##### 



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 March 31, 2004 OR o
    
    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. 
  Illinois
    
    04-1864170(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 225 Windsor Drive, Itasca, Illinois
    
    60143(Address of principal executive offices)
    
    (Zip Code)
 630-875-5300 
  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. x o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12B-2 of the Exchange Act) x o
 March 31,2004
    
    2003Shares Outstanding:Common Stock with
Associated Rights
    
    
    14,196,501
    
    
    
    13,964,245




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PART 1. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(In thousands) (Unaudited)March 31,
    
    December 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,571
    
    
    $
    10,645Accounts receivable, net
    
    
    61,541
    
    
    
    65,190Inventories
    
    
    60,124
    
    
    
    60,820Prepaid expenses
    
    
    3,660
    
    
    
    4,114Deferred income taxes and taxes receivable
    
    
    5,065
    
    
    
    5,146Total current assets
    
    
    140,961
    
    
    
    145,915Property, Plant and Equipment, at Cost:Property, plant and equipment
    
    
    87,029
    
    
    
    85,606Less - accumulated depreciation
    
    
    (58,998
    )
    
    
    (57,265
    )Property, plant and equipment, net
    
    
    28,031
    
    
    
    28,341Other Assets:Goodwill
    
    
    9,221
    
    
    
    2,890Other
    
    
    1,576
    
    
    
    1,458Deferred income taxes
    
    
    23,883
    
    
    
    23,864Total other assets
    
    
    34,680
    
    
    
    28,212Total Assets
    
    $
    203,672
    
    
    $
    202,468
 The accompanying notes are an integral part of these condensed financial statements. 2




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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(In thousands) (Unaudited)March 31,
    
    December 31,2004
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    15,679
    
    
    $
    2,858Accounts payable
    
    
    16,652
    
    
    
    21,723Federal, state and foreign income taxes
    
    
    3,581
    
    
    
    7,375Accrued expenses:Payroll and commissions
    
    
    2,208
    
    
    
    4,812Royalties
    
    
    4,927
    
    
    
    7,735Post-retirement benefits
    
    
    764
    
    
    
    1,375Other
    
    
    5,838
    
    
    
    5,686Total current liabilities
    
    
    49,649
    
    
    
    51,564Long-Term Liabilities:Notes payable
    
    
    6,417
    
    
    
    9Post-retirement benefits
    
    
    3,308
    
    
    
    3,248Deferred income taxes
    
    
    294
    
    
    
    294Total long-term liabilities
    
    
    10,019
    
    
    
    3,551Commitments and ContingenciesMinority interest
    
    
    111
    
    
    
    114Shareholders Equity:Common stock
    
    
    3,154
    
    
    
    3,154Capital in excess of par value
    
    
    45,800
    
    
    
    45,863Retained earnings
    
    
    343,248
    
    
    
    347,650Accumulated other comprehensive income
    
    
    4,490
    
    
    
    3,740396,692
    
    
    
    400,407Less - shares held in treasury, at cost
    
    
    (252,799
    )
    
    
    (253,168
    )Total shareholders equity
    
    
    143,893
    
    
    
    147,239Total Liabilities and Shareholders Equity
    
    $
    203,672
    
    
    $
    202,468
 The accompanying notes are an integral part of these condensed financial statements. 3




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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
(In thousands, except per share amounts) 2004
    
    2003Net revenues
    
    $
    50,452
    
    
    $
    46,137Cost of sales
    
    
    29,796
    
    
    
    27,627Gross profit
    
    
    20,656
    
    
    
    18,510Selling, distribution, general and administrative expenses
    
    
    27,878
    
    
    
    23,021Operating loss
    
    
    (7,222
    )
    
    
    (4,511
    )Interest expense
    
    
    (85
    )
    
    
    (49
    )Interest income
    
    
    112
    
    
    
    170Other income (expense), net
    
    
    (315
    )
    
    
    (406
    )Loss before income taxes
    
    
    (7,510
    )
    
    
    (4,796
    )Income tax benefit
    
    
    (3,108
    )
    
    
    (2,005
    )Net loss
    
    
    (4,402
    )
    
    
    (2,791
    )Retained earnings, beginning of period
    
    
    347,650
    
    
    
    330,368Retained earnings, end of period
    
    $
    343,248
    
    
    $
    327,577Net loss per common share - basic and diluted
    
    $
    (0.31
    )
    
    $
    (0.20
    )
 The accompanying notes are an integral part of these condensed financial statements. 4




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ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
(In thousands) 2004
    
    2003Operating Activities:Net loss
    
    $
    (4,402
    )
    
    $
    (2,791
    )Adjustments to reconcile net loss to net
cash used by operating activities
    
    
    (7,004
    )
    
    
    (2,116
    )Net cash used by operating activities
    
    
    (11,406
    )
    
