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, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____ .
Commission File Number 0-1349
Enesco Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1864170
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Windsor Drive, Itasca, Illinois 60143
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
630-875-5300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
(Former name, address and fiscal year, if changed since last report)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
March 31,
2002 2001
---------- ----------
Shares Outstanding:
Common Stock with 13,827,008 13,653,809
Associated Rights
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
---------- -----------
ASSETS
CURRENT ASSETS:
Cash and certificates of deposit $ 2,921 $ 7,932
Accounts receivable, net 56,833 58,582
Inventories 54,054 56,437
Prepaid expenses 2,184 2,622
Current tax assets 12,995 13,052
--------- ---------
Total current assets 128,987 138,625
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Property, plant and equipment 68,280 68,199
Less - accumulated depreciation and amortization (42,539) (41,617)
--------- ---------
Property, plant and equipment, net 25,741 26,582
--------- ---------
OTHER ASSETS:
Goodwill and other intangibles, net 33,389 33,423
Other 1,140 1,141
Deferred income taxes 19,645 19,780
--------- ---------
Total other assets 54,174 54,344
--------- ---------
TOTAL ASSETS $ 208,902 $ 219,551
========= =========
The accompanying notes are an integral part of these condensed
financial statements.
2
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and loans payable $ 8,761 $ 6,749
Accounts payable 21,541 28,345
Federal, state and foreign income taxes 26,986 28,713
Accrued expenses-
Payroll and commissions 3,422 3,183
Royalties 5,419 5,782
Post-retirement benefits 2,087 3,246
Other 7,358 8,218
--------- ---------
Total current liabilities 75,574 84,236
--------- ---------
LONG-TERM LIABILITIES:
Post-retirement benefits 3,381 3,718
Deferred income taxes 5,220 5,220
--------- ---------
Total long-term liabilities 8,601 8,938
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 3,154 3,154
Capital in excess of par value 47,535 47,847
Retained earnings 337,319 338,726
Accumulated other comprehensive income (loss) (6,306) (5,722)
--------- ---------
381,702 384,005
Less - shares held in treasury, at cost (256,975) (257,628)
--------- ---------
Total shareholders' equity 124,727 126,377
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 208,902 $ 219,551
========= =========
The accompanying notes are an integral part
of these condensed financial statements.
3
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
--------- ---------
Net revenues $ 54,877 $ 62,236
Cost of sales 30,708 34,228
--------- ---------
Gross profit 24,169 28,008
Selling, distribution, general and administrative expenses 26,378 33,542
Amortization of goodwill and other intangibles -- 489
--------- ---------
Operating profit (loss) (2,209) (6,023)
Interest expense (123) (426)
Interest income 98 123
Other income (expense), net (311) (127)
--------- ---------
Income (loss) before income taxes (2,545) (6,453)
Income taxes (benefit) (1,138) (3,013)
--------- ---------
Net income (loss) (1,407) (3,440)
Retained earnings, beginning of period 338,726 337,615
--------- ---------
Retained earnings, end of period $ 337,319 $ 334,175
========= =========
Earnings (Loss) Per Common Share:
Basic and diluted $ (0.10) $ (0.25)
========= =========
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, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
Operating Activities: 2002 2001
------- -------
Net income (loss) $(1,407) $(3,440)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities (5,349) 4,036
------- -------
Net cash provided (used) by operating activities (6,756) 596
------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (530) (1,059)
Proceeds from sales of property, plant and equipment 15 --
------- -------
Net cash provided (used) by investing activities (515) (1,059)
------- -------
FINANCING ACTIVITIES:
Net issuance (repayment) of notes and loans payable 2,012 (1,541)
Other common stock issuance 341 217
------- -------
Net cash provided (used) by financing activities 2,353 (1,324)
------- -------
Effect of exchange rate changes on cash and cash equivalents (93) (116)
------- -------
Increase (decrease) in cash and cash equivalents (5,011) (1,903)
Cash and cash equivalents, beginning of year 7,932 4,006
------- -------
Cash and cash equivalents, end of period $ 2,921 $ 2,103
======= =======
The accompanying notes are an integral part
of these condensed financial statements.
