##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 Commission File Number 001-09267
 Enesco Group, Inc.
 
  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)
 
 
  þ o
  þ o
  o þ




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ENESCO GROUP, INC.
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    5Item 1. Financial Statements
    
    
    5Consolidated
Balance Sheets
As of September 30, 2005 (Unaudited) and December 31, 2004
    
    
    5Consolidated Statements of Operations
For the Three Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    7Consolidated Statements of Operations
For the Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    8Consolidated Statements of Shareholders Equity and Comprehensive
Income (Loss)
For the Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    9Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    10Notes to Consolidated Financial Statements (Unaudited)
    
    
    11Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36EXHIBIT INDEX
    
    
    37SIGNATURES
    
    
    39EXHIBIT 10.9EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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Cautionary Factors That May Affect Future Results
     Business Environment
 
    
    Day-to-day effects of current economic conditions and market fluctuations. This
includes contributing factors such as inflation and 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, possibly causing a business
disruption in global economic activity, 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, can significantly
influence giftware prices and product demand.
    
    The level of success of our new product introductions and those of our competitors will
impact our competitive position.
 3




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##### 




    
    Ability to implement the Companys comprehensive plan for operating improvement and
achieving its goals for cost savings and market share increases.
    
    Ability to comply with the covenants in the existing U.S. credit facility and to enter
into new credit facilities to finance operational requirements at competitive cost and
interest rates.
 Sales Environment
 
    
    Ability to secure, maintain and renew licenses, particularly Jim Shore Designs, Inc.,
Disney and Priscilla Hillman (Cherished Teddies),which have been top performers and make
up approximately 25% of associated product line revenues.
    
    Changes in the geographical mix of revenue for the U.S. and International will impact gross margin.
    
    Ability to grow revenues in mass and niche market channels.
    
    Mass retailers attempts at direct sourcing and determining the right product designs.
    
    Sales and profitability 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 at all.
    
    Success in moving customers out of accounts receivable and credit hold.
 Production, Procurement and Distribution
 
    
    Timing of customer orders, shipments to the U.S. from suppliers in China and emerging
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, can influence demand.
    
    Fluctuations in customs regulations, tariffs, freight and political changes 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, force majeure events and/or business decisions made by
suppliers could have an adverse impact on operating results.
    
    Variations in sales channels, product costs or mix of products sold.
 Legal and Other
 
    
    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. Risk of trademarks and license infringements, and
our ability to effectively enforce our rights.
 4




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##### 



PART I. FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 ENESCO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(In thousands)
 (Unaudited)September 30,
    
    December 31,2005
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,093
    
    
    $
    14,646Accounts receivable, net
    
    
    76,626
    
    
    
    70,526Inventories
    
    
    54,219
    
    
    
    65,371Prepaid expenses
    
    
    4,247
    
    
    
    3,310Deferred income taxes
    
    
    587
    
    
    
    920Total current assets
    
    
    139,772
    
    
    
    154,773Property, Plant and Equipment, at cost:Land and improvements
    
    
    1,200
    
    
    
    1,200Buildings and improvements
    
    
    19,934
    
    
    
    22,131Machinery and equipment
    
    
    9,910
    
    
    
    10,273Office furniture and equipment
    
    
    37,851
    
    
    
    37,454Transportation equipment
    
    
    669
    
    
    
    79669,564
    
    
    
    71,854Less  accumulated depreciation and amortization
    
    
    (53,058
    )
    
    
    (49,345
    )Property, plant and equipment, net
    
    
    16,506
    
    
    
    22,509Other Assets:Goodwill
    
    
    9,560
    
    
    
    9,403Other
    
    
    3,138
    
    
    
    4,116Deferred income taxes
    
    
    3,072
    
    
    
    3,082Total other assets
    
    
    15,770
    
    
    
    16,601Total assets
    
    $
    172,048
    
    
    $
    193,883
  5




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##### 



ENESCO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(In thousands)
 (Unaudited)September 30,
    
    December 31,2005
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    50,222
    
    
    $
    26,354Accounts payable
    
    
    21,148
    
    
    
    18,680Income taxes payable
    
    
    7,450
    
    
    
    6,405Deferred
gain on sale of property, plant and equipment
    
    
    1,711
    
    
    
    1,711Accrued expenses Payroll and commissions
    
    
    3,554
    
    
    
    2,599Royalties
    
    
    7,160
    
    
    
    12,267Post-retirement benefits
    
    
    176
    
    
    
    821Other
    
    
    5,016
    
    
    
