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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 THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ . Commission File Number 0-1349 Enesco Group, Inc. 
  Illinois
    
    04-1864170(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    

Identification
No.)
 225 Windsor Drive, Itasca, Illinois
    
    
    60143(Address of principal executive offices)
    
    (Zip Code)
 630-875-5300   N/A
(Former name, address and fiscal year, if changed since last report)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12B-2 of
the Exchange Act) þ o
 At March 31, 2005, 14,659,496 shares of the registrants Common Stock with Associated Rights were
outstanding.   1




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ENESCO GROUP, INC.
TABLE OF CONTENTS PART I.  FINANCIAL INFORMATION
    
    6Item 1. Financial Statements
    
    6Consolidated Balance Sheets As of March 31, 2005 (Unaudited) and December 31, 2004
    
    6Consolidated Statements of Operations For the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    8Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
    
    9For the Three Months Ended March 31, 2005 and 2004 (Unaudited)Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    10Notes to Consolidated Financial Statements (Unaudited)
    
    11Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    30Item 4. Controls and Procedures
    
    30PART II. OTHER INFORMATION
    
    30Item 1. Legal Proceedings
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    30Item 3. Defaults Upon Senior Securities
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    31Item 5. Other Information
    
    31Item 6. Exhibits and reports on Form 8-K
    
    31SIGNATURES
    
    32EXHIBIT INDEX
    
    33EXHIBIT 31.1
    
    34EXHIBIT 31.2
    
    36EXHIBIT 32.1
    
    38EXHIBIT 32.2
    
    39
 2




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Cautionary Factors That May Affect Future Results This report and other written reports and oral statements made from time to time by Enesco and its
management may contain cautionary or forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements can be identified by the use of the words such as anticipate, estimate,
expect, project, intend, plan, believe, and other words of similar meaning. In
particular, these include statements relating to intentions, beliefs or current expectations
concerning, among other things, future performance, results of operations, the outcome of
contingencies such as legal proceedings, and financial condition. Forward-looking statements give
current expectations or forecasts of future events. They do not relate strictly to historical or
current facts. Any or all of the forward-looking statements made in this report and in any other public statements
may turn out to be incorrect. By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on circumstances that may or may not occur
in the future. We caution you that actual future results of operations may vary materially from
forward-looking statements. Any forward-looking statements made in this report speak only as of the
date of such statement. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future events or otherwise, except as may be required under
applicable securities laws. However, you should consult any further disclosures we make on related
subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the Securities and Exchange
Commission. It is not possible to predict or identify all factors that could potentially cause actual results
to differ materially from expected and historical results. Some such factors are: Business Environment  
    Day-to-day effects of current economic conditions and market fluctuations. This
includes contributing factors such as 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 and armed conflict, possibly causing a business disruption
in global economic activity, changes in logistics, and security 3




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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.
    Ability to realize projected cost savings considering the evolving business and
regulatory environment, and the degree of success in implementing planned organizational
restructurings and process improvements, particularly among the operations in the United
States.
    Ability to continue to renew or enter into new credit facilities to finance operational
requirements at competitive cost and interest rates.
    Ability to timely and efficiently resolve current and future Enterprise Resource
Planning (ERP) system issues with reliance on the Companys former legacy functioning
operating systems. Sales Environment  
    Ability to secure, maintain and renew licenses, particularly Jim Shore (Heartwood
Creek), Priscilla Hillman (Cherished Teddies), Disneyand Precious Moments,which have been
top performers and make up approximately 40% of associated product line revenues.
    Changes in the geographical mix of revenue for the United States and International will
impact gross margin.
    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. Production, Procurement and Distribution  
    Timing of customer orders, shipments to the United States 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. 4




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
    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. Legal and Other  
    The actual events, circumstances, outcomes and amounts differing from judgments,
assumptions and estimates (including items potentially impacted by the implementation of
the ERP system in the United States) 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 consolidated financial statements. Risk of trademarks and license
infringements, and our ability to effectively enforce our rights. 5




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ITEM 1. FINANCIAL STATEMENTS ENESCO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004 (Unaudited)March 31,
    
    
    December 31,(In thousands)
    
    2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    18,636
    
    
    $
    14,646Accounts receivable, net
    
    
    64,389
    
    
    
    70,526Inventories
    
    
    62,633
    
    
    
    65,371Prepaid expenses
    
    
    4,934
    
    
    
    3,310Deferred income taxes
    
    
    820
    
    
    
    920Total current assets
    
    
    151,412
    
    
    
    154,773Property, Plant and Equipment, at Cost:Land and improvements
    
    
    1,200
    
    
    
    1,200Buildings and improvements
    
    
    21,948
    
    
    
    22,131Machinery and equipment
    
    
    10,231
    
    
    
    10,273Office furniture and equipment
    
    
    37,383
    
    
    
    37,454Transportation equipment
    
    
    714
    
    
    
    79671,476
    
    
    
    71,854Less - accumulated depreciation and amortization
    
    (52,142
    )
    
    
    (49,345
    )Property, plant and equipment, net
    
    $
    19,334
    
    
    $
    22,509Other Assets:Goodwill
    
    
    9,403
    
    
    
    9,403Other
    
    
    4,011
    
    
    
    4,116Deferred income taxes
    
    
    3,072
    
    
    
    3,082Total other assets
    
    
    16,486
    
    
    
    16,601$
    187,232
    
    
    $
    193,883
 The accompanying notes are an integral part of these consolidated financial statements. 6




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ENESCO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004 (Unaudited)March 31,
    
    
    December 31,(In thousands)
    
    2005
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    38,048
    
    
    $
    26,354Accounts payable
    
    
    14,395
    
    
    
    18,680Federal, state and foreign income taxes
    
    
    8,078
    
    
    
    6,405Deferred gain on sale of fixed assets
    
    
    1,711
    
    
    
    1,711Accrued expenses -Payroll and commissions
    
    
    2,696
    
    
    
    2,599Royalties
    
    
    12,098
    
    
    
    12,267Post-retirement benefits
    
    
    1,284
    
    
    
    2,029Other
    
    
    5,498
    
    
    
    4,733Total current liabilities
    
    
    83,808
    
    
    
    74,778Long-Term Liabilities:Post-retirement benefits
    
    
    2,917
    
    
    
