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, 1999
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
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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)
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,
1999 1998
---- ----
Shares Outstanding:
Common Stock with 13,821,359 16,088,446
Associated Rights
Total number of pages
contained herein 31
Index to Exhibits is
on page 23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
(In Thousands)
June 30, December 31,
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and Certificates of Deposits $ 11,097 $ 17,905
Accounts Receivable, Net 99,637 86,171
Inventories 72,689 81,740
Prepaid Expenses 3,984 4,672
Current Tax Assets 13,193 15,199
---------- --------
Total Current Assets 200,600 205,687
---------- --------
PROPERTY, PLANT & EQUIPMENT, at cost 79,881 84,988
Less Accumulated Depreciation 49,002 51,375
---------- --------
30,879 33,613
---------- --------
OTHER ASSETS:
Goodwill and Other Intangibles, Net 39,615 40,816
Other 27,980 27,287
Deferred Tax Assets 11,996 12,546
---------- -------
79,591 80,649
---------- -------
Total Assets $ 311,070 $ 319,949
========== ========
The accompanying notes are an integral part of these condensed financial
statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
(In Thousands)
June 30, December 31,
1999 1998
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and Loans Payable $ 41,709 $ 7,900
Accounts Payable 24,193 25,373
Federal, State and Foreign Taxes on Income 59,821 56,614
Accrued Expenses--
Payroll and Commissions 6,320 5,385
Royalties 6,979 6,826
Post-Retirement Benefits 1,906 5,280
Other 22,072 23,453
---------- ----------
Total Current Liabilities 163,000 130,831
---------- ----------
LONG-TERM LIABILITIES:
Post-Retirement Benefits 31,299 31,494
Deferred Tax Liabilities 6,564 7,043
---------- ----------
Total Long-Term Liabilities 37,863 38,537
---------- ----------
SHAREHOLDERS' EQUITY:
Common Stock 3,154 3,154
Capital in Excess of Par Value 48,689 48,506
Retained Earnings 316,982 315,335
Accumulated Other Comprehensive Income (3,460) (2,258)
---------- ----------
365,365 364,737
Less - Shares Held in Treasury, at Cost (255,158) (214,156)
---------- -----------
Total Shareholders' Equity 110,207 150,581
---------- -----------
Total Liabilities & Equity $ 311,070 $ 319,949
========== ===========
The accompanying notes are an integral part of these condensed financial statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED JUNE 30, 1999 and 1998 (Unaudited)
(In thousands, except per share amounts)
1999 1998
---- ----
Net Sales $ 94,933 $ 137,169
Cost of Sales 50,205 72,207
------- ------------
Gross Profit 44,728 64,962
Selling, Distribution, General and
Administrative Expenses 34,089 42,920
------- ------------
Operating Profit 10,639 22,042
Interest expense (895) (846)
Other income (expense), net (376) (558)
------- ------------
Income Before Income Taxes 9,368 20,638
Income taxes 3,748 8,874
------- -----------
Net Income $ 5,620 $ 11,764
======= ===========
Earnings Per Common Share:
Basic $ 0.39 $ 0.72
======= ============
Diluted $ 0.39 $ 0.72
======= ============
The accompanying notes are an integral part of these condensed financial
statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
(In thousands, except per share amounts)
1999 1998
---- ----
Net Sales $ 188,858 $ 245,389
Cost of Sales 97,998 129,659
-------------- ------------
Gross Profit 90,860 115,730
Selling, Distribution, General and
Administrative Expenses 72,659 86,237
-------------- ------------
Operating Profit 18,201 29,493
Interest expense (1,308) (1,602)
Other income (expense), net (295) (1,102)
-------------- ------------
Income Before Income Taxes 16,598 26,789
Income taxes 6,640 11,519
-------------- ------------
Net Income 9,958 15,270
Retained Earnings, beginning of period 315,335 355,806
Cash dividends, $.56 per share in 1999 and 1998 (8,311) (9,118)
-------------- ------------
Retained Earnings, end of period $ 316,982 $ 361,958
============= ============
Earnings Per Common Share:
Basic $ 0.67 $ 0.93
============= ============
Diluted $ 0.66 $ 0.92
============== ============
The accompanying notes are an integral part of these condensed financial
statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
(In Thousands)
1999 1998
---- ----
OPERATING ACTIVITIES:
Net Income $ 9,958 $ 15,270
Adjustments to reconcile net income to net
cash provided by operating activities (552) (20,599)
--------- ------------
Net cash provided (used) by operating activities 9,406 (5,329)
--------- ------------
INVESTING ACTIVITIES:
Purchase of property, plant & equipment (2,123) (2,085)
Proceeds from sales of property, plant & equipment 2,030 214
Deferred tax liabilities (479) (22)
--------- ------------
Net cash provided (used) by investing activities (572) (1,893)
--------- ------------
FINANCING ACTIVITIES:
Cash dividends (8,311) (9,118)
Exchanges and purchases of common stock (41,268) (34,005)
Notes and loans payable 33,809 33,379
Exercise of stock options - 2,031
Other common stock issuance 449 402
--------- ------------
Net cash provided (used) by financing activities (15,321) (7,311)
--------- ------------
Effect of exchange rate changes on cash
and cash equivalents (321) (179)
--------- ------------
Increase (decrease) in cash and cash equivalents (6,808) (14,712)
Cash and cash equivalents, beginning of year 17,905 35,722
--------- ------------
Cash and cash equivalents, end of quarter $ 11,097 $ 21,010
=========== ============
The accompanying notes are an integral part of these condensed financial
statements.
