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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM -------- TO --------
COMMISSION FILE NUMBER 0-1349
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ENESCO GROUP, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 04-1864170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 WINDSOR DRIVE, ITASCA, ILLINOIS 60143
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 875-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.125 New York Stock Exchange
per share, together with the Pacific Exchange
Associated Common Stock Purchase Rights
("Common Stock")
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $154,958,339 on March 1, 2004.
The number of shares outstanding of the registrant's Common Stock as of
March 1, 2004 was 14,179,368 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders
are incorporated by reference into this Form 10-K.
This Annual Report on Form 10-K contains a number of forward-looking
statements. Any statements contained herein (including without limitation
statements to the effect that Enesco or its management "believes", "expects",
"anticipates", "plans" and similar expressions) that are not statements of
historical fact should be considered forward-looking statements. There are a
number of important factors that could cause Enesco's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
P A R T I
ITEM 1. BUSINESS.
General
We are a global, full-line supplier of gift, collectible and home and
garden decor products. We sell our products internationally at wholesale to
independent retailers, department stores, mass merchants, catalogers and other
distributors. Our products include diverse lines of branded porcelain bisque,
cold cast and resin figurines, cottages, musicals, music boxes, ornaments, plush
animals, waterballs, candles, tableware and general home accessories. Our
products are primarily produced by independent manufacturers in the Far East. In
certain instances, a factory's total capacity is devoted exclusively to Enesco's
product.
Our corporate headquarters is located at 225 Windsor Drive, Itasca,
Illinois 60143-1225. Our telephone number at that location is (630) 875-5300. We
maintain an Internet website at www.enesco.com. We are not including the
information contained on our website as part of, or incorporating it by
reference into, this Form 10-K. All of the reports that we file with the SEC are
available, free of charge, at the Investor Relations section of our website as
soon as reasonably practicable after such material is filed with the SEC. In
addition, Enesco's Corporate Governance Guidelines and Code of Business Conduct
and Ethics, applicable to all directors and employees, including our principal
executive officer, principal financial officer and controller, are available at
the Investor Relations Section of our website and copies are available without
charge by writing to the Secretary of Enesco, 225 Windsor Drive, Itasca,
Illinois 60143.
Product
Enesco's giftware, collectible and home and garden decor product lines
consist of approximately 24,000 items worldwide, including approximately 8,000
items sold in the United States. These product lines are comprised of: 1)
product licensed by Enesco and its subsidiaries from independent creative
designers; 2) Enesco's collection of proprietary designs; and 3) product
distributed by Enesco under third party distribution arrangements. Most of our
products have suggested retail prices between $5 and $500.
Among Enesco's best known licensed lines are:
- - Precious Moments - Heartwood Creek by Jim Shore - Cherished Teddies
- - Walt Disney Company - Bratz - Nickelodeon
- - Kitchen Fairies - Children of the Inner Light - Julie Ueland
- - John Deere - It's A Wonderful Life - Rudolph the
Red-Nosed Reindeer
- - Walt Disney Classic - Halcyon Days - Pooh & Friends
Collection
Enesco's best known proprietary product lines include:
- - Foundations - Growing Up Girls - Circle of Love
- - Mary's Moo Moos - Lilliput Lane - Border Fine Arts
In January 2004, Enesco expanded its relationship with Disney by becoming
the exclusive global licensee for the Walt Disney Classics Collection and
assuming management of the Walt Disney Collector's Society. The collection
consists of sculpted figurines that recreate moments from Disney's popular
animated films. It is sold through an independent sales force and is available
globally at fine gift and collectible stores, select Disney Stores,
DisneyStore.com, Disney catalog and Disney Theme Parks and Resorts around the
world.
-2-
For our collectible lines, including Precious Moments and Cherished
Teddies, we introduce new items and limited edition pieces each year. To allow
for these new introductions and to keep each line balanced, we retire a number
of the existing pieces from production each year.
Enesco offers a wide range of other giftware and home and garden
decorative items to satisfy seasonal and non-seasonal consumer demand. Our
Everyday Gift line, sold to mass retailers in the United States, includes many
name brand licensed products and offers giftware product that is distinct from
that being sold at our independent gift retailers.
In early 2003, Enesco's subsidiary in the United Kingdom acquired Bilston
& Battersea Enamels plc, a British manufacturer and distributor of giftware,
home accessories and related products, including the hand-decorated enamel and
sculptured boxes sold worldwide under the Halycyon Days Enamels and Halycyon
Days Bonbonnieres brands.
In February 2004, Enesco acquired Gregg Manufacturing, Inc. d/b/a Gregg
Gift Company, a U.S. based supplier and distributor of giftware. Gregg's product
line includes book covers, organizers, tote bags and home decor accessories that
are distributed through Christian retailers, mass market, catalogs, book shops
and card & gift stores.
Enesco continues to actively explore additional acquisitions worldwide as
part of its long-term strategic plan.
In order to expand the breadth of our product offerings while minimizing
costs, we have also entered into several strategic distribution arrangements.
These include alliances with:
- - Nachtmann Crystal, for Enesco to sell a line of crystal giftware items in
the United States, England and Ireland.
- - NICI AG, for Enesco to be the exclusive distributor in the United States
and Canada of a line of plush animals and coordinating fashion
accessories. The NICI lines are targeted for the `tween market and are
popular, leading lines in Europe.
- - Publications International, for Enesco to sell a line of gift books and
stationery products to the specialty retail channel in the United States.
- - Christmas by Krebs, for Enesco to sell a line of high quality glass
ornaments to the specialty retail channel in the United States.
- - Small World of Italy, for Enesco to sell Italian link charm bracelets to
the specialty retail channel in the United States.
Our subsidiaries in the United Kingdom, France and Canada have also
entered into a number of distribution arrangements, including the Demdaco lines
(resin figurines), Applause (plush), Amorini (Italian charms & bracelets), Pine
Ridge Art (cards and calendars) and Franz Porcelain (vases).
Enesco plans to enter into more worldwide strategic alliances for new
product distribution opportunities.
Beginning in 2002, Enesco began to display in its U.S. showrooms selected
product offerings developed by our subsidiaries in the United Kingdom and
Canada. These products are sold to Enesco's U.S. customers by our U.S. card and
gift channel sales force. During 2003, sales of these products resulted in
approximately $5 million of sales to Enesco on a consolidated basis.
Each year, we undertake a comprehensive review of all products being sold
and under development. Using an analysis based on profitability, we remove
certain items from our product lines. Each year we will introduce new product
offerings, on a selective basis, and plan to limit quantities of many items in
our collectible lines.
Customers
We have approximately 40,000 customers worldwide, including our core
independent gift retail customers. We also sell to national card and gift
chains, mass merchants, military p/x's, home television shopping, jewelry and
department stores and catalogers, including Carlton Cards stores, Avon, Harry &
David, Lowe's, Walgreens, CVS, Eckerds, Wal-Mart, Target, Shopko, K-Mart and
QVC. No single account represented more than 5% of Enesco's sales in 2003.
-3-
During 2002, Enesco introduced an Everyday Gift program with many mass
retailers in the United States in order to increase sales beyond our seasonal
programs. Our Everyday Gift program, which includes many name brand licensed
products experienced strong sell-through results in 2003 and we expect this
program to expand to additional mass market accounts during 2004.
Sales and Marketing
In 2003, Enesco aligned its United States business via a channel and brand
matrix structure. The matrix is comprised of seven business or sales channels
supported by five major brand categories. We believe this structure allows us to
better focus on the products and services required by each of our
customer-retailer groups. Each channel business unit is responsible for securing
new business and expanding sales with existing customers, while improving profit
margins and maintaining operating goals. Brand teams are charged with securing
the right products at the right price for a given channel. The channels and
brands are:
Channels Brands
Card & Gift Precious Moments
Mass & Chain Drug Enesco Developed
Home & Garden Major Licenses
Multi-level Marketing Design Partners
Premier Retail Strategic Partners
Channel Expansion
International
Multi-level Marketing includes Avon, Bradford and other direct response or
direct marketing customers. Premier Retail consists of high-end retailers, such
as jewelry and department stores. Channel Expansion targets new customers with
whom Enesco has done little or no business such as golf shops, coffee shops and
other niche retailers. Enesco Developed brands are lines such as Foundations,
Circle of Love and Mary's Moo Moos, developed by Enesco's in-house artists, and
also includes Cherished Teddies. Major Licenses includes licensed lines such as
Disney, Bratz and Nickelodeon. Design Partners includes licensed artists such as
Jim Shore, Julie Ueland and Rosalind Walshe. Strategic Partners includes the
distribution arrangements for the United States discussed above.
In the card and gift channel, Enesco utilizes account-focused sales teams
comprised of approximately 200 worldwide field sales employees, including
approximately 130 based throughout the United States. Smaller accounts in the
card and gift channel in the United States and those that are geographically
remote, are handled by Enesco's inside sales account managers. They are trained
to sell on the telephone to retailers, including prospecting for new accounts
and contacting customers who have not been contacted recently by the field sales
team. In addition, we continue to utilize a team of sales executives to manage
our larger, national accounts.
To further strengthen our relationship with card & gift retailers, in 2004
Enesco launched an innovative web-based program called "Power Chord". The
program allows consumers to shop on-line for Enesco products. The technology
provides direct access to store locations, facilitating consumer purchases from
our retailers and minimizing their need to stock large inventories.
Enesco's home decor line is sold in the U.S. by an independent
representative selling group and a team of inside sales executives to manage
certain regional or national accounts.
The Canadian, French and United Kingdom operations each have their own
employee sales organizations. Enesco also sells its products through
distributors in twenty-five countries around the world, an increase of nine
countries from 2002. In addition to selling various product lines in the U.K.
and several other European countries, Enesco Limited, a subsidiary of Enesco
Group, Inc., with its headquarters located in Carlisle, Cumbria, England,
oversees the operations of our affiliated company located in France and the
sales forces in Germany, Holland and Belgium. Enesco Limited also administers
the collectors clubs that are based in Europe. Our Canadian subsidiary, N.C.
Cameron, also sells various product lines in Canada and administers the
collectors clubs based in Canada.
-4-
In 2003, we opened an Enesco Asia sales office in order to increase sales
and service to distributors in the Pacific Rim.
Net international sales in 2003 increased compared to 2002 and comprised
approximately 36% of the Company's sales in 2003, compared with approximately
31% in 2002 and 29% in 2001. Local currency international sales were translated
into U.S. dollars at higher exchange rates in 2003 versus 2002. If the 2003
local currency sales were translated into U.S. dollars at the 2002 exchange
rates, international sales would have been lower by approximately $9 million in
2003. Total sales recorded in the United Kingdom for 2003 and 2002 were $53.3
million and $45.1 million respectively. Total sales recorded in Canada for 2003
and 2002 were $30.8 million and $25.7 million, respectively. See also Note 5 to
Consolidated Financial Statements appearing on Page C-21 of this Form 10-K.
We believe that Enesco's general terms of sale are competitive in the
giftware industry. Enesco offers extended payment terms and dating programs in
the U.S. to its retail customers in the card, gift and collectible channel.
These programs extend the payment due date for products, providing the retailer
the opportunity to sell the item prior to paying Enesco.
We support the marketing efforts of our sales force with promotional
programs, including displays of our product lines in nine showrooms located
throughout the United States, participation at trade and private shows held in
major U.S. and foreign cities, trade and consumer advertising and annual
catalogs. In addition, we maintain an interactive consumer information Internet
website at www.enesco.com and maintain toll-free telephone lines for retail
customers and consumers.
Enesco's collectors clubs are an important component of the marketing
program for our collectible product lines. Consumers may subscribe for exclusive
product offerings and newsletters from Enesco's clubs. During 2003, the number
of active memberships for the collectors clubs decreased by approximately 21%
from 2002 membership levels, continuing a downward trend that reflects the soft
market for collectible product.