    3,008Deferred gain on sale of fixed assets
    
    
    6,317
    
    
    
    6,830Total long-term liabilities
    
    
    9,234
    
    
    
    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
    
    
    43,793
    
    
    
    44,229Retained earnings
    
    
    287,246
    
    
    
    302,462Accumulated other comprehensive income
    
    
    7,574
    
    

    
    8,152341,767
    
    
    
    357,997Less - Shares held in treasury, at cost:Common stock, 10,569 shares at March 31,
2005 and 10,671 shares at December 31,
2004
    
    
    (247,577
    )
    
    
    (248,730
    )Total shareholders equity
    
    
    94,190
    
    
    
    109,267Total liabilities and shareholders equity
    
    $
    187,232
    
    
    $
    193,883
 The accompanying notes are an integral part of these consolidated financial statements. 7




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ENESCO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited) (In thousands, except per share amounts)
    
    2005
    
    
    2004Net revenues
    
    $
    60,084
    
    
    $
    52,323Cost of sales
    
    
    37,481
    
    
    
    30,014Gross profit
    
    
    22,603
    
    
    
    22,309Selling, general and administrative expenses
    
    
    34,626
    
    
    
    29,531Operating loss
    
    
    (12,023
    )
    
    
    (7,222
    )Interest expense
    
    
    (399
    )
    
    
    (85
    )Interest income
    
    
    120
    
    
    
    112Other expense, net
    
    

    (835
    )
    
    
    (315
    )Loss before income taxes
    
    
    (13,137
    )
    
    
    (7,510
    )Income tax (expense) benefit
    
    
    (2,079
    )
    
    
    3,108Net loss
    
    $
    (15,216
    )
    
    $
    (4,402
    )Net loss per
common share - basic and diluted
    
    $
    (1.04
    )
    
    $
    (0.31
    )
 The accompanying notes are an integral part of these consolidated financial statements. 8




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Enesco Group, Inc.
Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss)
For the Three Months Ended March 31, 2005 and March 31, 2004
(Unaudited)  AccumulatedCapital in
    
    
    OtherCommon Stock
    
    
    Treasury Stock
    
    
    Excess of
    
    
    Comprehensive
    
    
    Common Stock(in thousands)
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,402
    )
    
    
    (4,402
    )Currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    750Total
comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    (4,402
    )
    
    
    (3,652
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    97
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    44Other common stock issuance
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    272
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    262Balance March 31, 2004
    
    
    25,228
    
    
    
    3,154
    
    
    
    11,032
    
    
    
    (252,799
    )
    
    
    45,800
    
    
    
    4,490
    
    
    
    343,248
    
    
    
    143,893Balance 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 income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578
    )
    
    
    (15,216
    )
    
    
    (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
    
    
    $
    94,190
 The accompanying notes are an integral part of these consolidated financial statements. 9




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ENESCO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2005 and 2004
(Unaudited) (In thousands)
    
    2005
    
    
    2004Operating Activities:Net Income (loss)
    
    $
    (15,216
    )
    
    $
    (4,402
    )Adjustments to reconcile net income(loss)
to net cash provided (used) by operating activitiesDepreciation and amortization of property, plant and equipment
    
    
    3,662
    
    
    
    1,454Deferred income taxes
    
    
    105
    
    
    
    62(Gains) losses on sale of capital assets
    
    
    (516
    )
    
    
    (3
    )Changes in assets and liabilities:Accounts receivable
    
    
    5,794
    
    
    
    5,168Inventories
    
    
    2,390
    
    
    
    1,527Prepaid expenses
    
    
    (1,653
    )
    
    
    505Other assets
    
    
    35
    
    
    
    (117
    )Accounts payable and accrued expenses
    
    
    (4,131
    )
    
    
    (11,865
    )Federal, state and foreign income taxes
    
    
    1,686
    
    
    
    (3,794
    )Long-term post retirement benefits
    
    
    (91
    )
    
    
    60Net cash provided (used) by operating activities
    
    
    (7,935
    )
    
    
    (11,405
    )Investing Activities:Purchases of property, plant and equipment
    
    
    (618
    )
    
    
    (868
    )Acquisitions, net of cash acquired
    
    
    0
    
    
    
    (7,262
    )Proceeds from sales of property, plant and equipment
    
    
    5
    
    
    
    12Net cash provided (used) by investing activities
    
    
    (613
    )
    
    
    (8,118
    )Financing Activities:Net issuance (repayment) of notes and loans payable
    
    
    11,761
    
    
    
    18,523Exercise of stock options
    
    
    322
    
    
    
    44Other common stock issuance
    
    
    395
    
    
    
    262Net cash provided (used) by financing activities
    
    
    12,478
    
    
    
    18,829Effect of exchange rate changes on cash and cash equivalents
    
    
    60
    
    
    
    620Increase (decrease) in cash and cash equivalents
    
    
    3,990
    
    
    
    (74
    )Cash and cash equivalents, beginning of period
    
    
    14,646
    
    
    
    10,645Cash and cash equivalents, end of period
    
    $
    18,636
    
    
    $
    10,571
 The accompanying notes are an integral part of these consolidated financial statements. 10




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ENESCO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2005
 1. Description of Business:
Enesco Group, Inc. (Enesco, We, or Our) is a corporation organized in 1937. Enescos
corporate headquarters are located at 225 Windsor Drive, Itasca, Illinois 60143. We are a world
leader in the gift, home décor, garden accessories, and collectible industries. We distribute
products to a wide variety of specialty gift retailers, home décor boutiques, garden stores, as
well as mass-market chains and direct retailers. Internationally, we serve markets in the United
Kingdom, Canada, Europe, Australia, Mexico, Asia and the Pacific Rim. Our product lines comprise
some of the worlds most recognizable brands, including, Heartwood Creek by Jim Shore, Walt Disney
Company, Walt Disney Classics Collection, Pooh & Friends, Nickelodeon, Bratz, Halcyon Days,
Lilliput Lane, Border Fine Arts, Dartington Crystal, Cherished Teddiesand Precious Moments. Some
of our specific products are accent furniture, wall décor, garden accessories, frames, desk
accessories, figurines, cottages, musicals, music boxes, ornaments, waterballs, candles, tableware,
general home accessories, crystal and glassware and porcelain bisque and other figurines. We believe that demographic and economic trends support growth in home decor, garden and gift
lines. The home redecoration focus continues to grow in the United States. Outdoor living is a
burgeoning lifestyle trend in the United States, especially as the population shifts to the
Sunbelt. We currently have a presence and compete in three major geographical areas that
include the United States, Europe and Canada. The United States accounted for approximately 59%,
Europe 30%, Canada 10% and rest of the world 1% of the 2004 consolidated net revenues. We expect
this geographic mix to remain at these approximate proportions in 2005. Europe is primarily the
United Kingdom, Germany and France, the rest of the world is Mexico and various other countries. Our operations in the United States, United Kingdom, Canada and France each have their own
employee sales organizations. We also sell our products through distributors in approximately 25
countries around the world. In addition to selling various Enesco-developed product lines in the
United Kingdom and several other European countries, Enesco Limited, a subsidiary of Enesco Group,
Inc., with its headquarters located in Carlisle, Cumbria, England, oversees the operations of our
subsidiary located in France and the independent agents in Germany, Holland and Belgium. Enesco
Limited also administers the collectors clubs that are based in 11




