000 CURRENT LIABILITIES: Notes and loans payable $ 6,749 $ 14,000 Accounts payable 28,345 17,867 Federal, state and foreign income taxes 28,713 35,154 Accrued expenses - Payroll and commissions 3,183 3,698 Royalties 5,782 7,747 Post-retirement benefits 3,246 4,407 Other 8,218 11,351 --------- --------- Total current liabilities 84,236 94,224 --------- --------- LONG-TERM LIABILITIES: Post-retirement benefits 3,718 6,065 Deferred income taxes 5,220 5,497 --------- --------- Total long-term liabilities 8,938 11,562 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 9) SHAREHOLDERS' EQUITY: Commmon stock, par value $.125 Authorized 80,000 shares Issued 25,228 shares 3,154 3,154 Capital in excess of par value 47,847 48,711 Retained earnings 338,726 337,615 Accumulated other comprehensive income (5,722) (4,388) --------- --------- 384,005 385,092 Less - Shares held in treasury, at cost Common stock, 11,459 shares in 2001 and 11,616 shares in 2000 (257,628) (259,399) --------- --------- Total shareholders' equity 126,377 125,693 --------- --------- $ 219,551 $ 231,479 ========= =========
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF INCOME ENESCO GROUP, INC. For the Years Ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts) 2001 2000 1999 Net revenues $ 268,979 $ 324,961 $ 391,844 Cost of sales 160,974 184,957 224,806 --------- --------- --------- Gross profit 108,005 140,004 167,038 Selling, distribution, general and administrative expenses 115,603 130,917 143,387 Amortization of goodwill and other intangibles 1,950 2,658 2,224 --------- --------- --------- Operating profit (loss) (9,548) 6,429 21,427 Interest expense (1,523) (3,196) (2,994) Interest income 371 1,161 579 Other income (expense), net (1,342) 759 273 --------- --------- --------- Income (loss) before income taxes (12,042) 5,153 19,285 Income taxes (benefit) (13,153) (9,939) (7,591) --------- --------- --------- Net income $ 1,111 $ 15,092 $ 26,876 --------- --------- --------- EARNINGS PER COMMON SHARE: BASIC: $ 0.08 $ 1.11 $ 1.88 ========= ========= ========= DILUTED: $ 0.08 $ 1.11 $ 1.87 ========= ========= =========
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ENESCO GROUP, INC. For the Years Ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts) 2001 2000 1999 Balance, beginning of year $337,615 $ 326,305 $ 315,335 Net income 1,111 15,092 26,876 Cash dividends, $.28 per share in 2000, $1.12 per share in 1999 -- (3,782) (15,906) -------- --------- --------- Balance, end of year $338,726 $ 337,615 $ 326,305 ======== ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ENESCO GROUP, INC. For the Years Ended December 31, 2001, 2000 and 1999
(In thousands) 2001 2000 1999 Net income $ 1,111 $ 15,092 $ 26,876 -------- --------- --------- Other comprehensive income: Cumulative translation adjustments (no tax effects) (1,334) (1,545) (585) -------- --------- --------- Total other comprehensive income (loss) (1,334) (1,545) (585) -------- --------- --------- Comprehensive income (loss) $ (223) $ 13,547 $ 26,291 ======== ========= =========
The accompanying notes are an integral part of these financial statements CONSOLIDATED STATEMENTS OF CASH FLOW ENESCO GROUP, INC. For the Years Ended December 31, 2001, 2000 and 1999
(In thousands) 2001 2000 1999 OPERATING ACTIVITIES: Net income $ 1,111 $ 15,092 $ 26,876 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 5,071 5,948 5,285 Amortization of goodwill and other intangibles 1,950 2,658 2,224 Deferred income taxes (8,450) (1,052) 3,392 (Gains) losses on sale of capital assets 96 24 (526) Changes in assets and liabilities: Accounts receivable 13,707 7,182 4,321 Inventories 3,479 902 18,940 Prepaid expenses 985 32 863 Other assets (194) 5,746 1,847 Accounts payable and accrued expenses 4,174 (11,127) (8,401) Settlement of supplemental retirment plan -- (928) -- Federal, state and foreign income taxes (6,399) (8,042) (14,296) Long-term post-retirement benefits (2,347) (2,538) (3,221) -------- -------- -------- Net cash provided by operating activities 13,183 13,897 37,304 -------- -------- -------- INVESTING ACTIVITIES: Purchase of property, plant and equipment (2,729) (4,794) (5,058) Proceeds from sales of property, plant and equipment 37 48 2,713 -------- -------- -------- Net cash used by investing activities (2,692) (4,746) (2,345) -------- -------- -------- FINANCING ACTIVITIES: Cash dividends -- (3,782) (15,906) Exchanges and purchases of common stock -- -- (47,198) Net issuance (repayment) of notes and loans payable (7,134) (13,925) 20,607 Exercise of stock options 18 -- -- Other common stock issuance 889 1,496 664 -------- -------- -------- Net cash used by financing activities (6,227) (16,211) (41,833) -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (338) 247 (212) -------- -------- -------- Increase (decrease) in cash and cash equivalents 3,926 (6,813) (7,086) Cash and cash equivalents, beginning of year 4,006 10,819 17,905 -------- -------- -------- Cash and cash equivalents, end of year $ 7,932 $ 4,006 $ 10,819 ======== ======== ========
