-----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, CIB2XdV1efSyLGdMA43P4TNyeYQao3JuVCuUZoAjkbv3ixOny4xGz9anRuFPWiNa mJFDvwwCT8SG0uCOCLGd3Q== 0000950172-99-001015.txt : 19990811 0000950172-99-001015.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950172-99-001015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990810 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: 99682356 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 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 - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 630-875-5300 - ---------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - ---------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] June 30, 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
EX-10 2 EXHIBIT 10 - EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT made June 29, 1999, between ENESCO GROUP, INC., a Massachusetts corporation (the "Company"), and Jeffrey A. Hutsell of 775 Summit Drive, Deerfield, Illinois ("Hutsell"). NOW, THEREFORE, in consideration of the mutual undertakings set forth below, the parties agree as follows: 1. Employment. The Company hereby employs Hutsell, and Hutsell agrees to be employed by the Company, upon the terms and subject to the conditions hereinafter set forth effective forthwith. Unless sooner terminated as hereinafter provided, the initial term of this employment shall be three (3)years commencing as of the date first written above, with an automatic extension of one day at the end of each day thereafter while Hutsell remains employed by the Company (so that the remaining term at the end of every day thereafter shall be three (3) years). 2. Duties. Hutsell shall be employed as President and Chief Executive Officer of the Company. He shall continue to serve as a member of its Board of Directors for the balance of his current term and thereafter as re-elected by the Shareholders of the Company. During his employment, Hutsell agrees to faithfully and diligently perform the duties of his office on a full time basis in the best interests of the Company. Nothing herein shall prohibit Hutsell from pursuing personal investments provided that such activities do not interfere with the performance of Hutsell's duties hereunder. Although it is contemplated that Hutsell will undertake some travel as part of performing the foregoing duties, Hutsell's principal place of employment shall be in the Itasca, Illinois area. 3. Compensation. While employed by the Company during the term of this agreement, Hutsell will receive the following compensation for services: (a) Base Salary. A base annual salary, payable in equal bi-weekly installments less applicable deductions, of $495,000.00 (Four Hundred Ninety-Five Thousand Dollars). The base salary shall be subject to review and adjustment annually by the Board of Directors acting in its sole discretion provided that the base salary shall not be less than $495,000.00 during the term of this agreement. (b) Annual Bonus. Hutsell shall be entitled to participate in the Management Incentive Plan maintained by the Company with a target bonus of minimally 65% of his annual base salary. His objectives shall be determined under the usual procedures of such Plan. (c) Other Benefits. Hutsell shall be entitled to participate in all standard insurance and other benefit programs maintained by the Company for its employees and directors at not less than the current coverage and benefit amounts in the case of the life and disability insurance, annual supplemental medical and financial planning bonuses and monthly automobile allowance(subject to increase based on the periodic review by the Company's Treasury Department). The Company shall continue coverage for both Hutsell and his spouse under the Company's Health Plan after retirement until (in the case of each of them) the earlier of their 65th birthdays, eligibility for Medicare or death. However, in the case of the death of Hutsell before his 65th birthday or eligibility for Medicare, coverage shall be continued for his spouse until the earlier of her 65th birthday, eligibility for Medicare or death. (d) Stock Options. Hutsell shall be entitled to participate in stock options under the Company's Plans offered to him in respect of Company shares from time to time. (e) Expenses. The Company shall reimburse Hutsell for all ordinary and necessary expenses paid or incurred by him in the course of the performance of his duties pursuant to this agreement, subject to the Company's requirements with respect to the manner of reporting such expenses. 4. Termination of Employment. (a) Termination by the Company for Cause. The Company may terminate this agreement and Hutsell's employment hereunder by giving ten (10) days' prior written notice to Hutsell upon its determination of: (i) Dishonesty or willful misconduct involving moral turpitude by Hutsell in the performance of his duties under this agreement (the term "misconduct" includes, without limitation, any material and willful breach by Hutsell of the terms of Paragraph 5 hereof), or (ii) Material disregard of, and material failure to comply with, the written instructions, policies or guidelines established by the Company's Board of Directors, or material failure to perform his duties hereunder. In the event of termination of this agreement under this Paragraph 4(a), Hutsell shall be entitled to all amounts due him under Paragraph 3 accrued to the date of termination, excluding the bonus for the fractional portion of the year of termination under Paragraph 3(b) above. (b) Termination Upon Death of Hutsell. Upon the death of Hutsell during the term of this agreement, his estate shall be entitled to receive all amounts due under Paragraph 3 accrued to the date of death, including, without limitation, the actual bonus pro-rated for the fractional portion of the year of death. (c) Termination Upon Total