-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OlkKYbjpnXt0/u//9v8HuLb0kaMpdbFIND85o1l87fXRoO5J2KngbBTpFQ3M7KuQ anyra7M2h9EQKDhPXkzLAg== 0000950172-98-001191.txt : 19981116 0000950172-98-001191.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950172-98-001191 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENESCO GROUP INC CENTRAL INDEX KEY: 0000093542 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 041864170 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09267 FILM NUMBER: 98745683 BUSINESS ADDRESS: STREET 1: 333 WESTERN AVE CITY: WESTFIELD STATE: MA ZIP: 01085 BUSINESS PHONE: 4135623631 FORMER COMPANY: FORMER CONFORMED NAME: STANHOME INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STANLEY HOME PRODUCTS INC DATE OF NAME CHANGE: 19820513 10-Q 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 September 30, 1998 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.) 333 Western Avenue, Westfield, Massachusetts 01085 - ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 413-562-3631 - ----------------------------------------------------------------------- (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 [ ] September 30, 1998 1997 ---- ---- Shares Outstanding: Common Stock with 15,953,929 17,419,333 Associated Rights Total number of pages contained herein 27 Index to Exhibits is on page 26 PART I. FINANCIAL INFORMATION ------------------------------ ITEM. 1. FINANCIAL STATEMENTS ENESCO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS SEPTEMBER 30, 1998 and DECEMBER 31, 1997 (Unaudited) (In Thousands) September 30, December 31, 1998 1997 ---- ---- ASSETS CURRENT ASSETS: Cash and certificates of deposit $ 13,487 $ 35,724 Accounts receivable, net 144,351 101,731 Inventories 83,777 107,752 Prepaid expenses 2,999 2,482 -------- -------- Total current assets 244,614 247,689 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost 84,619 82,414 Less - Accumulated depreciation and amortization 50,628 46,836 -------- -------- 33,991 35,578 -------- -------- OTHER ASSETS: Goodwill and other intangibles, net 87,226 89,596 Other 29,568 27,539 -------- -------- 116,794 117,135 -------- -------- $395,399 $400,402 ======== ======== The accompanying notes are an integral part of these condensed financial statements. ENESCO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS SEPTEMBER 30, 1998 and DECEMBER 31, 1997 (Unaudited) (In Thousands) September 30, December 31, 1998 1997 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes and loans payable $ 51,918 $ 8,388 Accounts payable 36,055 43,576 Federal, state and foreign taxes on income 36,410 42,158 Accrued expenses-- Payroll and commissions 11,003 13,576 Royalties 7,458 6,767 Vacation, sick and postretirement benefits 4,759 4,853 Pensions and profit sharing 2,105 6,128 Other 21,789 24,958 -------- -------- Total current liabilities 171,497 150,404 -------- -------- LONG-TERM LIABILITIES: Postretirement benefits 22,201 21,084 -------- -------- Total long-term liabilities 22,201 21,084 -------- -------- SHAREHOLDERS' EQUITY: Common stock 3,154 3,154 Capital in excess of par value 48,282 46,858 Retained earnings 363,770 355,806 Accumulated other comprehensive income ( 1,746) ( 1,519) -------- -------- 413,460 404,299 Less - Shares held in treasury, at cost 211,759 175,385 -------- -------- Total shareholders' equity 201,701 228,914 -------- -------- $395,399 $400,402 ======== ======== The accompanying notes are an integral part of these condensed financial statements. ENESCO GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 and 1997 (Unaudited) (In thousands, except per share amounts) 1998 1997 ---- ---- NET SALES $110,170 $128,261 COST OF SALES 60,645 72,570 -------- -------- GROSS PROFIT 49,525 55,691 SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES 36,614 55,951 -------- -------- OPERATING PROFIT (LOSS) 12,911 ( 260) Interest expense ( 988) ( 1,678) Other expense, net ( 812) ( 978) -------- -------- INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS 11,111 ( 2,916) Income taxes 4,827 ( 164) -------- -------- INCOME (LOSS) OF CONTINUING OPERATIONS, NET OF TAXES 6,284 ( 2,752) INCOME (LOSS) OF DISCONTINUED OPERATIONS, NET OF TAXES - ( 700) NET LOSS ON SALE OF DIRECT RESPONSE - - -------- -------- NET INCOME (LOSS) $ 6,284 ($ 3,452) ======== ======== EARNINGS (LOSS) PER COMMON SHARE, BASIC: CONTINUING OPERATIONS $ .39 ($ .16) DISCONTINUED OPERATIONS - ( .04) SALE OF DIRECT RESPONSE - - ----- ----- TOTAL $ .39 ($ .20) ===== ===== DILUTED: CONTINUING OPERATIONS $ .39 ($ .16) DISCONTINUED OPERATIONS - ( .04) SALE OF DIRECT RESPONSE - - ----- ----- TOTAL $ .39 ($ .20) ===== ===== 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, 1998 and 1997 (Unaudited) (In thousands, except per share amounts) 1998 1997 ---- ---- NET SALES $355,559 $367,323 COST OF SALES 190,304 198,406 -------- -------- GROSS PROFIT 165,255 168,917 SELLING, DISTRIBUTION, GENERAL AND ADMINISTRATIVE EXPENSES 122,851 143,077 -------- -------- OPERATING PROFIT 42,404 25,840 Interest expense ( 2,590) ( 5,368) Other expense, net ( 1,914) ( 2,044) -------- -------- INCOME BEFORE INCOME TAXES FROM CONTINUING OPERATIONS 37,900 18,428 Income taxes 16,346 9,228 -------- -------- INCOME OF CONTINUING OPERATIONS, NET OF TAXES 21,554 9,200 INCOME OF DISCONTINUED OPERATIONS, NET OF TAXES - 2,158 NET LOSS ON SALE OF DIRECT RESPONSE - ( 35,000) -------- -------- NET INCOME (LOSS) 21,554 ( 23,642) RETAINED EARNINGS, beginning of period 355,806 403,805 Cash dividends, $.84 per share in 1998 and 1997 ( 13,590) ( 14,786) -------- -------- RETAINED EARNINGS, end of period $363,770 $365,377 ======== ======== EARNINGS (LOSS) PER COMMON SHARE, BASIC: CONTINUING OPERATIONS $1.32 $ .52 DISCONTINUED OPERATIONS - .12 SALE OF DIRECT RESPONSE - ( 1.98) ----- ----- TOTAL $1.32 ($1.34) ===== ===== DILUTED: CONTINUING OPERATIONS $1.32 $ .51 DISCONTINUED OPERATIONS - .12 SALE OF DIRECT RESPONSE - ( 1.96) ----- ----- TOTAL $1.32 ($1.33) ===== ===== 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, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 ---- ---- OPERATING ACTIVITIES: Net income (loss) $21,554 ($23,642) Less - Net income discontinued operations - ( 2,158) - Loss on sale of Direct Response - 35,000 Adjustments to reconcile continuing operations net income to net cash provided by operating activities ( 36,006) ( 62,600) Operating activities of discontinued operations - 47,178 ------- ------- Net cash used by operating activities ( 14,452) ( 6,222) ------- ------- INVESTING ACTIVITIES: Purchase of property, plant and equipment ( 3,090) ( 3,122) Proceeds from sales of property, plant and equipment 510 669 Investing activities of discontinued operations - ( 1,195) ------- ------- Net cash used by investing activities ( 2,580) ( 3,648) ------- ------- FINANCING ACTIVITIES: Cash dividends ( 13,590) ( 14,786) Exchanges and purchases of common stock ( 37,441) ( 17,376) Notes and loans payable 43,543 40,856 Exercise of stock options 2,085 2,005 Other common stock issuance 406 237 Financing activities of discontinued operations - 6,071 ------- ------- Net cash provided (used) by financing activities ( 4,997) 17,007 ------- ------- Effect of exchange rate changes on cash and cash equivalents ( 208) ( 1,158) ------- ------- Increase/(decrease) in cash and cash equivalents ( 22,237) 5,979 Cash and cash equivalents, beginning of year 35,722 10,306 ------- ------- Cash and cash equivalents, end of quarter $13,485 $16,285 ======= =======
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, 1997 condensed balance sheet, which was derived from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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. 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, 1997. As reported in the Company's Form 10-Q for the quarter ended March 31, 1998, at its annual meeting in April 1998, the Company's shareholders approved a proposal to change its corporate name to "Enesco Group, Inc.", to reflect the Company's transformation into a singularly focused designer and marketer of branded gifts and collectibles. The Stanhome Inc. name was sold as part of the December 1997 agreement to sell the majority of the business of the Direct Selling discontinued operation. 1. ACCOUNTING POLICIES: The Company's financial statements for the nine months ended September 30, 1998 have been prepared in accordance with the accounting policies described in Note 1 to the December 31, 1997 consolidated financial statements included in the Company's 1997 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 $12,640,000 at September 30, 1998 and $11,146,000 at December 31, 1997. 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 ------------------ 1998 1997 ---- ---- Interest $ 3,233 $4,438 Income taxes $22,093 $5,161 2. COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards Board ("FASB") adopted a new standard on reporting comprehensive income, which established standards for reporting and display of comprehensive income (net income (loss) together with other non-owner changes in equity) and its components in a full set of general purpose financial statements. The standard became effective for the Company in 1998 and required reclassification of comparative financial statements for prior years. The other comprehensive income consists only of cumulative translation adjustments. Comprehensive income (loss) for the quarters and nine months ended September 30, 1998 and 1997 was as follows (in thousands):
