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