10-Q 1 e10-q.txt QUARTERLY REPORT 1 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 June 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. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-1864170 ------------------------------------ ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 Windsor Drive, Itasca, Illinois 60143 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 630-875-5300 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A ------------------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] June 30, 2000 1999 ---- ---- Shares Outstanding: Common Stock with 13,577,032 13,821,359 Associated Rights 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENESCO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 (UNAUDITED) (IN THOUSANDS) JUNE 30, DECEMBER 31, 2000 1999 --------- --------- ASSETS CURRENT ASSETS: Cash and certificates of deposit $ 2,248 $ 10,819 Accounts receivable, net 74,079 81,553 Inventories 66,013 62,317 Prepaid expenses 3,757 3,763 Taxes on income 10,708 12,680 --------- --------- Total current assets 156,805 171,132 --------- --------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, at cost 83,412 82,244 Less accumulated depreciation 53,659 51,251 --------- --------- Property, plant and equipment, net 29,753 30,993 --------- --------- OTHER ASSETS: Goodwill and other intangibles, net 37,201 38,410 Other 2,311 25,438 Deferred income taxes 3,258 11,394 --------- --------- Total other assets 42,770 75,242 --------- --------- TOTAL ASSETS $ 229,328 $ 277,367 ========= ========= The accompanying notes are an integral part of these condensed financial statements. 3 ENESCO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 (UNAUDITED) (IN THOUSANDS) JUNE 30, DECEMBER 31, 2000 1999 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes and loans payable $ 27,927 $ 28,178 Accounts payable 18,677 21,296 Taxes on income 31,549 43,196 Accrued expenses Payroll and commissions 3,886 5,337 Royalties 6,062 6,565 Postretirement benefits 3,455 4,740 Other 17,382 19,386 --------- --------- Total current liabilities 108,938 128,698 --------- --------- LONG-TERM LIABILITIES: Postretirement benefits 8,071 28,273 Deferred income taxes 5,005 5,964 --------- --------- Total long-term liabilities 13,076 34,237 --------- --------- SHAREHOLDERS' EQUITY: Common stock 3,154 3,154 Capital in excess of par value 48,348 48,754 Retained earnings 320,250 326,305 Accumulated other comprehensive income (4,643) (2,843) --------- --------- 367,109 375,370 Less - shares held in treasury, at cost (259,795) (260,938) --------- --------- Total shareholders' equity 107,314 114,432 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 229,328 $ 277,367 ========= ========= The accompanying notes are an integral part of these condensed financial statements. 4 ENESCO GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 --------- --------- Net revenues $ 71,739 $ 94,933 Cost of sales 41,502 50,205 --------- --------- Gross profit 30,237 44,728 Selling, distribution, general and administrative expenses 34,358 34,089 --------- --------- Operating profit (loss) (4,121) 10,639 Interest expense (738) (895) Other income (expense), net 798 (376) --------- --------- Income (loss) before income taxes (4,061) 9,368 Income tax provision (benefit) (1,625) 3,748 --------- --------- Net income (loss) $ (2,436) $ 5,620 ========= ========= Earnings (Loss) Per Common Share: Basic $ (0.18) $ 0.39 ========= ========= Diluted $ (0.18) $ 0.39 ========= ========= The accompanying notes are an integral part of these condensed financial statements. 5 ENESCO GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 --------- --------- Net revenues $ 143,623 $ 188,858 Cost of sales 79,356 97,998 --------- --------- Gross profit 64,267 90,860 Selling, distribution, general and administrative expenses 67,000 72,659 --------- --------- Operating profit (loss) (2,733) 18,201 Interest expense (1,395) (1,308) Other income (expense), net 341 (295) --------- --------- Income (loss) before income taxes (3,787) 16,598 Income tax provision (benefit) (1,515) 6,640 --------- --------- Net income (loss) (2,272) 9,958 Retained earnings, beginning of period 326,305 315,335 Cash dividends, $.28 per share in 2000 and $.56 per share in 1999 (3,783) (8,311) --------- --------- Retained earnings, end of period $ 320,250 $ 316,982 ========= ========= Earnings (Loss) Per Common Share: Basic $ (0.17) $ 0.67 ========= ========= Diluted $ (0.17) $ 0.66 ========= ========= The accompanying notes are an integral part of these condensed financial statements. 6 ENESCO GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS) 2000 1999 --------- --------- OPERATING ACTIVITIES: Net income (loss) $ (2,272) $ 9,958 Adjustments to reconcile net income (loss) to net cash provided by operating activities (225) (1,031) --------- --------- Net cash provided (used) by operating activities (2,497) 8,927 --------- --------- INVESTING ACTIVITIES: Purchase of property, plant & equipment (2,419) (2,123) Proceeds from sales of property, plant & equipment 75 2,030 --------- --------- Net cash used by investing activities (2,344) (93) --------- --------- FINANCING ACTIVITIES: Cash dividends (3,783) (8,311) Exchanges and purchases of common stock - (41,268) Notes and loans payable (251) 33,809 Other common stock issuance 737 449 --------- --------- Net cash used by financing activities (3,297) (15,321) --------- --------- Effect of exchange rate changes on cash and cash equivalents (433) (321) --------- --------- Decrease in cash and cash equivalents (8,571) (6,808) Cash and cash equivalents, beginning of year 10,819 17,905 --------- --------- Cash and cash equivalents, end of quarter $ 2,248 $ 11,097 ========= ========= The accompanying notes are an integral part of these condensed financial statements. 