Design and Production
Enesco has a continuous product development program. New items are added
to the product line only if they can be produced and marketed on a basis that
meets our profitability criteria. We believe that our ability to design, produce
and market new products provides a competitive advantage in the giftware
industry, since product sales are, in part, dependent on our ability to identify
and respond quickly to changing trends and to utilize our design and production
systems to bring new product to market.
The products included in the Lilliput Lane and Border Fine Arts lines are
supplied in part by manufacturing plants owned by Enesco's subsidiary operating
in the United Kingdom. During 2001, we closed one of our manufacturing plants in
England, shifting this production to the remaining United Kingdom sites or Asia.
Substantially all of Enesco's other product lines are produced by independent
manufacturers in the Far East, under the supervision of personnel from Enesco's
subsidiary in Hong Kong, Enesco International (H.K.) Limited, and in the
Philippines, Indonesia, Thailand, Europe and Canada.
During 2003, Enesco's purchases from its three largest contract
manufacturers accounted for approximately 18%, 16% and 12%, respectively, of its
total purchases, with no other single manufacturer accounting for more than 10%
of Enesco's net purchases. During 2003, approximately 70% of Enesco's total
product purchases came from manufacturing sources located in the People's
Republic of China (P.R.C.), which enjoys most-favored nation trade status. While
we believe that there are other manufacturing sources available for our product
lines, any loss, disruption or substantial reduction of sourcing capability or
shipping from one or more of our key manufacturing facilities could have a
significant short-term adverse effect on Enesco's operations.
Our global procurement and product development strategies allow us to
realize volume discounts for our U.S. operations and foreign subsidiaries. This
global procurement approach helped us to reduce our product costs in 2002 and
2003.
Enesco has a Vendor Certification Program that requires all manufacturing
sources, whether affiliates or contract manufacturers, to agree to, and comply
with, quality compliance and labor standards established and enforced by Enesco
and certain of our licensors.
-5-
In December 2003, the Office of U.S. Customs and Border Protection certified
Enesco as a member of the Customs Trade Partnership Against Terrorism (CTPAT).
The Department of Homeland Security instituted CTPAT as a means to identify low
risk importers and allow the free flow of goods even under heightened security
conditions. Enesco's certification is strategically important since it should
reduce the risk of significant delays in the importation of our product. Also,
Enesco's certification will permit Enesco to become, or continue to be, a vendor
for certain U.S. customers who require CTPAT certification as a condition to
conducting business.
Distribution
In order to serve our customers located in the United States, and to a
certain extent international customers, product is shipped by ocean freight from
abroad and then by rail or truck to Enesco's main warehouse and distribution
facility, located in Elk Grove Village, Illinois. This warehouse facility also
serves as Enesco's primary distribution facility and main showroom. Enesco also
uses third party warehouse and distribution facilities in: Fort Mills, South
Carolina to handle the distribution of certain product to mass merchants; and
Fenton, Missouri to handle warehouse and distribution of the Walt Disney Classic
Collection in the United States. Shipments from Enesco to its customers are
handled by United Parcel Service and other commercial carriers.
Seasonality and Backlog
In addition to our everyday gift products, we produce specially designed
product for holiday seasons, including Christmas, Valentine's Day, Easter,
Mother's Day, Father's Day, Halloween and Thanksgiving. The pattern of our sales
is influenced by the shipment of seasonal merchandise. During 2003, our sales
peaked in the third quarter.
At the end of 2003, Enesco had a backlog of orders totaling approximately
$17 million, compared to approximately $19 million at the end of 2002. It is
standard practice in the giftware industry, however, that orders are subject to
amendment or cancellation prior to shipment for various reasons, including
credit considerations, product availability and customer requests. Due to the
many external factors that can impact the status of unshipped orders at any
particular time, the comparison of backlog orders in any given year with those
at the same date in a prior year is not necessarily indicative of sales
performance for that year or for prospective sales results in future years. We
believe the decrease in backlog is attributed to timing of product
introductions, variability in retail order cycles, general economic conditions,
Enesco's demonstrated ability to reduce order lead times and continued
consolidation in the collectible channel.
Competition
Competition in the giftware, collectibles and decorative accent industry
in the United States, Canada, United Kingdom and Europe is highly fragmented
among a number of companies and product categories. The principal factors
affecting success in the marketplace are originality of product design, quality,
price, marketing ability, customer service and sourcing. Enesco's main
competitors in the United States are Hallmark, Department 56, Lladro, Boyd's
Bears, Ty, Inc. and Russ Berrie, among others.
Trademarks and Other Intellectual Property
The intellectual property rights associated with Enesco's licensed product
lines are materially important to our sales, especially the Precious Moments(R),
Cherished Teddies(R) and Heartwood Creek(TM) lines, which accounted for
approximately 33%, 8% and 5%, respectively, of Enesco's consolidated revenue
during 2003, compared to 38%, 11% and 1%, respectively, for 2002, and 39%, 13%
and 0% for 2001. The Precious Moments license currently has a term through
December 31, 2007, the Cherished Teddies license currently has a term through
December 31, 2010 and the Heartwood Creek license currently has a term through
December 31, 2004. Enesco is currently negotiating an extension of its license
for Heartwood Creek.
We continuously enter into various license agreements relating to
trademarks, copyrights, designs and products, which enables us to market new
items compatible with our product lines. Our licenses are either non-exclusive
or exclusive for
-6-
specific products in specified channels and territories. Royalties are paid on
licensed items and, in some cases, advance royalties or minimum guarantees are
required by these license agreements.
Protection of all of Enesco's intellectual property, whether owned or
licensed, is important to our business. We maintain an aggressive and visible
program to identify and challenge companies and individuals worldwide who
infringe our registered trademarks and copyrighted designs.
Employees and Related Matters
As of December 31, 2003, Enesco employed 563 persons in the United States,
which reflects the workforce reductions that occurred in 2003, eliminating
approximately 42 positions in the United States. Enesco's U.S.-based warehouse
personnel employed as of December 31, 2003 are represented by Local Union No.
781 of the International Brotherhood of Teamsters under a contract that expires
on June 30, 2006. Enesco believes that its labor relations are good. As of
December 31, 2003, Enesco's foreign subsidiaries employed 725 persons.
Enesco utilizes an account-focused sales team comprised of approximately
130 commissioned field sales employees based throughout the United States.
Enesco continues to utilize a team of sales executives to manage larger national
accounts and inside sales employees to manage smaller accounts on a
telemarketing basis.
Financial and Other Information
Information required by this item is set forth in the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page B-1 of this Form 10-K, and "Notes to Consolidated
Financial Statements" beginning on page C-11 of this Form 10-K.
ITEM 2. PROPERTIES.
The following chart summarizes the material real estate holdings of Enesco
worldwide:
Location Description Owned/Leased Sq. Ft. Lease Term
-------- ----------- ------------ ------- ----------
Elk Grove Village, IL USA Warehouse, Owned 485,500 N/A
Distribution & main
showroom
Itasca, IL, USA Headquarters offices Owned 101,580 N/A
West Chicago, IL, USA Warehouse Leased 106,461 May 2004
Mississauga, Ontario, Canada Warehouse, Leased 101,000 Dec. 2007
Distribution, showroom
& offices
Carlisle, Cumbria, England Warehouse, Leased 48,500 Sept. 2005
Distribution, showroom
& offices
Carlisle, Cumbria Warehouse Leased 35,000 Sept. 2005
England
Skirsgill, Penrith Manufacturing Leased 20,000 Dec. 2008
England
Skirsgill, Penrith Manufacturing and Leased 13,500 Sept. 2005
England offices
Villeneuve Loubet, France Warehouse, Leased 55,972 Dec. 2006
Distribution showroom
& offices
-7-
We also lease showrooms in eight other major market locations in the U.S.
and a showroom in Hong Kong for the sale of our products. The facilities of
Enesco are maintained in good operating condition and are, in the aggregate,
adequate for our purposes and are generally fully utilized, with the exception
of the West Chicago, IL warehouse a portion of which was subleased in 2003. The
lease for the warehouse in West Chicago, IL will expire in 2004 and we plan to
either vacate the space and lease a smaller warehouse or continue to lease
approximately 50,000 sq. ft. through the end of 2004.
ITEM 3. LEGAL PROCEEDINGS.
On February 13, 2004, the staff of the Securities and Exchange Commission
("SEC") informed Enesco that the SEC staff is considering recommending that the
SEC bring a civil action against Enesco for possible violations of the U.S.
securities laws, related to trading in Enesco's securities in the April-June
2000 time period. If the SEC were to file suit against Enesco, they have
indicated that they would expect to seek disgorgement of approximately $1.2
million of alleged profits, penalties in an unspecified amount and an injunction
against further violation of U.S. securities laws. As permitted under SEC
procedures, Enesco will continue to discuss this matter with the SEC and intends
to respond in writing before the SEC staff formally decides what action, if any,
to recommend. Enesco is unable to determine what amount, if any, could
ultimately be paid with respect to this matter. Until this notification by the
SEC on February 13, 2004, Enesco had had no contact with the SEC on this matter
since late 2001.
On February 19, 2004, the SEC further informed Enesco that the SEC staff
is considering recommending that the SEC bring a civil action against a former
Senior Vice President and General Counsel of Enesco, for possible violations of
the U.S. securities laws related to trading in Enesco's securities in the
April-June 2000 time period. Enesco is obligated to indemnify the former
officer, subject to the terms of Enesco's By-laws, with respect to his expenses
incurred in connection with this matter.
In the ordinary course of Enesco's business, there have arisen various
other legal proceedings pending against Enesco and its subsidiaries. While we
cannot predict the eventual outcome of these proceedings, we believe that none
of these proceedings will have a material adverse impact upon the consolidated
financial statements of Enesco.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, their respective ages and positions as of March 1,
2004 and a description of their business experience is set forth below. There
are no family relationships among any of the executive officers.
Date First
Name Age Positions Elected
- ---- --- --------- ----------
Daniel DalleMolle 53 President and Chief Executive Officer 3/28/01
Director
Member of Executive Committee
Prior to Mr. DalleMolle joining Enesco in March 2001, he was Group
President of the Hardware and Tool Companies of Newell Rubbermaid, Inc. from
1999 until 2001. From 1998 until 1999, he was President and Chief Operating
Officer of Intermatic, Inc., a low voltage lighting and timer manufacturer. From
1996 until 1998, he was President of Lee Rowan Company, a wire, plastic and wood
manufacturer of storage products and from 1992 until 1996, he was President of
Anchor Hocking Co., both wholly owned subsidiaries of Newell Rubbermaid.
Eugene Freedman 79 Founding Chairman 9/02/98
Director 9/04/97
Member of the Executive Committee 9/04/97
Mr. Freedman previously served as Vice Chairman of Enesco from October,
1997 to September, 1998, Executive Vice President of Enesco from
-8-
April, 1988 to September, 1998, and Vice President of Enesco from January, 1984
to April, 1998. He also served for many years as Chairman, President and Chief
Executive Officer of Enesco Corporation, a subsidiary of Enesco Group, Inc., of
which Mr. Freedman was a founder in 1959.
Thomas F. Bradley 52 Chief Financial Officer 1/06/03
Treasurer
Prior to Mr. Bradley joining Enesco in January 2003, he was President of
Amerock, a manufacturer of cabinet hardware, since 1996. Mr. Bradley served in
numerous vice president and controller positions at Newell Rubbermaid from 1984
until 1996. Before joining Newell Rubbermaid, Mr. Bradley held various financial
positions at Rayovac Corporation.
