##### 



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)
  
   
   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 September 30, 2006 and December 31, 2005
    
    
    5Consolidated Statements of Operations (Unaudited) For the Three Months Ended September 30, 2006 and 2005
    
    
    6Consolidated Statements of Operations (Unaudited) For the Nine Months Ended September 30, 2006 and 2005
    
    
    7Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) (Unaudited) For the Nine Months Ended September 30, 2006 and 2005
    
    
    8Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2006 and 2005
    
    
    9Notes to Consolidated Financial Statements (Unaudited) For the Nine Months Ended September 30, 2006
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    31PART IIItem 1.
    
    Legal Proceedings
    
    
    31Item 1A.
    
    Risk Factors
    
    
    31Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3.
    
    Defaults Upon Senior Securities
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    33Item 5.
    
    Other Information
    
    
    33Item 6.
    
    Exhibits
    
    
    33Signatures
    
    
    35Exhibit 31.1Exhibit 31.2Exhibit 32
 2




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##### 



Forward-Looking Statements
     Long-term Financing
 
    
    Ability to pay all amounts currently due under our U.S.
credit facility by December 29, 2006.
    
    Ability to extend our current financing arrangements beyond
the December 29, 2006 forbearance termination date, if
necessary, and continue to have access to financing.
    
    Ability to comply with the other covenants in our existing U.S. credit facility and to
enter into and comply with the covenants in any new financing arrangements 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.
 Operating Improvement Plan
 
    
    Ability to implement our comprehensive plan for operating improvement and to achieve its
goals for cost savings and market share increases.
 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 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 31% 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 multiple third-party logistics providers.
    
    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 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 September 30, 2006 and December 31, 2005
 (Unaudited)September 30,
    
    
    December 31,(In thousands, except per share amounts)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,451
    
    
    $
    12,918Accounts receivable, net
    
    
    45,619
    
    
    
    42,285Inventories
    
    
    38,906
    
    
    
    40,659Prepaid expenses
    
    
    4,299
    
    
    
    3,471Deferred income taxes
    
    
    899
    
    
    
    783Asset held for sale
    
    
    2,076
    
    
    
    Total current assets
    
    
    99,250
    
    
    
    100,116Property, plant and equipment, at cost:Land and improvements
    
    
    1,200
    
    
    
    1,200Buildings and improvements
    
    
    17,862
    
    
    
    19,538Machinery and equipment
    
    
    9,661
    
    
    
    9,636Office furniture and equipment
    
    
    38,803
    
    
    
    37,826Transportation equipment
    
    
    374
    
    
    
    53267,900
    
    
    
    68,732Less: accumulated depreciation and amortization
    
    
    (57,424
    )
    
    
    (53,228
    )Property, plant and equipment, net
    
    
    10,476
    
    
    
    15,504Other assets:Goodwill
    
    
    3,341
    
    
    
    8,364Other
    
    
    2,054
    
    
    
    3,135Deferred income taxes
    
    
    3,072
    
    
    
    3,072Total other assets
    
    
    8,467
    
    
    
    14,571Total assets
    
    $
    118,193
    
    
    $
    130,191LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    59,431
    
    
    $
    30,823Accounts payable
    
    
    15,323
    
    
    
    15,306Federal, state and foreign income taxes
    
    
    9,250
    
    
    
    9,005Deferred gain on sale of fixed assets
    
    
    4,942
    
    
    
    6,358Accrued expenses:Payroll and commissions
    
    
    2,979
    
    
    
    3,083Royalties
    
    
    3,936
    
    
    
    5,782Post-retirement benefits
    
    
    128
    
    
    
    142Other
    
    
    5,197
    
    
    
    5,585Total current liabilities
    
    
    101,186
    
    
    
    76,084Non-current liabilities:Post-retirement benefits
    
    
    932
    
    
    
    1,281Total non-current liabilities
    
    
    932
    
    
    
    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
    
    
    38,788
    
    
    
    41,430Retained earnings
    
    
    207,479
    
    
    
    248,437Accumulated other comprehensive income
    
    
    8,606
    
    
    
    4,438258,027
    
    
    
    297,459Less: Shares of Common Stock held in treasury, at cost:10,121 shares at September 30, 2006 and 10,308 shares at December 31, 2005
    
    
    (241,952
    )
    
