##### 



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.
 
  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)
  
  
   R £
  Large accelerated filer £
    
    Accelerated filer £
    
    Non-accelerated filer R
  £ R




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##### 



ENESCO GROUP, INC.
 TABLE OF CONTENTS
  
 PART IItem 1.
    
    Financial Statements
    
    
    4Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    5Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005
    
    
    6Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the Three Months
Ended March 31, 2006 and 2005
    
    
    7Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005
    
    
    8Notes to Consolidated Financial Statements for the Three Months Ended March 31, 2006
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26PART IIItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits
    
    
    29Signatures
    
    
    30Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32
  2




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##### 



Forward-Looking Statements
   -K
  Operating Improvement Plan
 
    
    Ability to implement Enescos comprehensive plan for operating improvement and to achieve
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 and comply with the covenants in new credit facilities to finance operational
requirements at competitive costs and interest rates.
 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, 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.
    
    Ability to maintain strategic alliance agreements, particularly with Jim Shore Designs,
Inc., in the event Enesco experiences a change in control, including, but not limited to, a
change in the President/CEO of Enesco.
 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% of associated product line revenues.
    
    Changes in the geographical mix of revenue for the U.S. and international, which will impact gross margin.
 3




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
    
    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 distribution improvements and cost savings
with a third-party logistics company using a new computer system.
    
    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, 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.
    
    Ability to comply with the continued listing standards of the New York Stock Exchange (NYSE).
    
    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 metrics 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. Financial Statements
 ENESCO GROUP, INC.
 
 Consolidated Balance Sheets
As of March 31, 2006 and December 31, 2005
 (Unaudited)March 31,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    8,724
    
    
    $
    12,918Accounts receivable, net
    
    
    34,087
    
    
    
    42,285Inventories
    
    
    42,414
    
    
    
    40,659Prepaid expenses
    
    
    4,044
    
    
    
    3,471Deferred income taxes
    
    
    836
    
    
    
    783Total current assets
    
    
    90,105
    
    
    
    100,116Property, plant and equipment, at cost:Land and improvements
    
    
    1,200
    
    
    
    1,200Buildings and improvements
    
    
    19,606
    
    
    
    19,538Machinery and equipment
    
    
    9,663
    
    
    
    9,636Office furniture and equipment
    
    
    37,920
    
    
    
    37,826Transportation equipment
    
    
    406
    
    
    
    53268,795
    
    
    
    68,732Less: accumulated depreciation and amortization
    
    
    (54,178
    )
    
    
    (53,228
    )Property, plant and equipment, net
    
    
    14,617
    
    
    
    15,504Other assets:Goodwill
    
    
    8,400
    
    
    
    8,364Other
    
    
    3,302
    
    
    
    3,135Deferred income taxes
    
    
    3,072
    
    
    
    3,072Total other assets
    
    
    14,774
    
    
    
    14,571Total assets
    
    $
    119,496
    
    
    $
    130,191LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    38,422
    
    
    $
    30,823Accounts payable
    
    
    12,522
    
    
    
    15,306Federal, state and foreign income taxes
    
    
    8,576
    
    
    
    9,005Deferred gain on sale of fixed assets
    
    
    5,886
    
    
    
    6,358Accrued expensesPayroll and commissions
    
    
    2,807
    
    
    
    3,083Royalties
    
    
    3,064
    
    
    
    5,782Post-retirement benefits
    
    
    140
    
    
    
    142Other
    
    
    4,165
    
    
    
    5,585Total current liabilities
    
    
    75,582
    
    
    
    76,084Non-current liabilities:Post-retirement benefits
    
    
    993
    
    
    
    1,281Total
non-current liabilities
    
    
    993
    
    
    
    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
    
    
    41,441
    
    
    
    41,430Retained earnings
    
    
    237,881
    
    
    
    248,437Accumulated other comprehensive income
    
    
    5,078
    
    
    
    4,438287,554
    
    
    
    297,459Less: cost of treasury stock (10,308 shares)
    
    
    (244,633
    )
    
    
    (244,633
    )Total shareholders equity
    
    
    42,921
    
    
    
    52,826Total liabilities and shareholders equity
    
    $
    119,496
    
    
    $
    130,191
  5




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##### 



ENESCO GROUP, INC.
 
