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, 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 preceeding 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,
2002 2001
---------- ----------
Shares Outstanding:
Common Stock with 13,888,905 13,745,990
Associated Rights
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
<Caption>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and certificates of deposit $ 3,173 $ 7,932
Accounts receivable, net 72,930 58,582
Inventories 53,244 56,437
Prepaid expenses 1,508 2,622
Current tax assets 12,096 13,052
--------- ---------
Total current assets 142,951 138,625
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 70,701 68,199
Less accumulated depreciation (45,266) (41,617)
--------- ---------
Property, plant and equipment, net 25,435 26,582
--------- ---------
OTHER ASSETS:
Goodwill and other intangibles, net -- 33,423
Other 1,112 1,141
Deferred income taxes 20,000 19,780
--------- ---------
Total other assets 21,112 54,344
--------- ---------
TOTAL ASSETS $ 189,498 $ 219,551
========= =========
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
2
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable $ 13,631 $ 6,749
Accounts payable 19,201 28,345
Federal, state and foreign income taxes 28,913 28,713
Accrued expenses:
Payroll and commissions 3,582 3,183
Royalties 5,817 5,782
Post-retirement benefits 2,596 3,246
Other 7,170 8,218
------------- --------------
Total current liabilities 80,910 84,236
------------- --------------
LONG-TERM LIABILITIES:
Post-retirement benefits 2,853 3,718
Deferred income taxes 772 5,220
------------- --------------
Total long-term liabilities 3,625 8,938
------------- --------------
SHAREHOLDERS' EQUITY:
Common stock 3,154 3,154
Capital in excess of par value 47,298 47,847
Retained earnings 314,486 338,726
Accumulated other comprehensive income (loss) (3,623) (5,722)
------------- --------------
361,315 384,005
Less - Shares held in treasury, at cost (256,352) (257,628)
------------- --------------
Total shareholders' equity 104,963 126,377
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 189,498 $ 219,551
============= ==============
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
3
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
2002 2001
--------------- --------------
Net revenues $ 69,043 $ 77,177
Cost of sales 40,412 45,436
-------------- -------------
Gross profit 28,631 31,741
Selling, distribution, general and administrative expenses 21,896 23,843
Amortization of goodwill and other intangibles - 487
-------------- -------------
Operating profit 6,735 7,411
Interest expense (203) (287)
Interest income 65 43
Other income (expense), net (362) (361)
-------------- -------------
Income before income taxes 6,235 6,806
Income tax expense 1,834 2,436
-------------- -------------
Net income 4,401 4,370
Retained earnings, beginning of period $ 310,085 $ 331,480
-------------- -------------
Retained earnings, end of period $ 314,486 $ 335,850
============== =============
Earnings per common share:
Basic $ 0.32 $ 0.32
============== =============
Diluted $ 0.31 $ 0.31
=============== =============
</Table>
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, 2002 AND 2001
(Unaudited)
(In thousands, except per share amounts)
<Table>
<Caption>
2002 2001
-------------- -------------
Net revenues $ 190,409 $ 206,565
Cost of sales 111,109 114,804
-------------- -------------
Gross profit 79,300 91,761
Selling, distribution, general and administrative expenses 71,102 91,275
Amortization of goodwill and other intangibles - 1,463
-------------- -------------
Operating profit (loss) 8,198 (977)
Interest expense (505) (1,237)
Interest income 214 243
Other income (expense), net (1,110) (725)
-------------- -------------
Income (loss) before income taxes 6,797 (2,696)
Income tax expense (benefit) 2,006 (931)
-------------- -------------
Income (loss) before cumulative effect
of a change in accounting principle 4,791 (1,765)
Cumulative effect of a change in
accounting principle, net of income taxes (29,031) -
-------------- -------------
Net income (loss) (24,240) (1,765)
Retained earnings, beginning of period 338,726 337,615
-------------- -------------
Retained earnings, end of period $ 314,486 $ 335,850
============== =============
Earnings (loss) per common share:
Income(loss) before cumulative effect of a change
in accounting principle, net of income taxes Basic $ 0.35 $ (0.13)
Diluted $ 0.34 $ (0.13)
Basic and diluted cumulative effect
of a change in accounting principle, net of income taxes $ (2.10) -
Basic and diluted earnings
for Net income (loss) $ (1.75) $ (0.13)
============== =============
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
5
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
OPERATING ACTIVITIES: 2002 2001
---------------- -----------------
Net income (loss) $ (24,240) $ (1,765)
Cumulative effect of a change in accounting
principle, net of income taxes 29,031 -
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities (15,263) (6,568)
--------------- ----------------