7 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 management, necessary to a fair statement of the results for the interim periods. Certain reclassifications have been made in 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 six months ended June 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 June 30, 2000 and $10.4 million at December 31, 1999. 8 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): Six Months Ended June 30 ------- 2000 1999 --------- --------- Interest $ 1,498 $ 985 Income taxes $ 1,278 $ 1,294 2. COMPREHENSIVE INCOME: The other comprehensive income consists only of cumulative translation adjustments. Comprehensive income (loss) for the three and six months ended June 30, 2000 and 1999 was as follows (in thousands): Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ------- ------ ------- ------- Net income (loss) $(2,436) $5,620 $(2,272) $ 9,958 Other comprehensive income: Cumulative translation adjustments (no tax effects) (1,297) (348) (1,800) (1,202) ---------------- ----------------- Comprehensive income $(3,733) $5,272 $(4,072) $ 8,756 ================ ================= 9 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 six months ended June 30, 2000 and 1999 (in thousands): Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ------- ------- -------- -------- NET REVENUES: United States $52,425 $75,562 $107,476 $150,162 United States intercompany (488) (893) (1,073) (1,742) International 20,067 21,184 37,942 42,280 International intercompany (265) (920) (722) (1,842) ------------------- -------------------- Total consolidated $71,739 $94,933 $143,623 $188,858 =================== ==================== OPERATING PROFIT (LOSS): United States $(5,166) $ 9,248 $ (4,888) $ 15,440 International 1,045 1,391 2,155 2,761 ------------------- -------------------- Total consolidated $(4,121) $10,639 $ (2,733) $ 18,201 =================== ==================== 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. 10 4. INVENTORY CLASSES: The major classes of inventories at June 30, 2000 and December 31, 1999 were as follows (in thousands): June 30, December 31, 2000 1999 -------- -------- Raw materials and supplies $ 754 $ 736 Work in progress 135 94 Finished goods in transit 11,843 13,221 Finished goods 53,281 48,266 -------- -------- $ 66,013 $ 62,317 ======== ======== 5. OTHER INCOME (EXPENSE), NET: Other income (expense), net for the three and six months ended June 30, 2000 and 1999 consists of the following (in thousands): Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ----- ------ -------- -------- Interest income $ 812 $ 117 $ 964 $ 264 Amortization of other assets (534) (512) (1,069) (1,027) Other, net 520 19 446 468 ----------------- -------------------- $ 798 $ (376) $ 341 $ (295) ================== ==================== 11 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 using the treasury stock method. The number of shares used in the earnings per share calculations for the three and six months ended June 30, 2000 and 1999 were as follows (in thousands): Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ------ ------ ------ ------ Basic Average common shares outstanding 13,559 14,312 13,533 14,972 Diluted Stock options - 91 - 52 ---------------- ----------------- Average shares diluted 13,559 14,403 13,533 15,024 ================ ================ 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. 12 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 June 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 June 30, 2000, net deferred amounts on outstanding agreements were not material. The outstanding agreement amounts (notional value) at June 30, 2000, are $11.5 million. 13 In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and 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. Management 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 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. 14 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 $581,800 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. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENESCO GROUP, INC. THREE AND SIX MONTHS ENDED JUNE 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. Forward-looking statements, in this Quarterly Report on Form 10-Q as well as in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements pertaining to the Company involve risks and uncertainties, including, without limitation, risks detailed from time to time in the Company's periodic reports and other information filed with the Securities and Exchange Commission. RESULTS OF OPERATION: Net revenues in the second quarter and first six months of 2000 decreased 24% compared to the same periods in 1999. The majority of the decline in revenues for both periods continued to be focused in the United States card, gift and collectible channels due in part to starting the year 2000 with unfilled orders down approximately $9 million compared to 1999 and to first six months 2000 net new orders down 27% compared to 1999. Approximately $5.7 million of the United States sales decrease in the second quarter this year was attributed to a shift in sales to the third quarter as a result of the Company's new product delivery schedule. This new product delivery system, previously announced, is designed to improve customer service and to reduce the Company's working capital requirements. 