##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One)  (X)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR  (  )
    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 
  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. Yes [x]      No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12B-2 of the Exchange Act) Yes [x]      No [  ] September 30,2004
    
    2003Shares Outstanding:Common Stock with
Associated Rights
    
    
    14,398,478
    
    
    
    14,074,126




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##### 



PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(In thousands) (Unaudited)September 30,
    
    December 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,016
    
    
    $
    10,645Accounts receivable, net
    
    
    99,167
    
    
    
    65,190Inventories
    
    
    65,020
    
    
    
    60,820Prepaid expenses
    
    
    3,892
    
    
    
    4,114Deferred income taxes and taxes receivable
    
    
    5,070
    
    
    
    5,146Total current assets
    
    
    184,165
    
    
    
    145,915Property, Plant and Equipment:Property, plant and equipment
    
    
    92,690
    
    
    
    85,606Less  accumulated depreciation
    
    
    (61,672
    )
    
    
    (57,265
    )Property, plant and equipment, net
    
    
    31,018
    
    
    
    28,341Other Assets:Goodwill and other intangibles, net
    
    
    10,262
    
    
    
    2,890Other
    
    
    1,644
    
    
    
    1,458Deferred income taxes
    
    
    23,683
    
    
    
    23,864Total other assets
    
    
    35,589
    
    
    
    28,212Total Assets
    
    $
    250,772
    
    
    $
    202,468
 The accompanying notes are an integral part of these consolidated
condensed financial statements. 2




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##### 



ENESCO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(In thousands) (Unaudited)September 30,
    
    December 31,2004
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes and loans payable
    
    $
    53,684
    
    
    $
    2,858Accounts payable
    
    
    26,729
    
    
    
    21,723Federal, state and foreign income taxes
    
    
    1,107
    
    
    
    7,375Accrued expenses:Payroll and commissions
    
    
    2,393
    
    
    
    4,812Royalties
    
    
    8,963
    
    
    
    7,735Post-retirement benefits
    
    
    1,891
    
    
    
    1,375Other
    
    
    6,683
    
    
    
    5,686Total current liabilities
    
    
    101,450
    
    
    
    51,564Long-Term Liabilities:Notes payable
    
    
    
    
    
    
    9Post-retirement benefits
    
    
    3,315
    
    
    
    3,248Deferred income taxes
    
    
    294
    
    
    
    294Total long-term liabilities
    
    
    3,609
    
    
    
    3,551Minority interest
    
    
    90
    
    
    
    114Shareholders Equity:Common stock
    
    
    3,154
    
    
    
    3,154Capital in excess of par value
    
    
    45,022
    
    
    
    45,863Retained earnings
    
    
    343,135
    
    
    
    347,650Accumulated other comprehensive income
    
    
    4,833
    
    
    
    3,740396,144
    
    
    
    400,407Less  shares held in treasury, at cost
    
    
    (250,521
    )
    
    
    (253,168
    )Total shareholders equity
    
    
    145,623
    
    
    
    147,239Total Liabilities and Shareholders Equity
    
    $
    250,772
    
    
    $
    202,468
 The accompanying notes are an integral part of these consolidated condensed
financial statements. 3




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##### 



ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(In thousands, except per share amounts) 2004
    
    2003Net revenues
    
    $
    84,225
    
    
    $
    71,766Cost of sales
    
    
    50,027
    
    
    
    40,628Gross profit
    
    
    34,198
    
    
    
    31,138Selling, distribution, general and
administrative expenses
    
    
    32,194
    
    
    
    24,009Operating profit
    
    
    2,004
    
    
    
    7,129Interest expense
    
    
    (350
    )
    
    
    (97
    )Interest income
    
    
    90
    
    
    
    66Other income (expense), net
    
    
    (548
    )
    
    
    (339
    )Income before income taxes
    
    
    1,196
    
    
    
    6,759Income tax expense
    
    
    157
    
    
    
    2,162Net income
    
    
    1,039
    
    
    
    4,597Retained earnings, beginning of period
    
    $
    342,096
    
    
    $
    329,751Retained earnings, end of period
    
    $
    343,135
    
    
    $
    334,348Earnings per common share:Basic
    
    $
    0.07
    
    
    $
    0.33Diluted
    
    $
    0.07
    
    
    $
    0.32
 The accompanying notes are an integral part of these consolidated
condensed financial statements. 4




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##### 



ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(In thousands, except per share amounts) 2004
    
    2003Net revenues
    
    $
    193,790
    
    
    $
    178,789Cost of sales
    
    
    112,165
    
    
    
    101,532Gross profit
    
    
    81,625
    
    
    
    77,257Selling, distribution, general and administrative expenses
    
    
    88,482
    
    
    
    70,620Operating income (loss)
    
    
    (6,857
    )
    
    
    6,637Interest expense
    
    
    (624
    )
    
    
    (641
    )Interest income
    
    
    345
    
    
    
    472Other income (expense), net
    
    
    (1,148
    )
    
    
    (974
    )Income (loss) before income taxes
    
    
    (8,284
    )
    
    
    5,494Income tax expense (benefit)
    
    
    (3,769
    )
    
    
    1,514Net income (loss)
    
    
    (4,515
    )
    
    
    3,980Retained earnings, beginning of period
    
    
    347,650
    
    
    
    330,368Retained earnings, end of period
    
    $
    343,135
    
    
    $
    334,348Earnings (loss) per common share:Basic and diluted
    
    $
    (0.32
    )
    
    $
    0.28
 The accompanying notes are an integral part of these consolidated
condensed financial statements. 5




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##### 



ENESCO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(In thousands) 2004
    
    2003Operating Activities:Net income (loss)
    
    $
    (4,515
    )
    