Net cash provided (used) by operating activities (10,472) (8,333)
--------------- ----------------
INVESTING ACTIVITIES:
Purchase of property, plant & equipment (2,349) (2,452)
Proceeds from sales of property, plant & equipment 109 -
--------------- ----------------
Net cash provided (used) by investing activities (2,240) (2,452)
--------------- ----------------
FINANCING ACTIVITIES:
Net issuance of notes and loans payable 6,882 9,945
Proceeds from the issuance of common stock 727 790
--------------- ----------------
Net cash provided (used) by financing activities 7,609 10,735
--------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 344 (38)
--------------- ----------------
Increase (decrease) in cash and cash equivalents (4,759) (88)
Cash and cash equivalents, beginning of period 7,932 4,006
--------------- ----------------
Cash and cash equivalents, end of period $ 3,173 $ 3,918
=============== ================
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
6
ENESCO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Enesco Group, Inc. (the "Company" or "Enesco") is in the gift, collectible and
home decor industry. Enesco distributes many leading collectible and gift lines
including Precious Moments, Cherished Teddies, Lilliput Lane, Border Fine Arts,
NICI, Mary Engelbreit, Julie Ueland and Jim Shore. 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 September 30, 2002 and for the three and
nine months ended September 30, 2002 and September 30, 2001 has been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These Consolidated
Condensed Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of management, these Consolidated Condensed Financial Statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America applicable to interim period financial
statements and reflect all adjustments necessary for a fair presentation of the
Company's financial position as of September 30, 2002, results of operations for
the three and nine months ended September 30, 2002 and September 30, 2001, and
cash flows for the nine months ended September 30, 2002 and September 30, 2001.
The results of operations for the three and nine months ended September 30, 2002
are not necessarily indicative of the operating results for the full fiscal year
or any future period. The information in this report reflects all normal
recurring adjustments and disclosures that are, in our opinion, necessary to
fairly present the results of operations and financial condition for the interim
periods. Certain reclassifications have been made to previously reported 2001
balances to conform with the current period presentation.
7
Revenue Recognition
Enesco recognizes revenue when title passes to its customers, which generally
occurs when merchandise is turned over to the shipper. A provision for
anticipated merchandise returns and allowances is recorded based upon historical
experience when the sale is recorded. Amounts billed to customers for shipping
and handling are included in revenue. License and royalty fees received by
Enesco are recognized as revenue when earned.
Computation of Earnings per Share
Basic earnings per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common shares and potential dilutive common
shares outstanding during the period. Diluted loss per share is computed using
the weighted-average number of common shares and excludes dilutive potential
common shares outstanding, as their effect is antidilutive. Potential dilutive
common share equivalents primarily consist of employee stock options and
warrants calculated using the treasury stock method.
Goodwill
On January 1, 2002, Enesco adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). In accordance with
FAS 142, Enesco ceased amortizing goodwill and other intangibles upon adoption.
Historically, Enesco had classified amortization of goodwill and other
intangibles as a non-operating expense. Amortization of intangibles is now
classified as an operating expense. All periods presented have been reclassified
to conform with the current presentation.
The adoption of FAS 142 also required the performance of a goodwill impairment
test as of January 1, 2002. The test for goodwill impairment involved a two step
process. The first step, which was completed in the second quarter of 2002,
compared the fair value of each reporting unit to its carrying amount. The
second step was completed in the third quarter of 2002. Since the fair value of
each reporting unit was less than its carrying amount, the amount of the
impairment loss was
8
measured by comparing the implied fair value of goodwill to its carrying amount.
As the carrying amount of goodwill at each reporting unit exceeded its implied
fair value, an impairment loss equal to that excess was recorded. The total
goodwill carrying value of $33.6 million was determined to be fully impaired. As
of January 1, 2002, a charge of $29.0 million was recorded, net of $4.6 million
related income taxes, as the cumulative effect of a change in accounting
principle, net of income taxes, in the Statement of Operations for the nine
months ended September 30, 2002.
