**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-Q**

** **

**(MarkOne)**

 

**ý****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

## **For the quarterlyperiod ended July 31, 2005**

 

**or**

 

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                 to                 **

** **

**Commission File Number 1-13026**

 

**BLYTH, INC.**

(Exact name of registrant as specified in its charter) 

 
| **DELAWARE**                                                    | ** ** | **36-2984916**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (IRS Employer Identification No.) |
|                                                            |       |                              |
| **One East Weaver Street, Greenwich, Connecticut**              | ** ** | **06831**                         |
| **(Address of principal executive  offices)**                   |       | (Zip Code)                        |

 

**(203) 661-1926**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes                            ý                                    No                                o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Yes                            ý                                    No                                o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes                            o                                    No                                ý

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

**40,977,144 Common Shares as of August 31,2005**

 

 

----

 

**BLYTH, INC.**

 

#### **INDEX**

 
| Part I.       Financial Information |                                                                                        |
|-------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                              |                                                                                        |   |   |
| Item 1.                                                           | Financial Statements:                                                                       |   |
|                                                              |                                                                                        |   |   |
|                                                              |                                                                                        | Condensed Consolidated Balance Sheets |   |
|                                                              |                                                                                        |   |   |
|                                                              |                                                                                        | Condensed Consolidated Statements of Earnings |   |
|                                                              |                                                                                        |   |   |
|                                                              |                                                                                        | Condensed Consolidated Statements of  Stockholders’ Equity |   |
|                                                              |                                                                                        |   |   |
|                                                              |                                                                                        | Condensed Consolidated Statements of Cash Flows |   |
|                                                              |                                                                                        |   |   |
|                                                              |                                                                                        | Notes to Condensed Consolidated Financial Statements |   |
|                                                              |                                                                                        |   |   |
| Item 2.                                                           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                                              |                                                                                        |   |   |
| Item 3.                                                           | Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|                                                              |                                                                                        |   |   |
| Item 4.                                                           | Controls and Procedures                                                                     |   |
|                                                              |                                                                                        |   |   |
| Part II.      Other  Information    |                                                                                        |
|                                                              |                                                                                        |   |   |
| Item 1.                                                           | Legal Proceedings                                                                           |   |
|                                                              |                                                                                        |   |   |
| Item 2.                                                           | Unregistered Sales of Equity Securities and  Use of Proceeds                                |   |
|                                                              |                                                                                        |   |   |
| Item 3.                                                           | Defaults upon Senior Securities                                                             |   |
|                                                              |                                                                                        |   |   |
| Item 4.                                                           | Submission of Matters to a Vote of Security  Holders                                        |   |
|                                                              |                                                                                        |   |   |
| Item 5.                                                           | Other Information                                                                           |   |
|                                                              |                                                                                        |   |   |
| Item 6.                                                           | Exhibits                                                                                    |   |
|                                                              |                                                                                        |   |   |
| Signatures                                                        |                                                                                        |   |
|                                                                   |                                                                                             |  |  |  |

 

2

----

 

Part I.  FINANCIAL INFORMATION

Item I.  FINANCIAL STATEMENTS

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                      | ** ** | **July 31,**    | ** ** | **January 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **(In thousands, except share and  per share data)**                                                                            | ** ** | **2005**        | ** ** | **2005**        | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **      | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **      | ** ** | ** **      | ** ** |
| **Current assets:**                                                                                                             |       |            |       |            |       |
| Cash and cash equivalents                                                                                                       |       | $               | 44,320     |            | $          | 91,695 |   |
| Accounts receivable, less allowance for doubtful  receivables of $3,945 and $4,028, respectively                                |       | 97,751          |       | 124,603         |       |
| Inventories                                                                                                                     |       | 295,113         |       | 234,984         |       |
| Prepaid and other                                                                                                               |       | 49,653          |       | 43,832          |       |
| Assets held for sale                                                                                                            |       | 4,092           |       | 3,949           |       |
| Deferred income taxes                                                                                                           |       | 15,127          |       | 15,068          |       |
| Total current  assets                                                                                                           |       | 506,056         |       | 514,131         |       |
| **Property, plant and equipment, at cost:**                                                                                     |       |            |       |            |       |
| Less accumulated  depreciation of $276,878 and $262,685, respectively                                                           |       | 238,082         |       | 258,896         |       |
| **Other assets:**                                                                                                               |       |            |       |            |       |
| Investments                                                                                                                     |       | 3,203           |       | 3,446           |       |
| Goodwill                                                                                                                        |       | 243,501         |       | 246,182         |       |
| Other intangible assets, net of accumulated  amortization of $4,917 and $3,867, respectively                                    |       | 38,183          |       | 39,233          |       |
| Deposits and other assets                                                                                                       |       | 14,144          |       | 13,932          |       |
|                                                                                                                            |       | 299,031         |       | 302,793         |       |
| Total assets                                                                                                                    |       | $               | 1,043,169  |            | $          | 1,075,820 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                   |       |            |       |            |       |
| **Current liabilities:**                                                                                                        |       |            |       |            |       |
| Bank lines of credit                                                                                                            |       | $               | 57,532     |            | $          | 11,813 |   |
| Current maturities of long-term debt                                                                                            |       | 828             |       | 4,489           |       |
| Accounts payable                                                                                                                |       | 64,009          |       | 81,333          |       |
| Accrued expenses                                                                                                                |       | 71,015          |       | 94,847          |       |
| Income taxes                                                                                                                    |       | —          |       | 9,477           |       |
| Total current  liabilities                                                                                                      |       | 193,384         |       | 201,959         |       |
| **Deferred income taxes**                                                                                                       |       | 45,728          |       | 47,740          |       |
| **Long-term debt, less current maturities**                                                                                     |       | 269,988         |       | 271,573         |       |
| **Other long-term liabilities**                                                                                                 |       | 32,495          |       | 33,199          |       |
| **Commitments and contingencies**                                                                                               |       | —          |       | —          |       |
| **Stockholders’ equity:**                                                                                                  |       |            |       |            |       |
| Preferred stock  - authorized 10,000,000 shares of $0.01 par value; no shares issued and  outstanding                           |       | —          |       | —          |       |
| Common stock -  authorized 100,000,000 shares of $0.02 par value; issued 50,519,160 shares  and 50,367,827 shares, respectively |       | 1,010           |       | 1,007           |       |
| Additional contributed capital                                                                                                  |       | 127,463         |       | 118,148         |       |
| Retained earnings                                                                                                               |       | 656,669         |       | 651,156         |       |
| Accumulated other comprehensive income                                                                                          |       | 8,020           |       | 36,102          |       |
| Unearned compensation on restricted stock                                                                                       |       | (3,958          | )          | —          |       |
| Treasury stock, at cost, 9,533,416 shares and  9,468,416 shares, respectively                                                   |       | (287,630        | )          | (285,064        | )          |
| Total  stockholders’ equity                                                                                                |       | 501,574         |       | 521,349         |       |
| Total  liabilities and stockholders’ equity                                                                                |       | $               | 1,043,169  |            | $          | 1,075,820 |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

 

