-----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, CUyS2ilLI5+46AhfRnjeNioUODgOE97pMkEvhDUjCiXhwf52uuxP83xnSi0LAevq XM27E0F0mJJZQVKZckJxiA== 0000950137-03-001790.txt : 20030327 0000950137-03-001790.hdr.sgml : 20030327 20030327171922 ACCESSION NUMBER: 0000950137-03-001790 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 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: 03621853 BUSINESS ADDRESS: STREET 1: 333 WESTERN AVE CITY: WESTFIELD STATE: MA ZIP: 01085 BUSINESS PHONE: 4135623631 FORMER COMPANY: FORMER CONFORMED NAME: STANLEY HOME PRODUCTS INC DATE OF NAME CHANGE: 19820513 FORMER COMPANY: FORMER CONFORMED NAME: STANHOME INC DATE OF NAME CHANGE: 19920703 10-K 1 c75748e10vk.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, 2002 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. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was $90,248,977 on February 28, 2003. The number of shares outstanding of the registrant's Common Stock as of February 28, 2003 was 13,929,832 shares. Parts I, II and III 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, 2002 (the "2002 Annual Report"). Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement, dated March 18, 2003 (the "Proxy Statement"), for its Annual Meeting of Stockholders to be held on April 24, 2003. PART I ITEM 1. BUSINESS. General We are a global, full-line supplier of gift, collectible and home and garden decor products. We sell our products internationally 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, candles, tableware and general home accessories. Our products are primarily produced by independent manufacturers in the Far East. In certain instances, a factory's total capacity is devoted exclusively to Enesco's product. Our corporate headquarters is located at 225 Windsor Drive, Itasca, Illinois 60143-1225. Our telephone number at that location is (630) 875-5300. We maintain an Internet website at www.enesco.com. All of the reports that we file with the SEC are available, free of charge, at the Investor Relations section of our website as soon as reasonably practicable after such material is filed with the SEC. Product Enesco's giftware, collectible and home and garden decor product lines consist of approximately 24,000 items worldwide, including approximately 8,000 items sold in the United States. These product lines are comprised of: 1) product licensed by Enesco and its subsidiaries from independent creative designers; 2) Enesco's collection of proprietary designs; and 3) product distributed by Enesco under third party distribution arrangements. Most of our products have suggested retail prices between $5 and $50. Among Enesco's best known licensed lines are: o Precious Moments o Cherished Teddies o Kim Anderson's Pretty as a Picture o Walt Disney Company o Children of the Inner Light o Nickelodeon o Mary Engelbreit o Jim Shore o Julie Ueland o John Deere o It's A Wonderful Life o Rudolph the Red-Nosed Reindeer
During 2003, Enesco is celebrating the 25th anniversary of its Precious Moments collection. To mark the milestone, Enesco has created the collection's 25th anniversary pieces, which include limited edition figurines, ornaments and a plush bear. Enesco's best known proprietary product lines include: o Growing Up Girls o Circle of Love o Mary's Moo Moos o Lilliput Lane o Border Fine Arts o Foundations
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, we retire a number of the existing pieces from production each year. Enesco offers a wide range of other giftware and home and garden decorative items to satisfy seasonal and non-seasonal consumer demand. During 2002, Enesco increased its business with many mass retailers beyond its seasonal programs to include an Everyday Gift program, which includes many name brand licensed products. The Everyday Gift line offers giftware product that is distinct from that being sold at our independent gift retailers. In order to expand the breadth of our product offerings with minimal development and inventory costs, we have entered into several strategic distribution arrangements. These include alliances with: o Lamplight Farms, for Enesco to sell a line of candle and natural flame lighting products in the United States. o NICI AG, for Enesco to be the exclusive distributor in the United States and Canada of a line of plush animals and coordinating fashion accessories. -2- The NICI lines are targeted for the 'tween market and are popular, leading lines in Europe. o Publications International, for Enesco to sell a line of gift book and stationery products to the specialty retail channel in the United States. o Christmas by Krebs, for Enesco to sell a line of high quality glass ornaments to the specialty retail channel in the United States. Our subsidiaries in the United Kingdom, France and Canada have also entered into a number of distribution arrangements, including the Demdaco lines, Applause and Pine Ridge Art (in Canada). Enesco plans to enter into more strategic alliances for new product distribution opportunities. Beginning in 2002, Enesco began to display in its U.S. showrooms selected product offerings developed by our subsidiaries in the United Kingdom and Canada. These products were sold to Enesco's U.S. customers by our U.S. sales force. Each year, we undertake a comprehensive review of all products being sold and under development. Using an analysis based on profitability, we remove certain items from our product lines. Each year we will introduce new product offerings, on a selective basis, and plan to limit quantities of many items in our collectible lines. Customers Our core customers are approximately 30,000 independent gift retailers worldwide. In addition, we sell to national chains, mass merchants, department stores and catalogers, including Carlton Cards stores, Avon, Harry & David, Lowe's, Walgreens, CVS, Wal-Mart, Sears and Target. No single account represented more than 5% of Enesco's sales in 2002. During 2002, Enesco increased its business with many mass retailers beyond its seasonal programs to include an Everyday Gift program, which includes many name brand licensed products. During 2003, we expect this program to expand to additional mass accounts based on the strong sell-through results experienced in 2002. Sales and Marketing Enesco utilizes an account-focused sales team comprised of approximately 150 field sales employees based throughout the United States. 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 recently by the field sales team. In addition, we continue to utilize a team of sales executives to manage our larger, national accounts. Beginning in January 2002, several changes were initiated with the U.S. sales force aimed at increasing sales and improving market penetration and customer service. The compensation plan for our field sales force was changed to a commission based program from the salary plus bonus structure in 2001. Enesco's high end Milieu home decor line is sold in the U.S. by independent representative selling groups with the capacity of reaching customers not previously served by Enesco, and a team of inside sales executives to manage larger, national accounts. The Canadian, French and United Kingdom operations each have their own employee sales organizations. Enesco also has agreements with distributors in Australia, China, Ecuador, Germany, Hong Kong, Japan, Malaysia, The Netherlands, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand. In addition to selling various product lines in the U.K. and several other European countries, Enesco 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 Limited also administers the collectors clubs that are based in Europe. Our Canadian subsidiary, N.C. Cameron, also sells various product lines in Canada and administers the collectors clubs based in Canada. -3- Net international sales in 2002 increased less than 1% compared to 2001 and comprised approximately 31% of the Company's sales in 2002, compared with approximately 29% in 2001 and 24% in 2000. Local currency international sales were translated into U.S. dollars at higher exchange rates in 2002 versus 2001. If the 2002 local currency sales were translated into U.S. dollars at the 2001 exchange rates, international sales would have been lower by approximately $2.2 million in 2002. See also Note 5 to Consolidated Financial Statements appearing on Page 28 of the 2002 Annual Report, which is incorporated herein by reference. We believe that Enesco's general terms of sale are competitive in the giftware industry. Enesco offers extended payment terms and 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. 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 2002, 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, we closed one of our manufacturing plants in England, 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 2002, Enesco's purchases from its three largest contract manufacturers accounted for approximately 17%, 19% and 22%, respectively, of its total purchases, with no other single manufacturer accounting for more than 10% of Enesco's net purchases. During 2002, approximately 74% 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, disruption or substantial reduction of sourcing capability or shipping from one or more of our key manufacturing facilities could have a significant short-term adverse effect on Enesco's operations. Our global procurement and new product development strategies allow us to realize volume discounts for our U.S. operations and foreign subsidiaries. This global procurement approach helped us 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 and certain of our licensors. Distribution In order to serve our customers located in the United States, and to a certain extent international customers, product is shipped by ocean freight from abroad and then by rail or truck to Enesco's main warehouse and distribution facility, located -4- in Elk Grove Village, Illinois. This warehouse facility also serves as Enesco's primary distribution facility and main showroom. Enesco also uses 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. 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 2002, our sales peaked in the third quarter. At the end of 2002, Enesco had a backlog of orders totaling approximately $19 million, compared to $28 million at the end of 2001. It is standard practice in the giftware industry, however, that orders are subject to amendment or cancellation prior to shipment for various reasons, including credit considerations, product availability and customer requests. 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. We believe the decrease in backlog is due to continuing soft demand in the U.S. card, gift and collectible channel and a change in Enesco's sales and product launch processes. Starting in the fall of 2001, Enesco began introducing products to our U.S. retail customers that we have, or plan to have, in stock throughout the year. Previously, products would be presented to customers primarily at corporate and regional shows and, based on customer response, the products would either be ordered for stock or the customer orders would be cancelled. The previous selling process resulted in higher levels of net new orders and backlog as compared to the current selling process, which smoothes out the levels of new orders and backlog. Consequently, the previous selling process resulted in higher levels of subsequent order cancellations and unfilled orders. We believe our new selling process is more customer friendly and though it has resulted in lower net new orders and backlog, it also has lowered our order cancellation rate and unfilled orders. 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, 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 38% and 11%, respectively, of Enesco's consolidated revenue during 2002, compared to 39% and 13%, respectively, for 2001, and 38% and 14% for 2000. 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. -5- Employees and Related Matters As of December 31, 2002, Enesco employed 605 persons in the United States, which reflects the workforce reductions that occurred in 2002, eliminating approximately 44 positions in the United States. Enesco's U.S.-based warehouse personnel employed as of December 31, 2002 are represented by Local Union No. 781 of the Teamsters under a contract that expires on June 30, 2006. As of December 31, 2002, Enesco's foreign subsidiaries employed 683 persons. Enesco utilizes an account-focused sales team comprised of approximately 150 commission field sales employees based throughout the United States. Enesco continues to utilize a team of sales executives to manage larger national accounts and inside sales employees to manage smaller accounts on a telemarketing basis. 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 8 of the 2002 Annual Report, and "Notes to Consolidated Financial Statements" beginning at page 21 of the 2002 Annual Report, and is incorporated herein by reference. ITEM 2. PROPERTIES. - ------- ---------- The following chart summarizes the material real estate holdings of Enesco worldwide:
Location Description Owned/Leased Sq. Ft. -------- ----------- ------------ ------- Elk Grove Village, IL USA Warehouse, Owned 485,500 Distribution & main showroom Itasca, IL, USA Headquarters offices Owned 101,580 West Chicago, IL, USA Warehouse Leased 106,461 Mississauga, Ontario, Canada Warehouse, Leased 101,000 Distribution, showroom & offices Carlisle, Cumbria, England Warehouse, Leased 48,500 Distribution, showroom, offices Skirsgill, Penrith Manufacturing and Leased 31,000 England offices Villeneuve Loubet, France Warehouse, Leased 55,972 Distribution showroom & offices
The warehouse/showroom and headquarters properties located in Illinois are subject to collateral mortgages under Enesco's revolving credit facility. We also lease showrooms in seven other major market locations in the U.S. and a showroom in Hong Kong for the sale of our products. The facilities of Enesco are maintained in good operating condition and are, in the aggregate, adequate for our purposes and are generally fully utilized, with the exception of the West Chicago, IL warehouse which we plan to vacate and sublease. -6- 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 27, 2003:
Date First Name Age Positions Elected - ---- --- --------- ---------- Daniel DalleMolle 52 President and Chief Executive Officer 3/28/01 Director
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 78 Founding Chairman 9/02/98 Director 9/04/97 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. Thomas F. Bradley 51 Chief Financial Officer 1/06/03
Prior to Mr. Bradley joining Enesco in January 2003, he was President of Amerock, a manufacturer of cabinet hardware, since 1996. Mr. Bradley served in numerous vice president and controller positions at Newell Rubbermaid from 1984 until 1996. Before joining Newell Rubbermaid, Mr. Bradley held various financial positions at Rayovac Corporation. Jeffrey S. Smith 46 Senior Vice President 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 Anchor Hocking Co., a wholly owned subsidiary of Newell Rubbermaid, Inc. Jeffrey W. Lemajeur 41 Vice President, Finance and Treasurer 1/06/03 Chief Financial Officer 2/01/01 Treasurer 3/03/99
