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 September 30, 2001
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
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(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)
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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 [ ]
September 30,
2001 2000
---- ----
Shares Outstanding:
Common Stock with 13,745,990 13,590,191
Associated Rights
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and certificates of deposit $ 3,918 $ 4,006
Accounts receivable, net 79,504 72,923
Inventories 65,744 60,491
Prepaid expenses 2,927 3,640
Current tax assets 11,866 12,095
--------- ---------
Total current assets 163,959 153,155
--------- ---------
PROPERTY PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 87,614 85,505
Less accumulated depreciation 59,947 56,256
--------- ---------
Property, plant and equipment, net 27,667 29,249
--------- ---------
OTHER ASSETS:
Goodwill, net 33,954 35,564
Other 1,038 947
Deferred income taxes 12,906 12,564
--------- ---------
Total other assets 47,898 49,075
--------- ---------
TOTAL ASSETS $ 239,524 $ 231,479
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
2
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
September 30, December 31,
2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable $ 23,945 $ 14,000
Accounts payable 24,347 17,867
Federal, state and foreign income taxes 34,432 35,154
Accrued expenses
Payroll and commissions 1,269 3,698
Royalties 7,481 7,747
Postretirement benefits 3,290 4,407
Other 11,685 11,351
--------- ---------
Total current liabilities 106,449 94,224
--------- ---------
LONG-TERM LIABILITIES:
Postretirement benefits 4,634 6,065
Deferred income taxes 4,623 5,497
--------- ---------
Total long-term liabilities 9,257 11,562
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 3,154 3,154
Capital in excess of par value 47,990 48,711
Retained earnings 335,850 337,615
Accumulated other comprehensive income (5,287) (4,388)
---------- ---------
381,707 385,092
Less - shares held in treasury, at cost (257,889) (259,399)
---------- ---------
Total shareholders' equity 123,818 125,693
---------- ---------
TOTAL LIABILITIES AND EQUITY $ 239,524 $ 231,479
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
3
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
--------- ---------
Net revenues $ 77,812 $ 88,247
Cost of sales 45,479 49,697
--------- ---------
Gross profit 32,333 38,550
Selling, distribution, general and
administrative expenses 24,436 32,263
Amortization of goodwill 487 532
--------- ---------
Operating profit 7,410 5,755
Interest expense (502) (1,088)
Interest income 43 79
Other income (expense), net (145) 117
--------- ---------
Income before income taxes 6,806 4,863
Income tax expense 2,436 1,945
--------- ---------
Net income $ 4,370 $ 2,918
========= =========
Earnings Per Common Share:
Basic $ 0.32 $ 0.21
========= =========
Diluted $ 0.31 $ 0.21
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
4
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
--------- ---------
Net revenues $ 207,886 $ 235,003
Cost of sales 114,865 132,186
--------- ---------
Gross profit 93,021 102,817
Selling, distribution, general and
administrative expenses 92,535 99,263
Amortization of goodwill 1,463 1,601
--------- ---------
Operating profit (loss) (977) 1,953
Interest expense (1,743) (2,483)
Interest income 243 1,043
Other income (expense), net (219) 563
--------- ---------
Income (loss) before income taxes (2,696) 1,076
Income tax expense (benefit) (931) 430
--------- ---------
Net income (loss) (1,765) 646
Retained earnings, beginning of period 337,615 326,305
Cash dividends, $.28 per share in 2000 - (3,783)
--------- ---------
Retained earnings, end of period $ 335,850 $ 323,168
========= =========
Earnings (Loss) Per Common Share:
Basic and diluted $ (0.13) $ 0.05
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES: 2001 2000
--------- ---------
Net income (loss) $ (1,765) $ 646
Adjustments to reconcile net
income to net cash provided by
operating activities (6,568) (13,296)
--------- ---------
Net cash provided (used) by
operating activities (8,333) (12,650)
--------- ---------
INVESTING ACTIVITIES:
Purchase of property, plant
& equipment (2,452) (3,235)
Proceeds from sales of property,
plant & equipment - 74
--------- ---------
Net cash provided (used) by
investing activities (2,452) (3,161)
--------- ---------
FINANCING ACTIVITIES:
Cash dividends - (3,783)
Net change in notes and loans payable 9,945 12,863
Common stock issuance proceeds 790 1,343
--------- ---------
Net cash provided (used) by
financing activities 10,735 10,423
--------- ---------
Effect of exchange rate changes on
cash and cash equivalents (38) (669)
--------- ---------
Increase (decrease) in cash and
cash equivalents (88) (6,057)
Cash and cash equivalents, beginning
of year 4,006 10,819
--------- ---------
Cash and cash equivalents, end
of period $ 3,918 $ 4,762
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
6
ENESCO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements and related notes included in
this report have been prepared by Enesco, without audit, except for the December
31, 2000 condensed balance sheet, which was included in Enesco's Annual Report
on Form 10-K for the year ended December 31, 2000, filed under the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. 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. It is suggested that these condensed
financial statements be read in conjunction with the audited financial
statements and related notes included in Enesco's Annual Report on Form 10-K for
the year ended December 31, 2000.