    5,941Total current liabilities
    
    
    96,437
    
    
    
    74,778Long-Term Liabilities:Post-retirement benefits
    
    
    1,564
    
    
    
    3,008Deferred gain on sale of fixed assets
    
    
    5,461
    
    
    
    6,830Total long-term liabilities
    
    
    7,025
    
    
    
    9,838Shareholders Equity:Common stock, par value $.125:Authorized 80,000 shares;Issued 25,228 shares
    
    
    3,154
    
    
    
    3,154Capital in excess of par value
    
    
    42,474
    
    
    
    44,229Retained earnings
    
    
    263,095
    
    
    
    302,462Accumulated other comprehensive income
    
    
    5,700
    
    
    
    8,152314,423
    
    
    
    357,997Less  shares held in treasury, at cost:Common stock, 10,414 shares at September 30, 2005 and
10,671 shares at December 31, 2004
    
    
    (245,837
    )
    
    
    (248,730
    )Total shareholders equity
    
    
    68,586
    
    
    
    109,267Total liabilities and shareholders equity
    
    $
    172,048
    
    
    $
    193,883
  6




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##### 



ENESCO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
(In thousands, except per share amounts)
 2005
    
    2004Net revenues
    
    $
    79,221
    
    
    $
    85,291Cost of sales
    
    
    46,824
    
    
    
    50,578Gross profit
    
    
    32,397
    
    
    
    34,713Selling, general and administrative expenses
    
    
    31,413
    
    
    
    33,056Operating income
    
    
    984
    
    
    
    1,657Interest expense
    
    
    (661
    )
    
    
    (350
    )Interest income
    
    
    15
    
    
    
    90Other expense, net
    
    
    (82
    )
    
    
    (201
    )Income before income taxes
    
    
    256
    
    
    
    1,196Income tax expense
    
    
    (2,371
    )
    
    
    (157
    )Net income (loss)
    
    $
    (2,115
    )
    
    $
    1,039Net income (loss) per common share  basic and diluted
    
    $
    (0.14
    )
    
    $
    0.07
  7




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##### 



ENESCO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
(In thousands, except per share amounts)
 2005
    
    2004Net revenues
    
    $
    188,464
    
    
    $
    199,309Cost of sales
    
    
    114,485
    
    
    
    115,058Cost of sales  loss on license termination
    
    
    7,713
    
    
    
    Gross profit
    
    
    66,266
    
    
    
    84,251Selling, general and administrative expenses
    
    
    99,206
    
    
    
    92,012Operating loss
    
    
    (32,940
    )
    
    
    (7,761
    )Interest expense
    
    
    (1,516
    )
    
    
    (624
    )Interest income
    
    
    173
    
    
    
    345Other expense, net
    
    
    (281
    )
    
    
    (244
    )Loss before income taxes
    
    
    (34,564
    )
    
    
    (8,248
    )Income tax (expense) benefit
    
    
    (4,803
    )
    
    
    3,769Net loss
    
    $
    (39,367
    )
    
    $
    (4,515
    )Net loss per common share  basic and diluted
    
    $
    (2.68
    )
    
    $
    (0.32
    )
  8




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ENESCO GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
(Unaudited)
(In thousands)
 AccumulatedCapital in
    
    Other
    
    
    
    
    
    TotalCommon Stock
    
    Treasury Stock
    
    Excess of
    
    Comprehensive
    
    Retained
    
    StockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    Par Value
    
    Income
    
    Earnings
    
    EquityBalance December
31, 2003
    
    
    25,228
    
    
    $
    3,154
    
    
    
    11,064
    
    
    $
    (253,168
    )
    
    $
    45,863
    
    
    $
    3,740
    
    
    $
    347,650
    
    
    $
    147,239Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,515
    )
    
    
    (4,515
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,093
    
    
    
    
    
    
    
    1,093Total
comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,422
    )Exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    1,706
    
    
    
    (685
    )
    
    
    
    
    
    
    
    
    
    
    1,021Other common
stock issuance
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    941
    
    
    
    (156
    )
    
    
    
    
    
    
    
    
    
    
    785Balance September
30, 2004
    
    
    25,228
    
    
    
    3,154
    
    
    
    10,830
    
    
    
    (250,521
    )
    
    
    45,022
    
    
    
    4,833
    
    
    
    343,135
    
    
    
    145,623Balance December
31, 2004
    
    
    25,228
    
    
    
    3,154
    
    
    
    10,671
    
    
    