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Europe. Our Canadian subsidiary, N.C. Cameron, sells its various product lines in Canada and
administers the collectors clubs based in Canada. Our 2005 marketing structure focuses on brand building, particularly for Enesco developed lines,
such as Foundations, Dartington in the United Kingdom, Gregg Gift and other lines of products,
such as Heartwood Creek by Jim Shore. We are leveraging the talents of outside artists across a
range of product categories and price positions. 2. Summary of Significant Accounting Policies: Basis of
Presentation

The accompanying financial data as of March 31, 2005 and for the three months ended March 31, 2005
and March 31, 2004 has been prepared by Enesco, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant to such rules and
regulations. These Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2004. In our opinion, these Consolidated Financial Statements have been prepared in conformity with
accounting principles generally accepted in the United States of America applicable to interim
period financial statements and reflect all adjustments necessary for a fair presentation of our
financial position as of March 31, 2005, results of operations for the three months ended March 31,
2005 and March 31, 2004, and cash flows for the three months ended March 31, 2005 and March 31,
2004. The results of operations for interim periods are not necessarily indicative of the operating
results for full fiscal years or any future period. The information in this report reflects all
normal recurring adjustments and disclosures that are, in our opinion, necessary to fairly present
the results of operations and financial condition for the interim periods. Estimates are used for,
but not limited to, the accounting for allowances for doubtful accounts and sales returns,
inventory valuations, impairments of tangible and intangible assets, and other special charges and
taxes. Actual results could differ from these estimates. When preparing an estimate we determine
what factors are most likely to affect the estimate. Enesco 12




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also gathers information inside and outside the organization. The information is evaluated and the
estimate is made. The following are the critical accounting policies that we believe could have a significant impact
on our financial statements if these judgments, assumptions and estimates used by us turn out to
be incorrect. In addition, we have discussed these critical accounting policies with our Audit
Committee. Accounts Receivable Allowances: Doubtful Accounts  The allowance for doubtful accounts is based on our assessment of the
collectability of specific customer accounts and the historical write-off percentage applied to
outstanding accounts receivable. If there is deterioration in a major customers credit
worthiness or actual defaults are significantly different than our historical experience, due to
changes in the business environment or other factors, estimates of the recoverability of amounts
due could be affected. This reserve is comprised of two parts. The first is a general reserve
which is calculated by applying the historical bad debt rate (currently 3.6%) to the month end
accounts receivable balance. The historical rate is adjusted annually to reflect actual
experience or more frequently if we deem necessary. If the general reserve percentage increased 1%
to 4.6%, this would require an adjustment to the reserve of $398,000 (as of March 31, 2005) and a
corresponding increase in bad debt expense of $398,000. The second part of the reserve is for
specific accounts, with an outstanding balance greater than $50,000, whose collectability, in our
opinion is in question. These accounts are reviewed on a monthly basis and are adjusted as deemed
necessary. Sales Allowances: Sales Returns  The sales returns and allowances (R&A) reserve is based on historical trends and
specific accounts where the customer has taken a deduction or has similarly challenged an invoice
and we believe it is likely the claim will be accepted. The general reserve is calculated by
applying the historical percentage of the sales return for the year (currently 2.9%) to the last
two months sales. This is considered by us to be a reasonable amount of time for customers to
receive, evaluate and request authorization to return a shipment. This part of the reserve
fluctuates with sales volume as the likelihood of a return increases or decreases with sales
levels. This percentage is adjusted yearly to reflect actual experience or more frequently if we
deem necessary. If the general reserve percentage increased 1% to 3.9%, this would require an
adjustment to the reserve of $229,000 (as of March 31, 2005) and a corresponding increase in R&A
cost of $229,000. The 13




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second part of the reserve is for specific deductions or claims that a customer has made and that
we deem may be accepted. This part of the reserve is reviewed by our management on a monthly
basis and is adjusted as deemed necessary. Inventory Reserves: Excess/Slow Moving Inventory  As part of our process of developing, forecasting and procuring
products, it is likely we may have excess inventory for certain SKUs. The selling price would
then be reduced in order to liquidate this excess inventory, often at less than the product cost.
For this reason an inventory reserve is maintained in order to properly state inventory at the
lower of cost or market. At every month end, perpetual inventory balances by SKU are compared to
unit sales for the most recent 12 rolling months. The difference between the inventory on hand
(units) and the last 12 months sales is identified as excess inventory and is subject to reserve.
The portion of inventory determined to be excess is reserved at approximately 30% of cost in order
to state that inventory at the lower of cost or market. Historical trends (which are verified
yearly or more often if deemed necessary) indicate that excess inventory on average is sold at a
30% loss. An entry is made each month to adjust the inventory reserve to the required balance. Inventory Shrinkage  Based on historic trends a reserve is established in anticipation of an
inventory shrink during the year leading up to the time when we take our physical inventory. This
reserve is cleared at year end as part of the year-end physical inventory process. Revenue Recognition: We recognize revenue when title passes to customers, which generally occurs when merchandise is
turned over to the shipper. A provision for anticipated merchandise returns and allowances is
recorded based upon historical experience when a sale is recorded. Our amounts billed to customers
for shipping and handling is included in revenue. License and royalty fees received by us are
recognized as revenue when earned. Impairments of Tangible and Intangible Assets: We assess the recoverability of significant tangible and intangible assets, including goodwill,
under Financial Accounting Standards Board (FASB) Statement Nos. 142  Goodwill and Other
Intangible Assets and 144  Accounting for the Impairment or Disposal of Long-Lived Assets. For
property, plant and equipment, we evaluate the recoverability of these assets whenever events or
changes in circumstances indicate that the carrying value of the assets may not be recoverable.
For goodwill, we 14




