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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 0-1349
Enesco Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1864170
- ----------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Windsor Drive, Itasca, Illinois 60143
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
630-875-5300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
(Former name, address and fiscal year, if changed since last report)
- --------------------------------------------------------------------------------
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 [ ]
June 30,
Shares Outstanding: 2002 2001
---- ----
Common Stock with 13,869,107 13,727,741
Associated Rights
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Current Assets
Cash and certificates of deposit $ 2,918 $ 7,932
Accounts receivable, net 72,220 58,582
Inventories 58,273 56,437
Prepaid expenses 1,901 2,622
Current tax assets 12,654 13,052
--------- ---------
Total current assets 147,966 138,625
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 69,842 68,199
Less - accumulated depreciation and amortization (44,160) (41,617)
--------- ---------
Property, plant and equipment, net 25,682 26,582
--------- ---------
OTHER ASSETS
Goodwill and other intangibles, net 33,658 33,423
Other 1,146 1,141
Deferred income taxes 19,830 19,780
--------- ---------
Total other assets 54,634 54,344
--------- ---------
TOTAL ASSETS $ 228,282 $ 219,551
--------- ---------
The accompanying notes are an integral part of these condensed financial
statements.
2
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes and loans payable $ 17,182 $ 6,749
Accounts payable 26,016 28,345
Federal, state and foreign income taxes 27,783 28,713
Accrued expenses-
Payroll and commissions 4,029 3,183
Royalties 5,749 5,782
Post-retirement benefits 2,705 3,246
Other 7,106 8,218
--------- ---------
Total current liabilities 90,570 84,236
--------- ---------
LONG-TERM LIABILITIES
Post-retirement benefits 2,921 3,718
Deferred income taxes 5,220 5,220
--------- ---------
Total long-term liabilities 8,141 8,938
--------- ---------
SHAREHOLDERS' EQUITY
Common stock 3,154 3,154
Capital in excess of par value 47,348 47,847
Retained earnings 339,116 338,726
Accumulated other comprehensive income (loss) (3,547) (5,722)
--------- ---------
386,071 384,005
Less - shares held in treasury, at cost (256,500) (257,628)
--------- ---------
Total shareholders' equity 129,571 126,377
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 228,282 $ 219,551
--------- ---------
The accompanying notes are an integral part of these condensed financial
statements.
3
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
--------- ---------
Net revenues $ 66,489 $ 67,152
Cost of sales 40,006 35,166
--------- ---------
Gross profit 26,483 31,986
Selling, distribution, general and administrative expenses 22,808 33,863
Amortization of goodwill and other intangibles -- 487
--------- ---------
Operating profit (loss) 3,675 (2,364)
Interest expense (179) (524)
Interest income 51 78
Other income (expense), net (437) (239)
--------- ---------
Income (loss) before income taxes 3,110 (3,049)
Income tax expense (benefit) 1,313 (354)
--------- ---------
Net income (loss) 1,797 (2,695)
Retained earnings, beginning of period 337,319 334,175
--------- ---------
Retained earnings, end of period $ 339,116 $ 331,480
--------- ---------
Earnings (loss) per common share:
Basic and diluted $ 0.13 $ (0.20)
--------- ---------
The accompanying notes are an integral part of these condensed financial
statements.
4
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
--------- ---------
Net revenues $ 121,366 $ 129,388
Cost of sales 70,697 69,368
--------- ---------
Gross profit 50,669 60,020
Selling, distribution, general and administrative expenses 49,206 67,430
Amortization of goodwill and other intangibles -- 976
--------- ---------
Operating profit (loss) 1,463 (8,386)
Interest expense (302) (950)
Interest income 149 200
Other income (expense), net (748) (366)
--------- ---------
Income (loss) before income taxes 562 (9,502)
Income tax expense (benefit) 172 (3,367)
--------- ---------
Net income (loss) 390 (6,135)
Retained earnings, beginning of period 338,726 337,615
--------- ---------
Retained earnings, end of period $ 339,116 $ 331,480
--------- ---------
Earnings (loss) per common share:
Basic and diluted $ 0.03 $ (0.45)
--------- ---------
The accompanying notes are an integral part of these condensed financial
statements
5
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(In Thousands)
OPERATING ACTIVITIES 2002 2001
-------- --------
Net income (loss) $ 390 $ (6,135)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities (15,444) (6,440)
-------- --------
Net cash provided (used) by operating activities (15,054) (12,575)
-------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,387) (1,615)
Proceeds from sales of property, plant and equipment 27 --
-------- --------
Net cash provided (used) by investing activities (1,360) (1,615)
-------- --------
FINANCING ACTIVITIES
Net issuance of notes and loans payable 10,433 17,061
Common stock issuance 629 679
-------- --------
Net cash provided (used) by financing activities 11,062 17,740
-------- --------
Effect of exchange rate changes on cash and cash equivalents 338 (132)
-------- --------
Increase (decrease) in cash and cash equivalents (5,014) 3,418
Cash and cash equivalents, beginning of year 7,932 4,006
-------- --------
Cash and cash equivalents, end of period $ 2,918 $ 7,424
-------- --------
The accompanying notes are an integral part of these condensed financial
statements.