The accompanying notes are an integral part of these financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 1. ACCOUNTING POLICIES: The accompanying Consolidated Financial Statements include the accounts of Enesco Group, Inc. and subsidiaries ("Enesco"). All significant intercompany transactions have been eliminated in the Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. Actual results could differ from those estimates. Certain reclassifications have been made in the 2000 and 1999 financial statements to conform to the 2001 presentation, including reflection of freight costs billed to customers as revenue and amortization of goodwill as an operating expense. Enesco's operations, which operate in a single industry segment, design, manufacture (primarily through third parties located in the Pacific Rim) and market a wide variety of licensed and proprietary branded gifts and collectibles to retailers primarily throughout the United States, Canada and Europe. Assets and liabilities of Enesco'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. Enesco 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 $2,645,000 in 2001, $3,245,000 in 2000, and $3,525,000 in 1999. Enesco recognizes revenue when title passes to its customers which generally occurs when merchandise is turned over to the shipper. A provision for anticipated merchandise returns and allowances is recorded based upon historical experience. Amounts billed to customers for shipping and handling are included in revenue. License and royalty fees received by Enesco are recognized as revenue when earned. Accounts receivable are reported net of reserves for uncollectible accounts as well as reserves for returns and allowances totaling $4,608,000 and $7,292,000 at December 31, 2001 and 2000, 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 as well as freight and duty costs to import the products. Enesco values all inventories utilizing the first-in, first-out method. Enesco 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):
2001 2000 Raw materials $ 504 $ 574 Work in process 68 87 Finished goods in transit 6,906 9,483 Finished goods 48,959 50,347 ------- ------- $56,437 $60,491 ------- -------
Concentration of risk for Enesco exists in revenue from major product lines, foreign sources of inventory, market 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 52% of Enesco's total sales for 2001, 52% of total sales for 2000 and 59% of total sales for 1999. Extended credit terms are offered to customers. Enesco continually monitors and manages the risks associated with all these activities. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 Depreciation is provided over the estimated useful lives of the assets utilizing straight-line and declining balance methods. During 2001, Enesco wrote off numerous fully depreciated assets that were taken out of service. The methods of depreciation 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 Office furniture and equipment 5-10 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. Enesco historically had classified amortization expense as a non-operating item but is now classifying amortization expense as an operating expense. However, amortization of goodwill will cease after 2001 per FAS 142. All periods presented have been reclassified to conform with the current presentation. Enesco 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, Enesco uses an estimate of the acquired business' undiscounted future net cash flows compared to the carrying value of goodwill to determine if a write-down is necessary. Intangible assets were net of accumulated amortization of $36,317,000 and $34,445,000 at December 31, 2001 and 2000, respectively. Enesco has established accruals for taxes payable and tax assessments. The accruals are included in current income taxes payable since it is uncertain as to when assessments may be made and paid. Enesco files and continues to file tax returns with a number of taxing authorities worldwide. While Enesco 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. To the extent accruals differ from assessments or when the open tax years are closed the accruals are adjusted through the provision for income taxes. The majority of open tax years become closed for assessments at the end of December for the particular open year. 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 and warrants using the treasury stock method. The number of shares used in the earnings per common share computation for 2001, 2000 and 1999 were as follows (in thousands):
2001 2000 1999 Basic Average common shares outstanding 13,708 13,562 14,329 Diluted Stock options and warrants 128 74 42 ------ ------ ------ Average shares diluted 13,836 13,636 14,371 ------ ------ ------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 Additional options to purchase 1.9 million, 2.5 million and 3.3 million shares were outstanding during 2001, 2000 and 1999, respectively, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. 2. NOTES AND LOANS PAYABLE: Notes and loans payable and weighted-average interest rates at December 31, 2001 and 2000 were as follows (in thousands):
2001 2000 ---- ---- BALANCE INTEREST RATE Balance Interest Rate ------- ------------- ------- ------------- Notes under uncommitted bank lines $ -- $ -- $10,000 7.9% Notes under committed bank lines 6,749 3.6% 4,000 6.8% ------ -------- ------- ------ Total $6,749 3.6% $14,000 7.6% ====== ======== ======= ======