    (248,730
    )
    
    
    44,229
    
    
    
    8,152
    
    
    
    302,462
    
    
    
    109,267Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,367
    )
    
    
    (39,367
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,452
    )
    
    
    
    
    
    
    (2,452
    )Total
comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,819
    )Exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    562
    
    
    
    (240
    )
    
    
    
    
    
    
    
    
    
    
    322Other common
stock issuance
    
    
    
    
    
    
    
    
    
    
    (207
    )
    
    
    2,331
    
    
    
    (1,515
    )
    
    
    
    
    
    
    
    
    
    
    816Balance September
30, 2005
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,414
    
    
    $
    (245,837
    )
    
    $
    42,474
    
    
    $
    5,700
    
    
    $
    263,095
    
    
    $
    68,586
  9




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ENESCO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
(In thousands)
 2005
    
    2004Operating Activities:Net loss
    
    
    (39,367
    )
    
    
    (4,515
    )Adjustments to reconcile net loss
to net cash used by operating activitiesDepreciation and amortization of property, plant and equipment
    
    
    6,702
    
    
    
    4,275Deferred income taxes
    
    
    303
    
    
    
    257Gains on sale of capital assets
    
    
    (1,351
    )
    
    
    (10
    )Stock based compensation
    
    
    816
    
    
    
    785Loss on license termination
    
    
    7,713
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (6,923
    )
    
    
    (31,557
    )Inventories
    
    
    2,214
    
    
    
    (846
    )Prepaid expenses
    
    
    (1,078
    )
    
    
    273Other assets
    
    
    626
    
    
    
    22Accounts payable and accrued expenses
    
    
    (2,451
    )
    
    
    3,830Income taxes payable
    
    
    1,018
    
    
    
    (6,268
    )Long-term post retirement benefits
    
    
    (1,444
    )
    
    
    58Net cash used by operating activities
    
    
    (33,222
    )
    
    
    (33,696
    )Investing Activities:Purchases of property, plant and equipment
    
    
    (1,974
    )
    
    
    (3,805
    )Acquisitions, net of cash acquired
    
    
    
    
    
    
    (14,321
    )Proceeds from sales of property, plant and equipment
    
    
    766
    
    
    
    58Net cash used by investing activities
    
    
    (1,208
    )
    
    
    (18,068
    )Financing Activities:Net issuance of notes and loans payable
    
    
    23,979
    
    
    
    50,111Exercise of stock options
    
    
    322
    
    
    
    1,021Net cash provided by financing activities
    
    
    24,301
    
    
    
    51,132Effect of exchange rate changes on cash and cash equivalents
    
    
    (424
    )
    
    
    1,003Decrease in cash and cash equivalents
    
    
    (10,553
    )
    
    
    371Cash and cash equivalents, beginning of period
    
    
    14,646
    
    
    
    10,645Cash and cash equivalents, end of period
    
    
    4,093
    
    
    
    11,016Supplemental disclosure of cash paid for:Interest
    
    
    466
    
    
    
    434Income taxes
    
    
    1,898
    
    
    
    2,343
  10




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ENESCO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
 1. Description of Business
 Heartwood Creek, Walt Disney Company, Walt Disney Classics
Collection, Pooh & Friends, Jim Shore Designs, Inc., Foundations, Circle of Love, Nickelodeon,
Bratz Halcyon Days, Lilliput Lane and Border Fine Arts
   Foundations Dartington Crystal Heartwood Creek
 11




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2. Summary of Significant Accounting Policies
 Basis of Presentation
     12




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Accounts Receivable Allowances
    Inventory Reserves
  13




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Revenue Recognition
   14




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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
   15




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Accounting for Stock-Based Compensation
 Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) as reported
    
    $
    (2,115
    )
    
    $
    1,039
    
    
    $
    (39,367
    )
    
    $
    (4,515
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (530
    )
    
    
    (582
    )
    
    
    (1,591
    )
    
    
    (1,747
    )Pro forma net income (loss)
    
    $
    (2,645
    )
    
    $
    457
    
    
    $
    (40,958
    )
    
    $
    (6,262
    )Income (loss) per share:Basic and diluted  as reported
    
    $
    (0.14
    )
    
    $
    0.07
    
    
    $
    (2.68
    )
    
    $
    (0.32
    )Basic and diluted  pro forma
    
    $
    (0.18
    )
    
    $
    0.03
    
    
    $
    (2.79
    )
    