    $
    3,980Adjustments to reconcile net income (loss) to
net cash used by operating activities
    
    
    (29,966
    )
    
    
    (23,436
    )Net cash used by operating activities
    
    
    (34,481
    )
    
    
    (19,456
    )Investing Activities:Purchases of property, plant and equipment
    
    
    (3,805
    )
    
    
    (3,843
    )Acquisitions, net of cash acquired
    
    
    (14,321
    )
    
    
    (3,732
    )Proceeds from sales of property, plant and equipment
    
    
    58
    
    
    
    38Net cash used by investing activities
    
    
    (18,068
    )
    
    
    (7,537
    )Financing Activities:Net isssuance of notes and loans payable
    
    
    50,111
    
    
    
    13,287Common stock issuance and exercise of stock options
    
    
    1,806
    
    
    
    1,119Net cash provided by financing activities
    
    
    51,917
    
    
    
    14,406Effect of exchange rate changes on cash and cash equivalents
    
    
    1,003
    
    
    
    446Increase
(decrease) in cash and cash equivalents
    
    
    371
    
    
    
    (12,141
    )Cash and cash equivalents, beginning of period
    
    
    10,645
    
    
    
    17,418Cash and cash equivalents, end of period
    
    $
    11,016
    
    
    $
    5,277
 The accompanying notes are an integral part of these consolidated condensed
financial statements. 6




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##### 



ENESCO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Description of Business Enesco Group, Inc. (the Company or Enesco) is a world leader in the gift,
collectible and home décor industries. Enesco distributes products to a wide
variety of specialty card and gift retailers, home décor boutiques, as well as
mass-market chains and direct mail retailers. Internationally, Enesco serves
markets in the United Kingdom, Canada, Europe, Australia, Mexico, Asia and the
Pacific Rim. The Companys product lines include some of the worlds most
recognizable brands, including Precious Moments, Walt Disney Classics
Collection, Nickelodeon, Heartwood Creek, Halcyon Days, Lilliput Lane and
Border Fine Arts, among others. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial data as of September 30, 2004 and for the three and
nine months ended September 30, 2004 and September 30, 2003 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 condensed or omitted pursuant to such rules and regulations. These
Consolidated Condensed Financial Statements should be read in conjunction with
the Consolidated Financial Statements and the notes thereto included in
Enescos Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, these Consolidated Condensed 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
Enescos financial position as of September 30, 2004, results of operations for
the three and nine months ended September 30, 2004 and September 30, 2003, and
cash flows for the nine months ended September 30, 2004 and September 30, 2003.
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 7




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##### 



disclosures that are, in our opinion, necessary to fairly present the results
of operations and financial condition for the interim periods. Revenue Recognition Enesco recognizes revenue when title passes to its 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 recognized. Amounts billed to customers
for shipping and handling are included in revenue. License and royalty fees
received by Enesco are recognized as revenue when earned. Computation of Earnings (Loss) per Common Share Basic earnings (loss) per common share is computed using the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted-average number of common shares and
potential dilutive common shares outstanding during the period. Diluted loss
per share is computed using the weighted-average number of common shares and
excludes potential dilutive common shares outstanding, as their effect is
antidilutive. Potential dilutive common share equivalents consist of stock
options and warrants calculated using the treasury stock method. Payments for Interest and Income Taxes Enesco made cash payments for interest and income taxes as follows (in
thousands): Nine Months EndedSeptember 302004
    
    2003Interest
    
    $
    434
    
    
    $
    294Income taxes
    
    $
    2,343
    
    
    $
    1,989
 8




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##### 



Accounting for Stock  Based Compensation As of September 30, 2004, the Company maintains three stock-based employee
compensation plans and one Non-Employee Director Compensation Plan. The
Company accounts 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 option-based
compensation cost is reflected in net income (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 income (loss) and earnings (loss) per common share as if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation (in thousands except per
share amounts). Three months ended
    
    Nine months endedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    1,039
    
    
    $
    4,597
    
    
    $
    (4,515
    )
    
    $
    3,980Deduct: Total stock option-based
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (349
    )
    
    
    (346
    )
    
    
    (1,046
    )
    
    
    (1,037
    )Pro forma net income (loss)
        $
    690
    
    
    $
    4,251
    
    
    $
    (5,561
    )
    
    $
    2,943Earnings (loss) per common share:Basic  as reported
    
    $
    0.07
    
    
    $
    0.33
    
    
    $
    (0.32
    )
    
    $
    0.28Diluted  as reported
    
    $
    0.07
    
    
    $
    0.32
    
    
    $
    (0.32
    )
    
    $
    0.28Basic   pro forma
    
    $
    0.05
    
    
    $
    0.30
    
    
    $
    (0.39
    )
    
    $
    0.21Diluted  pro forma
    
    $
    0.05
    
    
    $
    0.29
    
    
    $
    (0.37
    )
    
    $
    0.21
 3. Comprehensive Income (Loss): Other comprehensive income (loss) consists only of cumulative foreign currency
translation adjustments. Comprehensive income (loss) for the three and nine
months ended September 30, 2004 and 2003 was as follows (in thousands): 9




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##### 



Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    1,039
    
    
    $
    4,597
    
    
    $
    (4,515
    )
    
    $
    3,980Other comprehensive income:Cumulative translation adjustments, excluding tax effects
    
    
    997
    
    
    
    135
    
    
    
    1,093
    
    
    
    3,353Comprehensive income (loss)
    
    $
    2,036
    
    
    $
    4,732
    
    
    $
    (3,422
    )
    
    $
    7,333
 4. Geographic Operating Segments: Enesco operates in the giftware, collectible and home décor industries,
predominantly in two major geographic areas (United States and International).
The following table summarizes operations by geographic classification for the
three and nine months ended September 30, 2004 and 2003 (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net SalesUnited States
    