3

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

 
| **Six months  ended July 31****(In thousands, except per share data)** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                              |       | $        | 647,922    |     | $          | 648,043 |   |
| Cost of goods sold                                                     |       | 340,516  |       | 318,921  |       |
| Gross profit                                                           |       | 307,406  |       | 329,122  |       |
| Selling                                                                |       | 203,619  |       | 208,702  |       |
| Administrative                                                         |       | 74,658   |       | 67,147   |       |
|                                                                   |       | 278,277  |       | 275,849  |       |
| Operating profit                                                       |       | 29,129   |       | 53,273   |       |
| Other expense (income):                                                |       |     |       |     |       |
| Interest expense                                                       |       | 10,653   |       | 10,258   |       |
| Other expense  (income), net                                           |       | 476      |       | (1,348   | )          |
|                                                                   |       | 11,129   |       | 8,910    |       |
| Earnings before  income taxes and minority interest                    |       | 18,000   |       | 44,363   |       |
| Income tax expense                                                     |       | 4,500    |       | 17,243   |       |
| Earnings before  minority interest                                     |       | 13,500   |       | 27,120   |       |
| Minority interest                                                      |       | (614     | )          | —   |       |
| Net earnings                                                           |       | $        | 14,114     |     | $          | 27,120 |   |
| Basic:                                                                 |       |     |       |     |       |
| Net earnings per  common share                                         |       | $        | 0.34       |     | $          | 0.60 |   |
| Weighted average  number of shares                                     |       | 40,933   |       | 45,381   |       |
| Diluted:                                                               |       |     |       |     |       |
| Net earnings per  common share                                         |       | $        | 0.34       |     | $          | 0.59 |   |
| Weighted average  number of shares                                     |       | 41,214   |       | 45,804   |       |

 

***The accompanying notes are an integral part of these financialstatements.***

 

4

----

 

**BLYTH, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(Unaudited)**

 
| **Three months ended July 31****(In  thousands, except per share data)** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                |       | $        | 292,154    |     | $          | 289,063 | ** ** |
| Cost of goods sold                                                       |       | 153,093  |       | 142,952  |       |
| Gross profit                                                             |       | 139,061  |       | 146,111  |       |
| Selling                                                                  |       | 91,758   |       | 93,627   |       |
| Administrative                                                           |       | 37,805   |       | 33,472   |       |
|                                                                     |       | 129,563  |       | 127,099  |       |
| Operating profit                                                         |       | 9,498    |       | 19,012   |       |
| Other expense (income):                                                  |       |     |       |     |       |
| Interest expense                                                         |       | 5,572    |       | 5,049    |       |
| Other expense  (income), net                                             |       | (368     | )          | (480     | )          |
|                                                                     |       | 5,204    |       | 4,569    |       |
| Earnings before  income taxes and minority interest                      |       | 4,294    |       | 14,443   |       |
| Income tax expense                                                       |       | 525      |       | 5,048    |       |
| Earnings before  minority interest                                       |       | 3,769    |       | 9,395    |       |
| Minority interest                                                        |       | (385     | )          | (50      | )          |
| Net earnings                                                             |       | $        | 4,154      |     | $          | 9,445 |   |
| Basic:                                                                   |       |     |       |     |       |
| Net earnings per  common share                                           |       | $        | 0.10       |     | $          | 0.21 |   |
| Weighted average  number of shares outstanding                           |       | 40,962   |       | 45,097   |       |
| Diluted:                                                                 |       |     |       |     |       |
| Net earnings per  common share                                           |       | $        | 0.10       |     | $          | 0.21 |   |
| Weighted average  number of shares outstanding                           |       | 41,207   |       | 45,502   |       |
|                                                                          |            |          |            |          |            |  |  |  |

 

***Theaccompanying notes are an integral part of these financial statements.***

 

5

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

**(Unaudited)**

(In thousands,except share data)

 
| ** **                                                            | ** ** | ** **        | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|----------------|------------|--------------|------------|--------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| ** **                                                            | ** ** | ** **        | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **other**          | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Common  stock** | ** ** | **contributed** | ** ** | **Retained**   | ** ** | **Treasury** | ** ** | **Unearned** | ** ** | **comprehensive** | ** ** | ** **         | ** ** |
| ** **                                                            | ** ** | **Shares**        | ** ** | **Amount**      | ** ** | **capital**    | ** ** | **earnings** | ** ** | **Stock**    | ** ** | **Compensation**  | ** ** | **income  (loss)** | ** ** | **Total**  | ** ** |
| **For the  six months ended July 31, 2004:**                          | ** ** | ** **        | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        |       |               |       |       |       |
| Balance, February 1, 2004                                             |       | 49,975,502        |       | $               | 999        |           | $          | 107,965      |       | $            | 570,171    |              | $          | (105,389           | )          | $          | —     |   | $ | 15,224 |   | $ | 588,970 |   |
| Net earnings for the period                                           |       |              |       |            |       |           |       | 27,120       |       |         |       |              |       |               |       | 27,120     |       |
| Foreign currency  translation adjustments                             |       |              |       |            |       |           |       |         |       |         |       |              |       | (3,503             | )          | (3,503     | )          |
| Unrealized holding  losses on certain investments (net of tax of $20) |       |              |       |            |       |           |       |         |       |         |       |              |       | (35                | )          | (35        | )          |
| Net gain on cash  flow hedging instruments (net of tax of $39)        |       |              |       |            |       |           |       |         |       |         |       |              |       | (69                | )          | (69        | )          |
| Comprehensive  income                                                 |       |              |       |            |       |           |       |         |       |         |       |              |       |               |       | 23,513     |       |
| Common stock  issued in connection with long-term incentive plan      |       | 376,425           |       | 8               |       | 9,057          |       |         |       |         |       |              |       |               |       | 9,065      |       |
| Tax benefit from stock options                                        |       |              |       |            |       | 630            |       |         |       |         |       |              |       |               |       | 630        |       |
| Dividends                                                             |       |              |       |            |       |           |       | (7,758       | )          |         |       |              |       |               |       | (7,758     | )          |
| Treasury stock purchases                                              |       |              |       |            |       |           |       |         |       | (178,649     | )          |              |       |               |       | (178,649   | )          |
| Balance, July 31, 2004                                                |       | 50,351,927        |       | $               | 1,007      |           | $          | 117,652      |       | $            | 589,533    |              | $          | (284,038           | )          | $          | —     |   | $ | 11,617 |   | $ | 435,771 |   |
| **For the  six months ended July 31, 2005:**                          | ** ** | ** **        | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Balance, February 1, 2005                                             |       | 50,367,827        |       | $               | 1,007      |           | $          | 118,148      |       | $            | 651,156    |              | $          | (285,064           | )          | $          | —     |   | $ | 36,102 |   | $ | 521,349 |   |
| Net earnings for the period                                           |       |              |       |            |       |           |       | 14,114       |       |         |       |              |       |               |       | 14,114     |       |
| Foreign currency  translation adjustments                             |       |              |       |            |       |           |       |         |       |         |       |              |       | (29,312            | )          | (29,312    | )          |
| Unrealized  holding gains on certain investments (net of tax of $57)  |       |              |       |            |       |           |       |         |       |         |       |              |       | 151                |       | 151        |       |
| Net gain on cash  flow hedging instruments (net of tax of $441)       |       |              |       |            |       |           |       |         |       |         |       |              |       | 1,079              |       | 1,079      |       |
| Comprehensive loss                                                    |       |              |       |            |       |           |       |         |       |         |       |              |       |               |       | (13,968    | )          |
| Common stock  issued in connection with long-term incentive plan      |       | 151,333           |       | 3               |       | 3,399          |       |         |       |         |       |              |       |               |       | 3,402      |       |
| Tax benefit from stock options                                        |       |              |       |            |       | 313            |       |         |       |         |       |              |       |               |       | 313        |       |
| Issuance of  restricted stock, net of cancellations                   |       |              |       |            |       | 5,603          |       |         |       | (495         | )          | (5,108            | )          |               |       | —     |       |
| Amortization of  unearned compensation                                |       |              |       |            |       |           |       |         |       |         |       | 1,150             |       |               |       | 1,150      |       |
| Dividends                                                             |       |              |       |            |       |           |       | (8,601       | )          |         |       |              |       |               |       | (8,601     | )          |
| Treasury stock purchases                                              |       |              |       |            |       |           |       |         |       | (2,071       | )          |              |       |               |       | (2,071     | )          |
| Balance, July 31, 2005                                                |       | 50,519,160        |       | $               | 1,010      |           | $          | 127,463      |       | $            | 656,669    |              | $          | (287,630           | )          | $          | (3,958     | ) | $ | 8,020 |   | $ | 501,574 |   |