Disability. If, at any time during the term of this agreement, Hutsell becomes unable to perform his duties hereunder due to illness or physical or mental incapacity for a continuous period of one hundred and eighty (180) days, the Company, may, at or after the expiration of such one hundred and eighty (180) day period and provided that Hutsell's incapacity is then continuing, elect to terminate Hutsell's employment under this agreement. During such one hundred and eighty (180) day period and until the Company so terminates his employment, Hutsell shall be entitled to all amounts payable or accrued under Paragraph 3 above until the date of termination, including, without limitation, the actual bonus prorated for the fractional portion of the year of termination. (d) Other Benefits Unaffected. Life or disability insurance benefits which may otherwise be payable are not affected by the provisions of Paragraphs 4(b) and 4(c) above. (e) Termination by Company Other Than For Cause or Total Disability. If the Company shall terminate Hutsell's employment other than for cause under Paragraph 4(a) above or for Total Disability under Paragraph 4(c) above, and his employment has not terminated by reason of his death under Paragraph 4(b) above, Hutsell shall receive (at the times such payments would have been made had there not been a termination) all amounts that would otherwise have been paid to him, or benefits provided, for the remaining term of this agreement under Paragraphs 3(a), 3(b), and 3(c), (except that the Health Plan coverage provided under Paragraph 3(c) shall continue for the duration as required in that Paragraph 3(c)) had Hutsell's employment not been terminated, except that no payments will be made for periods following his death. For purposes of the bonus payment made for any year under this provision, the target bonus shall be based on the Profit Plan objectives for such year and any bonus shall be determined based on the corporate performance versus those Plan objectives. In return for the payments to be made under this subparagraph (e), Hutsell agrees to execute and deliver to the Company a Release in the form as deemed appropriate or necessary by the Company. (f) Termination by Hutsell. Hutsell may terminate this agreement and his employment hereunder at any time by giving six (6) months' prior written notice to the Company or such lesser notice period as the Company may accept. In the event of a termination of this agreement under this Paragraph 4(f), Hutsell shall be entitled to all amounts due to him under Paragraph 3 to the date of termination, including, without limitation, the actual bonus pro-rated for the fractional portion of the year of termination. (g) Change in Control. The amount payable to Hutsell under Paragraph 4(e) of this agreement shall be reduced on a proportionate basis (over the remaining term of this agreement) by any amount paid to Hutsell under the Change in Control Agreement between Hutsell and the Company dated June 15, 1998, without giving effect to the Gross-Up Payment under Paragraph 1(c) thereof for this purpose. (h) Survival of Rights and Obligations. In the event of termination of Hutsell's employment under either Paragraphs 4(a), 4(b), 4(e) or 4(f), then, except to the extent specifically provided for in Paragraphs 3, 4, 5 and 6, neither party shall have any right, claim, or action against, or obligation or responsibility to, the other party arising out of, or resulting from, such termination of employment. 5. Confidential Information, Covenant Not to Compete and Non-Solicitation. (a) Hutsell agrees that he will not use or disclose to anyone (other than for the benefit of the Company) either during the term of his employment or at any time thereafter, any Confidential Information obtained by him or made known to him while employed by the Company, and will make all reasonable, necessary and appropriate efforts to safeguard all such Confidential Information from disclosure to anyone other than as permitted hereby. As used herein "Confidential Information" includes, but is not limited to, trade secrets, business and sales policies, methods, plans and customer lists, including any lists written or other of such persons or entities, whether of the Company or any other organization associated or affiliated with or owned by or owning the Company, but shall not include information which becomes generally available to the public other than as a result of disclosure by Hutsell's act or default or the acts or defaults of Hutsell's agents or representatives. (b) In consideration of Hutsell's continued employment in accordance with the terms of this agreement, Hutsell agrees that he will not, during the term hereof and for the period ending one (1) year (or such longer period as he is paid hereunder) from the date he ceases to be employed by the Company, either alone or in conjunction with any individual, firm, corporation, association or other entity (except for the benefit of the Company), either as principal, agent, officer, employee, director, investor, consultant, shareholder, associate or in any other capacity whatsoever: (i) carry on, participate in, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking which is in whole or in part competitive with any of the businesses carried on by the Company within the respective territories in which such businesses are then carried on (except for any equity share investment in a public company whose shares are listed on a recognized stock exchange where such share investment does not in the aggregate exceed 5% of the issued equity shares of such company); (ii) attempt to solicit any suppliers, customers, employees or independent dealers away from the Company; (iii) carry on, participate in, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking which bears any name similar to that of the Company; or (iv) take any act as a result of which the relations between the Company and its suppliers, customers, employees or others may be impaired or which may otherwise be detrimental to the business of the Company. Competition shall be deemed to include (i) any dealings with the Company's employees or independent dealers, and (ii) the use in any way of the Company's customer or mailing lists. Competition shall be deemed to exclude employment by another company or enterprise whose principal business activity is not the creation, making or manufacturing of gifts, giftware or collectibles. The reference to Company in this Paragraph 5 shall include all subsidiaries and affiliated entities of the Company. Hutsell agrees that the remedy at law for breach by him of the foregoing covenant will be inadequate and that the Company shall be entitled to injunctive relief. 