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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____ .
Commission File Number 0-1349
Enesco Group, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1864170
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Windsor Drive, Itasca, Illinois 60143
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(Address of principal executive offices) (Zip Code)
630-875-5300
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(Registrant's telephone number, including area code)
N/A
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(Former name, address and fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
September 30,
2000 1999
---- ----
Shares Outstanding:
Common Stock with 13,590,191 13,477,936
Associated Rights
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current Assets:
Cash and certificates of deposit $ 4,762 $ 10,819
Accounts receivable, net 92,382 81,553
Inventories 61,366 62,317
Prepaid expenses 4,894 3,763
Taxes on income 9,963 12,680
------------ ----------
Total current assets 173,367 171,132
------------ ----------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 83,852 82,244
Less accumulated depreciation 54,818 51,251
------------ ----------
Property, plant and equipment, net 29,034 30,993
------------ ----------
OTHER ASSETS:
Goodwill and other intangibles, net 36,517 38,410
Other 1,126 25,438
Deferred income taxes 3,243 11,394
------------ ----------
Total other assets 40,886 75,242
------------ ----------
TOTAL ASSETS $ 243,287 $ 277,367
============ ==========
The accompanying notes are an integral part of these condensed financial
statements.
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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and loans payable $ 41,041 $ 28,178
Accounts payable 21,199 21,296
Taxes on income 32,800 43,196
Accrued expenses
Payroll and commissions 2,784 5,337
Royalties 6,548 6,565
Postretirement benefits 3,610 4,740
Other 12,080 19,386
----------- -----------
Total current liabilities 120,062 128,698
----------- -----------
LONG-TERM LIABILITIES:
Postretirement benefits 8,033 28,273
Deferred income taxes 4,827 5,964
----------- -----------
Total long-term liabilities 12,860 34,237
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 3,154 3,154
Capital in excess of par value 48,805 48,754
Retained earnings 323,168 326,305
Accumulated other comprehensive income (5,116) (2,843)
----------- -----------
370,011 375,370
Less - shares held in treasury, at cost (259,646) (260,938)
----------- -----------
Total shareholders' equity 110,365 114,432
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 243,287 $ 277,367
----------- -----------
The accompanying notes are an integral part of these condensed financial
statements.
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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999
------------ -----------
Net revenues $86,337 $107,405
Cost of sales 47,787 60,584
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Gross profit 38,550 46,821
Selling, distribution, general and
administrative expenses 32,263 35,134
------------ -----------
Operating profit 6,287 11,687
Interest expense (1,088) (1,078)
Other income (expense), net (336) (383)
------------ -----------
Income before income taxes 4,863 10,226
Income tax provision 1,945 3,617
------------ -----------
Net income $ 2,918 $ 6,609
============ ===========
Earnings Per Common Share:
Basic $ 0.21 $ 0.48
============ ===========
Diluted $ 0.21 $ 0.48
============ ===========
The accompanying notes are an integral part of these condensed financial
statements.