Quarters Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- NET INCOME (LOSS) $ 6,284 ($ 3,452) $21,554 ($23,642) ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME: Cumulative translation adjustments 146 ( 1,355) ( 227) ( 11,122) ------- ------- ------- ------- TOTAL OTHER COMPREHENSIVE INCOME 146 ( 1,355) ( 227) ( 11,122) ------- ------- ------- ------- COMPREHENSIVE INCOME (LOSS) $ 6,430 ($ 4,807) $21,327 ($34,764) ======= ======= ======= =======
3. DISCONTINUED OPERATIONS: In 1997, the Company discontinued and sold the majority of the Hamilton Direct Response and Worldwide Direct Selling operations. In connection with the Hamilton sale, the Company recorded a $35 million after tax charge in the first quarter of 1997. Accordingly, the applicable financial statements and related notes present these two business segments as discontinued operations. Therefore, the operating results of these two business segments have been segregated and reported as discontinued operations in the Consolidated Statements of Income and Statements of Cash Flow. There have not been any significant changes in the loss provisions for closing costs and any other loss provisions previously established in connection with the discontinued operations. All of the provisions are anticipated to be used. 4. INVENTORY CLASSES: The major classes of inventories at September 30 and December 3l were as follows (in thousands): September 30, December 31, 1998 1997 ---- ---- Raw materials and supplies $ 1,328 $ 1,719 Work in process 376 930 Finished goods in transit 11,717 14,865 Finished goods 70,356 90,238 -------- -------- $ 83,777 $107,752 ======== ======== 5. OTHER EXPENSE, NET: Other expense, net for the quarters and nine months ended September 30, 1998 and 1997 consists of the following (in thousands): Quarters Ended September 30 -------------- 1998 1997 ---- ---- Interest income $ 11 $ 60 Amortization of other assets ( 774) ( 902) Other, net ( 49) ( 136) ------ ------ ($ 812) ($ 978) ====== ====== Nine Months Ended September 30 ----------------- 1998 1997 ---- ---- Interest income $ 632 $1,117 Amortization of other assets ( 2,420) ( 2,921) Other, net ( 126) ( 240) ------ ------ ($1,914) ($2,044) ====== ====== 6. EARNINGS PER COMMON SHARE (BASIS OF CALCULATION): In February 1997, the Financial Accounting Standards Board adopted a new standard on accounting for earnings per share. The standard became effective for the Company at December 31, 1997 and required restatement of prior years' earnings per share. 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 computations for the third quarter and first nine months were as follows (in thousands): Third Quarter First Nine Months --------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Basic Average common shares outstanding 16,035 17,432 16,315 17,652 Diluted Stock options 67 109 67 109 ------ ------ ------ ------ Average shares diluted 16,102 17,541 16,382 17,761 The lower average number of shares for the third quarter and first nine months of 1998 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 intercompany 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, 1998, 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 September 30, 1998, net deferred amounts on outstanding agreements were not material. The outstanding agreement amounts (notional value), at September 30, 1998, are $7.4 million U.S. dollars. Management does not believe that FASB No. 133, "Accounting for Derivative Instruments and Hedging Activities", when adopted by the Company on January 1, 2000, will have a material impact on the consolidated financial condition or results of operations of the Company. 8. STOCK PURCHASE RIGHTS: Pursuant to action by the Enesco Group, Inc. Board of Directors on July 22, 1998, effective with the expiration on September 19, 1998 of the stock purchase rights presently existing under the Company's Stockholder Rights Plan, one new right for each outstanding share of the Company's common stock ("common stock") will be issued (a "New Right") under a Renewed Rights Agreement. Each New Right initially will represent the right to purchase one share of common stock for $125. The New Rights will only become exercisable, or separately transferable, promptly after the Company announces that a person has acquired or tendered for 15% or more, or promptly after a tender offer commences that could result in