    $
    54,942
    
    
    $
    48,220
    
    
    $
    120,082
    
    
    $
    118,387United States inter-company
    
    
    (216
    )
    
    
    (145
    )
    
    
    (691
    )
    
    
    (606
    )International
    
    
    29,694
    
    
    
    23,868
    
    
    
    75,227
    
    
    
    61,640International inter-company
    
    
    (195
    )
    
    
    (177
    )
    
    
    (828
    )
    
    
    (632
    )Total consolidated
    
    $
    84,225
    
    
    $
    71,766
    
    
    $
    193,790
    
    
    $
    178,789Operating Profit (Loss)United States
    
    $
    (533
    )
    
    $
    4,316
    
    
    $
    (12,387
    )
    
    $
    806International
    
    
    2,537
    
    
    
    2,813
    
    
    
    5,530
    
    
    
    5,831Total consolidated
    
    $
    2,004
    
    
    $
    7,129
    
    
    $
    (6,857
    )
    
    $
    6,637
 Transfers between geographic operating segments are made at the estimated fair
value of the merchandise transferred. No single customer accounted for 10% or
more of consolidated net sales. Export sales to foreign unaffiliated customers
represented less than 10% of consolidated net sales. There were no material changes in assets from the amounts disclosed in Enescos
December 31, 2003 Annual Report and the basis of geographic classification of
sales and operating profit has not changed in 2004. 10




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##### 



5. Other Income (Expense), net: Other income (expense), net for the three and nine months ended September 30,
2004 and 2003 consisted of the following (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Foreign currency loss
    
    $
    (2
    )
    
    $
    (1
    )
    
    $
    (8
    )
    
    $
    (1
    )Gain (loss) on sale of fixed assets
    
    
    
    
    
    
    (3
    )
    
    
    10
    
    
    
    (8
    )Bank charges and other
    
    
    (546
    )
    
    
    (335
    )
    
    
    (1,150
    )
    
    
    (965
    )$
    (548
    )
    
    $
    (339
    )
    
    $
    (1,148
    )
    
    $
    (974
    )
 6. Earnings (Loss) per Common Share (Basis of Calculations): The number of shares used in the earnings (loss) per common share computation
for the three and nine months ended September 30, 2004 and 2003 were as follows
(in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Basic average common shares outstanding
    
    
    14,356
    
    
    
    14,065
    
    
    
    14,250
    
    
    
    14,000Dilutive effect of stock options and warrants
    
    
    313
    
    
    
    396
    
    
    
    
    
    
    
    344Diluted average common shares outstanding
    
    
    14,669
    
    
    
    14,461
    
    
    
    14,250
    
    
    
    14,344
 The average number of diluted shares outstanding for the nine months ended
September 30, 2004 excludes common stock equivalents relating to options and
warrants because they would have been antidilutive in calculating the loss per
share. Had Enesco reported a profit for the nine months ended September 30,
2004, the number of average shares diluted would have increased by 313
thousand. Additionally, options to purchase 1.4 million and 1.0 million
shares were outstanding during 2004 and 2003, respectively, but were not
included in the computation of diluted earnings (loss) per share because the
options exercise price was greater than the average market price of the
common shares. 11




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##### 



7. Financial Instruments: Enesco operates globally with various manufacturing and distribution
facilities and product sourcing locations around the world. Enesco may reduce
its exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through derivative financial instruments.
Enesco currently does not use derivative financial instruments for trading or
speculative purposes. Enesco regularly monitors foreign currency exposures
and ensures hedge contract amounts do not exceed the amounts of the underlying
exposures. Enescos current hedging activity is limited to foreign currency purchases and
inter-company foreign currency transactions. The purpose of Enescos foreign
currency hedging activities is to protect Enesco from the risk that eventual
settlement of foreign currency transactions will be affected adversely by
changes in exchange rates. Enesco hedges these exposures by entering into
various foreign exchange forward contracts. Derivative instruments are carried
at fair value in the Consolidated Condensed Balance Sheets as a component of
current assets or current liabilities. Changes in the fair value of foreign
exchange forward contracts that meet the applicable hedging criteria 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 are recorded currently in income as
cost of sales 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 nine months ended September 30, 2004. To manage foreign currency risk, as of September 30, 2004, Enesco had entered
into forward exchange agreements with a notional value of $4.2 million that
will mature within 377 days. These contracts include sales of British pounds
sterling and purchases of U.S. dollars at an average exchange rate of 1.81, a
sale of U.S. dollars and the purchase of British pounds sterling at an average
exchange rate of 1.81 and sales of Euros and purchases of U.S. dollars at an
average exchange rate of 1.20. The fair value of these contracts is not
significant. As of September 30, 2004, Enesco had $53.7 million of interest
bearing debt outstanding, of which $45.2 million was revolving credit facility
debt with an interest rate of 2.94% and $7.1 million was a term loan with an
interest rate of 2.38%. The remaining $1.4 million was primarily revolving
credit facility debt with an interest rate of 2.69%. 12




