##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   Enesco Group, Inc.(Exact name of registrant as specified in its charter)
 Illinois
    
    04-1864170(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer 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)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ




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##### 



ENESCO GROUP, INC.
 TABLE OF CONTENTS
 PART IItem 1.
    
    Consolidated Financial Statements
    
    5Consolidated Balance Sheets (Unaudited) As of June 30, 2006 and December 31, 2005
    
    5Consolidated Statements of Operations (Unaudited) For the Three Months Ended June 30, 2006 and 2005
    
    6Consolidated Statements of Operations (Unaudited) For the Six Months Ended June 30, 2006 and 2005
    
    7Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) (Unaudited) For the Six Months Ended June 30, 2006 and 2005
    
    8Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2006 and 2005
    
    9Notes to Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART IIItem 1.
    
    Legal Proceedings
    
    30Item 1A.
    
    Risk Factors
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    32Item 5.
    
    Other Information
    
    33Item 6.
    
    Exhibits
    
    33SignaturesExhibit 31.1Exhibit 31.2Exhibit 32
 2




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##### 



Forward-Looking Statements
     Operating Improvement Plan
 
    
    Ability to implement our comprehensive plan for operating improvement and to achieve its
goals for cost savings and market share increases.
 Long-Term Financing
 
    
    Ability to enter into new financing arrangements to replace our U.S. credit facility that
is scheduled to terminate in September 2006.
    
    Ability to comply with the covenants in our existing U.S. credit facility and to enter
into and comply with the covenants in new credit facilities to finance operational
requirements at competitive costs and interest rates.
    
    Ability to obtain increases in advance rates on eligible collateral, which will allow
borrowings sufficient to fund operational requirements.
 Business Environment
 
    
    Day-to-day effects of current economic conditions and market fluctuations. This includes
contributing factors, such as inflation, interest and foreign currency rate changes, which
may create a positive or negative impact on operations.
    
    Consumer interest in products is seasonal and may vary based on current market demand
fluctuations and time of year.
    
    Effects of terrorist activity, armed conflict and epidemics, and local labor shortages
possibly causing a business disruption in global economic activity, and changes in logistics
and security arrangements. This is particularly significant with respect to our heavy
reliance on external manufacturing facilities located in China.
    
    Competitive activities, particularly those of our main competitors, which can
significantly influence giftware prices and product demand.
    
    The level of success of our new product introductions and those of our competitors, which
will impact our competitive position.
 3




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##### 



Sales Environment
 
    
    Ability to secure, maintain and renew licenses and contracts, particularly Jim Shore
Designs, Inc., Disney and Priscilla Hillman (Cherished Teddies®), which are our top
performers and make up approximately 27.5% of associated product line revenues.
    
    Changes in the geographical mix of revenue for the U.S. and International, which will impact gross margin.
    
    Ability to grow revenue in mass and niche market channels.
    
    Mass retailers attempts at direct sourcing and determining the right product designs.
    
    Sales and profitability, which can be affected by changes over time in consumer
preferences from one type of product to another. This may create a shift in demand from
products with higher margins to those with lower margins or to products we do not sell.
    
    Success in implementing new credit standards and a new credit scoring system, and
continuing to improve days sales outstanding.
 Production, Procurement and Distribution
 
    
    Ability to implement and execute supply chain warehousing and distribution improvements
and cost savings with a third-party logistics company.
    
    Timing of customer orders, shipments to the U.S. from suppliers in China and other
developing countries, and the ability to forecast and meet customer demands for products in
a timely and cost-effective manner.
    
    Ability to understand metrics to track and effectively manage manufacturing and supply
chain lead times, which cause fluctuations in inventory levels and order fulfillment
timeliness.
    
    Changes in customs regulations, tariffs, freight and political climate, which can
adversely affect results of operations.
    
    Availability to source products due to changes in conditions that impact suppliers
including environmental conditions, laws and regulations, litigation involving suppliers,
transportation disruptions, labor shortages, power outages, force majeure events and/or
business decisions made by suppliers, which could have an adverse impact on operating
results.
 Legal and Other
 
    
    Risk of trademark and license infringements, and our ability to effectively enforce our
rights.
    