6
ENESCO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Enesco Group, Inc. (the "Company" or "Enesco") is in the gift, collectible and
home decor industry. Enesco distributes many leading collectible and gift lines
including Precious Moments, Cherished Teddies, Lilliput Lane, Border Fine Arts,
NICI, Mary Engelbreit and Julie Ueland. Enesco distributes product worldwide and
has wholly owned subsidiaries located in Hong Kong, Canada, France and the U.K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements included in the Company's Form 10-Q for the period
ended March 31, 2002 were subsequently reviewed by the Company's independent
public accountants, KPMG LLP, after their appointment in June of 2002, pursuant
to Rule 10-01(d) of Regulation S-X. No material changes resulted from the
review.
The accompanying financial data as of June 30, 2002 and for the three and six
months ended June 30, 2002 and June 30, 2001 has been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These Consolidated
Condensed Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of management, these consolidated condensed financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America applicable to interim period financial
statements and reflect all adjustments necessary for a
7
fair presentation of the Company's financial position as of June 30, 2002,
results of operations for the three and six months ended June 30, 2002 and June
30, 2001, and cash flows for the six months ended June 30, 2002 and June 30,
2001. The results of operations for the three and six months ended June 30, 2002
are not necessarily indicative of the operating results for the full fiscal year
or any future period. The information in this report reflects all normal
recurring adjustments and disclosures that are, in our opinion, necessary to
fairly present the results of operations and financial condition for the interim
periods. Certain reclassifications have been made to previously reported 2001
balances in order to conform with the current period presentation.
Revenue Recognition
Enesco recognizes revenue when title passes to its customers, which generally
occurs when merchandise is turned over to the shipper. A provision for
anticipated merchandise returns and allowances is recorded based upon historical
experience when the sale is recorded. Amounts billed to customers for shipping
and handling are included in revenue. License and royalty fees received by
Enesco are recognized as revenue when earned.
Computation of Earnings per Share
Basic earnings per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common shares and potential dilutive common
shares outstanding during the period. Diluted loss per share is computed using
the weighted-average number of common shares and excludes dilutive potential
common shares outstanding, as their effect is antidilutive. Potential dilutive
common share equivalents primarily consist of employee stock options and
warrants calculated using the treasury stock method.
Goodwill
Effective January 1, 2002, Enesco adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). In
accordance with FAS 142, Enesco ceased amortizing goodwill and other intangibles
upon adoption. Historically, Enesco had classified amortization of goodwill and
other intangibles as a non-operating expense. Amortization of
8
intangibles is now classified as an operating expense. All periods presented
have been reclassified to conform with the current presentation. FAS 142
requires companies to perform goodwill impairment tests on an annual basis. We
have performed the requisite transitional impairment test and have determined
that goodwill, which aggregates $33.7 million as of June 30, 2002, is impaired
under FAS 142. The Company has not yet determined the amount of such impairment,
ranging from zero dollars to $33.7 million, which will be recorded by December
31, 2002.
In accordance with FAS 142, 2001 results have not been restated for the effects
of ceasing goodwill amortization. Had goodwill amortization been discontinued
effective January 1, 2001, net income (loss) and earnings (loss) per common
share would have been as follows (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss):
Reported net income (loss) $ 1,797 $ (2,695) $ 390 $ (6,135)
Goodwill amortization, net of income taxes -- 479 -- 961
----------------------- ---------------------
Adjusted net income (loss) $ 1,797 $ (2,216) $ 390 $ (5,174)
----------------------- ---------------------
Earnings (loss) per common share:
Reported basic and diluted $ 0.13 $ (0.20) $ 0.03 $ (0.45)
Goodwill amortization, net of income taxes -- 0.04 -- 0.07
----------------------- ---------------------
Adjusted basic and diluted $ 0.13 $ (0.16) $ 0.03 $ (0.38)
----------------------- ---------------------
Payments for Interest and Income Taxes
Enesco made cash payments for interest and income taxes as follows (in
thousands):
Six Months Ended
June 30
-------
2002 2001
---- ----
Interest $ 330 $1,216
Income taxes $ 784 $ 432
9
Recent Accounting Pronouncements
In June of 2001, the FASB issued the following Statements of Financial
Accounting Standards: (1) FAS 141 "Business Combinations" and (2) FAS 143
"Accounting for Asset Retirement Obligations". FAS 141 did not have any impact
on Enesco's historical financial statements. FAS 143 is not expected to have a
material impact on the financial statements of Enesco when adopted. In August of
2001, the FASB issued FAS 144 "Accounting for the Impairment of or Disposal of
Long-Lived Assets". FAS 144, adopted as of January 1, 2002, did not have any
impact on the operating results or financial position of Enesco. FAS 145
"Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections", was issued in April of 2002. Adoption of FAS 145
had no impact on the operating results or financial position of Enesco.