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##### 



8. Acquisitions On February 29, 2004, the Company acquired Gregg Manufacturing, Inc. d/b/a
Gregg Giftware Company (Gregg Gift), a California-based manufacturer, for
approximately $7.4 million in cash ($7.3 million net of acquired cash). Gregg
Gift manufactures and distributes branded and specialty giftware that includes
book covers, organizers, tote bags and home décor accents targeting the growing
inspirational marketplace. Gregg Gift generated revenues of approximately $11.0
million in 2003. In March 2004, Enescos domestic $50.0 million credit facility was amended to
add term notes totaling $7.7 million for the purpose of funding the acquisition
of Gregg Gift. At the same time, Gregg Gift was added as a borrowing subsidiary
under the credit facility. Certain financial covenants relating to the credit
facility were modified, including measurements at the end of each quarter. On July 21, 2004, the Company acquired substantially all of the assets of
Dartington Crystal Limited (Dartington) through its U.K. subsidiary, Enesco
Limited, for approximately $7.0 million in cash. The purchase price was funded
by internally generated cash from Enesco Limited. Dartington designs and
manufactures a full range of uncut crystal products, such as glassware, bowls,
vases, candleholders and giftware. Dartington generated revenues of
approximately $16.8 million in 2003. 9. Subsequent Events New President. On October 1, 2004, Cynthia PassmoreMcLaughin was appointed
President of Enesco. George R. Ditomassi, a member of the Board of Directors,
continues to serve as Interim Chief Executive Officer. Enesco Limited Plans to Restructure Manufacturing Facility. On October 28,
2004, Enesco Limited announced its plans to restructure one of its
manufacturing facilities located in Workington, England, eliminating
approximately 28 positions. The annual savings from this restructuring are
expected to be approximately $650 thousand. 13




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##### 



SEC Ends Investigation. On November 1, 2004, Enesco received notice from the
SEC that the SEC has ended its investigation of Enesco and a former officer,
and no enforcement action has been recommended. Amendment to Credit Facility. On November 2, 2004, Enesco entered into an
amendment to its U.S. credit facility providing that the December 31, 2004
covenants will be amended on or before November 22, 2004. The
November 2nd amendment also provided that certain other provisions of the credit facility
will be further amended, including, but not limited to, providing a security
interest in selected assets to the lenders. See Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations, Liquidity and
Capital Resources Section. 14




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##### 



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENESCO GROUP, INC.
NINE MONTHS ENDED SEPTEMBER 30, 2004 Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words believes, anticipates,
estimates, expects, projections, projects, and words of similar
meaning, constitute forward-looking statements within the meaning of Federal
securities laws. These forward-looking statements are based in part on Enescos
reasonable expectations and are subject to a number of factors and risks, many
of which are beyond Enescos control. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described below under the heading
Risk Factors and elsewhere in this Quarterly Report, and in other documents
we file with the Securities and Exchange Commission. In light of these
uncertainties and risks, there can be no assurance that the forward-looking
statements in this Form 10-Q will occur or continue in the future. Except for
required filings under the Securities Exchange Act of 1934, Enesco undertakes
no obligation to release publicly any revisions to these forward-looking
statements that may reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Results of Operations Critical Accounting Policies The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the amounts reported in the Consolidated Condensed Financial Statements and
accompanying notes. Estimates are used for, but not limited to, the accounting
for allowances for doubtful accounts and sales returns, inventory valuation,
goodwill impairment, contingencies, restructuring costs and other special
charges and income taxes. Actual results could differ from these estimates.
The following critical accounting policies are impacted significantly by
judgments, assumptions and estimates used in the preparation of the
Consolidated Condensed Financial Statements. 15




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The allowance for doubtful accounts is based on our assessments of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customers credit
worthiness or actual defaults are significantly different than our historical
experience, estimates of the recoverability of amounts due could be affected.
An allowance for sales returns is established based on historical trends in
product returns. If future returns do not reflect historical trends, net
revenues could be affected. Inventory purchases and commitments are based on future demand forecasts. If
there is a sudden or significant decrease in demand for our products or there
is a higher incidence of inventory obsolescence because of rapidly changing
customer requirements, we may be required to decrease the carrying value of
inventory and gross profit could be affected. Enesco has established accruals for income taxes payable and tax assessments.
The accruals are included in current income taxes payable since it is uncertain
as to when assessments may be made and paid. Enesco has filed and continues to
file tax returns with a number of taxing authorities worldwide. While Enesco
believes 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 are otherwise deemed unnecessary at a point in time,
the accruals are adjusted through the provision for income taxes. The majority
of open tax years become closed for assessments at the end of December for the
particular open year. 16




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Third Quarter 2004 Overview Results for the three months ended September 30, 2004 are summarized as
follows: Percent of Net SalesQuarter Ended September 30,
    
    Quarter Ended September 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    
    84,225
    
    
    
    71,766
    
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    50,027
    
    
    
    40,628
    
    
    
    59.4
    %
    
    
    56.6
    %Gross profit
    
    
    34,198
    
    
    
    31,138
    
    
    
    40.6
    %
    
    
    43.4
    %Selling, distribution, G&A
    
    
    32,194
    
    
    
    24,009
    
    
    
    38.2
    %    
    
    33.5
    %Operating profit
    
    
    2,004
    
    
    
    7,129
    
    
    
    2.4
    %
    
    
    9.9
    %Other expense:Interest expense
    
    
    (350
    )
    
    
    (97
    )
    
    
    -0.4
    %
    
    
    -0.1
    %Interest income
    
    
    90
    
    
    
    66
    
    
    
    0.1
    %
    
    
    0.1
    %Other income (expense), net
    
    
    (548
    )
    
    
    (339
    )
    
    
    -0.7
    %
    
    
    -0.5
    %Total other expense
    
    
    (808
    )
    
    
    (370
    )
    
    
    -1.0
    %
    
    
    -0.5
    %Income before income taxes
    
    
    1,196
    
    
    
    6,759
    
    
    
    1.4
    %
    
    
    9.4
    %Income tax expense
    
    
    157
    
    
    
    2,162
    
    
    
    0.2
    %
    
    
    3.0
    %Net income
    
    
    1,039
    
    
    
    4,597
    
    
    
