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