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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999
--------- ---------
Net revenues $ 229,960 $ 296,263
Cost of sales 127,143 158,582
--------- ---------
Gross profit 102,817 137,681
Selling, distribution, general and
administrative expenses 99,263 107,793
--------- ---------
Operating profit 3,554 29,888
Interest expense (2,483) (2,386)
Other income (expense), net 5 (678)
--------- ---------
Income before income taxes 1,076 26,824
Income tax provision 430 10,257
--------- ---------
Net income 646 16,567
Retained earnings, beginning of period 326,305 315,335
Cash dividends, $.28 per share in 2000
and $.84 per share 1999 (3,783) (12,132)
--------- ---------
Retained earnings, end of period $ 323,168 $ 319,770
========= =========
Earnings Per Common Share:
Basic $ 0.05 $ 1.14
========= =========
Diluted $ 0.05 $ 1.13
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
2000 1999
---------- ----------
Operating Activities:
Net income $ 646 $ 16,567
Adjustments to reconcile net income to net
cash provided by operating activities (13,296) (18,821)
---------- ----------
Net cash provided (used) by operating activities (12,650) (2,254)
---------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant & equipment (3,235) (3,401)
Proceeds from sales of property, plant & equipment 74 2,109
---------- ----------
Net cash used by investing activities (3,161) (1,292)
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FINANCING ACTIVITIES:
Cash dividends (3,783) (12,132)
Exchanges and purchases of common stock - (47,086)
Notes and loans payable 12,863 55,495
Other common stock issuance 1,343 568
---------- ----------
Net cash provided (used) by financing activities 10,423 (3,155)
---------- ----------
Effect of exchange rate changes on cash
and cash equivalents (669) (86)
---------- ----------
Decrease in cash and cash equivalents (6,057) (6,787)
Cash and cash equivalents, beginning of year 10,819 17,905
---------- ----------
Cash and cash equivalents, end of quarter $ 4,762 $ 11,118
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
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ENESCO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements and related notes
included herein have been prepared by the Company, without audit except for the
December 31, 1999 condensed balance sheet, which was derived from the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, pursuant to 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, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. The information furnished reflects all normal
recurring adjustments which are, in the opinion of the Company, necessary to a
fair statement of the results for the interim periods. Certain reclassifications
have been made in the 1999 financial statements to conform to the 2000
presentation. It is suggested that these condensed financial statements be read
in conjunction with the financial statements and related notes to consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
1. ACCOUNTING POLICIES:
The Company's financial statements for the three and nine month periods
ended September 30, 2000 have been prepared in accordance with the accounting
policies described in Note 1 to the December 31, 1999 consolidated financial
statements included in the Company's 1999 Annual Report on Form 10-K. The
Company considers all highly liquid securities, including certificates of
deposit with maturities of three months or less, when purchased, to be cash
equivalents. Accounts receivable are stated net of reserves for uncollectible
accounts, returns and allowances of $9.5 million at September 30, 2000 and $10.4
million at December 31, 1999.
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The Company recognizes revenue as merchandise is turned over to the shipper and
a provision for anticipated merchandise returns and allowances is recorded based
upon historical experience. Amounts billed to customers for shipping and
handling orders and collector club subscriptions are netted against the
associated costs. License and royalty fees received by the Company are
recognized as revenue.
The Company paid cash for interest and taxes as follows (in thousands):
Nine Months Ended
September 30
2000 1999
Interest $ 2,162 $ 1,731
Income taxes $ 1,337 $ 2,091
2. COMPREHENSIVE INCOME:
The other comprehensive income consists only of cumulative translation
adjustments. Comprehensive income (loss) for the three and nine month periods
ended September 30, 2000 and 1999 was as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Net income $ 2,918 $6,609 $ 646 $ 16,567
Other comprehensive income:
Cumulative translation adjustments
(no tax effects) (473) 1,120 (2,273) (82)
-------------------- --------------------
Comprehensive income (loss) $ 2,445 $7,729 $(1,627) $ 16,485
==================== ====================
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3. GEOGRAPHIC OPERATING SEGMENTS:
The Company operates in one industry segment, predominately in two
major geographic areas (United States and International). The following tables
summarize the Company's operations by geographic area for the three and nine
month periods ended September 30, 2000 and 1999 (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Net Revenues:
United States $ 65,161 $ 83,000 $ 172,637 $ 233,162
United States intercompany (438) (475) (1,511) (2,217)
International 21,790 25,543 59,732 67,823
International intercompany (176) (663) (898) (2,505)
--------- --------- --------- ---------
Total consolidated $ 86,337 $ 107,405 $ 229,960 $ 296,263
========= ========= ========= =========
Operating Profit (Loss):
United States $ 3,909 $ 9,088 $ (979) $ 24,528
International 2,378 2,599 4,533 5,360
--------- --------- --------- ---------
Total consolidated $ 6,287 $ 11,687 $ 3,554 $ 29,888
========= ========= ========= =========
Transfers between geographic areas 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 amount disclosed in
the Company's December 31, 1999 Annual Report and the basis of geographic area
measurement of sales and operating profit did not change in 2000.
