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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 March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____ .
Commission File Number 0-1349
Enesco Group, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
630-875-5300
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(Registrant's telephone number, including area code)
N/A
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(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 [ ]
March 31,
---------------------------
2003 2002
---------- ----------
Shares Outstanding:
Common Stock with 13,964,245 13,827,008
Associated Rights
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,517 $ 17,418
Accounts receivable, net 48,916 54,347
Inventories 43,920 48,334
Prepaid expenses 1,745 2,491
Deferred income taxes and taxes receivable 7,029 7,586
--------- ---------
Total current assets 113,127 130,176
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Property, plant and equipment 74,277 72,920
Less - accumulated depreciation (48,099) (46,691)
--------- ---------
Property, plant and equipment, net 26,178 26,229
--------- ---------
OTHER ASSETS:
Other 1,153 1,171
Deferred income taxes 22,235 22,209
--------- ---------
Total other assets 23,388 23,380
--------- ---------
TOTAL ASSETS $ 162,693 $ 179,785
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
2
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable $ -- $ --
Accounts payable 12,997 18,395
Federal, state and foreign income taxes 13,171 15,416
Accrued expenses:
Payroll and commissions 1,188 4,412
Royalties 5,314 7,911
Post-retirement benefits 1,601 2,320
Other 5,285 5,623
--------- ---------
Total current liabilities 39,556 54,077
--------- ---------
LONG-TERM LIABILITIES:
Post-retirement benefits 2,658 3,092
Deferred income taxes 678 703
--------- ---------
Total long-term liabilities 3,336 3,795
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 3,154 3,154
Capital in excess of par value 46,897 47,148
Retained earnings 327,577 330,368
Accumulated other comprehensive loss (2,400) (2,712)
--------- ---------
375,228 377,958
Less - shares held in treasury, at cost (255,427) (256,045)
--------- ---------
Total shareholders' equity 119,801 121,913
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 162,693 $ 179,785
========= =========
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 MARCH 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002
--------- ---------
Net revenues $ 46,137 $ 54,877
Cost of sales 27,627 30,708
--------- ---------
Gross profit 18,510 24,169
Selling, distribution, general and administrative expenses 23,021 26,378
--------- ---------
Operating loss (4,511) (2,209)
Interest expense (49) (123)
Interest income 170 98
Other income (expense), net (406) (311)
--------- ---------
Loss before income taxes and cumulative effect
of a change in accounting principle (4,796) (2,545)
Income tax benefit (2,005) (1,138)
--------- ---------
Loss before cumulative effect of a change
in accounting principle (2,791) (1,407)
Cumulative effect of a change in accounting principle,
net of income taxes -- (29,031)
--------- ---------
Net loss (2,791) (30,438)
Retained earnings, beginning of period 330,368 338,726
--------- ---------
Retained earnings, end of period $ 327,577 $ 308,288
========= =========
Loss per common share - basic and diluted:
Loss before cumulative effect of a
change in accounting principle $ (0.20) $ (0.10)
========= =========
Cumulative effect of a change in accounting
principle, net of income taxes $ -- $ (2.10)
========= =========
Net loss $ (0.20) $ (2.20)
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
4
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
(In thousands)
OPERATING ACTIVITIES: 2003 2002
-------- --------
Net loss $ (2,791) $(30,438)
Cumulative effect of a change in accounting
principle, net of income taxes -- 29,031
Adjustments to reconcile net loss to net
cash used by operating activities (2,116) (5,349)
-------- --------
Net cash used by operating activities (4,907) (6,756)
-------- --------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,306) (530)
Proceeds from sales of property, plant and equipment 7 15
-------- --------
Net cash used by investing activities (1,299) (515)
-------- --------
FINANCING ACTIVITIES:
Net issuance (repayment) of notes and loans payable -- 2,012
Common stock issuance 367 341
-------- --------
Net cash provided by financing activities 367 2,353
-------- --------
Effect of exchange rate changes on cash and cash equivalents (62) (93)
-------- --------
Decrease in cash and cash equivalents (5,901) (5,011)
Cash and cash equivalents, beginning of period 17,418 7,932
-------- --------
Cash and cash equivalents, end of period $ 11,517 $ 2,921
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
5
ENESCO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
A global leader in the gift, collectibles and home decor industry for 45 years,
Enesco Group, Inc. (the "Company" or "Enesco") offers such notable product lines
as Cherished Teddies, Mary Engelbreit, Border Fine Arts, Lilliput Lane and NICI,
among others. The Company's award winning Precious Moments figurine collection
is one of the top collectible lines throughout the world. 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 accompanying financial data as of March 31, 2003 and for the three months
ended March 31, 2003 and March 31, 2002 has been prepared by Enesco, 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 Enesco's Annual Report on Form 10-K for the year ended
December 31, 2002.