    
    (244,633
    )Total shareholders equity
    
    
    16,075
    
    
    
    52,826Total liabilities and shareholders equity
    
    $
    118,193
    
    
    $
    130,191
  5




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Operations
For the Three Months Ended September 30, 2006 and 2005
(Unaudited)
 September 30,
    
    
    September 30,(In thousands, except per share amounts)
    
    2006
    
    
    2005Net revenues
    
    $
    50,757
    
    
    $
    75,522Cost of sales
    
    
    29,381
    
    
    
    44,354Gross profit
    
    
    21,376
    
    
    
    31,168Selling, general and administrative expenses
    
    
    23,814
    
    
    
    29,927Operating income (loss) income from continuing operations
    
    
    (2,438
    )
    
    
    1,241Interest expense
    
    
    (1,361
    )
    
    
    (661
    )Interest income
    
    
    23
    
    
    
    15Other expense, net
    
    
    (149
    )
    
    
    (145
    )Income (loss) from continuing operations before income taxes
    
    
    (3,925
    )
    
    
    450Income tax expense
    
    
    (1,565
    )
    
    
    (2,429
    )Loss from continuing operations
    
    
    (5,490
    )
    
    
    (1,979
    )Discontinued operations:Loss from operations of Dartington
    
    
    
    
    
    
    (194
    )Income tax benefit
    
    
    
    
    
    
    58Loss from discontinued operations
    
    
    
    
    
    
    (136
    )Net loss
    
    $
    (5,490
    )
    
    $
    (2,115
    )Loss per share of Common Stock:Basic and diluted  continuing operations
    
    $
    (0.36
    )
    
    $
    (0.13
    )Basic and diluted  discontinued operations
    
    
    
    
    
    $
    (0.01
    )Basic and diluted  net loss
    
    $
    (0.36
    )
    
    $
    (0.14
    )
  6




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Operations
For the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 September 30,
    
    
    September 30,(In thousands, except per share amounts)
    
    2006
    
    
    2005Net revenues
    
    $
    124,092
    
    
    $
    178,394Cost of sales
    
    
    76,526
    
    
    
    107,819Cost of sales  loss on license termination
    
    
    
    
    
    
    7,713Gross profit
    
    
    47,566
    
    
    
    62,862Selling, general and administrative expenses
    
    
    74,455
    
    
    
    94,719Goodwill impairment loss
    
    
    5,292
    
    
    
    Operating loss from continuing operations
    
    
    (32,181
    )
    
    
    (31,857
    )Interest expense
    
    
    (2,859
    )
    
    
    (1,516
    )Interest income
    
    
    76
    
    
    
    173Other expense, net
    
    
    (375
    )
    
    
    (288
    )Loss from continuing operations before income taxes
    
    
    (35,339
    )
    
    
    (33,488
    )Income tax expense
    
    
    (2,770
    )
    
    
    (5,126
    )Loss from continuing operations
    
    
    (38,109
    )
    
    
    (38,614
    )Discontinued operations:Loss from operations of Dartington (including loss on disposal in 2006
of $2,321)
    
    
    (3,659
    )
    
    
    (1,076
    )Income tax benefit
    
    
    810
    
    
    
    323Loss from discontinued operations
    
    
    (2,849
    )
    
    
    (753
    )Net loss
    
    $
    (40,958
    )
    
    $
    (39,367
    )Loss per share of Common Stock:Basic and diluted  continuing operations
    
    $
    (2.54
    )
    
    $
    (2.63
    )Basic and diluted  discontinued operations
    
    $
    (0.19
    )
    
    $
    (0.05
    )Basic and diluted  net loss
    
    $
    (2.73
    )
    
    $
    (2.68
    )
  7




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
For the Nine Months Ended September 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
September 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,958
    )
    
    
    (40,958
    )Currency
translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,168
    
    
    
    
    
    
    
    4,168Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,790
    )Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    (187
    )
    
    
    2,681
    
    
    
    (2,642
    )
    
    
    
    
    
    
    
    
    
    
    39Balance
September 30, 2006
    
    
    25,228
    
    
    $
    3,154
    
    
    
    10,121
    
    
    $
    (241,952
    )
    