 

***The accompanying notes are an integral part of thesefinancial statements.***

 

6

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Six months ended July 31 (In thousands)**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                                                 |       |     |       |     |       |
| Net earnings                                                                          |       | $        | 14,114     |     | $          | 27,120 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:  |       |     |       |     |       |
| Depreciation and  amortization                                                        |       | 18,843   |       | 17,756   |       |
| Gain on  disposition of fixed assets                                                  |       | (18      | )          | —   |       |
| Tax benefit from  stock options                                                       |       | 313      |       | 630      |       |
| Deferred income  taxes                                                                |       | (1,120   | )          | 1,679    |       |
| Equity in  earnings/loss of investee                                                  |       | 243      |       | (46      | )          |
| Minority  interest                                                                    |       | (674     | )          | (99      | )          |
| Gain on sale of  assets held for sale                                                 |       | —   |       | (364     | )          |
| Changes in operating  assets and liabilities, net of effect of business acquisitions: |       |     |       |     |       |
| Accounts  receivable                                                                  |       | 20,700   |       | 18,748   |       |
| Inventories                                                                           |       | (70,394  | )          | (67,584  | )          |
| Prepaid and  other                                                                    |       | (7,438   | )          | 3,466    |       |
| Deposits and  other assets                                                            |       | (128     | )          | (41      | )          |
| Goodwill  disposed of due to sale of assets held for sale                             |       | —   |       | (3,621   | )          |
| Accounts payable                                                                      |       | (14,382  | )          | (18,858  | )          |
| Accrued expenses                                                                      |       | (20,914  | )          | (22,276  | )          |
| Other  liabilities                                                                    |       | 1,601    |       | 684      |       |
| Income taxes                                                                          |       | (8,913   | )          | 251      |       |
| Total  adjustments                                                                    |       | (82,281  | )          | (69,675  | )          |
| Net cash used in  operating activities                                                |       | (68,167  | )          | (42,555  | )          |
| Cash flows from investing activities:                                                 |       |     |       |     |       |
| Purchases of  property, plant and equipment                                           |       | (7,445   | )          | (8,888   | )          |
| Purchases of  long-term investments                                                   |       | —   |       | (21,000  | )          |
| Proceeds from  sale of assets held for sale                                           |       | —   |       | 9,752    |       |
| Purchase of  businesses, net of cash acquired                                         |       | (3,954   | )          | (6,757   | )          |
| Net cash used in  investing activities                                                |       | (11,399  | )          | (26,893  | )          |
| Cash flows from financing activities:                                                 |       |     |       |     |       |
| Proceeds from  issuance of common stock                                               |       | 3,402    |       | 9,065    |       |
| Purchases of  treasury stock                                                          |       | (2,071   | )          | (178,649 | )          |
| Borrowings from  bank line of credit                                                  |       | 57,149   |       | 121,170  |       |
| Repayments on  bank line of credit                                                    |       | (10,094  | )          | (16,321  | )          |
| Repayments of  long-term debt                                                         |       | (4,398   | )          | (4,468   | )          |
| Dividends paid                                                                        |       | (8,601   | )          | (7,758   | )          |
| Net cash  provided by (used in) financing activities                                  |       | 35,387   |       | (76,961  | )          |
| Effect of exchange rate changes on cash                                               |       | (3,196   | )          | 880      |       |
| Net decrease in  cash and cash equivalents                                            |       | (47,375  | )          | (145,529 | )          |
| Cash and cash equivalents at beginning of period                                      |       | 91,695   |       | 229,726  |       |
| Cash and cash equivalents at end of period                                            |       | $        | 44,320     |     | $          | 84,197 |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

 

7

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**BLYTH, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**1.**                                      Basis of Presentation

** **

Blyth is a designer and marketer of home fragranceproducts and accessories, home décor, seasonal decorations, householdconvenience items, personalized gifts and products for the foodservicetrade.  We compete in the global Home Expressionsindustry, and our products can be found throughout North America, Europe andAustralia.  Our financial results arereported in three segments - the Direct Selling segment, the Wholesale segmentand the Catalog & Internet segment. These reportable segments are based on similarities in distributionchannels, customers and management oversight.

 

Within the Direct Selling segment, the Companydesigns, manufactures or sources, markets and distributes an extensive line ofproducts including scented candles, candle-related accessories, fragranced bathgels and body lotions and other fragranced products.  The Company also operates a small directselling craft company.  These productsare sold directly to the consumer under the PartyLite® and Purple TreeTM brandsthrough a network of independent sales consultants using the party plan methodof direct selling.  PartyLite® is sold inNorth America, Europe and Australia. Purple TreeTM is sold in North America.

 

Within the Wholesale segment, the Company designs,manufactures or sources, markets and distributes an extensive line of homefragrance products, candle-related accessories, seasonal decorations such asornaments, artificial trees and trim, and home décor products such as pictureframes, lamps and textiles.  Products inthis segment are sold in North America and Europe to retailers in the premium,specialty and mass channels under the CBK®, Carolina®, Colonial®(1), ColonialCandle of Cape Cod®, Colonial at HOMEâ, Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), Holiday365TM, KaemingkTM(2), Liljeholmens®, Seasons of Cannon Falls® andTriumph Tree®(1) brands.  In addition,chafing fuel and tabletop lighting products and accessories for the Away FromHome or foodservice trade are sold through this segment under the Ambria®,FilterMate®, HandyFuelTM and Sterno® brands.

 

Within the Catalog & Internet segment, theCompany designs, sources and markets a broad range of household convenienceitems, premium photo albums, frames, holiday cards, personalized gifts and kitchenaccessories.  These products are solddirectly to the consumer under the Exposuresâ, Miles Kimballâ, Walter Drakeâ, Home Marketplace® andDirections...the path to better healthâ brands.  Theseproducts are sold primarily in North America.

 

The condensed consolidated financial statementsinclude the accounts of the Company and its direct and indirectsubsidiaries.  All significantintercompany accounts and transactions have been eliminated.  Investments in companies that are notmajority owned or controlled are reported using the equity method and arerecorded in investments.  Other expense(income), net consists of interest income earned from investments, foreigncurrency gains and losses, gains and losses from sales of investments and theCompany’s equity in the income or losses of unconsolidated investments.  Certain of the Company’s subsidiaries operateon a 52 or 53-week fiscal year ending on the Saturday closest to January 31.  European operations maintain a calendar yearaccounting period, which is consolidated with the Company’s fiscal period.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements include alladjustments necessary for fair presentation of the Company’s consolidatedfinancial position at July 31, 2005 and the consolidated results of itsoperations and cash flows for the six-month periods ended July 31, 2005and 2004.  These interim statementsshould be read in conjunction with the Company’s consolidated financialstatements for the year ended January 31, 2005, as set forth in theCompany’s Annual Report on Form 10-K. Operating results for the six months ended July 31, 2005 are notnecessarily indicative of the results that may be expected for the year ending January 31,2006.

 

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(1)Colonial, Euro-Decor, Gies and Triumph Tree trademarks are registered and soldonly outside the United States.