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 fair presentation of
Enesco's financial position as of March 31, 2003, results of operations for the
three months ended March 31, 2003 and March 31, 2002, and cash flows for the
three months ended March 31, 2003 and March 31, 2002. The results of operations
for interim periods are not necessarily indicative of the operating results for
full fiscal years or any future period. The information in this report reflects
all normal recurring adjustments and disclosures that are, in our
6
opinion, necessary to fairly present the results of operations and financial
condition for the interim periods.
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 a 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 LOSS PER SHARE
Basic loss 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.
PAYMENTS FOR INTEREST AND INCOME TAXES
Enesco made cash payments for interest and income taxes as follows (in
thousands):
Three Months Ended
March 31
-----------------------
2003 2002
---- ----
Interest $ 49 $198
Income taxes $247 $515
7
ACCOUNTING FOR STOCK - BASED COMPENSATION
At March 31, 2003, the Company has six stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had exercise prices equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share as if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31
--------------------------------
2003 2002
-------- --------
Net income (loss) as reported $ (2,791) $(30,438)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (324) (302)
-------- --------
Pro forma net income (loss) $ (3,115) $(30,740)
======== ========
Loss per share:
Basic and diluted - as reported $ (0.20) $ (2.20)
======== ========
Basic and diluted - pro forma $ (0.22) $ (2.23)
======== ========
8
3. COMPREHENSIVE INCOME (LOSS):
Other comprehensive income (loss) consists only of cumulative foreign currency
translation adjustments. Comprehensive income (loss) for the three months ended
March 31, 2003 and 2002 was as follows (in thousands):
Three Months Ended
March 31
--------------------------------
2003 2002
-------- --------
Net income loss $ (2,791) $(30,438)
Other comprehensive income (loss):
Cumulative translation adjustments (no tax effects) 312 (584)
-------- --------
Comprehensive loss $ (2,479) $(31,022)
======== ========
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 months ended March 31, 2003 and 2002 (in
thousands):
Three Months Ended
March 31
--------------------------------
2003 2002
-------- --------
NET SALES
United States $ 28,574 $ 37,562
United States inter-company (216) (381)
International 18,053 17,926
International inter-company (274) (230)
-------- --------
Total consolidated $ 46,137 $ 54,877
======== ========
OPERATING PROFIT (LOSS)
United States $ (5,975) $ (3,592)
International 1,464 1,383
-------- --------
Total consolidated $ (4,511) $ (2,209)
-------- --------
9
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, 2002 Annual Report and the basis of geographic classification of
sales and operating profit has not changed in 2003.
5. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three months ended March 31, 2003 and 2002
consisted of the following (in thousands):
Three Months Ended
March 31
--------------------------
2003 2002
----- -----
Foreign currency gain (loss) $ (2) $ 20
Loss on sale of fixed assets -- (1)
Bank charges and other (404) (330)
----- -----
$(406) $(311)
----- -----
6. LOSS PER COMMON SHARE (BASIS OF CALCULATIONS):
The number of shares used in the loss per common share computations for the
three months ended March 31, 2003 and 2002 were as follows (in thousands):
Three Months Ended
March 31
---------------------------
2003 2002
------ ------
Average common shares outstanding - basic 13,931 13,790
Dilutive effects of stock options and warrants -- --
------ ------
Average shares outstanding - diluted 13,931 13,790
====== ======
10
The average number of diluted shares outstanding for the three months ended
March 31, 2003 and March 31, 2002 excludes common stock equivalents relating to
options and warrants because there was a net loss and such common stock
equivalents would have been antidilutive. Had Enesco reported a profit for the
three months ended March 31, 2003 and March 31, 2002, the number of average
shares outstanding-diluted would have increased by 267 thousand and 195
thousand, respectively. Additionally, options to purchase 1.8 million and 1.7
million shares were outstanding during 2003 and 2002, respectively, but were not
included in the computation of diluted 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. Derivative 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 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 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 three months ended March 31, 2003.
11
To manage foreign currency risk, as of March 31, 2003, Enesco had entered into
forward exchange agreements with a notional value of $3.4 million that will
mature within 158 days. These contracts include sales of British pounds sterling
and purchases of U.S. dollars at an average exchange rate of 1.57, a sale of
U.S. dollars and the purchase of British pounds sterling at an average exchange
rate of 1.57 and sales of Euros and purchases of U.S. dollars at an average
exchange rate of 1.07. The fair value of these contracts is not significant. As
of March 31, 2003, Enesco had no outstanding interest bearing debt.
8. ACQUISITION
On March 18, 2003, the Company announced an offer to purchase Bilston &
Battersea Enamels plc, which is based in Bilston, West Midlands, England,
through its European subsidiary, Enesco Holdings Limited. Bilston & Battersea
Enamels manufactures and distributes giftware, home accessories and related
products, including the high quality, hand-decorated enamels and sculptured
boxes sold under the Halcyon Days Enamels and Halcyon Days Bonbonnieres brands.
Bilston and Battersea Enamels generated sales of approximately $10 million
worldwide in 2002 and expects similar sales for 2003. Enesco paid approximately
$4 million in cash to acquire the company in April 2003.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ENESCO GROUP, INC.
THREE MONTHS ENDED MARCH 31, 2003
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," "projects," 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 filings under the Securities
Exchange Act of 1934, Enesco undertakes no obligation 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 valuations,
goodwill impairments, contingencies, restructuring costs and other special
charges and taxes. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgements,
assumptions and estimates used in the preparation of the Consolidated Condensed
Financial Statements.
13
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, net revenues could be
affected.
Inventory purchases and commitments are based on future demand forecasts. If
there is a sudden or significant decrease in demand for our products or there is
a higher incidence of inventory obsolescence because of rapidly changing
customer requirements, we may be required to decrease the carrying value of
inventory and gross profit could be affected.
Enesco has established accruals for tax payables 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.
ACQUISITION OF BILSTON AND BATTERSEA
In April of 2003, the Company finalized the purchase of Bilston and Battersea
for approximately $4 million in cash. Bilston and Battersea manufactures and
distributes giftware, home accessories and related products, including the
high-end quality, hand decorated enamel boxes sold under the Halcyon Days
Enamels and Halcyon Days Bononnieres brands. Bilston and Battersea generated
revenues of approximately $10 million in 2002 and expects similar sales for
2003.
NET REVENUE AND GROSS PROFIT
Net sales in the first quarter of 2003 decreased by 16%, or $8.7 million, from
the first quarter of 2002. The decrease in net sales for the first quarter of
2003 compared to the same period last year was primarily the result of decreased
U.S. sales of the Precious Moments and Cherished Teddies
14
product lines. Enesco's Precious Moments lines represented approximately 34% of
2003 year to date sales compared to 43% for 2002. The Cherished Teddies lines
represented approximately 10% of 2003 year to date sales compared to 11% for
2001.