    The actual events, circumstances, outcomes and amounts differing from judgments,
assumptions and estimates used in determining the value of certain assets (including the
amounts of related allowances), liabilities, claims and tax assessments of undetermined
merit and amount asserted against us for various legal matters and other items reflected in
our Consolidated Financial Statements.
 4




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##### 



PART
I  FINANCIAL INFORMATION
 Item 1 Consolidated Financial Statements
 ENESCO GROUP, INC.
 Consolidated Balance Sheets
As of June 30, 2006 and December 31, 2005
 (Unaudited)June 30,
    
    
    December 31,(In thousands, except per share amounts)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,309
    
    
    $
    12,918Accounts receivable, net
    
    
    34,358
    
    
    
    42,285Inventories
    
    
    34,071
    
    
    
    40,659Prepaid expenses
    
    
    4,134
    
    
    
    3,471Deferred income taxes
    
    
    899
    
    
    
    783Asset held for sale
    
    
    2,015
    
    
    
    Total current assets
    
    
    82,786
    
    
    
    100,116Property, plant and equipment, at cost:Land and improvements
    
    
    1,200
    
    
    
    1,200Buildings and improvements
    
    
    17,678
    
    
    
    19,538Machinery and equipment
    
    
    9,624
    
    
    
    9,636Office furniture and equipment
    
    
    38,624
    
    
    
    37,826Transportation equipment
    
    
    371
    
    
    
    53267,497
    
    
    
    68,732Less: accumulated depreciation and amortization
    
    
    (56,398
    )
    
    
    (53,228
    )Property, plant and equipment, net
    
    
    11,099
    
    
    
    15,504Other assets:Goodwill
    
    
    3,301
    
    
    
    8,364Other
    
    
    2,079
    
    
    
    3,135Deferred income taxes
    
    
    3,061
    
    
    
    3,072Total other assets
    
    
    8,441
    
    
    
    14,571Total assets
    
    $
    102,326
    
    
    $
    130,191LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    42,642
    
    
    $
    30,823Accounts payable
    
    
    13,903
    
    
    
    15,306Federal, state and foreign income taxes
    
    
    8,301
    
    
    
    9,005Deferred gain on sale of fixed assets
    
    
    5,414
    
    
    
    6,358Accrued expenses:Payroll and commissions
    
    
    2,439
    
    
    
    3,083Royalties
    
    
    3,564
    
    
    
    5,782Post-retirement benefits
    
    
    123
    
    
    
    142Other
    
    
    3,905
    
    
    
    5,585Total current liabilities
    
    
    80,291
    
    
    
    76,084Non-current liabilities:Post-retirement benefits
    
    
    943
    
    
    
    1,281Total non-current liabilities
    
    
    943
    
    
    
    1,281Shareholders Equity:Common
Stock, par value $0.125: authorized 80,000 shares; issued 25,228 shares
    
    
    3,154
    
    
    
    3,154Capital in excess of par value
    
    
    40,000
    
    
    
    41,430Retained earnings
    
    
    212,969
    
    
    
    248,437Accumulated other comprehensive income
    
    
    8,137
    
    
    
    4,438264,260
    
    
    
    297,459Less: Shares of Common Stock held in treasury, at cost:10,319 shares at June 30, 2006 and 10,308 shares at December 31, 2005
    
    
    (243,168
    )
    
    
    (244,633
    )Total shareholders equity
    
    
    21,092
    
    
    
    52,826Total liabilities and shareholders equity
    
    $
    102,326
    
    
    $
    130,191
  5




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Operations
For the Three Months Ended June 30, 2006 and 2005
(Unaudited)
 June 30,
    
    
    June 30,(In thousands, except per share amounts)
    
    2006
    
    
    2005Net revenues
    
    $
    37,751
    
    
    $
    45,744Cost of sales
    
    
    26,796
    
    
    
    28,360Cost of
sales  loss on license termination
    
    
    
    
    
    
    7,713Gross profit
    
    
    10,955
    
    
    
    9,671Selling, general and administrative expenses
    
    
    26,574
    
    
    
    30,580Goodwill impairment loss
    
    
    5,292
    
    
    
    Operating loss from continuing operations
    
    
    (20,911
    )
    
    
    (20,909
    )Interest expense
    
    
    (940
    )
    
    
    (456
    )Interest income
    
    
    24
    
    
    
    38Other income (expense), net
    
    
    (239
    )
    
    
    12Loss from continuing operations before income taxes
    
    
    (22,066
    )
    
    
    (21,315
    )Income tax expense
    
    
    (617
    )
    
    
    (463
    )Loss from continuing operations
    
    
    (22,683
    )
    
    
    (21,778
    )Discontinued operationsLoss from operations of Dartington (including loss on
disposal in 2006 of $2,321)
    
    
    (3,185
    )
    
    
    (368
    )Income tax benefit
    
    
    956
    
    
    
    110Loss from discontinued operations
    
    
    (2,229
    )
    
    
    (258
    )Net loss
    
    $
    (24,912
    )
    
    $
    (22,036
    )Loss per share of Common Stock:Basic and diluted  continuing operations
    
    $
    (1.52
    )
    
    $
    (1.48
    )Basic and diluted  discontinued operations
    
    $
    (0.15
    )
    