1. ACCOUNTING POLICIES:
Enesco's financial statements for the three and nine months ended September 30,
2001 have been prepared in accordance with the accounting policies described in
Note 1 to the December 31, 2000 consolidated financial statements included in
our 2000 Annual Report on Form 10-K. We consider all highly liquid securities,
including certificates of deposit with maturities of three months or less, when
purchased, to be cash equivalents. Accounts receivable are stated net of
reserves for uncollectible accounts and returns and allowances of $6.8 million
at September 30, 2001 and $7.3 million at December 31, 2000.
Enesco recognizes revenue when title passes to its customers which generally
occurs when merchandise is turned over to the shipper. A provision for
anticipated merchandise returns and allowances is recorded based upon historical
experience. Amounts billed to customers for shipping and handling are included
in revenue. License and royalty fees received by Enesco are recognized as
revenue when earned.
7
Enesco had historically classified amortization expense as a non-operating item
and will be classifying amortization expense as an operating expense going
forward. However, amortization of goodwill will cease after 2001 per a new
accounting standard. All periods presented have been reclassified to conform
with the current presentation.
Adoption of SAB 101 "Revenue Recognition" in the fourth quarter of 2000 and EITF
00-22 "Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future" in the first quarter of 2001 did not affect Enesco's accounting and
reporting policies. In accordance with EITF 00-10 "Accounting for Shipping and
Handling Fees and Costs" (which was adopted in the fourth quarter of 2000)
Enesco classifies shipping and handling costs billed to customers as revenue and
the related costs are classified as cost of sales. Revenues and cost of sales
for the third quarter and first nine months of 2000 were restated by $1.9
million and $5.0 million, respectively, to include shipping and handling costs
billed to customers. Adoption of SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities" on January 1, 2001 did not have a material impact on the
results of operations or financial condition.
Enesco made cash payments for interest and income taxes as follows (in
thousands):
Nine Months Ended
September 30
------------
2001 2000
--------- ---------
Interest $ 1,682 $ 2,162
Income taxes $ 739 $ 1,337
2. COMPREHENSIVE INCOME:
Other comprehensive income consists only of cumulative foreign currency
translation adjustments. Comprehensive income (loss) for the three and nine
months ended September 30, 2001 and 2000 was as follows (in thousands):
8
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $ 4,370 $ 2,918 $ (1,765) $ 646
Other comprehensive
income (loss):
Cumulative translation
adjustments (no
tax effects) 514 (473) (899) (2,273)
-------------------- ----------------------
$ 4,884 $ 2,445 $ (2,664) $ (1,627)
==================== ======================
3. GEOGRAPHIC OPERATING SEGMENTS:
Enesco operates in one industry segment, predominately in two major geographic
areas (United States and International). The following tables summarizes
Enesco's operations by geographic area for the three and nine months ended
September 30, 2001 and 2000 (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
NET SALES:
United States $56,878 $66,902 $152,175 $177,235
United States intercompany (376) (438) (1,567) (1,511)
International 21,441 21,959 57,871 60,177
International intercompany (131) (176) (593) (898)
-------------------- ----------------------
Total consolidated $77,812 $88,247 $207,886 $235,003
==================== ======================
OPERATING PROFIT (LOSS):
United States $ 5,243 $ 3,567 $ (4,357) $ (2,002)
International $ 2,167 $ 2,188 $ 3,380 $ 3,955
-------------------- ----------------------
Total consolidated $ 7,410 $ 5,755 $ (977) $ 1,953
==================== ======================
Transfers between geographic areas are made at the market value of the
merchandise transferred. No single customer accounted for 5% 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 amount disclosed in Enesco's
December 31, 2000 Annual Report and the basis of geographic area measurement of
sales and operating profit did not change in 2001.