Total interest paid was $1,675,000 in 2001, $3.3 million in 2000 and $3.2 million in 1999. In August 2000, Enesco entered into a $50 million revolving credit facility to replace an expiring revolving credit facility. The credit agreement contains financial and operating covenants including restrictions on incurring indebtedness and liens, selling property, repurchasing Enesco's shares and paying dividends. In addition, Enesco is required to satisfy fixed charge coverage ratio and leverage ratio tests at the end of each quarter. The credit agreement, as amended, grants a security interest in Enesco's domestic accounts receivable, inventory and real estate. The credit agreement is scheduled to expire in May 2002. As of December 31, 2001 Enesco was in compliance with all covenants under the revolving credit agreement or a waiver has been obtained. At December 31, 2001, Enesco had formal and informal unused lines of credit of approximately $50 million. The informal lines are bank lines that have no commitment fees. 3. EMPLOYEE BENEFIT PLANS: Long-term post-retirement benefits at December 31, 2001 and 2000, were as follows (in thousands):
2001 2000 ---- ---- Post-retirement benefits 1,648 2,308 Corporate downsizing 493 1,400 Supplemental 401(k) 882 690 Deferred compensation/severance 695 1,667 ------ ------ Balance sheet total $3,718 $6,065 ====== ======
Enesco has established grantor trusts to fund its non-qualified supplemental retirement plans. The trusts are irrevocable and assets contributed are subject to the claims of creditors and, therefore, are not considered plan assets reportable as a funding component under paragraph 19 of FAS 87. The assets held in these trusts at December 31, 2001 and 2000, are accounted for at the lower of cost or market and amounted to $800 thousand and $700 thousand, respectively. These assets are included in other assets in the accompanying consolidated balance sheets. During 2000, Enesco made lump-sum payments of $17 million and recognized a $3 million settlement gain on the termination of various non-qualified supplemental retirement plans from a grantor trust. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 The following table summarizes the components of net periodic benefit costs (in thousands):
2001 2000 1999 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ -- $ -- $ 370 Interest cost -- 410 1,000 -------- ------- ------- -- 410 1,370 Additional FAS 88 (gain) recognized due to settlement/actuarial (gain) -- (3,046) (639) -------- ------- ------- Net periodic benefit cost (income) $ -- $(2,636) $ 731 ======== ======= =======
Enesco had sponsored a defined benefit post-retirement health care and life insurance plan. Employees became eligible for the benefits under this plan when they reached allowable retirement age while working for Enesco. 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 employment. All of the benefits for these plans are vested and all the participants are former employees. The $393 thousand service cost in 2000 is attributed to the former Chief Executive Officer's severance. 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 included in Enesco's consolidated balance sheets at December 31, 2001 and 2000 (in thousands):
2001 2000 ---- ---- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 2,308 $ 3,255 Service cost -- 393 Interest cost 82 115 Actuarial (gain) (646) $(1,094) Benefits paid (96) $ (361) ------- ------- Benefit obligation at end of year $ 1,648 $ 2,308 ------- ------- FUNDED STATUS: (Accrued) benefit cost $(1,648) $(2,308) ======= =======
Net periodic post-retirement benefit expense includes the following components (in thousands):
2001 2000 1999 ---- ---- ---- Service cost $ -- $ 393 $ -- Interest cost 82 115 115 Recognized actuarial (gain) loss (646) (1,094) 207 ------- ------- ------- Net period benefit cost (income) $ (564) $ (586) $ 322 ======= ======= =======
After the year 2001, a 15% annual rate of increase 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 post-retirement benefit obligation as of December 31, 2001, by $61 thousand and the interest cost components of the net post-retirement benefit expense for the year then ended by $13 thousand. The weighted-average discount rate used in determining the accumulated post-retirement 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 $2.3 million in 2001, $2.1 million in 2000 and $1.7 million in 1999. 4. SHAREHOLDERS' EQUITY: Pursuant to action by Enesco'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 Enesco's Stockholder Rights Plan, one new right for each outstanding share of Enesco's 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 only will become exercisable, or separately transferable, promptly after Enesco 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 Stock Option Plan previously adopted by the Board which provides for both incentive and non-qualified stock options. Options for up to 1.5 million 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 be granted annually to each non-employee Director then serving. Enesco also has 1991 and 1984 Stock Option Plans, which provide for both incentive and non-qualified stock options, under which options for up to two million and three million shares of common stock, respectively, may be granted. No further options may be granted under the 1984 and 1991 Plans. 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 the time of grant. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 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 10 years from the date of grant. Under the 1996 Plan, options become exercisable only after a six-month waiting period and upon Enesco'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 10 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 Enesco's Chairman of the Board. The options become exercisable six months from date of grant and expire 10 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 Enesco'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 10 years from the date of grant. At December 31, 2001, Enesco had six stock-based compensation (fixed option) plans, which are described above. Enesco 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 Enesco's six stock-based compensation plans, been determined applying the fair value based method provided for in FAS 123, Enesco's net income and earnings per common share for 2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