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4. INVENTORY CLASSES:
The major classes of inventories at September 30, 2000 and December 31,
1999 were as follows (in thousands):
September 30, December 31,
2000 1999
Raw materials and supplies $ 784 $ 736
Work in progress 99 94
Finished goods in transit 11,629 13,221
Finished goods 48,854 48,266
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$61,366 $62,317
======= =======
5. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three and nine month periods ended
September 30, 2000 and 1999 consists of the following (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Interest income $ 79 $ 176 $ 1,043 $ 440
Amortization of other assets (532) (514) (1,601) (1,541)
Other, net 117 (45) 563 423
------- ------- ------- -------
$ (336) $ (383) $ 5 $ (678)
======= ======= ======= =======
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6. EARNINGS PER COMMON SHARE (BASIS OF CALCULATIONS):
Basic earnings per common share are based on the average number of
common shares outstanding during the period covered. Diluted earnings per common
share assumes, in addition to the above, a dilutive effect of common share
equivalents during the period. Common share equivalents represent dilutive stock
options and warrants using the treasury stock method.
The number of shares used in the earnings per share calculations for
the three and nine month periods ended September 30, 2000 and 1999 were as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Basic
Average common shares outstanding 13,583 13,716 13,548 14,585
Diluted
Stock options/Warrants 157 81 63 54
--------------- ---------------
Average shares diluted 13,740 13,797 13,611 14,639
=============== ===============
The lower average number of shares outstanding for 2000 primarily
resulted from the repurchase of shares as part of the Company's 1999 repurchase
program.
7. FINANCIAL INSTRUMENTS:
The Company operates globally with various manufacturing and
distribution facilities and product sourcing locations around the world. The
Company may reduce its exposure to fluctuations in foreign interest rates and
exchange rates by creating offsetting positions through the use of derivative
financial instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes.
The notional amount of forward exchange contracts and options is the
amount of foreign currency bought or sold at maturity. The notional amount of
interest rate swaps is the underlying principal amount used in determining the
interest payments exchanged over the life of the swap. The notional amounts are
not a direct measure of the Company's exposure through its use of derivatives.
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The Company periodically uses interest rate swaps to hedge portions of
interest payable on debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable interest
rates.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments, contractual
foreign currency cash flows or obligations, including third party and
inter-company foreign currency transactions. The Company regularly monitors its
foreign currency exposures and ensures that hedge contract amounts do not exceed
the amounts of the underlying exposures.
The Company enters into various short-term foreign exchange agreements
during the year. The purpose of the Company's foreign currency hedging
activities is to protect the Company from risk that the eventual settlement of
foreign currency transactions will be adversely affected by changes in exchange
rates. The Company's various subsidiaries import products in foreign currencies
and from time to time will enter into agreements or build foreign currency
deposits as a partial hedge against currency fluctuations on inventory
purchases. Gains and losses on these agreements are deferred and recorded as a
component of cost of sales when the related inventory is sold. At September 30,
2000, deferred amounts were not material. The Company makes short-term foreign
currency intercompany loans to various international subsidiaries and utilizes
agreements to fully hedge these transactions against currency fluctuations. The
cost of these agreements is included in the interest charged to the subsidiaries
and expensed monthly as the interest is accrued. The intercompany interest
eliminates upon consolidation and any gains and losses on the agreements are
recorded as a component of other income. The Company receives dividends,
royalties and other payments from its subsidiaries and licensees. From time to
time, the Company will enter into foreign currency forward agreements as a
partial hedge against currency fluctuations on these current receivables. Gains
and losses are recognized or the credit or debit offsets the foreign currency
payables. As of September 30, 2000, net deferred amounts on outstanding
agreements were not material. The outstanding agreement amounts (notional value)
at September 30, 2000, were $5.1 million.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
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reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The impact of SFAS 133 on the
Company's financial statements will depend on several factors, including
interpretive guidance issued from the FASB, the extent of the Company's hedging
activities and use of equity and other financial derivatives, the Company's
ability to forecast foreign currency transactions compared to actual results and
the effectiveness of the hedging instruments used. However, the Company does not
believe that SFAS No. 133, when adopted by the Company on January 1, 2001 will
have a material impact on the consolidated financial condition or results of
operations of the Company.
8. TERMINATION OF PRECIOUS MOMENTS ACQUISITION:
The Company entered into an agreement on April 19, 2000 to purchase
certain assets of Precious Moments, Inc. and the Precious Moments Company for
$125 million in cash plus other considerations ranging up to 40% of the cash
purchase price. This transaction was expected to close no later than June 30,
2000. On June 28, 2000 the Company announced that it would not proceed with the
purchase of certain assets of Precious Moments, Inc. and the Precious Moments
Company.