    
    (4,907
    )Investing Activities:Acquisition, net of cash acquired
    
    
    (7,262
    )
    
    
    Purchase of property, plant and equipment
    
    
    (868
    )
    
    
    (1,306
    )Proceeds from sales of property, plant and
equipment
    
    
    12
    
    
    
    7Net cash used by investing activities
    
    
    (8,118
    )
    
    
    (1,299
    )Financing Activities:Issuance of notes and loans payable
    
    
    18,523
    
    
    
    Common stock issuance and exercise of stock
options
    
    
    307
    
    
    
    367Net cash provided by financing activities
    
    
    18,830
    
    
    
    367Effect of exchange rate changes on cash and
cash equivalents
    
    
    620
    
    
    
    (62
    )Decrease in cash and cash equivalents
    
    
    (74
    )
    
    
    (5,901
    )Cash and cash equivalents, beginning of period
    
    
    10,645
    
    
    
    17,418Cash and cash equivalents, end of period
    
    $
    10,571
    
    
    $
    11,517
 The accompanying notes are an integral part of these condensed financial statements. 5




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ENESCO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  1.
    
    Description of Business A global leader in the gift, collectibles and home décor industry for over 45
years, Enesco Group, Inc. (the Company or Enesco) offers such notable
product lines as Heartwood Creek, Cherished Teddies, Mary Engelbreit, Border
Fine Arts, Lilliput Lane, Walt Disney Classics Collection, Nickleodeonand
Halcyon Days, among others. The Companys award winning Precious Moments
figurine collection is one of the top collectible lines throughout the world.
Enesco distributes product worldwide and has wholly owned subsidiaries located
in the U.S., Hong Kong, Canada, France and the U.K.  2.
    
    Summary of Significant Accounting Policies Basis of Presentation The accompanying financial data as of March 31, 2004 and for the three months
ended March 31, 2004 and March 31, 2003 has been prepared by Enesco, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. These Consolidated Condensed
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in Enescos Annual Report
on Form 10-K for the year ended December 31, 2003. In the opinion of management, these Consolidated Condensed Financial Statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America applicable to interim period financial
statements and reflect all adjustments necessary for a fair presentation of
Enescos financial position as of March 31, 2004, results of operations for the
three months ended March 31, 2004 and March 31, 2003, and cash flows for the
three months ended March 31, 2004 and March 31, 2003. The results of
operations for interim periods are not necessarily indicative of the operating
results for full fiscal years or any future period. The 6




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information in this report reflects all normal recurring adjustments and
disclosures that are, in our opinion, necessary to fairly present the results
of operations and financial condition for the interim periods. Revenue Recognition Enesco recognizes revenue when title passes to its customers, which generally
occurs when merchandise is turned over to the shipper. A provision for
anticipated merchandise returns and allowances is recorded based upon
historical experience when a sale is recorded. Amounts billed to customers for
shipping and handling are included in revenue. License and royalty fees
received by Enesco are recognized as revenue when earned. Computation of Loss per Share Basic loss per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common shares and potential dilutive
common shares outstanding during the period. Diluted loss per share is
computed using the weighted-average number of common shares and excludes
dilutive potential common shares outstanding, as their effect is antidilutive.
Potential dilutive common share equivalents primarily consist of employee stock
options and warrants calculated using the treasury stock method. Payments for Interest and Income Taxes Enesco made cash payments for interest and income taxes as follows (in
thousands): Three Months EndedMarch 312004
    
    2003Interest
    
    $
    140
    
    
    $
    49Income taxes
    
    $
    627
    
    
    $
    247
 7




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Accounting for Stock  Based Compensation At March 31, 2004, the Company has three stock-based employee compensation
plans, not including plans with options that fully expired during the first
quarter of 2004. The Company accounts for those plans under the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based compensation plan cost is reflected in net loss, as all options
granted under those plans had exercise prices equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net loss and loss per share as if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation plans. Three months ended March 312004
    
    2003Net loss as reported
    
    $
    (4,402
    )
    
    $
    (2,791
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (331
    )
    
    
    (346
    )Pro forma net loss
    
    $
    (4,733
    )
    
    $
    (3,137
    )Loss per share:Basic and diluted - as reported
    
    $
    (0.31
    )
    
    $
    (0.20
    )Basic and diluted - pro forma
    
    $
    (0.33
    )
    
    $
    (0.23
    )
  3.
    
    Comprehensive Income (Loss): Other comprehensive income (loss) consists only of cumulative foreign currency
translation adjustments. Comprehensive income (loss) for the three months
ended March 31, 2004 and 2003 was as follows (in thousands): 8




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Three Months EndedMarch 312004
    
    2003Net loss
    
    $
    (4,402
    )
    
    $
    (2,791
    )Other comprehensive income (loss):Cumulative translation adjustments (no tax effects)
    
    
    750
    
    
    
    312Comprehensive loss
    
    $
    (3,652
    )
    
    $
    (2,479
    )
  4.
    