 Consolidated Statements of Operations
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
 March 31,
    
    
    March 31,(In thousands, except per share amounts)
    
    2006
    
    
    2005Net revenues
    
    $
    37,964
    
    
    $
    60,084Cost of sales
    
    
    22,000
    
    
    
    37,481Gross profit
    
    
    15,964
    
    
    
    22,603Selling, general and administrative expenses
    
    
    25,273
    
    
    
    35,282Operating loss
    
    
    (9,309
    )
    
    
    (12,679
    )Interest expense
    
    
    (559
    )
    
    
    (399
    )Interest income
    
    
    28
    
    
    
    120Other income (expense), net
    
    
    19
    
    
    
    (179
    )Loss before income taxes
    
    
    (9,821
    )
    
    
    (13,137
    )Income tax expense
    
    
    (735
    )
    
    
    (2,079
    )Net loss
    
    $
    (10,556
    )
    
    $
    (15,216
    )Loss per Common Share:Basic and diluted
    
    $
    (0.71
    )
    
    $
    (1.04
    )
  6




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##### 



ENESCO GROUP, INC.
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
For the Three Months Ended March 31, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,216
    )
    
    
    (15,216
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578
    )
    
    
    
    
    
    
    (578
    )Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,794
    )Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    562
    
    
    
    (240
    )
    
    
    
    
    
    
    
    
    
    
    322Other common stock
issuance
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    591
    
    
    
    (196
    )
    
    
    
    
    
    
    
    
    
    
    395Balance
March 31, 2005
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,569
    
    
    $
    (247,577
    )
    
    $
    43,793
    
    
    $
    7,574
    
    
    $
    287,246
    
    
    $
    94,190Balance
December 31, 2005
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,308
    
    
    $
    (244,633
    )
    
    $
    41,430
    
    
    $
    4,438
    
    
    $
    248,437
    
    
    $
    52,826Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,556
    )
    
    
    (10,556
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    
    
    
    
    640Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,916
    )Stock based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Balance
March 31, 2006
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,308
    
    
    $
    (244,633
    )
    
    $
    41,441
    
    
    $
    5,078
    
    
    $
    237,881
    
    
    $
    42,921
  7




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##### 



ENESCO GROUP, INC.
 
 Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
 March 31,
    
    
    March 31,(In
thousands)
    
    2006
    
    
    2005Cash Flows from Operating Activities:Net loss
    
    $
    (10,556
    )
    
    $
    (15,216
    )Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization of property, plant and equipment
    
    
    959
    
    
    
    3,662Deferred income taxes
    
    
    (53
    )
    
    
    105Gains on
sales of property, plant and equipment
    
    
    (509
    )
    
    
    (516
    )Stock based compensation
    
    
    11
    
    
    
    395Changes in assets and liabilities:Accounts receivable
    
    
    8,368
    
    
    
    5,794Inventories
    
    
    (1,536
    )
    
    
    2,390Prepaid expenses
    
    
    (554
    )
    
    
    (1,653
    )Other assets
    
    
    (10
    )
    
    
    35Accounts payable and accrued expenses
    
    
    (7,163
    )
    
    
    (4,131
    )Income taxes payable
    
    
    (426
    )
    
    
    1,686Non-current post retirement benefits
    
    
    (486
    )
    
    
    (91
    )Net cash used by operating activities
    
    
    (11,955
    )
    
    
    (7,540
    )Cash Flows from Investing Activities:Purchases of property, plant and equipment
    
    
    (21
    )
    
    
    (618
    )Proceeds from sales of property, plant and equipment
    
    
    44
    
    
    
    5Net cash provided (used) by investing activities
    
    
    23
    
    
    
    (613
    )Cash Flows from Financing Activities:Net issuance of notes and loans payable
    
    
    7,599
    
    
    
    11,761Exercise of stock options
    
    
    
    
    