Effective January 1, 2002, Enesco adopted EITF 00-14 "Accounting for Certain
Sales Incentives" and EITF 00-25 "Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer". Adoption of EITF 00-14 did not
impact results of operations or financial condition as Enesco's internal
accounting policies already conformed to EITF 00-14. However, pursuant to EITF
00-25, "net revenues" as well as "selling, distribution, general and
administrative expenses" (relating to advertising allowances) were reclassified
for 2001, decreasing the previously reported balances in the second quarter of
2001 by $177 thousand and year to date 2001 balances by $686 thousand. These
reclassifications had no impact on Enesco's net income or financial position.
10
3. COMPREHENSIVE INCOME (LOSS):
Other comprehensive income (loss) consists only of cumulative foreign currency
translation adjustments. Comprehensive income (loss) for the three and six
months ended June 30, 2002 and 2001 was as follows (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
------------------- -------------------
Net income (loss) $ 1,797 $(2,695) $ 390 $(6,135)
Other comprehensive income (loss):
Cumulative translation adjustments (no tax effects) 2,759 433 2,175 (1,413)
------------------- -------------------
Comprehensive income (loss) $ 4,556 $(2,262) $ 2,565 $(7,548)
=================== ===================
4. GEOGRAPHIC OPERATING SEGMENTS:
Enesco operates in the giftware and collectible wholesale industry,
predominantly in two major geographic classifications (United States and
International). The following table summarizes operations by geographic
classification for the three and six months ended June 30, 2002 and 2001 (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2002 2001 2002 2001
------------------------ ------------------------
NET SALES
United States $ 48,458 $ 48,905 $ 86,020 $ 94,628
United States inter-company (247) (467) (628) (1,191)
International 18,452 18,890 36,378 36,413
International inter-company (174) (176) (404) (462)
------------------------ ------------------------
Total consolidated $ 66,489 $ 67,152 $ 121,366 $ 129,388
======================== ========================
OPERATING PROFIT (LOSS)
United States $ 1,990 $ (3,400) $ (1,605) $ (9,600)
International 1,685 1,036 3,068 1,214
------------------------ ------------------------
Total consolidated $ 3,675 $ (2,364) $ 1,463 $ (8,386)
======================== ========================
11
Transfers between geographic operating segments 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.
There were no material changes in assets from the amounts disclosed in Enesco's
December 31, 2001 Annual Report and the basis of geographic classification of
sales and operating profit has not changed in 2002.
5. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three and six months ended June 30, 2002 and
2001 consists of the following (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
---------------- ----------------
2002 2001 2002 2001
---------------- ----------------
Foreign currency gain (loss) $ (9) $ 16 $ 11 $ 15
Gain (loss) on sale of fixed assets (2) -- (3) 1
Bank charges and other (426) (255) (756) (382)
---------------- ----------------
$(437) $(239) $(748) $(366)
================ ================
6. EARNINGS (LOSS) PER COMMON SHARE (BASIS OF CALCULATIONS):
The number of shares used in the earnings (loss) per common share computation
for the three and six months ended June 30, 2002 and 2001 were as follows (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
---------------- -----------------
2002 2001 2002 2001
---------------- -----------------
Basic
Average common shares outstanding 13,852 13,701 13,820 13,671
Diluted
Stock options and warrants 332 -- 243 --
---------------- -----------------
Average shares diluted 14,184 13,701 14,063 13,671
================ =================
12
The average number of diluted shares outstanding for the three and six months
ended June 30, 2001 excludes common stock equivalents relating to options and
warrants since the impact of the reported net loss was antidilutive. Had Enesco
reported a profit for the three months ended June 30, 2001 and the six months
ended June 30, 2001, the number of average shares diluted would have increased
by 184 thousand and 129 thousand, respectively. Additionally, options to
purchase 1.7 million and 2.9 million shares were outstanding during 2002 and
2001, respectively, but were not included in the computation of diluted earnings
(loss) per share because the options' exercise price was greater than the
average market price of the common shares.
7. FINANCIAL INSTRUMENTS:
Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. Enesco may reduce its exposure
to fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through derivative financial instruments. Enesco currently
does not use derivative financial instruments for trading or speculative
purposes. Enesco regularly monitors foreign currency exposures and ensures hedge
contract amounts do not exceed the amounts of the underlying exposures.