    $
    (0.02
    )Basic and diluted  net loss
    
    $
    (1.67
    )
    
    $
    (1.50
    )
  6




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Operations
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
 June 30,
    
    
    June 30,(In thousands, except per share amounts)
    
    2006
    
    
    2005Net revenues
    
    $
    73,334
    
    
    $
    102,872Cost of sales
    
    
    47,145
    
    
    
    63,465Cost of sales  loss on license termination
    
    
    
    
    
    
    7,713Gross profit
    
    
    26,189
    
    
    
    31,694Selling, general and administrative expenses
    
    
    50,641
    
    
    
    64,792Goodwill impairment loss
    
    
    5,292
    
    
    
    Operating loss from continuing operations
    
    
    (29,744
    )
    
    
    (33,098
    )Interest expense
    
    
    (1,499
    )
    
    
    (855
    )Interest income
    
    
    52
    
    
    
    158Other income (expense), net
    
    
    (222
    )
    
    
    (143
    )Loss from continuing operations before income taxes
    
    
    (31,413
    )
    
    
    (33,938
    )Income tax expense
    
    
    (1,494
    )
    
    
    (2,697
    )Loss from continuing operations
    
    
    (32,907
    )
    
    
    (36,635
    )Discontinued operationsLoss from operations of Dartington (including loss on disposal in 2006
of $2,321)
    
    
    (3,659
    )
    
    
    (882
    )Income tax benefit
    
    
    1,098
    
    
    
    265Loss from discontinued operations
    
    
    (2,561
    )
    
    
    (617
    )Net loss
    
    $
    (35,468
    )
    
    $
    (37,252
    )Loss per share of Common Stock:Basic and diluted  continuing operations
    
    $
    (2.20
    )
    
    $
    (2.50
    )Basic and diluted  discontinued operations
    
    $
    (0.17
    )
    
    $
    (0.04
    )Basic and diluted  net loss
    
    $
    (2.37
    )
    
    $
    (2.54
    )
  7




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
 AccumulatedCapital in
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Treasury Stock
    
    
    Excess of
    
    
    Comprehensive
    
    
    Retained
    
    
    Shareholders(In thousands)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Par Value
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance December 31, 2004
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,671
    
    
    $
    (248,730
    )
    
    $
    44,229
    
    
    $
    8,152
    
    
    $
    302,462
    
    
    $
    109,267Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,252
    )
    
    
    (37,252
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,067
    )
    
    
    
    
    
    
    (3,067
    )Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,319
    )Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    562
    
    
    
    (240
    )
    
    
    
    
    
    
    
    
    
    
    322Other common stock
issuance
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    1,561
    
    
    
    (830
    )
    
    
    
    
    
    
    
    
    
    
    731Balance
June 30, 2005
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,483
    
    
    $
    (246,607
    )
    
    $
    43,159
    
    
    $
    5,085
    
    
    $
    265,210
    
    
    $
    70,001Balance
December 31, 2005
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,308
    
    
    $
    (244,633
    )
    
    $
    41,430
    
    
    $
    4,438
    
    
    $
    248,437
    
    
    $
    52,826Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,468
    )
    
    
    (35,468
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,699
    
    
    
    
    
    
    
    3,699Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,769
    )Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1,465
    
    
    
    (1,430
    )
    
    
    
    
    
    
    
    
    
    
    35Balance
June 30, 2006
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,319
    
    
    $
    (243,168
    )
    
    $
    40,000
    
    
    $
    8,137
    
    
    $
    212,969
    
    
    $
    21,092
  8




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
 June 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005Cash Flows from Operating Activities of Continuing Operations:Loss from continuing operations
    
    $
    (32,907
    )
    
    $
    (36,635
    )Adjustments to reconcile net loss to net cash used by operating
activities of continuing operations:Depreciation and amortization of property, plant and equipment
    
    
    1,713
    
    
    
    5,694Goodwill impairment loss
    
    
    5,292
    
    
    
    Deferred income taxes
    
    
    (105
    )
    
    
    204Capitalized loan cost write-off
    
    
    967
    
    
    
    Gains on sales of property, plant and equipment
    
    
    (986
    )
    
    
    (945
    )Stock-based compensation
    
    
    35
    
    
    
    731Loss on license termination
    
    
    
    
    
    
    7,713Changes in assets and liabilities:Accounts receivable, net
    
    
    9,237
    
    
    
    12,951Inventories
    
    
    6,494
    
    
    
    (1,231
    )Prepaid expenses
    
    
    (556
    )
    
    
    (992
    )Other assets
    
    
    525
    
    
    
    485Accounts payable and accrued expenses
    
    
    (7,078
    )
    