Net new orders of $68 million year to date for 2003 were down 8% versus the
comparable period of 2002. Net open orders (backlog) of $40 million at March 31,
2003 were down approximately $7 million, or 16%, from the same point in time
last year. Backlog represents orders received and approved by Enesco, subject to
cancellation for various reasons, including credit considerations, product
availability and customer requests. We believe the decrease in net new orders
and backlog is mainly due to moving the annual spring retailer show from March
in 2002 to April in 2003 and lower retail sales in the United States due to
general economic conditions and continued consolidation in the card and gift
channel.
Gross profit for the first quarter of 2003 of $18.5 million was 40.1% of net
sales as compared to first quarter 2002 gross profit of $24.2 million, which was
44.0% of net sales. The decrease in gross profit for the first quarter of 2003
as compared to 2002 was due to an inventory adjustment in 2003 of $1.4 million
to write down slow moving products introduced in 2001, lower retail sales
volumes, as well as changes in product and sales channel mix. Gross profit may
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.
SELLING, DISTRIBUTION, AND GENERAL AND ADMINISTRATIVE EXPENSES
Selling, distribution and general and administrative expenses (operating
expenses) for the first quarter of 2003 were $23.0 million, or 49.9% of sales,
compared to first quarter 2002 of $26.4 million, or 48.1% of sales. Operating
expenses decreased by approximately $3.4 million year to date in 2003 from the
prior year primarily due to the impact of numerous cost control measures
including headcount reductions, showroom savings, catalog savings and decreased
travel. The Company expects to see additional operating expense decreases during
the remainder of 2003.
OPERATING INCOME (LOSS)
In the first quarter of 2003, Enesco incurred an operating loss of $4.5 million
compared to an operating loss of $2.2 million in 2002. The $2.3 million increase
in operating loss was the result of the $8.7 million decrease in sales,
partially offset by lower operating expenses.
15
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest expense of $49 thousand for the first quarter of 2003 was $74 thousand
less than the first quarter of 2002 due to lower average borrowings and lower
interest rates. Interest income for the first quarter of 2003 is $170 thousand
compared to $98 thousand in 2002 due to additional cash balances in 2003. Other
expense, net, for the first quarter of 2003 is $406 thousand compared to $311
thousand in same quarter in 2002. Other expense, net, for the first quarter of
2003 is higher by $95 thousand due to increased bank charges and less foreign
currency gains.
PROVISION FOR INCOME TAXES
The effective tax rate was 41.8% for the first quarter of 2003 and 44.7% for the
first quarter of 2002, reflecting the geographical mix of earnings. The
effective tax rate differs from the U.S. statutory rate primarily due to the
varying tax rates of foreign jurisdictions. Our future effective tax rates could
be affected if the mix of earnings varies in countries that have higher or lower
statutory rates or if tax laws and regulations change.
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 the effects of terrorist
activity, armed conflict, epidemics and natural disasters. Any or all of these
factors could have a material impact on our future results.
As a global concern, we face exposure to movements in foreign currency exchange
rates. These exposures may change over time and could have a material impact on
our financial results and cash flows. Historically, our primary exposures have
related to non dollar-denominated transactions in Canada and Europe, as well as
dollar denominated inventory purchases by our international operating units.
At the present time, we hedge only those currency exposures associated with
certain assets and liabilities denominated in foreign currencies and
periodically will hedge anticipated foreign currency cash flows. The hedging
activity undertaken by Enesco is intended to offset the impact of
16
currency fluctuations on certain foreign currency transactions. See Note 7,
"Financial Instruments", to the Consolidated Condensed 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 $11.5 million on March 31, 2003.
Operating cash flows are a function of earnings (losses) plus non-cash expenses
such as depreciation and our ability to manage working capital. Cash used by
operating activities in the first quarter of 2003 was $4.9 million. The major
uses of funds from operating activities were decreased accrued expenses of $6.9
million and decreased accounts payable of $5.4 million. These uses of cash were
partially offset by operating cash provided by reductions in accounts receivable
and inventory.