Enesco's current hedging activity is limited to foreign currency purchases and
intercompany foreign currency transactions. The purpose of Enesco's foreign
currency hedging activities is to protect Enesco from the risk that eventual
settlement of foreign currency transactions will be affected adversely by
changes in exchange rates. Enesco hedges these exposures by entering into
various short-term foreign exchange forward contracts. Under FAS 133, the
instruments are carried at fair value in the Condensed Consolidated Balance
Sheets as a component of current assets or current liabilities. Changes in the
fair value of foreign exchange forward contracts that meet the applicable
hedging criteria of FAS 133 are recorded as a component of Other comprehensive
income and reclassified into earnings in the same period during which the hedged
transaction affects earnings. Changes in the fair value of foreign exchange
forward contracts that do not meet the applicable hedging criteria of FAS 133
are recorded currently in income as cost of sales or foreign exchange gain or
loss, as applicable. Hedging activities did not have a material impact on
results of operations or financial condition during the six months ended June
30, 2002.
13
To manage foreign currency risk, as of June 30, 2002, Enesco entered into
forward exchange agreements with a notional value of $13.7 million that will
mature within 215 days. These contracts include sales of British pounds sterling
and purchases of U.S. dollars at an average exchange rate of 1.43, a sale of
U.S. dollars and the purchase of British pounds sterling at an average exchange
rate of 1.53, and sales of Euros and purchases of U.S. dollars at an average
exchange rate of 0.9087. The fair value of these contracts is not significant.
As of June 30, 2002, Enesco had $17.2 million outstanding of interest bearing
debt with interest rates ranging from 3.19% to 3.98% and maturities within 22
days. The fair value approximates the carrying value of these debt instruments.
Enesco currently has not hedged the interest rate risk on any of its outstanding
borrowings.
8. CORPORATE HEADQUARTERS CLOSING ACCRUAL
In 1997, Enesco's Board of Directors decided to move its corporate headquarters
from Massachusetts to Illinois. At that time, provisions were recorded to cover
the costs relating to the closing of the Massachusetts site. At June 30, 2002,
the corporate headquarters closing accrual totaled $700 thousand, a decrease of
$500 thousand from December 31, 2001, relating to payments made in 2002. Due to
the duration and timing of severance provisions and related benefits, the
accrual will not be fully utilized until the first quarter of 2004. The accrual
is expected to be utilized as follows: $200 thousand for the remainder of 2002,
$400 thousand in 2003, and $100 thousand in 2004.
9. WORKFORCE REDUCTIONS
On May 3, 2001, Enesco reduced its workforce in the United States by 120
positions, or approximately 14%. This workforce reduction affected clerical and
professional employees and is expected to generate annual savings of
approximately $8 million. Severance costs of approximately $500 thousand were
recorded in the second quarter of 2001. On August 29, 2001, Enesco reduced its
workforce in the United States by an additional 45 positions, generating an
estimated $3.5 million of annual savings. In September 2001, Enesco closed a
manufacturing plant in the U.K., eliminating approximately 45 positions and
generating estimated annual savings of $700 thousand. The costs associated with
the third quarter 2001 U.S. and U.K. workforce reductions totaled $360
14
thousand. In the fourth quarter of 2001, Enesco recorded $70 thousand of
severance costs related to a U.S. workforce reduction.
In the second quarter of 2002, Enesco further reduced its workforce in the
United States. This workforce reduction is expected to generate annual savings
of approximately $1.0 million. Severance costs of approximately $250 thousand
were recorded in the second quarter. Approximately $150 thousand of severance
remains to be paid as of June 30, 2002 relating to the second quarter 2002
workforce reduction.
10. SUBSEQUENT EVENTS
On July 3, 2002, members of Local Union No. 781 of the Teamsters agreed to a
five year contract with Enesco in the United States.
Enesco continues to monitor the contract negotiations between the Pacific
Maritime Association (PMA) and the International Longshore and Warehouse Union.
The PMA represents West Coast port employers and shippers. Enesco receives the
majority of its imports from overseas suppliers through these ports. The
previous contract between the PMA and union longshoremen expired on July 1,
2002, and an extension has been agreed to through mid-August 2002. Negotiations
between the parties continue to progress. A work stoppage by the union members
could cause a disruption in our operations and potentially affect future
results.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ENESCO GROUP, INC.
SIX MONTHS ENDED JUNE 30, 2002
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," and words of similar meaning, constitute
"forward-looking statements" within the meaning of Federal securities laws.