    
    322Net cash provided by financing activities
    
    
    7,599
    
    
    
    12,083Effect of exchange rate changes on cash and cash equivalents
    
    
    139
    
    
    
    60Increase (decrease) in cash and cash equivalents
    
    
    (4,194
    )
    
    
    3,990Cash and cash equivalents, beginning of period
    
    
    12,918
    
    
    
    14,646Cash and cash equivalents, end of period
    
    $
    8,724
    
    
    $
    18,636(In millions)Supplemental disclosure of cash paid for:Interest
    
    $
    0.8
    
    
    $
    0.4Income taxes
    
    $
    1.2
    
    
    $
    0.2
  8




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ENESCO GROUP, INC.
 
 Notes to Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 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 Birthday
Girls ® Heartwood Creek  by
Jim Shore
 Note 2. Summary of Significant Accounting Policies
 Basis of Presentation
  9




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Accounts Receivable Allowances
 Doubtful Accounts
  Sales Returns and Allowances
  10




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Inventory Reserves
 Excess or Slow Moving Inventory
   Inventory Shrinkage
  Revenue Recognition
   11




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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.
 Note 3. Brand Category Revenues and Geographic Operating Segments
  Three Months EndedMarch 31, 20052006
    
    
    2005(In thousands)Proprietary Designs
    
    $
    12,837
    
    
    $
    19,363Licensed Brands
    
    
    10,381
    
    
    
    14,854Third-party Distribution
    
    
    14,592
    
    
    
    14,237Precious Moments®(1)
    
    
    
    
    
    
    10,814Other
    
    
    542
    
    
    
    1,406Intercompany
    
    
    (388
    )
    
    
    (590
    )Total consolidated
    
    $
    37,964
    
    
    $
    60,084
 
 (1)
    
    Includes only Precious Moments® product sales recorded by U.S. operations. 12




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##### 



Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Net RevenuesU.S
    
    $
    12,721
    
    
    $
    32,354International
    
    
    25,243
    
    
    
    27,730Total consolidated
    
    $
    37,964
    
    
    $
    60,084Operating Profit (Loss)U.S
    
    $
    (10,684
    )
    
    $
    (13,710
    )International
    
    
    1,375
    
    
    
    1,031Total consolidated
    
    $
    (9,309
    )
    
    $
    (12,679
    )Long-lived AssetsU.S.Property, plant & equipment, net
    
    $
    9,097
    
    
    $
    11,784Other assets
    
    
    11,666
    
    
    
    12,375Total U.S
    
    
    20,763
    
    
    
    24,159InternationalProperty, plant & equipment, net
    
    
    5,520
    
    
    
    7,550Other assets
    
    
    3,108
    
    
    
    4,111Total International
    
    
    8,628
    
    
    
    11,661Total consolidated
    
    $
    29,391
    
    
    $
    35,820Capital ExpendituresU.S
    
    $
    9
    
    
    $
    285International
    
    
    12
    
    
    
    333Total consolidated
    
    $
    21
    
    
    $
    618Depreciation and AmortizationU.S
    
    $
    695
    
    
    $
    3,284International
    
    
    264
    
    
    
    378Total consolidated
    
    $
    959
    
    
    $
    3,662
   Note 4. Other Income (Expense), Net
  Note 5. Income (Loss) Per Common Share (Basis of Calculations)
  13




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##### 



Three Months EndedMarch 31,(In thousands)
    
    2006
    
    
    2005Average common shares outstanding-basic
    
    
    14,920
    
    
    
    14,607Dilutive effects of stock options and warrants
    
    
    
    
    
    
    Average diluted shares outstanding
    
    
    14,920
    
    
    
    14,607
  Note 6. Financial Instruments
  Accounting for Derivative
Instruments and Hedging Activities
  Forward
Contracts
    

Notional
Amount
    

Exchange
Rate(In thousands)Euros
    
    $750
    
    1.2350
 Note 7. Stock-Based Compensation
 Share-Based Payments
 Accounting for Stock
Issued to Employees
 14




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##### 



Three MonthsEnded(In thousands, except per share amounts)
    