ownership of 15% or more, of the common stock then outstanding. If the New Rights become exercisable after any person acquires or tenders for 15% or more of the common stock then outstanding (except through an offer for all common stock that has been approved by the Enesco Group, Inc. Board of Directors), each New Right not owned by that person or related parties will enable its holder to purchase, at the New Right's exercise price, common stock (or other securities or assets, or a combination thereof) having double the value of the exercise price. In the event of certain merger or asset sale transactions with another party, similar terms would apply to the purchase of that party's common stock. The New Rights, which have no voting power, expire on July 22, 2008, subject to extension. Upon approval by the Enesco Group, Inc. Board of Directors, the New Rights may be redeemed for $.01 each under certain conditions. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENESCO GROUP, INC. QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 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, 1997 which contains the audited financial statements and notes thereto for the years ended December 31, 1997, 1996 and 1995 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, 1997, 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. As reported in the Company's Form 10-Q for the quarter ended March 31, 1998, at the Company's Annual Meeting on April 23, 1998, the shareholders approved a resolution authorizing the Company to change its name from Stanhome Inc. to Enesco Group, Inc., to reflect the Company's transformation into a singularly focused designer and marketer of branded gifts and collectibles. Commencing on May 1, 1998, shares of the Company's common stock traded on the New York Stock Exchange and the Pacific Exchange under the symbol "ENC". RESULTS OF OPERATIONS: Net sales in 1998 were 14% below 1997 in the third quarter bringing the first nine months sales 3% below 1997. Most of the sales decrease was in the United States and reflected decreased retailer ordering due, in part, to high retail inventory levels combined with the Company's initiatives of tighter credit policies, lower inventories, fewer stock keeping units and increased focus on core brands. Year-to-date International sales decreased slightly and represented approximately 17% of total 1998 and 1997 year-to-date sales. The Precious Moments line represented 39% of the 1998 year-to-date sales compared to 37% in 1997 and the Cherished Teddies line represented 20% of 1998 and 1997 year-to-date sales. In the United States, the Company is in 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 return. As these lines are phased out during the next year, the absence of sales from these lines will reduce sales volumes. Partly reflecting the reduction of product offerings and improved deliveries, total unfilled orders as of September 30, 1998 were down approximately $15 million or 15% compared to September 30, 1997. This trend is expected to continue. Also, the reduction in unfilled orders was due to slowing retail demand due, in part, to high retail inventory levels of certain products and to changing buying practices of many retailers, reflecting, in part, the improved deliveries of products. In response to the high retail inventories, the number of new product introductions for the Precious Moments and Cherished Teddies lines has been reduced and promotions have been offered to assist retailers in moving inventories. Gross profit as a percentage of net sales improved to 45.0% for the third quarter this year compared to 43.4% in 1997 and gross profit year-to-date as a percentage of net sales in 1998 improved to 46.5% compared to 46.0% last year primarily due to favorable sales mix reflecting, in part, the Company's efforts to manage and lower inventory levels. Selling, distribution, general and administrative expenses, excluding a third quarter 1997 $18 million pre-tax charge to downsize and move the Company's Westfield, MA corporate headquarters, decreased 3.5% in the third quarter of 1998 versus 1997 but represented 33.2% of 1998 net sales compared to 29.6% in 1997. Selling, distribution, general and administrative expenses, excluding the 1997 downsizing charge, decreased 1.8% in the first nine months of 1998 versus 1997 but represented 34.6% of 1998 net sales compared to 34.1% in 1997. The 1998 expenses were a higher percentage of sales principally due to the impact of lower sales on fixed costs. The 1998 reduction in expenses was due primarily to lower general and administrative expenses in the United