These forward-looking statements are based in part on Enesco's reasonable
expectations and are subject to a number of factors and risks, many of which are
beyond Enesco's control. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described below under the heading "Risk Factors" and elsewhere
in this Quarterly Report, and in other documents we file with the Securities and
Exchange Commission. In light of these uncertainties and risks, there can be no
assurance that the forward-looking statements in this Form 10-Q will occur or
continue in the future. Except for required, periodic filings under the
Securities Exchange Act of 1934, Enesco undertakes no obligations to release
publicly any revisions to these forward looking statements that may reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Consolidated Condensed Financial Statements and
accompanying notes. Estimates are used for, but not limited to, the accounting
for allowances for doubtful accounts and sales returns, inventory allowances,
goodwill impairments, contingencies, restructuring costs and other special
charges and taxes. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgements,
assumptions and estimates used in the preparation of the Consolidated Condensed
Financial Statements.
16
The allowance for doubtful accounts is based on our assessments of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are significantly different than our historical experience,
estimates of the recoverability of amounts due could be affected. An allowance
for sales returns is established based on historical trends in product returns.
If future returns do not reflect historical trends, revenue could be affected.
Inventory purchases and commitments are based on future demand forecasts. If
there is a sudden and significant decrease in demand for our products or there
is a higher incidence of inventory obsolescence because of rapidly changing
customer requirements, we may be required to increase our inventory allowances
and gross profit could be affected.
Enesco has established accruals for taxes payable and tax assessments. The
accruals are included in current income taxes payable since it is uncertain as
to when assessments may be made and paid. Enesco has filed and continues to file
tax returns with a number of taxing authorities worldwide. While Enesco believes
such filings have been and are in compliance with applicable laws, regulations
and interpretations, positions taken are subject to challenge by the taxing
authorities often for an extended number of years after the filing dates. To the
extent accruals differ from assessments, or when the open tax years are closed,
the accruals are adjusted through the provision for income taxes. The majority
of open tax years become closed for assessments at the end of December for the
particular open year.
NET REVENUE AND GROSS PROFIT
Net sales in the second quarter of 2002 decreased by 1%, or $660 thousand, from
the second quarter of 2001. Net sales in the first six months of 2002 decreased
by 6%, or $8.0 million, from the first six months of 2001. The decreases in net
sales for the second quarter and first six months of 2002 compared to the same
periods last year were primarily the result of decreased sales in the U.S. card
and gift channel due to unfavorable economic conditions, the consolidation of
accounts in this channel and a second quarter decline in Harry Potter product
sales in Europe.
17
Enesco's Precious Moments lines represented approximately 40% of 2002 year to
date sales compared to 42% for 2001. The Cherished Teddies lines represented
approximately 11% of 2002 year to date sales compared to 14% for 2001.
Net new orders of $136 million for the second quarter of 2002 were down 8%
versus the comparable period of 2001. Backlog of $43 million at June 30, 2002
was down approximately $23 million or 36% from the same point in time last year.
Net open orders (backlog) are orders received and approved by Enesco, subject to
cancellation for various reasons, including credit considerations, product
availability and customer requests. We believe the decreases in net new orders
and backlog are due to continuing soft demand in the US card, gift and
collectible channel and a change in Enesco's product launch process. Starting in
the fall of 2001, Enesco presents only products to our US retail customers that
we have or plan to have in stock throughout the year. Previously, products would
be presented to customers primarily at corporate and regional shows and, based
on customer response, the products would either be ordered for stock or the
customer orders would be cancelled. The previous selling process resulted in
higher levels of net new orders and backlog as compared to the current selling
process which smoothes out the levels of new orders and backlog. Consequently,
the previous selling process resulted in higher levels of subsequent order
cancellations and unfilled orders. We believe the new selling process is more
customer friendly and though it results in lower net new orders and backlog, it
also results in lower order cancellations and unfilled orders.
Gross profit for the second quarter of 2002 of $26.5 million was 39.8% of net
sales as compared to second quarter 2001 gross profit of $ 32.0 million, which
was 47.6% of net sales. Gross profit for the first six months of 2002 was $50.7
million or 41.7% of net sales, as compared to gross profit for the first six
months of 2001 of $60.0 million, which was 46.4% of net sales. The decrease in
gross profit for the second quarter and first six months of 2002 as compared to
2001 was due to lower shipping volumes as well as changes in product and sales
channel mix. Earlier in 2002, lower product acquisition costs were negotiated
with some of our major suppliers. We expect these lower costs to favorably
impact gross profit starting in the second half of 2002. Gross profit can be
affected in the future by changes in vendor pricing, obsolescence charges,
changes in shipment volume, price competition and changes in distribution
channel, geographic or product mix.
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SELLING, DISTRIBUTION, AND GENERAL AND ADMINISTRATIVE EXPENSES
Selling, Distribution and General and Administrative Expenses (operating
expenses) for the second quarter of 2002 were $22.8 million, or 34.3% of sales,
and year to date were $49.2 million, or 40.5% of sales, down significantly
compared to second quarter 2001 of $33.9 million, or 50.5% of sales, and year to
date 2001 of $67.4 million, or 52.1% of sales. Operating expenses decreased by
approximately $18.2 million year to date from the prior year primarily due to
the impact of numerous cost control measures including headcount reductions,
showroom savings, catalog savings and less travel. The decrease was also due to
$2.3 million of non-recurring 2001 costs related to the January 1, 2001 United
States sales force reorganization. The $2.3 million of 2001 costs consisted of
commissions on orders placed before January 1, 2001 that were shipped in 2001,
as well as the hiring and training costs for approximately 200 employees.