    March 31, 2005Net loss as reported
    
    $
    (15,216
    )Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards
    
    
    (127
    )Pro forma net loss
    
    
    (15,343
    )Loss per share:Basic and diluted  as reported
    
    $
    (1.04
    )Basic and diluted  pro forma
    
    $
    (1.05
    )
   Three Months Ended March 31, 2006Weighted Average
    
    
    Aggregate
    
    
    Weighted AverageOptions
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Remaining TermOutstanding at beginning of period
    
    
    2,218,760
    
    
    $
    9.53Granted
    
    
    61,200
    
    
    
    1.86Forfeited
    
    
    (5,888
    )
    
    
    3.70Exercised
    
    
    
    
    
    
    N/AExpired
    
    
    (54,187
    )
    
    
    7.57Outstanding at end of period
    
    
    2,219,885
    
    
    
    9.39
    
    
    
    47,958
    
    
    
    6.18Exercisable at end of period
    
    
    2,044,885
    
    
    $
    10.04
    
    
    $
    
    
    
    
    5.88
   Three Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2006
    
    March 31, 2005
    
    Methodology for the Three Months Ended March 31, 2006Expected term (in years)
    
    
    6.25
    
    
    
    6.25
    
    
    Simplified SAB 107 transition method.Expected volatility
    
    
    63.1
    %
    
    
    57.0
    %
    
    Historic volatility over expected term of each grant.Expected risk-free interest rate
    
    
    4.31
    %
    
    
    4.25
    %
    
    Set to the Treasury Constant Maturity (TCM) rate as
of the measurement date with maturity equal to the
expected term.Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    Dividends are not expected to be paid in the future.Fair value
    
    $
    1.16
    
    
    $
    4.28
    
    
    Black-Scholes valuation model.
 15




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Note 8. Precious Moments, Inc. Licensing Agreement Termination
 Precious Moments ®
  Note 9. Notes and Loans Payable
       16




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##### 



Note 10. Income Taxes
   Note 11. Subsequent Events
   17




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   
    
    gross profit margins of 40% to 45% from our continuing product lines;
    
    $30 million to $32 million in pre-tax annualized cost savings from corporate,
marketing and general administrative functions; and
    
    pre-tax annualized cost savings of $4 million to $6 million from a more
efficient distribution and warehousing model.
  18




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##### 



Impact of the Operating Improvement Plan Initiatives
  Rationalization of the U.S. product portfolio
  Precious Moments ® Precious Moments ®
 Reducing global corporate overhead, general and administrative and marketing costs
  Implementing a cost-effective distribution and warehousing model
  19




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##### 



RESULTS OF OPERATIONS
 Net Revenue and Gross Profit
 Precious Moments ® ® Precious Moments ® Precious Moments ®
 Increase (Decrease)Three Months Ended March 31,(In millions)
    
    2006 vs. 2005Termination of Precious
Moments® U.S. licensing
agreement
    
    
    $   (10.8
    )Shipping delays at third-party warehouse and
distribution center
    
    
    (4.1
    )Lost
replenishment product sales due to shipping delay at
third-party warehouse and distribution
center
    
    
    (2.7
    )Lower revenues from collectible
products
    
    
    (2.7
    )First quarter 2005 sales of now discontinued
product lines
    
    
    (1.5
    )Unfavorable foreign currency exchange rate
impact
    
    
    (1.4
    )Lower revenues from Gregg Gift products
    
    
    (1.2
    )Lower revenues from Dartington
products
    
    
    (0.4
    )First quarter 2006 sales of recently
introduced products
    
    
    2.3Other, net
    
    
    0.4$   (22.1
    )
 Precious Moments ® Heartwood Creek  by Jim Shore
 Precious Moments ®
 Precious Moments ®
 20




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##### 



Precious Moments ®
 Three Months Ended March 31,($ in thousands)
    
    2006
    
    
    2005
    
    
    Change %Net revenues, other than Precious Moments®.
    