    
    (4,659
    )Income taxes payable
    
    
    (718
    )
    
    
    1,110Non-current post-retirement benefits
    
    
    (338
    )
    
    
    (1,378
    )Net cash used by operating activities of continuing operations
    
    
    (18,425
    )
    
    
    (16,952
    )Cash Flows from Investing Activities of Continuing Operations:Purchases of property, plant and equipment
    
    
    (217
    )
    
    
    (1,204
    )Proceeds from sales of property, plant and equipment
    
    
    77
    
    
    
    6Net cash used by investing activities of continuing operations
    
    
    (140
    )
    
    
    (1,198
    )Cash Flows from Financing Activities of Continuing Operations:Net issuance of notes and loans payable
    
    
    11,819
    
    
    
    8,797Exercise of stock options
    
    
    
    
    
    
    322Net cash provided by financing activities of continuing operations
    
    
    11,819
    
    
    
    9,119Cash Flows from Discontinued Operations:Operating activities
    
    
    (595
    )
    
    
    (594
    )Investing activities
    
    
    1,088
    
    
    
    (23
    )Net cash provided by (used in) discontinued operations
    
    
    493
    
    
    
    (617
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    644
    
    
    
    (427
    )Decrease in cash and cash equivalents
    
    
    (5,609
    )
    
    
    (10,075
    )Cash and cash equivalents, beginning of period
    
    
    12,918
    
    
    
    14,646Cash and cash equivalents, end of period
    
    $
    7,309
    
    
    $
    4,571Supplemental disclosure of cash paid for:Interest
    
    $
    1,320
    
    
    $
    770Income taxes
    
    $
    1,526
    
    
    $
    1,090
  9




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##### 



ENESCO GROUP, INC.
 Notes to Consolidated Financial Statements (Unaudited)
For the Six Months Ended June 30, 2006
 Note 1. Description of Business
   Bratz  Border Fine Arts  Cherished
Teddies ® , Halcyon Days ® , Heartwood Creek  by Jim Shore, Lilliput
Lane  , Pooh & Friends ® , Walt Disney Classics Collections ® Disney ® ,
    Foundations ® Growing Up
Girls ® Gregg Gift Heartwood Creek  by Jim
Shore
 Note 2. Summary of Significant Accounting Policies
 Basis of Presentation
  10




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##### 



Accounts Receivable Allowances
 Doubtful Accounts
  Sales Returns and Allowances
  11




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##### 



Inventory Reserves
 Excess or Slow Moving Inventory
   Inventory Shrinkage
  Revenue Recognition
   12




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##### 



Impairments of Tangible and Intangible Assets
 Goodwill and Other Intangible Assets Accounting for the
Impairment or Disposal of Long-Lived Assets.
   Tax Accruals
   Accounting for Stock-Based Compensation
 Share-Based
Payments.
 13




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##### 



Note 3. Brand Category Revenues and Geographic Operating Segments
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Proprietary Designs
    
    $
    11,593
    
    
    $
    11,921
    
    
    $
    22,053
    
    
    $
    28,345Licensed Brands
    
    
    14,719
    
    
    
    14,486
    
    
    
    25,101
    
    
    
    29,340Third-Party Distribution
    
    
    10,833
    
    
    
    10,497
    
    
    
    25,421
    
    
    
    24,718Precious Moments®(1)
    
    
    
    
    
    
    7,991
    
    
    
    
    
    
    
    18,805Other
    
    
    990
    
    
    
    1,731
    
    
    
    1,531
    
    
    
    2,742Intercompany
    
    
    (384
    )
    
    
    (882
    )
    
    
    (772
    )
    
    
    (1,078
    )Total consolidated
    
    $
    37,751
    
    
    $
    45,744
    
    
    $
    73,334
    
    
    $
    102,872
 
 (1)
    
    Includes only Precious Moments® product sales recorded by U.S. operations.  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net RevenuesU.S.
    
    $
    16,400
    
    
    $
    24,422
    
    
    $
    29,121
    
    
    $
    56,777International
    
    
    21,351
    
    
    
    21,322
    
    
    
    44,213
    
    
    
    46,095Total consolidated
    
    $
    37,751
    
    
    $
    45,744
    
    
    $
    73,334
    
    
    $
    102,872Operating Profit (Loss)U.S.
    
    $
    (22,496
    )
    
    $
    (20,867
    )
    
    $
    (33,179
    )
    
    $
    (34,576
    )International
    
    
    1,585
    
    
    
    (42
    )
    
    
    3,435
    
    
    
    1,478Total consolidated
    
    $
    (20,911
    )
    
    $
    (29,909
    )
    
    $
    (29,744
    )
    
    $
    (33,098
    )Long-lived AssetsU.S.Property, plant & equipment, net
    
    $
    8,643
    
    
    $
    10,379
    
    
    $
    8,643
    
    
    $
    10,379Other assets
    
    
    5,151
    
    
    
    11,694
    
    
    
    5,151
    
    
    
    11,694Total U.S.
    