    1.2
    %
    
    
    6.4
    %
 In the U.S., we continue to experience challenges related to our Enterprise
Resource Planning (ERP) system implementation. Despite a focused effort to
resolve the issues, we continue to experience inefficiencies related to order
processing and shipping. In our efforts to resolve these issues, we incurred
approximately $2.0 million and $3.1 million of costs for the three and nine
months ended September 30, 2004, respectively. These costs primarily consist
of higher than normal distribution center and customer service labor and
overtime, as well as system-related consulting. During the fourth quarter,
Enesco expects to spend an amount comparable to the third quarter in associated
system implementation costs. As of September 30, 2004, we believe there were
approximately $7 million of open orders that could have been shipped in the
third quarter had we been able to operate at normal efficiency and capacity
levels. We continued to experience strong growth in net new orders versus the prior
year. Year-to-date through September 30, 2004, net new orders of approximately
$220 million are up 17% from the 17




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same period in 2003. The increased new order levels are being generated in
both the U.S. and International markets and are the result of several factors,
including but not limited to, successful new product lines like Heartwood Creek
and Willow Tree,as well as our expanded relationship with Disneyand the
acquisitions of Bilston & Battersea, Gregg Gift and Dartington Crystal. Backlog
at September 30, 2004 of approximately $39 million is $9 million or 31% higher
than a year ago. International results continue to be strong with net revenues increasing
approximately 25% compared to third quarter of 2003. Enescos third quarter 2004 sales of $84.2 million were up 17% versus third
quarter 2003 sales. The increase is primarily due to the acquisitions of the
Walt Disney Classics Collectionlicense, Gregg Gift and Dartington Crystal, the
impact of changes in foreign currency exchange rates, as well as revenue growth
in our core business. Third quarter 2004 gross profit increased by 10%, or $3.1
million versus third quarter 2003. Gross margin decreased from 43.4% of net
sales in 2003 to 40.6% of net sales in 2004. The decrease in gross margin is
due to ERP system implementation issues and changes in the sales mix. Operating
expenses increased $8.2 million or 34% this quarter over the same quarter last
year. The increase is primarily due to normal operating costs from the
acquired businesses, costs related to our ERP system implementation and changes
in foreign currency exchange rates. Additionally, costs were incurred in 2004
for new marketing programs, compliance with the Sarbanes-Oxley Act of 2002,
severance costs related to former executives and core business sales increases.
Operating and net income results were unfavorable for this quarter and the
year-to-date periods as compared to 2003 primarily due to operational
inefficiencies and higher expenses related to our ERP system implementation. Net Revenue and Gross Profit Net sales of $84.2 million in the third quarter of 2004 increased by 17%, or
$12.5 million, from $71.8 million in the third quarter of 2003. The increase in
net sales for the third quarter of 2004 compared to 2003 was due to
acquisitions, changes in foreign currency rates, as well as growth in the core
business. Newer product lines favorably impacting third quarter 2004 results
include Heartwood Creekby Jim Shore (which comprised approximately 20% of
total third quarter sales), Willow Treeand the Walt Disney Classics
Collection. Net sales of $193.8 million in the first nine months of 2004
increased by 8.4%, or $15.0 million, from $178.8 million in the first nine
months of 2003. The increase in net sales for the first nine months of 2004
compared to the same period last 18




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year was primarily the result of the acquisitions, newer product line successes
and favorable foreign currency exchange rate impacts, which more than offset
the continued decline in Precious Momentsand Cherished Teddiessales. While
the Gregg Gift acquisition adds seven months of sales to the first nine months
of 2004, the Bilston & Battersea acquisition delivered nine months of sales
this year as compared to only six months of sales at this point in 2003. The
acquisition of Dartington Crystal adds two months of sales only to 2004. The
Walt Disney Classics Collectionalso produced nine months of revenue in 2004,
which is incremental versus 2003. Heartwood Creekby Jim Shore, Willow Treeand
other product lines like My Little Kitchen Fairies, Circle of Loveand Growing
Up Girlsall continue to perform well. Enescos Precious Momentslines
represented approximately 21.6% of 2004 year-to-date sales compared to 32.2%
for 2003. The Heartwood Creekline represented approximately 13.5% of 2004
year-to-date sales compared to 5.0% for 2003. Net new orders of approximately $220 million year-to-date for 2004 were an
increase of 17% versus the comparable period of 2003. Net open orders (backlog)
of approximately $39 million at September 30, 2004 were up $9 million, or 31%,
from the same point in time last year. Backlog represents orders received and
approved by Enesco, subject to cancellation for various reasons, including
credit considerations, product availability and customer requests. We believe
the increase in backlog is mainly due to higher demand in the United States
primarily for Heartwood Creekproduct and the effect of acquisitions, as well
as unshipped orders due to ERP system implementation issues. Gross profit for the third quarter of 2004 of $34.2 million was 40.6% of net
sales as compared to the third quarter of 2003 gross profit of $31.1 million,
which was 43.4% of net sales. Gross profit for the first nine months of 2004
was $81.6 million or 42.1% of net sales, as compared to gross profit for the
first nine months of 2003 of $77.3 million, which was 43.2% of net sales. The
changes in gross profit for third quarter 2004 and the first nine months of
2004 as compared to the same periods last year are primarily due to ERP system
implementation issues and changes in the product mix. Gross profit may be
affected in the future by changes in vendor pricing, obsolescence charges,
changes in shipment volume, price competition and changes in distribution
channel, geographic or product mix. Selling, Distribution, and General and Administrative Expenses Selling, distribution, and general and administrative expenses (operating
expenses) for the third quarter of 2004 of $32.2 million, reflected an $8.2
million or 34% increase over the third quarter of 19