6. Discoveries. Hutsell will promptly disclose in writing to the Company when requested, each improvement, discovery, idea and invention relating to the business of the Company made or conceived by him from and after the date hereof either alone or in conjunction with others and while employed by the Company or within one (1) year after the termination of such employment if such improvement, discovery, idea or invention then results from or was suggested by such employment (whether or not patentable, whether or not made or conceived (i) at the request of or upon the suggestion of the Company, (ii) during his usual hours of work, or (iii) in or about the premises of the Company and whether or not prior or subsequent to the execution hereof). He will not disclose any such improvement, discovery, idea or invention to any person, except the Company. Each such improvement, discovery, idea and invention shall be the sole and exclusive property of, and is hereby assigned to, the Company, and at the request of the Company, Hutsell will assist and cooperate with the Company and any person or persons from time to time designated by the Company to obtain for the Company the grant of any letters patent in the United States and/or such other country or countries as may be designated by the Company, covering any such improvement, discovery, idea or invention and will, in connection therewith, execute such applications, statements, assignments or other documents, furnish such information and data and take all such other actions (including, without limitation, the giving of testimony) as the Company may from time to time reasonably request. 7. Applicable Law. This agreement shall be construed in accordance with the laws of the State of Illinois. 8. Notices. Any notice or other writing required or permitted to be given hereunder or for the purposes hereof (hereinafter in this Paragraph 8 called a "notice") to any party shall be sufficiently given if delivered personally, if sent by prepaid registered mail or if transmitted by facsimile machine or other form of recorded communication tested prior to transmission to such party: (a) in the case of notice to Hutsell to him at: 775 Summit Drive Deerfield, Illinois 60015 (b) in the case of a notice to the Company to it at: Enesco Group, Inc. 225 Windsor Drive Itasca, Illinois 60143 Attention: General Counsel or at such other address as the party to whom such writing is to be given shall have last notified the party giving the same in the manner provided in this paragraph. Any notice delivered to the party to whom it is addressed as hereinbefore provided shall be deemed to have been given and received on the day it is so delivered at such address, provided that if such day is not a Business Day (Monday through Friday excluding federal and state holidays) then the notice shall be deemed to have been given and received on the Business Day next following such day. Any notice mailed as aforesaid shall be deemed to have been given and received on the seventh Business Day next following the date of its mailing. Any notice transmitted by telex or other form of recorded communication shall be deemed given and received on the first Business Day after its transmission. 9. Entirety of Agreement. This agreement constitutes the entire agreement between the parties and no amendment, waiver, alteration or modification of this agreement shall be valid unless in each instance such amendment, waiver, alteration or modification is agreed to in writing by all of the parties. 10. Assignment. Neither party may assign this agreement or any of the rights or duties hereunder, except that the Company must assign its rights, obligations and responsibilities under this agreement to (i) a successor or assignee of all or substantially all of its business or assets, or (ii) any corporation with which it merges or with which it may be consolidated. Subject to the foregoing, this agreement shall inure to the benefit of and be binding upon the Company and Hutsell and their respective successors, assigns, heirs and legal representatives. 11. Invalidity of any Provision. If any provision of this agreement or the application thereof to any party or circumstance is held invalid or unenforceable, the remaining provisions of this agreement and the application of such provisions to the other party or circumstances will not be affected thereby, the provisions of this agreement being severable in any such instance. IN WITNESS WHEREOF, the parties have executed this Agreement. ENESCO GROUP, INC. By: /s/ John F. Cauley ------------------------------ John F. Cauley Chairman of the Board /s/ Jeffrey A. Hutsell ------------------------------ Jeffrey A. Hutsell EX-27 3 EXHIBIT 27
5 1,000 6-MOS DEC-31-1999 JUN-30-1999 11,097 0 111,304 11,667 72,689 200,600 79,881 49,002 311,070 163,000 0 0 0 3,154 107,053 311,070 188,858 188,858 97,998 97,998 70,292 2,367 1,308 16,598 6,640 9,958 0 0 0 9,958 0.67 0.66 Note As per FASB Statement No. 128, earnings per share, "Primary" is now "Basic"
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