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, 1998 condensed balance sheet, which was derived from the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
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. The June 30, 1998 consolidated statement of cash flows has
been restated to reflect deferred taxes as separate classifications. 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, 1998.
1. ACCOUNTING POLICIES:
The Company's financial statements for the three and six months
ended June 30, 1999 have been prepared in accordance with the accounting
policies described in Note 1 to the December 31, 1998 consolidated
financial statements included in the Company's 1998 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 were net of reserves
for uncollectible accounts, returns and allowances of $11.7 million at June
30, 1999 and $9.3 million at December 31, 1998.
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.
The Company paid cash for interest and taxes as follows (in
thousands):
Six Months Ended
June 30
-------
1999 1998
---- ----
Interest $ 985 $ 2,412
Income taxes $ 1,294 $ 16,631
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, 1999 and 1998 was as follows (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Net Income $ 5,620 $ 11,764 $ 9,958 $ 15,270
Other Comprehensive Income
Cumulative translation adjustments (348) (475) (1,202) (373)
(no tax effects)
------- -------- -------- ---------
Comprehensive Income $ 5,272 $ 11,289 $ 8,756 $ 14,897
======= ======== ======== =========
/TABLE>
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
quarter and six months ended June 30, 1999 and 1998 (in thousands):
Three Months Ended Six Months Ended
Geographic Areas June 30 June 30
- ---------------- ------- -------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales:
United States $ 76,249 $ 118,061 $ 151,296 $ 207,726
United States intercompany (893) (1,403) (1,742) (3,015)
International 20,497 21,516 41,146 43,185
International intercompany (920) (1,005) (1,842) (2,507)
-------- ---------- --------- ---------
Total consolidated $ 94,933 $ 137,169 $ 188,858 $ 245,389
======== ========= ========= =========
Operating Profit:
United States $ 9,316 $ 21,188 $ 15,553 $ 27,830
International 1,323 854 2,648 1,663
------- -------- -------- ---------
Total consolidated $ 10,639 $ 22,042 $ 18,201 $ 29,493
======== ======== ======== =========
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, 1998 Annual Report and the basis of
geographic area measurement of sales and operating profit did not change in
1999.
4. INVENTORY CLASSES:
The major classes of inventories at June 30 and December 31 were
as follows (in thousands):
June 30, December 31,
1999 1998
---- -----
Raw materials and supplies $ 1,510 $ 1,185
Work in progress 382 396
Finished goods in-transit 8,662 12,202
Finished goods 62,135 67,957
-------- --------
$ 72,689 $ 81,740
======== ========
5. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three and six months ended
June 30, 1999 and 1998 consists of the following (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Interest income $ 117 $ 278 $ 264 $ 621
Amortization of other assets (512) (773) (1,027) (1,646)
Other, net 19 (63) 468 (77)
-------- ------- -------- ---------
$ (376) $ (558) $ (295) $ (1,102)
======== ======= ======== =========
6. EARNINGS PER COMMON SHARE (BASIS OF CALCULATION):
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, 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Basic
Average Common
Shares Outstanding 14,312 16,264 14,972 16,442
Diluted
Stock Options 91 84 52 84
Average Shares Diluted 14,403 16,348 15,024 16,526
The lower average number of shares for 1999 primarily resulted
from the repurchase of shares as part of the Company's 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.
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. In October 1996, the Company entered
into a three-year interest rate swap with a notional amount of $50 million
to effectively convert variable interest on debt to a fixed rate of 6.12%.
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, 1999, 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, technical service fees, 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, 1999, net deferred amounts on outstanding agreements were not material.
The outstanding agreement amounts (notional value) at June 30, 1999, are
$9.6 million U.S. dollars.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ENESCO GROUP, INC.