    $
    38,788
    
    
    $
    8,606
    
    
    $
    207,479
    
    
    $
    16,075
  8




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##### 



ENESCO GROUP, INC.
 Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 September 30,
    
    
    September 30,(In thousands)
    
    2006
    
    
    2005Cash Flows from Operating Activities of Continuing Operations:Loss from continuing operations
    
    $
    (38,109
    )
    
    $
    (38,614
    )Adjustments to reconcile net loss to net cash used by operating
activities of continuing operations:Depreciation and amortization of property, plant and equipment
    
    
    2,475
    
    
    
    6,584Goodwill impairment loss
    
    
    5,292
    
    
    
    Deferred income taxes
    
    
    (116
    )
    
    
    303Capitalized loan cost write-off
    
    
    967
    
    
    
    Gains on sales of property, plant and equipment
    
    
    (1,892
    )
    
    
    (1,351
    )Stock-based compensation
    
    
    39
    
    
    
    816Loss on license termination
    
    
    
    
    
    
    7,713Changes in assets and liabilities:Accounts receivable, net
    
    
    (2,233
    )
    
    
    (6,695
    )Inventories
    
    
    (785
    )
    
    
    3,708Prepaid expenses
    
    
    (977
    )
    
    
    (1,043
    )Other assets
    
    
    595
    
    
    
    599Accounts payable and accrued expenses
    
    
    445
    
    
    
    (5,344
    )Income taxes payable
    
    
    1,023
    
    
    
    1,338Non-current post-retirement benefits
    
    
    (340
    )
    
    
    (1,444
    )Net cash used by operating activities of continuing operations
    
    
    (33,616
    )
    
    
    (33,430
    )Cash Flows from Investing Activities of Continuing Operations:Purchases of property, plant and equipment
    
    
    (393
    )
    
    
    (1,660
    )Proceeds from sales of property, plant and equipment
    
    
    517
    
    
    
    766Net cash provided (used) by investing activities of continuing operations
    
    
    124
    
    
    
    (894
    )Cash Flows from Financing Activities of Continuing Operations:Net issuance of notes and loans payable
    
    
    28,608
    
    
    
    23,979Exercise of stock options
    
    
    
    
    
    
    322Net cash provided by financing activities of continuing operations
    
    
    28,608
    
    
    
    24,301Cash Flows from Discontinued Operations:Operating activities
    
    
    (3,114
    )
    
    
    208Investing activities
    
    
    1,753
    
    
    
    (314
    )Net cash used in discontinued operations
    
    
    (1,361
    )
    
    
    (106
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    778
    
    
    
    (424
    )Decrease in cash and cash equivalents
    
    
    (5,467
    )
    
    
    (10,553
    )Cash and cash equivalents, beginning of period
    
    
    12,918
    
    
    
    14,646Cash and cash equivalents, end of period
    
    $
    7,451
    
    
    $
    4,093Supplemental disclosure of cash paid for:Interest
    
    $
    2,063
    
    
    $
    466Income taxes
    
    $
    2,266
    
    
    $
    1,898
  9




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##### 



ENESCO GROUP, INC.
 Notes to Consolidated Financial Statements (Unaudited)
For the Nine Months Ended September 30, 2006
 Note 1. Description of Business
   Heartwood Creek ® by Jim Shore, Foundations ® ,
Pooh & Friends ® , Walt Disney Classics Collections ® , Disney
Traditions  , Disney ® , Border Fine Arts  Cherished
Teddies ® , Halcyon Days ® , and Lilliput Lane  ,
   Cera Trend Fanciful
Felines  Ewe & Me
 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Proprietary Designs
    
    $
    12,460
    
    
    $
    15,033
    
    
    $
    34,489
    
    
    $
    43,378Licensed Brands
    
    
    22,321
    
    
    
    34,355
    
    
    
    47,422
    
    
    
    63,695Third-Party Distribution
    
    
    16,433
    
    
    
    15,434
    
    
    
    41,854
    
    
    
    40,138Precious Moments®(1)
    
    
    
    
    
    
    10,925
    
    
    
    
    
    
    
    29,728Other
    
    
    492
    
    
    
    83
    
    
    
    2,048
    
    
    
    2,725Intercompany
    
    
    (949
    )
    
    
    (308
    )
    
    
    (1,721
    )
    