9
4. INVENTORY CLASSES:
The major classes of inventories at September 30, 2001 and December 31, 2000
were as follows (in thousands):
September 30, December 31,
2001 2000
---- ----
Raw materials and supplies $ 696 $ 574
Work in progress 72 87
Finished goods in transit 4,588 9,483
Finished goods 60,388 50,347
--------------------------
$ 65,744 $ 60,491
==========================
5. CORPORATE HEADQUARTERS CLOSING RESERVE:
Enesco's corporate headquarters closing reserve, established in 1997, provided
for severance and benefit payments due to terminated employees. During the first
nine months of 2001, the Company made $1.8 million of payments, which were
charged against the corporate headquarters closing reserve. At September 30,
2001, $1.6 million remained in the reserve, almost all of which is for future
severance payments and related payroll taxes.
6. OTHER INCOME (EXPENSE):
Other income (expense) for the three and nine months September 30, 2001 and 2000
consists of the following (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
Foreign currency gain (loss) $ (7) $ (6) $ 8 $ (139)
Gain (loss) on sale of fixed assets (5) - (4) (25)
Miscellaneous (133) 123 (223) 727
---------------- ----------------
$ (145) $ 117 $(219) $ 563
================ ================
10
7. EARNINGS PER COMMON SHARE (BASIS OF CALCULATIONS):
Basic earnings per common share are based on the average number of common shares
outstanding during the period. Diluted earnings per common share assumes, in
addition to the above, a dilutive effect of common share equivalents during the
period. Common share equivalents represent dilutive stock options and warrants
calculated using the treasury stock method.
The number of shares used in the earnings per share calculations for the three
and nine months ended September 30, 2001 and 2000 were as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Basic
Average common shares outstanding 13,737 13,583 13,692 13,548
Diluted
Stock options/warrants 157 157 - 63
------------------ -------------------
Average shares diluted 13,894 13,740 13,692 13,611
================== ===================
The average number of diluted shares outstanding for 2001 and 2000 includes
common stock equivalents relating to options and warrants except for the nine
months ended September 30, 2001 since the impact of the reported net loss was
antidilutive. Had Enesco reported a profit for the nine months ended September
30, 2001, the number of average shares diluted would have increased by 138
thousand. Also, options to purchase 2.6 million and 2.3 million shares were
outstanding during 2001 and 2000, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
8. DERIVATIVE FINANCIAL INSTRUMENTS:
Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. Enesco may reduce its exposure
to fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through the use of derivative financial instruments. Enesco
currently does not use derivative financial instruments for trading or
speculative purposes. Enesco regularly monitors its foreign currency exposures
and ensures that the hedge contract amounts do not exceed the amounts of the
underlying exposures.
11
Enesco's current hedging activity is limited to foreign currency purchases and
intercompany foreign currency transactions. The purpose of Enesco's foreign
currency hedging activities is to protect Enesco from the risk that the eventual
settlement of foreign currency transactions will be adversely affected by
changes in exchange rates. Enesco hedges these exposures by entering into
various short-term foreign exchange forward contracts. Under SFAS No. 133, the
instruments are carried at fair value in the condensed consolidated balance
sheet as a component of other current assets or other current liabilities.
Changes in the fair value of foreign exchange forward contracts that meet the
applicable hedging criteria of SFAS No. 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 SFAS No. 133 are recorded currently in income as cost of sales or
foreign exchange gain or loss, as applicable. Enesco's hedging activities did
not have a material impact on Enesco's results of operations or financial
condition during the three and nine months ended September 30, 2001.