**(2)** Kaemingk is sold only outside theUnited States.

** **

**8**

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** **

**EmployeeStock Options**

** **

The Company has elected to adopt the disclosure onlyprovisions of Statement of Financial Accounting Standards (SFAS) No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure,” and continues tofollow Accounting Principles Board (APB) opinion No. 25, “Accounting forStock Issued to Employees” and related interpretations in accounting for stockoptions granted to its employees and directors under the intrinsic valuemethod.  Accordingly, no compensationexpense is recorded for the stock options issued to employees unless the optionprice is below market at the measurement date. The Company does not at this time issue stock options below marketvalue, therefore no compensation expense has been recorded in the financial statements.  Had compensation expense for the Company’sstock options been determined in accordance with the fair value method in SFAS No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 148, the Company’sreported net income and earnings per share would have been adjusted to the pro formaamounts indicated below:

 
| ** **                                                                                                   | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(In thousands except per share  data)**                                                                    | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net earnings:                                                                                                |       |                            |       |                          |       |   |   |   |   |
| As reported                                                                                                  |       | $                               | 4,154      |                          | $          | 9,445 |   | $ | 14,114 |   | $ | 27,120 |   |
| Stock-based  employee compensation expense determined under SFAS No. 123 for all awards,  net of related tax |       | 272                             |       | 598                           |       | 606 |   | 1,043 |   |
| Pro forma                                                                                                    |       | $                               | 3,882      |                          | $          | 8,847 |   | $ | 13,508 |   | $ | 26,077 |   |
| Net earnings per common share:                                                                               |       |                            |       |                          |       |   |   |   |   |
| As reported:                                                                                                 |       |                            |       |                          |       |   |   |   |   |
| Basic                                                                                                        |       | $                               | 0.10       |                          | $          | 0.21 |   | $ | 0.34 |   | $ | 0.60 |   |
| Diluted                                                                                                      |       | 0.10                            |       | 0.21                          |       | 0.34 |   | 0.59 |   |
| Pro forma:                                                                                                   |       |                            |       |                          |       |   |   |   |   |
| Basic                                                                                                        |       | $                               | 0.09       |                          | $          | 0.20 |   | $ | 0.33 |   | $ | 0.57 |   |
| Diluted                                                                                                      |       | 0.09                            |       | 0.19                          |       | 0.33 |   | 0.57 |   |

 

9

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**2.**                                      Business Acquisitions

** **

On September 10, 2004, the Company acquired100% interests in Edelman B.V. (“Edelman”), a designer and marketer of everydayhome, garden and seasonal décor, and Euro-Decor B.V. (“Euro-Decor”), a designerand marketer of traditional and contemporary gift and florist products.  The acquisitions align with one component ofthe Company’s overall growth strategy, which is to grow through selectedacquisitions in the Home Expressions industry. The cash purchase price was approximately $48.6 million less cash acquiredof $1.1 million resulting in net cash paid of $47.5 million.  Included in the purchase price and recordedin fiscal 2005 is a $9.2 million earn out, based on a multiple of 2004 earningsbefore interest and income taxes that the combined companies had achieved.  The earn out was paid in the first quarter offiscal 2006.  The Company also assumedEdelman and Euro-Decor’s long-term debt of approximately $7.2 million.  During the fourth quarter of fiscal 2005, anadjustment was recorded to reflect the final appraised value of the acquiredproperty, plant and equipment for $3.8 million, as well as the net pensionasset of $0.6 million.  The excess of thepurchase price over the estimated fair value of the net assets acquiredapproximated $33.0 million, which will not be deductible for income taxpurposes.  The results of operations ofEdelman and Euro-Decor have been included in the Condensed ConsolidatedStatements of Earnings of the Company since September 11, 2004.  For segment reporting purposes, Edelman andEuro-Decor are included in the Wholesale segment.

 
| The following provides an allocation of the purchase  price of Edelman and Euro-Decor (in thousands): |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |   |   |   |
| Cash Purchase  Price                                                                                  |   | $ | 48,609 |   |
| Less: Assets acquired                                                                                 |   |   |   |
| Cash                                                                                                  |   | 1,112 |   |
| Accounts  receivable                                                                                  |   | 23,684 |   |
| Inventories                                                                                           |   | 16,964 |   |
| Prepaid and  other                                                                                    |   | 4,044 |   |
| Property, plant  and equipment                                                                        |   | 10,109 |   |
| Other assets                                                                                          |   | 624 |   |
| Total assets acquired                                                                                 |   | 56,537 |   |
| Plus: Liabilities assumed                                                                             |   |   |   |
| Bank line of  credit                                                                                  |   | 18,523 |   |
| Accounts payable                                                                                      |   | 3,227 |   |
| Accrued expenses                                                                                      |   | 11,911 |   |
| Other  liabilities                                                                                    |   | 22 |   |
| Debt                                                                                                  |   | 7,195 |   |
| Total liabilities assumed                                                                             |   | 40,878 |   |
| Unallocated purchase price (goodwill)                                                                 |   | $ | 32,950 |   |

 

10

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The following unaudited pro forma summary financialinformation summarizes the estimated combined results of operations of theCompany, Edelman and Euro-Decor assuming that the acquisitions of Edelman andEuro-Decor had taken place on February 1, 2004.  The unaudited pro forma combined results ofoperations were prepared on the basis of information provided to the Company bythe former management of Edelman and Euro-Decor and no representation is madeby the Company with respect to the accuracy of such information.  The pro forma combined results of operationsreflect adjustments for interest income, additional depreciation based on thefair market value of Edelman’s and Euro-Decor’s property, plant, and equipment,and income tax expense.

 
| ** **                                | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(In thousands except per share  data)** | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                 |       | $                               | 292,154    |                          | $          | 300,951 |   | $ | 647,922 |   | $ | 682,339 |   |
| Net earnings                              |       | 4,154                           |       | 8,107                         |       | 14,114 |   | 26,302 |   |
| Basic:                                    |       |                            |       |                          |       |   |   |   |   |
| Net earnings per common share             |       | $                               | 0.10       |                          | $          | 0.18 |   | $ | 0.34 |   | $ | 0.58 |   |
| Diluted:                                  |       |                            |       |                          |       |   |   |   |   |
| Net earnings per common share             |       | $                               | 0.10       |                          | $          | 0.18 |   | $ | 0.34 |   | $ | 0.57 |   |

 

The unaudited pro forma combined results ofoperations are not necessarily indicative of, and do not purport to represent,what the Company’s results of operations or financial condition actually wouldhave been had the acquisitions been made as of February 1, 2004.

 

**3.**                                      Inventories

 

The components of inventory are as follows (inthousands):

 
| ** **      | ** ** | **July 31, 2005** | ** ** | **January 31, 2005** | ** ** |
|-----------------|------------|-------------------|------------|----------------------|------------|
| Raw materials   |       | $                 | 32,005     |                 | $          | 27,286 |   |
| Work in process |       | 1,285             |       | 2,641                |       |
| Finished goods  |       | 261,823           |       | 205,057              |       |
|            |       | $                 | 295,113    |                 | $          | 234,984 |   |

 

11

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**4.****                                      Goodwilland Other Intangibles**

 

**The following table shows changesin the carrying amount of goodwill for the six months ended July 31, 2005,by operating segment (in thousands):**

 
| ** **                                                                                    | ** ** | ** **         | ** ** | ** **    | ** ** | **Catalog &** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                    | ** ** | **Direct Selling** | ** ** | **Wholesale** | ** ** | **Internet**      | ** ** | **Total**  | ** ** |
| Goodwill at January 31, 2005                                                                  |       | $                  | 307        |          | $          | 171,353           |       | $          | 74,522     |   | $ | 246,182 |   |
| Kaemingk earn out payment                                                                     |       | $                  | —     |          | $          | 3,932             |       | $          | —     |   | 3,932 |   |
| Edelman and Euro-Decor acquisition costs                                                      |       | —             |       | 22            |       | —            |       | 22         |       |
| Foreign currency  translation adjustment related to Kaemingk, Edelman and Euro-Decor goodwill |       | —             |       | (6,635        | )          | —            |       | (6,635     | )          |
| Total adjustments                                                                             |       | —             |       | (2,681        | )          | —            |       | (2,681     | )          |
| Goodwill at July 31, 2005                                                                     |       | $                  | 307        |          | $          | 168,672           |       | $          | 74,522     |   | $ | 243,501 |   |