5
ENESCO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The financial statements of Enesco Group, Inc. (Enesco) included in this Form
10-Q filing have not been reviewed by an independent public accountant, as
required by Rule 10-01(d) of Regulation S-X, pursuant to final rules promulgated
by the Securities and Exchange Commission on March 18, 2002 (Release 34-45589)
regarding "Requirements for Arthur Andersen LLP Auditing Clients." We will
comply with Rule 10-01(d) of Regulation S-X when filing our Form 10-Q for the
second quarter of 2002. The consolidated condensed financial statements and
related notes included in this report have been prepared by management, without
audit, except for the December 31, 2001 condensed balance sheet, which was
included in Enesco's Annual Report on Form 10-K for the year ended December 31,
2001, 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 the opinion of management, 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, 2001.
1. ACCOUNTING POLICIES:
Enesco's financial statements for the three months ended March 31, 2002 were
prepared in accordance with the accounting policies described in Note 1 to the
December 31, 2001 consolidated financial statements included in our 2001 Annual
Report on Form 10-K. Certain reclassifications to the 2001 Consolidated
Condensed Statement of Operations and Retained Earnings have been made to
conform with the current presentation. 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 reported net of
reserves for both uncollectible accounts and returns and allowances totaling
$4.9 million at March 31, 2002 and $4.6 million at December 31, 2001.
6
Enesco recognizes revenue when title passes to its customers, which generally
occurs when merchandise is turned over to the shipper. A provision for
anticipated merchandise returns and allowances is recorded based upon historical
experience when the sale is recorded. Amounts billed to customers for shipping
and handling are included in revenue. License and royalty fees received by
Enesco are recognized as revenue when earned.
Enesco historically classified amortization of intangibles as a non-operating
expense and is now classifying amortization of intangibles as an operating
expense. Amortization of goodwill ceased after 2001 per FAS 142. All periods
presented have been reclassified to conform with the current presentation.
Adoption of EITF 00-25 "Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer" on January 1, 2002 resulted in a
reclassification of previously reported 2001 results. Certain advertising
allowances totaling $509 thousand, which were previously recorded as operating
expenses, are now recorded as a reduction in revenue. These reclassifications
had no impact on Enesco's net income or financial position.
Enesco made cash payments for interest and income taxes as follows (in
thousands):
Three Months Ended
March 31
2002 2001
------ ------
Interest $ 198 $ 540
Income taxes $ 515 $ 76
2. GOODWILL
Enesco adopted FAS 142 as of January 1, 2002. FAS 142 requires that goodwill and
certain intangibles no longer be amortized, but instead be tested for impairment
at least annually based on a fair value method. Enesco's initial impairment
testing of goodwill is required to be completed by the end of the second quarter
of 2002.
In accordance with FAS 142, 2001 results have not been restated for the effects
of ceasing goodwill amortization. Had goodwill amortization been discontinued
effective January 1, 2001, net income
7
(loss) and earnings (loss) per common share would have been as follows (in
thousands, except per share data):
Three Months Ended
March 31
-----------------------
2002 2001
-------- --------
Net income (loss):
Reported net income (loss) $(1,407) $ (3,440)
Goodwill amortization, net of income taxes -- 482
------- --------
Adjusted net income (loss) $(1,407) $ (2,958)
------- --------
Earnings (loss) per common share:
Reported basic and diluted $ (0.10) $ (0.25)
Goodwill amortization, net of income taxes -- 0.03
------- --------
Adjusted basic and diluted $ (0.10) $ (0.22)
======= ========
Any impairment loss resulting from the transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. Enesco has not yet determined what effect these
impairment tests will have on our earnings and financial position.