    $
    (0.44
    )
 3. Brand Revenues and Geographic Operations
  16




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##### 



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Design Partners
    
    $
    17,729
    
    
    $
    18,002
    
    
    $
    37,179
    
    
    $
    42,458Enesco Developed
    
    
    24,890
    
    
    
    26,641
    
    
    
    67,848
    
    
    
    67,646Major Licenses
    
    
    7,802
    
    
    
    9,418
    
    
    
    14,317
    
    
    
    17,354Strategic Partners
    
    
    7,264
    
    
    
    5,344
    
    
    
    19,897
    
    
    
    14,777Precious Moments (a)
    
    
    9,081
    
    
    
    14,839
    
    
    
    30,984
    
    
    
    44,196Service Fees (b)
    
    
    2,571
    
    
    
    
    
    
    
    2,571
    
    
    
    Other
    
    
    10,638
    
    
    
    11,458
    
    
    
    16,938
    
    
    
    14,397Intercompany
    
    
    (754
    )
    
    
    (411
    )
    
    
    (1,270
    )
    
    
    (1,519
    )Consolidated
    
    $
    79,221
    
    
    $
    85,291
    
    
    $
    188,464
    
    
    $
    199,309
  (a)
    
    Includes both Precious Moments, Inc. (PMI) product sales recorded under the PM
Termination Agreement, discussed in Note 8 below, and continuing sales by non-U. S.
operations.(b)
    
    Includes sales commissions and distribution service fees earned from PMI under the
Transition Agreement.
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net RevenuesUnited States
    
    $
    48,690
    
    
    $
    55,502
    
    
    $
    105,467
    
    
    $
    123,787United States intercompany
    
    
    (495
    )
    
    
    (216
    )
    
    
    (495
    )
    
    
    (691
    )International
    
    
    31,285
    
    
    
    30,200
    
    
    
    84,267
    
    
    
    77,041International intercompany
    
    
    (259
    )
    
    
    (195
    )
    
    
    (775
    )
    
    
    (828
    )Total consolidated
    
    $
    79,221
    
    
    $
    85,291
    
    
    $
    188,464
    
    
    $
    199,309Operating Income (Loss)United States
    
    $
    (1,779
    )
    
    $
    (788
    )
    
    $
    (36,355
    )
    
    $
    (12,995
    )International
    
    
    2,763
    
    
    
    2,445
    
    
    
    3,415
    
    
    
    5,234Total consolidated
    
    $
    984
    
    
    $
    1,657
    
    
    $
    (32,940
    )
    
    $
    (7,761
    )
 17




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##### 



4. Other Income (Expense), Net
  5. Income (Loss) Per Common Share (Basis of Calculations)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Average common shares outstanding-basic
    
    
    14,773
    
    
    
    14,356
    
    
    
    14,692
    
    
    
    14,250Dilutive effects of stock options and
warrants
    
    
    
    
    
    
    313
    
    
    
    
    
    
    
    Average diluted shares outstanding
    
    
    14,773
    
    
    
    14,669
    
    
    
    14,692
    
    
    
    14,250
  6. Financial Instruments
   18




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##### 



Accounting for Derivative
Instruments and Hedging Activities
  Forward Contracts
    
    Notional Amount
    
    Exchange Rate(in thousands)Euros
    
    $250
    
    1.1963Euros
    
    $1,000
    
    1.2350
 7. Acquisitions and Goodwill
   8. Precious Moments Licensing Termination
  19




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##### 



9. U.K. Property Sale and Restructurings
 Lilliput Lane
  20




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##### 



10. Notes and Loans Payable
     11. Income Taxes
  21




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  22




---



##### 



Overview
     23




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##### 



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    Change %
    
    2005
    
    2004
    
    Change %Net revenues, excluding PMI product
    
    $
    68,297
    
    
    $
    71,004
    
    
    
    -3.8
    %
    
    $
    158,735
    
    
    $
    157,888
    
    
    
    0.5
    %PMI product revenues
    
    
    8,353
    
    
    
    14,287
    
    
    
    -41.5
    %
    
    
    27,158
    
    
    
    41,421
    
    
    
    -34.4
    %PMI service fees
    
    
    2,571
    
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    Net revenues as reported
    
    $
    79,221
    
    
    $
    85,291
    
    
    
    -7.1
    %
    
    $
    188,464
    
    
    $
    199,309
    
    
    
    -5.4
    %Costs of sales, excluding PMI
    
    $
    38,706
    
    
    $
    41,465
    
    
    