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2003. Operating expenses year-to-date of $88.5 million represent a $17.9
million or 25% increase over 2003. The increase in operating expenses in the
third quarter and first nine months of 2004 as compared to 2003 is primarily
due to the inclusion of normal operating expenses from the acquisitions, the
impact of foreign currency exchange rate changes, as well as costs related to
the continued ERP system implementation efforts. Additional costs were also
incurred in 2004 for Precious Momentsmarketing efforts, compliance with the
Sarbanes-Oxley Act of 2002, and severance expenses related to former
executives. Operating Profit (Loss) In the third quarter of 2004, Enesco generated an operating profit of $2.0
million compared to a $7.1 million operating profit in 2003. Enesco incurred
an operating loss of $6.9 million for the first nine months of 2004, compared
to a $6.6 million operating profit during the first nine months of 2003. The
2004 quarterly and nine months year-to-date operating income (loss) variances
versus 2003 are primarily the result of higher ERP system implementation costs
and continued (operating expense) investment in Precious Momentsmarketing
efforts. Interest and Other Income (Expense), Net Interest expense of $350 thousand for the third quarter of 2004 was $253
thousand higher than the third quarter of 2003 primarily due to increased loan
balances and higher interest rates. Other expense, net, for the third quarter
of 2004 was $548 thousand compared to $339 thousand in 2003. The increase is
due to higher bank and credit card processing costs. Interest expense of $624 thousand for the first nine months of 2004 was $17
thousand less than the first nine months of 2003. The decrease in interest
expense is primarily due to an Illinois income tax audit settlement paid in
2003. Interest income for the first nine months of 2004 is $345 thousand
compared to $472 thousand in 2003. The decrease in interest income in 2004 is
due to interest income received on an Illinois tax refund in 2003, as well as
increased interest income due to higher invested cash balances in 2003. Other
expense, net, for the first nine months of 2004 is higher by $174 thousand. Provision for Income Taxes The effective tax rate was 13.1% for the third quarter of 2004 and 45.5% for
the first nine months of 2004. The comparable tax rates were 32.0% and 27.6%
for third quarter and year-to-date 2003, respectively, reflecting the
geographical mix of earnings. The effective tax rate differs from the U.S.
statutory rate primarily due to the varying tax rates of foreign jurisdictions.
Our future 20




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effective tax rates could be affected if the mix of earnings varies in
countries that have higher or lower statutory rates or if tax laws and
regulations change. International Economies and Currencies We conduct business globally. Accordingly, our future results could be
materially affected by a variety of uncontrollable and changing factors
including, among others, changes in foreign currency exchange rates;
regulatory, political, or economic conditions in a specific country or region;
trade protection measures and other regulatory requirements; and the effects of
terrorist activity, armed conflict, epidemics and natural disasters. Any or
all of these factors could have a material impact on our future results. As a global concern, we face exposure to changes in foreign currency exchange
rates. These exposures may change over time and could have a material impact
on our financial results and cash flows. Historically, our primary exposures
have related to non-U.S. dollar-denominated transactions in Canada and Europe,
as well as U.S. dollar-denominated inventory purchases by our international
operating units. At the present time, we hedge only those currency exposures associated with
certain assets and liabilities denominated in foreign currencies and
periodically will hedge anticipated foreign currency cash flows. The hedging
activity undertaken by Enesco is intended to offset the impact of currency
fluctuations on certain foreign currency transactions. See Note 7, Financial
Instruments, to the Consolidated Condensed Financial Statements for additional
information. 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. For additional discussion, see the Risk Factors section below. Cash
and cash equivalents were $11.0 million on September 30, 2004. Operating cash flows are a function of net income (loss) plus non-cash expenses
such as depreciation, and our ability to manage working capital. Cash used by
operating activities in the 21




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first nine months of 2004 was $34.5 million. The major uses of funds for
operating activities were the net loss and the related change in taxes payable,
increased accounts receivables and increased inventory. Increased accounts
receivables since December 31, 2003 is primarily due to the addition of
accounts receivable from the acquisitions and the impact of changes in foreign
currency translation rates. The inventory increase is primarily due to the
acquisitions and ERP system implementation-related delays in processing
shipments. Enesco has filed and continues to file tax returns with a number of taxing
authorities worldwide. While 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. Enesco has established accruals for
tax assessments. These accruals are included in current income taxes payable
since it is uncertain as to when assessments may be made and paid. Based upon
Enescos current liquid asset position and credit facilities, Enesco believes
it has adequate resources to fund any such assessments. To the extent accruals
differ from actual assessments, when the open tax years are closed or the
accruals are otherwise deemed unnecessary at a point in time, the accruals are
adjusted through the provision for income taxes. The majority of the open tax
years close at the end of December for the particular open year. Cash used by investing activities in the first nine months of 2004 was $18.1
million, primarily due to the acquisitions of Gregg Gift on February 29, 2004
and Dartington Crystal on July 21, 2004. Additional costs were also incurred
for computer hardware and software-related purchases for the new ERP system
implementation. Cash provided by financing activities in the first nine months of 2004 was
$51.9 million, due to increased borrowings related to the acquisitions of Gregg
Gift and Dartington Crystal, as well as working capital requirements. In June 2003, Enesco entered into a new three-year domestic $50.0 million
unsecured revolving credit facility that includes Enesco International (H.K.)
Limited as a borrowing subsidiary. The credit agreement contains financial and
operating covenants including restrictions on incurring indebtedness and liens,
acquisitions, selling property, repurchasing the Companys shares and paying
dividends. In addition, Enesco is required to satisfy fixed charge coverage
ratio and leverage ratio tests at the end of each quarter and a minimum annual
operating profit covenant. 22