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, 2002 and 2001 was as follows (in thousands):
Three Months Ended
March 31
------------------
2002 2001
------- -------
Net income (loss) $(1,407) $(3,440)
Other comprehensive income (loss):
Cumulative translation adjustments (no tax effects) (584) (1,846)
------------------
Comprehensive income (loss) $(1,991) $(5,286)
==================
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
8
operations by geographic classification for the three months ended March 31,
2002 and 2001 (in thousands):
Three Months Ended
March 31
---------------------
2002 2001
NET SALES
United States $ 37,562 $ 45,723
United States inter-company (381) (724)
International 17,926 17,523
International inter-company (230) (286)
--------------------
Total consolidated $ 54,877 $ 62,236
====================
OPERATING PROFIT (LOSS)
United States $ (3,592) $ (6,200)
International 1,383 177
--------------------
Total consolidated $ (2,209) $ (6,023)
====================
Transfers between geographic operating segments are made at the market value of
the merchandise transferred. No single customer accounted for 10% or more of
consolidated net sales. Export sales to foreign unaffiliated customers represent
less than 10% of consolidated net sales.
There were no material changes in assets from the amounts disclosed in Enesco's
December 31, 2001 Annual Report and the basis of geographic classification of
sales and operating profit did not change in 2002.
5. INVENTORY CLASSES:
The major classes of inventories at March 31, 2002 and December 31, 2001 were as
follows (in thousands):
March 31, December 31,
2002 2001
--------- ------------
Raw materials $ 512 $ 504
Work in process 62 68
Finished goods 53,480 55,865
------- -------
$54,054 $56,437
======= =======
9
6. 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
three months of 2002, Enesco charged payments of $275 thousand to former
employees against the corporate headquarters closing reserve. At March 31, 2002,
$1.0 million remained in the reserve, almost all of which is for future
severance payments and related payroll taxes.
7. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three months ended March 31, 2002 and 2001
consists of the following (in thousands):
Three Months Ended
March 31
------------------
2002 2001
------- -------
Foreign currency gain (loss) $ 20 $ 95
Gain (loss) on sale of fixed assets (1) 1
Bank charges and other (330) (223)
----- -----
$(311) $(127)
===== =====
8. EARNINGS (LOSS) PER COMMON SHARE (BASIS OF CALCULATIONS):
Basic earnings (loss) per common share is based on the average number of common
shares outstanding during the period. Diluted earnings (loss) per common share
calculates, in addition to the above, the 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 (loss) per common share computation
for the three months ended March 31, 2002 and 2001 were as follows (in
thousands):
10
Three Months Ended
March 31
---------------------
2002 2001
------- ------
Basic
Average common shares outstanding 13,790 13,637
Diluted
Stock options and warrants -- --
--------------------
Average shares diluted 13,790 13,637
====================
The average number of shares outstanding for 2002 and 2001 excludes common stock
equivalents relating to options and warrants since the impact of the reported
net loss was antidilutive. Had Enesco reported a profit for the three months
ended March 31, 2002 and 2001, the number of average shares diluted would have
increased by 195 thousand and 180 thousand, respectively. Additionally, options
to purchase 1.7 million and 2.1 million shares were outstanding during 2002 and
2001, respectively, but were not included in the computation of diluted earnings
(loss) per share because the options' exercise price was greater than the
average market price of the common shares.
9. FINANCIAL INSTRUMENTS:
Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. Enesco may reduce its exposure
to fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through derivative financial instruments. Enesco currently
does not use derivative financial instruments for trading or speculative
purposes. Enesco regularly monitors foreign currency exposures and ensures hedge
contract amounts do not exceed the amounts of the underlying exposures.
Enesco's current hedging activity is limited to foreign currency purchases and
intercompany foreign currency transactions. The purpose of Enesco's foreign
currency hedging activities is to protect Enesco from the risk that eventual
settlement of foreign currency transactions will be affected adversely by
changes in exchange rates. Enesco hedges these exposures by entering into
various short-term foreign exchange forward contracts. Under FAS 133, the
instruments are carried at fair value in the Condensed Consolidated Balance
Sheets as a component of Other current assets or
11
Other current liabilities. Changes in the fair value of foreign exchange forward
contracts that meet the applicable hedging criteria of FAS 133 are recorded as a
component of Other comprehensive income and reclassified into earnings in the
same period during which the hedged transaction affects earnings. Changes in the
fair value of foreign exchange forward contracts that do not meet the applicable
hedging criteria of FAS 133 are recorded currently in income as cost of sales or
foreign exchange gain or loss, as applicable. Hedging activities did not have a
material impact on results of operations or financial condition during the three
months ended March 31, 2002.