    -6.7
    %
    
    $
    94,804
    
    
    $
    90,725
    
    
    
    4.5
    %PMI cost of sales
    
    
    8,118
    
    
    
    5,622
    
    
    
    44.4
    %
    
    
    15,681
    
    
    
    15,401
    
    
    
    1.8
    %Loss on PMI license termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,713
    
    
    
    PMI royalties
    
    
    
    
    
    
    3,491
    
    
    
    -100.0
    %
    
    
    4,000
    
    
    
    8,932
    
    
    
    -55.2
    %Cost of sales as reported
    
    $
    46,824
    
    
    $
    50,578
    
    
    
    -7.4
    %
    
    $
    122,198
    
    
    $
    115,058
    
    
    
    6.2
    %Gross profit %, excluding PMI
    
    
    43.3
    %
    
    
    41.6
    %
    
    
    
    
    
    
    40.3
    %
    
    
    42.5
    %Gross profit %, PMI
    
    
    25.7
    %
    
    
    36.2
    %
    
    
    
    
    
    
    7.9
    %
    
    
    41.3
    %Gross profit % based on reported revenues
    
    
    40.9
    %
    
    
    40.7
    %
    
    
    
    
    
    
    35.2
    %
    
    
    42.3
    %
   Initiatives to Stabilize Enescos Operating Model
  24




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##### 



Operational Improvement Plan
  
    
    Product Portfolio: The Company intends to reduce its number of
overall product lines from approximately 170 to between 50 and 60
to concentrate on giftable products, which elicit strong and
sustainable market demand and profitability, and leverage Enescos
core distribution base. The Company expects to eliminate those
product lines that do not meet these criteria.
    
    Corporate Overhead, General and Administrative and Marketing: The
Company began to reduce corporate and general and administrative
costs, as well as professional and consulting fees by $30 million
to $32 million pre-tax on an annualized basis. These reductions
are expected to approximate $15 million for corporate overhead,
$11 million for general and administrative costs, and a range of
$4 to $6 million for selling and marketing costs.
    
    Distribution and Warehousing: The Company expects to implement
strategies to bring its U.S. distribution and warehousing costs
more in line with industry standards, while improving quality and
service levels. Cost savings are expected to be in the range of
$4 million to $6 million pre-tax on an annualized basis.
   Initiatives to Improve Enescos Cash Flow
  25




---



##### 



Continued Restructuring Initiatives
 Reduction in Salary Expenditures
  Keystone Reengagement
  RESULTS OF OPERATIONS
 Overview
 26




---



##### 



Net Revenue and Gross Profit
 Heartwood Creek Foundations
 Heartwood
Creek
   27




---



##### 



Selling, General and Administrative Expenses (SG&A)
  Changes in SG&A from the Three Monthsand Nine Months ended September 30, 2004 to theThree Months
    
    Nine Months($ in millions)
    
    Ended
    
    EndedSeptember
    
    September30, 2005
    
    30, 2005Reduced salaries and benefit costs
    
    $
    (3.4
    )
    
    $
    (4.6
    )Reduced spending on selling and marketing initiatives
    
    
    (0.9
    )
    
    
    (2.7
    )Lower travel and entertainment
    
    
    (0.4
    )
    
    
    (1.2
    )Lower commissions due to reduced sales volume
    
    
    (0.4
    )
    
    
    (1.1
    )Higher bank fees
    
    
    0.8
    
    
    
    2.5Accelerated depreciation on ERP system
    
    
    
    
    
    
    3.7Severance and plant closure costs
    
    
    0.6
    
    
    
    1.5Increase in bad debt reserve
    
    
    0.7
    
    
    
    1.4Incremental SG&A costs from the Dartington acquisition
    
    
    0.4
    
    
    
    3.3Higher consulting fees
    
    
    0.7
    
    
    
    1.6Higher audit fees
    
    
    0.5
    
    
    
    1.6Higher legal fees
    
    
    0.7
    
    
    
    0.6Other, net
    
    
    (0.9
    )
    
    
    0.6$
    (1.6
    )
    
    $
    7.2
 Operating Income (Loss)
  28




---



##### 



Interest and Other Income (Expense), Net
  Provision for Income Tax Expense (Benefit)
     29




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
  Liquid Assets
  Cash Flows
    30




---



##### 



Credit Facilities
     31




---



##### 



New Accounting Pronouncements
 Accounting for Stock-Based Compensation. Accounting
for Stock Issued to Employees Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services Employers Accounting for Employee Stock Ownership Plans. .
 32




---



##### 



Inventory Costs
 Accounting for Conditional Asset Retirement
Obligations Accounting for Asset Retirement Obligations
  
    
    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.
    