THREE AND SIX MONTHS ENDED JUNE 30, 1999
The information set forth below should be read in conjunction with
the unaudited condensed consolidated 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, 1998 which
contains the audited financial statements and notes thereto for the years
ended December 31, 1998, 1997, and 1996 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, 1998, 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 OPERATIONS:
Net sales in the second quarter of 1999 decreased 31%, compared
to the second quarter last year and net sales for the first six months of
1999 decreased 23% compared to 1998. Most of the sales decrease was in the
United States and was due primarily to the following:
o Starting 1999 with unfilled orders down approximately $28
million compared to the same period last year.
o A significant year-on-year reduction of stock keeping units
due to profitability analysis.
o Reduction of closeout revenue due to better inventory
movement.
o Continued reductions in dealer inventory levels.
o Continued improvement in dealer service and deliveries,
allowing dealers to order less in advance and shipping
product when the dealer requests versus when the product is
available.
o Significantly lower than anticipated reduction in reorders
for in-stock products from late May through June due to
softness in the retail giftware market and even more
conservative dealer reorder patterns.
Additionally, to further improve customer communications,
relationships and service in the United States, during the second quarter
this year the Company combined its two independent sales representative
divisions into a single independent sales force representing all the
Company's product lines.
In the United States, the Company is continuing the process of
analyzing the total economic return for all of its product lines, with the
objective to improve the supply chain economics from factory to customer
and to phase out those product lines that do not have adequate returns. As
these lines are phased out, the absence of sales from these lines will
reduce sales volumes. This process is being expanded to the international
locations during 1999.
Year-to-date 1999 International Sales decreased 3% and represented
approximately 21% of total 1999 sales compared to 17% in 1998. The Precious
Moments line represented approximately 40% of total 1999 and 1998
year-to-date sales. The Cherished Teddies line represented 22% of 1999
year-to-date sales compared to 21% in 1998.
Total Company comparable unfilled orders as of the end of the
second quarter were up approximately $8 million or 9% compared to the same
period last year. Comparable 1999 year-to-date net new order intake
(excluding close outs) was down approximately 6% compared to the same
period in 1998. 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 as a percentage of sales was 47% for the second
quarter this year and last year, and gross profit year-to-date as a
percentage of sales improved to 48% compared to 47% last year primarily due
to improved sales mix reflecting the Company's efforts to eliminate low
margin products and to manage and lower inventories. To further improve
gross margins and reduce fixed costs and inventories, the Company in July
1999 sold its assembly and packaging subsidiary in Mexico for approximately
book value. The Company will continue to purchase products from the new
owners.
Selling, distribution, general and administrative expenses,
decreased 21% in the second quarter of 1999 versus 1998, but represented
36% of 1999 net sales compared to 31% in 1998. Selling, distribution,
general and administrative expenses, decreased 16% in the first six months
of 1999 versus 1998, but represented 39% of 1999 net sales compared to 35%
in 1998. The 1999 expenses were a higher percentage of sales principally
due to the impact of lower sales on fixed costs. The 1999 reductions in
expenses were from lower variable expenses (approximately 10% of sales) due
to the lower sales volumes and reductions from cost controls and work force
reductions compared to 1998.
Due to the factors described above, operating profit decreased 52%
in the second quarter and 38% for the first six-months compared to 1998.
All of the decrease in operating profit was the United States.
International operating profit increased.
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. In
addition to the currency risks, the Company's international operations,
including sources of imported products, are subject to other risks of doing
business abroad, including 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, net of investment income, increased in the
second quarter and first six months of 1999 compared to 1998 due to higher
average borrowing levels resulting from borrowings to fund the stock buy
back program.
OTHER INCOME, net in 1999 benefited from a net gain on the sales
of assets in the first quarter of 1999 of approximately $350 thousand and a
reduction in the amount of goodwill amortization resulting from the lower
amount of goodwill to be amortized after the 1998 $46 million write-off.
THE PROVISION FOR INCOME TAXES of 40% in the second quarter and
first six months of 1999 was lower than comparable periods of 1998, due
primarily to the impact of lower goodwill amortization in 1999 which does
not receive a tax benefit and the Company's expectation of 1999 income mix
between the United States and international locations. 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 1999 from
operating activities were from net income, depreciation, amortization and
lower levels of inventory. Accounts receivable increased 16% from year-end
1998 and decreased 25% from the second quarter 1998. The decrease from June
1998 reflects lower sales, but the higher amount of days sales outstanding
is primarily due to the timing of sales during the second quarter this year
compared to 1998 and slower payments. Current taxes payable increased, and
accounts payable and accrued expenses decreased from year-end levels due to
timing of payments and seasonal sales volumes.
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 major use of cash in investing activities in the first six
months of 1999 was for capital expenditures. Proceeds from the sales of
property, plant and equipment primarily represents the sale of the
Company's former Westfield, MA corporate headquarters. Capital expenditure
commitments for $6 million are forecasted for 1999. The level of changes of
marketable securities from period to period principally represents
investment alternatives versus certificates of deposit, time deposits, and
inter-company loans.