To manage foreign currency risk, as of March 31, 2002, Enesco had entered into
forward exchange agreements with a notional value of $16.7 million that will
mature within 183 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 1.45. The fair value of these contracts is not significant. As
of March 31, 2002, Enesco had $8.8 million outstanding of interest bearing debt
with interest rates ranging from 3.0% to 3.94% and maturities within 20 days.
The fair value approximates the carrying value of these debt instruments. Enesco
currently has not hedged the interest rate risk on any of its outstanding
borrowings.
10. 2001 WORKFORCE REDUCTIONS:
On May 3, 2001, Enesco reduced its workforce in the United States by 120
positions, or approximately 14%. This workforce reduction affected clerical and
professional employees and is expected to generate annual savings of
approximately $8 million. Severance costs 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 U.K. eliminating approximately 45 positions and
generating estimated annual savings of $700 thousand. The costs associated with
the third quarter U.S. and U.K. workforce reductions totaled $360 thousand. In
the fourth quarter of 2001, Enesco recorded $70 thousand of severance costs
related to U.S. workforce reductions. The remaining $32 thousand of accrued
severance costs as of December 31, 2001 related to U.S. 2001 workforce
reductions was paid in the first quarter of 2002.
12
11. 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 a Class II member of the Board of Directors on
March 28, 2001. His Board term will expire on April 24, 2003.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ENESCO GROUP, INC.
THREE MONTHS ENDED MARCH 31, 2002
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, 2001, which contains the audited financial
statements and notes thereto for the years ended December 31, 2001, 2000, and
1999 and Management's Discussion and Analysis of Financial Condition and Results
of Operations for those respective periods.
RESULTS OF OPERATIONS
First quarter 2002 revenues of $54.9 million were down approximately $7 million,
or 12%, from the same period in 2001. The majority of the revenue decline
continues to be focused in the United States card, gift and collectible channel.
International sales of $17.7 million for the first quarter of 2002 were higher
by $459 thousand, or 3%, from the same period in 2001. International sales for
2002 were unfavorably impacted by the strength of the U.S. dollar versus local
currencies. If foreign currency denominated sales for 2002 were translated into
United States dollars at March 31, 2001 exchange rates, total sales for the
first quarter would have been higher by an additional $513 thousand.
Enesco's Precious Moments lines represented approximately 43% of 2002 year to
date sales compared to 45% for 2001. The Cherished Teddies lines represented
approximately 11% of 2002 year to date sales compared to 13% for 2001.
As of January 1, 2001, in the U.S., Enesco began utilizing a salary-based
employee sales force, replacing its historical independent contractor sales
force for the card, gift and collectible and home decor channels. Throughout
2001, Enesco serviced these channels with this sales organization but did not
achieve the cost efficiencies, market penetration or customer service levels
expected.
Therefore, as of January 1, 2002, numerous changes were initiated aimed to
improve sales, market penetration and customer service levels. The U.S.
employee-based field sales force was increased
14
and their compensation plan was changed to a variable commission-based format
versus a salary plus bonus format. Additionally, this sales force has been
refocused to serve only the card, gift and collectible channel. The U.S. home
decor channel is serviced by 11 independent representative selling groups who
have the capability of reaching previously unserved customers. New domestic
programs have been initiated providing our customers better value. These
programs include dating terms on seasonal products, more flexible shipping
schedules and improved product availability.
Net new orders of $74 million for the first quarter of 2002 were down 14% versus
the comparable period of 2001. Backlog of $47 million at March 31, 2002 was down
approximately $24 million, or 34%, from the same period last year. The decreases
result from the continuing soft demand in the core U.S. card, gift and
collectible channel. Net open orders are orders received and approved by Enesco,
subject to cancellation for various reasons, including credit considerations,
product availability and customer requests.