    Geographic Operating Segments: Enesco operates in the giftware and collectible wholesale industry,
predominantly in two major geographic classifications (United States and
International). The following table summarizes
operations by geographic classification for the three months ended March 31,
2004 and 2003 (in thousands): Three Months EndedMarch 312004
    
    2003Net SalesUnited States
    
    $
    26,967
    
    
    $
    28,574United States inter-company
    
    
    (186
    )
    
    
    (216
    )International
    
    
    24,068
    
    
    
    18,053International inter-company
    
    
    (397
    )
    
    
    (274
    )Total consolidated
    
    $
    50,452
    
    
    $
    46,137Operating Profit (Loss)United States
    
    $
    (8,771
    )
    
    $
    (5,975
    )International
    
    
    1,549
    
    
    
    1,464Total consolidated
    
    $
    (7,222
    )
    
    $
    (4,511
    )
 Transfers between geographic operating segments 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. 9




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There were no material changes in the mix of geographic operating segment
assets from the amounts disclosed in Enescos December 31, 2003 Form 10-K and
the basis of geographic classification of sales and operating profit has not
changed in 2004.  5.
    
    Other Income (Expense), net: Other income (expense), net for the three months ended March 31, 2004 and 2003
consisted of the following (in thousands): Three Months EndedMarch 312004
    
    2003Foreign currency loss
    
    $
    (6
    )
    
    $
    (2
    )Gain on sale of fixed assets
    
    
    3
    
    
    
    Bank charges and other
    
    
    (312
    )
    
    
    (404
    )$
    (315
    )
    
    $
    (406
    )
  6.
    
    Loss per Common Share (Basis of Calculations): The number of shares used in the loss per common share computations for the
three months ended March 31, 2004 and 2003 were as follows (in thousands): Three Months EndedMarch 312004
    
    2003Average common shares outstanding - basic
    
    
    14,178
    
    
    
    13,931Dilutive effects of stock options and warrants
    
    
    
    
    
    
    Average shares outstanding - diluted
    
    
    14,178
    
    
    
    13,931
 The average number of diluted shares outstanding for the three months ended
March 31, 2004 and March 31, 2003 excludes common stock equivalents relating
to options and warrants because there was a net loss and such common stock
equivalents would have been antidilutive. Had Enesco reported a profit for
the three months ended March 31, 2004 and March 31, 2003, the number of 10




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average shares outstanding-diluted would have increased by 719 thousand and
267 thousand, respectively. Additionally, options to purchase 0.6 million and
1.8 million shares were outstanding during 2004 and 2003, respectively, but
were not included in the computation of diluted loss per share because the
options exercise prices were greater than the average market price of the
common shares.  7.
    
    Financial Instruments: Enesco operates globally with various manufacturing and distribution
facilities and product sourcing locations around the world. Enesco may reduce
its exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through derivative financial instruments.
Enesco currently does not use derivative financial instruments for trading or
speculative purposes. Enesco regularly monitors foreign currency exposures
and ensures hedge contract amounts do not exceed the amounts of the underlying
exposures. Enescos current hedging activity is limited to foreign currency purchases and
intercompany foreign currency transactions. The purpose of Enescos foreign
currency hedging activities is to protect Enesco from the risk that eventual
settlement of foreign currency transactions will be affected adversely by
changes in exchange rates. Enesco hedges these exposures by entering into
various short-term foreign exchange forward contracts. Derivative instruments
are carried at fair value in the Condensed Consolidated Balance Sheets as a
component of current assets or current liabilities. Changes in the fair value
of foreign exchange forward contracts that meet the applicable hedging criteria
are recorded as a component of other comprehensive income and reclassified into
earnings in the same period during which the hedged transaction affects
earnings. Changes in the fair value of foreign exchange forward contracts that
do not meet the applicable hedging criteria are recorded currently in income as
cost of sales or foreign exchange gain or loss, as applicable. Hedging
activities did not have a material impact on results of operations or financial
condition during the three months ended March 31, 2004. To manage foreign currency risk, as of March 31, 2004, Enesco had entered into
forward exchange agreements with a notional value of $8.0 million that will
mature within 58 days. These contracts include sales of British pounds
sterling and purchases of U.S. dollars at an average exchange rate of 1.82, a
sale of U.S. dollars and the purchase of British pounds sterling at an average
exchange rate of 1.82 and sales of Euros and purchases of U.S. dollars at an
average exchange rate of 1.21. The 11




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fair value of these contracts is not
significant. As of March 31, 2004, Enesco had $22.1 million of interest bearing
debt outstanding of which $22.0 million was unsecured credit facility debt with
an average interest rate of 2.13%. The remaining $58 thousand was debt, related
to the purchase of machinery and vehicles by our U.K. subsidiary with interest
rates ranging from 7.6% to 10.1% and maturities ranging from November 2004
through May 2005.  8.
    