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 union,
non-union, clerical and professional employees and will generate annual savings
of approximately $8 million. One-time severance costs approximating $500
thousand were recorded in the second quarter of 2001. On August 29, 2001 Enesco
reduced its workforce in the United States by an additional 45 positions
generating an estimated $3.5 million of annual savings. In September 2001 Enesco
closed a manufacturing plant in the United Kingdom (U.K.), also eliminating
approximately 45 positions. The closing of the manufacturing site is expected to
save $700 thousand annually. The one-time costs associated with the third
quarter U.S. and U.K. workforce reductions totaled $360 thousand. As of
September 30, 2001, $260 thousand remains to be paid to former employees
relating to the 2001 workforce reductions out of the $860 thousand provision.
10. NEW PRESIDENT AND CEO:
Daniel DalleMolle was elected as President and Chief Executive Officer (CEO) of
Enesco as of March 28, 2001. Mr. DalleMolle succeeded interim CEO Anne-Lee
Verville. The President and CEO position had been vacant since June 27, 2000.
Mr. DalleMolle was also appointed to Class II of the Board of Directors on March
28, 2001. His Board term will expire on April 24, 2003.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENESCO GROUP, INC.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
The information set forth below should be read in conjunction with the unaudited
consolidated condensed financial statements and notes thereto included in Part I
- - Item 1 of the Quarterly Report and the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 which contains the audited financial
statements and notes thereto for the years ended December 31, 2000, 1999, and
1998 and Management's Discussion and Analysis of Financial Condition and Results
of Operations for those respective periods.
RESULTS OF OPERATIONS
Third quarter 2001 revenues were down approximately $10 million, or 12%, from
the same period in 2000. Year to date sales for 2001 were down approximately $27
million, or 12%, from the comparable 2000 period. The majority of the revenue
decline continues to be focused in United States card, gift and collectible
channels.
International sales for the third quarter of 2001 were down $.5 million, or 2%,
from the same period in 2000. Year to date international sales for 2001 were
down $2.0 million, or 3%, from the comparable 2000 period. International sales
for 2001 were unfavorably impacted by the strength of the U.S. dollar versus
local currencies. If foreign currency denominated sales for 2001 were translated
into United States dollars at 2000 exchange rates, sales for the third quarter
and first nine months would have been higher by $.6 million and $3.1 million,
respectively. In other words, third quarter and year to date 2001 international
sales in local currencies were up compared to 2000.
Unfilled orders (backlog) at the beginning of the year were down approximately
$2 million, or 4%, compared to the year ago period. Net new orders for 2001,
when compared to 2000, were down 40% for the third quarter and down 26% for the
nine-month period. Backlog at September 30, 2001 was down approximately $45
million, or 53%, from the same period last year. The decrease in backlog and
third quarter orders relates to the unprecedented demand for Harry Potter
products introduced to retailers in the third quarter of 2000. Enesco shipped
approximately $20 million of
13
Harry Potter products in the fourth quarter of 2000, the fastest product launch
in the Company's history. Also contributing to the decreases were continuing
soft demand in the core U.S. card and gift channel and a noticeable reduction in
orders received after the tragic events on September 11, 2001. As a result of
the order and backlog shortfalls, fourth quarter 2001 revenue is expected to be
less than fourth quarter 2000 revenue. Orders received and accepted by Enesco
are subject to cancellation for credit considerations, product availability and
customer requests.
Enesco's Precious Moments lines represented approximately 39% of 2001 year to
date sales compared to 40% for 2000 and the Cherished Teddies lines represented
approximately 13% of 2001 year to date sales compared to 15% for 2000.
Gross profit for 2001 compared to 2000 decreased $6.2 million, or 16%, for the
third quarter and decreased $9.8 million, or 10%, for the first nine months. The
2000 results for the second quarter and year to date periods included a $2.9
million inventory write-down related to the termination of the Precious Moments
acquisition. The year to date gross profit margin expressed as a percentage of
sales was 45% in 2001 and 45% for 2000, excluding the one-time $2.9 million
charge in 2000. The lower gross margin percentage for the third quarter (42% in
2001 vs. 44% in 2000) relates to the higher proportion of direct import sales to
major account customers in 2001 compared to 2000. The direct import sales have
inherently lower margins but require no working capital investment such as
inventory and receivables or any distribution expense.