In accordance with FAS 142, 2001 results have not been restated for the effects
of ceasing goodwill amortization. Had goodwill amortization been discontinued
effective January 1, 2001, net income (loss) and earnings (loss) per common
share would have been as follows (in thousands, except per share data):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2002 2001 2002 2001
------ ------ -------- -------
Net income (loss):
As reported $4,401 $4,370 $(24,240) $(1,765)
Goodwill amortization, net of income taxes - 480 - 1,441
------ ------ -------- -------
As adjusted $4,401 $4,850 $(24,240) $ (324)
====== ====== ========= =======
Earnings (loss) per common share-basic:
As reported $ 0.32 $ 0.32 $ (1.75) $ (0.13)
Goodwill amortization, net of income taxes - 0.03 - 0.11
------ ------ -------- -------
As adjusted $ 0.32 $ 0.35 $ (1.75) $ (0.02)
====== ====== ======== =======
Earnings (loss) per common share-diluted:
As reported $ 0.31 $ 0.31 $ (1.75) $ (0.13)
Goodwill amortization, net of income taxes - 0.03 - 0.11
------ ------ -------- -------
As adjusted $ 0.31 $ 0.34 $ (1.75) $ (0.02)
====== ====== ======== =======
</Table>
9
Payments for Interest and Income Taxes
Enesco made cash payments for interest and income taxes as follows (in
thousands):
<Table>
<Caption>
Nine Months Ended
September 30
-------------------------
2002 2001
-------------------------
Interest $ 515 $ 1,682
Income taxes $ 896 $ 739
</Table>
Recent Accounting Pronouncements
In July 2002, FAS No. 146, "Accounting For Costs Associated with Exit or
Disposal Activities" was issued. This statement revises accounting for specified
employee and contract terminations that are part of restructuring activities,
but excludes restructuring activities of operations acquired in a business
combination. The provisions require that exit or disposal costs be recorded when
they are incurred and can be measured at fair value. The provisions of this
statement are effective for activities that are initiated after December 31,
2002. The implementation of this statement will not have an impact on the
Company's financial condition, results of operations, or cash flows for the
periods presented in this filing.
3. COMPREHENSIVE INCOME (LOSS):
Other comprehensive income (loss) consists only of cumulative foreign currency
translation adjustments. Comprehensive income (loss) for the three and nine
months ended September 30, 2002 and 2001 was as follows (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
2002 2001 2002 2001
------ ------ -------- -------
Net income (loss) $4,401 $4,370 $(24,240) $(1,765)
Other comprehensive income (loss):
Cumulative translation adjustments (no tax effects) (76) 514 2,099 (899)
------ ------ -------- -------
Comprehensive income (loss) $4,325 $4,884 $(22,141) $(2,664)
====== ====== ======== =======
</Table>
10
4. GEOGRAPHIC OPERATING SEGMENTS:
Enesco operates in the giftware and collectible wholesale industry,
predominantly in two major geographic classifications (United States and
International). The following table summarizes operations by geographic
classification for the three and nine months ended September 30, 2002 and 2001
(in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ --------------------
2002 2001 2002 2001
------- ------- -------- --------
NET SALES
United States $47,928 $56,262 $133,948 $150,890
United States inter-company (251) (377) (879) (1,568)
International 21,555 21,423 57,933 57,836
International inter-company (189) (131) (593) (593)
------- ------- -------- --------
Total consolidated $69,043 $77,177 $190,409 $206,565
======= ======= ======== ========
OPERATING PROFIT (LOSS)
United States $ 3,687 $ 5,244 $ 2,084 $ (4,357)
International 3,048 2,167 6,114 3,380
------- ------- -------- --------
Total consolidated $ 6,735 $ 7,411 $ 8,198 $ (977)
======= ======= ======== ========
</Table>
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.
Except for the goodwill impairment described in Note 2, there were no material
changes in assets from the amounts disclosed in Enesco's December 31, 2001
Annual Report and the basis of geographic classification of sales and operating
profit has not changed in 2002.