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 quarter of 2003 was $1.3 million,
primarily due to computer hardware and software purchases related to
implementation of a new domestic computer system planned to be completed by the
end of 2003.
17
Cash provided by financing activities in the first quarter of 2003 was $367
thousand, due to the issuance of additional treasury stock shares.
In August 2000, Enesco entered into a $50 million domestic revolving credit
facility to replace an expiring revolving credit facility. The credit agreement
contains financial and operating covenants including restrictions on incurring
indebtedness and liens, selling property, repurchasing Enesco's shares and
paying dividends. In addition, Enesco is required to satisfy minimum operating
profit, fixed charge coverage ratio and leverage ratio tests at the end of each
quarter. The credit agreement, as amended, grants a security interest in
Enesco's domestic accounts receivable, inventory and real estate. In May 2002,
the credit facility was further amended to extend the termination date to May
2003. Certain financial covenants were also modified. As of March 31, 2003,
Enesco was in compliance with all covenants in the revolving credit facility. In
January 2003, the security interest in Enesco's inventory was released. The size
of the facility remains at $50 million. As of March 31, 2003, there were no
amounts outstanding under the facility.
In May 2003, the credit facility was further amended to extend the termination
date to June 2003. At the same time, Enesco received a binding commitment letter
for a new three year domestic $50.0 million unsecured revolving credit facility
to replace the expiring revolving credit facility. The commitment letter terms
and conditions contain financial and operating covenants including restrictions
on incurring indebtedness and liens, acquisitions, selling property,
repurchasing the Company's shares and paying dividends. In addition, Enesco is
required to satisfy fixed charge coverage ratio and leverage ratio tests at the
end of each quarter and a minimum annual operating profit covenant. Enesco
expects to enter into the new revolving credit facility in June 2003. Enesco is
not aware of any trends, events, demands, commitments or uncertainties that
reasonably can be expected to have a material effect on liquidity and the
ability to meet anticipated requirements for working capital and capital
expenditures. We believe that our current cash and cash equivalents, cash
generated from operations, and available financing 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.
18
The principal sources of Enesco's liquidity are its available cash balances,
cash from operations and available financing. At March 31, 2003, Enesco had
formal and informal unused lines of credit of approximately $53.1 million. The
informal lines are bank lines that have no commitment fees. As of March 31,
2003, Enesco had no interest bearing debt outstanding.
Fluctuations in the value of the U.S. dollar versus international currencies
affect the U.S. dollar translation value of international currency denominated
balance sheet items. The changes in the balance sheet dollar values due to
international currency translation fluctuations are recorded as a component of
shareholders' equity.
RISK FACTORS
Set forth below and elsewhere in this 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 Report.
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
- - The ability to secure, maintain and renew popular licenses, particularly
our licenses for Precious Moments and Cherished Teddies
- - Fluctuations in demand for our products
- - Manufacturing lead times
- - The effects of terrorist activity and armed conflict, that could cause a
disruption in global economic activity, changes in logistics and security
arrangements, particularly with respect to our reliance on manufacturing
facilities in China
- - The timing of orders, timing of shipments and our ability to meet customer
demands
- - Inventory levels and purchase commitments below or exceeding requirements
based upon future demand forecasts
- - Price and product competition in the giftware industry
19
- - The trend toward retail store consolidation in the card and gift channel
in the United States
- - Variations in sales channels, product costs or mix of products sold
- - The geographical mix of our revenue and the associated impact on gross
margin
- - Our ability to achieve targeted cost reductions particularly in the United
States' operations
- - Actual events, circumstances, outcomes and amounts differing from
judgments, assumptions and estimates used in determining the amounts of
certain assets (including the amounts of related allowances), liabilities
and other items reflected in our financial statements.
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.