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perform an annual impairment assessment or more frequently if impairment indicators arise. Tax Accruals: Accruals have been established for taxes payable and potential tax assessments. The accruals are
included in current income taxes payable since it is uncertain as to when assessments may be made
and paid. We have filed and continue to file tax returns with a number of taxing authorities
worldwide. We believe such filings have been and are in compliance with applicable laws,
regulations and interpretations. Positions taken are subject to challenge by the taxing authorities
often for an extended number of years after the filing dates. To the extent accruals differ from
assessments, when the open tax years are closed or the accruals require adjustment at a point in
time, the accruals are adjusted through the provision for income taxes. Payments for Interest and Income Taxes: We made cash payments for interest and income taxes as follows (in thousands): Three Months EndedMarch 312005
    
    
    2004Interest
    
    $
    424
    
    
    $
    140Income taxes
    
    $
    238
    
    
    $
    627
 Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
the difference between financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are also recognized for the tax effects
attributable to the carryforward of net operating losses (NOLs). Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. During the quarter, we determined the need for a valuation
allowance for deferred tax assets arising primarily for the carryforward of net operating losses.
The ultimate realization of net deferred tax assets is dependent upon the generation of future
taxable income during (i) the years in which temporary differences reverse and (ii) the years prior
to the expiration of 15




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the NOL carryforward. We consider projected future taxable income and tax planning strategies
in making this assessment. Based on these factors, we believe that it is more likely than not that
the Company will realize the benefits of the net deferred tax assets of approximately $4 million as
of March 31, 2005. Also during the quarter, we provided $2.6 million to establish a reserve for the potential impact
of a foreign tax examination. Additionally, other reserves were determined unnecessary; the
benefit of $1.1 million was recorded in the current quarter. Accounting for Stock  Based Compensation: At March 31, 2005, we have four stock-based compensation (fixed options) plans, not including plans
with options that have fully expired. We account for those plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. No stock-based compensation plan cost is reflected in
net loss, as all options granted under those plans had exercise prices equal to the market value of
the underlying common stock on the date of grant. The following table illustrates the effect on
net loss and loss per share as if Enesco had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to
stock-based compensation plans. Three Months EndedMarch 312005
    
    
    2004Net loss as reported
    
    $
    (15,216
    )
    
    $
    (4,402
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects, if any
    
    
    (517
    )
    
    
    (582
    )Pro forma net loss
    
    $
    (15,733
    )
    
    $
    (4,984
    )Loss per share:Basic and diluted  as reported
    
    $
    (1.04
    )
    
    $
    (0.31
    )Basic and diluted  pro forma
    
    $
    (1.08
    )
    
    $
    (0.35
    )
 16




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3. Geographic Operating Segments: We operate in the giftware and collectible wholesale industry, predominantly in two major
geographic classifications (United States and International). The following table summarizes
operations by geographic classification for the three months ended March 31, 2005 and 2004 (in
thousands): Three Months EndedMarch 312005
    
    
    2004Net RevenuesUnited States
    
    $
    32,581
    
    
    $
    28,171United States inter-company
    
    
    (226
    )
    
    
    (186
    )International
    
    
    28,093
    
    
    
    24,735International inter-company
    
    
    (364
    )
    
    
    (397
    )Total consolidated
    
    $
    60,084
    
    
    $
    52,323Operating Profit (Loss)United States
    
    $
    (13,190
    )
    
    $
    (8,771
    )International
    
    
    1,167
    
    
    
    1,549Total consolidated
    
    $
    (12,023
    )
    
    $
    (7,222
    )
 Growth in net United States revenue was primarily due to the revenue generated from the Gregg Gift
acquisition of approximately $2 million and favorable effect of foreign exchange rates in
translation of approximately $1 million. The increase in United States operating loss was
primarily due to higher SG&A costs of approximately $3 million, driven by accelerated depreciation
on the ERP system and 2004 year-end audit and related Sarbanes-Oxley costs. Growth in net International revenues was primarily due to the revenue generated from the July, 2004
Dartington Crystal acquisition of approximately $3 million and the favorable foreign exchange rates
in translation. The decrease in International operating income is primarily due to the higher SG&A
costs of approximately $0.3 million driven by the July, 2004 Dartington acquisition. Transfers between geographic operating segments are made at the market value of the merchandise
transferred. No single customer accounted for 10% or more of consolidated net sales. Export sales
from the United States to foreign unaffiliated customers represent less than 10% of consolidated
net sales. 17




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There were no material changes in the mix of geographic operating segment assets from the amounts
disclosed in our December 31, 2004 Form 10-K and the basis of geographic classification of sales
and operating profit has not changed in the first quarter of 2005. 4. Other Income (Expense),
net:

Other income (expense), net for the three months ended March 31, 2005 and 2004 consisted of the
following (in thousands): Three Months EndedMarch 312005
    
    
    2004Foreign currency gain (loss)
    
    $
    6
    
    
    $
    (6
    )Gain on sale of fixed assets
    
    
    3
    
    
    
    3Bank charges and other
    
    
    (844
    )
    
    
    (312
    )$
    (835
    )
    
    $
    (315
    )
 Bank charges have increased approximately $0.5 million primarily due to the ongoing effort to amend
the United States credit facility and establish a global facility. (See Note 8, Subsequent Events,
for further details). 5. Loss Per Common Share (Basis of Calculations): The number of shares used in the loss per common share computations for the three months ended
March 31, 2005 and 2004 were as follows (in thousands): Three Months EndedMarch 312005
    
    
    2004Average common shares outstanding  basic
    
    
    14,607
    
    
    
    14,178Dilutive effects of stock options and warrants
    
    
    
    
    
    
    Average shares outstanding  diluted
    
    
    14,607
    
    
    
    14,178
 The average number of diluted shares outstanding for the three months ended March 31, 2005 and
March 31, 2004 excludes common stock equivalents relating to options and 18