Selling, distribution, general and administrative (SD&A) expenses decreased $7.8
million, or 24%, for the third quarter and decreased $6.7 million, or 7%, for
the nine-month period of 2001 versus 2000. Results for 2001 included one-time
charges totaling $3.2 million, comprised of $2.3 million for the U.S. sales
force reorganization (recorded in the first and second quarter) and $860
thousand for severance provisions ($500 thousand in the second quarter and $360
thousand in the third quarter). The U.S. sales force reorganization costs were
primarily commissions earned in 2001 by former independent contractors for
orders placed before January 1, 2001 but shipped during 2001. Commissions are
earned and recorded as expense when orders are shipped. There were also some
costs relating to hiring and sales account management training in January of
2001. All of the sales force reorganization costs were expensed as incurred.
Likewise, second quarter 2000 results included one-time charges of $2.2 million
for the termination of the Precious Moments acquisition and $2.8 million for
executive severance offset by a gain of $2.7 million on the termination of
14
supplemental retirement plans. Exclusive of one-time items, SD&A costs for 2001
were down $8.2 million, or 25%, for the third quarter and down $7.6 million, or
8%, for the nine months from the comparable 2000 periods. The decrease from 2000
reflects numerous cost reductions partially offset by higher domestic bad debt
expense early in 2001. SD&A costs, excluding one-time items, were 31% of sales
for the third quarter of 2001 and 43% for the first nine months of 2001,
compared to 37% for the third quarter of 2000 and 41% for the first nine months
of 2000. Enesco expects to report continued reductions in recurring operating
expenses going forward.
Amortization of goodwill was lower for the quarter by $45 thousand and the year
to date period by $138 thousand due to the completion of an asset's amortization
period at the end of 2000. Enesco had historically classified amortization
expense as a non-operating item and will be classifying amortization expense as
an operating expense going forward. However, amortization of goodwill will cease
after 2001 per a new accounting standard. All periods presented have been
reclassified to conform with the current presentation.
The operating profit of $7.4 million for the third quarter of 2001 was a $1.6
million improvement from the operating profit of $5.8 million for the year ago
period. For the first nine months of 2001, the operating loss of $1 million was
$3.0 million unfavorable compared to the $2.0 million operating profit reported
for 2000. These variances are due to the operating items described in the
preceding paragraphs.
Since the beginning of the second quarter, Enesco has initiated several courses
of action aimed at improving operational performance and increasing shareholder
value:
- - The first initiative, announced in May 2001, reduced the U.S. workforce by
14% and will generate annual savings of approximately $8 million. One time
costs associated with the May workforce reduction totaled $500 thousand.
- - Enesco negotiated extended payment terms from certain Far East vendors.
- - Enesco is restructuring its Operations, Marketing and Sales departments to
generate efficiencies in the supply chain and product development cycle as
well as improved customer service.
- - Enesco announced a further domestic workforce reduction in August 2001
eliminating approximately 45 positions generating an estimated $3.5
million of annual savings.
15
- - Enesco closed a U.K. manufacturing site in September 2001, also
eliminating approximately 45 positions. The closing of the U.K.
manufacturing site is expected to save $700 thousand annually. The
one-time costs associated with the third quarter U.S. and U.K.
workforce reductions totaled $360 thousand.
- - Enesco is adding 20 field sales employees in the United States that
will be compensated on a commission basis while reducing its telesales
force by 14 positions. We expect the net effect to be increased
customer service levels and market penetration. Also, high-end home
decor items will be sold by independent representative groups who have
customers in channels not currently served by Enesco's domestic
giftware and collectible sales force.
- - Operating costs are being more closely scrutinized, unnecessary
expenditures are being eliminated and all incremental spending must be
cost-justified prior to being incurred.
Interest expense for 2001 was lower by $586 thousand for the quarter and $740
thousand year to date due to lower average borrowings and lower interest rates.
Lower interest income in 2001 is mainly due to a non-recurring $675 thousand
second quarter 2000 amount related to an expired warranty term. Other expenses
for 2001 are higher due to the non-recurring $625 thousand gain on an expired
warranty term recorded in the second quarter of 2000.