Gross profit for the first quarter of 2002 was $24.2 million, a decrease of $3.8
million, or 14%, compared to 2001. The gross profit margin, expressed as a
percentage of net sales, was 44% in 2002 and 45% in 2001. The lower gross margin
percentage in 2002 relates to product and sales channel mix, as all products and
channels do not have the same gross margin. Enesco has negotiated lower product
acquisition costs with some of its major suppliers. We expect these lower costs
to favorably impact gross margin in the second half of 2002 and beyond.
Selling, distribution, general and administrative (SD&A) expenses of $26.4
million, decreased $7.2 million, or 21%, for the first quarter of 2002 versus
2001. The decrease from 2001 reflects numerous cost reductions, primarily
headcount-related savings from the 2001 workforce reductions as well as other
operational changes. The decrease was also due to $1.8 million of non-recurring
costs related to the January 1, 2001 United States sales force reorganization.
The $1.8 million of costs consisted of commissions on orders placed before
January 1, 2001 that were shipped in 2001, as well as the hiring and training
costs for approximately 200 employees. Commissions are expensed when orders are
shipped. All of the January 2001 sales force reorganization costs were expensed
as incurred. Enesco expects to report continued reductions in recurring
operating expenses in future periods.
15
The January 2002 sales force changes (referenced above) relating to the change
in compensation structure and addition of U.S. field and home decor sales
representatives were subsequent to the January 2001 sales reorganization. The
January 2002 sales force changes did not generate any additional costs.
Enesco historically classified amortization of intangibles as a non-operating
expense and is now classifying amortization of intangibles as an operating
expense. Amortization of goodwill ceased after 2001 per FAS 142. All periods
presented have been reclassified to conform with the current presentation.
Due to the factors described above, first quarter 2002 operating loss of $2.2
million was $3.8 million less compared to first quarter 2001. Operating loss in
the United States decreased by $2.6 million and international operating profit
increased by $1.2 million compared to 2001.
Interest expense of $123 thousand for the first quarter of 2002 was $303
thousand less than 2001 due to lower average borrowings and lower interest
rates. Lower interest income in 2002 is due to lower interest rates. Other
expense, net, for 2002 is higher due to increased bank charges and less foreign
currency gains.
Income tax benefit for the first quarter of 2002 was 44.7% of the pre-tax loss.
The difference from the 46.7% rate for the comparable period in 2001 reflects
the geographical mix of earnings and the impact of non-deductible goodwill
amortization. The 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 can impact 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
LIQUIDITY AND CAPITAL RESOURCES:
Enesco historically has satisfied its working 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.
Operating cash flows are a function of earnings plus non-cash expenses such as
depreciation and our ability to manage working capital. Operating cash used in
the first quarter of 2002 was $6.8 million versus net cash provided by operating
activities of $.6 million in the first quarter of 2001. The major uses of funds
from operating activities in the first quarter of 2002 were decreased accounts
payable and lower income taxes payable. The major sources of funds from changes
in working capital include lower accounts receivable and lower inventories. The
lower accounts receivable is a function of lower sales and faster collections
being offset partially by dating programs. To stimulate sales, Enesco began
offering domestic dating programs to its retailers in the third quarter of 2001.
The marginal impact of the dating programs is that as sales increase, accounts
receivable increase and days sales outstanding also increase. Accounts payable
decreased due to the seasonality of product purchases. Income taxes payable were
reduced due to the current period loss and tax payments made in the first
quarter. The corporate headquarters closing reserve at March 31, 2002 totaled
$1.0 million, a decrease of $275 thousand from December, 2001, relating to
payments made. 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: $500 thousand for
the remainder of 2002, $400 thousand in 2003 and $100 thousand in 2004.
Enesco has filed and continues to file tax returns with a number of taxing
authorities worldwide. While we believe such filings have been and are in
compliance with applicable laws, regulations and interpretations, positions
taken are subject to challenge by the taxing authorities often for an extended
number of years after the filing dates. Enesco has established accruals for tax
assessments. These accruals are included in current income taxes payable since
it is uncertain as to when assessments may be made and paid. Based upon Enesco's
current liquid asset position and credit facilities, Enesco believes it has
adequate resources to fund any such assessments. To the extent accruals differ
from actual assessments or when the open tax years are closed, the accruals
17
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 in investing activities in the first three months of 2002
was for capital expenditures.