Commissions are expensed when orders are shipped. All of the January 2001 sales
force reorganization costs were expensed as incurred.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, Enesco adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). In
accordance with FAS 142, Enesco ceased amortizing goodwill and other intangibles
upon adoption. Historically, Enesco classified amortization of goodwill and
other intangibles as a non-operating expense. We are now classifying
amortization of goodwill and other intangibles as an operating expense. All
periods presented have been reclassified to conform with the current
presentation. FAS 142 requires us to perform goodwill impairment tests on an
annual basis. We have performed the requisite transitional impairment test and
have determined that goodwill, which aggregates $33.7 million as of June 30,
2002, is impaired under FAS 142. The Company has not yet determined the amount
of such impairment, ranging from zero dollars to $33.7 million, which will be
recorded by December 31, 2002. For additional information regarding FAS 142, see
Note 2 "Summary of Significant Accounting Policies" to the Consolidated
Financial Statements.
OPERATING INCOME (LOSS)
Significant reductions in operating expenses generated an increase in second
quarter 2002 operating income of $6.1 million compared to second quarter 2001.
In the second quarter 2002, we had operating income of $3.7 million compared to
a $2.4 million operating loss in 2001. Operating
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income was $1.5 million for the first six months of 2002, compared with an $8.4
million loss in the first six months of 2001. The year to date increase in
operating income over 2001 includes improvements by all operating units, with
the largest improvement in the United States.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest expense of $179 thousand for the second quarter of 2002 was $345
thousand less than the second quarter of 2001 due to lower average borrowings
and lower interest rates. Lower interest income in 2002 is due to lower interest
rates. Other expense, net, for the second quarter of 2002 is $200 thousand
higher due to increased bank charges and less foreign currency gains.
Interest expense of $300 thousand for the first six months of 2002 was $650
thousand less than the first six months of 2001 due to lower average borrowings
and lower interest rates. Lower interest income in 2002 is due to lower interest
rates. Other expense, net, for the first six months of 2002 is higher by $400
thousand due to increased bank charges and less foreign currency gains.
PROVISION FOR INCOME TAXES
The effective tax rate was 42.2% for the second quarter of 2002 and 30.6% for
the first six months of 2002. The comparable tax rates were 11.6% and 35.4% for
second quarter and year to date 2001, respectively, reflecting the geographical
mix of earnings, the impact of non-deductible goodwill amortization and an
estimate revision in the second quarter of 2001. The effective tax rate differs
from the U.S. statutory rate primarily due to the varying tax rates of foreign
jurisdictions. Our future effective tax rates could be affected if earnings are
other than anticipated in countries where we have lower statutory rates or by
changes in tax laws and regulations.
INTERNATIONAL ECONOMIES AND CURRENCIES
We conduct business globally. Accordingly, our future results could be
materially affected by a variety of uncontrollable and changing factors
including, among others, foreign currency exchange rates; regulatory, political,
or economic conditions in a specific country or region; trade protection
measures and other regulatory requirements; and natural disasters. Any or all of
these factors could have a material impact on our future results.
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As a global concern, we face exposure to movements in foreign currency exchange
rates. These exposures may change over time and could have a material impact on
our financial results and cash flows. Historically, our primary exposures have
related to non dollar-denominated transactions in Canada and Europe, as well as
dollar denominated inventory purchases by our international operating units.
At the present time, we hedge only those currency exposures associated with
certain assets and liabilities denominated in foreign currencies and
periodically will hedge anticipated foreign currency cash flows. The hedging
activity undertaken by us is intended to offset the impact of currency
fluctuations on certain foreign currency transactions. See Note 7, "Financial
Instruments", to the Consolidated Financial Statements for additional
information.
LIQUIDITY AND CAPITAL RESOURCES
Enesco has historically satisfied working capital requirements with internally
generated funds and short term loans. Cash balances and working capital
requirements fluctuate due to operating results, shipping cycles, accounts
receivable collections, inventory management and timing of payments, among other
factors. Working capital requirements fluctuate during the year and are
generally greatest early in the fourth quarter and lowest early in the first
quarter. For additional discussion, see the Risk Factors section below. Cash and
cash equivalents were $2.9 million on June 30, 2002.