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warrants because there
was a net loss and such common stock equivalents would have been anti-dilutive. Additionally,
options to purchase 1.1 million and 0.6 million shares were outstanding during 2005 and 2004,
respectively, but were not included in the computation of diluted loss per share because the
options exercise prices were greater than the average market price of the common shares. 6. Financial Instruments: We operate globally with various manufacturing and distribution facilities and product
sourcing locations around the world. We may reduce our exposure to fluctuations in interest rates
and foreign exchange rates by creating offsetting positions through the use of derivative
financial instruments. We do not use derivative financial instruments for trading or speculative
purposes. We regularly
monitor foreign currency exposures and ensure that the hedge contract amounts do not exceed the
amounts of the underlying exposures. Our current hedging activity is limited to foreign currency purchases and intercompany foreign
currency transactions. The purpose of our foreign currency hedging activities is to protect Enesco
from the risk that the eventual settlement of foreign currency transactions will be adversely
affected by changes in exchange rates. We hedge these exposures by entering into various
short-term foreign exchange forward contracts. Under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, the instruments are carried at fair value in the balance sheet
as a component of other current assets or other current liabilities. Changes in the fair value of
foreign exchange forward contracts that meet the applicable hedging criteria of SFAS 133 are
recorded as a component of other comprehensive income and reclassified into earnings in the same
period during which the hedged transaction affects earnings. Changes in the fair value of foreign
exchange forward contracts that do not meet the applicable hedging criteria of SFAS 133 are
recorded currently in income as cost of revenues or foreign exchange gain or loss, as applicable.
Hedging activities did not have a material impact on results of operations or financial condition
during the three months ended March 31, 2005. 7. Acquisitions: In February 2004, we acquired Gregg Manufacturing, Inc. d/b/a Gregg Gift Company (Gregg Gift) for
$7.3 million. Gregg Gift is a United States-based supplier and distributor of giftware. Gregg
Gifts product line includes book covers, organizers, tote bags, garden and home décor accessories
that are distributed through Christian retailers, mass market, catalogs, book shops and card and
gift stores. During the first quarter of 2005, we have integrated certain areas of Gregg Gift,
including 19




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utilizing our field sales force to sell Gregg Gifts product to independent card and
gift retailers. Net revenue in the first quarter of 2005 and 2004 was $2.6 million and $1.0
million, respectively. Operating profit in the first quarter of 2005 and 2004 was $0.2 million
$0.1 million, respectively. In July 2004, Enesco Limited acquired certain assets of Dartington Crystal Limited (Dartington)
for $7.0 million. Dartington is a United Kingdom-based designer and manufacturer of uncut crystal.
Dartingtons product line includes glassware, bowls, vases, candleholders and giftware. Net
revenue in the first quarter of 2005 was $2.9 million. Operating loss in the first quarter of
2005 was $0.3 million. 8. Subsequent Events: We were notified in April 2005 that a foreign jurisdiction issued a tax assessment totaling
approximately $8 million (U.S. dollars), resulting from an ongoing audit for the years 1998  2004.
We plan to vigorously defend the tax positions claimed on the original filed returns and refute
the assertions of the auditor. We have filed an objection to the tax auditors decision and expect
to prevail on a substantial portion of the assessment. With the assistance of outside counsel we
currently estimate the probable exposure at approximately $3 million. Our tax reserves were
adjusted to the amount we believe to be the probable additional tax to be incurred. This amount
does not include interest, which begins to run from the date of the assessment notice. We will
accrue interest on the reserved tax amount until the matter is resolved. Our Precious Momentslicense currently has a term through December 31, 2007. We anticipate that
no later than second quarter of 2005 that we and Precious Moments, Inc. will determine whether to
terminate their license, renew the license on the same terms currently in effect, or negotiate
different terms. In April 2005 the Lilliput Lane (LL) Workington plant was closed. Fifty-five workers were made
redundant, operations were consolidated into Penrith and the plant was put up for sale. The
plants net book value approximates estimated net realizable value. 9. Notes Payable and Loans Payable: On March 29, 2005, we entered into an amendment to our existing United States credit facility,
effective March 31, 2005, extending the term until January 1, 2006. The credit facility
commitments range from $50 million to $70 million, based on our seasonal borrowing needs. The
amendment also sets certain financial covenants for 2005. In the event the outstanding loans under
the amended United States credit 20




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##### 



facility are not paid off: (1) by May 16, 2005, a fee of $700,000
will become payable; (2) by June 30, 2005, another fee of $700,000 will become payable; and (3)
with the proceeds from a refinancing provided by lenders that include Fleet National Bank or an
affiliate of Fleet National Bank, then a fee of $1,750,000 will become payable. On March 28, 2005, we signed a commitment letter (the Commitment) with Fleet Capital Corporation,
operating as Bank of America Business Credit (BABC), for BABC to fully underwrite a $100 million
global senior revolving credit facility with a five year term (the Senior Credit Facility).
Under the proposed Senior Credit Facility, we will be the borrower and our material domestic and
foreign subsidiaries will be guarantors. The proposed Senior Credit Facility will be secured by
substantially all of the assets of Enesco and its material domestic and foreign
subsidiaries. The proposed Senior Credit Facility will contain standard terms and conditions,
including financial and other covenants, including, without limitation, restrictions on incurring
indebtedness and liens, acquisitions, selling property, repurchasing our shares and paying
dividends. We plan to use borrowings under the Senior Credit Facility to pay off
the outstanding loans under the amended U.S. credit facility upon the closing of the
Senior Credit Facility. The Commitment for Senior Credit Facility is subject to satisfaction of customary conditions
precedent in a manner acceptable to BABC and Bank of America Securities LLC in their reasonable discretion.
In connection with the closing, we may need to obtain additional financing secured by, among other things, certain real estate assets in
order to satisfy certain minimum excess availability
conditions set forth in the Commitment. We expect to
close on the Senior Credit Facility and, if necessary, the additional financing during the second quarter of 2005, however, no assurances can
be provided that the Senior Credit Facility or the additional financing will close or that
the Senior Credit Facility will close on terms identical to
those set forth in the Commitment. At March 31, 2005, the amount outstanding under our current credit facility was $36.6 million, and
the loan was in compliance with its financial covenants. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides more depth into the financial condition and results of
operations of Enesco and its subsidiaries. This discussion should be read in conjunction with the
financial statements and the accompanying notes included elsewhere in this Form 10-Q. It contains
forward-looking statements based on our current expectations, which are inherently subject to
risks and uncertainties. Actual results and the timing of certain events may differ significantly
from those referred to in such forward-looking statements. We undertake no obligation beyond 21