Mr. Lemajeur became Vice President of Finance, Strategic Planning, Mergers and Acquisitions in January 2003. 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. -7- Josette V. Goldberg 45 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 46 Vice President, General Counsel, 3/01/01 Secretary and Clerk
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 54 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. PART 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 2002 Annual Report and is incorporated herein by reference. Enesco did not declare any dividends in 2002. Future dividends and resumption of the stock repurchase program will depend on future financial results and the terms of our revolving credit facility. 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 2002 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 8 through 15 of the 2002 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 14 of the 2002 Annual Report and is incorporated herein by reference. -8- 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 16 through 32 of the 2002 Annual Report and is incorporated herein by reference. Also incorporated herein by reference are the Quarterly Results (Unaudited) during 2002 and 2001 set forth on page 34 of the 2002 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. For information regarding our change in independent auditors from Arthur Andersen LLP to KPMG LLP, please refer to our Form 8-K filed with the Securities and Exchange Commission (SEC) on June 10, 2002. We have had no disagreements with our independent auditors regarding accounting or financial disclosure matters. PART 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. 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 herein by reference. Securities Authorized for Issuance Under Equity Compensation Plans. Information required by this item is set forth under the caption "Executive Compensation - Equity Compensation Plans" in the Company's Proxy Statement and is incorporated herein 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. -9- ITEM 14. CONTROLS AND PROCEDURES. Within the 90 days prior to the date of this Form 10-K, Enesco carried out an evaluation, under the supervision and with the participation of Enesco's management, including Enesco's Chief Executive Officer, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of Enesco's disclosure controls and procedures. Based on that evaluation, Enesco's management, including the Chief Executive Officer, Chief Financial Officer and Treasurer, concluded that Enesco's disclosure controls and procedures are operating effectively as designed. There have been no significant changes in Enesco's internal controls or in other factors that could significantly affect internal controls subsequent to the date Enesco carried out its evaluation. We are committed to a continuing process of identifying, evaluating and implementing improvements to the effectiveness of our disclosure and internal controls and procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our controls and procedures will prevent all errors. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within Enesco have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in any control system, misstatements due to error or violations of law may occur and not be detected. ITEM 15. 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 13 of this Form 10-K. (a)(3) Exhibits. The exhibits required by this item are listed in the Exhibit Index on pages 19 - 21 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(gg) in the Exhibit Index. Reports on Form 8-K. A Current Report on Form 8-K dated June 10, 2002 was filed by Enesco Group, Inc. with the SEC under Item 4 regarding a change in Enesco's certifying accountant. Effective June 4, 2002, the Board of Directors of Enesco, upon the recommendation of its Audit Committee, decided to engage KPMG LLP as Enesco's independent public accountants for the fiscal year 2002. 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. -10- o Changes in economic conditions and specific market conditions o The ability to secure, maintain and renew popular licenses, particularly our licenses for Precious Moments and Cherished Teddies o Fluctuations in demand for our products o Manufacturing lead times o The effects of terrorist activity and armed conflict, such as disruption in global economic activity, changes in logistics and security arrangements, particularly with respect to our dependence on manufacturing facilities in China o The timing of orders, timing of shipments and our ability to meet customer demands o Inventory levels and purchase commitments exceeding requirements based upon future demand forecasts o Price and product competition in the giftware industry o The trend toward retail store consolidation in the card and gift channel in the United States o Variations in sales channels, product costs or mix of products sold o The geographical mix of our revenue and the associated impact on gross margin o Our ability to achieve targeted cost reductions, particularly in the United States' operations o Actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the amounts of certain assets (including the amounts of related allowances), liabilities and other items reflected in our financial statements. 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 27th day of March, 2003. ENESCO GROUP, INC. (Registrant) By: /s/ Daniel DalleMolle -------------------------------------- Daniel DalleMolle President and Chief Executive Officer By: /s/ Thomas F. Bradley -------------------------------------- Thomas F. Bradley Chief Financial Officer By: /s/ Jeffrey W. Lemajeur -------------------------------------- Jeffrey W. Lemajeur Treasurer -11- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 27th day of March, 2003 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/ 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 /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 -12- CERTIFICATION UNDER EXCHANGE ACT RULES 13a-14 AND 15d-14 PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Daniel DalleMolle, certify that: 1. I have reviewed this Annual Report on Form 10-K of Enesco Group, Inc. (the "Registrant"). 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this Annual Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Daniel DalleMolle ------------------------------------- President and Chief Executive Officer -13- CERTIFICATION UNDER EXCHANGE ACT RULES 13A-14 AND 15D-14 PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas F. Bradley, certify that: 1. I have reviewed this Annual Report on Form 10-K of Enesco Group, Inc. (the "Registrant"). 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this Annual Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Thomas F. Bradley ------------------------------------- Chief Financial Officer -14- ENESCO GROUP, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - Incorporated by reference to "Report of Independent Public Accountants" on pages 31 and 32 of the Enesco Group, Inc. 2002 Annual Report to Stockholders. FINANCIAL STATEMENTS - All of which are incorporated by reference to the Enesco Group, Inc. 2002 Annual Report to Stockholders. Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Operations For the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Retained Earnings For the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows For the Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements, December 31, 2002, 2001 and 2000 Quarterly Results (Unaudited) REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON PAGE 16 AND 17 SCHEDULE SUPPORTING FINANCIAL STATEMENTS: Schedule Number Description - -------- ----------- II Valuation and Qualifying Accounts and Reserves For Each of the Three Years Ended December 31, 2002(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. -15- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE To the Stockholders and Board of Directors of Enesco Group, Inc.: On February 18, 2003, we reported on the consolidated balance sheet of Enesco Group, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, retained earnings, comprehensive income and cash flows for the year then ended, as contained in the 2002 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for fiscal year 2002. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related financial statement schedule, as it relates to the year ended December 31, 2002, as listed in Item 15 of the annual report on Form 10-K. That financial statement schedule is the responsibility of the company's management. Our responsibility is to express an opinion on that financial statement schedule based on our audit. The consolidated financial statement schedule, as it relates to the years ended December 31, 2001 and 2000, was subject to auditing procedures performed by other auditors, who have ceased operations, whose report dated February 20, 2002 stated that such information is fairly stated, in all material respects, when considered in relation to the 2001 and 2000 basic consolidated financial statements taken as a whole. In our opinion, such financial statement schedule, as it relates to the year ended December 31, 2002, when considered in relation to the 2002 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As described above, the consolidated financial statement schedule, as it relates to the years ended December 31, 2000 and 2001, was audited by other auditors who have ceased operations. As described in Note 1 to the consolidated financial statements, in the year ended December 31, 2002, the Company changed its method of accounting for goodwill and intangible assets. We were not engaged to audit, review, or apply any additional procedures to the 2001 and 2000 consolidated financial statement schedules and, accordingly, we do not express an opinion or any other form of assurance on them. KPMG LLP Chicago, Illinois February 18, 2003 -16- 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 - -------------------------------------------------------------------------------- This report is a copy of a report previously issued by Arthur Andersen LLP. Arthur Andersen LLP has not reissued the report. The prior-period consolidated financial statements referred to in the report have been revised to include the transitional disclosures required by FAS 142, "Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. - -------------------------------------------------------------------------------- -17- ENESCO GROUP, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2002
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, 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 FOR THE YEAR ENDED DECEMBER 31, 2002 - ------------------------------------ Reserves which are deducted in the balance sheet from assets to which they apply- Reserves for uncollectible accounts $ 2,858,950 $ 1,633,892 $ - $ 1,735,650 $ 2,757,192 Reserves for returns and allowances $ 1,748,393 $ 3,594,676 $ - $ 4,160,152 $ 1,182,917 Accumulated amortization of other assets $36,317,424 $ - $ - $36,317,424 $ - Reserve for downsizing corporate headquarters $ 1,262,145 $ - $ - $ 768,111 $ 494,034 Reserve for discontinued operations $ 265,987 $ - $ - $ 53,530 $ 212,457
18 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)* 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.) 10 (i)* 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.) -19- 10 (j)* 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 (k)* 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, Thomas F. Bradley and Jeffrey S. Smith. 10 (l)* 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 (m)* 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 (n)* 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 (o)* 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 (p)* 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 (q) Fourth Amendment to License Agreement between Precious Moments, Inc. and Enesco Group, Inc. 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 10 (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.) -20- 10 (w)* 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 (x)* 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 (y)* 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 (z)* 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 (aa)* 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 (bb)* 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 (cc)* 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 (dd)* 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.) 10 (ee)* Eighth Amendment to Amended and Restated Senior Revolving Credit Agreement. (Exhibit 10.1 to Form 10-Q filed for the period ended March 31, 2002 in Commission File No. 0-1349.) 10 (ff)* ROA Incentive Program 2002 (Exhibit 10.2 to Form 10-Q filed for the period ended March 31, 2002 in Commission File No. 0-1349.) 10 (gg) Daniel DalleMolle Employment Agreement. 13 Portions of the 2002 Annual Report to the Stockholders of Enesco Group, Inc. 21 Subsidiaries of Enesco Group, Inc. 23.1 Consent of KPMG LLP 23.2 Statement regarding inability to obtain Consent of Arthur Anderson LLP 24 Power of Attorney 99.1 Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Incorporated By Reference -21- EX-10.(Q) 3 c75748exv10wxqy.txt FOURTH AMENDMENT TO LICENSE AGREEMENT Exhibit 10(q) FOURTH AMENDMENT TO AGREEMENT THIS AMENDMENT TO AGREEMENT, dated this 30th day of December, 2002, between UNITED FEATURE SYNDICATE, INC., d.b.a. UNITED MEDIA, a New York corporation with its principal office at 200 Madison Avenue, 4th Floor, New York, New York 10016 ("UM"), as exclusive worldwide licensing representative of PRECIOUS MOMENTS, INCORPORATED, an Illinois corporation with its principal office at 2170 Point Boulevard, Suite 200, Elgin, Illinois 60123 ("Licensor"), and ENESCO GROUP, INC., a Massachusetts corporation with its principal office at 225 Windsor Drive, Itasca, Illinois 60143 ("Licensee"), is to evidence: WHEREAS, pursuant to an agreement dated July 1, 1993, Licensor granted Enesco Corporation, an Ohio corporation ("Enesco Ohio"), certain rights with respect to the PRECIOUS MOMENTS property; and WHEREAS, said agreement was amended by amendments dated December 29, 1997, and January 22, 1999 (said agreement, as amended, being hereinafter referred to as the "Agreement"); and WHEREAS, Enesco Ohio assigned the Agreement to Licensee effective January 21, 2000; and WHEREAS, since the Agreement was signed UM has become exclusive worldwide licensing representative of Licensor; and WHEREAS, the Agreement was further amended by an amendment dated July 30, 2001; and WHEREAS, the parties wish to amend the Agreement further in certain respects; NOW, THEREFORE, the Agreement is amended as follows: 1. Subparagraph 2(c)(1) is deleted and the following substituted therefor: "(1) The establishment, marketing, and operation of the PRECIOUS MOMENTS Collectors Club (the 'Club') to facilitate a sharing of common enjoyment by individuals of the PRECIOUS MOMENTS Artwork and Designs." 