States. The reductions were from cost controls, the start of benefits from downsizing the Company's Westfield, MA corporate headquarters, and a reduction of compensation resulting from the expiration on December 31, 1997 of an executive officer's employment agreement that had entitled a bonus in an amount equal to five percent of Enesco's pre-tax income, with certain adjustments, less a base salary. Year-to-date results include a first quarter 1998 net pre-tax expense of approximately one million dollars resulting from a workforce reduction in the United States. Operating profit, excluding the 1997 downsizing charge, in 1998 decreased 27% in the third quarter and 3% for the first nine months compared to 1997 and represented, for the year-to-date, 11.9% of sales in 1998 and 1997, due to the factors described above. Most of the decrease in operating profit was in the United States. International operating profit decreased slightly. 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 in the third quarter and first nine months of 1998 compared with 1997, from lower borrowing levels due to the utilization of cash proceeds from the sale of discontinued operations in 1997 and, in 1998, a reduction in accounts receivable and inventories versus 1997. Other expense, net is principally the amortization of goodwill and was less in the first nine months of 1998 compared to 1997 due to certain categories being fully amortized. THE PROVISION FOR INCOME TAXES from continuing operations of 43% for the first nine months of 1998 was lower than the 50% year-to-date provision last year due primarily to a higher percentage of total before tax income from the United States, which has a lower effective tax rate. This is also the primary reason for the differences in taxes between years for the third quarter. DISCONTINUED OPERATIONS: In April 1997, the Company announced the sale of the majority of its Hamilton Direct Response business and a plan to sell its Direct Selling business. The majority of the Direct Selling business was sold in December 1997. The Company's Direct Selling Cosmhogar manufacturing subsidiary, located in Spain, was not sold. The Cosmhogar facility and certain other assets of the Direct Selling Group remain to be sold. In July 1998, the Company paid Yves Rocher, the purchaser of the Direct Selling business, $1.875 million ($1.125 million after taxes) from previously established reserves to settle and compromise certain asserted claims relating to the sale of the Direct Selling business. The applicable financial statements and related notes present these two divested business segments as discontinued operations. Therefore, the operating results of these two divested business segments have been segregated and reported as discontinued operations in the Consolidated Statements of Income and Statements of Cash Flows. Note 3, Discontinued Operations, to the Consolidated Condensed Financial Statements provides additional information on the two discontinued operations. 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 1998 from operating activities for continuing operations were from net income, depreciation, amortization and lower levels of inventories. Inventories decreased compared to year-end 1997 as progress was made in alleviating the high levels of inventory. Due to seasonal sales volume, accounts receivable increased compared to year-end 1997. Accounts receivable in the third quarter of 1998 decreased 18% compared to the third quarter of 1997. The decrease occurred from the lower sales in the third quarter 1998 and from the impact of the implementation of tighter credit controls and improved collection performance. Accounts payable and accrued expenses decreased from year-end levels due to lower seasonal volumes and to reductions in the amounts remaining to be paid from the 1997 provision to downsize corporate headquarters and in payments due relating to the 1997 sales of discontinued operations. Taxes payable decreased due to seasonal volumes and payments of taxes related to the sale of the Direct Selling business. The major use of cash in investing activities in the first nine months of 1998 was for capital expenditures. Capital expenditure commitments for $8 million are forecasted for 1998. The level of changes of marketable securities from period to period principally represents investment alternatives versus certificates of deposit, time deposits, and intercompany loans. The major uses of cash in financing activities in the first nine months of 1998 were for dividends to shareholders and purchases of common stock, which were primarily financed with increased