    
    13,794
    
    
    
    22,073
    
    
    
    13,794
    
    
    
    22,073InternationalProperty, plant & equipment, net
    
    
    2,456
    
    
    
    6,333
    
    
    
    2,456
    
    
    
    6,333Other assets
    
    
    3,290
    
    
    
    4,111
    
    
    
    3,290
    
    
    
    4,111Total International
    
    
    5,746
    
    
    
    10,444
    
    
    
    5,746
    
    
    
    10,444Total consolidated
    
    $
    19,540
    
    
    $
    32,517
    
    
    $
    19,540
    
    
    $
    32,517Capital ExpendituresU.S.
    
    $
    125
    
    
    $
    393
    
    
    $
    135
    
    
    $
    678International
    
    
    70
    
    
    
    193
    
    
    
    82
    
    
    
    526Total consolidated
    
    $
    195
    
    
    $
    586
    
    
    $
    217
    
    
    $
    1,204Depreciation and AmortizationU.S.
    
    $
    578
    
    
    $
    1,800
    
    
    $
    1,273
    
    
    $
    5,084International
    
    
    229
    
    
    
    275
    
    
    
    440
    
    
    
    610Total consolidated
    
    $
    807
    
    
    $
    2,075
    
    
    $
    1,713
    
    
    $
    5,694
  14




---



##### 



Note 4. Income (Loss) Per Common Share (Basis of Calculations)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Average common shares outstanding-basic
    
    
    14,960
    
    
    
    14,700
    
    
    
    14,943
    
    
    
    14,653Dilutive effects of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average diluted shares outstanding
    
    
    14,960
    
    
    
    14,700
    
    
    
    14,943
    
    
    
    14,653
  Note 5. Financial Instruments
  Accounting for Derivative Instruments and Hedging Activities
  Forward Contracts
    
    Notional Amount
    
    Exchange Rate(In thousands)Euros
    
    $500
    
    1.2350
 15




---



##### 



Note 6. Stock-Based Compensation
 Share-Based Payments
 Accounting for
Stock Issued to Employees
  Three Months
    
    
    Six MonthsEnded
    
    
    Ended(In thousands, except per share amounts)
    
    June 30, 2005
    
    
    June 30, 2005Net loss as reported
    
    $
    (22,036
    )
    
    $
    (37,252
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (55
    )
    
    
    (182
    )Pro forma net loss
    
    
    (22,091
    )
    
    
    (37,434
    )Loss per share  continuing operations:Basic and diluted  as reported
    
    $
    (1.48
    )
    
    $
    (2.50
    )Basic and diluted  pro forma
    
    $
    (1.49
    )
    
    $
    (2.51
    )
   Three Months Ended June 30, 2006Weighted AverageWeighted Average
    
    
    Aggregate
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Term (Yrs.)Outstanding at beginning of period
    
    
    2,219,885
    
    
    $
    9.39Granted
    
    
    14,159
    
    
    
    1.47Forfeited
    
    
    (200,032
    )
    
    
    2.77Exercised
    
    
    
    
    
    
    Expired
    
    
    (81,070
    )
    
    
    23.55Outstanding at end of period
    
    
    1,952,942
    
    
    $
    9.42
    
    
    
    
    
    
    
    5.80Exercisable at end of period
    
    
    1,940,783
    
    
    $
    9.47
    
    
    $
    
    
    
    
    5.78
 16




---



##### 



Six Months Ended June 30, 2006Weighted AverageWeighted Average
    
    
    Aggregate
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Term (Yrs)Outstanding at beginning of period
    
    
    2,218,760
    
    
    $
    9.53Granted
    
    
    75,359
    
    
    
    1.79Forfeited
    
    
    (205,920
    )
    
    
    2.79Exercised
    
    
    
    
    
    
    Expired
    
    
    (135,257
    )
    
    
    17.15Outstanding at end of period
    
    
    1,952,942
    
    
    $
    9.42
    
    
    
    
    
    
    
    5.80Exercisable at end of period
    
    
    1,940,783
    
    
    $
    9.47
    
    
    $
    
    
    
    
    5.78
   Three Months
    
    Three MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2005
    
    Methodology for the Six Months Ended June 30, 2006Expected term (in years)
    
    
    6.25
    
    
    
    6.25
    
    
    Simplified SAB 107 transition method.Expected volatility
    
    
    61.2
    %
    
    
    57.5
    %
    
    Historic volatility over expected term of each grant.Expected risk-free interest rate
    
    
    4.99
    %
    
    
    3.86
    %
    
    Set to the Treasury Constant Maturity rate as of the
measurement date with maturity closest to the
expected term.Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    Dividends are not expected to be paid in the future.Fair value
    
    $
    0.91
    
    
    $
    2.35
    
    
    Black-Scholes valuation model.
 Note 7. Precious Moments, Inc. Licensing Agreement Termination
 Precious Moments ®
  17




---



##### 



Note 8. Notes and Loans Payable
          18




---



##### 



Note 9. Income Taxes
    Note 10. Discontinued Operations
    19




---



##### 



Note 11. Legal Proceedings
  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   1.
    