2. Subparagraph 4(b) is deleted and the following substituted therefor: "(b) Notwithstanding any other provisions of this Agreement, the special percentage royalty provisions set forth below shall apply in the situations set forth below: "(i) Collectors Club FIGURINES. The percentage royalty for Club 'Members Only' FIGURINES sold by Licensee to Club members shall be 6.5% of the Net Retail Sales Price. Also, if at any time while this Agreement remains in effect the Club, in accordance with generally accepted accounting principles, begins operating at a profit, Licensee shall, commencing retroactively to the first quarter of the fiscal year in which Licensee began operating the Club at a profit, pay a royalty of 6.5% of the Net Retail Sales Price on all FIGURINES provided to Club members as part of New Member and Renewing Member kits (hereinafter the 'Symbol of Membership FIGURINES'); with respect to the Symbol of Membership FIGURINES, the Net Retail Sales Price for each Symbol of Membership FIGURINE shall be deemed to be the suggested retail price for such Symbol of Membership FIGURINE stated in Licensee's promotional literature offering such Symbol of Membership FIGURINE to Club members (the foregoing royalty shall be payable only with respect to the Symbol of Membership FIGURINES and not with respect to other elements of the kits). Licensee's royalty accountings under this Agreement shall be accompanied by a certificate, signed by Licensee's Chief Financial Officer, stating whether or not the Club was operated at a profit during the relevant accounting period. UM confirms that a $42,000 audit finding resulting from the audit of Licensee's books and records conducted in 2001 shall be credited toward the deferred $1,000,000 of the Difference Payment for calendar year 2001 due from Licensee, under subparagraph 4(c), on or before December 31, 2002. Licensor has determined not to pursue the audit finding resulting from said audit relating to the Symbol of Membership FIGURINES. "(ii) Abbeville Book. The percentage royalties payable for the existing Abbeville published book entitled PRECIOUS MOMENTS Last Forever (Paragraph H, Books, No. 3) shall be 7.5% of the Net Wholesale Sales Price. "(iii) 25th Anniversary Products.With respect to Licensed products commemorating the 25th anniversary of the Precious Moments Artwork and Designs (Licensee skus indicated below), Licensee shall pay a royalty of 10% of the Net Wholesale Sales Price; no royalty shall be due on printed collateral materials and premium items (e.g., balloons, key chains, and merchandising materials, such as signs) sent by Licensee to retailers free of charge along with the 25th anniversary Licensed Products to publicize the 25th anniversary celebration: #108531 ('Collecting Life's Most Precious Moments' Figurine') #108532 ('Collecting Life's Most Precious Moments' Ornament') #109682 (25th Anniversary Plush Teddy Bear) #PCC864 ('I will make you Fishers of Men' Lithograph) #522139 ('I will make you Fishers of Men' Figurine) #108543 ('A Portrait of Loving, Caring, and Sharing' Figurine) #488135 ('Delivering Good News to You' Figurine) #804444 ('Happy Anniversary' Figurine) #110238 ('Precious Moments from the Beginning' Figurine) #108602 ('Thanks for a Quarter Century of Loving, Caring and Sharing' Figurine) #110239 ('God Loveth A Cheerful Giver' Ornament) #108544 ('Marching Ahead to Another 25 years of Precious Moments') "(iv) Royalty-Free Licensed Products. Licensee acknowledges that it shall have no right to sell any Licensed Products on a royalty-free basis without the express prior written consent of Licensor and UM." 3. Subparagraph 4(c) is deleted and the following substituted therefor: "(c) Guaranteed Minimum Royalties. If the total of the royalties due to Licensor from Licensee, pursuant to subparagraphs 4(a) and 4(b) hereof, during any calendar year (starting with Calendar year 1998) during the Term of this Agreement is less than $15,000,000 (hereinafter the 'Annual Minimum Royalty'), Licensee agrees to pay Licensor the difference between the Annual Minimum Royalty and the total of the royalties (hereinafter the 'Difference Payment') due for the prior calendar year. Any such Difference Payment shall be paid no later than 90 days after the last day of December of the prior calendar year. Notwithstanding the foregoing, Licensor has deferred $1,000,000 of the Difference Payment for calendar year 2001 so that Licensee shall not be obligated to pay said $1,000,000 until on or before December 31, 2002. Licensee shall pay Licensor interest on said deferred amount at a rate of 3% per year from March 31, 2002." 4. Except as expressly modified by this amendment, all terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this fourth amendment to agreement as of the date set forth above. UNITED FEATURE SYNDICATE, INC. d.b.a. UNITED MEDIA, as exclusive worldwide licensing representative of PRECIOUS MOMENTS, INCORPORATED By /s/ Joshua Kislevitz ----------------------------------- ENESCO GROUP, INC. By: /s/ Dan DalleMolle ----------------------------------- EX-10.(GG) 4 c75748exv10wxggy.txt DANIEL DALLEMOLLE EMPLOYMENT AGREEMENT Exhibit 10(gg) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 10th day of February, 2003, between Enesco Group, Inc., a Massachusetts corporation ("Employer"), and Daniel DalleMolle ("Employee"). WITNESSETH: WHEREAS, Employee and Employer desire to enter into this Agreement pertaining to the terms of the employment of the Employee by Employer; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Employment. Employer hereby agrees to continue to employ Employee, and Employee hereby accepts such continued employment by Employer, upon the terms and conditions herein set forth. Employee shall serve as President and Chief Executive Officer of Employer. Although it is contemplated that Employee will undertake some travel as part of his duties, the primary place of employment shall be at Employer's principal offices, located at Itasca, Illinois. Employee also shall continue to be elected to the Executive Committee of the Board of Directors as long as he is a member of the Board. 2. Term. The term of the Agreement shall commence on April 1, 2003, and shall expire on March 31, 2006 unless sooner terminated as hereinafter provided. After expiration of the term, and subject to the termination provisions hereinafter contained, the Agreement may be renewed for additional one to five year periods by mutual written agreement of the parties. If the Board chooses not to renew the Employee's contract, the Employee will be entitled to severance as defined in the Section 6 below. 3. Duties. Employee will, during the term hereof (a) faithfully and diligently do and perform all such acts and duties and furnish such services as the Board of Directors of Employer shall direct, (b) do and perform all acts in the ordinary course of Employer's business (with such limits as the Board of Directors of Employer may prescribe) necessary and conducive to Employer's best interests, (c) execute all duties attendant to his office, and (d) devote his full time, energy, and skill to the business of Employer and to the promotion of Employer's best interests, except for vacations, holidays and absences made necessary because of illness and except that Employee may participate in the affairs of any governmental, educational or charitable institution, and serve as a member of the board of directors of other companies so long as the Board of Directors of Employer does not determine that such activities interfere with the business of Employer or diminish Employee's obligations under the Agreement. Employee's performance under this Agreement will be reviewed annually by the Board of Directors. 1 4. Compensation. Employer shall pay to Employee for all services to be performed by Employee during the term of the Agreement: (a) A base annual salary at the rate of $480,000 (Base Salary), payable in substantially equal periodic semi-monthly installments less applicable deductions in accordance with Employer's practices for other executives, as such practices may be determined from time to time. During March of each year, the Employee's compensation shall be considered for an annual review by the Board of Directors and Compensation Committee. (b) Employee shall be eligible for a bonus for each fiscal year of employment pursuant to his written objectives under the Return on Assets Incentive Bonus Plan (ROA Bonus Plan) for Employer's senior management, which is adopted annually by Employer's Board of Directors. (c) Any additional or special compensation, such as incentive pay or bonuses, based upon Employee's performance, as the Board of Directors of Employer, in its discretion, may from time to time determine. 5. Fringe Benefits. (a) Employee shall be eligible to participate in any incentive plans or arrangements ("Incentive Plans") that Employer may establish or practices it may follow for the benefit of its executives as in effect from time to time, and shall be entitled to receive any other bonus or discretionary compensation payments as Employer may determine from time to time. (b) Employee shall be entitled to paid vacations in accordance with Employer's customary vacation policy. Employee shall also be entitled to all paid holidays given by Employer to its other senior executives. (c) Employee and his dependents shall be entitled to participate in and receive benefits under any qualified or supplemental defined contribution retirement plan, health and dental plan, disability plan, survivor income plan, and life insurance plan or arrangement ("Benefits Plans"), and any additional or substitute Benefit Plans Employer may make available in the future to its senior executives, subject to and on a basis consistent with the terms, conditions, and overall administration of such Benefit Plans. (d) Employee shall be entitled to the use of a company-leased automobile, with regular maintenance, insurance and appropriate business expenses related thereto reimbursed, subject to Employer's receipt of the original receipts therefor. 2 6. Termination. (a) Employee shall have the right at any time during the term of this Agreement to terminate his employment with the Employer upon giving ninety (90) days written notice of said termination to Employer. In the event of termination of his employment by Employee for any reason, Employer shall have no further liability hereunder from and after the date of termination other than the payment of all compensation (base salary and bonus, if any, payable in accordance with the terms of the ROA Bonus Plan) to Employee or his heirs or his personal representatives for all periods prior to such termination. (b) Employer shall have the right at any time during the term of this Agreement to terminate the employment of Employee with Employer upon giving notice to Employee. In the event of termination of his employment by Employer for any reason other than "good cause," Employer shall continue to pay Employee an amount equal to his Base Salary for twenty-four (24) months, plus two bonus payments under the ROA Bonus Plan each of an amount equal to the average bonus payout, if any, paid to Employee for the last two years (payable at the normal times that bonuses are paid under the ROA Bonus Plan), subject to Employee's execution of Employer's standard form of Release, and Employer shall have no further liability to Employee. The Employee may choose to receive his severance of twenty-four (24) months of base pay and two bonus payments in one lump sum. In addition, the Employee may exercise any stock options that have vested in accordance with the terms of the Stock Option Grant. For purposes of the preceding sentence, "good cause" shall be deemed to exist if, and only if: (i) Employee shall engage, during the performance of his duties hereunder in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation, moral turpitude, willful misconduct, intentional wrongdoing or malfeasance; (ii) Employee shall be convicted of a criminal violation involving fraud, dishonesty or moral turpitude; or (iii) Employee shall materially breach the Agreement other than by engaging in acts or omissions enumerated in clauses (i) and (ii) above), and such breach by its nature, is incapable of being cured, or such breach remains uncured for more than ten (10) days following receipt by Employee of written notice from Employer specifying the nature of the breach and demanding the cure thereof. 7. Death. If Employee dies during the term of the Agreement, Employer agrees to pay to a beneficiary designated in writing by Employee, an amount equal to Employee's aggregate Base Salary (at the rate then in effect) for a period of twelve (12) months from the date of death and an amount equal to the annual average of Employee's bonus payments for the two calendar years preceding the year of death. Such 3 payments shall be made at the same times, as they would have been made to Employee if he were alive and employed by Employer. Any death benefits payable under this Paragraph 7 are in addition to any other benefits due to Employee or his beneficiaries or dependents from Employer. 8. Disability. If during the term of this Agreement Employee incurs a Disability, Employee's obligation to perform his services hereunder will terminate and in such event Employer agrees: (a) to continue to pay Employee his Base Salary (at the rate then in effect) during a period equal to the lesser of twelve (12) months from the date of onset of such Disability or the balance of the term of this Agreement (the "Disability Period"); (b) to pay to Employee during the Disability Period the bonus provided pursuant to Paragraph 4(b) of this Agreement; and (c) during the Disability Period to continue to cover Employee and his dependents under all health, dental, disability, accident and life insurance plans or arrangements made available by Employer in which Employee or his dependents were participating immediately prior to the date of onset of such Disability as if Employee continued to be an employee of Employer; provided that, if participation in any one or more of such plans and arrangements is not possible under the terms thereunder, Employer will provide substantially identical benefits. Notwithstanding the foregoing, any payments to Employee pursuant to subparagraphs (a) and (b) above shall be reduced by the amount of any disability benefits otherwise payable to Employee under any disability program(s) maintained by Employer. If Employee is receiving benefits hereunder and his Disability ceases, his benefits under this Paragraph 8 shall terminate. For purposes of the Agreement, the term "Disability" will have the same meaning as in Employer's long-term disability plan, or if no such plan exists shall mean a physical or mental disability, as determined by an independent physician selected with the approval of both Employer and Employee, which will render Employee incapable of performing his duties under the Agreement for 60 days or more within any 365-day period. 