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what
is required under applicable securities law to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances, including those set forth in the
section entitled Cautionary Factors That May Affect Future Results and elsewhere in this Form
10-Q. The accompanying Consolidated Financial Statements include the accounts of Enesco Group, Inc. and
subsidiaries (Enesco). All significant intercompany transactions have been eliminated in the
Consolidated Financial Statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires the use of our
managements estimates. Actual results could differ from those estimates. Certain reclassifications
are included in the 2004 financial statements which conform to the 2005 presentation, including
club revenues and club cost of goods sold reclassified from selling, general and
administrative expenses. We operate in a single industry segment, which designs, manufactures
(primarily through third parties located in the Pacific Rim) and markets a wide variety of licensed
and proprietary branded gifts and collectibles to retailers primarily throughout the United States,
Canada, Europe and Asia. The discussion should be read in conjunction with the financial
statements and the accompanying notes included elsewhere in this Form 10-Q. Overview In the first quarter of 2005 we accomplished significant organizational changes which are expected
to help improve ongoing operational performance and effectiveness throughout the year. Our Board
of Directors elected current President, Cynthia Passmore-McLaughlin, as President and Chief
Executive Officer. Ms. Passmore-McLaughlins appointment was effective January 15, 2005. Ms.
Passmore-McLaughlin also was elected to the Board of Directors. Paula Manley was announced and
appointed Chief Financial Officer on January 4, 2005. Ms. Manley formally joined Enesco on January
24, 2005. We announced on February 1, 2005 the appointment of David Nicklin to a newly-created
position of Chief Marketing Officer, who will be leading the redesigned marketing team at Enesco.
During the first quarter of 2005, we restructured our United States marketing and sales
organization areas to enhance effectiveness of these critical functions and to organize its sales
personnel based on whether or not their customers utilize centralized buying versus buying at a
single retail outlet. As a result, the Card & Gift and Home & Garden field sales forces were
combined in 2005. On Feb 28, 2005 we appointed Michael Rumak as Chief Information Officer. In this
newly created position, Mr. Rumak will report directly to our President and CEO, Cynthia
Passmore-McLaughlin. Mr. Rumak officially joined Enesco on March 7, 2005. In this role, Mr.
Rumak will lead the planning and 22




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development of strategic information systems at Enesco. Mr.
Rumaks initial efforts will focus on implementation of the legacy software platform. He will align
information technology with the Companys strategy, and will build and develop the IT organization,
system and processes to support business needs. On May 2, 2005 we announced the appointment of
Koreen Ryan as General Counsel and Secretary. Ms. Ryan formally joins Enesco on May 16, 2005. Most
recently, Ms. Ryan was Senior Counsel for the South Asia / APMEA (Asia, Pacific, Middle East,
Africa) Group of McDonalds Corporation (NYSE: MCD), a leading global foodservice retailer with
more than 30,000 local restaurants in 119 countries. The products we are designing in-house are performing well. We are continuing to grow revenue
for owned brands and product lines where we have a strong economic model. Our own intellectual
properties as well as trademarked products have been
strong contributors to growth within our business. First quarter 2005 revenue from our
Foundations developed brand continues to increase over the prior year by $0.9
million. First quarter 2005 revenue also increased from our license design partner, Heartwood
Creek by Jim Shore of $3.5 million. We will continue developing our brands and work with both in-house and outside artists to
create new and innovative products and designs. Along these lines we are pleased to have
signed in October, 2004 an eight-year licensing agreement with Jim Shore, the talented artist
behind Heartwood Creek brand of products. This globally recognized high quality brand has
performed very well with sales increasing over 100% in the first quarter of 2005 compared to
2004. Precious Moments product sales were down approximately 2% in the first quarter of 2005
compared to 2004 and Cherished Teddies product sales were down approximately 20% in the first
quarter of 2005 compared to 2004. Sales increases in the first quarter of 2005 over the first quarter of 2004 were driven by our
ability to ship product on time this year versus last year, primarily related to the ERP
system back-log. As of March 31, 2005 there were minimal delays due to ERP problems. We began to upgrade certain modules of the legacy software system to provide advanced features
and capabilities required by the business. We expect all the changes to be completed by the
third quarter of 2005. We expect that our new customer technologies, our wireless sales
systems and web based program PowerChord will not be adversely affected when we transition to
our Legacy information system. We have seen early success with our PowerChord system, which 23




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strengthens our relationships with independent retailers and allows consumers to shop on
our website. Sales increased approximately 15% in the first quarter of 2005. The sales increase was driven by
our 2004 acquisitions, new products and favorable changes in foreign currency translation rates.
Excluding the increase in sales from the 2004 acquisitions and favorable effect for foreign
exchange, sales were up approximately 4% Gross profit increased 1% in the first quarter of 2005
as compared to the first quarter 2004. Our gross profit margins were 37.6% of net sales in the
first quarter of 2005 as compared to 42.6% in the first quarter of 2004. SG&A expenses were 17%
higher in the first quarter of 2005 as compared to the first quarter of 2004 primarily due to our
acquisitions, accelerated depreciation on the planned abandonment of the new ERP system, as well as
higher costs incurred as part of 2004s year-end audit and the related Sarbanes-Oxley requirements.
As a result, we incurred an operating loss of $12.0 million. The net loss of $15.2 million for
the first quarter of 2005 increased from a loss of $4.4 million last year due to higher operating
costs and increased interest and tax expenses. We expect that the current unfavorable economic conditions will also impact our day-to-day
operations. Such things for us to consider are the higher freight costs associated with fuel
increases, higher impact of foreign exchange (other than USD), and the effect of rising interest
rates on consumer spending. We will be evaluating the impact of these factors in the short term to
determine the adverse effects, and possible opportunities in our business strategies to pass along
costs to our customers. Results of Operations Net Revenue and Gross Profit Net revenues in the first quarter 2005 of $60.1 million increased $7.8 million, or 14.8% above the
first quarter 2004 level of $52.3 million. The increase was primarily due to acquisitions of Gregg
Gift in February 2004 and Dartington in July 2004, which together generated $4.5 million more
revenue in the first quarter 2005 than the prior year, successes among newer product lines such as
Heartwood Creek by Jim Shoreof $3.5 million, Demdaco (Willow Tree) of $1.9 million,
Foundationsof $0.9 million, and favorable foreign currency translation rate impacts of
approximately $1.2 million. Those revenue increases were partially offset by declining revenues
for Precious Momentsof approximately $0.4 million, Cherished Teddiesof $0.6
million, and Disneyof approximately $0.6 million.
Revenues were lower by approximately $1.5 million among several smaller product 24