2001 2000 1999 ---- ---- ---- Net income As reported $ 1,111 $ 15,092 $ 26,876 Pro forma $ 103 $ 14,274 $ 25,983 Earnings per common As reported $ 0.08 $ 1.11 $ 1.87 share diluted Pro forma $ 0.01 $ 1.05 $ 1.81
The options granted in 2001, 2000 and 1999 were under the 1996 Plan and the 1991 Plan. The fair value of each option grant in 2001, 2000 and 1999 was estimated at the time of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
2001 2000 1999 ---- ---- ---- Dividend yield yearly 0.0% 7.6% 4.5% Expected volatility 85.0% 65.0% 45.0% Risk-free interest rate 4.4% 6.4% 5.0% Expected life (years) 6.0 5.0 8.0 Weighted-average grant-date fair value of options granted during the year, per share $ 4.13 $ 1.73 $ 5.66
Stock option status and activity under Enesco's six stock-based compensation (fixed option) plans is summarized as follows:
WEIGHTED-AVERAGE FIXED OPTIONS SHARES (000s) EXERCISE PRICE ------------- --------------- 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 Granted 636 4.87 Forfeited (1,152) 27.70 --------- -------------- Outstanding at December 31, 2000 2,802 22.95 Granted 826 5.58 Exercised (4) 4.81 Forfeited (778) 17.58 --------- -------------- Outstanding at December 31, 2001 2,846 $ 19.41 ========= ==============
FIXED OPTIONS 2001 SHARES 2000 Shares 1999 Shares (000s) (000s) (000s) ------ ------ ------ Options exercisable at year end 1,301 1,535 2,278
A summary of information about fixed stock options outstanding at December 31, 2001, is as follows:
WEIGHTED- NUMBER AVERAGE NUMBER OUTSTANDING REMAINING WEIGHTED- EXERCISABLE WEIGHTED RANGE OF EXERCISE AT 12/31/01 CONTRACTUAL AVERAGE AT 12/31/01 AVERAGE PRICES (000s) LIFE EXERCISE PRICE (000s) EXERCISE PRICE $4 to $15 1,004 9 $ 5.49 161 $ 4.83 $15 to $26 470 7 $ 17.08 230 $ 17.07 $26 to $36 1,372 4 $ 30.39 909 $ 31.00 ----- ----- ----------- ----- -------- $4 to $36 2,846 6 $ 19.41 1,301 $ 25.29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 An analysis of treasury stock transactions for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands):
COMMON STOCK ------------ SHARES COST ------ ---- Balance at 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 at December 31, 1999 11,753 260,938 Issue of PAYSOP shares (16) (179) Investment Savings Plan - 401(k) issues (69) (780) Non-Employee Director Stock Plan issues (52) (580) ------ --------- Balance at December 31, 2000 11,616 259,399 Exercise of Stock Options (4) (42) Issue of PAYSOP shares (17) (190) Investment Savings Plan - 401(k) issues (85) (957) Non-Employee Director Stock Plan issues (51) (582) ------ --------- Balance at December 31, 2001 11,459 $ 257,628 ====== =========
In 1985, Enesco approved a Payroll-Based Stock Ownership Plan ("PAYSOP") which provides common stock to eligible employees and allows Enesco a Federal income tax deduction equal to the market value of the issued stock. The PAYSOP Plan was merged into the retirement plan on January 1, 2000. In 1987, Enesco 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 Enesco a Federal income tax deduction equal to the market value of the issued stock. Compensation expense for common stock issued was $481 thousand for 2001 and $412 thousand for 2000. The Non-Employee Director Stock Plan allows for an annual retainer of 950 shares of common stock and an additional amount of common stock worth $15 thousand per annum valued as of the day following the annual meeting for each non-employee director who is not the Chairman of the Board. Compensation expense for common stock issued to non-employee directors was $297 thousand for 2001 and $102 thousand for 2000. An analysis of the changes in capital in excess of par value for the years ended December 31, 2001 and 2000, is as follows (in thousands):
Increase/ (Decrease) 2001 2000 ---- ---- PAYSOP $ (80) $ (67) 401(k) plan (476) (352) Non-employee director (285) (153) Exercise of stock options (23) -- Stock warrants -- 529 ----- ----- Total $(864) $ (43) ===== =====
Other comprehensive income consists only of cumulative foreign currency translation adjustments. On June 28, 2000, Enesco entered into a licensing agreement with Time Warner Entertainment Company, LP. Pursuant to this agreement, Enesco issued Time Warner a warrant to purchase 200,000 shares of Enesco's common stock at an exercise price of $4.375 per share. This warrant expires June 27, 2005, subject to certain extensions. The warrant's fair value of $529 thousand, which was included in capital in excess of par value, was determined using the Black-Scholes pricing model, assuming an expected life of five years, a dividend yield of 0%, a risk-free interest rate of 6.789% and a volatility factor of 64%. The fair value of the warrant is being amortized as a component of royalty expense in cost of sales over the term of the licensing agreement. 5. GEOGRAPHIC OPERATING SEGMENTS (IN THOUSANDS): Enesco operates in one industry segment, giftware and collectible sales at wholesale, predominately in two major geographic areas (United States and International).