Jeffrey S. Smith 47 Senior Vice President, Sales 9/06/01
Marketing and Product Development
Mr. Smith previously served as Senior Vice President, Operations of Enesco
from September 2001 until February 2003. Prior to Mr. Smith joining Enesco in
June 2001, he was the Vice President of Supply Chain from 1997 until June 2001,
at Rauch Industries, a manufacturer and distributor of Christmas merchandise,
and a division of Syratech Corporation. From 1994 to 1997, he was Vice President
of Operations of Ambrosia Industries, a manufacturer and marketer of glass
giftware. Before joining Ambrosia, Mr. Smith held numerous positions with Anchor
Hocking Co., a wholly owned subsidiary of Newell Rubbermaid, Inc.
Josette V. Goldberg 46 Senior Vice President, Human
Resources and Administration 1/17/01
Senior Vice President, Human Resources 1/19/00
Vice President, Human Resources 6/02/99
Prior to Ms. Goldberg joining Enesco in February 1998, she was the Vice
President of Human Resources for Household Finance Corporation, a consumer
finance division of Household International, from 1996 to 1998. Previously, she
spent 11 years with Balcor Company, a real estate and property management
division of American Express where she held the position of Senior Vice
President of Human Resources and Administration.
M. Frances Durden 47 Vice President, General Counsel, 3/01/01
Secretary
Ms. Durden previously served as Corporate Counsel of Enesco from January,
1999 until February, 2001. Prior to Ms. Durden joining Enesco in January 1999,
she served as Senior Vice President and General Counsel of Michael Anthony
Jewelers, Inc. in Mt. Vernon, New York, from 1994 to January, 1999. Prior to
that, she practiced corporate law with an Ohio law firm.
Charles E. Sanders 55 Assistant Treasurer 2/28/01
Prior to Mr. Sanders joining Enesco in December, 2000, he served in
various positions from 1971 to 2000, including Vice President, Treasurer and
Corporate Secretary, with RDM Sports Group, Inc. or its predecessors in Atlanta,
GA.
NOTE: All officers are elected for the ensuing year and until their successors
are duly elected and qualified.
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
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, 2003, there were 2,345 record
holders of the Common Stock.
-9-
2003
----------------------------------
Market Price
Quarter Dividend High Low
First $ -- $ 7.60 $ 6.45
Second -- 9.00 7.01
Third -- 8.94 7.00
Fourth -- 11.00 8.00
2002
----------------------------------
Market Price
Quarter Dividend High Low
First $ -- $ 7.00 $ 5.50
Second -- 9.10 6.50
Third -- 9.21 6.25
Fourth -- 7.85 5.45
Enesco did not declare any dividends in 2003 or 2002. Future dividends and
resumption of the stock repurchase program will depend on future financial
results and the terms of our revolving credit facility. The credit agreement
contains financial and operating covenants, including restrictions on
repurchasing Enesco shares and paying dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information as of December 31,
2003, with respect to compensation plans under which shares of Enesco common
stock may be issued.
Number of
Securities
or Weighted- Number of
Securities average Securities
to be Issued Exercise Remaining
Upon Price of Available for
Exercise of Outstanding Future Issuance
Options, Options, Under Equity
Warrants and Warrants and Compensation
Plan Category Rights (#) Rights ($) Plans (#)
------------ ------------ ---------------
Equity compensation plans approved by our shareholders:
1996 Stock Option Plan 1,599,339 $ 12.72 1,341,638
1991 Stock Option Plan 637,242 18.69 --
Equity securities not approved by Enesco shareholders:
1997 President and Chief Executive
Officer Stock Option Plan 100,000 $ 27.31 --
1998 Chairman Stock Option Plan 14,000 $ 25.81 --
1999 Non-Employee Director Stock Plan 95,097 -- 4,903
1999 cancellation of Non-Employee
Directors Retirement Plan 20,523 -- --
Shares issued as partial compensation
for services Chair of Executive
Search Committee 17,292 -- --
Warrants to purchase common stock 200,000 4.38 --
Options to purchase common stock 367,997 6.13 --
--------- -------- ---------
Total 3,051,490 $ 13.18 1,346,541
========= ======== =========
-10-
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is attached as Appendix A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The information required by this Item is attached as part of Appendix B.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is attached as part of Appendix B.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is attached as Appendix C.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
We have had no disagreements with our independent auditors regarding
accounting or financial disclosure matters.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Form 10-K, Enesco carried out
an evaluation, under the supervision and with the participation of Enesco's
management, including Enesco's Chief Executive Officer, Chief Financial Officer
and Treasurer, of the effectiveness of the design and operation of Enesco's
disclosure controls and procedures. Based on that evaluation, Enesco's
management, including the Chief Executive Officer, Chief Financial Officer and
Treasurer, concluded that Enesco's disclosure controls and procedures are
operating effectively as designed. In January 2004, Enesco began operation of a
new computer system in the United States. Except for this new computer system,
there have been no significant changes in Enesco's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
Enesco carried out its evaluation.
We are committed to a continuing process of identifying, evaluating and
implementing improvements to the effectiveness of our disclosure and internal
controls and procedures. Our management, including our Chief Executive Officer
and Chief Financial Officer, does not expect that our controls and procedures
will prevent all errors. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues within Enesco have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in any control system,
misstatements due to error or violations of law may occur and not be detected.
P A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item regarding the Corporate Governance
Guidelines and Code of Business Conduct and Ethics of Enesco is set forth under
Item 1. Business-General on page 2 of this Form 10-K. Information required by
this item regarding the directors of Enesco is set forth under the captions
"Proposal 1: Election of Directors" and "Information as to Board of Directors
and Nominees" in Enesco's Proxy Statement and is incorporated herein by
reference. Information required by this item regarding the executive officers of
Enesco is included under
-11-
a separate caption in Part I hereof, and is incorporated herein by reference, in
accordance with General Instruction G(3) of Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K. Information required by this item regarding reporting
compliance is included under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in Enesco's Proxy Statement and is incorporated herein by
reference. Enesco will file its Proxy Statement with the Securities and Exchange
Commission not later than 120 days after the end of the 2003 fiscal year end
covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is set forth under the captions
"Executive Compensation", "Human Resource and Compensation Committee Report on
Executive Compensation", "Performance Graphs", "Compensation of Non-Employee
Directors" and "Compensation Committee Interlocks and Insider Participation" in
the Company's Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners
Information required by this item is set forth under the caption "Our
Largest Stockholders" and "Shares Held By Our Directors and Executive Officers"
in the Company's Proxy Statement and is incorporated herein by reference.
Security Ownership of Management
Information required by this item is set forth under the caption "Shares
Held by Our Directors and Executive Officers" in the Company's Proxy Statement
and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans.
Information required by this item is set forth under the caption
"Executive Compensation - Equity Compensation Plans" in the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is set forth under the caption
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information required by this item is set forth under the caption
"Independent Public Accountants" in the Company's Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) Financial Statements and Schedules. The financial
statements and schedules required by this item are listed in the Index to
Financial Statements and Schedules of Enesco Group, Inc. on page C-1 of this
Form 10-K.
(a)(3) Exhibits. The exhibits required by this item are listed in the
Exhibit Index on pages D-1 - D-2 of this Form 10-K. The management contracts and
compensatory plans or arrangements required to be filed as an exhibit to this
Form 10-K are listed as Exhibits 10(a) to 10(s) in the Exhibit Index.
Reports on Form 8-K.
(1) A Current Report on Form 8-K dated October 23, 2003 was filed with
the SEC furnishing a press release reporting Enesco's Third Quarter
2003 financial results.
-12-
(2) A Current Report on Form 8-K dated February 26, 2004 was filed with
the SEC furnishing a press release reporting Enesco's Fourth Quarter
2003 and year ended December 31, 2003 financial results.
FORWARD LOOKING STATEMENTS
This Form 10-K, including all information incorporated by reference into
this Form 10-K, contains certain forward-looking statements within the meaning
of the Federal securities laws. These forward-looking statements may include the
words "believe," "expect," "plans" or similar words and are based in part on
Enesco's reasonable expectations and are subject to a number of factors and
risks, many of which are beyond Enesco's control. Enesco's future results may
differ materially from its current results and actual results could differ
materially from those projected in the forward-looking statements contained in,
and incorporated by reference into, this Form 10-K as a result of certain
factors including, but not limited to, those set forth below. Readers should
also carefully review any risk factors described in other documents that we file
from time to time with the Securities and Exchange Commission.
- Changes in economic conditions and specific market conditions
- The ability to secure, maintain and renew popular licenses,
particularly our licenses for Precious Moments, Heartwood Creek and
Cherished Teddies
- Fluctuations in demand for our products
- Manufacturing lead times
- The effects of terrorist activity and armed conflict, such as
disruption in global economic activity, changes in logistics and
security arrangements, particularly with respect to our dependence
on manufacturing facilities in China
- The timing of orders, timing of shipments and our ability to meet
customer demands
- Inventory levels and purchase commitments exceeding requirements
based upon future demand forecasts
- Price and product competition in the giftware industry
- The trend toward retail store consolidation in the card and gift
channel in the United States
- Variations in sales channels, product costs or mix of products sold
- The geographical mix of our revenue and the associated impact on
gross margin
- Our ability to achieve targeted cost reductions, particularly in the
United States' operations
- 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 contained in, and incorporated by reference into,
this Form 10-K will occur or continue in the future. Except for required,
periodic filings under the Securities Exchange Act of 1934, Enesco undertakes no
obligations to release publicly any revisions to these forward looking
statements that may reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
-13-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 12th day of
March, 2004.
ENESCO GROUP, INC.
(Registrant)
By: /s/ Daniel DalleMolle
-------------------------
Daniel DalleMolle
President and Chief
Executive Officer
By: /s/ Thomas F. Bradley
------------------------
Thomas F. Bradley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 12th day of March, 2004 by the following
persons on behalf of the registrant and in the capacities indicated.
Signature Title
- --------- -----
/s/ Daniel DalleMolle
- -------------------------
Daniel DalleMolle Director, President and
Chief Executive Officer
/s/ John F. Cauley
- -------------------------
John F. Cauley Director
/s/ Anne-Lee Verville
- -------------------------
Anne-Lee Verville Chairman of the Board,
Director
/s/ Judith R. Haberkorn
- -------------------------
Judith R. Haberkorn Director
/s/ Donna Brooks Lucas
- -------------------------
Donna Brooks Lucas Director
/s/ Eugene Freedman
- -------------------------
Eugene Freedman Founding Chairman and
Director
/s/ George R. Ditomassi
- -------------------------
George R. Ditomassi Director
/s/ Thane A. Pressman
- ----------------------------
Thane A. Pressman Director
/s/ Donald L. Krause _
- ----------------------------
Donald L. Krause Director
/s/ Hector J. Orci
- ----------------------------
Hector J. Orci Director
-14-
APPENDIX A
FIVE-YEAR FINANCIAL HIGHLIGHTS
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) 2003 2002
--------- ---------
Net revenues (1) $ 249,059 $ 253,788
Cost of sales (2) 136,844 146,696
--------- ---------
Gross profit 112,215 107,092
Selling, distribution, general and administrative expenses 96,299 93,322
Amortization of goodwill and other intangibles (3) -- --
--------- ---------
Operating profit (loss) 15,916 13,770
Interest expense (787) (747)
Interest income 537 286
Other income (expense), net (1,334) (1,533)
--------- ---------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 14,332 11,776
Income taxes (4) (2,950) (8,897)
--------- ---------
Income before cumulative effect of a change in accounting principle 17,282 20,673
Cumulative effect of a change in accounting principle, net of income taxes (3) -- (29,031)
--------- ---------
Net income (loss) $ 17,282 ($ 8,358)
========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic: Income before cumulative effect of a change in accounting principle $ 1.23 $ 1.49
Cumulative effect of a change in accounting principle, net of tax -- (2.09)
Net income (loss) 1.23 (0.60)
--------- ---------
Diluted: Income before cumulative effect of a change in accounting principle $ 1.20 $ 1.47
Cumulative effect of a change in accounting principle, net of tax -- (2.09)
Net income (loss) 1.20 (0.60)
--------- ---------
Average shares of common stock-basic 14,028 13,854
Average shares of common stock-diluted 14,444 14,110
Shares of common stock outstanding at year end 14,164 13,909
--------- ---------
Market value per common share at year end $ 10.32 $ 7.08
Cash dividends declared $ -- $ --
Dividends declared per common share $ -- $ --
--------- ---------
Capital expenditures $ 5,496 $ 4,284
Depreciation $ 4,991 $ 5,014
Working capital $ 94,322 $ 76,099
Total assets $ 202,468 $ 179,785
Total long-term liabilities $ 3,551 $ 3,795
Shareholders' equity $ 147,238 $ 121,913
--------- ---------
Return on average shareholders' equity 13% (7)%
--------- ---------
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 ended 1/1/02 with the adoption of FAS 142.