    Securing stable, long-term financing.Our current credit facility, as amended, will
terminate on September 15, 2006. We are seeking to put in place a new debt financing
structure, which must be completed in the third quarter of 2006, and have retained
Jefferies & Company, Inc. to assist us in procuring replacement financing. Loan costs
capitalized, totaling approximately $1.6 million, previously incurred in anticipation of
securing new financing through LaSalle Bank were written-off when Enesco did not request
LaSalle to extend its December 2005 commitment letter through June 30, 2006.2.
    
    Continuing the Operating Improvement Plan.Effective May 10, 2006, Enesco retained
Mesirow Financial Consulting, LLC (Mesirow) to provide support to the finance team in the
continued implementation of our Operating Improvement Plan and to assist us in identifying
other improvement opportunities. Mesirow replaced the Keystone Consulting Group (Keystone),
our former restructuring advisor, whose agreement expired on March 31, 2006, but worked
under a verbal
 20




---



##### 



extension through April 30, 2006. We continue to work aggressively to increase revenue and
implement cost reductions. In addition to the 2005 Operating Improvement Plan, we are
looking at new price initiatives, personnel redeployment, reorganizing our sales and customer
service functions and pursuing productivity increases throughout Enesco.
 3.
    
    Implementing a better distribution system.In the past six months, we have
experienced logistical difficulties with our distribution process, which difficulties have
materially and adversely affected our business. We continue to work toward rectifying our
distribution process and have identified several solutions that we expect will alleviate
the problems with our distribution process. In the interim, we are taking the following
actions: (1) We are arranging with our third party distributor in China to handle increased
volumes of case product shipments directly from China. (2) We will continue to ship our
high-value product lines through our contract distributor in St. Louis, in lieu of closing
the operation this quarter (3) In lieu of ceasing operations at our Elk Grove Village,
Illinois distribution center this quarter, we are ramping up in the third quarter 2006 to
handle the distribution of our 2006 Christmas product sales, and will likely vacate at year
end.We have also taken many steps over the last few months to work better with NDC, our
third-party logistics provider, to rectify the shipping issues that have been encountered
since our transition to our new facility in January 2006. However, the new facility is not
designed to perform at the shipping levels and requirements that our business and customers
require. We are working closely with NDC to implement process improvements as well as
redesigning the floor plan and identifying specific automation needs. In order to achieve
the pick and pack replenishment shipping volumes necessary to make Enesco successful and
provide high-quality customer satisfaction, there will need to be capital expenditures made
to automate the facility, which we preliminarily estimate will total $0.5 million to $1.0
million. Enesco and NDC are currently working on a plan that is expected to be implemented in
the fourth quarter of 2006 that will support a pick and pack program in 2007.4.
    
    Improving customer service. Over the last few years, our distribution, procurement and
Enterprise Resource Planning system (ERP) problems have adversely affected our relationship
with many of our customers. We intend to review our U.S. ERP options and potentially look
at replacing the system with one already running successfully at one of our international
subsidiaries. We believe many of these customers have remained loyal only because of the
fine products and licenses that Enesco offers. It is our intention to solve our remaining
issues and refocus on servicing our customers. Without our loyal customers, we will not
succeed and grow.
    
    
    gross profit margins of 40% to 45% from our continuing product lines
    
    3% to 5% consolidated operating margins by 2007
  21




---



##### 



Precious Moments®
   Impact of the Operating Improvement Plan Initiatives
  Rationalization of the U.S. product portfolio
    Precious
Moments ® Precious Moments ®
 22




---



##### 



Reducing global corporate overhead, general and administrative and marketing costs
   Implementing a cost-effective distribution and warehousing model
  RESULTS OF OPERATIONS
 Net Revenue and Gross Profit
 Precious Moments ® Precious Moments® Precious Moments ® Precious Moments ®
 Precious Moments ®
 Precious Moments ®
  23




---



##### 



Precious Moments ® Precious Moments ®
 Precious Moments ®
 Precious
Moments ®
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,($ in thousands)
    