GEOGRAPHIC AREAS 2001 2000 1999 ---- ---- ---- NET SALES United States $ 193,026 $ 247,969 $ 304,675 United States inter-company (1,984) (2,014) (2,539) International 78,634 80,028 93,122 International inter-company (697) (1,022) (3,414) --------- --------- --------- Total consolidated $ 268,979 $ 324,961 $ 391,844 --------- --------- --------- OPERATING PROFIT (LOSS) United States $ (15,028) $ 921 $ 15,422 International 5,480 5,508 6,005 --------- --------- --------- Total consolidated $ (9,548) $ 6,429 $ 21,427 --------- --------- --------- LONG-LIVED ASSETS United States Property, Plant and Equipment, net $ 21,512 $ 23,238 $ 23,692 Other Assets 40,666 34,232 59,566 --------- --------- --------- Total United States 62,178 57,470 83,258 International Property, Plant and Equipment, net 5,070 6,011 7,301 Other Assets 13,678 14,843 15,676 --------- --------- --------- Total International 18,748 20,854 22,977 --------- --------- --------- Total consolidated $ 80,926 $ 78,324 $ 106,235 --------- --------- --------- CAPITAL EXPENDITURES United States $ 1,880 $ 3,723 $ 2,437 International 849 1,071 2,621 --------- --------- --------- Total consolidated $ 2,729 $ 4,794 $ 5,058 --------- --------- --------- DEPRECIATION AND AMORTIZATION United States $ 4,707 $ 6,065 $ 5,545 International 2,314 2,541 1,964 --------- --------- --------- Total consolidated $ 7,021 $ 8,606 $ 7,509 ========= ========= =========
Total sales for the United Kingdom for 2001, 2000 and 1999 were $45.3 million, $44.9 million and $45.7 million, respectively. Total long-lived assets of the United Kingdom at December 31, 2001, 2000 and 1999, were $14.5 million, $15.9 million and $17.4 million, 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. 6. INCOME TAXES: The domestic and foreign components of the current and deferred income tax assets (liabilities) consist of the following (in thousands):
2001 2000 ---- ---- CURRENT TAX ASSETS Federal-- Inventory reserve $ 4,054 $ 1,803 Bad debt reserve 654 937 NOL carryforward 1,402 2,300 Returns and allowances reserve 442 914 Other items, net 3,036 4,302 State-- Inventory reserve 1,013 448 Bad debt reserve 164 233 NOL carryforward 350 300 Returns and allowances reserve 110 227 Other items, net 739 496 Foreign-- Other items, net 1,088 135 ------- ------- Total Current Tax Assets $13,052 $12,095 ======= ======= DEFERRED TAX ASSETS Federal-- NOL carryforward $13,849 $ 8,748 Postretirement benefits 1,190 1,972 State-- NOL carryforward 3,462 1,200 Postretirement benefits 298 431 Foreign-- Other items, net 981 213 ------- ------- Total Deferred Tax Assets $19,780 $12,564 ======= ======= DEFERRED TAX LIABILITIES Federal-- Acquisition step-up amortization adjustment $ 3,558 $ 3,780 Accelerated depreciation 598 623 State-- Acquisition step-up amortization adjustment 890 939 Accelerated depreciation 149 155 Foreign-- Other items, net 25 -- ------- ------- Total Deferred Tax Liabilities $ 5,220 $ 5,497 ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000, 1999 The United States net current and long-term deferred tax assets are expected to become realizable in future years with future United States taxable income exclusive of reversing temporary differences, consistent with Enesco's history. The United States NOL carryforwards expire in 2020 and 2021. The domestic and foreign components of income (loss) before income taxes are as follows (in thousands):
2001 2000 1999 ---- ---- ---- Domestic $(27,669) $ (7,817) $ 6,751 Foreign 15,627 12,970 12,534 -------- -------- -------- $(12,042) $ 5,153 $ 19,285 ======== ======== ========
The provision for (benefit from) income taxes consists of the following (in thousands):
2001 2000 1999 ---- ---- ---- CURRENTLY PAYABLE: United States Federal $ (9,881) $(12,528) $(12,000) United States State 1,210 (461) (446) Foreign (326) 1,998 2,263 -------- -------- -------- (8,997) (10,991) (10,183) ======== ======== ======== DEFERRED: United States Federal (4,110) 1,834 2,027 United States State (1,027) (590) 797 Foreign 981 (192) (232) -------- -------- -------- (4,156) 1,052 2,592 -------- -------- -------- $(13,153) $ (9,939) $ (7,591) ======== ======== ========
A reconciliation of the total effective income tax rate to the statutory Federal income tax rate is as follows:
2001 2000 1999 ---- ---- ---- Statutory income tax rate 35.0% 35.0% 35.0% State taxes, net of federal income tax effect (2.8) (13.3) 1.2 Impact of foreign tax rates and credits (5.8) 1.1 (0.3) Impact of nondeductible expenses 4.7 17.2 2.5 ----- ------ ----- Subtotal effective income tax rate 31.1% 40.0% 38.4% Prior year tax benefit 78.1 (232.9) (77.8) ----- ------ ----- Total effective income tax rate 109.2% (192.9%) (39.4%) ===== ====== =====
The 2001 benefit of $9,402,000, the 2000 benefit of $12 million and the 1999 benefit of $15 million relate primarily to prior year accruals which were no longer required due to completed tax audits and closed tax years for a number of taxing authorities worldwide. Enesco made income tax payments of $2.1 million in 2001, $2 million in 2000 and $3.2 million in 1999. 7. OTHER INCOME (EXPENSE), NET: Other income (expense), net consists of the following (in thousands):
2001 2000 1999 ---- ---- ---- Foreign currency (loss) $ (12) $ (69) $ (35) Gain (loss) on sale of fixed assets (96) (24) 526 Bank charges and other (1,234) 852 (218) ------- ----- ----- $(1,342) $ 759 $ 273 ======= ===== =====
8. FINANCIAL INSTRUMENTS: Enesco operates globally with various manufacturing and distribution facilities and product sourcing locations around the world. Enesco may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. Enesco currently does not use derivative financial instruments for trading or speculative purposes. Enesco regularly monitors foreign currency exposures and ensures that the hedge contract amounts do not exceed the amounts of the underlying exposures. Enesco's current hedging activity is limited to foreign currency purchases and intercompany foreign currency transactions. The purpose of Enesco's foreign currency hedging activities is to protect Enesco from the risk that the eventual settlement of foreign currency transactions will be affected adversely by changes in exchange rates. Enesco hedges these exposures by entering into various short-term foreign exchange forward contracts. Under FAS 133, the instruments are carried at fair value in the balance sheet as a component of other current assets or other current liabilities. Changes in the fair value of foreign exchange forward contracts that meet the applicable hedging criteria of FAS 133 are recorded as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Changes