The major uses of cash in financing activities in the first six
months of 1999 were for dividends to shareholders and purchases of common
stock. During the first six months this year, the Company repurchased 2.054
million shares for $41.268 million. The Company has an authorized program
to purchase shares of stock for the Company treasury from time to time in
the open market or in private transactions, depending on market and
business conditions, and may utilize funds for this purpose in the future.
As of June 30, 1999, approximately 1.4 million shares remained available
for purchase under the program. The Company's earnings, cash flow, and
available debt capacity have made and make stock repurchases, in the
Company's view, one of its best investment alternatives. The aggregate
exercise price of the total number of stock options outstanding was $94.8
million at June 30, 1999, and the Company could receive some or all of
these funds in the future if the options are exercised.
The principal sources of the Company's liquidity are its available
cash balances, cash from operations and available financing alternatives.
The Company is not aware of any trends, events, demands, commitments or
uncertainties which reasonably can be expected to have a material effect on
the liquidity of the Company and its ability to meet anticipated
requirements for working capital, dividends, capital expenditures and the
stock repurchase program.
YEAR 2000 COMPLIANCE PROGRAM
A Company-wide program has been initiated by management to update
all necessary information technology and non-technology systems to achieve
Year 2000 compliance. This effort has been in progress since early 1997.
The program includes impact assessment, correction, testing and
implementation stages. There is continual review and monitoring of progress
and achievement against plan.
In 1998 the Company engaged independent consulting resources to
audit and evaluate its approach and plans to achieve Year 2000 compliance.
This audit was completed at a cost of approximately $300,000. The results
were used to confirm and enhance, where necessary, the Year 2000 program
plans. A follow-up independent audit to confirm current compliance is in
progress.
Impact assessment is complete, although there is ongoing effort to
confirm and monitor the Year 2000 programs of critical suppliers, customers
and third parties on whom the Company relies. Based on the results of the
impact assessment, if the Company's suppliers, customers and third parties
do not address the Year 2000 issues in a timely manner, there could be a
material financial risk to the Company.
The Company's product vendors and customer bases are fragmented
and generally are not dependent on computer control or systematization of
their business operations. Management, therefore, believes that the
greatest risks presented by potential Year 2000 failures of third parties
are those which would affect the general economy or certain industries,
such as may occur if there were insufficient electric power or other
utilities needed for the Company's operations or manufacture of its
products or insufficient reliable means of transporting the Company's
products. While such failures could affect important operations of the
Company, either directly or indirectly, in a significant manner, the
Company cannot at present estimate either the likelihood or the potential
cost of such failures.
Regarding internal issues, the Company has remedied and tested all
mission critical systems and 90% of all systems. This was accomplished
through internal correction or the normal replacement of existing systems,
computer software and hardware. All correction and replacement work,
including testing and implementation, is expected to be completed by
December 1999.
The capital and operating cost of addressing the Year 2000 issues
are anticipated to be approximately $1,000,000 (excluding internal labor
costs) and are included in the planned capital and operating investment
budgets. The cost breakdown is estimated at approximately 80% capital and
20% expense. Most Year 2000 project work is being accomplished through the
use of internal resources. While this effort is substantial, it has often
been combined with other planned systems improvements, replacements and
maintenance projects. Thus, the Year 2000 work is not adversely affecting
planned improvements in the Company's systems, computer applications and
hardware environment.
The need for contingency plans will be addressed as part of the
Company's Year 2000 program. While the Company currently anticipates that
its own systems will be Year 2000 compliant, it cannot guarantee the full
compliance of third parties, therefore, contingency plans, as appropriate,
are being developed.
The Company is currently assessing the alternative of purchasing
for 1999 delivery, higher levels of inventory as a contingency to keep its
dealers supplied with product in the case of delivery problems from its
suppliers.
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, 1998 as updated by Note 7 to the Consolidated Condensed Financial
Statements included in Item 1 herein, or is immaterial.
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
- Jeffrey A. Hutsell Employment Agreement
- Financial Data Schedule
(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.
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 6, 1999
/s/ Jeffrey A. Hutsell
-----------------------------------------
Jeffrey A. Hutsell
President and Chief Executive Officer
Date: August 6, 1999
/s/ Allan G. Keirstead
-----------------------------------------
Allan G. Keirstead
Chief Administrative and Financial
Officer
EXHIBIT INDEX
Reg. S-K
Item 601 Exhibit 10-Q Page No.
- --------- ------- -------------
10 Jeffrey A. Hutsell Employment Agreement 24
27 Financial Data Schedule 31