Additionally, the adoption of FAS 142 resulted in Enesco writing off $29.0
million of goodwill in 2002 recorded as a cumulative effect of a change in
accounting principle.
4) The provision for income taxes includes a $6.8 million benefit in 2003, 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.
A-1
2001 2000 1999
--------- --------- ---------
$ 267,108 $ 323,800 $ 390,069
160,889 184,897 224,750
--------- --------- ---------
106,219 138,983 165,319
113,817 129,816 141,668
1,950 2,658 2,224
--------- --------- ---------
(9,548) 6,429 21,427
(1,523) (3,196) (2,994)
371 1,161 579
(1,342) 759 273
--------- --------- ---------
(12,042) 5,153 19,285
(13,153) (9,939) (7,591)
--------- --------- ---------
1,111 15,092 26,876
-- -- --
--------- --------- ---------
$ 1,111 $ 15,092 $ 26,876
========= ========= =========
$ 0.08 $ 1.11 $ 1.88
-- -- --
0.08 1.11 1.88
--------- --------- ---------
$ 0.08 $ 1.11 $ 1.87
-- -- --
0.08 1.11 1.87
--------- --------- ---------
13,708 13,562 14,329
13,836 13,636 14,371
13,769 13,612 13,476
--------- --------- ---------
$ 6.30 $ 4.69 $ 11.06
$ -- $ 3,782 $ 15,906
$ -- $ 0.28 $ 1.12
--------- --------- ---------
$ 2,729 $ 4,794 $ 5,058
$ 5,071 $ 5,948 $ 5,285
$ 54,389 $ 58,931 $ 42,434
$ 219,551 $ 231,479 $ 277,367
$ 8,938 $ 11,562 $ 34,237
$ 126,377 $ 125,693 $ 114,432
--------- --------- ---------
1% 13% 20%
--------- --------- ---------
A-2
APPENDIX B
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENESCO GROUP, INC.
The following discussion addresses the financial condition and results of
operations of Enesco Group, Inc. and subsidiaries ("Enesco"). To enhance
understanding of this discussion, please read the financial statements,
accompanying notes and the financial highlights.
RESULTS OF OPERATIONS
2003 COMPARED TO 2002
Net revenues of $249 million decreased $5 million, or slightly less than 2%, due
to lower product sales in the United States, which were partially offset by
higher International sales.
Net sales in the United States of $159.8 million were 9% below the 2002
level primarily due to lower mass market promotional sales and lower collectible
market sales of the Precious Moments and Cherished Teddies product lines. These
decreases were offset partially by success in some of our newer product lines,
such as Heartwood Creek, Foundations and My Little Kitchen Fairies.
Net International sales of $89.3 million were 14% above 2002 levels due
primarily to sales from the April 2003 acquisition of Bilston & Battersea
Enamels plc (B&B) and the impact of changes in foreign currency translation
rates. Net International sales represented approximately 36% of total sales in
2003 compared to 31% of total sales in 2002. Local currency sales were
translated into U.S. dollars at higher exchange rates in 2003 versus 2002. If
the 2003 local currency sales were translated into United States dollars at the
2002 exchange rates, International sales would have been lower by approximately
$9 million in 2003.
Enesco's Precious Moments lines represented approximately 33% of 2003
sales compared to 38% in 2002. The Cherished Teddies lines represented
approximately 8% of 2003 sales compared to 11% in 2002. The number of members in
each of the Precious Moments and Cherished Teddies collector clubs decreased by
approximately 21% as of December 31, 2003, as compared to December 31, 2002.
Sales of newer product lines, like Heartwood Creek, Foundations, Children
of the Inner Light and My Little Kitchen Fairies, accounted for approximately
11% of total sales in 2003 as compared to approximately 2% of total 2002 sales.
Net open orders (backlog) as of December 31, 2003, were $17 million, down
approximately $2 million or 12% compared to the same time last year. Backlog
consists of orders received and approved by Enesco, subject to cancellation for
various reasons, including credit considerations, product availability and
customer requests. We believe the decrease in backlog can be attributed to
timing of product introductions, variability in retailer order cycles, economic
conditions, Enesco's demonstrated ability to reduce order lead times and
continued consolidation in the collectible market.
Gross profit of $112 million increased by $5 million or 5% in 2003. The
increase was primarily due to the impact of changes in foreign currency
translation rates, improved customer/product mix, better procurement/inventory
management and lower royalty costs negotiated with certain licensors.
Additionally, incremental gross profit from the Bilston & Battersea acquisition
partially offset a volume-related decline in gross profit caused by lower
product sales in the United States. Enesco's gross profit margin, expressed as a
percentage of sales, was 45% in 2003 compared to 42% in 2002.
Selling, distribution, general and administrative expenses (SD&A) of $96
million for 2003 reflected a $3 million, or 3% increase, over 2002 SD&A levels.
The increase in 2003 SD&A is attributable to the impact of changes in foreign
currency translation rates, which added $3 million to SD&A in 2003 and the
addition of B&B, which added approximately $2 million to SD&A. Spending
reductions in our U.S. and European entities of approximately $2 million helped
to keep the overall SD&A increase to only 3%. The spending reductions were
achieved through reduced headcount, lower catalog printing and tradeshow costs,
as well as lower depreciation expense.
Due to the factors described above, 2003 operating profit of $15.9 million
reflected a $2.1 million or 16% increase over 2002 operating profit.
Geographically, U.S.- related operating income of $5.3 million was a $0.4
B-1
million or 8% improvement over 2002, while International 2003 operating profit
of $10.6 million increased by $1.7 million or 20% over 2002.
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 of $175.8 million 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 of $78.0 million 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 U.S. dollars at higher exchange rates in 2002 versus 2001. If
the 2002 local currency sales were translated into U.S. dollars at the 2001
exchange rates, International sales would have been lower by approximately $2.2
million in 2002.
Enesco's Precious Moments lines represented approximately 38% of 2002
sales compared to 39% in 2001. The Cherished Teddies lines represented
approximately 11% of 2002 sales compared to 13% in 2001. The memberships in each
of the Precious Moments and Cherished Teddies collector clubs decreased by
approximately 7% at December 31, 2002, compared to December 31, 2001.
In January 2002, numerous U.S. sales force changes were initiated to
improve 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 was focused to serve only the collectibles, card
and gift channels. The U.S. home decor channel was 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 were 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 was primarily due to a change in
Enesco's product launch and sales processes. Enesco began introducing products
to 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 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 partially offset by a decrease in sales volume in 2002. Enesco's gross
profit margin 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 closeout 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
B-2
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
one-time 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.
INTEREST EXPENSE, INTEREST INCOME AND OTHER EXPENSE, NET
Interest expense of $787 thousand for 2003 was $40 thousand or 5% higher than
2002 primarily due to interest expense related to an Illinois income tax audit
settlement in the second quarter of 2003. Excluding the settlement, interest
expense would have been $367 thousand or $380 thousand lower than 2002 interest
expense due to lower average borrowings and lower interest rates. Interest
income for 2003 of $537 thousand was $251 thousand higher than in 2002 due to
interest income from an Illinois income tax refund and higher invested cash
balances during 2003.
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 was $286 thousand compared to $371 thousand in 2001 due to lower
interest rates.
PROVISIONS FOR INCOME TAXES
The 2003 tax provision includes a $6.8 million benefit, related to prior year
tax accruals, which were no longer required. The 2003 effective tax rate
(excluding the $6.8 million benefit) was 27.2% compared to 34.2% in 2002
(excluding a $12.9 million benefit). The difference from the effective tax rate
for 2002 reflects the geographical mix of earnings. 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 earning changes in countries where we have lower statutory rates or if
tax laws and regulations change.
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 $10.6 million on December 31, 2003.
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 used by operating activities in 2003 was $4.0 million versus an $18.2
million source of cash in 2002. The significant components of the 2003 $4.0
million use of cash from operating activities were increased receivables of
approximately $7.0 million; increased inventory of approximately $9.0 million
and lower current income taxes payable of approximately $8.0 million. The
increased receivables were driven primarily by the addition of B&B in 2003 and
higher sales in the fourth quarter of 2003. The increased inventories were
primarily due to the addition of B&B and higher inventory levels in the United
States. U.S. inventory levels were increased in the fourth quarter of 2003 in
order to improve customer service levels. Current income tax liabilities were
reduced by a $6.8 million reversal of prior year accruals, which were no longer
necessary. The reported net
B-3
income of $17.3 million and add-back of the $4.9 million non-cash impact of
depreciation partially offset the above noted cash uses, resulting in the net
$4.3 million use from operating activities.
Cash used by investing activities was $9.6 million in 2003 versus a cash
use of $4.2 million in 2002. The major uses of cash by investing activities in
2003 were for capital expenditures related to the hardware and software
purchases for Enesco's new computer system, which began operation in January of
2004, and the acquisition of B&B in 2003.
Cash provided by financing activities was $4.3 million in 2003 versus a
$6.0 million use of cash from 2002 financing activities. The major source of
cash from 2003 financing activities was due to increased notes payable and
common stock issuance primarily for exercise of stock options and 401k stock
issuances. Enesco did not declare any dividends in 2003. Future dividends and
resumption of the stock repurchase program will depend on future financial
results. No shares were purchased in 2002 or 2003. Outstanding shares of Enesco
common stock were exchanged from an optionee to partially pay for the exercise
price of options in 2003. Note 4 to the Consolidated Financial Statements
provide 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, 2003, authorization to purchase one million shares remained available under
the program. 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, when the open tax years are closed or
the accruals are otherwise deemed unnecessary at a point in time, the accruals
are adjusted through the provision for income taxes. In 2003, the adjustment was
a tax benefit of $6.8 million. The majority of the open tax years become closed
for assessment at the end of December for the particular open year.
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, are not
considered plan assets and are excluded from pension computations.
In June 2003, Enesco entered into a new three year domestic $50.0 million
unsecured revolving credit facility that includes Enesco International (H.K.)
Limited as a borrowing subsidiary. The credit agreement contains financial and
operating covenants including restrictions on incurring indebtedness and liens,
acquisitions, selling property, repurchasing the Company's shares and paying
dividends. In addition, Enesco is required to satisfy fixed charge coverage
ratio and leverage ratio tests at the end of the second, third and fourth
quarters and a minimum annual operating profit covenant. As of December 31,
2003, Enesco was in compliance with all covenants under the revolving credit
agreement. Enesco is not aware of any trends, events, demands, commitments or
uncertainties that reasonably can be expected to have a material adverse 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 will
satisfy our expected working capital needs, capital expenditures and other
liquidity requirements associated with our existing operations, however, in the
course of pursuing growth opportunities, including but not limited to
acquisitions and alliances, Enesco may need to negotiate additional or amend
existing credit facilities (See Note 11, Subsequent Events). In addition, there
are no transactions, arrangements or other relationships with unconsolidated
entities or other persons, as of December 31, 2003, that are reasonably likely
to materially affect liquidity or requirements for capital resources.