    2006
    
    
    2005
    
    
    Change %
    
    
    2006
    
    
    2005
    
    
    Change %Net revenues, other than Precious Moments®
    
    $
    37,751
    
    
    $
    37,753
    
    
    
    
    
    
    $
    73,334
    
    
    $
    84,067
    
    
    
    (12.8
    )%Precious Moments® product revenues
    
    
    
    
    
    
    7,991
    
    
    
    
    
    
    
    
    
    
    
    18,805
    
    
    
    Net revenues as reported
    
    $
    37,751
    
    
    $
    45,774
    
    
    
    (17.5
    )%
    
    $
    73,334
    
    
    $
    102,872
    
    
    
    (28.7
    )%Cost of sales, other than Precious Moments®
    
    $
    26,796
    
    
    $
    24,045
    
    
    
    (11.4
    )%
    
    $
    47,145
    
    
    $
    51,902
    
    
    
    (9.2
    )%Precious Moments® cost of sales
    
    
    
    
    
    
    3,622
    
    
    
    
    
    
    
    
    
    
    
    7,563
    
    
    
    Precious Moments® loss on license
termination
    
    
    
    
    
    
    7,713
    
    
    
    
    
    
    
    
    
    
    
    7,713
    
    
    
    Precious Moments® royalties
    
    
    
    
    
    
    693
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    Cost of sales, as reported
    
    $
    26,796
    
    
    $
    36,073
    
    
    
    (25.7
    )%
    
    $
    47,145
    
    
    $
    71,178
    
    
    
    (33.8
    )%Gross margin, other than Precious Moments®
    
    
    29.0
    %
    
    
    36.3
    %
    
    
    
    
    
    
    35.7
    %
    
    
    38.3
    %Gross margin, Precious Moments®
    
    
    
    
    
    
    (50.5
    )%
    
    
    
    
    
    
    
    
    
    
    (2.5
    )%Gross margin as reported
    
    
    29.0
    %
    
    
    21.1
    %
    
    
    
    
    
    
    35.7
    %
    
    
    30.8
    %
 Precious Moments®,
 Selling, General and Administrative Expenses (SG&A)
  24




---



##### 



Increase (Decrease)
    
    
    Increase (Decrease)Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006 vs. 2005
    
    
    2006 vs. 2005Reduced administrative salaries and benefit costs
    
    
    
    
    
    $
    (3.5
    )
    
    
    
    
    
    
    
    
    
    $
    (7.8
    )Accelerated depreciation of ERP system in prior year
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    (3.7
    )Reduced distribution and warehousing costs in the U.S.
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (2.2
    )Employee severances
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    (0.9
    )Lower consulting fees
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Lower travel and entertainment
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Favorable foreign currency exchange rate impact
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Capitalized
loan cost write-off
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6Higher bank fees
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    2.3Other, net
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    (1.8
    )$
    (4.0
    )
    
    
    
    
    
    
    
    
    
    $
    (14.2
    )
 Operating Income (Loss)
  Interest and Other Income (Expense), Net
  Provision for Income Tax Expense (Benefit)
   Discontinued operations
   LIQUIDITY AND CAPITAL RESOURCES
  25




---



##### 



Liquid Assets
   Cash Flows
     26




---



##### 



Operating Improvement Plan Goals
  Credit Facilities
         27




---



##### 



Recent Accounting Pronouncements
  
    
    The cumulative effect of the change to the new accounting principle on periods prior to
those presented shall be reflected in the carrying amounts of assets and liabilities as of
the beginning of the first period presented.
    
    An offsetting adjustment, if any, shall be made to the opening balance of retained
earnings (or other appropriate components of equity or net assets in the statement of
financial position) for that period.
 28




---



##### 




    
    Financial statements for each individual prior period presented shall be adjusted to
reflect the period-specific effects of applying the new accounting principle.
  New York Stock Exchange and NYSE Arca Delisting
    Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Accounting for Derivative
Instruments and Hedging Activities
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  29




---



##### 



Changes in Internal Control over Financial Reporting
  PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  We will need to refinance all of our indebtedness under our current credit facility on or before maturity.
  Our failure to generate sufficient cash to meet our liquidity needs may materially and adversely
affect our ability to service our indebtedness and operate our business.
  30




---



##### 



Our existing credit facility contains, and any new credit facility will likely contain, various
covenants which limit our managements discretion in the operation of our business.
  
    
    incur additional indebtedness;
    
    pay dividends or distributions on, or redeem or repurchase, our common stock;
    
    make investments;
    
    incur liens;
    
    transfer or sell assets;
    
    consolidate, merge, or transfer all or substantially all of our assets; and
    
    retain and dismiss consultants to provide strategic and structural services without approval of our lenders.
  Any failure to comply with the covenants in our current credit facility could have a material
adverse effect on our business, financial condition and results of operations.
  We are highly dependent upon the abilities of our senior management team and consultants, which
have recently experienced significant changes.
  