    Financial statements for each individual prior period presented shall be adjusted to
reflect the period-specific effects of applying the new accounting principle.
  NYSE Continued Listing Requirements
  33




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##### 



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
  Changes in Internal Control over Financial Reporting
  34




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##### 



PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
    35




---



##### 



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
  ITEM 5. OTHER INFORMATION
  ITEM 6. EXHIBITS
  36




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##### 



Exhibit Number
    
    Exhibit Index  Description of Exhibit10.1
    
    
    Fifth Amendment to Second Amended and Restated Revolving
Credit Agreement between Enesco Group, Inc. and Fleet
National Bank filed (on January 31, 2005) as Exhibit 10.1
to registrants Current Report on Form 8-K, dated January
28, 2005, and hereby incorporated by reference.10.2
    
    
    Letter Amendment to Fifth Amendment to Second Amended and
Restated Revolving Credit Agreement among Enesco Group,
Inc., Fleet National Bank and LaSalle Bank N.A. filed (on
February 17, 2005) as Exhibit 10 to registrants Current
Report on Form 8-K, dated February 16, 2005, and hereby
incorporated by reference.10.3
    
    
    Sixth Amendment dated March 29, 2005 between Enesco Group,
Inc., Fleet National Bank and LaSalle Bank, N.A. filed (on
March 29, 2005) as Exhibit 10.1 to registrants Current
Report on Form 8-K, dated March 28, 2005, and hereby
incorporated by reference.10.4
    
    
    Seventh Amendment and Termination Agreement, dated May 17,
2005, between Precious Moments, Incorporated and Enesco
Group, Inc. filed (on May 18, 2005) as Exhibit 99.1 to
registrants Current Report on Form 8-K, dated May 18,
2005, and hereby incorporated by reference.10.5
    
    
    Seventh Amendment to Second Amended and Restated Senior
Revolving Credit Agreement dated May 16, 2005 by and among
Enesco Group, Inc., Fleet National Bank and LaSalle Bank,
N.A., filed (on May 26, 2005) as Exhibit 99.1 to
registrants Current Report on Form 8-K, dated May 26,
2005, and hereby incorporated by reference.10.6
    
    
    Eighth Amendment to Second Amended and Restated Senior
Revolving Credit Agreement dated May 16, 2005 by and among
Enesco Group, Inc., Fleet National Bank and LaSalle Bank,
N.A., filed (on July 7, 2005) as Exhibit 99.1 to
registrants Current Report on Form 8-K, dated July 7,
2005, and hereby incorporated by reference.10.7
    
    
    Letter Amendment to Eighth Amendment to Second Amended and
Restated Revolving Credit Agreement among Enesco Group,
Inc., Fleet National Bank and LaSalle Bank N.A. filed (on
July 28, 2005) as Exhibit 99.1 to registrants Current
Report on Form 8-K dated July 28, 2005, and hereby
incorporated by reference.10.8
    
    
    Ninth Amendment to Second Amended and Restated Senior
Revolving Credit Agreement dated August 31, 2005 by and
among Enesco Group, Inc., Fleet National Bank and LaSalle
Bank, N.A., filed (on September 1, 2005) as Exhibit 99.1 to
registrants Current Report on Form 8-K, dated August 31,
2005, and hereby incorporated by reference.10.9
    
    
    Letter Amendment to Ninth Amendment to Second Amended and
Restated Revolving Credit Agreement among Enesco Group,
Inc., Bank of America, N.A. (formerly known as Fleet
National Bank) and LaSalle Bank N.A., dated September 29,
2005.31.1
    
    
    Certification of Chief Executive Officer under Exchange Act
Rules 13a-15e and 15d-15e pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 37




---



##### 



Exhibit Number
    
    Exhibit Index  Description of Exhibit31.2
    
    
    Certification of Principal Financial Officer under Exchange
Act Rules 13a-15e and 15d-15e pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    
    Statement of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Statement of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 38




---



##### 



Signatures
  ENESCO GROUP, INC.
(Registrant)Date: November 9, 2005
    By:
    /s/ Cynthia Passmore-McLaughlinCynthia Passmore-McLaughlinPresident and Chief Executive Officer Date: November 9, 2005
    By:
    /s/ Anthony G. TestolinAnthony G. TestolinChief Accounting Officer
(principal financial officer) 39