    Acquisition On February 29, 2004, the Company acquired Gregg Manufacturing, Inc. d/b/a
Gregg Giftware Company (Gregg Gift), a California-based manufacturer, for
approximately $7.4 million in cash ($7.3 million net of acquired cash). Gregg
Gift manufactures and distributes branded and specialty giftware that includes
book covers, organizers, tote bags and home décor accents targeting the growing
inspirational marketplace. Gregg Gift generated revenues of approximately $11
million in 2003. In March 2004, Enescos domestic $50.0 million credit facility was amended
to add term notes totaling $7.7 million for the purpose of funding the
acquisition of Gregg Gift. The total unsecured credit facility is currently
$57.7 million. At the same time, Gregg Gift was added as a borrowing
subsidiary. Certain of the financial covenants were modified, including
measurements at the end of each quarter. 12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENESCO GROUP,
INC.
THREE MONTHS ENDED MARCH 31, 2004 Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words believes, anticipates,
estimates, expects, projections, projects, and words of similar
meaning, constitute forward-looking statements within the meaning of Federal
securities laws. These forward-looking statements are based in part on Enescos
reasonable expectations and are subject to a number of factors and risks, many
of which are beyond Enescos control. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described below under the heading
Risk Factors and elsewhere in this Quarterly Report, and in other documents
we file with the Securities and Exchange Commission. In light of these
uncertainties and risks, there can be no assurance that the forward-looking
statements in this Form 10-Q will occur or continue in the future. Except for
required filings under the Securities Exchange Act of 1934, Enesco undertakes
no obligation to release publicly any revisions to these forward looking
statements that may reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Results of Operations Critical Accounting Policies The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the amounts reported in the Consolidated Condensed Financial Statements and
accompanying notes. Estimates are used for, but not limited to, the accounting
for allowances for doubtful accounts and sales returns, inventory valuations,
goodwill impairments, contingencies, restructuring costs and other special
charges and taxes. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by
judgements, assumptions and estimates used in the preparation of the
Consolidated Condensed Financial Statements. 13




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The allowance for doubtful accounts is based on our assessments of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customers credit
worthiness or actual defaults are significantly different than our historical
experience, estimates of the recoverability of amounts due could be affected.
An allowance for sales returns is established based on historical trends in
product returns. If future returns do not reflect historical trends, net
revenues could be affected. Inventory purchases and commitments are based on future demand forecasts. If
there is a sudden or significant decrease in demand for our products or there
is a higher incidence of inventory obsolescence because of rapidly changing
customer requirements, we may be required to decrease the carrying value of
inventory and gross profit could be affected. Enesco has established accruals for tax payables and tax assessments. The
accruals are included in current income taxes payable since it is uncertain as
to when assessments may be made and paid. Enesco has filed and continues to
file tax returns with a number of taxing authorities worldwide. While Enesco
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. To the extent accruals differ from assessments, when the open tax years
are closed or the accruals are otherwise deemed unnecessary at a point in time,
the accruals are adjusted through the provision for income taxes. The majority
of open tax years become closed for assessments at the end of December for the
particular open year. First Quarter 2004 Overview In the first quarter of 2004 Enesco accomplished three significant tasks which
we expect will help grow revenue and earnings this year and improve operational
effectiveness. First, we completed the transition of the Walt Disney Classics Collection
business to Enesco. Effective January 1, 2004, we are now marketing these
licensed products to retailers worldwide. This expands our relationship with
Disney and our presence in the upper end of the collectibles and giftware
marketplace. 14




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Second, on February 29, 2004 we completed the acquisition of Gregg Gift, a
leading supplier and marketer of specialty giftware targeting the growing
inspirational giftware market. Gregg Gifts products include book covers,
organizers, tote bags and home décor accents that are either designed by the
company or utilize well known licensed artwork from popular artists such as
Thomas Kincaidand Mary Engelbreit. First quarter results include one month of
operations from Gregg Gift. Lastly, we implemented a new enterprise resource planning (ERP) system in the
U.S. effective January 1, 2004. We encountered transitional and learning
curve related challenges during the implementation that caused inefficiencies
that impacted our financial results. We believe the most significant
challenges are behind us and look forward to continuing to improve our business
through the use of this new technology. Financially, Enesco produced a 9% sales increase in the first quarter of 2004
versus the first quarter of 2003. The sales increase was driven by
acquisitions, new products and changes in foreign currency translation rates.
Gross profit increased by 12% as margins increased to 40.9% of net sales from
40.1% of net sales. Operating expenses were $4.9 million or 21% higher
primarily due to costs related to the acquired businesses and new products as
well as costs incurred as part of the new ERP system. Additionally, we
incurred significant costs related to Precious Momentsmarketing programs and
strategic analysis of the giftware industry. While these costs impacted the
first quarter of 2004, we expect to realize benefits from these initiatives in
the future. As a result of these investments and the seasonal nature of our
business, operating and net income results for the first quarter of 2004 were
unfavorable as compared to the same quarter last year. Net Revenue and Gross Profit Net sales of $50.5 million in the first quarter of 2004 increased by 9%, or
$4.3 million, from the first quarter of 2003. The increase in net sales for the
first quarter of 2004 compared to the same period last year was primarily the
result of acquisitions, new products and changes in foreign currency
translation rates. Revenue from acquisitions include a full quarter of sales
from the 2003 acquisition of Bilston & Battersea and one month of Gregg Gift
sales versus no sales from these entities in the quarter ended March 31, 2003.
The Walt Disney Classics Collectionand continued success from new product
lines like Heartwood Creekand Foundationsalong with favorable impacts due to
changes in foreign currency translation rates also positively impacted sales
for the 15