In March 2004, Enesco's domestic $50.0 million credit facility was amended
to add term notes totaling $7.7 million for the purpose of funding the
acquisition of Gregg Manufacturing, Inc. d/b/a Gregg Gift Company ("Gregg"). The
total unsecured credit facility is currently $57.7 million. At the same time,
Gregg was added as a borrowing subsidiary. Certain of the financial covenants
were modified, including measurements at the end of each quarter.
B-4
The principal sources of Enesco's liquidity are its available cash
balances, cash from operations and available financing. At December 31, 2003,
Enesco had formal and informal unused lines of credit of approximately $54
million. The informal lines are bank lines that have no commitment fees. As of
December 31, 2003, Enesco had $2.9 million of 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 $ 2,858 $ 2,858 $ -- $ -- $ --
Letters of Credit 4,198 4,198 -- -- --
Operating Leases 9,700 3,500 5,200 1,000 --
License Guarantees 61,897 16,647 45,250 -- --
-------- --------- -------- --------- -------
TOTAL CONTRACTUAL CASH OBLIGATIONS $ 78,653 $ 27,203 $ 50,450 $ 1,000 $ --
-------- --------- -------- --------- -------
ACQUISITIONS
On April 8, 2003, the Company acquired Bilston & Battersea Enamels plc (Bilston
& Battersea), which is based in Bilston, West Midlands, England, through its
European subsidiary, Enesco Holdings Limited. Bilston & Battersea manufactures
and distributes giftware, home accessories and related products, including the
high quality, hand-decorated enamels and sculptured boxes sold under the Halcyon
Days Enamels and Halcyon Days Bonbonnieres brands. Enesco paid approximately
$4.4 million in cash ($3.7 million net of acquired cash) to acquire the company,
which resulted in Enesco recording $2.9 million of goodwill related to the
purchase.
On February 29, 2004, the Company acquired Gregg Manufacturing, Inc. d/b/a Gregg
Gift Company ("Gregg"), a California based manufacturer, for approximately $7.4
million in cash ($7.3 million net of acquired cash). Gregg manufactures and
distributes branded and specialty giftware that includes book covers,
organizers, tote bags and home decor accents targeting the growing inspirational
marketplace. Gregg generated revenues of approximately $11 million in 2003.
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
collectability 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.
B-5
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, when the open
tax years are closed or the accruals are otherwise deemed unnecessary at a point
in time, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FAS No. 132 (Revised) ("FAS 132-R"),
"Employer's Disclosure about Pensions and Other Post-Retirement Benefits." FAS
132-R retains disclosure requirements of the original FAS 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. FAS 132-R is effective for fiscal years ending after
December 15, 2003, except that certain disclosure requirements are effective for
fiscal years ending after June 15, 2004. Interim period disclosures are
effective for periods beginning after December 15, 2003. The adoption of the
disclosure provisions of FAS 132-R did not have a material effect on the
Company's Consolidated Financial Statements.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." FAS
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. FAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of the provisions of FAS 150
did not have a material effect on the Company's Consolidated Financial
Statements.
In April 2003, the FASB issued FAS No. 149, "Amendments of Statement 133
on Derivative Instruments and Hedging Activities." FAS 149 amends and clarifies
accounting for derivative instruments embedded in other contracts, and for
hedging activities under FAS No. 133. FAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of the provisions of FAS 149 did not have a
material effect on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, Consolidated Financial Statements for companies that
have interests in entities that are Variable Interest Entities (VIE) as defined
under FIN 46. According to this interpretation, if a company has an interest in
a VIE and is at risk for a majority of the VIE's expected losses or receives a
majority of the VIE's expected gains it shall consolidate the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. For entities acquired or created before February 1,
2003, this interpretation is effective no later than the end of the first
interim or reporting period ending after March 15, 2004, except for those VIE's
that are considered to be special purpose entities, for which the effective date
is no later than the end of the first interim or annual reporting period ending
after December 15, 2003. For all entities that were acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim or
annual period ending after December 31, 2003. The adoption of the provisions of
this interpretation did not have a material effect on the Company's Consolidated
Financial Statements.
B-6
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, 2003, Enesco had entered into a forward
exchange agreement with a notional value of $6.2 million to mature within 5
days. This contract was to sell U.S. dollars and purchase British pounds
sterling at an average exchange rate of 1.78. The fair value of the contract is
not significant. As of December 31, 2003, Enesco had $2.9 million of interest
bearing debt.
B-7
APPENDIX C
ENESCO GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - on pages C-2 through C-5 of this Form
10-K.
FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations For the Years Ended December 31,
2003, 2002 and 2001
Consolidated Statements of Retained Earnings For the Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income For the Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows For the Years Ended December
31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements, December 31, 2003, 2002
and 2001
Quarterly Results (Unaudited)
SCHEDULE SUPPORTING FINANCIAL STATEMENTS ON PAGE C-27.
Schedule
Number Description
- -------- -----------
II Valuation and Qualifying Accounts and Reserves For Each of the Three
Years Ended December 31, 2003(a)
NOTES:
(a) All other schedules are not submitted because they are not
applicable, not required or because the required information is
included in the consolidated financial statements or notes thereto.
(b) Individual financial statements of the Company have been omitted
since (1) consolidated statements of the Company and its
subsidiaries are filed and (2) the Company is primarily an operating
company and all subsidiaries included in the consolidated financial
statements filed are wholly-owned and do not have a material amount
of debt to outside persons.
C-1
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. and subsidiaries (the Company) as of December 31, 2003 and 2002 and the
related consolidated statements of operations, retained earnings, comprehensive
income and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The accompanying 2001 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 audits 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 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, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the 2001 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 in Note 1 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 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 consolidated
financial statements taken as a whole.
/s/ KPMG LLP
Chicago, Illinois
February 25, 2004
C-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
To the Shareholders and Board of Directors of Enesco Group, Inc.:
On February 25, 2004, we reported on the consolidated balance sheets of Enesco
Group, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and
the related consolidated statements of operations, retained earnings,
comprehensive income and cash flows for the years then ended as contained in the
December 31, 2003 annual report on Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedule, as it relates to the years ended December
31, 2003 and 2002, as listed in Item 15 of the December 31, 2003 annual report
on Form 10-K. That financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on that
financial statement schedule based on our audits. The consolidated financial
statement schedule, as it relates to the year ended December 31, 2001, was
subject to auditing procedures performed by other auditors, who have ceased
operations, whose report dated February 20, 2002 stated that such information is
fairly stated, in all material respects, when considered in relation to the 2001
basic consolidated financial statements taken as a whole.
In our opinion, such financial statement schedule, as it relates to the years
ended December 31, 2003 and 2002, when considered in relation to the 2003 and
2002 basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
February 25, 2004
C-3
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 consolidated
financial statements referred to in the report 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.
C-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Enesco Group, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Enesco Group,
Inc.'s annual report to shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated February 20, 2002. Our audit was
made for the purpose of forming an opinion of the consolidated financial
statements taken as a whole. The schedule listed in the accompanying index is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 20, 2002
This report is a copy of a report previously issued by Arthur Andersen LLP.
Arthur Andersen LLP has not reissued the report. The prior-period consolidated
financial statements referred to in the report have been revised to include the
transitional disclosures required by Statement of Financial Standards 142,
"Goodwill and Other Intangible Assets," which was adopted by the Company as of
January 1, 2002.
C-5
CONSOLIDATED BALANCE SHEETS
ENESCO GROUP, INC.
December 31, 2003 and 2002
ASSETS
(In thousands)
2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 10,645 $ 17,418
Accounts receivable, net 65,190 54,347
Inventories 60,820 48,334
Prepaid expenses 4,114 2,491
Deferred income taxes and taxes receivable 5,146 7,586
---------- ----------
Total current assets 145,915 130,176
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and improvements 3,710 3,710
Buildings and improvements 37,525 36,058
Machinery and equipment 16,412 8,828
Office furniture and equipment 27,164 23,862
Transportation equipment 795 462
---------- ----------
85,606 72,920
Less - accumulated depreciation and amortization (57,265) (46,691)
---------- ----------
Property, plant and equipment, net 28,341 26,229
---------- ----------
OTHER ASSETS:
Goodwill 2,890 --
Other 1,458 1,171
Deferred income taxes 23,864 22,209
---------- ----------
Total other assets 28,212 23,380
---------- ----------
$ 202,468 $ 179,785
---------- ----------
The accompanying notes are an integral part of these financial statements.
C-6
CONSOLIDATED BALANCE SHEETS
ENESCO GROUP, INC.
December 31, 2003 and 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
2003 2002
CURRENT LIABILITIES:
Notes and loans payable $ 2,858 $ --
Accounts payable 21,723 18,395
Federal, state and foreign income taxes 7,375 15,416
Accrued expenses -
Payroll and commissions 4,812 4,412
Royalties 7,735 7,911
Post-retirement benefits 1,375 2,320
Other 5,686 5,623
---------- ----------
Total current liabilities 51,564 54,077
---------- ----------
LONG-TERM LIABILITIES:
Notes payable 9 --
Post-retirement benefits 3,248 3,092
Deferred income taxes 294 703
---------- ----------
Total long-term liabilities 3,551 3,795
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
Minority interest 114 --
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 45,863 47,148
Retained earnings 347,650 330,368
Accumulated other comprehensive income (loss) 3,740 (2,712)
---------- ----------
400,407 377,958
Less - Shares held in treasury, at cost
Common stock, 11,064 shares in 2003 and 11,319 shares in 2002 (253,168) (256,045)
---------- ----------
Total shareholders' equity 147,239 121,913
---------- ----------
$ 202,468 $ 179,785
---------- ----------
The accompanying notes are an integral part of these financial statements.
C-7
CONSOLIDATED STATEMENTS OF OPERATIONS
ENESCO GROUP, INC.
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands, except per share amounts) 2003 2002 2001
Net revenues $ 249,059 $ 253,788 $ 267,107
Cost of sales 136,844 146,696 160,889
---------- ---------- ----------
Gross profit 112,215 107,092 106,218
Selling, distribution, general and administrative expenses 96,299 93,322 113,816
Amortization of goodwill -- -- 1,950
---------- ---------- ----------
Operating profit (loss) 15,916 13,770 (9,548)
Interest expense (787) (747) (1,523)
Interest income 537 286 371
Other income (expense), net (1,334) (1,533) (1,342)
---------- ---------- ----------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 14,332 11,776 (12,042)
Income tax benefit 2,950 8,897 13,153
---------- ---------- ----------
Income before cumulative effect of a change in accounting principle 17,282 20,673 1,111
Cumulative effect of a change in accounting principle, net of income taxes -- (29,031) --
---------- ---------- ----------
Net income (loss) $ 17,282 $ (8,358) $ 1,111
---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC:
Income before cumulative effect of a change in accounting principle $ 1.23 $ 1.49 $ 0.08
Cumulative effect of a change in accounting principle, net of tax $ -- $ (2.09) $ --
Net income (loss) $ 1.23 $ (0.60) $ 0.08
DILUTED:
Income before cumulative effect of a change in accounting principle $ 1.20 $ 1.47 $ 0.08
Cumulative effect of a change in accounting principle, net of tax $ -- $ (2.09) $ --
Net income (loss) $ 1.20 $ (0.60) $ 0.08
The accompanying notes are an integral part of these financial statements.
C-8
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
ENESCO GROUP, INC.
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands) 2003 2002 2001
---------- ---------- ----------
Balance, beginning of year $ 330,368 $ 338,726 $ 337,615
Net income (loss) 17,282 (8,358) 1,111
---------- ---------- ----------
Balance, end of year $ 347,650 $ 330,368 $ 338,726
========== ========== ==========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
ENESCO GROUP, INC.
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands) 2003 2002 2001
-------- -------- --------
Net income (loss) $ 17,282 $ (8,358) $ 1,111
-------- -------- --------
Other comprehensive income:
Cumulative translation adjustments 6,452 3,010 (1,334)
-------- -------- --------
Total other comprehensive income (loss) 6,452 3,010 (1,334)
-------- -------- --------
Comprehensive income (loss) $ 23,734 $ (5,348) $ (223)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
C-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
ENESCO GROUP, INC.