in the fair value of foreign exchange forward contracts that do not meet the applicable hedging criteria of FAS 133 are recorded currently in income as cost of sales or foreign exchange gain or loss, as applicable. Hedging activities did not have a material impact on results of operations or financial condition during 2001. To manage foreign currency risk, as of December 31, 2001, Enesco had entered into forward exchange agreements with a notional value of $17.0 million that will mature within 90 days. These contracts include sales of British pounds sterling and the purchase of U.S. dollars at an average exchange rate of 1.44 and a sale of U.S. dollars and the purchase of British pounds sterling at an average exchange rate of 1.45. The fair value of these contracts is not significant. As of December 31, 2001, Enesco had $6.7 million outstanding of interest bearing debt with interest rates ranging from 3.25% to 4.75% and maturities within 31 days. The fair value approximates the carrying value of these debt instruments. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 9. COMMITMENTS AND CONTINGENCIES: Enesco incurred rental expense under operating leases of $4.5 million in 2001, $5 million in 2000 and $5.2 million in 1999. The minimum rental commitments under noncancelable operating leases as of December 31, 2001, are as follows (in thousands):
AGGREGATE PERIOD AMOUNT 2002 $ 2,900 2003 2,500 2004 1,400 2005 800 2006 400 Later years 300 ------- Total minimum future rentals $ 8,300 =======
Enesco 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 $21.5 million in 2001, $26 million in 2000 and $27 million in 1999. Pursuant to various licensing agreements, the future minimum guaranteed royalty payments are $17,100,000 in 2002, $15.7 million in 2003, $15.1 million in 2004, $15 million in 2005 and $15 million in 2006. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. Historically, audit adjustments have not been significant nor does Enesco expect future audit adjustments to be significant. There are various legal proceedings pending against Enesco which have arisen during the normal course of business. Management believes the ultimate outcome of those legal proceedings will not have a material adverse impact on the financial position or results of operations of Enesco. 10. CORPORATE HEADQUARTERS CLOSING RESERVE: Enesco's corporate headquarters closing reserve, established in 1997, provided for severance and benefit payments due to terminated employees. In 2001, Enesco made $2.2 million of payments to former employees, which were charged against the corporate headquarters closing reserve. At December 31, 2001, $1.2 million remained in the reserve ($700 thousand in current liabilities and $500 thousand in long-term post-retirement benefits), almost all of which is for future severance payments and related payroll taxes. 11. 2001 WORKFORCE REDUCTIONS: On May 3, 2001, Enesco reduced its workforce in the United States by 120 positions, or approximately 14%. This workforce reduction affected clerical and professional employees and will generate annual savings of approximately $8 million. One-time severance costs approximating $500 thousand were recorded in the second quarter of 2001. On August 29, 2001, Enesco reduced its workforce in the United States by an additional 45 positions generating an estimated $3.5 million of annual savings. In September 2001, Enesco closed a manufacturing plant in the U.K., eliminating approximately 45 positions and generating savings of $700 thousand annually. The one-time costs associated with the third quarter U.S. and U.K. workforce reductions totaled $360 thousand. In the fourth quarter of 2001, Enesco recorded $70 thousand of severance costs related to U.S. workforce reductions. As of December 31, 2001, $32 thousand remains to be paid to former employees relating to the 2001 workforce reductions. 12. TERMINATION OF PRECIOUS MOMENTS ACQUISITION: Enesco entered into an agreement on April 19, 2000, to purchase certain assets of Precious Moments, Inc. and the Precious Moments Company for $125 million in cash plus other considerations ranging up to 40% of the cash purchase price. On June 28, 2000, Enesco announced that it would not proceed with the purchase of certain assets of Precious Moments, Inc. and the Precious Moments Company. The cost to terminate the agreement of $5.1 million was recorded in the second quarter of 2000. Precious Moments product that was to be used as part of the consideration for the agreement to purchase certain assets of Precious Moments Inc. was written down by $2.9 million and charged to cost of sales. The inventory was written down to reflect market conditions and to preserve collectibility of continuing product lines. The majority of the product was destroyed. In addition, there were $2.2 million of operating expenses related to the proposed acquisition which were incurred primarily in the second quarter of 2000 and included a break-up fee. 13. NEW PRESIDENT AND CEO: Daniel DalleMolle was elected as President and Chief Executive Officer (CEO) of Enesco as of March 28, 2001. Mr. DalleMolle succeeded interim CEO Anne-Lee Verville. The President and CEO position had been vacant since June 27, 2000. Mr. DalleMolle also was appointed to Class II of the Board of Directors on March 28, 2001. His Board term will expire on April 24, 2003. 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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois February 20, 2002 STOCK MARKET, DIVIDEND AND SHAREHOLDER INFORMATION
2001 2000 MARKET PRICE Market Price QUARTER DIVIDEND HIGH LOW Quarter Dividend High Low First $ -- $ 6.85 $ 4.63 First $ 0.28 $ 11.50 $ 6.13 Second -- 7.24 5.12 Second -- 7.38 3.88 Third -- 7.26 3.96 Third -- 13.44 4.81 Fourth -- 7.31 3.30 Fourth -- 7.31 4.25
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. As of December 31, 2001, there were 2,693 record holders of the Common Stock. QUARTERLY RESULTS (UNAUDITED): ENESCO GROUP, INC. The following tables set forth information with respect to the consolidated quarterly results of operations for 2001 and 2000. 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 2001, Enesco recognized a $9.4 million tax benefit primarily for prior year tax accruals that were no longer required. Also in the fourth quarter of 2001, Enesco recorded an $8.7 million pretax charge to write-down inventory to its net realizable value following a product rationalization program. In the fourth quarter of 2000, Enesco recognized a $12 million tax benefit primarily for prior year tax accruals that were no longer required.