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quarter. These factors were partially offset by a continued decline
experienced in both the Precious Momentsand Cherished Teddiesproduct lines.
Enescos Precious Momentslines represented approximately 24% of 2004 year to
date sales compared to 34% for 2003. The Cherished Teddieslines represented
approximately 7% of 2004 year to date sales compared to 10% for 2003. Net new orders of $79 million year to date for 2004 were an increase of 18%
versus the comparable period of 2003. Net open orders (backlog) of $45
million at March 31, 2004 were up approximately $6 million, or 14%, from the
same point in time last year. Backlog represents orders received and approved
by Enesco, subject to cancellation for various reasons, including credit
considerations, product availability and customer requests. The increase in net
new orders is due to high levels of interest and demand for our newly acquired
and developed product lines such as Bilston & Battersea, Gregg Gift, Walt
Disney Classics Collectionand Heartwood Creek. Changes in backlog can be
attributed to timing of product introductions, variability in retailer order
cycles, economic conditions and Enescos demonstrated ability to reduce order
lead times. In addition, we believe that approximately $3 million of the
increased backlog as of March 31, 2004 is attributable to delayed shipments of
scheduled first quarter 2004 orders due to inefficiencies caused by the
implementation of our new ERP system. Gross profit for the first quarter of 2004 of $20.7 million was 40.9% of net
sales as compared to first quarter 2003 gross profit of $18.5 million, which
was 40.1% of net sales. The gross profit dollar increase for the first quarter
of 2004 as compared to 2003 was due to favorable impacts from changes in
foreign currency translation rates, acquisitions and new products. The gross
profit rate improvement is due to continued success in improving procurement
and inventory management methods and decreased lower margin closeout sales in
the first quarter of 2004. Gross profit may be affected in the future by
changes in vendor pricing, obsolescence charges, changes in shipment volume,
price competition and changes in distribution channel, geographic or product
mix. Selling, Distribution, and General and Administrative Expenses Selling, distribution and general and administrative expenses (operating
expenses) for the first quarter of 2004 were $27.9 million, which was $4.9
million or 21% higher than the first quarter of 2003. The increase was due to
several factors, including changes in foreign currency translation rates, the
addition of expenses for the acquired businesses, new ERP system
implementation costs and strategic marketing investments including PM
ROCKS!. PM ROCKS! is a 2004 marketing 16




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program designed to generate Precious Moments brand interest with the pre-teen
demographic market both from a collectible and giftable viewpoint. Operating Income (Loss) In the first quarter of 2004, Enesco incurred an operating loss of $7.2 million
compared to an operating loss of $4.5 million in 2003. The $2.7 million
increase in operating loss was primarily the result of increased operating
expenses more than offsetting the sales and gross profit growth generated from
new products and acquisitions. The higher operating expenses are expected to
have a beneficial revenue/ gross profit impact in the future. Interest and Other Income (Expense), Net Interest expense of $85 thousand for the first quarter of 2004 was $36 thousand
higher than the first quarter of 2003 due to higher average borrowings.
Interest income for the first quarter of 2004 is $112 thousand compared to $170
thousand in 2003. Other expense, net, for the first quarter of 2004 is $315
thousand compared to $406 thousand in same quarter in 2003. See Note 5, Other
Income (Expense), Net, to the Consolidate Condensed Financial Statements for
additional information. Provision for Income Taxes The effective tax rate was 40.9% for the first quarter of 2004 and 41.8% for
the first quarter of 2003, reflecting the geographical mix of earnings. The
effective tax rate differs from the U.S. statutory rate primarily due to the
varying tax rates of foreign jurisdictions. Our future effective tax rates
could be affected if the mix of earnings varies in countries that have higher
or lower statutory rates or if tax laws and regulations change. International Economies and Currencies We conduct business globally. Accordingly, our future results could be
materially affected by a variety of uncontrollable and changing factors
including, among others, foreign currency exchange rates; regulatory,
political, or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; and the effects of
terrorist activity, armed conflict, epidemics and natural disasters. Any or
all of these factors could have a material impact on our future results. 17