    $
    37,964
    
    
    $
    49,270
    
    
    
    (22.9
    )%Precious Moments® product revenues
    
    
    
    
    
    
    10,814Net revenues as reported
    
    $
    37,964
    
    
    $
    60,084
    
    
    
    (36.8
    )%Cost of goods sold, other than Precious Moments®
    
    $
    22,000
    
    
    $
    30,233
    
    
    
    (27.2
    )%Precious Moments® cost of sales
    
    
    
    
    
    
    3,941Precious Moments® royalties
    
    
    
    
    
    
    3,307Cost of goods sold as reported
    
    $
    22,000
    
    
    $
    37,481
    
    
    
    (41.3
    )%Gross margin, other than Precious Moments®
    
    
    42.1
    %
    
    
    38.6
    %Gross margin, Precious Moments®
    
    
    
    %
    
    
    33.0
    %Gross margin as reported
    
    
    42.1
    %
    
    
    37.6
    %
 Selling, General and Administrative Expenses (SG&A)
   Increase (Decrease)Three Months EndedMarch 31,2006 vs. 2005(In millions)Reduced administrative salaries and benefit costs
    
    
    $     (3.7
    )Accelerated depreciation of ERP system in prior year
    
    
    (2.4
    )Reduced distribution and warehousing costs
    
    
    (1.0
    )Lower commissions due to reduced sales volume
    
    
    (0.8
    )Reduced spending on selling and marketing initiatives
    
    
    (0.6
    )Lower Sarbanes-Oxley compliance costs
    
    
    (0.5
    )Lower travel and entertainment
    
    
    (0.4
    )Favorable foreign currency exchange rate impact
    
    
    (0.4
    )Higher bank fees
    
    
    0.5Higher consulting fees
    
    
    0.4Other, net
    
    
    (1.1
    )$   (10.0
    )
  21




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##### 



Operating Income (Loss)
  Interest and Other Income (Expense), Net
  Provision for Income Tax Expense (Benefit)
  LIQUIDITY AND CAPITAL RESOURCES
  Liquid Assets
  Cash Flows
    22




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##### 



Operating Improvement Plan Goals
  Credit Facilities
       23




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##### 



Recent Accounting Pronouncements
 Inventory Costs,
 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.
  24




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##### 




    
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.
  New York Stock Exchange Continued Listing Standards Compliance
   
 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
  25




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##### 



Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
      26




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##### 



Item 1A. Risk Factors
  Our failure to generate sufficient cash to meet our liquidity needs may affect our ability to
service our indebtedness and grow our business.
   Our existing credit facility contains, and any new credit facility will most likely contain,
various covenants which limit our managements discretion in the operation of our business and the
failure to comply with such covenants could have a material adverse effect on our business,
financial condition and results of operations.
  
    
    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.
  We are highly dependent upon the ability of our senior management and consultants to effectively
run our operations.
    27




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##### 



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
  28




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##### 



EXHIBIT INDEX
 Item 601
    

Exhibit10.1*
    
Eleventh amendment to Second Amended and Restated Senior
Revolving Credit Agreement, dated as of March 31, 2006, by and
among Enesco Group, Inc., Fleet National Bank and LaSalle Bank,
N.A. (Exhibit 99.1 to Form 8-K filed on April 3, 2006 in
Commission File No. 001-09267).10.2*
    
Business Purchase Agreement between Enesco Limited and Dartington
Crystal (Torrington) Limited (Exhibit 99.2 to Form 8-K filed on
May 2, 2006 in Commission File No. 001-09267).10.3
    
Transition/Resignation and Release Agreement between Enesco
Group, Inc. and Koreen A. Ryan, dated March 14, 2006.31.1
    
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 Principal 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 Principal 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 29




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##### 



Signatures
  ENESCO GROUP, INC.
       (Registrant)Date:  May 12, 2006
    By:
    /s/ Cynthia PassmoreCynthia PassmorePresident and Chief Executive OfficerDate:  May 12, 2006
    By:
    /s/ Anthony G. TestolinAnthony G. TestolinChief Accounting Officer
(Principal Financial Officer) 30