11
5. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three and nine months ended September 30,
2002 and 2001 consisted of the following (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
------------------ ------- -----
Foreign currency gain (loss) $ - $ (7) $ 11 $ 8
Gain (loss) on sale of fixed assets (4) (5) (7) (4)
Bank charges and other (358) (349) (1,114) (729)
----- ----- ------- -----
$(362) $(361) $(1,110) $(725)
===== ===== ======= =====
</Table>
6. EARNINGS (LOSS) PER COMMON SHARE (BASIS OF CALCULATIONS):
The number of shares used in the earnings (loss) per common share computation
for the three and nine months ended September 30, 2002 and 2001 were as follows
(in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2002 2001 2002 2001
------------------ ----- ------
Basic
Average common shares outstanding 13,879 13,737 13,839 13,692
Diluted
Stock options and warrants 367 157 - -
------ ------ ------ ------
Average shares diluted 14,246 13,894 13,839 13,692
====== ====== ====== ======
</Table>
The average number of diluted shares outstanding for the nine months ended
September 30, 2002 and September 30, 2001 excludes common stock equivalents
relating to options and warrants since the impact of the reported net loss was
antidilutive. Had Enesco reported a profit for the nine months ended September
30, 2002 and September 30, 2001, the number of average shares diluted would have
increased by 256 thousand and 138 thousand, respectively. Additionally, options
to purchase 1.5 million and 2.6 million shares were outstanding during 2002 and
2001, respectively,
12
but were not included in the computation of diluted earnings (loss) per share
because the options' exercise price was greater than the average market price of
the common shares.
7. FINANCIAL INSTRUMENTS:
Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. Enesco may reduce its exposure
to fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through derivative financial instruments. Enesco currently
does not use derivative financial instruments for trading or speculative
purposes. Enesco regularly monitors foreign currency exposures and ensures hedge
contract amounts do not exceed the amounts of the underlying exposures.
Enesco's current hedging activity is limited to foreign currency purchases and
intercompany foreign currency transactions. The purpose of Enesco's foreign
currency hedging activities is to protect Enesco from the risk that eventual
settlement of foreign currency transactions will be affected adversely by
changes in exchange rates. Enesco hedges these exposures by entering into
various short-term foreign exchange forward contracts. 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 nine months ended September 30, 2002.
To manage foreign currency risk, as of September 30, 2002, Enesco had entered
into forward exchange agreements with a notional value of $10.5 million that
will mature within 93 days. These contracts include sales of British pounds
sterling and purchases of U.S. dollars at an average exchange rate of 1.44, a
sale of U.S. dollars and the purchase of British pounds sterling at an average
exchange rate of 1.56, sales of Euros and purchases of U.S. dollars at an
average exchange rate of .913, and a sale of U.S. dollars and the purchase of
Euros at an average exchange rate of .975. The fair value of these contracts is
not significant. As of September 30, 2002, Enesco had $13.6 million outstanding
of interest bearing debt with interest rates ranging from 3.25% to 3.92%
13
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.
8. CORPORATE HEADQUARTERS CLOSING ACCRUAL
In 1997, Enesco's Board of Directors decided to move its corporate headquarters
from Massachusetts to Illinois. At that time, provisions were recorded to cover
the costs relating to the closing of the Massachusetts site. At September 30,
2002, the corporate headquarters closing accrual totaled $600 thousand, a
decrease of $600 thousand from December 31, 2001, relating to payments made in
2002. Due to the duration and timing of severance provisions and related
benefits, the accrual will not be fully utilized until the first quarter of
2004. The accrual is expected to be utilized as follows: $100 thousand for the
remainder of 2002, $400 thousand in 2003, and $100 thousand in 2004.
9. WORKFORCE REDUCTIONS
On May 3, 2001, Enesco reduced its workforce in the United States by 120
positions, or approximately 14%. This workforce reduction affected clerical and
professional employees and was expected to generate annual savings of
approximately $8 million. Severance costs of approximately $500 thousand were
recorded in the second quarter of 2001. On August 29, 2001, Enesco reduced its
workforce in the United States by an additional 45 positions, generating an
estimated $3.5 million of annual savings. In September 2001, Enesco closed a
manufacturing plant in the U.K., eliminating approximately 45 positions and
generating estimated annual savings of $700 thousand. The costs associated with
the third quarter 2001 U.S. and U.K. workforce reductions totaled $360 thousand.
In the fourth quarter of 2001, Enesco recorded $70 thousand of severance costs
related to a U.S. workforce reduction.
In the second quarter of 2002, Enesco further reduced its workforce in the
United States. This workforce reduction is expected to generate annual savings
of approximately $1.0 million. Severance costs of approximately $250 thousand
were recorded in the second quarter.