 

Other intangibleassets consisted of the following (in thousands):

 
| ** **                                   | ** ** | **July 31, 2005** | ** ** | **January 31, 2005**           | ** ** |
|----------------------------------------------|------------|-------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **Gross**         | ** ** | **Accumulated   Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated   Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived  trade names and trademarks |       | $                 | 28,100     |                           | $          | — |   | $ | 28,100 |   | $ | 28,100 |   | $ | — |   | $ | 28,100 |   |
| Customer lists                               |       | 15,000            |       | 4,917                          |       | 10,083 |   | 15,000 |   | 3,867 |   | 11,133 |   |
| Total                                        |       | $                 | 43,100     |                           | $          | 4,917 |   | $ | 38,183 |   | $ | 43,100 |   | $ | 3,867 |   | $ | 39,233 |   |

 

Estimatedamortization expense for the next five fiscal years is as follows:  $2.1 million, $1.8 million, $1.5 million,$1.5 million and $1.2 million.

 

**5.****                                      Earningsper Share**

 

The components of basic and diluted earnings pershare are as follows (in thousands):

 
| ** **                                              | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net earnings                                            |       | $                               | 4,154      |                          | $          | 9,445 |   | $ | 14,114 |   | $ | 27,120 |   |
| Weighted average number of common shares  outstanding:  |       |                            |       |                          |       |   |   |   |   |
| Basic                                                   |       | 40,962                          |       | 45,097                        |       | 40,933 |   | 45,381 |   |
| Dilutive effect  of stock options and restricted shares |       | 245                             |       | 405                           |       | 281 |   | 423 |   |
| Weighted average number of common shares  outstanding:  |       |                            |       |                          |       |   |   |   |   |
| Diluted                                                 |       | 41,207                          |       | 45,502                        |       | 41,214 |   | 45,804 |   |
|                                                         |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |

 

For the three and six-month periods ended July 31,2005, options to purchase 275,700 and 118,000 shares of common stock,respectively, are not included in the computation of earnings per share becausethe effect would be anti-dilutive.  Also,for the three and six-month periods ended July 31, 2004, options topurchase 3,000 and 13,000 shares of common stock, respectively, are notincluded in the computation of earnings per share because the effect would beanti-dilutive.

 

12

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**6.**                                      Segment Information

** **

Blyth is a designer and marketer of home fragranceproducts and accessories, home décor, seasonal decorations, householdconvenience items, personalized gifts and products for the foodservicetrade.  We compete in the global HomeExpressions industry, and our products can be found throughout North America,Europe and Australia.  Our financialresults are reported in three segments - the Direct Selling segment, theWholesale segment and the Catalog & Internet segment.  These reportable segments are based onsimilarities in distribution channels, customers and management oversight.

 

Operating profit in all segments represent net salesless operating expenses directly related to the business segments and corporateexpenses allocated to the business segments. Other expense includes interest expense, interest income and equity inearnings of investees, which are not allocated to the business segments.  Identifiable assets for each segment consistof assets used directly in its operations and intangible assets, if any,resulting from purchase business combinations. Unallocated Corporate within the identifiable assets include corporatecash and cash equivalents, prepaid income tax, corporate fixed assets, deferredbond costs and other long-term investments, which are not allocated to thebusiness segments.

 
| ** **                                              | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(In thousands)**                                      | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net Sales**                                           |       |                            |       |                          |       |   |   |   |   |
| Direct Selling                                          |       | $                               | 141,185    |                          | $          | 150,309 |   | $ | 314,435 |   | $ | 340,172 |   |
| Wholesale                                               |       | 116,340                         |       | 103,313                       |       | 262,659 |   | 231,076 |   |
| Catalog &  Internet                                 |       | 34,629                          |       | 35,441                        |       | 70,828 |   | 76,795 |   |
| **Total**                                               |       | $                               | 292,154    |                          | $          | 289,063 |   | $ | 647,922 |   | $ | 648,043 |   |
| **Operating profit**                                    |       |                            |       |                          |       |   |   |   |   |
| Direct Selling                                          |       | $                               | 20,908     |                          | $          | 25,051 |   | $ | 48,904 |   | $ | 63,053 |   |
| Wholesale                                               |       | (8,820                          | )          | (4,255                        | )          | (15,477 | ) | (6,934 | ) |
| Catalog &  Internet                                 |       | (2,590                          | )          | (1,784                        | )          | (4,298 | ) | (2,846 | ) |
|                                                    |       | 9,498                           |       | 19,012                        |       | 29,129 |   | 53,273 |   |
| Other expense                                           |       | (5,204                          | )          | (4,569                        | )          | (11,129 | ) | (8,910 | ) |
| **Earnings before income taxes and minority  interest** |       | $                               | 4,294      |                          | $          | 14,443 |   | $ | 18,000 |   | $ | 44,363 |   |

 
| ** **               | ** ** | **July 31, 2005** | ** ** | **January 31, 2005** | ** ** |
|--------------------------|------------|-------------------|------------|----------------------|------------|
| **Identifiable  Assets** |       |              |       |                 |       |
| Direct Selling           |       | $                 | 231,929    |                 | $          | 249,126 |   |
| Wholesale                |       | 608,450           |       | 613,819              |       |
| Catalog &  Internet  |       | 175,956           |       | 164,237              |       |
| Unallocated  Corporate   |       | 26,834            |       | 48,638               |       |
| **Total**                |       | $                 | 1,043,169  |                 | $          | 1,075,820 |   |

 

13

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**7.**                                      Assets Held for Sale

** **

**During the third quarter of fiscal2005, the Colorado Springs facility, purchased as part of the Walter Drakeacquisition, became available for sale and management maintains an activeprogram to locate a buyer.  The netrealizable value of the building as of July 31, 2005 is $4.1 million,which approximates the carrying value less selling costs.  The building is classified as assets held forsale in the Condensed Consolidated Balance Sheet as of July 31, 2005 and January 31,2005.**

** **

**8.****                                      BankLines of Credit**

 

On June 2, 2005, theCompany replaced its prior $200 million credit facility with a new $150 millionunsecured revolving credit facility having a five year term (the “CreditFacility”).  The Company has the abilityto increase the Credit Facility, under certain circumstances, by an additional$50 million.  The Credit Facility may beused for seasonal working capital needs and general corporate purposes,including strategic acquisitions.  TheCredit Facility contains, among other provisions, requirements for maintainingcertain financial ratios and limitations on certain payments.  Amounts outstanding under the Credit Facilitybear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate orat the Eurocurrency rate plus a credit spread ranging from 0.360% to 0.800%,calculated on the basis of the Company’s senior unsecured long-term debtrating.  On July 31, 2005,approximately $46.8 million (including letters of credit) was outstanding underthe Credit Facility.

 

**9.****                                      TenderOffer**

 

On June 7, 2004, the Company announced that its Board of Directorsapproved a repurchase of up to 4,000,000 outstanding shares of the Company’scommon stock, with the right to repurchase up to an additional 2% of the Company’soutstanding shares, at a price per share not greater than $35.00 nor less than$30.00 through a Dutch auction cash tender offer.  The final number of shares repurchased underthe tender offer, which expired on July 9, 2004, was 4,906,616 shares foran aggregate purchase price of $172.6 million including fees and expenses.  The tender offer was funded with $86.1million of available cash and $86.5 million of borrowings against our prior$200 million Credit Facility.