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands) 2003 2002 2001
OPERATING ACTIVITIES:
Net income (loss) $ 17,282 $ (8,358) $ 1,111
Cumulative effect of a change in accounting principle, net of taxes -- 29,031 --
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization of property, plant and equipment 5,236 5,014 5,071
Amortization of goodwill -- -- 1,950
Deferred income taxes (801) 1,872 (8,450)
(Gains) losses on sale of capital assets 5 12 96
Changes in assets and liabilities:
Accounts receivable (7,108) 5,141 13,707
Inventories (9,401) 9,070 3,479
Prepaid expenses (1,236) 203 985
Other assets 956 1,125 (194)
Accounts payable and accrued expenses (1,090) (11,081) 4,174
Federal, state and foreign income taxes (7,953) (13,166) (6,399)
Long-term post-retirement benefits 156 (626) (2,347)
--------- --------- ---------
Net cash provided (used) by operating activities (3,954) 18,237 13,183
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,918) (4,284) (2,729)
Acquisition, net of cash acquired (3,732) -- --
Proceeds from sales of property, plant and equipment 37 99 37
--------- --------- ---------
Net cash used by investing activities (9,613) (4,185) (2,692)
--------- --------- ---------
FINANCING ACTIVITIES:
Net issuance (repayment) of notes and loans payable 2,677 (6,858) (7,134)
Exercise of stock options 588 176 18
Other common stock issuance 1,004 708 889
--------- --------- ---------
Net cash provided (used) by financing activities 4,269 (5,974) (6,227)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 2,525 1,408 (338)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (6,773) 9,486 3,926
Cash and cash equivalents, beginning of year 17,418 7,932 4,006
--------- --------- ---------
Cash and cash equivalents, end of year $ 10,645 $ 17,418 $ 7,932
========= ========= =========
The accompanying notes are an integral part of these financial statements.
C-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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 financial statements to conform to
the 2003 and 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 operations items are translated at average exchange rates for the
year. Translation gains and losses are reported as a component of accumulated
other comprehensive income (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 $676 thousand in 2003, $495 thousand in 2002 and $860 thousand in 2001.
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 $4.6 million and $3.8 million at
December 31, 2003 and 2002, 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):
2003 2002
Raw materials $ 898 $ 369
Work in process 342 58
Finished goods in transit 5,904 2,154
Finished goods 53,676 45,753
-------- --------
$ 60,820 $ 48,334
======== ========
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 41% of
C-11
total sales for 2003, 49% of total sales for 2002 and 52% of total sales for
2001. 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. 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 to 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 results have not been restated for the
effects of ceasing goodwill amortization. Had goodwill amortization been
discontinued effective January 1, 2001, net income (loss) and earnings (loss)
per common share would have been as follows (in thousands, except per share
data):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
C-12
YEAR ENDED DECEMBER 31
2003 2002 2001
Net income (loss):
As reported $ 17,282 $ (8,358) $ 1,111
Goodwill amortization, net of income taxes -- -- 1,679
---------- ---------- ----------
As adjusted $ 17,282 $ (8,358) $ 2,790
========== ========== ==========
Earning (loss) per common share- basic:
As reported $ 1.23 $ (0.60) $ 0.08
Goodwill amortization, net of income taxes -- -- 0.12
---------- ---------- ----------
As adjusted $ 1.23 $ (0.60) $ 0.20
========== ========== ==========
Earnings (loss) per common share-diluted:
As reported $ 1.20 $ (0.60) $ 0.08
Goodwill amortization, net of income taxes -- -- 0.12
---------- ---------- ----------
As adjusted $ 1.20 $ (0.60) $ 0.20
========== ========== ==========
In the second quarter of 2003, Enesco acquired Bilston & Battersea (see
note 10). As a result of this acquisition, the Company recorded goodwill of
$2,890.
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, when the open
tax years are closed or the accruals are otherwise deemed unnecessary at a point
in time, the accruals are adjusted through the provision for income taxes. The
majority of open tax years become closed for assessments at the end of December
for the particular open year.
Basic earnings per common share are based on the average number of common
shares outstanding during the year. Diluted earnings per common share, assumes
in addition to the above, the dilutive effect of common share equivalents during
the year. Common share equivalents represent dilutive stock options and warrants
using the treasury stock method. The number of shares used in the earnings per
common share computation for 2003, 2002 and 2001 were as follows (in thousands):
2003 2002 2001
Basic:
Average common shares outstanding 14,028 13,854 13,708
Diluted:
Stock options and warrants 416 256 128
------ ------ ------
Average shares - diluted 14,444 14,110 13,836
====== ====== ======
Additional options to purchase 1.0 million, 1.4 million and 1.9 million
shares were outstanding during 2003, 2002 and 2001, 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 share.
At December 31, 2003, the Company has four stock-based employee and two
non-employee director compensation plans, which are described more fully in Note
4, Shareholders' Equity. In addition, from time to time Enesco has issued stock
options outside of the plans as an employment inducement. The shares will be
issued from treasury stock. 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
C-13
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 (in thousands).
YEAR ENDED DECEMBER 31
2003 2002 2001
Net income (loss) as reported $ 17,282 $ (8,358) $ 1,111
Add: Stock-based employee compensation
expense included in reported net
income (loss), net of related tax effects -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1,382) (1,206) (1,008)
---------- ---------- ----------
Pro forma net income (loss) $ 15,900 $ (9,564) $ 103
========== ========== ==========
Earnings (loss) per share:
As reported:
Basic $ 1.23 $ (0.60) $ 0.08
---------- ---------- ----------
Diluted $ 1.20 $ (0.60) $ 0.08
========== ========== ==========
2. NOTES AND LOANS PAYABLE:
Notes and loans payable and weighted-average interest rates at December 31, 2003
and 2002 were as follows (in thousands):
2003 2002
INTEREST Interest
BALANCE RATE Balance Rate
Notes under committed bank lines $ 2,858 2.1% $ -- --
------- -------- ------- --------
Total interest paid under committed bank lines was $408 thousand in 2003, $772
thousand in 2002 and $1.7 million in 2001.
In June 2003, Enesco entered into a new three year domestic $50.0 million
unsecured revolving credit facility that includes Enesco International (H.K.)
Limited as a borrowing subsidiary. The credit agreement contains financial and
operating covenants including restrictions on incurring indebtedness and liens,
acquisitions, selling property, repurchasing the Company's shares and paying
dividends. In addition, Enesco is required to satisfy fixed charge coverage
ratio and leverage ratio tests at the end of the
C-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
second, third and fourth quarters and a minimum annual operating profit
covenant. As of December 31, 2003, Enesco was in compliance with all covenants
under the revolving credit agreement. At December 31, 2003, Enesco had formal
and informal unused lines of credit of approximately $54 million. The informal
lines are bank lines that have no commitment fees (See Note 11, Subsequent
Events).
3. EMPLOYEE BENEFIT PLANS:
Long-term liabilities for post-retirement benefits at December 31, 2003 and 2002
were as follows (in thousands):
2003 2002
Post-retirement benefits $ 1,720 $ 1,623
Corporate headquarters closing -- 40
Supplemental 401(k) 1,201 923
Deferred compensation/severance 327 506
------- -------
Balance sheet total $ 3,248 $ 3,092
======= =======
Enesco has established grantor trusts to fund its non-qualified
supplemental retirement plans. The trusts are irrevocable and assets contributed
are subject to the claims of creditors and therefore, are not considered plan
assets reportable as a funding component under paragraph 19 of FAS No. 87. The
assets are held in these trusts at market value and amounted to $1.2 million at
December 31, 2003, and $900 thousand at December 31, 2002. These assets are
included in other assets in the accompanying consolidated balance sheets.
Enesco had sponsored a defined benefit post-retirement health care and
life insurance plan that had long-term liabilities of $1.7 million and $1.6
million as of December 31, 2003 and 2002, respectively. Certain non-employee
directors and employees became eligible for the benefits under this plan when
they reached allowable retirement age while working or serving on the board at
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 non-employee director or employee benefits were principally
accrued during the employment or service of the applicable non-employee director
or employee. All of the benefits for these plans are vested and all the
participants are former employees or non-employee directors. 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 post-retirement
plan included in the current and long term liabilities sections of Enesco's
consolidated balance sheets at December 31, 2003 and 2002 (in thousands):
2003 2002
-------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 1,741 $ 1,648
Service cost -- --
Interest cost 35 80
Actuarial loss 191 148
Benefits paid (131) (135)
-------- --------
Benefit obligation at end of year $ 1,836 $ 1,741
-------- --------
FUNDED STATUS:
(Accrued) benefit cost $ (1,836) $ (1,741)
======== ========
Net periodic post-retirement benefit expense includes the following components
(in thousands):
C-15
2003 2002 2001
Service cost $ -- $ -- $ --
Interest cost 35 80 82
Recognized actuarial loss (gain) 191 148 (646)
------ ------ ------
Net period benefit cost (income) $ 226 $ 228 $ (564)
====== ====== ======
A 15% annual rate of increase in per capita cost of covered health care
benefits was assumed for periods after December 31, 2003. 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, 2003 by $65
thousand and the interest cost components of the net post-retirement benefit
expense for the year then ended by $13 thousand. The weighted-average discount
rate used in determining the accumulated post-retirement benefit was 5%.
In addition, certain subsidiaries have established funded profit sharing
and defined contribution retirement plans.
Total consolidated profit sharing and retirement plan expense amounted to
$2.2 million in 2003, $2.0 million in 2002, and $2.3 million in 2001.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
If the New Rights become exercisable after any person acquired or tenders
for 15% or more of the common stock then outstanding (except through an offer
for all common stock that has been approved by the Board), each New Right not
owned by that person or related parties will enable its holder to purchase, at
the New Right's exercise price, common stock (or other securities or assets, or
a combination thereof) having double the value of the exercise price. In the
event of certain merger or asset sale transactions with another party, similar
terms would apply to the purchase of that party's common stock.
The New Rights, which have no voting power, expire on July 22, 2008,
subject to extension. Upon approval by the Board, the New Rights may be redeemed
for $.01 each under certain conditions.
In 1996, the shareholders approved a Stock Option Plan previously adopted
by the Board, which provides for both incentive and non-qualified stock options.
Options for up to 1.5 million shares of common stock may be granted under the
1996 Plan. The 1996 Plan, as amended by the Board in 1998,
C-16
provides that non-qualified options for 1,500 shares of common stock be granted
annually to each non-employee Director then serving. In 2003, the shareholders
approved an amendment previously adopted by the Board to the 1996 Plan that
increased the number of shares available for option grants under the 1996 Plan
from 1.5 million to 3.0 million and provided for vesting of the options over
four years, at the rate of 25% of the options per year, without the restrictions
on the exercise of vested options that was set forth in the 1996 Plan. 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 granted prior to
April 2003 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. Under the 1996 Plan as
amended by shareholder approval in 2003, new options vest equally over four
years, with 25% of the shares subject to the vesting on each of the first four
anniversary dates of the date of grant of the option, with the options being
thereafter exercisable by the optionee regardless of the fair market value of
Enesco's common stock. 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. The 1993 options expired during 2003.