Income tax expense for 2001 was 35.8% of the pre-tax income for the third
quarter and 34.5% of the pre-tax loss for the nine-month period. The difference
from the 40% rate for the three and nine months periods in 2000 reflects the
geographical mix of earnings and the impact of non-deductible goodwill
amortization. The actual effective income tax rates are dependent upon numerous
factors and actual results may vary.
INTERNATIONAL ECONOMIES AND CURRENCY:
The value of the U.S. dollar versus international currencies where Enesco
conducts business impacts operating results. 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. In addition to
the currency risks, Enesco's international operations, including sources of
imported products, are subject to risks of doing business abroad, including
reliance on third party overseas manufacturers, import or export restrictions
and changes in economic and political climates.
16
FINANCIAL CONDITION:
Enesco has historically satisfied its capital requirements with internally
generated funds and short-term loans. Working capital requirements fluctuate
during the year and are generally greatest early in the fourth quarter and
lowest early in the first quarter.
The major sources of funds from operating activities in the first nine months of
2001 were depreciation, amortization, and increased accounts payable. The major
uses of funds from operating activities in the first nine months of 2001 were
increased accounts receivable, increased inventory and lower accrued expenses.
To stimulate sales, Enesco began offering some domestic dating programs to its
retailers in the third quarter of 2001. These programs extend the payment due
date for shipments allowing the retailer a chance to sell the item to a consumer
prior to paying Enesco. The marginal impact of the dating programs is that as
sales increase, accounts receivable increase and days sales outstanding also
increase. Inventory has increased due to a seasonal buildup as well as Enesco's
decision to take an inventory position for Harry Potter products in anticipation
of potential reorder demand after the movie's November 16th release. Accounts
payable increased from year-end due to the implementation of extended payment
terms to Enesco's Far East vendors in the second quarter of 2001. Accrued
expenses decreased from year end due to the timing of payments and the impact of
lower sales volumes. The corporate headquarters closing reserve at September 30,
2001 totaled $1.6 million, a decrease of $1.8 million from year-end. Due to the
duration and timing of severance provisions and related benefits, the reserve
will not be fully utilized until the first quarter of 2004. The reserve is
expected to be utilized as follows: $300 thousand for the remainder of 2001,
$800 thousand in 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
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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.
The major use of cash from investing activities in the first nine months of 2001
was for capital expenditures. Capital expenditures of approximately $4 million
are currently anticipated for 2001. Year to date capital expenditures for 2001
totaled $2.5 million.
The major source of cash from financing activities in the first nine months of
2001 was the increase in short term debt. The principal sources of Enesco's
liquidity are its available cash balances, cash from operations and available
financing alternatives.
In August 2000, Enesco entered into a $50 million revolving credit facility with
Fleet National Bank to replace an existing credit facility. The Fleet credit
agreement contains financial and operating covenants including restrictions on
indebtedness and liens, selling property, repurchasing our stock and paying
dividends. In addition, Enesco is required to satisfy fixed charge coverage
ratio and leverage ratio tests at the end of each quarter.
In March 2001, Enesco agreed to modify its credit agreement with Fleet, which
included modification of the financial covenants. Enesco further agreed, in
April 2001, to modify the Fleet credit agreement to reduce the commitment to $25
million and to grant Fleet a security interest in inventory and accounts
receivable. Enesco further amended the credit agreement with Fleet National Bank
in June 2001 and August 2001. The amended agreement included an assignment of a
$10 million interest to a participant bank, an increased revolving credit
commitment to $35 million, increased credit capacity to $50 million including a
letter of credit facility of $15 million, an extension of the facility
termination date and mortgages on two parcels of domestic real estate.
In September 2001, Enesco's credit facility with Fleet was further amended to
extend the termination date to May 2002, and certain financial covenants were
also modified. The size of the credit facility remains at $50 million, however,
the revolving credit commitment was increased to $40 million and the letter of
credit facility was lowered to $10 million. These modifications are not expected
to have a material effect on Enesco's liquidity or the ability of Enesco to meet
working capital requirements.
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CURRENT AND PENDING ACCOUNTING STANDARDS:
EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor
Income Statement Characterization of Consideration from a Vendor to Retailer"
will become effective later this year. Enesco has determined that EITF 00-14
will not materially impact its results of operations and financial condition.