---



##### 



lines, such as Border Fine Arts, Children of the Inner Light and My little Kitchen Fairies andfor
Collector Club revenue by $1.1 million. Net new orders of $76.4 million year-to-date for 2005 decreased by 3% from the comparable period of
2004. The decrease was primarily due to lower United States orders resulting from softness in the
Card & Gift and Mass Markets and the decline in the direct selling business. Net open orders
(backlog) of $42.6 million at March 31, 2005 were down approximately $2 million, or 5%, from the
same point in time last year primarily due to ERP shipping efficiencies. Backlog represents orders
received and approved by Enesco, subject to cancellation for various reasons, including credit
considerations, product availability and customer requests. Changes in backlog can be attributed to
timing of product introductions, variability in retailer order cycles, economic conditions and
Enescos demonstrated ability to reduce order lead times. Gross profit in the first quarter of 2005 of $22.6 million increased $0.3 million, or 1%, above
the first quarter of 2004 level of $22.3 million. The increase is due to incremental gross profit
from the Gregg Gift and Dartington Crystal 2004 acquisitions of $1.6 million, the favorable impact
of foreign currency translation rates of $ 0.5 million and lower inventory reserve provisions of
$1.0 million, partially offset by a volume-related decline in gross profits caused by lower
product revenue of collectible figurines lines, primarily Precious Moments, Cherished Teddies,
lower Collector Club sales and higher royalty cost associated with Precious Moments of $ 1.6
million. The gross profit margin expressed as a percentage of net revenues was 37.6% in first
quarter of 2005, compared to 42.6% in first quarter of 2004. The five percentage point decline is
primarily attributable to increases in Precious Moments royalty costs, increased close out sales
and lower Collector Club sales. Selling, General and Administrative Expenses (SG&A) SG&A in the first quarter of 2005 of $34.6 million increased $5.1 million, 17% above the 2004
level of $29.5 million. The increase is primarily due to incremental SG&A expenses from the
Dartington and Gregg Gift acquisitions of $2.0 million, the impact of foreign currency translation
rate changes of $0.5 million, accelerated depreciation on the ERP system to be abandoned mid year
of $2.4 million and increased fees related to the 2004 year-end audit and Sarbanes-Oxley
compliance requirements of $0.9 million. These increases were partially offset by recognition of
the previously deferred gain on the sale of a building of $0.5 million and lower travel
expenditures. 25




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##### 



Operating Loss The operating loss of $12.0 million in the first quarter of 2005 increased $4.8 million above the
first quarter 2004 level of $7.2 million. The increase in loss is primarily due to increased SG&A
expenses of $5.1 million, discussed above, with little additional gross margin contribution from
the net increase in revenue. Interest and Other Income (Expense), Net Interest expense in the first quarter of 2005 of $0.4 million increased $0.3 million above the
first quarter of 2004. The increase is primarily due to higher borrowings and higher interest
rates. Interest income in the first quarter of 2005 of $0.1 million remained constant with the
first quarter of 2004 level. Other expense in the first quarter of 2005 of $0.8 million compared
to an expense of $0.3 million in the first quarter of 2004 increased $0.5 million, primarily due
to bank loan fees of $0.4 million and credit card charges of approximately $0.1 million. Provision for Income Tax Expense (Benefit) Income tax expense for the first quarter 2005 was $2.1 million compared to a tax benefit of ($3.1)
million for the first quarter 2004. The components of income tax expense include a tax benefit
from a net operating loss of ($5.5) million, offset by a valuation allowance on the net operating
loss carryforward of $5.5 million, a non-United States tax expense of $0.6 million, a tax reserve
established for a potential non United States tax assessment of $2.6 million and reversal of an
unnecessary tax reserves of $(1.1) million. Income tax expense for the first quarter 2004 was a
tax benefit of $3.1 million comprised of the NOL carryforward of $3.8 million and a non-United
States tax expense of $0.7 million. Plant Closure In April 2005 the Lilliput Lane (LL) Workington plant was closed. Fifty-five workers were made
redundant, operations were consolidated into Penrith and the plant was put up for sale. Closure is
estimated to save approximately 500,000 (GBP) British Pounds or approximately $0.9 million (USD)
United States Dollars in operating costs in 2005, but redundancies will cost approximately 500,000
(GBP) British Pounds or approximately $0.9 million (USD) United States Dollars; full year operating
cost savings are estimated at 900,000 (GBP) British Pounds or approximately $2 million (USD) United
States Dollars. The plant net book value approximates estimated net realizable value. 26




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Liquidity and Capital Resources Enesco has historically satisfied working capital requirements with internally generated funds and
short-term loans. Cash balances and working capital requirements fluctuate due to operating
results, shipping cycles, accounts receivable collections, inventory management and timing of
payments, among other factors. Working capital requirements fluctuate during the year and are
generally greatest early in the fourth quarter and lowest early in the first quarter. Cash and
cash equivalents were $18.6 million on March 31, 2005. We are not aware of any trends, events, demands, commitments or uncertainties that reasonably can
be expected to have a material adverse effect on liquidity and the ability to meet anticipated
requirements for working capital and capital expenditures. We believe that our current cash and
cash equivalents, cash generated from operations, and available financing will satisfy our expected
working capital needs, capital expenditures and other liquidity requirements associated with our
existing operations. However, in the course of pursuing growth opportunities, including but not
limited to acquisitions and alliances, Enesco may need to negotiate additional or amend existing
credit facilities. There are no transactions, arrangements or other relationships with
unconsolidated entities or other persons, as of March 31, 2005, that are reasonably likely to
materially affect liquidity or requirements for capital resources. Cash and cash equivalents in the first quarter of 2005 were $18.6 million versus $14.6 million in
2004. Operating cash flows are a function of our earnings plus non-cash expenses, such as
depreciation, and our ability to manage working capital. The net decrease in cash used by
operating activities of $3.5 million was primarily due to a net reduction in working capital offset
by the higher net loss of approximately $11 million, which included an increase in non-cash charges
of $2.2 million for depreciation. Net cash used by investing activities in 2005 decreased by $7.5 million. In 2004, investment
activity included the acquisition of Gregg Gift for approximately $7.3 million in cash. There
were no acquisitions in 2005. Net cash provided by financing activities in 2005 was $12.5 million, a $6.3 million decrease from
the $18.8 million provided from financing activities in 2004. Higher borrowing was needed in the
first quarter of 2004 for the acquisition of Gregg Gift. We have historically satisfied capital requirements with borrowings, and in 2004, proceeds from
the sale of property, plant and equipment. Cash balances and working capital requirements
fluctuate due to operating results, shipping cycles, accounts 27