Our ability to import products and satisfy customer orders on a timely basis is
affected by the availability of, and demand for, quality production capacity
abroad. We compete with other importers of giftware products for the foreign
manufacturing sources that can produce high-quality products at affordable
prices. While we believe that there are other manufacturing sources available
for our product lines, any loss, disruption or substantial reduction of sourcing
capability or shipping from one or more of our key manufacturing facilities
could have a significant short-term adverse effect on our operations. We are
subject to the following risks inherent in foreign manufacturing: fluctuations
in currency exchange rates; labor, economic and political instability; the
effects of terrorist activity, armed conflict and epidemics, causing disruption
in global economic activity and changes in logistics and security arrangements;
cost and capacity fluctuation and delays in transportation, dockage and
materials handling; restrictive actions by foreign governments;
nationalizations; the laws and policies of the United States affecting
importation of goods, including duties, quotas and taxes. Since the terrorist
attacks on September 11, 2001 and the outbreak of the SARS epidemic, the U.S.
Customs Service has enacted various security procedures affecting the
importation of goods. Such procedures could adversely affect the cost and timing
of our receipt of goods from our foreign manufacturers.
20
In 2002, approximately 74% of our products were manufactured in, and imported
from China. We anticipate that this percentage will remain the same or increase
in the foreseeable future. China has joined the World Trade Organization and has
been accorded permanent "Normal Trade Relations" status by the U.S. government.
Various commercial and legal practices widespread in China, including the
handling of intellectual properties and certain labor practices, as well as
certain political and military actions taken or suggested by China, are under
review by the U.S. government. China has been designated a Country of Particular
Concern ("CPC") pursuant to the International Religious Freedom Act of 1998
("IRFA"). The IRFA provides several specific retaliatory actions that could be
taken by the U.S. government; none of which we believe would have a material
impact on our business. The IRFA, however, also accords the President broad
discretion in fashioning other or additional actions and, due to the breadth of
the presidential powers under the IRFA, we are unable to predict what, if any,
action the President could take in the future.
Accordingly, conducting business with vendors located in China is subject to
political uncertainties, the financial impact of which we are unable to
estimate. To the extent China may have its exports or transaction of business
with U.S. entities subject to political retaliation, the cost of Chinese imports
could increase significantly and/or the ability to import goods from China may
be materially impaired. In such an event, there could be an adverse effect on
our operations until alternative arrangements for the manufacture of our product
were made on economic, production and operational terms at least as favorable as
those currently in effect.
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
21
- - 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.
22
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 March 31, 2003, Enesco had entered into forward exchange agreements with a
notional value of $3.4 million that will mature within 158 days. These contracts
include sales of British pounds sterling and the purchase of U.S. dollars at an
average exchange rate of 1.57, and a sale of U.S. dollars and the purchase of
British pounds sterling at an average exchange rate of 1.57. The fair value of
these contracts is not significant. As of March 31, 2003, Enesco had no interest
bearing debt outstanding
23
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-Q, Enesco carried out an
evaluation, under the supervision and with the participation of Enesco's
management, including Enesco's (i)Chief Executive Officer ("CEO") and (ii)Chief
Financial Officer and Treasurer ("CFO"), of the effectiveness of the design and
operation of Enesco's disclosure controls and procedures. Based on that
evaluation, Enesco's management, including the CEO and CFO, concluded that
Enesco's disclosure controls and procedures are operating effectively as
designed. There have been no significant changes in Enesco's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date Enesco carried out its evaluation. We are committed to a continuing
process of identifying, evaluating and implementing improvements to the
effectiveness of our disclosure and internal controls and procedures. Our
management, including our CEO and CFO, does not expect that our controls and
procedures will prevent all errors. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues within Enesco have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in any
control system, misstatements due to error or violations of law may occur and
not be detected.
24
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 24, 2003.
(b) The matters voted upon at the meeting were (i) the election of Directors;
(ii) the reincorporation of Enesco in the State of Illinois; (iii)
amendments to the 1996 Stock Option Plan; and (iv) the ratification of
KPMG LLP as Enesco's independent accountants for 2003.