9. Noncompetition. In consideration of Employee's employment hereunder, Employee hereby agrees that during the initial or any renewal term of the Agreement and for a period of two years thereafter, he will not, singly, jointly, or as a member, employee, or agent of any partnership or as an officer, agent, employee, director or stockholder, or inventor of any other corporation or entity, or in any other capacity, directly or indirectly: (a) own, manage, operate, participate in, perform services for or otherwise carry on, assist or be connected with a Competing Business doing business anywhere within the respective territories in which Employer's business is then carried on (provided that the foregoing shall not apply to any corporation, partnership or other entity 4 in which Employee (and/or his spouse and/or children) only owns an ownership interest of one percent (1%) or less and exercises not more than one percent (1%) of the voting control); (b) solicit or contact (or assist in any solicitation or contact of) any customer of Employer with a view toward inducing the purchase of a Competing Product or otherwise diverting business from Employer; (c) induce or attempt to persuade any employee or agent of Employer to terminate such employment or agency relationship or violate the terms of any agreement with Employer; or (d) induce or attempt to persuade any customer or supplier of Employer to terminate or materially change such relationship; For purposes of this Agreement. "Competing Products" means products, processes or services of any person or organization other than Employer, in existence or under development, which are substantially the same as or which perform the same function or otherwise compete with any products, processes, or services developed, manufactured or sold by Employer during the time of the Employee's employment with the Employer or about which Employee acquires Confidential Information through his relationship with Employer, including, but not limited to, the creation, manufacturing, marketing and distribution of giftware, collectibles and home decor product. "Competing Business" means any person or organization engaged in, or planning to become engaged in, research, development, production, distribution, marketing, providing or selling of a Competing Product. 10. Confidentiality. Employee acknowledges that preservation of a continuing business relationship between Employer and its subsidiaries and its respective customers, representatives and employees is of critical importance to the continued business success of Employer, that it is the policy of Employer and its subsidiaries to guard as confidential the Confidential Information defined below, and that as Chief Executive Officer Employee will acquire Confidential Information and personal relationships with customers and prospective customers, which relationships may constitute Employer's primary relationships with such customers and prospective customers. In view of the foregoing, Employee agrees that, except as required for the performance of his duties under this Agreement, he will not during the initial or any renewal term of the Agreement and thereafter, without the prior written consent of Employer, use for the benefit of himself or any third party or disclose to any third party any Confidential Information. Employee further agrees that if his employment by Employer is terminated for any reason, he will not take with him but will leave with Employer all records and papers and all matter of whatever nature which contains Confidential Information. For purposes of this Agreement, "Confidential Information" means any information, including any plan, 5 drawing, specification, pattern, procedure, design, device, list or compilation, which relates to the present or planned business of Employer which has not been disclosed publicly by authorized representatives of Employer. Confidential Information may include, for example, inventions, marketing and sales plans or programs; customer and supplier information and lists; financial data; purchasing and pricing information; product engineering information; technological know-how; designs, plans or specifications regarding products and materials; manufacturing processes and techniques; regulatory approval strategies; computer programs, data, formulae and compositions; service techniques and protocols; and new product strategies, plans and designs. Confidential Information also includes all information received by Employer under an obligation of confidentiality to a third party. 11. Patent and Trade Secret Agreement. (a) Employee will promptly report to Employer all discoveries, inventions or improvements of whatsoever nature conceived or made by him at any time he was employed by Employer. All such discoveries, inventions and improvements which are applicable in any way to Employer's business shall be the sole and exclusive property of Employer. (b) Whenever requested by Employer, whether during or subsequent to his employment by Employer, Employee agrees to execute any papers Employer may deem necessary for the protection of its interest in said discoveries, inventions, and improvements, trade secrets and confidential information, including written assignments of inventions to Employer. (c) The covenants set forth in this Paragraph 11 are made by Employee in consideration of the employment, or continuing employment of, and the compensation paid to, Employee during his employment by Employer. 12. Remedies. Employee acknowledges that the services to be rendered by him hereunder are of a special, unique and extraordinary character, that it would be likely to be highly injurious to Employer or its successors in interest with respect to the resulting disruption in their management, and by reason of the foregoing Employee consents and agrees that if, during the term of the Agreement he violates any provisions of the Agreement, Employer or its successors in interest shall be entitled, in addition to any other remedies that they may have, including money damages, to an injunction to be issued by a court of competent jurisdiction, restraining him from committing or continuing any violation of the Agreement. If, at any time, Employee violates, to any material extent, any of the covenants or agreements set forth in Paragraphs 9, 10 and 11 of this Agreement, Employer shall have the right to immediately terminate all of its obligations to make any further payments under the Agreement. 6 13. Assignment. Neither Employee nor Employer may assign the Agreement, except that Employer's obligations hereunder shall be binding legal obligations of any successor to all or substantially all of Employer's business by purchase, merger, consolidation, or otherwise. 14. Employee Assignment. No interest of Employee or his spouse or any other beneficiary under the Agreement, or any right to receive any payment or distribution hereunder, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind, nor may such interest or right to receive a payment or distribution be taken, voluntarily or involuntarily, for the satisfaction of the obligations or debts of, or other claims against, Employee or his spouse or other beneficiary, including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. 15. Benefits Unfunded. All rights of Employee and his spouse or other beneficiary under the Agreement shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of Employer for payment of any amounts due hereunder. Neither Employee nor his spouse or other beneficiary shall have any interest in or rights against any specific assets of Employer, and Employee and his spouse or other beneficiary shall have only the rights of a general unsecured creditor of Employer. 16. Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of the Agreement to be performed by the other party shall be deemed a waiver of any other provisions or conditions at the same time or at any prior or subsequent time. 17. Applicable Law. The Agreement shall be construed and interpreted in all respects pursuant to the laws of the State of Illinois (without regard to principles of conflicts of laws) applicable to contracts made and to be performed within such State. 18. Entire Agreement. The Agreement contains the entire Agreement between Employer and Employee and supersedes any and all previous agreements, written or oral, between the parties relating to the subject matter hereof. No amendment or modification of the terms of the Agreement shall be binding upon either of the parties hereto unless reduced to writing and signed by each of the parties hereto. 19. Counterparts. The Agreement may be executed in counterparts, each of which shall be deemed an original. 20. Severability. In the event any provision of the Agreement is held illegal or invalid, the remaining provisions of the Agreement shall not be affected thereby. 21. Successors. The Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives and successors. 7 22. Notices. Notices required under the Agreement shall be in writing and shall be deemed duly given on the first business day after the day of sending by national next-day courier service, upon confirmation of delivery by telecopy or five business days after mailing by registered mail, return receipt requested, to the following addresses or phone numbers or to such other address or phone number as the party being notified may have previously furnished to the others by written notice: If to Employer: Anne-Lee Verville, Chairman of the Board Enesco Group Inc. 225 Windsor Drive Itasca, Illinois 60143 630-875-5552 With a copy to: General Counsel Enesco Group, Inc. 225 Windsor Drive Itasca, Illinois 60143 630-875-5300 630-875-8464 (telecopy) If to Employee: Mr. Daniel DalleMolle Chief Executive Officer Enesco Group Inc. 225 Windsor Drive Itasca, Illinois 60143 630-875-8110 With a copy to: Ron Parizek Byrne Nadborne & Associates 206 S. Jefferson Chicago, Illinois 60661 312-454-1500 23. Arbitration. Except as to any matters in respect to which Employer elects to proceed in accordance with the provisions of Paragraph 12 hereof, any controversy or claim arising out of the Agreement, or breach hereof, shall be settled by arbitration in the City of Chicago pursuant to the rules and procedures of J.A.M.S. Endispute before a single arbitrator. The arbitrator's determination shall be final and binding upon all parties and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 24. Board Approval. The right and obligations of Employer under the Agreement are contingent upon the approval or ratification by its Board of Directors of the execution of the Agreement on its behalf. 8 25. Withholding. Employer may withhold from any payment that it is required to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law. 26. Headings. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of any provision of the Agreement. IN WITNESS WHEREOF, Employer and Employee have executed this Agreement as of the day and year first above written. Enesco Group, Inc. By: /s/ Anne-Lee Verville ------------------------------- Anne-Lee Verville Chairman of the Board Employee: /s/ Daniel DalleMolle ----------------------------------- Daniel DalleMolle 9 EX-13 5 c75748exv13.txt PORTIONS OF THE 2002 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13 (ENESCO GROUP, INC. LOGO) 2002 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL CONTENTS - -------------------------------------------------------------------------------- Management's Discussion and Analysis page 8 - -------------------------------------------------------------------------------- Consolidated Financial Statements page 16 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements page 21 - -------------------------------------------------------------------------------- Reports of Independent Public Accountants page 31 - -------------------------------------------------------------------------------- Stock Market, Dividend and Shareholder Information page 33 - -------------------------------------------------------------------------------- Quarterly Results page 34 - -------------------------------------------------------------------------------- Five-Year Financial Highlights page 35 - -------------------------------------------------------------------------------- Corporate Data page 36 - -------------------------------------------------------------------------------- ENESCO GROUP, INC. 2002 ANNUAL REPORT 7 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 2002 COMPARED TO 2001 Net revenues decreased $13 million, or 5%, in 2002 due to lower product sales in the United States. Net sales in the United States decreased 7%, primarily in the traditional collectible, card and gift channels, continuing a trend in recent years. The decrease was due primarily to reduced sales of Precious Moments, Cherished Teddies and Harry Potter merchandise, partially offset by an increase in home decor merchandise. Net International sales increased less than 1% in 2002 compared to 2001 and represented approximately 31% of total sales in 2002 compared to 29% of total sales in 2001. Local currency International sales were translated into United States dollars at higher exchange rates in 2002 versus 2001. If the 2002 local currency sales were translated into United States dollars at the 2001 exchange rates, International sales would have been lower by approximately $2.2 million in 2002. Enesco's Precious Moments lines represented approximately 38% of 2002 sales compared to 39% in 2001. The Cherished Teddies lines represented 11% of 2002 sales compared to 13% in 2001. The number of members in the Precious Moments and Cherished Teddies collector clubs were both down approximately 7% at December 31, 2002, compared to December 31, 2001. As of January 1, 2002, numerous U.S. sales force 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 from a salary plus bonus format. Additionally, this sales force has been focused to serve only the collectibles, card and gift channels. The U.S. home decor channel is serviced by independent representative selling groups with the capability of reaching customers not currently served by Enesco, along with a team of inside sales executives to manage larger national accounts. Along with these changes in Enesco's U.S. sales force, new domestic programs have been initiated to provide Enesco customers better value, including extended payment terms,more flexible shipping schedules and improved product availability. Net open orders (backlog) as of December 31, 2002, were $19 million, down approximately $9 million, or 32%, compared to the same period last year. Net open orders are orders received and approved by Enesco, subject to cancellation for various reasons, including credit considerations, product availability and customer requests. The decrease in backlog is primarily due to a change in Enesco's product launch and sales processes. Enesco now introduces products to our U.S. retail customers that we have, or plan to have, in stock throughout the year. Previously, products would be presented to customers primarily at corporate and regional shows and, based on customer response, the products would either be ordered for stock or the customer orders would be cancelled. The previous selling process resulted in higher levels of net new orders and backlog as compared to the current selling process. Consequently, the previous selling process resulted in higher levels of order cancellations and net open orders. We believe the new selling process is more customer friendly and 8 ENESCO GROUP, INC. 2002 ANNUAL REPORT although it results in lower net new orders and backlog, it has also lowered our order cancellation rate. Gross profit increased $874 thousand, or 1%, in 2002 as compared to 2001. The primary reason for the gross profit increase in 2002 as compared to 2001 was the 2001 non-cash charge of $8.7 million related to the write down of inventory values. Enesco's gross profit margin, expressed as a percentage of net sales, was 42% of sales in 2002 compared to 43% in 2001 (exclusive of the $8.7 million charge in 2001). The 2002 gross profit margin percentage was adversely impacted by increased sales of close-out items written down in the fourth quarter of 2001. Selling, distribution, general and administrative expenses ("SD&A") decreased $20.5 million, or 18%, in 2002 versus 2001 and represented 37% of sales in 2002 compared to 43% in 2001. 