16 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. Year to date 2000 international sales decreased 8% versus 1999 and represented approximately 26% of total year to date 2000 sales compared to 21% in 1999. Net 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, sales would have been approximately $1 million higher in 2000. The Precious Moments line represented 43% of 2000 year to date sales compared to 40% in 1999. The Cherished Teddies line represented 16% of 2000 year to date sales compared to 22% in 1999. As of June 30, 2000, compared to the same period last year, members of the Precious Moments Collector Clubs were down approximately 8% and the members of the Cherished Teddies Collector Clubs were down approximately 12%. Total Company unfilled orders as of June 30, 2000 were down approximately $18 million, or 17%, compared to the same period last year. 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 second quarter and first six months following the sales decrease and due to a $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. Excluding the $2.9 million inventory write-down, the Company's 2000 gross profit margin, expressed as a percentage of net revenues, was 46% and 47% for the second quarter and six months respectively, compared to the 1999 gross profit margins of 47% and 48%. The differences in margins are due to channel and product sales mix, as all product lines and channels do not have the same gross profit margins. 17 Selling, distribution, general and administrative expenses for the second quarter 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. Excluding the one time items, 2000 selling, distribution, general and administrative expenses, which are largely fixed, expressed as a percentage of net revenues were 45% for the second quarter and six months, compared to 36% for the second quarter and 38% for the six month in 1999. The 2000 expenses were a higher percentage of net revenues principally 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. Due to factors described above, the Company in 2000 recorded an operating loss for the second quarter and six months compared to operating profit for both periods in 1999. 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. INTEREST EXPENSE decreased in the second quarter this year versus 1999 due to lower borrowings, partially off-set by higher rates. Interest expense for the first six months was higher than 1999, principally from starting the year with higher borrowings versus 1999 and to higher prevailing interest rates. 18 OTHER INCOME, net in the second quarter 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 (BENEFIT) FOR INCOME TAXES was 40% for all periods. 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 six months of 2000 from operating activities were from depreciation, amortization, lower accounts receivable due to lower sales 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. The major uses of funds from operating activities in the first six months were higher inventories (seasonal requirements) 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 before tax loss this year. Additionally, 2000 payables decreased versus June 1999 and year-end 1999 since the Company did not declare a second quarter dividend. 19 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 six 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 six months of 2000 were for dividends to shareholders. The Company did not declare a second quarter 2000 dividend due to anticipated financing covenants related to the now terminated Precious Moments acquisition. 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. 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. 20 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. 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4 Warrant Agreement with Warner Bros. Consumer Products for 200,000 shares of Common Stock issued on June 28, 2000. 10 Notice of Intent to Terminate dated July 12, 2000 of Allan G. Keirstead under Relocation Agreement. 27 Financial Data Schedule for the Six Months Ended June 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. 22 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: August 14, 2000 /s/ John F. Cauley ------------------------------------------ John F. Cauley Interim Chief Executive Officer Date: August 14, 2000 /s/ Allan G. Keirstead ------------------------------------------ Allan G. Keirstead Chief Administrative and Financial Officer 23 EXHIBIT INDEX Reg. S-K Item 601 Exhibit 10-Q Page No. --------- ------- ------------ 4 Warrant Agreement with Warner Bros. ___ Consumer Products for 200,000 shares Common Stock issued on June 29, 2000 10 Notice of Intent to Terminate dated ___ July 12, 2000 of Allan G. Keirstead under Relocation Agreement 27 Financial Data Schedule for the ___ Six Months Ended June 30, 2000