(i) The members of Class II were standing for election to a three-year
term expiring at the Annual Meeting in 2006. Upon motion duly made and
seconded, it was voted to elect Daniel DalleMolle, Eugene Freedman and
Donna Brooks Lucas as Class II Directors for a three-year term expiring at
the Annual Meeting in 2006 and until their successors are elected and
qualified. The votes for each of the candidates were reported as follows:
Daniel DalleMolle For: 11,518,742
Withheld: 1,223,976
Eugene Freedman For: 11,496,618
Withheld: 1,246,100
Donna Brooks Lucas For: 11,173,557
Withheld: 1,569,161
In addition, the following directors continue to serve on the Board:
John F. Cauley, George R. Ditomassi, Anne-Lee Verville, Judith R.
Haberkorn, Thane A. Pressman and Donald L. Krause.
25
(ii) The reincorporation of Enesco Group, Inc. in the State of Illinois
from the Commonwealth of Massachusetts was proposed for stockholder
approval. Upon motion duly made and seconded, it was voted to
reincorporate Enesco Group, Inc, in the State of Illinois. The vote was
reported as follows:
Reincorporation of Enesco
Group, Inc. in Illinois For: 9,751,685
Against: 2,941,909
Abstain: 49,124
It is presently anticipated that the reincorporation merger will be
consummated on or about June 30, 2003.
(iii) Amendments to the 1996 Stock Option Plan (the "Plan") were proposed
for stockholder approval. Upon motion duly made and seconded, it was voted
to approve the amendments to the Plan. The vote was reported as follows:
Amendments to
The Plan For: 7,059,140
Against: 5,603,512
Abstain: 80,065
26
(iv) The ratification of KPMG LLP as Enesco's independent accountants for
2003 was proposed for stockholder approval. Upon motion duly made and
seconded, it was voted to ratify KPMG LLP as Enesco's independent
accountants for 2003. The vote was reported as follows:
Ratification of
KPMG LLP For: 12,601,222
Against: 103,939
Abstain 37,557
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment dated as of May 5, 2003 to the License
Agreement between Precious Moments, Inc. and Enesco Group,
Inc.
10.2 Commitment Letter dated as of May 14, 2003 between Fleet
National Bank and Enesco Group, Inc.
10.3 Ninth Amendment to Amended and Restated Senior Revolving
Credit Agreement dated as of May 14, 2003 between Enesco
Group, Inc. and Fleet National Bank
99.1 Statement of Chief Executive Officer Pursuant to Section 906
of the Sabanes-Oxley Act of 2002
99.2 Statement of Chief Financial Officer and Treasurer Pursuant to
Section 906 of the Sabanes-Oxley Act of 2002
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K dated January 7, 2003 was filed
with the SEC under Item 5 reporting that Thomas Bradley was
elected as Chief Financial Officer of Enesco as of January 3,
2003.
(2) A Current Report on Form 8-K dated February 10, 2003 was filed
with the SEC under Item 5 reporting that Paul Perez, formerly
Senior Vice President of Sales, Marketing and Product
Development, left Enesco to pursue other opportunities.
All other items hereunder are omitted because either such item is inapplicable
or the response to it is negative.
28
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: May 15, 2003 /s/ Daniel DalleMolle
-------------------------------------
Daniel DalleMolle
President and Chief Executive Officer
Date: May 15, 2003 /s/ Thomas F. Bradley
-------------------------------------
Thomas F. Bradley
Chief Financial Officer and Treasurer
29
CERTIFICATION UNDER EXCHANGE ACT RULES 13A-14 AND 15D-14 PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel DalleMolle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enesco Group, Inc.
(the "Registrant").
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Daniel DalleMolle
-------------------------------
President and Chief Executive Officer
30
CERTIFICATION UNDER EXCHANGE ACT RULES 13A-14 AND 15D-14 PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas F. Bradley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enesco Group, Inc.
(the "Registrant").
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Thomas F. Bradley
-------------------------------------
Chief Financial Officer and Treasurer
31