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 quarters of 2001) 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 did not generate any one-time charges. Results for 2002 include onetime charges of $346 thousand for severance provisions. Exclusive of one-time items, SD&A costs for 2002 were down $17.7 million, or 16%, from 2001. Significant cost reductions were achieved through headcount reductions, less travel, lower showroom rental expense, less bad debt expense and lower catalog printing costs. Additional less significant savings have been achieved in most spending categories. SD&A costs, excluding one-time items, were 37% of sales for 2002, compared to 41% for 2001. Enesco expects to report continued reductions in recurring operating expenses going forward. In 2002, amortization of goodwill ceased in accordance with FAS 142. Amortization of goodwill was zero in 2002 as compared to $2.0 million 2001. Due to the factors described above, 2002 operating profit increased $23.3 million compared to 2001. Operating profit in the United States increased $20.0 million and International operating profit increased $3.3 million compared to 2001. 2001 COMPARED TO 2000 Net revenues decreased $57 million, or 18%, in 2001 due to lower product sales in the United States. Net sales in the United States decreased 23%, primarily in the traditional collectible, card and gift channels, continuing a trend in recent years. The biggest single portion of the decrease related to sales of Harry Potter merchandise, which were $10 million less in 2001 compared to 2000. Net International sales decreased 2% 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 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. Net open orders (backlog) as of December 31, 2001, were down approximately $20 million, or 42%, compared to ENESCO GROUP, INC. 2002 ANNUAL REPORT 9 the same period last year. Contributing to this decrease was 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 $33 million, or 24%, in 2001 largely as a result of the sales decrease. Results for 2001 included 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 valued 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 43% in 2000 (exclusive of the $2.9 million charge). Selling, distribution, general and administrative expenses ("SD&A"), decreased $16.0 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 quarters) 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 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 $17.2 million, or 14%, 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 41% of sales for 2001, compared to 40% for 2000. Enesco initiated numerous cost savings programs in 2001 aimed at increasing margins, lowering operating costs, and increasing efficiencies including: o Enesco reduced its U.S. workforce by 14% (120 positions) in May 2001, generating annual savings of approximately $8 million. o In August 2001, a further domestic workforce reduction eliminated approximately 45 positions generating an additional estimated $3.5 million of annual savings. o A U.K. manufacturing site was closed in September 2001 eliminating 45 positions, generating annual savings of approximately $700 thousand. o Enesco restructured its Operations, Marketing and Creative departments generating efficiencies in the supply chain and product development cycle as well as improving customer service. o Operating costs were more closely scrutinized, unnecessary expenditures were eliminated, and all incremental spending was 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. 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. 10 ENESCO GROUP, INC. 2002 ANNUAL REPORT INTEREST EXPENSE, INTEREST INCOME AND OTHER EXPENSE, NET Interest expense of $747 thousand for 2002 was $776 thousand less than 2001 due to lower average borrowings and lower interest rates. Interest income for 2002 is $286 thousand compared to $371 thousand in 2001 due to lower interest rates. Other expense, net, for 2002 is higher by $191 thousand due to increased bank charges and foreign currency losses. 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 was 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 was higher due to a non-recurring $625 thousand gain on an expired warranty term recorded in the second quarter of 2000. PROVISIONS FOR INCOME TAXES The 2002 tax provision includes a $12.9 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 2002 effective tax rate (excluding the 2002 $12.9 million benefit) was 34.2% compared to 31.1% in 2001 (excluding a 2001 $9.4 million benefit). The difference from the effective tax rate for 2001 reflects the geographical mix of earnings and the impact of non-deductible goodwill amortization. The effective tax rate differs from the U.S.statutory rate primarily due to the varying tax rates of foreign jurisdictions. Our future effective tax rates could be affected if the mix of earnings change in countries where we have lower statutory rates or if tax laws and regulations change. The 2001 tax provision included 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 effective tax rates may vary from year to year. LIQUIDITY AND CAPITAL RESOURCES Enesco has historically satisfied its capital requirements with internally generated funds and short-term loans. Cash balances and working capital requirements fluctuate due to operating results, shipping cycles, accounts receivable collections, inventory management and timing of payments, among other factors. Working capital requirements fluctuate during the year and are generally greatest early in the fourth quarter and lowest early in the first quarter. Cash and cash equivalents were $17.4 million on December 31, 2002. Operating cash flows are a function of our earnings plus non-cash expenses such as depreciation and our ability to manage working capital. Net cash provided by operating activities in 2002 was $18.2 million versus $13.2 million in the prior year. The major sources of funds from changes in working capital include lower accounts receivable and lower inventories. The major uses of funds from operating activities in 2002 were lower accounts payable and lower current income taxes. The lower accounts receivable is a function of faster collections being partially offset 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 efforts to reduce inventory to the level needed to support current sales levels. Accounts payable decreased due to fewer inventory purchases in late 2002 and the seasonality of product purchased. Accrued expenses decreased due to the timing of payments and the impact of lower sales volumes. Current income tax liabilities were reduced by a $12.9 million reversal of prior year accruals, which were no longer required. The corporate headquarters closing reserve (Note 10 to the Consolidated Financial Statements) at December 31, 2002, totaled $500 thousand, a decrease of $700 thousand ENESCO GROUP, INC. 2002 ANNUAL REPORT 11 from year end 2001, relating to payments made in 2002. 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: $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 potential 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 are adjusted through the provision for income taxes. In 2002, the adjustment was a tax benefit of $12.9 million. The majority of the open tax years become closed for assessment at the end of December for the particular open year. The major use of cash in investing activities in 2002 was for capital expenditures. Capital expenditures increased $1.6 million, or 57%, in 2002 as compared to 2001 mainly due to computer hardware and software purchases related to implementation of a new computer system planned in 2003. The major use of cash in financing activities in 2002 was for the repayment of debt. Enesco did not declare any dividends in 2002. Future dividends and resumption of the stock repurchase program will depend on future financial results. Note 4 to the Consolidated 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, 2002, authorization to purchase one million shares remained available under the program. No shares were purchased in 2001 or 2002. 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 domestic 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 minimum operating profit, 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. In May 2002, the credit facility was further amended to extend the termination date to May 2003. Certain financial covenants were also modified. As of December 31, 2002, Enesco was in compliance with all covenants in the revolving credit facility. In January 2003, the security interest in Enesco's inventory was released. The size of the facility remains at $50 million. Enesco is currently pursuing various options to meet capital and operating needs after the credit agreement expires. Enesco believes it has access to a wide variety of financing arrangements based on our credit rating, historic operating cash flows 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. We believe that our current cash and cash equivalents, cash generated from operations, and available financing alternatives will satisfy our expected working capital needs, capital expenditures and other liquidity requirements associated with our existing operations. In addition, there are no transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or requirements for capital resources. The principal sources of Enesco's liquidity are its available cash balances, cash from operations and available financing alternatives. At December 31, 2002, Enesco had formal and 12 ENESCO GROUP, INC. 2002 ANNUAL REPORT informal unused lines of credit of approximately $63 million. The informal lines are bank lines that have no commitment fees. As of December 31, 2002, Enesco had no interest bearing debt outstanding. 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):
LESS THAN AFTER CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS - --------------------------------------------- ---------- ---------- ---------- ---------- ---------- Short-term borrowings $ -- $ -- $ -- $ -- $ -- Letters of credit 3,600 3,600 -- -- -- Operating leases 10,200 3,400 5,600 1,200 -- License guarantees 75,800 15,400 45,400 15,000 -- ---------- ---------- ---------- ---------- ---------- Total Contractual Cash Obligations $ 89,600 $ 22,400 $ 51,000 $ 16,200 $ -- ========== ========== ========== ========== ==========
CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, the accounting for allowances for doubtful accounts and sales returns, inventory valuations, goodwill impairments, contingencies, restructuring costs and other special charges and taxes. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements. The allowance for doubtful accounts is based on our assessments of the collectibility of specific customer accounts and the aging of accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are significantly different than our historical experience, estimates of the recoverability of amounts due could be affected. An allowance for sales returns is established based on historical trends in product returns. If future returns do not reflect historical trends, revenue could be affected. Inventory purchases and commitments are based on future demand forecasts. If there is a sudden or significant decrease in demand for our products or there is a higher incident of inventory obsolescence because of rapidly changing customer requirements, we may be required to decrease the carrying value of inventory and gross profit could be affected. Enesco has established accruals for taxes payable and tax assessments. The accruals are included in current income ENESCO GROUP, INC. 2002 ANNUAL REPORT 13 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 provisions for income taxes. The majority of open tax years become closed for assessments at the end of December for the particular open year. MARKET RISK We conduct business globally. Accordingly, our future results could be materially affected by a variety of uncontrollable and changing factors including, among others, foreign currency exchange rates; regulatory, political or economic conditions in a specific country or region; trade protection measures and other regulatory requirements; and shipping disruptions due to war or terrorist activities, natural disasters or other factors. Any or all of these factors could have a material impact on our future results. As a global concern, we face exposure to movements in foreign currency exchange rates. These exposures may change over time and could have a material impact on our financial results and cash flows. Historically, our primary exposures have related to non dollar-denominated transactions in Canada and Europe, as well as dollar denominated inventory purchases by our International operating units. At the present time, we hedge only those currency exposures associated with certain assets and liabilities denominated in foreign currencies and periodically will hedge anticipated foreign currency cash flows. The hedging activity undertaken by Enesco is intended to offset the impact of currency fluctuations on certain foreign currency transactions. To manage foreign currency risk, as of December 31, 2002, Enesco had entered into a forward exchange agreement with a notional value of $8.0 million to mature within two days. This contract was to sell U.S. dollars and purchase British pounds sterling at an average exchange rate of 1.60. The fair value of the contract is not significant. As of December 31, 2002, Enesco had no outstanding interest bearing debt. RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, FAS No. 146, "Accounting For Costs Associated with Exit or Disposal Activities" was issued. This statement revises accounting for specified employee and contract terminations that are part of restructuring activities, but excludes restructuring activities of operations acquired in a business combination. The provisions require that exit or disposal costs be recorded when they are incurred and can be measured at fair value. The provisions of this statement are effective for activities that are initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on Enesco's financial condition, results of operations, or cash flows. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires a guarantor to recognize, at the inception of a qualified guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 is effective on a prospective basis for qualified guarantees issued or modified after December 31, 2002. The adoption of this Interpretation is not expected to have a material impact on Enesco's financial condition or results of operations. In December 2002, the FASB issued FAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure-an amendment of FAS 123." This statement amends FAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Enesco has 14 ENESCO GROUP, INC. 2002 ANNUAL REPORT chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of the Enesco stock at the date of the grant over the amount an employee must pay to acquire the stock. Enesco has adopted the annual disclosure provisions of FAS No. 148 in its financial reports for the year ending December 31, 2002, and will adopt the interim disclosure provisions for its financial reports for the quarter ended March 31, 2003. As the adoption of this standard involves disclosures only, Enesco does not expect a material impact on its results of operations, financial position or liquidity. 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 in this section. 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. These risk factors include: o Changes in economic conditions and specific market conditions o Fluctuations in demand for our products o Manufacturing lead times o The effects of terrorist activity and armed conflict, such as disruption in global economic activity, changes in logistics and security arrangements o The timing of orders, timing of shipments and our ability to meet customer demands o Inventory levels and purchase commitments exceeding requirements based upon future demand forecasts o Price and product competition in the giftware industry o The trend toward retail store consolidation in the card and gift channel o Variations in sales channels, product costs or mix of products sold o The ability to secure, maintain and renew popular licenses o The geographical mix of our revenue and the associated impact on gross margin o Our ability to achieve targeted cost reductions o Actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the amounts of certain assets (including the amounts of related allowances), liabilities and other items reflected in our financial statements. 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 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. ENESCO GROUP, INC. 2002 ANNUAL REPORT 15 CONSOLIDATED BALANCE SHEETS ENESCO GROUP, INC. December 31, 2002 and 2001 ASSETS
(In thousands) 2002 2001 CURRENT ASSETS: Cash and cash equivalents $ 17,418 $ 7,932 Accounts receivable, net 54,347 58,582 Inventories 48,334 56,437 Prepaid expenses 2,491 2,622 Deferred income taxes and taxes receivable 7,586 13,052 ------------- ------------- Total current assets 130,176 138,625 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Land and improvements 3,710 3,710 Buildings and improvements 36,058 34,739 Machinery and equipment 8,828 6,603 Office furniture and equipment 23,862 22,689 Transportation equipment 462 458 ------------- ------------- 72,920 68,199 Less - accumulated depreciation and amortization (46,691) (41,617) ------------- ------------- Property, plant and equipment, net 26,229 26,582 ------------- ------------- OTHER ASSETS: Goodwill, net -- 33,423 Other 1,171 1,141 Deferred income taxes 22,209 19,780 ------------- ------------- Total other assets 23,380 54,344 ------------- ------------- $ 179,785 $ 219,551 ============= =============
The accompanying notes are an integral part of these financial statements. 16 ENESCO GROUP, INC. 2002 ANNUAL REPORT LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands) 2002 2001 CURRENT LIABILITIES: Notes and loans payable $ -- $ 6,749 Accounts payable 18,395 28,345 Federal, state and foreign income taxes 15,416 28,713 Accrued expenses - Payroll and commissions 4,412 3,183 Royalties 7,911 5,782 Post-retirement benefits 2,320 3,246 Other 5,623 8,218 ------------- ------------- Total current liabilities 54,077 84,236 ------------- ------------- LONG-TERM LIABILITIES: Post-retirement benefits 3,092 3,718 Deferred income taxes 703 5,220 ------------- ------------- Total long-term liabilities 3,795 8,938 ------------- ------------- COMMITMENTS AND CONTINGENCIES (NOTE 9) SHAREHOLDERS' EQUITY: Common stock, par value $.125 Authorized 80,000 shares Issued 25,228 shares 3,154 3,154 Capital in excess of par value 47,148 47,847 Retained earnings 330,368 338,726 Accumulated other comprehensive loss (2,712) (5,722) ------------- ------------- 377,958 384,005 Less - Shares held in treasury, at cost Common stock, 11,319 shares in 2002 and 11,459 shares in 2001 (256,045) (257,628) ------------- ------------- Total shareholders' equity 121,913 126,377 ------------- ------------- $ 179,785 $ 219,551 ============= =============
ENESCO GROUP, INC. 2002 ANNUAL REPORT 17 CONSOLIDATED STATEMENTS OF OPERATIONS ENESCO GROUP, INC. For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share amounts) 2002 2001 2000 Net revenues $ 253,788 $ 267,107 $ 323,800 Cost of sales 146,696 160,889 184,897 ------------- ------------- ------------- Gross profit 107,092 106,218 138,903 Selling, distribution, general and administrative expenses 93,322 113,816 129,816 Amortization of goodwill -- 1,950 2,658 ------------- ------------- ------------- Operating profit (loss) 13,770 (9,548) 6,429 Interest expense (747) (1,523) (3,196) Interest income 286 371 1,161 Other income (expense), net (1,533) (1,342) 759 ------------- ------------- ------------- Income (loss) before income taxes and cumulative effect of a change in accounting principle 11,776 (12,042) 5,153 Income tax benefit 8,897 13,153 9,939 ------------- ------------- ------------- Income before cumulative effect of a change in accounting principle 20,673 1,111 15,092 Cumulative effect of a change in accounting principle, net of income taxes (29,031) $ -- $ -- ------------- ------------- ------------- Net income (loss) $ (8,358) $ 1,111 $ 15,092 ============= ============= ============= EARNINGS (LOSS) PER COMMON SHARE: BASIC: Income before cumulative effect of a change in accounting principle $ 1.49 $ 0.08 $ 1.11 Cumulative effect of a change in accounting principle, net of tax $ (2.09) $ -- $ -- Net income (loss) $ (0.60) $ 0.08 $ 1.11 ============= ============= ============= DILUTED: Income before cumulative effect of a change in accounting principle $ 1.47 $ 0.08 $ 1.11 Cumulative effect of a change in accounting principle, net of tax $ (2.09) $ -- $ -- Net income (loss) $ (0.60) $ 0.08 $ 1.11 ============= ============= =============
The accompanying notes are an integral part of these financial statements. 18 ENESCO GROUP, INC. 2002 ANNUAL REPORT CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ENESCO GROUP, INC. For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share amounts) 2002 2001 2000 Balance, beginning of year $ 338,726 $ 337,615 $ 326,305 Net income (loss) (8,358) 1,111 15,092 Cash dividends, $.28 per share in 2000 -- -- (3,782) ------------- ------------- ------------- Balance, end of year $ 330,368 $ 338,726 $ 337,615 ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ENESCO GROUP, INC. For the Years Ended December 31, 2002, 2001 and 2000
(In thousands) 2002 2001 2000 Net income (loss) $ (8,358) $ 1,111 $ 15,092 ------------- ------------- ------------- Other comprehensive income: Cumulative translation adjustments (no tax effects) 3,010 (1,334) (1,545) ------------- ------------- ------------- Total other comprehensive income (loss) 3,010 (1,334) (1,545) ------------- ------------- ------------- Comprehensive income (loss) $ (5,348) $ (223) $ 13,547 ============= ============= =============
The accompanying notes are an integral part of these financial statements. ENESCO GROUP, INC. 2002 ANNUAL REPORT 19 CONSOLIDATED STATEMENTS OF CASH FLOWS ENESCO GROUP, INC. For the Years Ended December 31, 2002, 2001 and 2000
(In thousands) 2002 2001 2000 OPERATING ACTIVITIES: Net income (loss) $ (8,358) $ 1,111 $ 15,092 Cumulative effect of a change in accounting principle, net of taxes 29,031 -- -- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 5,014 5,071 5,948 Amortization of goodwill -- 1,950 2,658 Deferred income taxes 1,872 (8,450) (1,052) (Gains) losses on sale of capital assets 12 96 24 Changes in assets and liabilities: Accounts receivable 5,141 13,707 7,182 Inventories 9,070 3,479 902 Prepaid expenses 203 985 32 Other assets 1,125 (194) 5,746 Accounts payable and accrued expenses (11,081) 4,174 (11,127) Settlement of supplemental retirement plan -- -- (928) Federal, state and foreign income taxes (13,166) (6,399) (8,042) Long-term post-retirement benefits (626) (2,347) (2,538) ------------- ------------- ------------- Net cash provided by operating activities 18,237 13,183 13,897 ------------- ------------- ------------- INVESTING ACTIVITIES: Purchase of property, plant and equipment (4,284) (2,729) (4,794) Proceeds from sales of property, plant and equipment 99 37 48 ------------- ------------- ------------- Net cash used by investing activities (4,185) (2,692) (4,746) ------------- ------------- ------------- FINANCING ACTIVITIES: Cash dividends -- -- (3,782) Net issuance (repayment) of notes and loans payable (6,858) (7,134) (13,925) Exercise of stock options 176 18 -- Other common stock issuance 708 889 1,496 ------------- ------------- ------------- Net cash used by financing activities (5,974) (6,227) (16,211) ------------- ------------- ------------- Effect of exchange rate changes on cash and cash equivalents 1,408 (338) 247 ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents 9,486 3,926 (6,813) Cash and cash equivalents, beginning of year 7,932 4,006 10,819 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 17,418 $ 7,932 $ 4,006 ============= ============= =============
The accompanying notes are an integral part of these financial statements. 20 ENESCO GROUP, INC. 2002 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 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 accounting principles generally accepted in the United States of America requires the use of management estimates. Actual results could differ from those estimates. Certain reclassifications have been made in the 2001 and 2000 financial statements to conform to the 2002 presentation, including reflection of freight costs billed to customers as revenue and co-op advertising allowances as contra revenue. 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, Europe and Asia. Assets and liabilities of Enesco's foreign subsidiaries are translated into U.S. dollars at the exchange rate on the balance sheet date, while statement of income items are translated at average exchange rates for the year. Translation gains and losses are reported as a component of accumulated other comprehensive loss in shareholders' equity. Transaction gains and losses are reported in the consolidated statements of operations. The carrying amount of cash and cash equivalents 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 $495 thousand in 2002, $860 thousand in 2001, and $2.1 million in 2000. 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 allowances for uncollectible accounts and returns and allowances totaling $3.8 million and $4.6 million at December 31, 2002 and 2001 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):
2002 2001 Raw materials $ 369 $ 504 Work in process 58 68 Finished goods in transit 2,154 6,906 Finished goods 45,753 48,959 ------------- ------------- $ 48,334 $ 56,437 ============= =============
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 items produced using licensed rights from third parties. The two largest licensed lines represented approximately 49% of total sales for 2002, 52% of total sales for 2001 and 52% of total sales for 2000. Extended credit terms are offered to customers. Enesco continually monitors and manages the risks associated with all these activities. Depreciation is provided over the estimated useful lives of the assets utilizing straight-line and declining balance methods. ENESCO GROUP, INC. 2002 ANNUAL REPORT 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 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
On January 1, 2002, Enesco adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). In accordance with FAS 142, Enesco ceased amortizing goodwill upon adoption. Historically, Enesco classified amortization of goodwill as a non-operating expense. Amortization is now classified as an operating expense. All periods presented have been reclassified to conform with the current presentation. The adoption of FAS 142 also required the performance of a goodwill impairment test as of January 1, 2002. The test for goodwill impairment involved a two step process. The first step, which was completed in the second quarter of 2002, compared the fair value of each reporting unit to its carrying amount. The second step was completed in the third quarter of 2002. Since the fair value of each reporting unit was less than its carrying amount, the amount of the impairment loss was measured by comparing the implied fair value of goodwill to its carrying amount. Since the carrying amount of goodwill at each reporting unit exceeded its implied fair value, an impairment loss equal to that excess was recorded. The total goodwill carrying value of $33.4 million was determined to be fully impaired. As of January 1, 2002, a charge of $29.0 million was recorded as the cumulative effect of a change in accounting principle, net of income tax benefits of $4.4 million, in the Statement of Operations for the year ended December 31, 2002. In accordance with FAS 142, 2001 and 2000 results have not been restated for the effects of ceasing goodwill amortization. Had goodwill amortization been discontinued effective January 1, 2000, net income (loss) and earnings (loss) per common share would have been as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31 2002 2001 2000 Net income (loss): As reported $ (8,358) $ 1,111 $ 15,092 Goodwill amortization, net of income taxes -- 1,679 2,409 ------------- ------------- ------------- As adjusted $ (8,358) $ 2,790 $ 17,501 ============= ============= ============= Earning (loss) per common share - basic: As reported $ (0.60) $ 0.08 $ 1.11 Goodwill amortization, net of income taxes -- 0.12 0.18 ------------- ------------- ------------- As adjusted $ (0.60) $ 0.20 $ 1.29 ============= ============= ============= Earnings (loss) per common share - diluted: As reported $ (0.60) $ 0.08 $ 1.11 Goodwill amortization, net of income taxes -- 0.12 0.17 ------------- ------------- ------------- As adjusted $ (0.60) $ 0.20 $ 1.28 ============= ============= =============
Enesco has established accruals for taxes payable and potential 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. 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. 22 ENESCO GROUP, INC. 2002 ANNUAL REPORT 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 2002, 2001 and 2000 were as follows (in thousands):
2002 2001 2000 Basic Average common shares outstanding 13,854 13,708 13,562 Diluted Stock options and warrants 256 128 74 ------------- ------------- ------------- Average shares - diluted 14,110 13,836 13,636
