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, 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.
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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)
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,
1999 1998
---- ----
Shares Outstanding:
Common Stock with
Associated Rights 13,477,936 15,953,929
Total number of pages
contained herein 41
Index to Exhibits is
on page 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
(In Thousands)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and Certificates of Deposit $ 11,118 $ 17,905
Accounts Receivable, Net 127,272 86,171
Inventories 68,062 81,740
Prepaid Expenses 4,477 4,672
Current Tax Assets 12,981 15,199
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Total Current Assets 223,910 205,687
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PROPERTY, PLANT & EQUIPMENT, at cost 80,769 84,988
Less Accumulated Depreciation 50,338 51,375
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30,431 33,613
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OTHER ASSETS:
Goodwill and Other Intangibles, Net 39,171 40,816
Other 25,414 27,287
Deferred Tax Assets 12,333 12,546
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76,918 80,649
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Total Assets $ 331,259 $ 319,949
============= =============
The accompanying notes are an integral part of these condensed financial statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
(In Thousands)
September 30, December 31,
1999 1998
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and Loans Payable $ 63,395 $ 7,900
Accounts Payable 21,046 25,373
Federal, State and Foreign Taxes on Income 63,067 56,614
Accrued Expenses
Payroll and Commissions 6,275 5,385
Royalties 6,843 6,826
Post-Retirement Benefits 1,264 5,280
Other 23,436 23,453
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Total Current Liabilities 185,326 130,831
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LONG-TERM LIABILITIES:
Post-Retirement Benefits 30,952 31,494
Deferred Tax Liabilities 6,564 7,043
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Total Long-Term Liabilities 37,516 38,537
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SHAREHOLDERS' EQUITY:
Common Stock 3,154 3,154
Capital in Excess of Par Value 48,739 48,506
Retained Earnings 319,770 315,335
Accumulated Other Comprehensive Income (2,340) (2,258)
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369,323 364,737
Less - Shares Held in Treasury, at Cost (260,906) (214,156)
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Total Shareholders' Equity 108,417 150,581
------------- ------------
Total Liabilities and Equity $ 331,259 $ 319,949
============= ============
The accompanying notes are an integral part of these condensed financial statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(In thousands, except per share amounts)
1999 1998
---- ----
Net Sales $ 107,405 $ 110,170
Cost of Sales 60,584 60,645
-------------- --------------
Gross Profit 46,821 49,525
Selling, Distribution, General and
Administrative Expenses 35,134 36,614
-------------- --------------
Operating Profit 11,687 12,911
Interest Expense (1,078) (988)
Other Income (Expense), Net (383) (812)
-------------- --------------
Income Before Income Taxes 10,226 11,111
Income Taxes 3,617 4,827
-------------- --------------
Net Income $ 6,609 $ 6,284
============== ==============
Earnings Per Common Share:
Basic $ 0.48 $ 0.39
============== ==============
Diluted $ 0.48 $ 0.39
============== ==============
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(In thousands, except per share amounts)
1999 1998
---- ----
Net Sales $ 296,263 $ 355,559
Cost of Sales 158,582 190,304
-------------- --------------
Gross Profit 137,681 165,255
Selling, Distribution, General and
Administrative Expenses 107,793 122,851
-------------- --------------
Operating Profit 29,888 42,404
Interest Expense (2,386) (2,590)
Other Income (Expense), Net (678) (1,914)
-------------- --------------
Income Before Income Taxes 26,824 37,900
Income Taxes 10,257 16,346
-------------- --------------
Net Income 16,567 21,554
Retained Earnings, Beginning of Period 315,335 355,806
Cash Dividends, $.84 per share in 1999 and 1998 (12,132) (13,590)
-------------- --------------
Retained Earnings, End of Period $ 319,770 $ 363,770
============== ==============
Earnings Per Common Share:
Basic $ 1.14 $ 1.32
============== ==============
Diluted $ 1.13 $ 1.32
============== ==============
The accompanying notes are an integral part of these condensed financial statements.
ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(In Thousands)
1999 1998
---- ----
OPERATING ACTIVITIES:
Net Income $ 16,567 $ 21,554
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities (18,342) (35,973)
------------------ ------------------
Net Cash Provided (Used) by Operating Activities (1,775) (14,419)
------------------ ------------------
INVESTING ACTIVITIES:
Purchase of Property, Plant & Equipment (3,401) (3,090)
Proceeds from Sales of Property, Plant & Equipment 2,109 510
Deferred Tax Liabilities (479) (33)
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Net Cash Provided (Used) by Investing Activities (1,771) (2,613)
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FINANCING ACTIVITIES:
Cash dividends (12,132) (13,590)
Exchanges and Purchases of Common Stock (47,086) (37,441)
Notes and Loans Payable 55,495 43,543
Exercise of Stock Options - 2,085
Other Common Stock Issuance 568 406
------------------ ------------------
Net Cash Provided (Used) by Financing Activities (3,155) (4,997)
------------------ ------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (86) (208)
------------------ ------------------
Increase (Decrease) in Cash and Cash Equivalents (6,787) (22,237)
Cash and Cash Equivalents, Beginning of Year 17,905 35,724
------------------ ------------------
Cash and Cash Equivalents, End of Quarter $ 11,118 $ 13,487
================== ==================
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 September 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 nine months
ended September 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 are stated net
of reserves for uncollectible accounts, returns and allowances of $11.9
million at September 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):
Nine Months Ended
September 30
-------------
1999 1998
---- ----
Interest $ 1,731 $ 3,233
Income taxes $ 2,091 $ 22,093
2. COMPREHENSIVE INCOME:
The other comprehensive income consists only of cumulative
translation adjustments. Comprehensive income (loss) for the three and nine
months ended September 30, 1999 and 1998 was as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 6,609 $ 6,284 $16,567 $21,554
Other Comprehensive Income
Cumulative translation adjustments
(no tax effects) 1,120 146 (82) (227)
------- ------- -------- --------
Comprehensive Income $ 7,729 $ 6,430 $16,485 $21,327
======= ======= ======== ========
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 months ended September 30, 1999 and 1998 (in thousands):
Three Months Ended Nine Months Ended
Geographic Areas September 30 September 30
- ---------------- ------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales:
United States $ 83,000 $ 86,815 $233,162 $293,356
United States intercompany (475) (789) (2,217) (3,804)
International 25,543 25,175 67,823 69,545
International intercompany (663) (1,031) (2,505) (3,538)
---------- --------- --------- ---------
Total consolidated $ 107,405 $110,170 $296,263 $355,559
========== ========= ========= =========
Operating Profit:
United States $ 9,088 $ 10,403 $ 24,528 $ 38,055
International 2,599 2,508 5,360 4,349
---------- --------- --------- --------
Total consolidated $ 11,687 $ 12,911 $ 29,888 $ 42,404
========== ========= ========= ========
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 September 30, 1999 and
December 31, 1998 were as follows (in thousands):
September 30, December 31,
1999 1998
---- ----
Raw materials and supplies $ 711 $ 1,185
Work in progress 237 396
Finished goods in-transit 8,027 12,202
Finished goods 59,087 67,957
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$ 68,062 $81,740
======== =======
5. OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three and nine months ended
September 30, 1999 and 1998 consists of the following (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income $ 176 $ 11 $ 440 $ 632
Amortization of other assets (514) (774) (1,541) (2,420)
Other, net (45) (49) 423 (126)
------- ------- -------- -------
$ (383) $ (812) $ (678) $(1,914)
======= ======= ======== =======
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 nine months ended September 30, 1999 and 1998 were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Basis
Average Common
Shares Outstanding 13,716 16,035 14,585 16,315
Diluted
Stock Options 81 67 54 67
------ ------ ------ ------
Average Shares Diluted 13,797 16,102 14,639 16,382
====== ====== ====== ======
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 interest rate swap agreement expired on October 28, 1999 and was not
renewed.
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, 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, 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, 1999, net
deferred amounts on outstanding agreements were not material. The
outstanding agreement amounts (notional value) at September 30, 1999 are
$4.2 million.
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. SALE OF SUBSIDIARIES
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 assets sold.
Also, during the third quarter, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ENESCO GROUP, INC.
THREE AND NINE MONTHS ENDED SEPTEMBER 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 third quarter of 1999 decreased 3%, compared to
the same quarter last year and net sales for the first nine months of 1999
decreased 17% 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 management.
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 Significant reduction in reorders from late May through September
due to softness in the Company's card, gift and collectible
channels and even more conservative dealer reorder patterns.
In order 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.
The Company continues to analyze the economic return for all of
its product lines, to eliminate unnecessary costs and reduce working
capital requirements.
Year-to-date 1999 International sales decreased 1% from 1998 and
represented approximately 22% of total 1999 sales compared to 19% in 1998.
Local currency International sales were translated into United States
dollars at lower exchange rates in 1999 versus 1998. If the year-to-date
1999 local currency sales were translated into United States dollars at the
1998 exchange rates, sales would have been approximately $1.5 million
higher.
The Precious Moments line represented approximately 38% of 1999
year-to-date sales compared to 39% in 1998. The Cherished Teddies line
represented 21% of 1999 year-to-date sales compared 20% in 1998. As of
September 30, 1999, compared to the same period last year, members of the
Precious Moments Collector Clubs were down approximately 17% and the
members of the Cherished Teddies Collector Clubs were down approximately
13%.
Total Company unfilled orders as of the end of the third quarter
were down approximately $7 million or 8% compared to the same period last
year. Comparable 1999 year-to-date net new order intake (excluding close
outs) was down approximately 9% 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.
The lower new order intake trend has continued into the fourth
quarter and, if it does not improve, the Company will be reporting a sales
and income decrease in the fourth quarter of 1999 compared to 1998.