(In thousands, except per share amounts) FOR THE THREE MONTHS ENDED -------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 2001 2001 2001 2001 ---- ---- ---- ---- Net revenues $ 62,745 $ 67,329 $77,812 $ 61,093 Cost of sales 34,228 35,158 45,479 46,109 -------- -------- ------- -------- Gross profit 28,517 32,171 32,333 14,984 Selling, distribution, general and administrative expenses 34,051 34,048 24,436 23,068 Amortization of goodwill 489 487 487 487 -------- -------- ------- -------- Operating profit (loss) $ (6,023) $ (2,364) $ 7,410 $ (8,571) -------- -------- ------- -------- Net income (loss) $ (3,440) $ (2,695) $ 4,370 $ 2,876 -------- -------- ------- -------- Earnings (loss) per common share: Basic $ (0.25) $ (0.20) $ 0.32 $ 0.21 ======== ======== ======= ======== Diluted $ (0.25) $ (0.20) $ 0.31 $ 0.21 ======== ======== ======= ========
For the Three Months Ended -------------------------- March 31, June 30, Sept. 30, Dec. 31, 2000 2000 2000 2000 ---- ---- ---- ---- Net revenues $ 73,460 $ 73,296 $88,247 $ 89,958 Cost of sales 39,430 43,059 49,697 52,771 -------- -------- ------- -------- Gross profit 34,030 30,237 38,550 37,187 Selling, distribution, general and administrative expenses 32,642 34,358 32,263 31,654 Amortization of goodwill 535 534 532 1,057 -------- -------- ------- -------- Operating profit (loss) $ 853 $ (4,655) $ 5,755 $ 4,476 ======== ======== ======= ======== Net income (loss) $ 164 $ (2,436) $ 2,918 $ 14,446 ======== ======== ======= ======== Earnings (loss) per common share: Basic and diluted $ 0.01 $ (0.18) $ 0.21 $ 1.05 ======== ======== ======= ========
FINANCIAL HIGHLIGHTS LAST FIVE 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) 2001 2000 ---- ---- Net revenues(1) $ 268,979 $ 324,961 Cost of sales(2) 160,974 184,957 --------- --------- Gross profit 108,005 140,004 Selling, distribution, general and administrative expenses 115,603 130,917 Amortization of goodwill and other intangibles(3) 1,950 2,658 --------- --------- Operating profit (loss) (9,548) 6,429 Interest expense (1,523) (3,196) Interest income 371 1,161 Other income (expense), net (1,342) 759 --------- --------- Income (loss) before income taxes from continuing operations (12,042) 5,153 Income taxes(4) (13,153) (9,939) --------- --------- Income (loss) of continuing operations, net taxes 1,111 15,092 Income of discontinued operations, net of taxes -- -- Net loss on sale of discontinued operations -- -- --------- --------- Net income (loss) $ 1,111 $ 15,092 ========= ========= Earnings (loss) per common share: Basic: Continuting operations $ 0.08 $ 1.11 Discontinued operations -- -- Sale of discontinued operations -- -- --------- --------- Total $ 0.08 $ 1.11 ========= ========= Diluted: Continuing operations $ 0.08 $ 1.11 Discontinued operations -- -- Sale of discontinued operations -- -- --------- --------- Total $ 0.08 $ 1.11 ========= ========= Average shares of common stock outstanding 13,708 13,562 Average shares of common stock diluted 13,836 13,636 Shares of common stock outstanding at year end 13,769 13,612 --------- --------- Market value per common share at year end $ 6.30 $ 4.69 Cash dividends declared $ -- $ 3,782 Dividends declared per common share $ -- $ 0.28 --------- --------- Capital expenditures $ 2,729 $ 4,794 Depreciation $ 5,071 $ 5,948 Working capital $ 54,389 $ 58,931 Total assets $ 219,551 $ 231,479 Total long-term liabilities $ 8,938 $ 11,562 Shareholders' equity $ 126,377 $ 125,693 --------- --------- Book value per common share $ 9.18 $ 9.23 Return on average shareholders' equity 1% 13% --------- ---------
1) Revenue figures include shipping and handling costs billed to customers. 2) Cost of sales includes non-cash charges of $8.7 million in 2001, $2.9 million in 2000 and $9.6 million in 1999. 3) Amortization of goodwill includes a non-recurring $46 million goodwill write-down in 1998. 4) The provision for income taxes includes a $9.4 million benefit in 2001 related to the reversal of prior year tax accruals, a $12 million benefit in 2000 related to the reversal of prior year tax accruals and a $15 million benefit in 1999 related to the reversal of prior year tax accruals.