Additional options to purchase 1.4 million, 1.9 million and 2.5 million shares were outstanding during 2002, 2001 and 2000, 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. At December 31, 2002, the Company has six stock-based employee compensation plans, which are described more fully in Note 4, Shareholders' Equity. The Company accounts for those plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
YEAR ENDED DECEMBER 31 2002 2001 2000 Net income (loss) as reported $ (8,358) $ 1,111 $ 15,092 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,206) (1,008) (818) ----------- ----------- ----------- Pro forma net income (loss) $ (9,564) $ 103 $ 14,274 =========== =========== =========== Earnings (loss) per share: Basic and diluted - as reported $ (0.60) $ 0.08 $ 1.11 =========== =========== =========== Basic and diluted - pro forma $ (0.69) $ 0.01 $ 1.05 =========== =========== ===========
2. NOTES AND LOANS PAYABLE: Notes and loans payable and weighted-average interest rates at December 31, 2002 and 2001 were as follows (in thousands):
2002 2001 INTEREST INTEREST BALANCE RATE BALANCE RATE Notes under committed bank lines $ -- -- $ 6,749 3.6% ============= ============= ============= =============
Total interest paid was $772 thousand in 2002, $1.7 million in 2001 and $3.3 million in 2000. 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. In January 2003, the security interest in Enesco's domestic inventory was released. The credit agreement is scheduled to expire in May 2003. Enesco is pursuing various options to meet capital and operating needs after the current arrangement expires. As of December 31, 2002, Enesco was in compliance with all covenants under the revolving credit agreement. At December 31, 2002, Enesco had formal and informal unused lines of credit of approximately $63 million. The informal lines are bank lines that have no commitment fees. 3. EMPLOYEE BENEFIT PLANS: Long-term post-retirement benefits at December 31, 2002 and 2001 were as follows (in thousands):
2002 2001 Post-retirement benefits $ 1,623 $ 1,648 Corporate headquarters closing 40 493 Supplemental 401(k) 923 882 Deferred compensation/severance 506 695 ----------- ----------- Balance sheet total $ 3,092 $ 3,718 =========== ===========
ENESCO GROUP, INC. 2002 ANNUAL REPORT 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 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 SFAS No. 87. The assets held in these trusts at December 31, 2002 and 2001 are accounted for at market value and amounted to $900 thousand at the end of each year. 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. The following table summarizes the components of net periodic benefit costs (in thousands):
2002 2001 2000 COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ -- $ -- $ -- Interest cost -- -- 410 ----------- ----------- ----------- -- -- 410 Additional FAS 88 (gain) recognized due to settlement/actuarial (gain) -- -- (3,046) ----------- ----------- ----------- Net periodic benefit cost (income) $ -- $ -- $ (2,636) =========== =========== ===========
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 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, 2002 and 2001 (in thousands):
2002 2001 CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 1,648 $ 2,308 Service cost -- -- Interest cost 80 82 Actuarial loss (gain) 148 (646) Benefits paid (135) (96) ----------- ----------- Benefit obligation at end of year $ 1,741 $ 1,648 ----------- ----------- FUNDED STATUS: (Accrued) benefit cost $ (1,741) $ (1,648) =========== ===========
Net periodic post-retirement benefit expense includes the following components (in thousands):
2002 2001 2000 Service cost $ -- $ -- $ 393 Interest cost 80 82 115 Recognized actuarial loss (gain) 148 (646) (1,094) ----------- ----------- ----------- Net period benefit cost (income) $ 228 $ (564) $ (586) =========== =========== ===========
A 15% annual rate of increase in per capita cost of covered health care benefits was assumed for periods after December 31, 2002. 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, 2002, by $56 thousand and the interest cost components of the net post-retirement benefit expense for the year then ended by $11 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 $2.0 million in 2002, $2.3 million in 2001 and $2.1 million in 2000. 24 ENESCO GROUP, INC. 2002 ANNUAL REPORT 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 will only 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 of Directors, 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 2 million and 3 million shares of common stock, respectively, could 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. 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, 2002, 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 by applying the fair value based method provided for in FAS No.123, Enesco's net income (loss) and earnings (loss) per common share for 2002, ENESCO GROUP, INC. 2002 ANNUAL REPORT 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 2001 and 2000 would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
2002 2001 2000 Net income As reported $ (8,358) $ 1,111 $ 15,092 (loss) Pro forma $ (9,564) $ 103 $ 14,274 Earnings (loss) per common As reported $ (0.60) $ 0.08 $ 1.11 share diluted Pro forma $ (0.69) $ 0.01 $ 1.05
The options granted in 2002, 2001 and 2000 were under the 1996 Plan and the 1991 Plan. The fair value of each option grant in 2002, 2001 and 2000 was estimated at the time of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
2002 2001 2000 Dividend yield yearly 0.0% 0.0% 7.6% Expected volatility 70.0% 85.0% 65.0% Risk-free interest rate 4.9% 4.4% 6.4% Expected life (years) 8.0 6.0 5.0 Weighted-average grant-date fair value of options granted during the year, per share $ 5.20 $ 4.13 $ 1.73
Stock option status and activity under Enesco's six stock-based compensation (fixed option) plans is summarized as follows:
WEIGHTED- AVERAGE SHARES EXERCISE FIXED OPTIONS (000S) PRICE 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 Granted 448 7.04 Exercised (36) 4.88 Forfeited (522) 25.98 ----------- ----------- Outstanding at December 31, 2002 2,736 $ 16.32 =========== ===========
2002 2001 2000 FIXED OPTIONS SHARES SHARES SHARES (000S) (000S) (000S) Options exercisable at year end 1,301 1,301 1,535
A summary of information regarding fixed stock options outstanding at December 31, 2002, is as follows:
NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE EXERCISE PRICES 12/31/02 (000S) CONTRACTUAL LIFE EXERCISE PRICE 12/31/02 (000S) EXERCISE PRICE $ 4 to $ 15 1,324 8 $ 6.05 468 $ 5.48 $ 15 to $ 26 438 6 $17.05 216 $17.10 $ 26 to $ 36 974 3 $29.95 617 $30.38 - ------------ --------------- ---------------- --------------- --------------- --------------- $ 4 to $ 36 2,736 6 $16.32 1,301 $19.21
26 ENESCO GROUP, INC. 2002 ANNUAL REPORT An analysis of treasury stock transactions for the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands):
COMMON STOCK SHARES COST 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 Exercise of Stock Options (36) (409) Issue of PAYSOP shares (21) (236) Investment Savings Plan - 401(k) issues (64) (719) Non-Employee Director Stock Plan issues (19) (219) --------- --------- Balance at December 31, 2002 11,319 $ 256,045 ========= =========
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 $435 thousand for 2002, $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 $137 thousand for 2002, $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, 2002 and 2001 is as follows (in thousands):
Increase / (Decrease) 2002 2001 PAYSOP $ (100) $ (80) 401(k) plan (284) (476) Non-employee director (82) (285) Exercise of stock options (232) (23) ------ ------ Total $ (698) $ (864) ====== ======
Other comprehensive income or loss 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 was amortized as a component of royalty expense in cost of sales over the term of the licensing agreement. ENESCO GROUP, INC. 2002 ANNUAL REPORT 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 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 2002 2001 2000 NET SALES United States $ 177,757 $ 191,399 $ 246,868 United States inter-company (1,969) (1,984) (2,014) International 78,704 78,389 79,968 International inter-company (704) (697) (1,022) ---------- ---------- ---------- Total consolidated $ 253,788 $ 267,107 $ 323,800 ========== ========== ========== OPERATING PROFIT (LOSS) United States $ 4,927 $ (14,925) $ 921 International 8,843 5,377 5,508 ---------- ---------- ---------- Total consolidated $ 13,770 $ (9,548) $ 6,429 ========== ========== ========== LONG-LIVED ASSETS United States Property, Plant & Equipment, net $ 21,354 $ 21,512 $ 23,238 Other Assets 23,038 40,666 34,232 ---------- ---------- ---------- Total United States 44,392 62,178 57,470 International Property, Plant & Equipment, net 4,875 5,070 6,011 Other Assets 57 13,678 14,843 ---------- ---------- ---------- Total International 4,932 18,748 20,854 ---------- ---------- ---------- Total consolidated $ 49,324 $ 80,926 $ 78,324 ========== ========== ========== CAPITAL EXPENDITURES United States $ 3,323 $ 1,880 $ 3,723 International 961 849 1,071 ---------- ---------- ---------- Total consolidated $ 4,284 $ 2,729 $ 4,794 ========== ========== ========== DEPRECIATION AND AMORTIZATION United States $ 3,481 $ 4,707 $ 6,065 International 1,533 2,314 2,541 ---------- ---------- ---------- Total consolidated $ 5,014 $ 7,021 $ 8,606 ========== ========== ==========
Total sales in the United Kingdom for 2002, 2001 and 2000 were $45.1 million, $45.3 million and $44.9 million, respectively. Total long-lived assets in the United Kingdom at December 31, 2002, 2001 and 2000 were $3.7 million, $14.5 million and $15.9 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 and liabilities consist of the following (in thousands):
CURRENT DEFERRED TAX ASSETS 2002 2001 Federal-- Inventory $ 1,522 $ 4,054 Bad debt reserve 491 654 NOL carryforward 932 1,402 Returns and allowances reserve 300 442 Other items, net 1,293 1,149 State-- Inventory 381 1,013 Bad debt reserve 123 164 NOL carryforward 233 350 Returns and allowances reserve 75 110 Other items, net 264 288 Foreign-- Other items, net 732 1,088 -------- -------- Total Current Deferred Tax Assets $ 6,346 $ 10,714 ======== ======== NON-CURRENT DEFERRED TAX ASSETS Federal-- NOL carryforward $ 16,033 $ 13,849 Post-retirement benefits 962 1,190 Other items, net 36 -- State-- NOL carryforward 4,008 3,462 Post-retirement benefits 240 298 Other items, net 9 -- Foreign-- Other items, net 921 981 -------- -------- Total Non-Current Deferred Tax Assets $ 22,209 $ 19,780 ======== ======== DEFERRED TAX LIABILITIES Federal-- Acquisition step-up amortization adjustment $ -- $ 3,558 Accelerated depreciation 542 598 State-- Acquisition step-up amortization adjustment -- 890 Accelerated depreciation 135 149 Foreign-- Other items, net 26 25 -------- -------- Total Deferred Tax Liabilities $ 703 $ 5,220 ======== ========
28 ENESCO GROUP, INC. 2002 ANNUAL REPORT The United States net 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, 2021 and 2022. The domestic and foreign components of income (loss) before income taxes and cumulative effect of a change in accounting principle are as follows (in thousands):
2002 2001 2000 Domestic $ (8,301) $(27,669) $ (7,817) Foreign 20,077 15,627 12,970 -------- -------- -------- $ 11,776 $(12,042) $ 5,153 ======== ======== ========
The provision for (benefit from) income taxes consists of the following (in thousands):
2002 2001 2000 CURRENTLY PAYABLE: United States Federal $ (9,583) $ (9,881) $(12,528) United States State (4,669) 1,210 (461) Foreign 3,483 (326) 1,998 -------- -------- -------- (10,769) (8,997) (10,991) ======== ======== ======== DEFERRED: United States Federal 1,164 (4,110) 1,834 United States State 291 (1,027) (590) Foreign 417 981 (192) -------- -------- -------- 1,872 (4,156) 1,052 -------- -------- -------- $ (8,897) $(13,153) $ (9,939) ======== ======== ========
A reconciliation of the total effective income tax rate to the statutory Federal income tax rate is as follows:
2002 2001 2000 Statutory income tax rate 35.0% 35.0% 35.0% State taxes, net of federal income tax effect (4.5) (2.8) (13.3) Impact of foreign tax rates and credits 1.3 (5.8) 1.1 Impact of nondeductible expenses 2.4 4.7 17.2 -------- -------- -------- Subtotal effective income tax rate 34.2% 31.1% 40.0% Prior year tax benefit (109.8) 78.1 (232.9) -------- -------- -------- Total effective income tax rate 75.6% 109.2% (192.9%) ======== ======== ========
The 2002 benefit of $12.9 million, the 2001 benefit of $9.4 million and the 2000 benefit of $12.0 million relate primarily to prior year accruals which were no longer required due primarily to completed tax audits and closed tax years for a number of taxing authorities worldwide. An income tax benefit of $4.4 million was recorded as a component of the cumulative effect of a change in accounting principle in the Statement of Operations for the year ended December 31, 2002. Enesco made income tax payments of $1.5 million in 2002, $2.1 million in 2001 and $2.0 million in 2000. 7. OTHER INCOME (EXPENSE), NET: Other income (expense), net consists of the following (in thousands):
2002 2001 2000 Foreign currency (loss) $ (16) $ (12) $ (69) Gain (loss) on sale of fixed assets (12) (96) (24) Bank charges and other (1,505) (1,234) 852 -------- -------- -------- $ (1,533) $ (1,342) $ 759 ======== ======== ========
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 adversely affected 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 ENESCO GROUP, INC. 2002 ANNUAL REPORT 29 ' 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 2002. To manage foreign currency risk, as of December 31, 2002, Enesco entered into a forward exchange agreement with a notional value of $8.0 million to mature within two days. This contract was a sale of U.S. dollars and a purchase of British pounds sterling at an average exchange rate of 1.60. The fair value of this contract is not significant. As of December 31, 2002, Enesco had no interest bearing debt outstanding. 9. COMMITMENTS AND CONTINGENCIES: Enesco incurred rental expense under operating leases of $3.8 million in 2002, $4.5 million in 2001 and $5.0 million in 2000. The minimum rental commitments under noncancelable operating leases as of December 31, 2002, are as follows (in thousands):
AGGREGATE PERIOD AMOUNT 2003 $ 3,400 2004 2,600 2005 1,700 2006 1,300 2007 700 Later years 500 --------- Total minimum future rentals $ 10,200 =========