    
    (1,270
    )Total consolidated
    
    $
    50,757
    
    
    $
    75,522
    
    
    $
    124,092
    
    
    $
    178,394
 
 (1)
    
    Includes only Precious Moments® product sales and service fees recorded by U.S.
operations.  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net RevenuesU.S
    
    $
    23,711
    
    
    $
    48,195
    
    
    $
    52,832
    
    
    $
    104,973International
    
    
    27,046
    
    
    
    27,327
    
    
    
    71,260
    
    
    
    73,421Total consolidated
    
    $
    50,757
    
    
    $
    75,522
    
    
    $
    124,092
    
    
    $
    178,394Operating LossU.S
    
    $
    (6,310
    )
    
    $
    (1,779
    )
    
    $
    (39,489
    )
    
    $
    (36,355
    )International
    
    
    3,872
    
    
    
    3,020
    
    
    
    7,308
    
    
    
    4,498Total consolidated
    
    $
    (2,438
    )
    
    $
    1,241
    
    
    $
    (32,181
    )
    
    $
    (31,857
    )Long-lived AssetsU.S.Property, plant & equipment, net
    
    $
    8,170
    
    
    $
    10,433
    
    
    $
    8,170
    
    
    $
    10,433Other assets
    
    
    2,054
    
    
    
    8,431
    
    
    
    2,054
    
    
    
    8,431Total U.S
    
    
    10,224
    
    
    
    18,864
    
    
    
    10,224
    
    
    
    18,864InternationalProperty, plant & equipment, net
    
    
    2,306
    
    
    
    6,073
    
    
    
    2,306
    
    
    
    6,073Other assets
    
    
    6,413
    
    
    
    7,339
    
    
    
    6,413
    
    
    
    7,339Total International
    
    
    8,719
    
    
    
    13,412
    
    
    
    8,719
    
    
    
    13,412Total consolidated
    
    $
    18,943
    
    
    $
    32,276
    
    
    $
    18,943
    
    
    $
    32,276Capital ExpendituresU.S
    
    $
    87
    
    
    $
    658
    
    
    $
    221
    
    
    $
    1,336International
    
    
    89
    
    
    
    113
    
    
    
    172
    
    
    
    324Total consolidated
    
    $
    176
    
    
    $
    771
    
    
    $
    393
    
    
    $
    1,660Depreciation and AmortizationU.S
    
    $
    557
    
    
    $
    602
    
    
    $
    1,831
    
    
    $
    5,756International
    
    
    214
    
    
    
    340
    
    
    
    644
    
    
    
    828Total consolidated
    
    $
    771
    
    
    $
    942
    
    
    $
    2,475
    
    
    $
    6,584
 14




---



##### 



Note 4. Income (Loss) Per Common Share (Basis of Calculations)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Average common shares outstanding-basic
    
    
    15,055
    
    
    
    14,773
    
    
    
    14,982
    
    
    
    14,692Dilutive effects of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average diluted shares outstanding
    
    
    15,055
    
    
    
    14,773
    
    
    
    14,982
    
    
    
    14,692
  Note 5. Financial Instruments
  Accounting for Derivative Instruments and Hedging Activities
  Instrument
    
    Currency
    
    Notional Amount
    
    Exchange Rate
    
    Maturity Date(in thousands)Forward Contract
    
    Euros
    
    $250
    
    1.2350
    
    10/16/2006Forward Contract
    
    Euros
    
    $200
    
    1.2810
    
    12/13/2006Option
    
    Euros
    
    $ 59
    
    1.2750
    
    7/31/2007Option
    
    Euros
    
    $250
    
    1.2790
    
    9/23/2007
 15




---



##### 



Note 6. Stock-Based Compensation
  Accounting for
Stock Issued to Employees
  Three Months Ended
    
    
    Nine Months Ended(In thousands, except per share amounts)
    
    September 30, 2005
    
    
    September 30, 2005Net loss as reported
    
    $
    (2,115
    )
    
    $
    (39,367
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (81
    )
    
    
    (263
    )Pro forma net loss
    
    
    (2,196
    )
    
    
    (39,630
    )Loss per share  continuing operations:Basic and diluted  as reported
    
    $
    (.14
    )
    
    $
    (2.68
    )Basic and diluted  pro forma
    
    $
    (.15
    )
    