borrowings. At September 30, 1998, all open borrowings were bank demand notes with a weighted-average interest rate of approximately 6%. During the first nine months this year, the Company repurchased 1.321 million shares for $36.6 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, 1998, .9 million shares remained available for purchase under the program. On October 21, 1998, the Company's Board of Directors authorized the repurchase of up to 2.5 million shares of the Company's outstanding common stock under its ongoing stock repurchase program, to be used for general corporate purposes or employee benefit plans. Share purchases may be made from time to time in the open market or in private transactions, depending on market and business conditions. 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 major source of funds from financing activities was from higher seasonal borrowings. The aggregate exercise price of the total number of stock options outstanding was $90 million at September 30, 1998, and the Company could receive some or all of these funds in the future if the options are exercised. 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 accumulated comprehensive income in shareholders' equity. 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. 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. Impact assessment is essentially complete, except for an ongoing effort to confirm 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. Regarding internal issues, the Company is actively working to remedy all Year 2000 concerns identified. This is being 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 mid-year 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 with the use of internal resources. While this effort is substantial, it has often been combined with other planned systems improvement, replacement 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 Company has engaged independent consulting resources to audit and evaluate its approach and plans to achieve Year 2000 compliance. This audit has been completed at a cost of approximately $300,000. The results are being used to confirm, and enhance where necessary, the current Year 2000 program plans. The need for contingency plans will be addressed as part of the Year 2000 program. While the Company currently anticipates that its own systems and those of critical business partners will be Year 2000 compliant, contingency plans, as appropriate, will be developed. Critical external business support functions such as shipping and transportation, banking, the Far East supply chain and customs will be included in this assessment. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Financial Data Schedule (b) Reports on Form 8-K - A Current Report on Form 8-K dated July 23, 1998 was filed by Enesco Group, Inc. with the Securities and Exchange Commission on July 23, 1998 reporting the renewal by the Board of Directors of Enesco Group, Inc. of its existing Rights Agreement through the adoption of a Renewed Rights Agreement dated as of July 22, 1998 between Enesco Group, Inc. and ChaseMellon Shareholder Services, L.L.C. - Current Reports on Form 8-K/A dated July 31, 1998 and September 11, 1998 were filed by Enesco Group, Inc. with the Securities and Exchange Commission on July 31, 1998 and September 11, 1998, respectively, amending and restating the pro forma condensed consolidated statements of income for the nine months ended September 30, 1997 and for the year ended December 31, 1996 originally filed as Exhibit 99.2 to the Current Report on Form 8-K filed by Enesco Group, Inc. with the Securities and Exchange Commission on December 31, 1997. 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 11, 1998 /s/ Jeffrey A. Hutsell ----------------------------------------- Jeffrey A. Hutsell President and Chief Executive Officer Date: November 11, 1998 /s/ Allan G. Keirstead ----------------------------------------- Allan G. Keirstead Chief Administrative and Financial Officer EXHIBIT INDEX Reg. S-K Item 601 Exhibit 10-Q Page No. - --------- ------- ------------- 27 Financial Data Schedule 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS 9-MOS DEC-31-1998 DEC-31-1997 SEP-30-1998 SEP-30-1997 13,487 0 0 0 156,991 0 12,640 0 83,777 0 244,614 0 84,619 0 50,628 0 395,399 0 171,497 0 0 0 0 0 0 0 3,154 0 198,547 0 395,399 0 355,559 0 355,559 0 190,304 0 190,304 0 121,357 0 1,494 0 2,590 0 37,900 0 16,346 0 21,554 0 0 0 0 0 0 0 21,554 0 1.32 (1.34) 1.32 (1.33) NOTE* AS PER FASB STATEMENT NO. 128, EARNINGS PER SHARE, "PRIMARY" IS NOW "BASIC".
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