At December 31, 2003, Enesco had five stock-based compensation (fixed
option) plans not including the 1993 options that expired during 2003 and the
1999 Non-Employee Director Stock Plan, 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 five stock-based
compensation plans been determined by applying the fair value based method
provided for in FAS 123, Enesco's net income (loss) and earnings (loss) per
common share for 2003, 2002 and 2001 would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):
2003 2002 2001
Net income (loss) As reported $ 17,282 $ (8,358) $ 1,111
Pro forma $ 15,900 $ (9,564) $ 103
Earnings (loss) per common As reported $ 1.20 $ (0.60) $ 0.08
share diluted Pro forma $ 1.10 $ (0.69) $ 0.01
The options granted in 2003, 2002 and 2001 were under the 1996 Plan and in 2001
also under the 1991 Plan. The fair value of each option grant in 2003, 2002 and
2001 was estimated at the time of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
C-17
2003 2002 2001
Annual dividend yield 0.0% 0.0% 0.0%
Expected volatility 46.0% 70.0% 85.0%
Risk-free interest rate 3.8% 4.9% 4.4%
Expected life (years) 8.0 8.0 6.0
Weighted-average grant-date fair value of
options granted during the year, per share $ 4.58 $ 5.20 $ 4.13
Stock option status and activity under Enesco's six stock-based
compensation plans including the 1993 options that expired during 2003 are
summarized as follows:
SHARES WEIGHTED-AVERAGE
STOCK OPTIONS (000s) EXERCISE PRICE
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
Granted 527 8.14
Exercised (134) 5.17
Forfeited (394) 25.90
----- -------
Outstanding at December 31, 2003 2,735 $ 13.96
===== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
2003 2002 2001
SHARES Shares Shares
STOCK OPTIONS (000s) (000s) (000s)
Options exercisable at year end 1,438 1,301 1,301
A summary of information regarding stock options outstanding at December
31, 2003, is as follows:
C-18
NUMBER WEIGHTED- NUMBER
OUSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED
RANGE OF AT 12/31/03 REMAINING AVERAGE AS 12/31/03 AVERAGE
EXERCISE PRICES (000s) CONTRACTUAL LIFE EXERCISE PRICE (000s) EXERCISE PRICE
$4 to $15 1,711 8 $ 6.76 828 $ 6.05
$15 to $26 301 5 $ 17.01 154 $ 17.34
$26 to $36 723 3 $ 29.74 456 $ 30.16
- ---------- ----- --- ------- ----- -------
$4 to $36 2,735 6 $ 13.96 1,438 $ 14.91
An analysis of treasury stock transactions for the years ended December 31,
2003, 2002 and 2001, is as follows (in thousands):
COMMON STOCK
SHARES COST
Balance at December 31, 2000 11,616 $ 259,399
Exercise of Stock Options (4) (42)
Investment Savings Plans - 401(k) issuances (102) (1,147)
Non-Employee Director Stock Plan issuances (51) (582)
------ ----------
Balance at December 31, 2001 11,459 257,628
Exercise of Stock Options (36) (409)
Investment Savings Plans - 401(k) issuances (85) (955)
Non-Employee Director Stock Plan issuances (19) (219)
------ ----------
Balance at December 31, 2002 11,319 256,045
Exercise of Stock Options (144) (1,514)
Stock Options Exchanges 10 105
Investment Savings Plans - 401(k) issuances (104) (1,279)
Non-Employee Director Stock Plan issuances (17) (189)
------ ----------
Balance at December 31, 2003 11,064 $ 253,168
====== ==========
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 for non-union
employees in accordance with Section 401(k) of the Internal Revenue Code. In
2003, Enesco amended the Enesco Group, Inc. Retirement Profit Sharing Plan for
Union Employees to allow union employees to make contributions to this plan in
accordance with Section 401(k) of the Internal Revenue Code. One of the features
of these retirement savings plans provides a common stock match for a portion of
employee contributions 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 $750 thousand for 2003, $435 thousand for
2002 and $481 thousand for 2001.
In 1998, the Board adopted the 1999 Non-Employee Director Stock Plan. The
Non-Employee Director Stock Plan allows for an annual retainer 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. For service
as Chairman of the Board, the Non-Employee Director Stock Plan allows for an
annual retainer of common stock worth $37.5 thousand per annum valued as of the
day following the annual meeting. Compensation expense for common stock issued
to non-employee Directors was $135 thousand for 2003, $137 thousand for 2002 and
$297 thousand for 2001.
C-19
An analysis of the changes in capital in excess of par value for the years
ended December 31, 2003 and 2002 is as follows (in thousands):
INCREASE / (DECREASE)
2003 2002 2001
401(k) plan $ (411) $ (384) $ (556)
Non-employee director (54) (82) (285)
Exercise of stock options (820) (232) (23)
-------- -------- --------
Total $ (1,285) $ (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 (the "warrant"). Time Warner sold the warrant
in August 2003 to a third party. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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). Net revenues and operating profit (loss) is determined by
customer location.
C-20
GEOGRAPHIC AREAS 2003 2002 2001
NET REVENUES
United States $ 161,057 $ 177,757 $ 191,399
United States inter-company (1,286) (1,969) (1,984)
International 90,036 78,704 78,389
International inter-company (748) (704) (697)
--------- --------- ---------
Total consolidated $ 249,059 $ 253,788 $ 267,107
========= ========= =========
OPERATING PROFIT (LOSS)
United States $ 5,345 $ 4,927 $ (14,925)
International 10,571 8,843 5,377
--------- --------- ---------
Total consolidated $ 15,916 $ 13,770 $ (9,548)
========= ========= =========
LONG-LIVED ASSETS
United States
Property, Plant & Equipment, net $ 22,480 $ 21,354 $ 21,512
Other Assets 25,260 23,038 40,666
--------- --------- ---------
Total United States 47,740 44,392 62,178
International
Property, Plant & Equipment, net 5,861 4,875 5,070
Other Assets 2,952 57 13,678
--------- --------- ---------
Total International 8,813 4,932 18,748
--------- --------- ---------
Total consolidated $ 56,553 $ 49,324 $ 80,926
========= ========= =========
CAPITAL EXPENDITURES
United States $ 4,292 $ 3,323 $ 1,880
International 1,204 961 849
--------- --------- ---------
Total consolidated $ 5,496 $ 4,284 $ 2,729
========= ========= =========
DEPRECIATION AND AMORTIZATION
United States $ 3,165 $ 3,481 $ 4,707
International 1,826 1,533 2,314
--------- --------- ---------
Total consolidated $ 4,991 $ 5,014 $ 7,021
========= ========= =========
Total sales recorded in the United Kingdom for 2003, 2002 and 2001 were
$53.3 million, $45.1 million and $45.3 million, respectively. Total long-lived
assets in the United Kingdom at December 31, 2003, 2002 and 2001 were $6.6
million, $3.7 million, and $14.5 million respectively.
Total sales recorded in Canada for 2003, 2002 and 2001 were $30.8 million,
$25.7 million and $22.6 million, respectively. Total long-lived assets in Canada
at December 31, 2003, 2002 and 2001 were $0.8 million, $0.7 million and $2.4
million, respectively.
Transfers between geographic areas are made at the market value of the
merchandise transferred. No single customer accounted for 10% or more of
consolidated net sales. Export sales to foreign unaffiliated customers represent
less than 10% of consolidated net sales.
6. INCOME TAXES:
C-21
The domestic and foreign components of the current and deferred income tax
assets and liabilities are attributable to the following (in thousands):
2003 2002
CURRENT DEFERRED TAX ASSETS
Federal--
Inventory valuation $ 1,177 $ 1,522
Bad debt reserve 591 491
NOL carryforward 854 932
Returns and allowances reserve 355 300
Other items, net 596 1,293
State--
Inventory reserve 294 381
Bad debt reserve 148 123
NOL carryforward 213 233
Returns and allowances reserve 89 75
Other items, net -- 264
Foreign--
Other items, net 672 732
-------- --------
Total Current Deferred Tax Assets $ 4,989 $ 6,346
======== ========
NON-CURRENT DEFERRED TAX ASSETS
Federal--
NOL carryforward $ 17,215 $ 16,033
Postretirement benefits 1,067 962
Other items, net 14 36
State--
NOL carryforward 4,304 4,008
Postretirement benefits 267 240
Other items, net 3 9
Foreign--
Other items, net 994 921
-------- --------
Total Non-Current Deferred Tax Assets $ 23,864 $ 22,209
======== ========
DEFERRED TAX LIABILITIES
Federal--
Accelerated depreciation $ 235 $ 542
State--
Accelerated depreciation 59 135
Foreign--
Other items, net -- 26
-------- --------
Total Deferred Tax Liabilities $ 294 $ 703
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
C-22
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, 2022 and 2023.
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):
2003 2002 2001
Domestic $ (5,482) $ (8,301) $ (27,669)
Foreign 19,814 20,077 15,627
--------- --------- ---------
$ 14,332 $ 11,776 $ (12,042)
========= ========= =========
The provision for (benefit from) income taxes consists of the following
(in thousands):
2003 2002 2001
CURRENTLY PAYABLE:
United States Federal $ (6,376) $ (9,583) $ (9,881)
United States State (820) (4,669) 1,210
Foreign 3,380 3,483 (326)
--------- --------- ---------
(3,816) (10,769) (8,997)
========= ========= =========
DEFERRED:
United States Federal 608 1,164 (4,110)
United States State 220 291 (1,027)
Foreign 38 417 981
--------- --------- ---------
866 1,872 (4,156)
--------- --------- ---------
$ (2,950) $ (8,897) $ (13,153)
========= ========= =========
A reconciliation of the total effective income tax rate to the statutory
federal income tax rate is as follows:
2003 2002 2001
Statutory income tax rate 35.0% 35.0% 35.0%
State taxes, net of federal income tax effect (2.7) (4.5) (2.8)
Impact of foreign tax rates and credits (4.2) 1.3 (5.8)
Impact of nondeductible expenses (0.9) 2.4 4.7
----- ----- -----
Subtotal effective income tax rate 27.2% 34.2% 31.1%
Reduction of income tax accruals (47.8) (109.8) 78.1
----- ----- -----
Total effective income tax rate (20.6)% (75.6)% 109.2%
===== ===== =====
The 2003 benefit of $6.8 million, the 2002 benefit of $12.9 million and
the 2001 benefit of $9.4 million relate primarily to the reduction of income tax
accruals, which were no longer required. 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 $4.5 million in 2003, $1.5 million in
2002, and $2.1 million in 2001.
7. OTHER INCOME (EXPENSE), NET:
Other income (expense), net consists of the following (in thousands):
C-23
2003 2002 2001
Foreign currency loss $ (10) $ (16) $ (12)
Loss on sale of fixed assets (5) (12) (96)
Bank charges and other (1,319) (1,505) (1,234)
-------- -------- --------
$ (1,334) $ (1,533) $ (1,342)
======== ======== ========
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 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 2003.
To manage foreign currency risk, as of December 31, 2003 Enesco entered
into a forward exchange agreement with a notional value of $6.2 million to
mature within five days. This contract was a sale of U.S. dollars and a purchase
of British pounds sterling at an average exchange rate 1.78. The fair value of
this contract is not significant.
As of December 31, 2003, Enesco had $2.9 million of interest bearing debt
outstanding.
9. COMMITMENTS AND CONTINGENCIES:
Enesco incurred rental expense under operating leases of $4.3 million in 2003,
$3.8 million in 2002 and $4.5 million in 2001.
The minimum rental commitments under non-cancelable operating leases as of
December 31, 2003 are as follows (in thousands):
AGGREGATE
PERIOD AMOUNT
2004 $ 3,500
2005 2,500
2006 1,700
2007 1,000
2008 700
Later years 300
--------
Total minimum future rentals $ 9,700
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
C-24
Enesco has entered into various licensing agreements requiring royalty
payments ranging from 2.0% to 15% of specified product sales. Royalty expenses,
which are charged to cost of sales under these licensing agreements, totaled
$18.9 million in 2003, $21.3 million in 2002 and $24.2 million in 2001. Future
minimum guaranteed royalty payments are $16.6 million in 2004, $15.2 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 by the
licensors. Historically, audit adjustments have not been significant nor does
Enesco expect future audit adjustments to be significant.