The cost to terminate the agreement of $5.1 million was recorded in the
second quarter. Precious Moments product that was to be used as part of the
consideration for the agreement to purchase certain assets of Precious Moments,
Inc. was written down by $2.9 million. The inventory was written down to reflect
market conditions and to preserve collectibility of continuing product lines.
The majority of the product will be destroyed. In addition, there was $2.2
million of expenses related to the proposed acquisition which were incurred
primarily in the second quarter and included a break-up fee.
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9. TIME WARNER WARRANT
On June 28, 2000, Enesco entered into a licensing agreement with Time
Warner Entertainment Company, LP. Pursuant to this agreement, Enesco issued Time
Warner a warrant to purchase 200,000 shares of Enesco's common stock at an
exercise price of $4.375 per share. This warrant expires June 27, 2005 subject
to certain extensions. The warrant's fair value of $528,800 was determined using
the Black-Scholes pricing model, assuming an expected life of five years, a
dividend yield of 0%, a risk-free interest rate of 6.789% and a volatility
factor of 64.0%.
The fair value of the warrant will be amortized as a component of
royalty expense when the related properties are introduced over the period the
related revenues are recognized.
10. SALE OF SUBSIDIARIES - 1999
During the third quarter of 1999, the Company sold its Via Vermont
assembly and packaging subsidiary located in Mexico for an amount that
approximated the net carrying value of the asset sold.
Also, during the third quarter of 1999, the Company sold its Cosmhogar
subsidiary located in Spain for a nominal value that did not result in a
significant gain or loss. The Company's net investment in the Cosmhogar
subsidiary, formerly part of its discontinued direct selling group sold in
December 1997, was classified as an other non-current asset.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENESCO GROUP, INC.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
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, 1999 which contains the audited
financial statements and notes thereto for the years ended December 31, 1999,
1998, and 1997 and Management's Discussion and Analysis of Financial Condition
and Results of Operations for those respective periods.
RESULTS OF OPERATION:
Net revenue for the third quarter and first nine months of 2000
decreased 20% and 22%, respectively, compared to the same periods in 1999. The
majority of the decline in revenues for both periods continued to be focused
(primarily in the United States) in the card, gift and collectible channels due
in part to starting the year 2000 with unfilled orders down $9 million compared
to 1999 and to first nine months 2000 net new orders down 17% compared to 1999
On August 1, 2000 the Company introduced a new retailer initiative in
the United States called Partners in Profit program, primarily for the card,
gift and collectible channels. In addition to improving the way the Company does
business with retailers, the new program greatly simplifies the type of account
structure and allows all accounts to consistently participate in profit programs
based on performance.
On November 1, 2000, the Company announced a major restructuring of its
United States Retail Specialty Sales Division in an effort to build sales and
better support its card, gift and collectible retailer base. Effective January
1, 2001, the Company in the United States will utilize an employee-based,
account management-focused sales team, eliminating its current structure of card
and gift channel independent contractor sales representatives based throughout
the United States.
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For many months now, the Company has been analyzing its sales structure
and how well it is able to respond to myriad changes in today's card and gift
arena and realized that to remain a leader in the industry, the Company needed
to restructure the United States sales team to construct an even better
partnership with our retailers. This type of organizational redesign has proven
successful in other areas of the Company's sales division over the last two
years, and it is expected that the new sales organization will yield improved
sales results. The majority of the new sales organization will be made up of
current independent contractors, who will receive in-depth account management
training as Enesco employees.
The new employee-based sales organization will have a compensation
structure of salary plus performance-based bonus which will increase fixed costs
at present sales levels by approximately $14 million pre-tax versus the variable
cost independent contractor commission based organization. At present sales
levels, it is expected that this new organizational structure will yield annual
pre-tax savings of approximately $1.5-$2 million due to improved productivity.
The pre-tax impact will vary by quarter based on the quarterly sales volumes.