10. SUBSEQUENT EVENTS
Enesco's US operations import the majority of its products from manufacturers in
the Pacific Rim through shipments primarily received via ports on the West
Coast. These shipments are handled by companies represented by the Pacific
Maritime Association (PMA) and the International Longshore and Warehouse Union
(ILWU). The labor contract between the PMA and ILWU expired on July 1,
14
2002. Following a series of contract extensions, negotiations between the
parties broke down and a lockout commenced on September 27, shutting down the
West Coast ports for 11 days. On October 8, a Federal judge issued an injunction
under the Taft-Hartley Act, allowing the ports to be reopened. The injunction
imposed a cooling-off period ending December 26, 2002, during which the previous
labor contract has been reinstated and the parties are continuing contract
negotiations with federal mediators. In the event that a contract is not signed
by the end of the 80-day period, both the ILWU and the PMA would be free to
resume any economic activities they choose, including strikes, slowdowns and
lockouts.
The 11-day lockout and work slowdowns by the ILWU caused some delays in the
delivery of shipments to the Company's US distribution center. The lockout
further created a backlog of new shipments from the Pacific Rim. The ultimate
extent of the delays and their impact on the Company's business has yet to be
determined.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENESCO GROUP, INC.
NINE MONTHS ENDED SEPTEMBER 30, 2002
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," and words of similar meaning, constitute
"forward-looking statements" within the meaning of Federal securities laws.
These forward-looking statements are based in part on Enesco's reasonable
expectations and are subject to a number of factors and risks, many of which are
beyond Enesco's control. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described below under the heading "Risk Factors" and elsewhere
in this Quarterly Report, and in other documents we file with the Securities and
Exchange Commission. In light of these uncertainties and risks, there can be no
assurance that the forward-looking statements in this Form 10-Q will occur or
continue in the future. Except for required 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.
16
The allowance for doubtful accounts is based on our assessments of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are significantly different than our historical experience,
estimates of the recoverability of amounts due could be affected. An allowance
for sales returns is established based on historical trends in product returns.
If future returns do not reflect historical trends, revenue could be affected.
Inventory purchases and commitments are based on future demand forecasts. If
there is a sudden 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 taxes payable and tax assessments. The
accruals are included in current income taxes payable since it is uncertain as
to when assessments may be made and paid. Enesco has filed and continues to file
tax returns with a number of taxing authorities worldwide. While Enesco believes
such filings have been and are in compliance with applicable laws, regulations
and interpretations, positions taken are subject to challenge by the taxing
authorities often for an extended number of years after the filing dates. To the
extent accruals differ from assessments, or when the open tax years are closed,
the accruals are adjusted through the provision for income taxes. The majority
of open tax years become closed for assessments at the end of December for the
particular open year.
NET REVENUE AND GROSS PROFIT
Net sales in the third quarter of 2002 decreased by 11%, or $8.1 million, from
the third quarter of 2001. Net sales in the first nine months of 2002 decreased
by 7.8%, or $16.0 million, from the first nine months of 2001. The decrease in
net sales for the third quarter of 2002 compared to 2001 was primarily due to a
decrease in Harry Potter product sales. The decrease in net sales for the first
nine months of 2002 compared to the same period last year was primarily the
result of decreased U.S. sales of the Precious Moments, Cherished Teddies and
Harry Potter product lines. Enesco's Precious Moments lines represented
approximately 37% of 2002 year to date sales compared to 38.5% for 2001. The
Cherished Teddies lines represented approximately 11% of 2002 year to date sales
compared to 13% for 2001.
17
Net new orders of $198 million year to date for 2002 were down less than 1%
versus the comparable period of 2001. Backlog of $35 million at September 30,
2002 was down approximately $4 million, or 11%, from the same point in time last
year. Net open orders (backlog) are orders received and approved by Enesco,
subject to cancellation for various reasons, including credit considerations,
product availability and customer requests. We believe the decrease in backlog
is due to a change in Enesco's product launch and sales processes. Beginning in
the fall of 2001, Enesco started introducing products to our US retail customers
that we have, or plan to have, in stock throughout the year. Previously,
products would be presented to customers primarily at corporate and regional
shows and, based on customer response, the products would either be ordered for
stock or the customer orders would be cancelled. The previous selling process
resulted in higher levels of net new orders and backlog as compared to the
current selling process. Consequently, the previous selling process resulted in
higher levels of order cancellations and unfilled orders. We believe the new
selling process is more customer friendly and although it results in lower net
new orders and backlog, it has also lowered our order cancellation rate and
unfilled orders.