Operating cash flows are a function of earnings plus non-cash expenses such as
depreciation and our ability to manage working capital. Cash used by operating
activities in the first six months of 2002 was $15.1 million. The major uses of
funds from operating activities were increased accounts receivable, increased
inventory and decreased accounts payable. Most of the cash used by operating
activities was due to a $13.6 million accounts receivable increase, which was
caused by the extension of dating terms to retailers. To stimulate sales, Enesco
began offering dating programs to its domestic retailers in the third quarter of
2001. The marginal impact of the dating programs is that as sales increase,
accounts receivable increases and days sales outstanding also increase. Accounts
payable decreased due to the seasonality of product purchases. The corporate
headquarters closing accrual at June 30, 2002 totaled $700 thousand, a decrease
of $500 thousand from December, 2001, relating to payments made. Due to the
duration and timing of severance
21
provisions and related benefits, the accrual will not be fully utilized until
the first quarter of 2004. The accrual is expected to be utilized as follows:
$200 thousand for the remainder of 2002, $400 thousand in 2003 and $100 thousand
in 2004.
Enesco has filed and continues to file tax returns with a number of taxing
authorities worldwide. While we believe such filings have been and are in
compliance with applicable laws, regulations and interpretations, positions
taken are subject to challenge by the taxing authorities often for an extended
number of years after the filing dates. Enesco has established accruals for tax
assessments. These accruals are included in current income taxes payable since
it is uncertain as to when assessments may be made and paid. Based upon Enesco's
current liquid asset position and credit facilities, Enesco believes it has
adequate resources to fund any such assessments. To the extent accruals differ
from actual assessments or when the open tax years are closed, the accruals will
be adjusted through the provision for income taxes. The majority of the open tax
years become closed at the end of December for the particular open year.
Cash used by investing activities in the first six months of 2002 was $1.4
million, primarily due to property, plant and equipment purchases.
Cash provided by financing activities in the first six months of 2002 was $11.1
million, primarily due to increased borrowings. At June 30, 2002, Enesco had
unused lines of credit of approximately $37 million.
In August 2000, Enesco entered into a $50 million domestic revolving credit
facility to replace an expiring revolving credit facility. The credit agreement
contains financial and operating covenants including restrictions on incurring
indebtedness and liens, selling property, repurchasing Enesco's shares and
paying dividends. In addition, Enesco is required to satisfy minimum operating
profit, fixed charge coverage ratio and leverage ratio tests at the end of each
quarter. The credit agreement, as amended, grants a security interest in
Enesco's domestic accounts receivable, inventory and real estate. In May 2002,
the credit facility was further amended to extend the termination date to May
2003. Certain financial covenants were also modified. The size of the facility
remains at $50 million.
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We believe that our current cash and cash equivalents, cash generated from
operations, and available financing alternatives will satisfy our expected
working capital needs, capital expenditures and other liquidity requirements
associated with our existing operations. In addition, there are no transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are reasonably likely to materially affect liquidity or
requirements for capital resources.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 2001, the FASB issued the following Statements of Financial
Accounting Standards: (1) FAS 141 "Business Combinations" and (2) FAS 143
"Accounting for Asset Retirement Obligations". FAS 141 did not have any impact
on Enesco's historical financial statements. FAS 143 is not expected to have a
material impact on the financial statements of Enesco when adopted. In August of
2001, the FASB issued FAS 144 "Accounting for the Impairment of or Disposal of
Long-Lived Assets". FAS 144, adopted as of January 1, 2002, did not have any
impact on the operating results or financial position of Enesco. FAS 145
"Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections", was issued in April of 2002. Adoption of FAS 145
had no impact on the operating results or financial position of Enesco.
Effective January 1, 2002 Enesco adopted EITF 00-14 "Accounting for Certain
Sales Incentives" and EITF 00-25 "Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer". Adoption of EITF 00-14 did not
impact results of operations or financial condition as Enesco's internal
accounting policies already conformed to EITF 00-14. However, pursuant to EITF
00-25, "net revenues" as well as "selling, distribution, general and
administrative expenses" (relating to advertising allowances) were reclassified
for 2001, decreasing the previously reported balances in the second quarter of
2001 by $177 thousand and year to date 2001 balances by $686 thousand.
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report and in other documents we
file with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Quarterly Report.
23
The results of operations for any quarter or fiscal year are not necessarily
indicative of results to be expected in future periods. Our operating results
have been in the past, and will continue to be, subject to quarterly and annual
fluctuations as a result of a number of factors. These factors include:
- - Changes in economic conditions and specific market conditions
- - Fluctuations in demand for our products
- - Manufacturing lead times
- - The effects of terrorist activity and armed conflict, such as disruption in
global economic activity, changes in logistics and security arrangements
- - The timing of orders, timing of shipments and our ability to meet customer
demands
- - Inventory levels and purchase commitments exceeding requirements based upon
future demand forecasts
- - Price and product competition in the giftware industry
- - The trend toward retail store consolidation in the card and gift channel
- - Variations in sales channels, product costs or mix of products sold
- - The ability to secure, maintain and renew popular licenses
- - The geographical mix of our revenue and the associated impact on gross margin
- - Our ability to achieve targeted cost reductions
- - Actual events, circumstances, outcomes and amounts differing from judgments,
assumptions and estimates used in determining the amounts of certain assets
(including the amounts of related allowances), liabilities and other items
reflected in our financial statements.