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##### 



receivable collections, inventory management and timing of payments, among other factors. Working
capital requirements fluctuate during the year and are generally greatest early in the fourth
quarter and lowest early in the first quarter. The principal sources of our liquidity are available cash balances, cash from operations and
available financing. At March 31, 2005, Enesco had unused lines of credit of approximately $22
million. As of March 31, 2005, Enesco had approximately $38 million interest bearing debt
outstanding. On March 29, 2005, we entered into an amendment to our existing United States credit facility,
effective March 31, 2005, extending the term until January 1, 2006. The credit facility
commitments range from $50 million to $70 million, based on our seasonal borrowing needs. The
amendment also sets certain financial covenants for 2005. In the event the outstanding loans under
the amended United States credit facility are not paid off: (1) by May 16, 2005, a fee of $700,000
will become payable; (2) by June 30, 2005, another fee of $700,000 will become payable; and (3)
with the proceeds from a refinancing provided by lenders that include Fleet National Bank or an
affiliate of Fleet National Bank, then a fee of $1,750,000 will become payable. On March 28, 2005, we signed a commitment letter (the Commitment) with Fleet Capital Corporation,
operating as Bank of America Business Credit (BABC), for BABC to fully underwrite a $100 million
global senior revolving credit facility with a five year term (the Senior Credit Facility).
Under the proposed Senior Credit Facility, we will be the borrower and our material domestic and
foreign subsidiaries will be guarantors. The proposed Senior Credit Facility will be secured by
substantially all of the assets of Enesco and its material domestic and foreign
subsidiaries. The proposed Senior Credit Facility will contain standard terms and conditions,
including financial and other covenants, including, without limitation, restrictions on incurring
indebtedness and liens, acquisitions, selling property, repurchasing our shares and paying
dividends. We plan to use borrowings under the Senior Credit Facility to pay off
the outstanding loans under the amended U.S. credit facility upon the closing of the
Senior Credit Facility. The Commitment for Senior Credit Facility is subject to satisfaction of customary conditions
precedent in a manner acceptable to BABC and Bank of America Securities LLC in their reasonable discretion.
In connection with the closing, we may need to obtain additional financing secured by, among other things, certain real estate assets in
order to satisfy certain minimum excess availability
conditions set forth in the Commitment. We expect to
close on the Senior Credit Facility and, if necessary, the additional financing during the second quarter of 2005, however, no assurances can
be provided that the Senior Credit Facility or the additional financing will close or that
the Senior Credit Facility will close on terms identical to
those set forth in the Commitment. 28




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At March 31, 2005, the amount outstanding under our current credit facility was $36.6 million, and
the loan was in compliance with its financial covenants. Fluctuations in the value of the United States dollar versus international currencies affect the
United States dollar translation value of international currency denominated balance sheet items.
The changes in the balance sheet dollar values due to international currency translation
fluctuations are recorded as a component of shareholders equity. New Accounting Pronouncements In December 2004, the FASB revised FASB Statement No. 123, Accounting for Stock-Based Compensation.
This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,and its
related implementation guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entitys equity instruments or that may be settled by the
issuance of those equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. This Statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers
Accounting for Employee Stock Ownership Plans.This Statement is effective as of the beginning of
the first annual reporting period that begins after June 15, 2005.This revised Statement will be
applicable for our yearly service awards; granted after the required effective date and modified,
repurchased or cancelled after that date. In March 2005, FASB issued Interpretation No. 47  Accounting for Conditional Asset Retirement
Obligations, which provides additional guidance on conditional asset retirement obligations under
FASB 143, Accounting for Asset Retirement Obligations. This standard is effective for fiscal
years ended after December 15, 2005. As of the date of this filing, we have not determined the
impact of this interpretation. 29




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the information previously reported under Item 7A of the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, including our President and Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of March 31, 2005. Our disclosure
controls and procedures are designed to ensure that information required to be disclosed by the
Company in the reports filed by the Company under the Securities Exchange Act of 1934, is recorded,
processed, summarized and reported, within the time periods specified in the Securities and
Exchange Commissions rules and forms and that such information is accumulated and communicated to
the Companys management, including its President and Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure. Based on this
evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective as of March 31, 2005. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended
March 31, 2005, that have materially affected or are reasonably likely to materially affect, our
internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings In the ordinary course of Enescos business, there have arisen various other legal proceedings
pending against Enesco and its subsidiaries. While we cannot predict the eventual outcome of these
proceedings, we believe that none of these proceedings will have a material adverse impact upon the
consolidated financial statements of Enesco. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 30




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NONE. ITEM 3. Defaults Upon Senior Securities NONE. ITEM 4. Submission of Matters to a Vote of Security Holders NONE. ITEM 5. Other Information NONE. ITEM 6. Exhibits (See
Exhibit Index) 31




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Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. ENESCO GROUP, INC.
(Registrant)Date: May 10, 2005
    By /s/ Cynthia Passmore-McLaughlinCynthia Passmore-McLaughlinPresident and Chief Executive Officer Date: May 10, 2005

By
/s/ Paula E. ManleyPaula E. ManleyChief Financial Officer 32




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Exhibit Index ExhibitNumber
    
    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.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 200231.2
    
    Certification of Chief Financial Officer under Exchange Act
Rules 13a-15e and 15d-15e pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Statement of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Statement of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 33