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As a global concern, we face exposure to movements in foreign currency
translation rates. These exposures may change over time and could have a
material impact on our financial results and cash flows. Historically, our
primary exposures have related to non dollar-denominated transactions in Canada
and Europe, as well as dollar denominated inventory purchases by our
international operating units. At the present time, we hedge only those currency exposures associated with
certain assets and liabilities denominated in foreign currencies and
periodically will hedge anticipated foreign currency cash flows. The hedging
activity undertaken by Enesco is intended to offset the impact of currency
fluctuations on certain foreign currency transactions. See Note 7, Financial
Instruments, to the Consolidated Condensed Financial Statements for additional
information. Liquidity and Capital Resources Enesco has historically satisfied working capital requirements with internally
generated funds and short-term loans. Cash balances and working capital
requirements fluctuate due to operating results, shipping cycles, accounts
receivable collections, inventory management and timing of payments, among
other factors. Working capital requirements fluctuate during the year and are
generally greatest early in the fourth quarter and lowest early in the first
quarter. For additional discussion, see the Risk Factors section below. Cash
and cash equivalents were $10.6 million on March 31, 2004. Operating cash flows are a function of earnings (losses) plus non-cash expenses
such as depreciation and our ability to manage working capital. Cash used by
operating activities in the first quarter of 2004 was $7.0 million. The major
uses of funds from operating activities were decreased accrued expenses of $6.2
million and decreased accounts payable of $5.7 million. The decreased accrued
expenses and accounts payable are due to normal first quarter and historically
routine activity primarily related to payment of bonus, royalty, and inventory
obligations. These uses of cash were partially offset by operating cash
provided by reductions in accounts receivable and inventory. Enesco has filed and continues to file tax returns with a number of taxing
authorities worldwide. While we believe 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 18




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extended number of years after the filing dates. Enesco 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 Enescos current liquid asset position and credit facilities,
Enesco believes it has adequate resources to fund any such assessments. To the
extent accruals differ from actual assessments, when the open tax years are
closed or the accruals are otherwise deemed unnecessary at a point in time, the
accruals are 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. Cash used by investing activities in the first quarter of 2004 was $8.1
million, primarily due to the acquisition of Gregg Gift on February 29, 2004
and computer hardware and software purchases related to the new ERP system
implementation. Cash provided by financing activities in the first quarter of 2004 was $18.8
million, due to increased borrowings related to the acquisition of Gregg Gift
and working capital requirements. In June 2003, Enesco entered into a new three year domestic $50.0 million
unsecured revolving credit facility that includes Enesco International (H.K.)
Limited as a borrowing subsidiary. The credit agreement contains financial and
operating covenants including restrictions on incurring indebtedness and liens,
acquisitions, selling property, repurchasing the Companys shares and paying
dividends. In addition, Enesco is required to satisfy fixed charge coverage
ratio and leverage ratio tests at the end of each quarter and a minimum annual
operating profit covenant. In March 2004, Enescos domestic $50.0 million credit facility was amended to
add term notes totaling $7.7 million for the purpose of funding the acquisition
of Gregg Gift. The total unsecured credit facility is currently $57.7 million.
At the same time, Gregg Gift, was added as a borrowing subsidiary and certain
financial covenants were modified. As of March 31, 2004, Enesco was in
compliance with all covenants under the revolving credit agreement. Enesco is not aware of any trends, events, demands, commitments or
uncertainties that reasonably can be expected to have a material adverse effect
on liquidity and the ability to meet anticipated requirements for working
capital and capital expenditures. We believe that our current cash and cash
equivalents, cash generated from operations, and available financing will
satisfy our expected 19




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working capital needs, capital expenditures and other liquidity requirements
associated with our existing operations. However, in the course of pursuing
growth opportunities, including but not limited to acquisitions and alliances,
Enesco may need to negotiate additional or amend existing credit facilities.
In addition, there are no transactions, arrangements or other relationships
with unconsolidated entities or other persons, as of March 31, 2004, that are
reasonably likely to materially affect liquidity or requirements for capital
resources. The principal sources of Enescos liquidity are its available cash balances,
cash from operations and available financing. At March 31, 2004, Enesco had
unused lines of credit of approximately $38.6 million. As of March 31, 2004,
Enesco had $22.1 million interest bearing debt outstanding. Fluctuations in the value of the U.S. dollar versus international currencies
affect the U.S. dollar translation value of international currency denominated
balance sheet items. The changes in the balance sheet dollar values due to
international currency translation fluctuations are recorded as a component of
shareholders equity. Risk Factors Set forth below and elsewhere in this Report and in other documents we file
with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report. The results of operations for any quarter or fiscal year are not necessarily
indicative of results to be expected in future periods. Our operating results
have been in the past, and will continue to be, subject to quarterly and annual
fluctuations as a result of a number of factors. These factors include:  
    