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In March 2004, Enescos domestic $50.0 million credit facility was amended to
add term notes totaling $7.7 million for the purpose of funding the acquisition
of Gregg Gift. At the same time, Gregg Gift was added as a borrowing subsidiary
and certain financial covenants were modified. In August 2004, Enesco negotiated a $10.0 million temporary increase to its
$57.7 million credit facility to meet anticipated seasonal requirements for
working capital. The total credit facility is currently $67.7 million.
Following December 31, 2004, the credit facility will revert back to $57.7
million. The modification is not expected to have a material effect on Enescos
liquidity or the ability of Enesco to meet working capital requirements. As of September 30, 2004, all covenants under the revolving credit agreement
were complied with or waived. However, it is expected that Enesco will be in
violation of certain financial covenants as of December 31, 2004. The
Companys management is currently working with its lenders and on November 2,
2004, signed an amendment to its credit facility providing that the December
31, 2004 covenants will be amended on or before November 22, 2004. The November
2nd amendment also provided that certain other provisions of the credit
facility will be further amended, including but not limited to, providing a
security interest in selected assets to the lenders on or before November 15,
2004. Because the December 31, 2004 covenants have not yet been amended,
Enesco has reclassified $5.8 million of long-term debt to a current liability
as of September 30, 2004. There has been no demand for acceleration of any
debt payments by the lenders and Enesco continues to borrow funds under its
domestic and international credit facilities to meet working capital needs. Based on the expected amendment to our revised credit facility discussed above,
we believe that our current cash and cash equivalents, cash generated from
operations, and available financing including the increased credit facility
amount, will satisfy our expected working capital needs, capital expenditures
and other liquidity requirements associated with our existing operations.
Enesco is also in the process of reviewing certain financing alternatives
available to it including, but not limited to, the sale and leaseback of its
real estate. Also, 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. In addition, there are no
transactions, arrangements or other relationships with unconsolidated entities
or other persons, as of September 30, 2004, that are reasonably likely to
materially affect liquidity or requirements for capital resources. 23




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The principal sources of Enescos liquidity are its available cash balances,
cash from operations and available financing. At September 30, 2004, Enesco had
formal and informal unused lines of credit of approximately $14.6 million. As
of September 30, 2004, Enesco had $53.7 million of interest bearing debt
outstanding. Fluctuations in the value of the U.S. dollar versus international currencies
affect the U.S. 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. Risk Factors Set forth below and elsewhere in this Report and in other documents we file
with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report. Our ability to operate efficiently, including order processing, shipment,
invoicing and collection of accounts receivable is dependent in a large part on
Enescos systems functioning properly and efficiently. Currently, in the U.S.
we are experiencing challenges related to our 2004 ERP system implementation.
In the event that we are not able to effectively complete the implementation of
the ERP system, our operating results will continue to be negatively impacted. We are evaluating our internal control systems in order to allow management to
report on, and our Independent Public Accounting Firm to attest to, our
internal controls, as required by Section 404(a) of the Sarbanes-Oxley Act of
2002 (Section 404). We are in the process of documenting and testing our system
of internal controls. As a result, we are incurring additional expenses and a
diversion of managements time. We may encounter unexpected delays while
completing the process of complying with the requirements of Section 404,
therefore we cannot be certain as to the timing of completion of our
evaluation, documentation, testing and any remediation actions or the impact of
the same on our operations since there is no precedent available by which to
measure compliance adequacy. If we are not able to implement the requirements
of Section 404(a) in a timely manner or with adequate compliance, we might be
subject to sanctions or investigation by regulatory authorities, such as the
Securities and Exchange Commission or the New York Stock Exchange. Any such
action could adversely affect our financial results and the market price of our
common stock. 24




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The results of operations for any quarter or fiscal year are not necessarily
indicative of results to be expected in future periods. Our operating results
have been in the past, and will continue to be, subject to quarterly and annual
fluctuations as a result of a number of factors. These factors include:  
    
    Changes in economic conditions and specific market conditions, including interest rate changes
    
    The ability to secure, maintain and renew popular licenses, particularly our licenses for Precious Moments, Heartwood
Creek, Cherished Teddiesand Disney
    
    Fluctuations in demand for our products
    
    Manufacturing lead times
    
    The effects of terrorist activity and armed conflict that could cause a disruption in global economic activity, changes in
logistics and security arrangements, particularly with respect to our reliance on manufacturing facilities in China
    
    The timing of orders, timing of shipments and our ability to forecast and meet customer demands
    
    Inventory levels and purchase commitments below or exceeding requirements based upon future demand forecasts
    
    Price and product competition in the giftware industry
    
    The trend toward retail store consolidation in the card and gift channel in the United States and our ability to collect
accounts receivable
    
    Variations in sales channels, product costs or mix of products sold
    
    The geographical mix of our revenue and the associated impact on gross margin
    
    Our ability to achieve targeted expense reductions particularly in the United States operations
    
    Our ability to identify and complete acquisitions and the results of those acquired operations
    
    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 U.S.) used in determining the amounts of certain assets
(including the amounts of related allowances), liabilities and other items reflected in our financial statements. As a consequence, operating results for a particular future period are
difficult to predict. Any of the foregoing factors, or any other factors
discussed elsewhere herein, or any other factors that are not 25