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 $21.3 million in 2002, $24.2 million in 2001 and $28.0 million in 2000. Pursuant to various licensing agreements, the future minimum guaranteed royalty payments are $15.4 million in 2003, $15.3 million in 2004, $15.1 million in 2005, $15.0 million in 2006 and $15.0 million in 2007. 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 In 1997, Enesco's Board of Directors decided to move its corporate headquarters from Massachusetts to Illinois. At that time, provisions were recorded to cover the costs relating to the closing of the Massachusetts site. At December 31, 2002, the corporate headquarters closing accrual totaled $500 thousand, a decrease of $700 thousand from December 31, 2001, relating to payments made in 2002. Due to the duration and timing of severance provisions and related benefits, the accrual will not be fully utilized until the first quarter of 2004. The accrual is expected to be utilized as follows: $400 thousand in 2003 and $100 thousand in 2004. 11. 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 was expected to 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., also eliminating approximately 45 positions, 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. In 2002, Enesco further reduced its workforce in the United States and the United Kingdom. The 2002 workforce reductions impacted approximately 76 employees and are expected to generate annual savings of approximately $2.7 million. Severance costs of approximately $346 thousand were recorded in 2002. As of December 31, 2002, $154 thousand remains to be paid to former employees relating to the 2002 workforce reductions. 30 ENESCO GROUP, INC. 2002 ANNUAL REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Enesco Group, Inc.: We have audited the accompanying consolidated balance sheet of Enesco Group, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, retained earnings, comprehensive income and cash flows for the year then ended. 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 audit. The accompanying 2001 and 2000 consolidated financial statements of Enesco Group, Inc. and subsidiaries were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements, before the revision described in Note 1 to the consolidated financial statements, in their report dated February 20, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed above, the 2001 and 2000 consolidated financial statements of Enesco Group, Inc. and subsidiaries were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole. KPMG LLP Chicago, Illinois February 18, 2003 ENESCO GROUP, INC. 2002 ANNUAL REPORT 31 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, 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 ----------------------------------------------------------------------------- This report is a copy of a report previously issued by Arthur Andersen LLP. Arthur Andersen LLP has not reissued the report. The prior-period financial statements covered by the report have been revised to include the transitional disclosures required by FAS 142, "Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. ----------------------------------------------------------------------------- 32 ENESCO GROUP, INC. 2002 ANNUAL REPORT STOCK MARKET, DIVIDEND AND SHAREHOLDER INFORMATION
2002 2001 - --------------------------------------------------- ---------------------------------------- MARKET PRICE Market Price QUARTER DIVIDEND HIGH LOW Quarter Dividend High Low First $ -- $ 7.00 $ 5.50 First $ -- $ 6.85 $ 4.63 Second -- 9.10 6.50 Second -- 7.24 5.12 Third -- 9.21 6.25 Third -- 7.26 3.96 Fourth -- 7.85 5.45 Fourth -- 7.31 3.30
Enesco Group, Inc.'s Common Stock is traded on the New York Stock Exchange and Pacific Exchange (symbol: ENC). The table shows, for the indicated periods, the high and low price range. As of December 31, 2002, there were 2,547 record holders of the Common Stock. ENESCO GROUP, INC. 2002 ANNUAL REPORT 33 QUARTERLY RESULTS (UNAUDITED): ENESCO GROUP, INC. The following tables set forth information with respect to the consolidated quarterly results of operations for 2002 and 2001. 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 2002, Enesco recognized a $12.9 million tax benefit primarily for prior year tax accruals that were no longer required. 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 thousands, except per share amounts) FOR THE THREE MONTHS ENDED -------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 2002 2002 2002 2002 Net revenues $ 54,877 $ 66,489 $ 69,043 $ 63,379 Cost of sales 30,691 40,006 40,412 35,587 ---------- ---------- ---------- ---------- Gross profit 24,186 26,483 28,631 27,792 Selling, distribution, general and administrative expenses 26,398 22,808 21,896 22,220 ---------- ---------- ---------- ---------- Operating profit (loss) $ (2,212) $ 3,675 $ 6,735 $ 5,572 ========== ========== ========== ========== Net income (loss) $ (30,438) $ 1,797 $ 4,401 $ 15,882 ========== ========== ========== ========== Earnings (loss) per common share: Basic $ (2.20) $ 0.13 $ 0.32 $ 1.14 ========== ========== ========== ========== Diluted $ (2.20) $ 0.13 $ 0.31 $ 1.12 ========== ========== ========== ==========
FOR THE THREE MONTHS ENDED -------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 2001 2001 2001 2001 Net revenues $ 62,236 $ 67,152 $ 77,177 $ 60,542 Cost of sales 34,202 35,166 45,436 46,085 ---------- ---------- ---------- ---------- Gross profit 28,034 31,986 31,741 14,457 Selling, distribution, general and administrative expenses 33,569 33,863 23,843 22,541 Amortization of goodwill 489 487 487 487 ---------- ---------- ---------- ---------- Operating profit (loss) $ (6,024) $ (2,364) $ 7,411 $ (8,571) ========== ========== ========== ========== Net income (loss) $ (3,440) $ (2,695) $ 4,370 $ 2,876 ========== ========== ========== ========== Earnings (loss) per common share: Basic and diluted $ (0.25) $ (0.20) $ 0.32 $ 0.21 ========== ========== ========== ==========
The sum of basic and diluted earnings (loss) per share for 2002 quarters does not equal the full year amount due to rounding and the impact of changes in average shares outstanding. 34 ENESCO GROUP, INC. 2002 ANNUAL REPORT 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) 2002 2001 2000 1999 1998 Net revenues(1) $ 253,788 $ 267,108 $ 323,800 $ 390,069 $ 456,828 Cost of sales(2) 146,696 160,889 184,897 224,750 249,625 ---------- ---------- ---------- ---------- ---------- Gross profit 107,092 106,219 138,983 165,319 207,203 Selling, distribution, general and administrative expenses 93,322 113,817 129,816 141,668 158,095 Amortization of goodwill and other intangibles(3) -- 1,950 2,658 2,224 49,195 ---------- ---------- ---------- ---------- ---------- Operating profit (loss) 13,770 (9,548) 6,429 21,427 (87) Interest expense (747) (1,523) (3,196) (2,994) (3,575) Interest income 286 371 1,161 579 795 Other income (expense), net (1,533) (1,342) 759 273 (428) ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of a change in accounting principle 11,776 (12,042) 5,153 19,285 (3,295) Income taxes(4) (8,897) (13,153) (9,939) (7,591) 19,148 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle 20,673 1,111 15,092 26,876 (22,443) Cumulative effect of a change in accounting principle, net of income taxes (29,031) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (8,358) $ 1,111 $ 15,092 $ 26,876 ($ 22,443) ========== ========== ========== ========== ========== EARNINGS (LOSS) PER COMMON SHARE: Basic: Income before cumulative effect of a change in accounting principle $ 1.49 $ 0.08 $ 1.11 $ 1.88 $ (1.38) Cumulative effect of a change in accounting principle, net of tax (2.09) -- -- -- -- Net income (loss) (0.60) 0.08 1.11 1.88 (1.38) ---------- ---------- ---------- ---------- ---------- Diluted: Income before cumulative effect of a change in accounting principle $ 1.47 $ 0.08 $ 1.11 $ 1.87 $ (1.38) Cumulative effect of a change in accounting principle, net of tax (2.09) -- -- -- -- Net income (loss) (0.60) 0.08 1.11 1.87 $ (1.38) ---------- ---------- ---------- ---------- ---------- Average shares of common stock - basic 13,854 13,708 13,562 14,329 16,208 Average shares of common stock - diluted 14,110 13,836 13,636 14,371 16,258 Shares of common stock outstanding at year end 13,909 13,769 13,612 13,476 15,852 ---------- ---------- ---------- ---------- ---------- Market value per common share at year end $ 7.08 $ 6.30 $ 4.69 $ 11.06 $ 23.25 Cash dividends declared $ -- $ -- $ 3,782 $ 15,906 $ 18,028 Dividends declared per common share $ -- $ -- $ 0.28 $ 1.12 $ 1.12 ---------- ---------- ---------- ---------- ---------- Capital expenditures $ 4,284 $ 2,729 $ 4,794 $ 5,058 $ 4,520 Depreciation $ 5,014 $ 5,071 $ 5,948 $ 5,285 $ 5,649 Working capital $ 76,099 $ 54,389 $ 58,931 $ 42,434 $ 74,856 Total assets $ 179,785 $ 219,551 $ 231,479 $ 277,367 $ 319,949 Total long-term liabilities $ 3,795 $ 8,938 $ 11,562 $ 34,237 $ 38,537 Shareholders' equity $ 121,913 $ 126,377 $ 125,693 $ 114,432 $ 150,581 ---------- ---------- ---------- ---------- ---------- Book value per common share $ 8.76 $ 9.18 $ 9.23 $ 8.49 $ 9.50 Return on average shareholders' equity (7%) 1% 13% 20% (12%) ---------- ---------- ---------- ---------- ----------
(1) Revenue figures include shipping and handling costs billed to customers and are reduced by co-op advertising allowances. (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 $46 million goodwill write-down in 1998. (4) The provision for income taxes includes a $12.9 million benefit in 2002, a $9.4 million benefit in 2001, a $12 million benefit in 2000, and a $15 million benefit in 1999 related primarily to reversals of prior year tax accruals. ENESCO GROUP, INC. 2002 ANNUAL REPORT 35 EX-21 6 c75748exv21.txt SUBSIDIARIES OF ENESCO GROUP, INC. . . . Exhibit 21 SUBSIDIARIES OF ENESCO GROUP, INC.
Jurisdiction Name of Organization - ---- --------------- Enesco 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 Holdings Limited England
All of the above-listed subsidiaries are included in the Company's consolidated financial statements for all of both 2001 and 2002. EX-23.1 7 c75748exv23w1.txt CONSENT OF KPMG LLP Exhibit 23.1 Consent of KPMG LLP The Board of Directors Enesco Group, Inc.: We consent to the incorporation by reference in the Registration Statements on Form S-8 File No. 2-97934, No. 33-11415, No. 33-42974, No. 33-50723, No. 33-58633, No. 333-11501, No. 333-48957, No. 333-68289, No. 333-69087, No. 333-75345, No. 333-91312 and No. 333-91318, of Enesco Group, Inc. and subsidiaries of our reports dated February 18, 2003 with respect to the consolidated balance sheet of Enesco Group, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, retained earnings, comprehensive income and cash flows for the year then ended, and the related consolidated financial statement schedule, which reports are incorporated by reference in and appear in, respectively, the December 31, 2002 annual report on Form 10-K of Enesco Group, Inc. and subsidiaries. Our reports refer to our audit of the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, to revise the 2001 and 2000 consolidated financial statements, as more fully described in Note 1 to the consolidated financial statements. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements other than with respect to such disclosures. KPMG LLP Chicago, Illinois March 24, 2003 EX-23.2 8 c75748exv23w2.txt STATEMENT REGARDING INABILITY TO OBTAIN CONSENT Exhibit 23.2 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proven that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, every accountant who has consented to be named as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report or valuation which purports to have been prepared or certified by the accountant. The Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "Form 10-K") to which this notice is filed as an exhibit is incorporated by reference into the following registration statements (collectively, the "Registration Statements") filed by Enesco Group, Inc. (f/k/a Stanhome Inc.) ("Enesco") with the Securities and Exchange Commission ("SEC"), and, for purposes of determining any liability under the Securities Act, is deemed to be a new registration statement for each Registration Statement into which it is incorporated by reference: Nos. 2-97934, 33-11415, 33-42974, 33-50723, 33-58633, 333-11501, 333-48957, 333-68289, 333-69087, 333-75345, 333-91312 and 333-91318. On June 15, 2002, Arthur Andersen LLP ("Arthur Andersen"), Enesco's independent public accounting firm for the year ended December 31, 2001, was convicted on federal obstruction of justice charges arising from the U.S. Government's investigation of Enron Corp. On June 4, 2002, Enesco engaged KPMG LLP as its independent public accountants for the fiscal year 2002. Enesco has not been able to obtain, after reasonable efforts, the written consent of Arthur Andersen to the incorporation by reference into the above-referenced Registration Statements as having certified Enesco's consolidated financial statements for the years ended December 31, 2000 and December 31, 2001, as required by Section 7 of the Securities Act. Accordingly, investors will not be able to assert claims against Arthur Andersen under Section 11(a) of the Securities Act for any untrue statement of a material fact contained in Enesco's consolidated financial statements for the years ended December 31, 2000 and December 31, 2001 or any omissions to state a material fact required to be stated therein. To the extent provided in Section 11(b) (3)(c) of the Securities Act, however, other persons who are liable under Section 11(a) of the Securities Act, including Enesco's officers and directors, may still rely on Arthur Andersen's original audit reports as being made by an expert for the purposes of establishing a due diligence defense under Section 11(b) of the Securities Act. EX-24 9 c75748exv24.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, Thomas F. Bradley and Charles E. 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, 2002 with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. March 27, 2003 By: /s/ Anne-Lee Verville ------------------------------------- Anne-Lee Verville Chairman of the Board and Director March 27, 2003 By: /s/ Daniel DalleMolle ------------------------------------- Daniel DalleMolle President and CEO March 27, 2003 By: /s/ Donna Brooks Lucas ------------------------------------- Donna Brooks Lucas Director March 27, 2003 By: /s/ John F. Cauley ------------------------------------- John F. Cauley Director March 27, 2003 By: /s/ George R. Ditomassi ------------------------------------- George R. Ditomassi Director March 27, 2003 By: /s/ Eugene Freedman ------------------------------------- Eugene Freedman Founding Chairman and Director March 27, 2003 By: /s/ Judith R. Haberkorn ------------------------------------- Judith R. Haberkorn Director March 27, 2003 By: /s/ Donald L. Krause ------------------------------------- Donald L. Krause Director March 27, 2003 By: /s/ Thane A. Pressman ------------------------------------- Thane A. Pressman Director EX-99.1 10 c75748exv99w1.txt STATEMENT OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 STATEMENT OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Enesco Group, Inc. (the "Company") for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel DalleMolle, the President and Chief Executive Officer of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company. March 27, 2003 By: /s/ Daniel DalleMolle ------------------------------------- President and Chief Executive Officer EX-99.2 11 c75748exv99w2.txt STATEMENT OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 STATEMENT OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Enesco Group, Inc. (the "Company") for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas F. Bradley, the Chief Financial Officer of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company. March 27, 2003 By: /s/ Thomas F. Bradley ----------------------------------- Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----