    $
    (2.70
    )
  16




---



##### 



Three Months Ended September 30, 2006Weighted AverageWeighted Average
    
    
    Aggregate
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Term (Yrs.)Outstanding at beginning of period
    
    
    1,952,942
    
    
    $
    9.42Granted
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    (69,163
    )
    
    
    10.95Outstanding at end of period
    
    
    1,883,779
    
    
    $
    9.36
    
    
    
    
    
    
    
    5.57Exercisable at end of period
    
    
    1,871,620
    
    
    $
    9.41
    
    
    $
    
    
    
    
    5.54
 Nine Months Ended September 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
    
    
    (204,420
    )
    
    
    15.05Outstanding at end of period
    
    
    1,883,779
    
    
    $
    9.36
    
    
    
    
    
    
    
    5.57Exercisable at end of period
    
    
    1,871,620
    
    
    $
    9.41
    
    
    $
    
    
    
    
    5.54
   Note 7. Precious Moments, Inc. Licensing Agreement Termination
 Precious Moments ®
  17




---



##### 



Note 8. Notes and Loans Payable
          18




---



##### 



Note 9. Income Taxes
   19




---



##### 



Note 10. Discontinued Operations
      Note 11. Legal Proceedings
  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  20




---



##### 



Overview
   1.
    
    Securing stable, long-term financing.The lenders
under our current credit facility recently agreed to forbear from enforcing
the remedies available to them under the facility as a result of
Enescos current continuing events of default. Such forbearance
will terminate on December 29, 2006 or earlier if we do not comply
with certain covenants and agreements. We continue to seek alternative financing that will pay off
all amounts due under our current credit facility and provide financing for our operations.
We retained Mesirow Financial, Inc. to assist us in these efforts. Loan costs capitalized,
totaling approximately $1.6 million, previously incurred in anticipation of securing new
financing through LaSalle Bank were written-off in June 2006 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 2005 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 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 nine 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 arranged with our third-party distributor in China to handle increased
volumes of product shipments to our retail customers directly from China. (2) We will
continue to ship our high-value product lines through our contract distributor in St.
Louis. (3) In lieu of ceasing operations at our Illinois distribution center this quarter,
we ramped up in the third quarter 2006 to handle the distribution of our 2006 Christmas
product sales, and will likely vacate the facility at year-end.We have also taken many steps over the last few months with National Distribution Centers
(NDC), our third-party logistics provider, to rectify the shipping issues that have been
encountered since our transition to a 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 will support a pick and pack program in
2007.
 21




---



##### 



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 our U.S. customers have remained loyal only because of
the fine products and exclusive brands 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
 Precious Moments ®
  Impact of the Operating Improvement Plan Initiatives
  Rationalization of the U.S. product portfolio
  22




---



##### 



Precious Moments ®
 23




---



##### 



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 ®
 24




---



##### 



Precious Moments ® Precious Moments ® Heartwood Creek ® by Jim Shore
 Precious Moments ® Precious Moments ® Precious Moments ® Heartwood Creek ® by Jim Shore
 Precious Moments ®
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,($ in thousands)
    
    2006
    
    
    2005
    
    
    Change %
    
    
    2006
    
    
    2005
    
    
    Change %Net revenues, other than Precious Moments®
    
    $
    50,757
    
    
    $
    64,598
    
    
    
    (21.4
    )%
    
    $
    124,092
    
    
    $
    148,665
    
    
    
    (16.5
    )%Precious Moments® product revenues
    
    
    
    
    
    
    8,353
    
    
    
    
    
    
    
    
    
    
    
    27,158
    
    
    
    Precious Moments® service fees
    
    
    
    
    
    
    2,571
    
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    Net revenues as reported
    
    $
    50,757
    
    
    $
    75,522
    
    
    
    (32.8
    )%
    
    $
    124,092
    
    
    $
    178,394
    
    
    
    (30.4
    )%Cost of sales, other than Precious Moments®
    
    $
    29,381
    
    
    $
    36,236
    
    
    
    (18.9
    )%
    
    $
    76,526
    
    
    $
    88,138
    
    
    
    (13.2
    )%Precious Moments® cost of sales
    
    
    
    
    
    
    8,118
    
    
    
    
    
    
    
    
    
    
    
    15,681
    
    
    