On February 13, 2004, the staff of the Securities and Exchange Commission
("SEC") informed Enesco that the SEC staff is considering recommending that the
SEC bring a civil action against Enesco for possible violations of the U.S.
securities laws, related to trading in Enesco's securities in the April-June
2000 time period. If the SEC were to file suit against Enesco, they have
indicated that they would expect to seek, among other things, disgorgement of
approximately $1.2 million of alleged profits, penalties in an unspecified
amount and an injunction against further violation of U.S. securities laws. As
permitted under SEC procedures, Enesco will continue to discuss this matter with
the SEC and intends to respond in writing before the SEC staff formally decides
what action, if any, to recommend. Enesco is unable to determine what amount, if
any, could ultimately be paid with respect to this matter. Until this
notification by the SEC on February 13, 2004, the Company had no contact with
the SEC on this matter since late 2001.
On February 19, 2004, the staff of the SEC informed Enesco that the SEC
staff is considering recommending that the SEC bring a civil action against a
former Senior Vice President and General Counsel of Enesco for possible
violations of the U.S. securities laws related to trading in Enesco's securities
in the April - June 2000 time period. Enesco is obligated to indemnify the
former officer, subject to the terms of Enesco's Bylaws, with respect to his
expenses incurred in connection with this matter.
There are various other 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. ACQUISITION
On April 8, 2003, the Company acquired Bilston & Battersea, which is based in
Bilston, West Midlands, England, through its European subsidiary, Enesco
Holdings Limited. Bilston & Battersea manufactures and distributes giftware,
home accessories and related products, including the high quality,
hand-decorated enamels and sculptured boxes sold under the Halcyon Days Enamels
and Halcyon Days Bonbonnieres brands. Enesco paid approximately $4.4 million in
cash ($3.7 million net of acquired cash) to acquire the company, which resulted
in Enesco recording $2.9 million of goodwill related to the purchase. Enesco
purchased 100% of the outstanding shares of Bilston & Battersea and has included
Bilston & Battersea's results of operations in its consolidated financial
statements since April 8, 2003.
11. SUBSEQUENT EVENTS (UNAUDITED)
On February 29, 2004, the Company acquired Gregg Manufacturing, Inc. d/b/a Gregg
Gift Company ("Gregg"), a California-based manufacturer, for approximately $7.4
million in cash ($7.3 million net of acquired cash). Gregg manufactures and
distributes branded and specialty giftware that includes book covers,
organizers, tote bags and home decor accents targeting the growing inspirational
marketplace. Gregg generated revenues of approximately $11 million in 2003.
In March 2004, Enesco's domestic $50.0 million credit facility was amended
to add term notes totaling $7.7 million for the purpose of funding the
acquisition of Gregg. The total unsecured credit facility is currently $57.7
million. At the same time, Gregg was added as a borrowing subsidiary. Certain of
the financial covenants were modified, including measurements at the end of each
quarter.
QUARTERLY RESULTS (UNAUDITED):
ENESCO GROUP, INC.
C-25
The following tables set forth information with respect to the consolidated
quarterly results of operations for 2003 and 2002. 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 2003, Enesco recognized a $6.8 million tax
benefit primarily for prior year tax accruals that were no longer required.
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 thousands, except per share amounts) FOR THE THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
2003 2003 2003 2003
Net revenues $ 46,137 $ 60,886 $ 71,766 $ 70,270
Cost of sales 27,627 33,277 40,628 35,312
--------- --------- --------- ---------
Gross profit 18,510 27,609 31,138 34,958
Selling, distribution, general and administrative expenses 23,021 23,590 24,009 25,679
--------- --------- --------- ---------
Operating profit (loss) $ (4,511) $ 4,019 $ 7,129 $ 9,279
========= ========= ========= =========
Net income (loss) $ (2,791) $ 2,174 $ 4,597 $ 13,302
========= ========= ========= =========
Earnings (loss) per common share:
Basic $ (0.20) $ 0.15 $ 0.33 $ 0.94
========= ========= ========= =========
Diluted $ (0.20) $ 0.15 $ 0.32 $ 0.90
========= ========= ========= =========
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
========= ========= ========= =========
The sum of basic and diluted earnings (loss) per share for 2003 and 2002
quarters does not equal the full year amount due to rounding and the impact of
changes in average shares outstanding.
C-26
SCHEDULE II
ENESCO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2003
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------------- ------------ ------------ ---------- ------------- ------------
FOR THE YEAR ENDED DECEMBER 31, 2001
Reserves which are deducted in the balance
sheet from assets to which they apply-
Reserves for uncollectible accounts $ 4,217,363 $ 2,451,986 $ -- $ 3,810,399 $ 2,858,950
Reserves for returns and allowances $ 3,074,561 $ 7,396,676 $ -- $ 8,722,844 $ 1,748,393
Accumulated amortization of other assets $ 34,444,712 $ 1,950,987 $ -- $ 78,275 $ 36,317,424
Reserve for downsizing corporate headquarters $ 3,378,696 $ -- $ -- $ 2,116,551 $ 1,262,145
Reserve for discontinued operations $ 324,601 $ -- $ -- $ 58,614 $ 265,987
FOR THE YEAR ENDED DECEMBER 31, 2002
Reserves which are deducted in the balance
sheet from assets to which they apply-
Reserves for uncollectible accounts $ 2,858,950 $ 1,633,892 $ -- $ 1,735,650 $ 2,757,192
Reserves for returns and allowances $ 1,748,393 $ 3,594,676 $ -- $ 4,160,152 $ 1,182,917
Accumulated amortization of other assets $ 36,317,424 $ -- $ -- $ 36,317,424 $ --
Reserve for downsizing corporate headquarters $ 1,262,145 $ -- $ -- $ 768,111 $ 494,034
Reserve for discontinued operations $ 265,987 $ -- $ -- $ 53,530 $ 212,457
FOR THE YEAR ENDED DECEMBER 31, 2003
Reserves which are deducted in the balance
sheet from assets to which they apply-
Reserves for uncollectible accounts $ 2,757,192 $ 2,156,292 $ -- $ 1,960,043 $ 2,953,441
Reserves for returns and allowances $ 1,182,917 $ 3,420,902 $ -- $ 2,953,491 $ 1,650,328
Accumulated amortization of other assets $ -- $ -- $ -- $ -- $ --
Reserve for downsizing corporate headquarters $ 494,034 $ -- $ -- $ 172,234 $ 321,800
Reserve for discontinued operations $ 212,457 $ -- $ -- $ 123,156 $ 89,301
C-27
EXHIBIT INDEX
Reg. S-K
Item 601 EXHIBIT
- --------- -------
2 (a)* Stock and Asset Purchase Agreement dated as of November 24, 1997
by and between Stanhome Inc. and Laboratoires De Biologie
Vegetale Yves Rocher. (Exhibit 2.1 to Form 8-K filed on December
31, 1997 in Commission File No. 0-1349.)
3 (a) Articles of Incorporation as amended.
3 (b) By-Laws
4 (a)* Renewed Rights Agreement dated as of July 22, 1998 between
Enesco Group, Inc. and Mellon Investor Services L.L.C. (Exhibit
4 to Form 8-K filed on July 23, 1998 in Commission File No.
0-1349.)
4 (b)* Warrant Agreement dated June 29, 2000 by and between Enesco
Group, Inc. and Warner Bros. (Exhibit 4 to Form 10-Q filed for
the period ended June 30, 2000 in Commission File No. 0-1349.)
10 (a)* 1991 Stock Option Plan, as amended and restated through December
4, 1996. (Exhibit 10 (b) to Form 10-K filed for the period ended
December 31, 1996 in Commission File No. 0-1349.)
10 (b)* Special Interim Chief Executive Officer Stock Option Plan.
(Exhibit 10(c) to Form 10-K filed for the period ended December
31, 1993 in Commission File No. 0-1349.)
10 (c) 1996 Stock Option Plan, as amended and restated through April
24, 2003.
10 (d)* 1998 Chairman Stock Option Plan. (Exhibit 10(f) to Form 10-K
filed for the period ended December 31, 1998 in Commission File
No. 0-1349.)
10 (e)* Non-Employee Director Stock Plan. (Exhibit 10 to Form 10-Q filed
for the period ended March 31, 1995 in Commission File No.
0-1349.)
10 (f)* 1999 Non-Employee Director Stock Plan. (Exhibit 10(h) to Form
10-K filed for the period ended December 31, 1998 in Commission
File No. 0-1349.)
10 (g)* Allan G. Keirstead Release Agreement. (Exhibit 10(j) to Form
10-K filed for the period ended December 31, 2000 in Commission
File No. 0-1349.)
10 (h)* Form of Change in Control Agreement. (Exhibit 19(c) to Form 10-K
filed for the period ended December 31, 1992 in Commission File
No. 0-1349.) A substantially identical agreement exists with
Daniel DalleMolle and Eugene Freedman.
10 (i)* Form of Change in Control Agreement with certain executive
officers and non-executive officers (Exhibit 19(c) to Form 10-K
filed for the period ended December 31, 1991 in Commission File
No. 0-1349.) Substantially identical agreements exist with M.
Frances Durden, Josette V. Goldberg, Thomas F. Bradley and
Jeffrey S. Smith.
10 (j)* Enesco Group, Inc. Supplemental Retirement Plan, as amended and
restated, effective January 1, 1999. (Exhibit 10(y) to Form 10-K
filed for the period December 31, 1998 in Commission File No.
0-1349.)
D-1
10 (k)* License Agreement between Precious Moments, Inc. and Enesco
Corporation. (Exhibit 10 to Form 10-Q filed for the period ended
June 30, 1993 in Commission File No. 0-1349.)
10 (l)* First Amendment to License Agreement between Precious Moments,
Inc. and Enesco Corporation. (Exhibit 10(hh) to Form 10-K filed
for the period ended December 31, 1997 in Commission File No.
0-1349.)
10 (m)* Second Amendment to License Agreement between Precious Moments,
Inc. and Enesco Corporation. (Exhibit 10(bb) to Form 10-K filed
for the period ended December 31, 1998 in Commission File No.
0-1349.)
10 (n)* Third Amendment to License Agreement between Precious Moments,
Inc. and Enesco Group, Inc.(Exhibit 10.1) to Form 10-Q filed for
the period ended September 30, 2001 in Commission File No.
0-1349.)
10 (o)* Fourth Amendment to License Agreement between Precious Moments,
Inc. and Enesco Group, Inc. (Exhibit 10(q) to Form 10-K filed
for the period ended December 31, 2002 in Commission File No.
0-1349.)
10 (p)* Fifth Amendment to License Agreement between Precious Moments,
Inc. and Enesco Group, Inc. (Exhibit 10.1 to Form 10-Q filed for
the period ended March 31, 2003 in Commission File No. 0-1349.)
10 (q)* Second Amended and Restated Senior Revolving Credit Agreement
dated June 16, 2003 by and among Enesco Group, Inc., Fleet
National Bank and LaSalle Bank, N.A. (Exhibit 10.1 to Form 8-K
filed on June 19, 2003 in Commission File No. 0-1349.)
10 (r) First Amendment dated March 5, 2004 to Second Amended and
Restated Senior Revolving Credit Agreement by and among Enesco
Group, Inc., Fleet National Bank and LaSalle Bank, N.A.
10 (s) ROA Incentive Program 2003
10 (t) * Daniel DalleMolle Employment Agreement (Exhibit 10(gg) to Form
10-K filed for the period ended December 31, 2002 in Commission
File No. 0-1349).
21 Subsidiaries of Enesco Group, Inc.
23.1 Consent of KPMG LLP
23.2 Statement regarding inability to obtain Consent of Arthur
Anderson LLP
24 Power of Attorney
31.1 Certification of Chief Executive Officer under Exchange Act
Rules 13a-15e and 15d-15e pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Exchange Act
Rules 13A-15e and 15d-15e pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Statement of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Statement of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
*Incorporated By Reference
D-2