    Changes in economic conditions and specific market conditions
    
    The ability to secure, maintain and renew popular licenses,
particularly our licenses for Precious Moments, Heartwood
Creek, Cherished Teddiesand Disney
    
    Fluctuations in demand for our products
    
    Manufacturing lead times 20




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
    
    The effects of terrorist activity, armed conflict or epidemics that could cause a disruption in global economic activity,
changes in logistics and security arrangements, particularly with respect to our reliance on manufacturing facilities in
China
    
    The timing of orders, timing of shipments and our ability to meet customer demands
    
    Inventory levels and purchase commitments below or exceeding requirements based upon future demand forecasts
    
    Price and product competition in the giftware industry
    
    The trend toward retail store consolidation in the card and gift channel in the United States
    
    Variations in sales channels, product costs or mix of products sold
    
    The geographical mix of our revenue and the associated impact on gross margin
    
    Our ability to achieve targeted cost reductions particularly in the United States operations
    
    Actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining
the amounts of certain assets (including the amounts of related allowances), liabilities and other items reflected in our
financial statements. As a consequence, operating results for a particular future period are
difficult to predict. Any of the foregoing factors, or any other factors
discussed elsewhere herein, could have a material adverse effect on our
business, results of operations and financial condition. Gross margin may be adversely affected in the future by increases in vendor
costs, excess inventory, obsolescence charges, changes in shipment volume,
price competition and changes in channels of distribution or in the mix of
products sold. Gross margin may also be impacted by geographic mix of product
sold. Our ability to import products and satisfy customer orders on a timely basis is
affected by the availability of, and demand for, quality production capacity
abroad. We compete with other importers of giftware products for the foreign
manufacturing sources that can produce high-quality products at affordable
prices. While we believe that there are other manufacturing sources available
for our product lines, any loss, disruption or substantial reduction of
sourcing capability or shipping from one or more of our key manufacturing
facilities could have a significant short-term adverse effect on our
operations. We are subject to the following risks inherent in foreign
manufacturing: fluctuations in currency exchange rates; labor, economic and
political instability; the effects of 21




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terrorist activity, armed conflict and epidemics, causing disruption in global
economic activity and changes in logistics and security arrangements; cost and
capacity fluctuation and delays in transportation, dockage and materials
handling; restrictive actions by foreign governments; nationalizations; the
laws and policies of the United States affecting importation of goods,
including duties, quotas and taxes. Since the terrorist attacks on September
11, 2001 and the SARS epidemic, the U.S. Customs Service has enacted various
security procedures affecting the importation of goods. Such procedures could
adversely affect the cost and timing of our receipt of goods from our foreign
manufacturers. In December 2003, the office of U.S. Customs and Border
Protection certified Enesco as a member of the Customs Trade Partnership
Against Terrorism (CTPAT). The Department of Homeland Security instituted
CTPAT as a means to identify low risk importers and allow the free flow of
goods even under heightened security conditions. Enescos certification is
strategically important since it may help reduce the risk of significant delays
in the importation of our product. In 2003, approximately 70% of our products were manufactured in, and imported
from China. We anticipate that this percentage will remain the same or
increase in the foreseeable future. China has joined the World Trade
Organization and has been accorded permanent Normal Trade Relations status by
the U.S. government. Various commercial and legal practices widespread in China, including the
handling of intellectual properties and certain labor practices, as well as
certain political and military actions taken or suggested by China, are under
review by the U.S. government. Accordingly, conducting business with vendors
located in China is subject to political uncertainties, the financial impact of
which we are unable to estimate. To the extent China may have its exports or
transaction of business with U.S. entities subject to political retaliation,
the cost of Chinese imports could increase significantly and/or the ability to
import goods from China may be materially impaired. In such an event, there
could be an adverse effect on our operations until alternative arrangements for
the manufacture of our product were made on economic, production and
operational terms at least as favorable as those currently in effect. The principal competitive risks in the markets in which we presently compete
and may compete in the future are: 22