 

**10.**                               Contingencies

** **

The Company has contingent liabilities that havearisen in the ordinary course of its business, including pendinglitigation.  The Company believes theoutcome of these matters will not have a material adverse effect on itsconsolidated financial position, results of operations or cash flows.

 

14

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**Item 2.**             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

**RESULTS OF OPERATIONS:**

** **

**Overview**

 

Blyth is a designer and marketer of home fragranceproducts and accessories, home décor, seasonal decorations, householdconvenience items, personalized gifts and products for the foodservicetrade.  We compete in the global HomeExpressions industry, and our products can be found throughout North America, Europeand Australia.  Our financial results arereported in three segments - the Direct Selling segment, the Wholesale segmentand the Catalog & Internet segment. These reportable segments are based on similarities in distributionchannels, customers and management oversight.

 

Today, on an annualized net sales basis consideringthe full year impact of recent acquisitions, Blyth is comprised of anapproximately $700 million direct selling business, an approximately $700million wholesale business and an approximately $200 million Catalog andInternet business.  Sales and earningsgrowth differ in each segment depending on geographic location, marketpenetration, our relative market share and product and marketing execution,among other business factors.  Over thelong term, all three segments should experience single-digit growth, mostlikely within the low to mid-single digit range, again depending on thebusiness factors previously noted.

 

Ourcurrent focus is driving sales growth of our brands so we may leverage morefully our infrastructure.  New productdevelopment continues to be critical to all three segments of ourbusiness.  In the Direct Selling segment,monthly sales and productivity incentives are designed to attract, retain andincrease the earnings opportunity of independent sales consultants.  In the Wholesale segment, we have numerouscollaborative initiatives underway, which we believe will help drive sales andleverage the sales and marketing talents across this segment.  These initiatives include customerinformation sharing and leveraging our in-house sales forces, as well asongoing global sourcing objectives and other organic strategic initiatives intowhich we are investing resources.

 

With the acquisitions of Miles Kimball in April 2003and Walter Drake in December 2003, we entered the Catalog and Internetchannel of direct to consumer distribution, giving us a presence in all of ourdesired channels.  The operations ofWalter Drake have been integrated into those of Miles Kimball and form the coreof our Catalog & Internet segment.

 

15

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**NetSales**

** **

Net Sales in the six months ended July 31,2005, decreased $0.1 million to $647.9 million from $648.0 million in the sameperiod a year earlier.  Net salesincreased $3.1 million, or 1.1%, to $292.2 million in the second quarter offiscal 2006 from $289.1 million in the second quarter of fiscal 2005.  The increase in net sales was primarily dueto the acquisitions of Edelman and Euro-Decor, which had a positive impact of 4percentage points.  Additionally, salesin the quarter benefited from the reversal of a contingent reserve in theamount of $5.5 million for a state settlement of an unclaimed property matter inthe quarter, associated with gift cards sold since the inception of the giftcard program in the Direct Selling business. The settlement related to unclaimed property amounts for historicalperiods.  The $5.5 million is due to thereversal of reserves for these historical periods as well as the adjustment ofreserves for gift cards not yet escheatable based on amounts of unclaimedproperty expected to be remitted in future periods, as a result of thissettlement and historical redemption patterns for gift cards.  These increases were partially offset by adecrease in sales primarily driven by the results of the Direct Selling Segmentas discussed below.

 

Net Sales - Direct SellingSegment

 

NetSales in the Direct Selling segment for the first six months of fiscal 2006,decreased $25.8 million, or 7.6%, to $314.4 million from $340.2 million a yearearlier.  Net Sales in the Direct Sellingsegment for the quarter ended July 31, 2005 decreased $9.1 million, or6.1%, to $141.2 million, from $150.3 million in the quarter ended July 31,2004.  PartyLite’s U.S. sales decreasedapproximately 13% compared to the prior year, which includes the effect of theaforementioned unclaimed property settlement in the quarter resulting in thereversal of $5.5 million of reserves. Excluding the reversal of the contingent reserve, PartyLite’s U.S. salesdeclined 19%.  Management believes thatsales in the U.S. market continue to be negatively impacted by increasedcompetition for hostesses and party guests in the Direct Selling channel*. *Decreasesin consultant count and in the number of shows continued in the U.S. market.* *PartyLiteCanada reported an approximate 6% increase versus the prior year in U.S.dollars (sales were down approximately 3% in local currency).  In PartyLite’s European markets, salesincreased approximately 5% in U.S. dollars (sales were approximately flat inlocal currencies).

 

Net Sales - Wholesale Segment

 

NetSales in the Wholesale segment increased $31.6 million, or 13.7%, to $262.7million in the six months ended July 31, 2005 from $231.1 million in thesix months ended July 31, 2004.  NetSales in the Wholesale segment in the quarter ended July 31, 2005,increased $13.0 million, or 12.6%, to $116.3 million from $103.3 million in thesame period a year earlier.  The increasein this segment is largely due to the addition of sales from Edelman andEuro-Decor, which were acquired in September 2004.

 

Net Sales - Catalog & Internet Segment

 

Net Sales in the Catalog &Internet segment for the first six months of fiscal 2006, decreased $6.0million, or 7.8%, to $70.8 million from $76.8 million in the same period a yearearlier.  Net Salesin the Catalog & Internet segment decreased $0.8 million, or 2.3%, to$34.6 million in the quarter ended July 31, 2005, compared with $35.4million in the same period in fiscal 2005. The decline from last year is primarily due to a sales shortfall of theWalter Drake catalog.

 

**GrossProfit**

** **

Gross profit in the first six months of fiscal 2006decreased $21.7 million, or 6.6% to $307.4 million, from $329.1 million in thefirst half of fiscal 2005.  Gross profitmargin decreased from 50.8% in the first half of fiscal 2005 to 47.4% in firsthalf of fiscal 2006.  Gross profitdecreased $7.0 million, or 4.8% from $146.1 million in the quarter ended July 31,2004 to $139.1 million in the quarter ended July 31, 2005.  Gross profit margin decreased from 50.5% forthe second quarter of fiscal 2005 to 47.6% in the second quarter of fiscal2006.  This decline is principally due tothe previously mentioned sales shortfalls in the PartyLite U.S. business, themargins of which are higher than other Blyth businesses, as well as highercommodity costs.

 

16

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**SellingExpense**

** **

Selling expense decreased $5.1 million, or 2.4%,from $208.7 million in the first six months of fiscal 2005, when sellingexpense was 32.2% of net sales, to $203.6 million in the same period in fiscal2006, or 31.4% of net sales.  Sellingexpense decreased $1.8 million, or 1.9%, from $93.6 million in the quarterended July 31, 2004 to $91.8 million in the quarter ended July 31,2005 primarily due to reduced sales.  Asa percent of sales, selling expense was 31.4% in the most recent quartercompared to 32.4% a year earlier primarily due to sales mix.