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presently known to us, could have a material adverse effect on our business,
results of operations and financial condition. Gross margin may be adversely affected in the future by increases in vendor
costs, excess inventory, obsolescence charges, changes in shipment volume,
price competition and changes in channels of distribution or in the mix of
products sold. Gross margin may also be impacted by geographic mix of product
sold. Our ability to import products and satisfy customer orders on a timely basis is
affected by the availability of, and demand for, quality production capacity
abroad. We compete with other importers of giftware products for the foreign
manufacturing sources that can produce high-quality products at affordable
prices. While we believe that there are other manufacturing sources available
for our product lines, any loss, disruption or substantial reduction of
sourcing capability or shipping from one or more of our key manufacturing
facilities could have a significant short-term adverse effect on our
operations. We are subject to the following risks inherent in foreign
manufacturing: fluctuations in currency exchange rates; labor, economic and
political instability; the effects of terrorist activity, armed conflict and
epidemics, causing disruption in global economic activity and changes in
logistics and security arrangements; cost and capacity fluctuation and delays
in transportation, dockage and materials handling; restrictive actions by
foreign governments; nationalizations; and the laws and policies of the United
States affecting importation of goods, including duties, quotas and taxes.
Since the terrorist attacks on September 11, 2001 and the SARS epidemic, the
U.S. Customs Service has enacted various security procedures affecting the
importation of goods. Such procedures could adversely affect the cost and
timing of our receipt of goods from our foreign manufacturers. In December
2003, the office of U.S. Customs and Border Protection certified Enesco as a
member of the Customs Trade Partnership Against Terrorism (CTPAT). The
Department of Homeland Security instituted CTPAT as a means to identify low
risk importers and allow the free flow of goods even under heightened security
conditions. Enescos certification is strategically important since it may
help reduce the risk of significant delays in the importation of our product. The principal competitive risks in the markets in which we presently compete
and may compete in the future are: performance; price; collectibility of our
products; market presence; new product introductions; product costs;
differentiation of new products from those of our competitors; and time to
market for new products. 26




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Enesco operates globally with various manufacturing and distribution facilities
and product sourcing locations around the world. As such, Enesco is exposed to
foreign exchange risk since purchases and sales are made in foreign currencies.
In addition, Enesco is subject to interest rate risk on outstanding
borrowings. Enesco may reduce its exposure to fluctuations in interest rates
and changes in foreign exchange rates by creating offsetting positions through
the use of derivative financial instruments. Enesco currently does not use
derivative financial instruments for trading or speculative purposes. Enesco
regularly monitors its foreign currency exposures and ensures that the hedge
contract amounts do not exceed the amounts of the underlying exposures. To
manage foreign currency risk, as of September 30, 2004, Enesco had entered into
forward exchange agreements with a notional value of $4.2 million that will
mature within 377 days. These contracts include sales of British pounds
sterling and the purchase of U.S. dollars at an average exchange rate of 1.81,
a sale of U.S. dollars and the purchase of British pounds sterling at an
average exchange rate of 1.81 and sales of Euros and purchases of U.S. dollars
at an average exchange rate of 1.20. The fair value of these contracts is not
significant. As of September 30, 2004, Enesco had $53.7 million of interest
bearing debt outstanding. 27




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ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Form 10-Q, Enesco carried out an
evaluation, under the supervision and with the participation of Enescos
management, including Enescos (i) Interim Chief Executive Officer (CEO) and
(ii) Controller, of the effectiveness of the design and operation of Enescos
disclosure controls and procedures. Since June 30, 2004, the following changes
are noted: (a) In August 2004, Enescos Chief Financial Officer resigned and a
successor has not yet been named; (b) We are in the process of complying with
the requirements of Section 404(a) of the Sarbanes-Oxley Act. As a result of
this effort, we have identified certain process improvements and other internal
control issues that we are in the process of addressing and/or documenting.
Based on the evaluation as of the end of the period covered by this 10-Q,
Enescos management, including the Interim CEO and Controller, concluded that
Enescos disclosure controls and procedures are operating effectively as
designed. We are committed to a continuing process of identifying, evaluating and
implementing improvements to the effectiveness of our disclosure and internal
controls and procedures. Our management, including our Interim CEO and
Controller, does not expect that our controls and procedures will prevent all
errors. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues within Enesco have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls is also based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in any control system,
misstatements due to error or violations of law may occur and not be detected. 28




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PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 13, 2004, the staff of the Securities and Exchange Commission
(SEC) informed Enesco that the SEC staff was considering recommending that
the SEC bring a civil action against Enesco for possible violations of the
U.S. securities laws, related to trading in Enescos securities in the
April-September 2000 time period. If the SEC were to file suit against
Enesco, the staff indicated that they would expect to seek disgorgement of
approximately $1.2 million of alleged profits, penalties in an unspecified
amount and an injunction against further violation of U.S. securities laws.
As permitted under SEC procedures, Enesco responded in writing to the SEC in
March 2004. On February 19, 2004, the SEC further informed Enesco that the SEC staff was
considering recommending that the SEC bring a civil action against a former
Senior Vice President and General Counsel of Enesco, for possible violations
of the U.S. securities laws related to trading in Enescos securities in the
April-September 2000 time period. As permitted under SEC procedures, the
former officer responded in writing to the SEC in March and May 2004. On November 1, 2004, Enesco received notice from the SEC that the SEC has
ended its investigation of Enesco and the former officer, and that no
enforcement action has been recommended. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 29




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ITEM 6. EXHIBITS  (a)
    
    Exhibits  10.1
    
    Third Amendment to the Second Amended and Restated
Senior Revolving Credit Agreement.31.1
    
    Certification of Interim 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 Controller under Exchange Act
Rules 13a-15e and 15d-15e pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Statement of Interim Chief Executive Officer
Pursuant to Section 906 of the Sabanes-Oxley Act of 200232.2
    
    Statement of Controller Pursuant to Section 906 of
the Sabanes-Oxley Act of 2002 30




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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: November 8, 2004
    /s/ George R. DitomassiGeorge R. Ditomassi
Interim Chief Executive Officer Date: November 8, 2004
    /s/ Anthony P. CaravelloAnthony P. Caravello
Controller 31