(In thousands, except per share amounts) 1999 1998 1997 ---- ---- ---- Net revenues(1) $ 391,844 $ 458,540 $ 485,883 Cost of sales(2) 224,806 249,666 268,797 --------- --------- --------- Gross profit 167,038 208,874 217,086 Selling, distribution, general and administrative expenses 143,387 159,766 186,468 Amortization of goodwill and other intangibles(3) 2,224 49,195 3,479 --------- --------- --------- Operating profit (loss) 21,427 (87) 27,139 Interest expense (2,994) (3,575) (6,783) Interest income 579 795 1,456 Other income (expense), net 273 (428) (982) --------- --------- --------- Income (loss) before income taxes from continuing operations 19,285 (3,295) 20,830 Income taxes(4) (7,591) 19,148 10,285 --------- --------- --------- Income (loss) of continuing operations, net 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: Continuting operations $ 1.88 $ (1.38) $ 0.60 Discontinued operations -- -- 0.12 Sale of discontinued operations -- -- (2.33) --------- --------- --------- Total $ 1.88 $ (1.38) $ (1.61) ========= ========= ========= Diluted: Continuing operations $ 1.87 $ (1.38) $ 0.60 Discontinued operations -- -- 0.12 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 declared $ 15,906 $ 18,028 $ 19,702 Dividends declared 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%) --------- --------- ---------
EX-21 4 c67370ex21.txt SUBSIDIARIES OF ENESCO GROUP, INC. EXHIBIT 21 SUBSIDIARIES OF ENESCO GROUP, INC.
Jurisdiction Name of Organization --------------- Enesco European Giftware Group Limited England Enesco France, S.A. France Enesco International Ltd. Delaware Enesco International (H.K) Limited Hong Kong N.C. Cameron & Sons Limited Ontario, Canada Enesco plc England
All of the above-listed subsidiaries are included in the Company's consolidated financial statements for all of both 2000 and 2001. EX-23 5 c67370ex23.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 20, 2002 included in 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, No. 333-69087 and No. 333-75345. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 2001, or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Chicago, Illinois March 26, 2002 EX-24 6 c67370ex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY Each of the undersigned Directors of Enesco Group, Inc. whose signature appears below constitutes and appoints Daniel DalleMolle, Jeffrey W. Lemajeur and Charles Sanders, 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, 2001 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 26, 2002 By: /s/ Anne-Lee Verville ---------------------------------- Anne-Lee Verville Chairman of the Board and Director March 26, 2002 By: /s/ Daniel DalleMolle ---------------------------------- Daniel DalleMolle President and CEO March 26, 2002 By: /s/ Donna Brooks Lucas ---------------------------------- Donna Brooks Lucas Director March 26, 2002 By: /s/ John F. Cauley ---------------------------------- John F. Cauley Director March 26, 2002 By: /s/ George R. Ditomassi ---------------------------------- George R. Ditomassi Director March 26, 2002 By: /s/ Eugene Freedman ---------------------------------- Eugene Freedman Founding Chairman and Director March 26, 2002 By: /s/ Judith R. Haberkorn ---------------------------------- Judith R. Haberkorn Director March 26, 2002 By: /s/ Donald L. Krause ---------------------------------- Donald L. Krause Director March 26, 2002 By: /s/ Homer G. Perkins ---------------------------------- Homer G. Perkins Director March 26, 2002 By: /s/ Thane A. Pressman ---------------------------------- Thane A. Pressman Director EX-99 7 c67370ex99.txt EXHIBIT 99 EXHIBIT 99 March 27, 2002 U.S. Securities and Exchange Commission Washington, D.C. Re: AUDIT BY ARTHUR ANDERSEN LLP Ladies and Gentlemen: Enesco Group, Inc. has engaged Arthur Andersen LLP as its independent public accountants. Arthur Andersen has represented to Enesco Group, Inc. that the audits were subject to Arthur Andersen's quality control systems for the U.S. accounting and auditing practices to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Arthur Andersen personnel working on the audit, availability of national office consultation, and availability of personnel at foreign affiliates of Arthur Andersen to conduct relevant portions of the audit. Sincerely, /s/ Jeffrey W. Lemajeur -------------------------------- Jeffrey W. Lemajeur Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----