Gross profit for the third quarter of 2002 of $28.6 million was 41.5% of net
sales as compared to third quarter 2001 gross profit of $32.0 million, which was
41.1% of net sales. Gross profit for the first nine months of 2002 was $79.3
million or 41.6% of net sales, as compared to gross profit for the first nine
months of 2001 of $91.8 million, which was 44.4% of net sales. The decrease in
gross profit for the third quarter and first nine months of 2002 as compared to
2001 was due to lower shipping volumes as well as changes in product and sales
channel mix. Earlier in 2002, lower product acquisition costs were negotiated
with some of our major suppliers. We expect these lower costs to favorably
impact gross profit in the fourth quarter of 2002 and beyond. Gross profit can
be affected in the future by changes in vendor pricing, obsolescence charges,
changes in shipment volume, price competition and changes in distribution
channel, geographic or product mix.
SELLING, DISTRIBUTION, AND GENERAL AND ADMINISTRATIVE EXPENSES
Selling, Distribution and General and Administrative Expenses (operating
expenses) for the third quarter of 2002 were $21.8 million, or 31.7% of sales,
and year to date were $71.1 million, or 37.3% of sales, down significantly
compared to third quarter 2001 of $23.8 million, or 30.9% of sales, and year to
date 2001 of $91.2 million, or 44.2% of sales. Operating expenses decreased by
approximately $20.1 million year to date in 2002 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 decrease
was also due to $2.3 million of non-recurring 2001
18
costs related to the January 1, 2001 United States sales force reorganization.
The non-recurring 2001 costs consisted of commissions on orders placed before
January 1, 2001 that were shipped in 2001, as well as the hiring and training
costs for approximately 200 employees. Commissions were expensed when orders
were shipped. All of the January 2001 sales force reorganization costs were
expensed as incurred.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, Enesco adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). In
accordance with FAS 142, Enesco ceased amortizing goodwill and other intangibles
upon adoption. Historically, Enesco classified amortization of goodwill and
other intangibles as a non-operating expense. We are now classifying
amortization of goodwill and other intangibles as an operating expense. All
periods presented have been reclassified to conform with the current
presentation. FAS 142 requires us to perform goodwill impairment tests upon
adoption and on an annual basis. In the third quarter of 2002, we determined
that goodwill with a carrying value of $33.6 million was fully impaired. The
non-cash writedown, net of $4.6 million related income taxes, has been recorded
as the cumulative effect of a change in accounting principle upon adoption on
January 1, 2002. For additional information regarding FAS 142, see Note 2
"Summary of Significant Accounting Policies" to the Consolidated Financial
Statements.
OPERATING INCOME (LOSS)
In the third quarter of 2002, Enesco generated operating income of $6.7 million
compared to $7.4 million in 2001. The $700 thousand decrease was the result of
the $8.1 million decrease in sales, partially offset by margin improvement and
lower operating expenses. Operating income was $8.2 million for the first nine
months of 2002, compared with a $1 million loss in the first nine months of
2001. The year to date increase in operating income over 2001 includes
improvements by all operating units, with the largest improvement in the United
States, primarily from reduced operating expenses.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest expense of $203 thousand for the third quarter of 2002 was $84 thousand
less than the third quarter of 2001 due to lower average borrowings and lower
interest rates. Interest income for the third quarter of 2002 is $65 thousand
compared to $43 thousand in 2001. Other expense, net, for the third quarter of
2002 is flat compared to the same quarter in 2001.
19
Interest expense of $505 thousand for the first nine months of 2002 was $732
thousand less than the first nine months of 2001 due to lower average borrowings
and lower interest rates. Lower interest income in 2002 is due to lower interest
rates. Other expense, net, for the first nine months of 2002 is higher by $385
thousand due to increased bank charges and less foreign currency gains.
PROVISION FOR INCOME TAXES
The effective tax rate was 29.4% for the third quarter of 2002 and 29.5% for the
first nine months of 2002. The comparable tax rates were 35.8% and 34.5% for
third quarter and year to date 2001, respectively, reflecting the geographical
mix of earnings and the impact of non-deductible goodwill amortization in 2001.