 

**AdministrativeExpense**

** **

**Administrative expenseincreased $7.6 million, or 11.3%, from $67.1 million in the first six months offiscal 2005 to $74.7 million in the same period of fiscal 2006.  As a percent of sales, administrative expensewas 11.5% in the first half of fiscal 2006 versus 10.4% in the same period lastyear.  Administrative expense increased$4.3 million or 12.8% from $33.5 million in the quarter ended July 31,2004 to $37.8 million in quarter ended July 31, 2005.  As a percent of sales, administrative expensewas 12.9% in the second quarter of fiscal 2006 versus 11.6% in the same periodlast year.  Administrative expensesprimarily increased due to the acquisitions of Edelman and Euro-Decor, whichwere acquired in the third quarter of fiscal 2005.**

** **

**OperatingProfit**

** **

Operating profit decreased $24.2 million, or 45.4%, from $53.3 million inthe first six months of fiscal 2005 to $29.1 million in the same period offiscal 2006.  Operating profit decreased$9.5 million, or 50.0%, from $19.0 million in the quarter ended July 31,2004 to $9.5 million in the quarter ended July 31, 2005.  The previously mentioned sales shortfalls inthe Direct Selling segment, planned seasonal losses for Edelman and Euro-Decorand investments in organic strategic initiatives are the primary reasons forthe decrease in operating profit, which more than offset the reversal of thecontingent reserve of $5.5 million for the settlement of an unclaimed propertymatter in the quarter.

 

Operating Profit - DirectSelling Segment

 

Operating profit in the Direct Sellingsegment****forthe first six months of fiscal 2006, decreased $14.2 million, or 22.5%, to$48.9 million from $63.1 million in the same period a year earlier.  Operating profit in thequarter ended July 31, 2005 in the Direct Selling segment decreased $4.2million, or 16.7%, to $20.9 million when compared to $25.1 million in the sameperiod a year earlier.  As noted above,the decreased profitability resulted from sales shortfalls in PartyLite’s U.S.operations, as well as continued investments in organic strategic initiatives,which more than offset the unclaimed property settlement.

 

Operating Loss - Wholesale Segment

 

Operatingloss in the Wholesale segment was $15.5 million in the six months ended July 31,2005 compared to a loss of $6.9 million in the six months ended July 31,2004.  Operating loss in thequarter ended July 31, 2005in the Wholesale segment was $8.8 million versus a loss of $4.3 million thesame period a year earlier.  Edelman andEuro-Decor seasonal losses and continued pressure on gross margins due toincreased raw material costs were primary contributors to the operating loss inthis segment.

 

17

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Operating Loss - Catalog & Internet Segment

 

Operating loss in theCatalog & Internet****segmentwas $4.3 million in the six months ended July 31, 2005 compared to a lossof $2.8 million in the six months ended July 31, 2004.  Operating loss in the quarter ended July 31, 2005 in the Catalog & Internet segmentwas $2.6 million versus a loss of $1.8 million in the same period a yearearlier.  Operating loss was above prioryear primarily due to the impact of reduced sales of the Walter Drake catalog.

 

**InterestExpense**

** **

Interest expense increased approximately $0.4million from $10.3 million in the first six months of fiscal 2005 to $10.7million in the same period of fiscal 2006. Interest expense increased $0.6 million from $5.0 million in the quarterended July 31, 2004 to $5.6 million in the quarter ended July 31,2005.  This increase is due to a higherinterest rate on revolver borrowings and lower cash balances.

 

**IncomeTaxes**

** **

Income tax expense decreased $12.7 million, or73.8%, from $17.2 million in the first six months of fiscal 2005 to $4.5million in the same period in the current fiscal year.  Income tax expense decreased $4.5 million, or90.0%, from $5.0 million in the quarter ended July 31, 2004 to $0.5million in quarter ended July 31, 2005. The effective tax rate for the quarter ended July 31, 2005 wasapproximately 12.2% compared to 35.0% in the second quarter of fiscal2005.  These decreases are primarily dueto the decrease in U.S. earnings versus higher foreign sourced earnings, whichare taxed at a lower rate than U.S. earnings and an adjustment to bring theyear-to-date income tax expense to the projected estimated full year effectiverate of 25.0%.

 

**NetEarnings**

** **

As a result of the foregoing, net earnings decreased$13.0 million, or 48.0%, from $27.1 million in the first six months of fiscal2005 to $14.1 million for the same period in fiscal 2006.  Net earnings decreased $5.2 million, or55.3%, from $9.4 million in the second quarter of fiscal 2005 to $4.2 millionin the second quarter of fiscal 2006.

 

Basic earnings per share based on the weightedaverage number of shares outstanding for the six months ended July 31,2005, were $0.34, a decrease of $0.26, or 43.3%, compared to $0.60 for the sixmonths ended July 31, 2004.  Basicearnings per share for the quarter ended July 31, 2005, were $0.10, adecrease of $0.11, or 52.4%, compared to $0.21 for the quarter ended July 31,2004.  Diluted earnings per share basedon the potential dilution that could occur if options to issue common stockwere exercised, were $0.34 for the six months ended July 31, 2005,compared to $0.59 for the same period last year, a decrease of $0.25, or42.4%.  Diluted earnings per share were$0.10 for the quarter ended July 31, 2005, compared to $0.21 for the sameperiod last year, a decrease of $0.11, or 52.4%.

 

18

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**Liquidityand Capital Resources**

** **

Net cash used in operations increased to $68.2million in the first six months of fiscal 2006 from $42.6 million in the sameperiod of fiscal 2005.  The increase incash used in operations in fiscal 2006 was primarily due to the reduction innet earnings.

 

Capital expenditures for property, plant andequipment were $7.4 million in the six months ended July 31, 2005 comparedto $8.9 million in the prior year period. Capital expenditures consisted primarily of investments in informationtechnology and upgrades of equipment and facilities.  The Company expects total capital spending ofapproximately $20.0 million for fiscal 2006.

 

On June 2, 2005, the Company replaced its prior$200 million credit facility with a new $150 million unsecured revolving creditfacility having a five year term (the “Credit Facility”).  The Company has the ability to increase theCredit Facility, under certain circumstances, by an additional $50million.  The Credit Facility may be usedfor seasonal working capital needs and general corporate purposes, includingstrategic acquisitions.  The CreditFacility contains, among other provisions, requirements for maintaining certainfinancial ratios and limitations on certain payments.  Amounts outstanding under the Credit Facilitybear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate orat the Eurocurrency rate plus a credit spread ranging from 0.360% to 0.800%,calculated on the basis of the Company’s senior unsecured long-term debtrating.  On July 31, 2005,approximately $46.8 million (including letters of credit) was outstanding underthe Credit Facility.

 

As of July 31, 2005, the Company had a total of$15.0 million available under an uncommitted bank line of credit with LaSalleBank National Association, which matures in June 2006.  Amounts outstanding under the line of creditbear interest at prime or LIBOR plus 0.90%. No amounts were outstanding under the uncommitted line of credit at July 31,2005.

 

At July 31, 2005, the Company had a total of$10.0 million available under an uncommitted line of credit with Bank ofAmerica to be used for letters of credit. At July 31, 2005, approximately $2.8 million of letters of creditwere outstanding under this credit line.

 

As of June 30, 2005,The Gies Group (“Gies”) had available lines of credit of approximately $32.4million of which approximately $2.0 million was outstanding.  The amounts outstanding under the lines ofcredit bear interest at a weighted average rate of 2.9% at June 30,2005.  The lines of credit are renewedannually.

 

As of June 30, 2005, Kaemingk had availablelines of credit of approximately $33.3 million with ING Bank N.V.  The lines of credit are collateralized bycertain real estate and equipment owned by Kaemingk.  $4.6 million was outstanding at June 30,2005.

 

As of June 30, 2005,Colony Gift Corporation Limited (“Colony”) had a $9.0 million short-termrevolving credit facility with Barclays Bank, which matures in August 2006.  Colony had borrowings under the creditfacility of approximately $1.4 million, at a weighted average interest rate of6.4%, as of June 30, 2005.