    
    the resignation of Cynthia Passmore as our President and Chief Executive Officer, and as
a Director, and the permanent appointment of Basil Elliott, as a Director, President and
Chief Executive Officer, and Marie Meisenbach Graul, as Executive Vice President and Chief
Financial Officer;
    
    the retirement of Anne-Lee Verville as Director and as Chairman of the Board and the
election of Leonard Campanaro as Chairman of the Board; and
    
    the retention of Mesirow Financial Consulting, LLC to replace Keystone Consulting Group,
effective May 10, 2006, to provide support to the finance team in implementing our
Operating Improvement Plan and to assist us in identifying other improvement opportunities.
  31




---



##### 



Following our delisting from the New York Stock Exchange, there is a limited trading market
for our common stock, which may hinder your ability to sell your shares and may contribute to lower
stock prices.
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
   Donna Brooks Lucas
    
    For:
    
    
    10,087,232Withheld:
    
    
    2,023,685Leonard A. Campanaro
    
    For:
    
    
    10,069,706Withheld:
    
    
    2,041,211
  Continuing Director
    
    Term ExpiresRichard W. Blackburn
    
    2008Judith R. Haberkorn
    
    2008Thane A. Pressman
    
    2008David C. duFour
    
    2007Basil A. Elliott
    
    2009
  32




---



##### 



Approval of the Amended and Restated
1996 Long-Term Incentive Plan
    
    For:
    
    
    5,768,495Against:
    
    
    2,067,904Abstain:
    
    
    388,198
  Ratification of KPMG LLP
    
    For:
    
    
    12,014,178Against:
    
    
    73,346Abstain:
    
    
    20,392
 Item 5. Other Information
  Item 6. Exhibits
  33




---



##### 



EXHIBIT INDEX
 Item 601
    
    Exhibit3.1*
    
    Amended By-laws of Enesco Group, Inc. (Exhibit 99.1 to Form 8-K
filed with the Commission on April 11, 2006 (File No.
001-09267.))10.1*
    
    Executive Separation Agreement by and between Enesco Group, Inc.
and Cynthia L. Passmore, dated May 12, 2006 (Exhibit 99.1 to Form
8-K/A filed with the Commission on May 17, 2006 (File No.
001-09267))10.2*
    
    Enesco Group, Inc. Amended and Restated 1996 Long-Term Incentive
Plan, Amended and Restated as of January 24, 2006 (Appendix B to
Enescos Proxy Statement for its 2006 Annual Meeting filed with
the Commission on April 20, 2006 (File No. 001-09267)).10.3*
    
    Notice and letter agreement, dated June 8, 2006, among Bank of
America, N.A., as Agent and Lender, Enesco Group, Inc. and the
Enesco Group, Inc. subsidiaries named therein (Exhibit 10.1 to
Form 8-K filed with the Commission on June 14, 2006 (File No.
001-09267)).10.4*
    
    Business Purchase Agreement, dated April 28, 2006, between Enesco
Limited and Dartington Crystal (Torrington) Limited (Exhibit 99.2
to Form 8-K filed with the Commission on May 2, 2006 (File No.
001-09267)).10.5*
    
    Form of Certificate of Grant of Non-Qualified Stock Options under
Amended and Restated 1996 Long-Term Incentive Plan (Exhibit 10.2
to Form 8-K filed with the Commission on May 23, 2006 (File No.
001-09267)).10.6*
    
    Form of Certificate of Grant of Restricted Stock under Amended
and Restated 1996 Long-Term Incentive Plan (Exhibit 10.3 to Form
8-K filed with the Commission on May 23, 2006 (File No.
001-09267)).10.7*
    
    Form of Certificate of Grant of Non-Qualified Stock Options under
1999 Non-Employee Director Plan, as amended (Exhibit 10.4 to Form
8-K filed with the Commission on May 23, 2006 (File No.
001-09267)).31.1
    
    Certification of Chief Executive Officer under Exchange Act Rules
13a-14(a) or 15d-14(a) pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer under Exchange Act Rules
13a-14(a) or 15d-14(a) pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Incorporated by reference 34




---



##### 



Signatures
  ENESCO GROUP, INC.(Registrant)Date: July 28 , 2006
    
    By:
    
    /s/ Basil A. ElliottBasil A. ElliottPresident and Chief Executive OfficerDate: July 28, 2006
    
    By:
    
    /s/ Marie Meisenbach GraulMarie Meisenbach GraulExecutive Vice President and Chief Financial Officer
 35