The transition to the new sales organization is expected to result in one time
pre-tax costs of approximately $800 thousand in the fourth quarter of 2000 and
approximately $3.5 million in 2001, primarily in the first quarter. The actual
one-time pre-tax costs and expected productivity savings are dependent upon
numerous factors and actual results may vary.
Year to date 2000 international sales decreased 10% versus 1999 and
represented approximately 26% of total year to date 2000 sales compared to 22%
in 1999. Local currency international sales were translated into United States
dollars at lower exchange rates in 2000 versus 1999. If the net year to date
2000 local currency sales were translated into United States dollars at the 1999
exchange rates, international sales would have been approximately $2.3 million
higher in 2000.
Year to date September 30, 2000 Precious Moments line sales were down
17% and Cherished Teddies line sales were down 45% compared to 1999. The
Precious Moments line represented 40% of 2000 year to date sales compared to 38%
in 1999. The Cherished Teddies line represented 15% of 2000 year to date sales
compared to 21% in 1999.
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As of September 30, 2000, compared to the same period last year, members of the
Precious Moments Collector Clubs were down approximately 6% and the members of
the Cherished Teddies Collector Clubs were down approximately 12%.
With approximately $19 million in orders for the new Harry Potter line,
total Company unfilled orders as of September 30, 2000 were up approximately 6%
or $4.5 million compared to the same period last year. Harry Potter orders will
begin shipping in the fourth quarter 2000. Total net new orders for the third
quarter 2000 were up 2% versus 1999 and year to date September 30, 2000 net new
orders were down 17% versus 1999. Net orders entered are orders received and
approved by the Company, subject to cancellation for various reasons, including
credit considerations, inventory shortages and customer requests.
Gross profit in 2000 decreased for the third quarter and first nine
months following the sales decrease. Year to date gross profit was also impacted
by a second quarter 2000 $2.9 million inventory write-down related to Precious
Moments product that was to be used as part of the consideration for the
agreement to purchase certain assets of Precious Moments, Inc. The proposed
acquisition was terminated and the inventory was written down to reflect market
conditions and to preserve collectibility of continuing product lines. The
majority of the product will be destroyed. Expressed as a percentage of net
revenue, the gross margin for the third quarter of 2000 was 45% versus 44% for
1999. Excluding the $2.9 million inventory writedown related to the termination
of the Precious Moments acquisition, the gross margin for the first nine months
of 2000 was 46% versus 46.5% for 1999. The differences in margins reflect
channel and product sales mix as all product lines and channels do not have the
same profit margin.
Selling, distribution, general and administrative expenses for the
third quarter of 2000 were down $2.9 million or 8%. Expressed as a percentage of
net revenue, selling, distribution, general and administrative expenses for the
third quarter of 2000 were 37% compared to 33% for 1999. The increase was due to
the impact of lower sales on fixed costs in the United States. Year to date
selling, distribution, general and administrative expenses for 2000 included one
time items of $2.2 million of costs related to the termination of the Precious
Moments acquisition; $2.8 million of severance cost for a Chief Executive
Officer and a $2.7 million settlement gain resulting from the termination of
supplemental retirement plans.
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Excluding one-time items, selling, distribution, general and administrative
expenses, for the first nine months of 2000 were down $10.8 million or 10% from
1999. Expressed as a percentage of net revenues, excluding the one-time items,
year to date 2000 selling, distribution and general and administrative expenses
were 42% compared to 36% for the same period in 1999. The 2000 expenses were a
higher percentage of net revenues due to the impact of lower sales on fixed
costs. The 2000 reductions in expenses, in dollars, were from lower variable
expenses following the sales decrease and reduction in fixed costs.
Third quarter 2000 operating profit was $6.3 million versus $11.7 in
1999. Expressed as a percentage of sales, operating profit was 7.3% this year
versus 10.9% last year. The majority of the decrease was in the United States.
International operating profit margin percentages improved versus 1999. Year to
date operating profit, excluding one-time items was $8.8 million versus $29.9
million in 1999, and expressed as a percentage of sales, operating profit was
3.8% this year versus 10.1% last year. The majority of the operating margin
decrease was in the United States.