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
    
    Performance
    
    Price
    
    Collectibility of our products
    
    Market presence
    
    New product introductions
    
    Product costs
    
    Differentiation of new products from those of our competitors
    
    Time to market on new products Legal Proceedings On February 13, 2004, the staff of the Securities and Exchange
Commission (SEC) informed Enesco that the SEC staff is considering
recommending that the SEC bring a civil action against Enesco for possible
violations of the U.S. securities laws, related to trading in Enescos
securities in the April-June 2000 time period. If the SEC were to file suit
against Enesco, they have indicated that they would expect to seek
disgorgement of approximately $1.2 million of alleged profits, penalties in
an unspecified amount and an injunction against further violation of U.S.
securities laws. As permitted under SEC procedures, Enesco responded in
writing to the SEC in March 2004 and has continued to discuss this matter
with the SEC staff, prior to the SEC staff formally deciding what action, if
any, to recommend. Enesco is unable to determine what amount, if any, could
ultimately be paid with respect to this matter. Until this notification by
the SEC on February 13, 2004, Enesco had not had contact with the SEC on this
matter since late 2001. On February 19, 2004, the SEC further informed Enesco that the SEC staff
is considering recommending that the SEC bring a civil action against a
former Senior Vice President and General Counsel of Enesco, for possible
violations of the U.S. securities laws related to trading in Enescos
securities in the April-June 2000 time period. Enesco is obligated to
indemnify the former officer, subject to the terms of Enescos By-laws, with
respect to his expenses incurred in connection with this matter. In the ordinary course of Enescos business, there have arisen various
other legal proceedings pending against Enesco and its subsidiaries. While
we cannot predict the eventual outcome of 23




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these proceedings, we believe that none of these proceedings will have a
material adverse impact upon the consolidated financial statements of Enesco. 24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. As such, Enesco is exposed to
foreign exchange risk since purchases and sales are made in foreign currencies.
In addition, Enesco is subject to interest rate risk on outstanding
borrowings. Enesco may reduce its exposure to fluctuations in interest rates
and foreign exchange rates by creating offsetting positions through the use of
derivative financial instruments. Enesco currently does not use derivative
financial instruments for trading or speculative purposes. Enesco regularly
monitors its foreign currency exposures and ensures that the hedge contract
amounts do not exceed the amounts of the underlying exposures. To manage
foreign currency risk, as of March 31, 2004, Enesco had entered into forward
exchange agreements with a notional value of $8.0 million that will mature
within 58 day. These contracts include sales of British pounds sterling and
the purchase of U.S. dollars at an average exchange rate of 1.82, a sale of
U.S. dollars and the purchase of British pounds sterling at an average exchange
rate of 1.82 and sales of Euros and purchases of U.S. dollars at an average
exchange rate of 1.21. The fair value of these contracts is not significant. As
of March 31, 2004, Enesco had $22.1 million of interest bearing debt
outstanding 25




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ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Form 10-Q, Enesco carried out an
evaluation, under the supervision and with the participation of Enescos
management, including Enescos (i) Interim Chief Executive Officer (CEO) and
(ii) Chief Financial Officer and Treasurer (CFO), of the effectiveness of the
design and operation of Enescos disclosure controls and procedures. Based on
that evaluation, Enescos management, including the Interim CEO and CFO,
concluded that Enescos disclosure controls and procedures are operating
effectively as designed. In January 2004, Enesco began operation of a new ERP
system in the U.S. Except for this new ERP system, there have been no
significant changes in Enescos internal controls or in other factors that
could significantly affect internal controls subsequent to the date Enesco
carried out its evaluation. We are committed to a continuing process of identifying, evaluating and
implementing improvements to the effectiveness of our disclosure and internal
controls and procedures. Our management, including our interim CEO and CFO,
does not expect that our controls and procedures will prevent all errors. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
within Enesco have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The design of any
system of controls is also based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in any control system, misstatements due to
error or violations of law may occur and not be detected. 26




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PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits  10.1
    
    2004 ROA Incentive Program31.1
    
    Certification of interim Chief Executive Officer
under Exchange Act Rules 13a-15e and 15d-15e pursuant to
Section 302 of the Sarbanes-Oxley act of 200231.2
    
    Certification of Chief Financial Officer under
Exchange Act Rules 13a-15e and 15d-15e pursuant to Section 302
of the Sarbanes-Oxley act of 200232.1
    
    Statement of interim Chief Executive Officer
Pursuant to Section 906 of the Sabanes-Oxley Act of 200232.2
    
    Statement of Chief Financial Officer and Treasurer
Pursuant to Section 906 of the Sabanes-Oxley Act of 2002  (b)
    
    Reports on Form 8-K  (1)
    
    A Current Report on Form 8-K dated April 21,2004
was filed with the SEC under Item 5 reporting the death of Dan
DalleMolle, President and Chief Executive Officer, and the
election of Thomas F. Bradley, the Chief Financial Officer, as
the interim Chief Executive Officer.(2)
    
    A Current Report on Form 8-K dated May 6, 2004
reporting Enescos First Quarter 2004 financial results. 27




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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: May 10, 2004
    
    /s/ Thomas F. BradleyThomas F. BradleyInterim Chief Executive OfficerDate: May 10, 2004
    
    /s/ Thomas F. BradleyThomas F. BradleyChief Financial Officer and Treasurer
 28