The effective tax rate differs from the U.S. statutory rate primarily due to the
varying tax rates of foreign jurisdictions. Our future effective tax rates could
be affected if earnings are other than anticipated in countries where we have
lower statutory rates or by changes in tax laws and regulations.
INTERNATIONAL ECONOMIES AND CURRENCIES
We conduct business globally. Accordingly, our future results could be
materially affected by a variety of uncontrollable and changing factors
including, among others, foreign currency exchange rates; regulatory, political,
or economic conditions in a specific country or region; trade protection
measures and other regulatory requirements; and natural disasters. Any or all of
these factors could have a material impact on our future results.
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 currency
fluctuations on certain foreign currency transactions. See Note 7, "Financial
Instruments", to the Consolidated Condensed Financial Statements for additional
information.
20
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 $3.1 million on September 30, 2002.
Operating cash flows are a function of earnings plus non-cash expenses such as
depreciation and our ability to manage working capital. Cash used by operating
activities in the first nine months of 2002 was $10.5 million. The major uses of
funds from operating activities were increased accounts receivable and decreased
accounts payable. Most of the cash used by operating activities was due to a
$14.3 million accounts receivable increase, which was caused by the extension of
payment terms to retailers. To stimulate sales, Enesco began offering dating
programs to its domestic retailers in the third quarter of 2001. The marginal
impact of the dating programs is that as sales increase, accounts receivable
increase and days sales outstanding also increase. Accounts payable decreased
due to the seasonality of product purchases.
The corporate headquarters closing accrual at September 30, 2002 totaled $600
thousand, a decrease of $600 thousand from December, 2001, relating to payments
made. Due to the duration and timing of severance provisions and related
benefits, the accrual will not be fully utilized until the first quarter of
2004. The accrual is expected to be utilized as follows: $100 thousand for the
remainder of 2002, $400 thousand in 2003 and $100 thousand in 2004.
Enesco has filed and continues to file tax returns with a number of taxing
authorities worldwide. While we believe such filings have been and are in
compliance with applicable laws, regulations and interpretations, positions
taken are subject to challenge by the taxing authorities often for an extended
number of years after the filing dates. Enesco has established accruals for tax
assessments. These accruals are included in current income taxes payable since
it is uncertain as to when assessments may be made and paid. Based upon Enesco's
current liquid asset position and credit facilities, Enesco believes it has
adequate resources to fund any such assessments. To the extent accruals differ
from actual assessments or when the open tax years are closed, the accruals will
be adjusted through the provision for income taxes. The majority of the open tax
years become closed at the end of December for the particular open year.
21
Cash used by investing activities in the first nine months of 2002 was $2.2
million, primarily due to property, plant and equipment purchases.
Cash provided by financing activities in the first nine months of 2002 was $7.6
million, primarily due to increased borrowings. At September 30, 2002, Enesco
had unused lines of credit of approximately $44 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 account 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.
We believe that our current cash and cash equivalents, cash generated from
operations, and available financing alternatives will satisfy our expected
working capital needs, capital expenditures and other liquidity requirements
associated with our existing operations. In addition, there are no transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are reasonably likely to materially affect liquidity or
requirements for capital resources.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, FAS No. 146, "Accounting For Costs Associated With Exit or
Disposal Activities" was issued. This statement revises accounting for specified
employee and contract terminations that are part of restructuring activities,
but excludes restructuring activities of operations acquired in a business
combination. The provisions require that exit or disposal costs be recorded when
they are incurred and can be measured at fair value. The provisions of this
statement are effective for activities that are initiated after December 31,
2002. The implementation of this statement will not have an impact on the
Company's Financial Condition, Results of Operations, or Cash Flows for the
periods presented in this filing.
22
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report and in other documents we
file with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Quarterly Report.
The results of operations for any quarter or fiscal year are not necessarily
indicative of results to be expected in future periods. Our operating results
have been in the past, and will continue to be, subject to quarterly and annual
fluctuations as a result of a number of factors. These factors include:
- - Changes in economic conditions and specific market conditions
- - Fluctuations in demand for our products
- - Manufacturing lead times
- - The effects of terrorist activity and armed conflict, such as disruption in
global economic activity, changes in logistics and security arrangements
- - The timing of orders, timing of shipments and our ability to meet customer
demands
- - Inventory levels and purchase commitments exceeding requirements based upon
future demand forecasts
- - Price and product competition in the giftware industry
- - The trend toward retail store consolidation in the card and gift channel
- - Variations in sales channels, product costs or mix of products sold
- - The ability to secure, maintain and renew popular licenses
- - Logistical issues such as the work stoppage at U.S. West Coast ports in
October of 2002
- - The geographical mix of our revenue and the associated impact on gross
margin
- - Our ability to achieve targeted cost reductions
- - Actual events, circumstances, outcomes and amounts differing from judgments,
assumptions and estimates used in determining the amounts of certain assets
(including the amounts of related allowances), liabilities and other items
reflected in our financial statements.