INTERNATIONAL ECONOMIES AND CURRENCY:
The value of the U.S. dollar versus international currencies where the
Company conducts business impacts the results of these businesses. 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, the Company's international
operations, including sources of imported products, are subject to the risks of
doing business abroad, including reliance on third party overseas manufacturers,
import or export restrictions and changes in economic and political climates.
The fluctuations in net sales and operating profit margins from quarter to
quarter are partially due to the seasonal characteristics of the Company's
business.
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INTEREST EXPENSE increased slightly in the third quarter this year
versus 1999 due to higher interest rates which offset lower average borrowings.
Interest expense for the first nine months was higher than 1999, principally
from starting the year with higher borrowings versus 1999 and to higher
prevailing interest rates.
OTHER INCOME (EXPENSE), net for the first nine months this year
benefited from interest income of $675 thousand and other income of $625
thousand related to the expiration of a warranty term related to transactions
from prior years for funds held in an escrow account. Other income, net in 1999
benefited from a net gain on the sale of assets in the first quarter of
approximately $350 thousand.
THE PROVISION FOR INCOME TAXES was 40% for the third quarter of 2000
and compared to the 35% for 1999. For the nine month period, the 2000 tax
provision was 40% versus 38% for 1999. The tax provisions for both periods in
1999 reflect the benefit on the third quarter sale of the Company's Mexican
assembly and packaging subsidiary. The actual effective tax rates are dependent
upon numerous factors and actual results may vary.
FINANCIAL CONDITION:
The Company has historically satisfied its capital requirements with
internally generated funds and short-term loans. Working capital requirements
fluctuate during the year and are generally greatest during the third quarter
and lowest at the beginning of the first quarter.
The major sources of funds in the first nine months of 2000 from
operating activities were from depreciation, amortization, lower inventory and a
reduction in long term other assets. Long term other assets decreased by $4.3
million from the release of an escrow account related to the expiration of a
warranty term related to transactions from prior years. Also, long term other
assets decreased by $18.7 million and long term liabilities decreased by $19.6
million, due to the lump sum pay-out of various non-qualified supplemental
retirement plans from a grantor trust and the settlement gain on the
terminations of $2.7 million. Deferred income tax assets decreased due to these
pay-outs and current taxes payable correspondingly decreased.
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The major uses of funds from operating activities in the first nine
months were higher receivables (seasonal sales volumes) and lower accrued
expenses (following the lower sales volumes and due to the timing of payments)
and net lower taxes payable on income resulting from the lower earnings this
year. Accounts payable in 2000 did not include a dividend payable since the
Company has not declared a quarterly dividend since the first quarter of 2000.
The September 30, 2000 decrease in accounts receivable, inventories and accrued
expenses compared to the same period in 1999 was primarily due to the lower
sales volumes in 2000.
The Company has filed and continues to file tax returns with a number
of taxing authorities worldwide. While the Company 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. The
Company 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 the Company's current liquid asset
position and credit facilities, the Company 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.
The major use of cash in investing activities in the first nine months
of 2000 was for capital expenditures. Annual capital expenditure commitments of
$6 million are forecasted for 2000. The 1999 proceeds from the sales of
property, plant and equipment primarily represented the sale of the Company's
former Westfield, MA corporate headquarters.
The major uses of cash in financing activities in the first nine months
of 2000 were for dividends to shareholders. The Company did not declare
dividends in the second and third quarters of 2000. Any future dividends and
resumption of the Company's stock repurchase program will depend on improved
future financial results. The principal sources of the Company's liquidity are
its available cash balances, cash from operations and available financing
alternatives.
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In August 2000, the Company entered into an unsecured $50 million
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
the Company's shares and paying dividends. In addition, the Company is required
to satisfy consolidated net worth, fixed charge coverage ratio and leverage
ratio tests, in each case at the end of each fiscal quarter.
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. International currency fluctuations of $2.3
million for 2000 increased the cumulative translation component which reduced
shareholders' equity in 2000. The translation adjustments to the September 30,
2000 balance sheet that produced the 2000 change in the cumulative translation
component of shareholders' equity were decreases in net working capital by $1.4
million, net property, plant and equipment by $.6 million and other assets by
$.3 million.