    Precious Moments® loss on license
termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,713
    
    
    
    Precious Moments® royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    Cost of sales, as reported
    
    $
    29,381
    
    
    $
    44,354
    
    
    
    (33.8
    )%
    
    $
    76,526
    
    
    $
    115,532
    
    
    
    (33.8
    )%Gross margin, other than Precious Moments®
    
    
    42.1
    %
    
    
    43.9
    %
    
    
    
    
    
    
    38.3
    %
    
    
    40.7
    %Gross margin, Precious Moments®
    
    
    
    
    
    
    25.7
    %
    
    
    
    
    
    
    
    
    
    
    7.9
    %Gross margin as reported
    
    
    42.1
    %
    
    
    41.3
    %
    
    
    
    
    
    
    38.3
    %
    
    
    35.2
    %
 Selling, General and Administrative Expenses (SG&A)
  25




---



##### 



Increase (Decrease)
    
    Increase (Decrease)Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006 vs. 2005
    
    2006 vs. 2005Reduced administrative salaries and benefit
costs
    
    
    $  (1.9
    )
    
    
    $   (7.8
    )Lower consulting fees
    
    
    (1.4
    )
    
    
    (2.2
    )Decrease in bad debt expense
    
    
    (1.0
    )
    
    
    (3.1
    )Lower commissions due to reduced sales
volume
    
    
    (1.0
    )
    
    
    (1.8
    )Reduced distribution and warehousing costs in
the U.S.
    
    
    (0.8
    )
    
    
    (2.7
    )Decrease in U.S. auditing and Sarbanes-Oxley
compliance costs
    
    
    (0.6
    )
    
    
    (1.6
    )Decrease in rents
    
    
    (0.3
    )
    
    
    (1.1
    )(Decrease) Increase in bank fees
    
    
    (0.3
    )
    
    
    0.7Lower travel and entertainment
    
    
    (0.1
    )
    
    
    (0.5
    )Accelerated depreciation of ERP system in prior
year
    
    
    (
    )
    
    
    (3.7
    )Capitalized loan cost write-off
    
    
    
    
    
    
    1.6Foreign currency translation impact
    
    
    0.5
    
    
    
    0.9Increase spending on selling and
marketing
    
    
    0.6
    
    
    
    0.6Other, net
    
    
    0.2
    
    
    
    0.4$  (6.1
    )
    
    
    $  (20.3
    )
 Operating Income (Loss) from Continuing Operations
  Interest and Other Income (Expense), Net
  Provision for Income Tax Expense (Benefit)
   26




---



##### 



Discontinued Operations
   LIQUIDITY AND CAPITAL RESOURCES
   Liquid Assets
   Cash Flows
   27




---



##### 



Operating Improvement Plan Goals
  Credit Facilities
      28




---



##### 



29




---



##### 



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
 Fair Value
Measurement
 Employers Accounting for Defined Benefit Pension
and Other Post-retirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  30




---



##### 



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
  PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  31




---



##### 



We will need to refinance all of our indebtedness under our
current credit facility on or before
the current forbearance termination date.
  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.
  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.
  The 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.
 32




---



##### 



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
  33




---



##### 



EXHIBIT INDEX
 Item 601
    
    Exhibit10.1
    
    Executive Employment Agreement entered into as of May 15, 2006, by and between Enesco Group, Inc. and
Basil Elliott (Exhibit 10.1 to Form 8-K filed with the Commission on August 17, 2006 (File No. 001-09267))*10.2
    
    Executive Employment Agreement entered into as of May 15, 2006, by and between Enesco Group, Inc. and
Marie Meisenbach Graul (Exhibit 10.2 to Form 8-K filed with the Commission on August 17, 2006
(File No. 001-09267))*10.3
    
    Twelfth Amendment to Second Amended and Restated Senior Revolving Credit Agreement among Enesco Group,
Inc., certain borrowing subsidiaries of Enesco Group, Inc., Bank of America, N.A., as Agent, and certain lenders
party thereto.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: November 14, 2006
    
    By:
    
    /s/ Basil A. ElliottBasil A. ElliottPresident and Chief Executive OfficerDate: November 14, 2006
    
    By:
    
    /s/ Marie Meisenbach GraulMarie Meisenbach GraulExecutive Vice President and Chief Financial Officer
 35