The impact of EITF 00-25, while not expected to have a material impact, is
currently under review.
Adoption of SAB 101 "Revenue Recognition" in the fourth quarter of 2000 and EITF
00-22 "Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future" in the first quarter of 2001 did not affect Enesco's accounting and
reporting policies. In accordance with EITF 00-10 "Accounting for Shipping and
Handling Fees and Costs" (which was adopted in the fourth quarter 2000) Enesco
classifies shipping and handling costs billed to customers as revenue and the
related costs are classified as cost of sales. Revenue and cost of sales for the
first quarter of 2000 were restated to include the shipping and handling costs
billed to customers. Adoption of SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities" on January 1, 2001 did not have a material impact on the
results of operations or financial condition.
Financial Accounting Standards (FAS) No. 141 "Business Combinations", FAS 142
"Goodwill and Intangible Assets" and FAS 143 "Accounting for Asset Retirement
Obligations" were finalized on June 30, 2001. FAS 144 "Accounting for the
Impairment of or Disposal of Long-Lived Assets" was issued in August of 2001.
FAS 141 is not expected to have any impact on the historical financial
statements of Enesco. We are evaluating the impact FAS 142 will have on Enesco's
results of operations and financial position. FAS 143 and FAS 144 are not
expected to have a material impact on the financial statements of Enesco when
adopted.
FORWARD LOOKING STATEMENTS:
This Form 10-Q including all information incorporated by reference into this
Form 10-Q, contains certain forward-looking statements within the meaning of the
Federal securities laws. These forward-looking statements may include the words
"believe," "expect," "plans" or similar words and are based in part on Enesco's
reasonable expectations and are subject to a number of factors and risks, many
of which are beyond Enesco's control. Enesco's future results may differ
materially from its current results and actual results could differ materially
from those projected in the forward-looking statements contained in, and
incorporated by reference into, this Form 10-Q as
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a result of certain factors including, but not limited to, those set forth
below. Readers should also carefully review any risk factors described in other
documents that we file from time to time with the Securities and Exchange
Commission:
- - Our ability to manufacture, increase capacity, source and ship new
and continuing product in a timely manner and consumers'
acceptance of those products at prices that will be sufficient to
profitably recover development, manufacturing, marketing, royalty
and other costs of the products;
- - Economic conditions including retail sales, higher fuel prices,
currency fluctuations and government regulation and other actions
in the various markets in which we operate throughout the world;
- - The inventory policies of retailers, together with the increased
reliance by retailers on quick response inventory management
techniques, which increase the risk of underproduction of popular
items, overproduction of less popular items and failure to achieve
tight and compressed shipping schedules;
- - The impact of competition on revenues, margins and other aspects
of Enesco's business, including the ability to secure, maintain
and renew popular licenses and the ability to attract and retain
talented employees in a competitive environment.
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.
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
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purchases and sales are made in foreign currencies. 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. In addition, Enesco is subject to interest rate
risk on its outstanding borrowings. To manage Enesco's foreign currency risk, as
of September 30, 2001 Enesco had entered into forward exchange agreements with a
notional value of $6.3 million that will mature within 90 days. These contracts
include sales of British pounds sterling and the purchase of U.S. dollars at an
average exchange rate of 1.43 and a sale of U.S. dollars and the purchase of
British pounds sterling at an average exchange rate of 1.48. The fair value of
these contracts is not significant. As of September 30, 2001, Enesco had $23.9
million outstanding of interest bearing debt with interest rates ranging from
4.88% to 4.92% and maturities within 20 days. The fair value approximates the
carrying value of these debt instruments.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Third Amendment to License Agreement with Precious
Moments, Inc.
10.2 Seventh Amendment to Amended and Restated Senior Revolving
Credit Agreement
10.3 First Amendment to Security Agreement with Fleet National Bank
10.4 Amended and Restated Note-LaSalle Bank National Association
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Enesco during
the quarter for which this report is filed.
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: November 14, 2001 /s/ Daniel DalleMolle
-------------------------------------------
Daniel DalleMolle
President and Chief Executive Officer
Date: November 14, 2001 /s/ Jeffrey W. Lemajeur
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Jeffrey W. Lemajeur
Chief Financial Officer
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