FORWARD-LOOKING STATEMENTS
This discussion contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and may
contain the use of forward-looking words or phrases such as "anticipate,"
"believe," "could," "expect," "intend," "may," "planned," "potential," "should,"
"will," and "would" or any variations of such words with similar meanings. These
forward-looking statements are inherently subject to known and unknown risks and
uncertainties. A variety of factors could cause actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statement. These factors include, but are not limited to,
the Company's ability to manufacture, increase capacity, source and ship new and
continuing product in a timely manner and customers' and consumers' acceptance
of those products at prices that will be sufficient to profitably recover
development,
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manufacturing, marketing, royalty and other costs of the products; economic
conditions including higher fuel prices, currency fluctuations and government
regulation and other actions in the various markets in which the Company
operates throughout the world; the inventory policies of retailers, together
with the increased reliance by retailers on quick response inventory management
techniques, which increase the risk of underproduction of popular items,
overproduction of less popular items and failure to achieve tight and compressed
shipping schedules; the impact of competition on revenues, margins and other
aspects of the Company'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; the assessment by the Company of revenues from its
2001 product line and of the impact on that assessment from discontinued product
lines and product lines with reduced expectations; the impact of market
conditions, and the impact of competition that could delay or increase the cost
of implementation of the sales reorganization program or alter planned actions
and reduce actual results; and other risks and uncertainties as are or may be
detailed from time to time in the Company's public announcements and filings
with the SEC such as Forms 8-K, 10-Q and 10-K. Additional information concerning
risk and uncertainties is contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed under the Securities Exchange Act of
1934. The Company undertakes no obligation to revise the forward-looking
statements contained in this discussion or to update the forward-looking
statements to reflect events or circumstances occurring after the date of this
discussion.
ADDITIONAL INFORMATION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 101, Revenue Recognition in Financial Statement (SAB
101) which addresses certain criteria for revenue recognition. SAB 101, as
amended by SAB 101A and SAB 101B, outlines the criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company must implement any applicable provisions of
SAB 101 no later than the fourth quarter of the fiscal year ending December 31,
2000. The Company is currently evaluating the effect of SAB 101 on the Company's
financial statements and current disclosures, but does not expect any
significant effect.
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In September 2000, the Emerging Issues Task Force reached a consensus
on Issue 00-10, Accounting for Shipping and Handling Fees and Costs (Issue
00-10). Issue 00-10, requires that all amounts billed to customers related to
shipping and handling should be classified as revenues. In addition, Issue
00-10, specifies that the classification of shipping and handling cost is an
accounting policy decision that should be disclosed pursuant to APB 22,
Disclosure of Accounting Policies. A company may adopt a policy of including
shipping and handling costs in cost of sales. If shipping and handling costs are
not included in cost of sales, a company should disclose both the amount of such
cost and the line item on the income statement which includes those costs. Issue
00-10 will be effective for the Company no later than the fourth quarter of the
fiscal year ending December 31, 2000. As reported in Note 1 of the annual
consolidated financial statements, currently, amounts billed to customer for
shipping and handling fees are netted against the associated costs. Issue 00-10
will require a reclassification of prior period income statements which will
increase both revenues and costs, but have no impact on reported income. The
Company is currently evaluating any other effect of Issue 00-10 on the Company's
financial statements and current disclosures.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item either is set forth in Exhibit 13 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999 as
updated by Note 7 to the Consolidated Condensed Financial Statements included in
Item 1 herein, or is immaterial.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fleet Bank Financing Documents
10.2 Jeffrey A. Hutsell Release Agreement
27 Financial Data Schedule for the Nine Months Ended
September 30, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
Quarter for which this report is filed.
All other items hereunder are omitted because either such item is inapplicable
or the response to it is negative.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENESCO GROUP, INC.
(Registrant)
Date: November 14, 2000 /s/ John F. Cauley
---------------------------------------
John F. Cauley
Interim Chief Executive Officer
Date: November 14, 2000 /s/ Allan G. Keirstead
---------------------------------------
Allan G. Keirstead
Chief Administrative and Financial
Officer
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EXHIBIT INDEX
Reg. S-K
Item 601 Exhibit
--------- -------
10.1 Fleet Bank Financing Documents
10.2 Jeffrey A. Hutsell Release Agreement
27 Financial Data Schedule for the
Nine Months Ended September 30, 2000
26