As a consequence, operating results for a particular future period are difficult
to predict. Any of the foregoing factors, or any other factors discussed
elsewhere herein, could have a material adverse effect on our business, results
of operations and financial condition.
23
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 meet customer demands also depends in part on our ability to
obtain timely deliveries of product from our suppliers. Although we work closely
with our suppliers to avoid these types of shortages, there can be no assurances
that we will not encounter problems in the future. We source product from a wide
variety of vendors, however, certain products and product lines are presently
available only from a single source or limited sources. While our suppliers have
performed effectively and have been relatively flexible to date, production
issues with our suppliers may have a material impact on our business.
Enesco continues to monitor the contract negotiations between the Pacific
Maritime Association (PMA) and the International Longshore and Warehouse Union.
The PMA represents West Coast port employers and shippers. Enesco receives the
majority of its imports from overseas suppliers through these ports. The
contract between the PMA and union longshoremen expired on July 1, 2002.
Following a series of contract extensions, negotiations between the parties
broke down and a lockout commenced on September 27, shutting down the West Coast
ports for 11 days. On October 8, a Federal judge issued an injunction under the
Taft-Hartley Act, allowing the ports to be reopened. The injunction imposed a
cooling-off period ending December 26, 2002, during which the previous labor
contract is reinstated and the parties are continuing contract negotiations with
federal mediators. In the event that a contract is not signed by the end of the
80-day period, both the ILWU and the PMA would be free to resume any economic
activities they choose, including strikes, slowdowns and lockouts. A further
work stoppage could cause a disruption in our operations and potentially affect
future results.
24
The principal competitive risks in the markets in which we presently compete and
may compete in the future are:
- - Performance
- - Price
- - Collectibility of our products
- - Market presence
- - New product introductions
- - Product costs
- - Differentiation of new products from those of our competitors
- - Time to market on new products
LEGAL PROCEEDINGS
We are a party to certain lawsuits in the normal course of our business.
Litigation can be expensive, lengthy and disruptive to normal business
operations. While we can not predict the eventual outcome of the proceedings, we
do not believe that any of the current legal proceedings will have a material
adverse effect on the consolidated financial statements of Enesco.
25
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 September 30, 2002, Enesco had entered
into forward exchange agreements with a notional value of $10.5 million that
will mature within 93 days. These contracts include sales of British pounds
sterling and purchases of U.S. dollars at an average exchange rate of 1.44, a
sale of U.S. dollars and the purchase of British pounds sterling at an average
exchange rate of 1.56, sales of Euros and purchases of U.S. dollars at an
average exchange rate of .913, and a sale of U.S. dollars and the purchase of
Euros at an average exchange rate of .975. The fair value of these contracts is
not significant. As of September 30, 2002, Enesco had $13.6 million outstanding
of interest bearing debt with interest rates ranging from 3.25% to 3.92% 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.
26
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
principal executive officer and its principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c),
as of a date within ninety days before the filing date of this report,
have concluded that, based on such evaluation, the Company's disclosure
controls and procedures were effective.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's
internal controls. As a result, no corrective actions were required or
undertaken.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Statement of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Statement of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
All other items hereunder are omitted because either such item is inapplicable
or the response to it is negative.
27
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 13, 2002 /s/ Daniel DalleMolle
-----------------------------------------
Daniel DalleMolle
President and Chief Executive Officer
Date: November 13, 2002 /s/ Jeffrey W. Lemajeur
-----------------------------------------
Jeffrey W. Lemajeur
Chief Financial Officer
28
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
29
CERTIFICATION UNDER EXCHANGE ACT RULES 13a-14 AND 15d-14 PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey W. Lemajeur, 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/ Jeffrey W. Lemajeur
--------------------------------------
Chief Financial Officer
30