The major source of cash from financing activities in the first three months of
2002 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. At March 31, 2002, Enesco had unused lines of credit of
approximately $43 million.
In August 2000, Enesco entered into a $50 million domestic revolving credit
facility to replace an expiring revolving credit facility. The credit agreement
contains financial and operating covenants including restrictions on incurring
indebtedness and liens, selling property, repurchasing Enesco's shares and
paying dividends. In addition, Enesco is required to satisfy minimum operating
profit, fixed charge coverage ratio and leverage ratio tests at the end of each
quarter. The credit agreement, as amended, grants a security interest in
Enesco's domestic accounts receivable, inventory and real estate. In May 2002,
the credit facility was further amended to extend the termination date to May
2003. Certain financial covenants were also modified. The size of the facility
remains at $50 million. Management believes that the resources available from
operations and the current credit facility as amended are sufficient to meet the
foreseeable requirements of the business.
RECENT ACCOUNTING PRONOUNCEMENTS:
Financial Accounting Standards (FAS) 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 did not have any impact on the historical financial statements of
Enesco. Under FAS 142, goodwill and intangible assets that have indefinite
useful lives will not be amortized, but rather will be tested at least annually
for impairment. Intangible assets that have finite useful lives will continue to
be amortized over their useful lives. As required, Enesco adopted FAS 142 as of
January 1, 2002, and ceased amortization of goodwill. The annual impact of
ceasing amortization of goodwill is $1.95 million or $487 thousand per quarter.
Enesco
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has not yet determined if the net book value of its existing goodwill of $33.4
million will be deemed impaired under the impairment tests required by FAS 142.
FAS 143 is not expected to have a material impact on the financial statements of
Enesco when adopted. FAS 144, adopted as of January 1, 2002, did not have any
impact on the financial statements of Enesco.
EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor
Income Statement Characterization of Consideration from a Vendor to a Retailer"
became effective as of January 1, 2002. Adoption of EITF 00-14 did not impact
results of operations and financial condition since Enesco's accounting policies
already conformed with EITF 00-14. Pursuant to EITF 00-25, "net revenues" as
well as "selling, distribution, general and administrative expenses" (relating
to advertising allowances) were restated for the first quarter of 2001,
decreasing each by $509 thousand.
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 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,
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. As such, Enesco is exposed to
foreign exchange risk since purchases and sales are made in foreign currencies.
In addition, Enesco is subject to interest rate risk on outstanding borrowings.
Enesco may reduce its exposure to fluctuations in interest rates and foreign
exchange rates by creating offsetting positions through the use of derivative
financial instruments. Enesco currently does not use derivative financial
instruments for trading or speculative purposes. Enesco regularly monitors its
foreign currency exposures and ensures that the hedge contract amounts do not
exceed the amounts of the underlying exposures. To manage foreign currency risk,
as of March 31, 2002, Enesco had entered into forward exchange agreements with a
notional value of $16.7 million that will mature within 183 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 1.45. The
fair value of these contracts is not significant. As of March 31, 2002, Enesco
had $8.8 million outstanding of interest bearing debt with interest rates
ranging from 3.0% to 3.94% and maturities within 20 days. The fair value
approximates the carrying value of these debt instruments. Enesco currently has
not hedged the interest rate risk on any of its outstanding borrowings.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
3.1 Restated Articles of Organization
10.1 Eighth Amendment to Amended and Restated Senior
Revolving Credit Agreement
10.2 ROA Incentive Program 2002
(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: May 15, 2002 /s/ Daniel DalleMolle
---------------------------------------
Daniel DalleMolle
President and Chief Executive Officer
Date: May 15, 2002 /s/ Jeffrey W. Lemajeur
---------------------------------------
Jeffrey W. Lemajeur
Chief Financial Officer
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