As a consequence, operating results for a particular future period are difficult
to predict. Any of the foregoing factors, or any other factors discussed
elsewhere herein, could have a material adverse effect on our business, results
of operations and financial condition.
Gross margin may be adversely affected in the future by increases in vendor
costs, excess inventory, obsolescence charges, changes in shipment volume, price
competition and changes in channels of distribution or in the mix of products
sold. Gross margin may also be impacted by geographic mix of product sold.
24
Our ability to meet customer demands also depends in part on our ability to
obtain timely deliveries of product from our suppliers. Although we work closely
with our suppliers to avoid these types of shortages, there can be no assurances
that we will not encounter problems in the future. We source product from a wide
variety of vendors, however, certain products and product lines are presently
available only from a single source or limited sources.
While our suppliers have performed effectively and have been relatively flexible
to date, production issues with our suppliers may have a material impact on our
business.
The principal competitive risks in the markets in which we presently compete and
may compete in the future are:
- - Performance
- - Price
- - Collectibility of our products
- - Market presence
- - New product introductions
- - Product costs
- - Differentiation of new products from those of our competitors
- - Time to market on new products
LEGAL PROCEEDINGS
We are a party to certain lawsuits in the normal course of our business.
Litigation can be expensive, lengthy and disruptive to normal business
operations. While we can not predict the eventual outcome of the proceedings, we
do not believe that any of the current legal proceedings will have a material
adverse effect on the consolidated financial statements of Enesco.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. As such, Enesco is exposed to
foreign exchange risk since purchases and sales are made in foreign currencies.
In addition, Enesco is subject to interest rate risk on outstanding borrowings.
Enesco may reduce its exposure to fluctuations in interest rates and foreign
exchange rates by creating offsetting positions through the use of derivative
financial instruments. Enesco currently does not use derivative financial
instruments for trading or speculative purposes. Enesco regularly monitors its
foreign currency exposures and ensures that the hedge contract amounts do not
exceed the amounts of the underlying exposures.
To manage foreign currency risk, as of June 30, 2002, Enesco had entered into
forward exchange agreements with a notional value of $13.7 million that will
mature within 215 days. These contracts include sales of British pounds sterling
and purchases of U.S. dollars at an average exchange rate of 1.43, a sale of
U.S. dollars and the purchase of British pounds sterling at an average exchange
rate of 1.53, and sales of Euros and purchases of U.S. dollars at an average
exchange rate of 0.9087. The fair value of these contracts is not significant.
As of June 30, 2002, Enesco had $17.2 million outstanding of interest bearing
debt with interest rates ranging from 3.19% to 3.98% and maturities within 22
days. The fair value approximates the carrying value of these debt instruments.
Enesco currently has not hedged the interest rate risk on any of its outstanding
borrowings.
26
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on April 25, 2002.
(b) The matter voted upon at the meeting was the election of Directors. The
members of Class I were standing for election to a three-year term
expiring at the Annual Meeting in 2005. Upon motion duly made and
seconded, it was voted to elect Judith R. Haberkorn, Donald L. Krause
and Thane A. Pressman as Class I Directors for a three-year term
expiring at the Annual Meeting in 2005 and until their successors are
elected and qualified. The votes for each of the candidates were
reported as follows:
Judith R. Haberkorn For: 12,620,591
Withheld: 184,229
Thane A. Pressman For: 12,630,082
Withheld: 274,738
Donald L. Krause For: 12,635,079
Withheld: 169,741
In addition, the following directors continue to serve on the Board:
Daniel DalleMolle, Eugene Freedman, Donna Brooks Lucas, John F. Cauley,
George R. Ditomassi and Anne-Lee Verville.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
99.1 CEO Certification
99.2 CFO Certification
(b) Reports on Form 8-K
-------------------
Form 8-K filed on June 10, 2002 reporting the appointment of
KPMG LLP as independent auditor for fiscal year 2002.
All other items hereunder are omitted because either such item is inapplicable
or the response to it is negative.
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Signatures
Pursuant to the requirements 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.
ENESCO GROUP, INC.
(Registrant)
Date: August 14, 2002 /s/ Daniel DalleMolle
--------------------------------------
Daniel DalleMolle
President and Chief Executive Officer
Date: August 14, 2002 /s/ Jeffrey W. Lemajeur
--------------------------------------
Jeffrey W. Lemajeur
Chief Financial Officer
29