The Company's 1999 gross profit margin, expressed as a percentage
of net sales, was 44% and 47% for the quarter and nine months respectively,
compared to the 1998 margins of 45% and 47%. The differences in margins are
due to product sales mix, as all product lines do not have the same gross
profit margin.
Selling, distribution, general and administrative expenses, which
are largely fixed, decreased 4% in the third quarter of 1999 versus 1998
and represented 33% of net sales in both 1999 and 1998. Selling,
distribution, general and administrative expenses decreased 12% in the
first nine months of 1999 versus 1998, but represented 36% 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 year-to-date 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, 1999's operating profit
decreased 9% in the third quarter and 30% for the first nine months
compared to 1998. All of the decrease in operating profit was from the
United States. International operating profit increased for both the
quarter and year-to-date periods when compared to 1998.
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, decreased slightly in
the third quarter and first nine months of 1999 when compared to 1998.
OTHER INCOME/EXPENSE, net in 1999 benefited from a net gain on the
sale 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 35% in the third quarter and 38%
in the first nine 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, expected mix between the United States and
International earnings, and a United States tax benefit on the third
quarter sale of the Company's Mexican assembly and packaging subsidiary.
The 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 1999 from
operating activities were from net income, depreciation, amortization,
lower levels of inventory and a net increase in current taxes payable, due
primarily to timing of payments. Accounts receivable increased 48% from
year-end 1998, but decreased 12% from the third quarter of 1998. The
decrease from September 1998 reflects lower sales and lower amount of trade
receivable days sales outstanding. 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
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 1999 was for capital expenditures. Capital expenditure
commitments for $6 million are forecasted for 1999. Proceeds from the sales
of property, plant and equipment primarily represents the sale of the
Company's former Westfield, MA corporate headquarters.
During the third quarter the Company sold the shares in its
Mexican assembly and packaging subsidiary for its net book carrying value.
The assets sold were primarily accounts receivable of $284,000, inventories
of $1,004,000 and property, plant and equipment of $458,000, net of
liabilities of $206,000.
Also, during the third quarter the Company sold the shares in its
Spanish manufacturing subsidiary (Cosmhogar), formerly part of its
discontinued direct selling group, for a nominal value. The net investment
in the subsidiary had been recorded in other non-current assets.
The major uses of cash in financing activities in the first nine
months of 1999 were for dividends to shareholders and purchases of the
Company's common stock. During the first nine months this year, the Company
repurchased 2.4 million shares for $47.1 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 September 30, 1999, approximately 1.0 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 million at September 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 in effect 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 has been completed. Results have
validated the process followed to achieve compliance.
Impact assessment is complete. Regarding internal issues, the
Company has remedied and tested all mission critical systems and 95% of all
systems. This was accomplished through internal correction or the normal
replacement of existing systems, computer software and hardware. The
Company is confident that all correction and replacement work, including
testing and implementation, will be completed by December 1999.
The capital and operating costs 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.
Regarding external issues, 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 systemization for
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 operation 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.
The need for contingency plans has been addressed as part of the
Company's Year 2000 program. While the Company currently believes that its
own systems will be Year 2000 compliant, it cannot guarantee the full
compliance of third parties, therefore, contingency plans, as appropriate,
have been developed. These include purchasing of additional inventory as a
contingency to keep its dealers supplied with product in the case of
delivery problems from its suppliers. Also, contingency plans of key
suppliers and other third parties are being assessed with joint plans being
developed where appropriate. The contingency plans have been subjected to
an independent audit.
Notice: Various statements in this discussion of Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements of the
Company's expectations, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance.
These forward-looking statements are subject to various risk factors which
may materially affect the Company's efforts to achieve Year 2000
compliance. These risk factors include the inability of the Company to
complete the plans and modification that it has identified, the failure of
software vendors to deliver the upgrades and repairs to which they have
committed, the wide variety of information technology systems and
components, both hardware and software, that must be evaluated and the
large number of vendors and customers with which the Company interacts. The
Company's assessment of the effects of Year 2000 on the Company are based,
in part, upon information received from third parties upon which the
Company reasonably relied which must be considered as a risk factor that
might affect the Company's Year 2000 efforts. The Company is attempting to
reduce the risks by utilizing an organized approach, extensive testing, and
allowance of ample contingency time to address issues identified by tests.
This Year 2000 Readiness Disclosure (the "Disclosure") is made pursuant to
the Year 2000 Information Readiness Disclosure Act, Public Law 105-271.
This Disclosure is not a warranty, and it does not alter the terms of
service for any customer. This Disclosure should not be used for purposes
of making investment decisions.
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
- Peter R. Johnson Separation 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: November 10, 1999 /s/ Jeffrey A. Hutsell
-----------------------------------------
Jeffrey A. Hutsell
President and Chief Executive Officer
Date: November 10, 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 Peter R. Johnson Separation Agreement 26
27 Financial Data Schedule 41