 

As of June 30, 2005, Edelman B.V. andEuro-Decor B.V. had available lines of credit of approximately $30.3 millionwith ABN Amro Bank N.V.  The lines ofcredit are collateralized by inventory and receivables owned by Edelman B.V.and Euro-Decor B.V.  At June 30,2005, approximately $6.3 million was outstanding at a weighted average interestrate of 2.9%.

 

At July 31, 2005, MilesKimball had approximately $9.7 million of long-term debt outstanding under areal estate mortgage note payable to John Hancock Life Insurance Company, whichmatures June 1, 2020.  Under theterms of the note, payments of principal and interest are required monthly at afixed interest rate of 7.89%.

 

19

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At June 30, 2005, Kaemingk had approximately$7.3 million of long-term debt outstanding under six loans with ING Bank N.V.at a weighted average interest rate of 5.0%. The bank loans have maturity dates ranging from 2008 through 2020.  The loans are collateralized by certain realestate and equipment owned by Kaemingk.

 

In July 1995, the Company privately placed$25.0 million aggregate principal amount of 7.54% Senior Notes due 2005.  The final payment on the notes was made on June 30,2005.

 

In May 1999, the Company filed a shelfregistration statement for issuance of up to $250.0 million in debt securitieswith the Securities and Exchange Commission. On September 24, 1999, the Company issued $150.0 million of 7.90%Senior Notes due October 1, 2009 at a discount of approximately $1.4million, which is being amortized over the life of the notes.  Such notes contain, among other provisions,restrictions on liens on principal property or stock issued to collateralizedebt.  At July 31, 2005, the Companywas in compliance with such provisions. Interest is payable semi-annually in arrears on April 1 and October 1.  On October 20, 2003, the Company issued$100.0 million 5.50% Senior Notes due on November 1, 2013 at a discount ofapproximately $0.2 million, which is being amortized over the life of thenotes.  Such notes contain provisions andrestrictions similar to those in the 7.90% Senior Notes.  At July 31, 2005, the Company was incompliance with such provisions. Interest is payable semi-annually in arrears on May 1 and November 1.  The notes may be redeemed in whole or in partat any time at a specified redemption price. The proceeds of the debt issuance were used for general corporatepurposes.

 

At July 31, 2005, CBK had $4.5 million oflong-term debt outstanding under an Industrial Revenue Bond (“IRB”), whichmatures on January 1, 2025.  Thebond is backed by an irrevocable letter of credit issued by La Salle Bank NationalAssociation.  The loan is collateralizedby certain of CBK’s assets.  The amountoutstanding under the IRB bears interest at short-term floating rates, whichequaled a weighted average interest rate of 3.5% at July 31, 2005.  Payments of principal are required annuallyand interest payments are required monthly under the terms of the bond.

 

The Company’s Board of Directors has authorized theCompany to repurchase up to 6,000,000 shares of common stock under the Company’sshare repurchase program.  Since January 31,2005, the Company has purchased an additional 65,000 shares on the open marketfor a cost of $2.1 million, bringing the cumulative total purchased shares to4,626,800 as of July 31, 2005 for a total cost of approximately $114.5million.  The acquired shares are held ascommon stock in treasury at cost.

 

**On June 7, 2004, theCompany announced that its Board of Directors approved a repurchase of up to4,000,000 outstanding shares of the Company’s common stock, with the right torepurchase up to an additional 2% of the Company’s outstanding shares, at aprice per share not greater than $35.00 nor less than $30.00 through a Dutchauction cash tender offer.  The finalnumber of shares repurchased under the tender offer, which expired on July 9,2004, was 4,906,616 shares for an aggregate purchase price of $172.6 millionincluding fees and expenses.  The tenderoffer was funded with $86.1 million of available cash and $86.5 million ofborrowings against our prior $200 million credit facility.**

** **

**On September 8, 2005,the Company announced that it had declared a cash dividend of $0.23 per shareof common stock for the six months ended July 31, 2005.  The dividend authorized at the Company’s September 8,2005 Board of Directors meeting, is payable to shareholders of record as of November 1,2005, and will be paid on November 15, 2005.**

** **

**CriticalAccounting Policies**

** **

There were no changes to our critical accountingpolicies in the second quarter of fiscal 2006. For a discussion of the Company’s critical accounting policies see ourAnnual Report on Form 10-K for the fiscal year ended January 31,2005.

 

20

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**RecentAccounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (SFAS No. 123R), “Share-Based Payment”. This Standardrequires companies to measure share-based payments at grant-date fair value andrecognize the compensation expense in their financial statements.  While we previously adopted, for disclosurepurposes only, the fair value based method of accounting pursuant to SFAS No. 123,“Accounting for Stock Based Compensation”, SFAS No. 123R requires aforfeiture assumption for our unvested awards. Additionally, SFAS No. 123Ramends the presentation of the statement of cash flows and requires additionalannual disclosures.  We will apply theprovisions of this standard using the modified prospective method for theunvested portion of previously issued awards that remain outstanding at February 1,2006.  The Company is still analyzing theeffect of this standard, however, management does not believe theimplementation of this standard will have a material impact on the financialstatements.

 

21

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**Item 3.** QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

** **

**MarketRisk**

** **

The Company has operations outside of the UnitedStates and sells its products worldwide. The Company’s activities expose it to a variety of market risks,including the effects of changes in foreign currency exchange rates, interestrates and commodity prices.  Thesefinancial exposures are actively monitored and, where considered appropriate,managed by the Company.

 

**InterestRate Risk**

** **

As of July 31, 2005, the Company is subject tointerest rate risk on approximately $64.8 million of variable rate debt.  Each 1-percentage point change in theinterest rate would impact pre-tax earnings by approximately $0.6 million ifapplied to the total.

 

On July 10, 2003, the Company terminated theinterest rate swap agreement in relation to $50.0 million of our outstanding7.90% Senior Notes, which mature on October 1, 2009.  This termination resulted in a deferred gainof approximately $5.0 million, which is being amortized over the remaining termof the Notes.

 

**ForeignCurrency Risk**

** **

The Company uses foreignexchange forward and options contracts to hedge the impact of foreign currencyfluctuations on foreign denominated inventory purchases, intercompany payablesand certain intercompany loans.  TheCompany does not hold or issue derivative financial instruments for tradingpurposes.

 

The Company has designated its forward exchange andoptions contracts on forecasted intercompany purchases and future purchasecommitments as cash flow hedges and, as such, as long as the hedge remainseffective and the underlying transaction remains probable, the effectiveportion of the changes in the fair value of these contracts will be recorded inaccumulated other comprehensive income (loss) (“OCI”) until earnings areaffected by the variability of the cash flows being hedged.  With regard to commitments for inventorypurchases, upon payment of each commitment, the underlying forward contract isclosed and the corresponding gain or loss is transferred from accumulated OCIand is included in the measurement cost of the acquired asset.  If a hedging instrument is sold or terminatedprior to maturity, gains and losses are deferred in accumulated OCI until thehedged item is settled.  However, if thehedged item is no longer likely to occur, the resultant gain or loss on theterminated hedge is recognized into earnings immediately.  Approximately $1.1 million of hedge gains areincluded in accumulated OCI at July 31, 2005, and are expected to betransferred into earnings within the next twelve months upon payment of theunderlying commitment.

 

The Company has designated its foreign currencyforward contracts related to intercompany loans as fair value hedges.  The gains or losses on the fair value hedgesare recognized into earnings and generally offset the transaction gains orlosses in the foreign denominated loans that they are intended to hedge.

 

For consolidated financial statement presentation,net cash flows from such hedges are classified in the categories of the cashflow with the items being hedged.

 

22

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The following table provides information about the Company’s foreignexchange forward and options contracts at July 31, 2005:

 
| ** **                                       | ** ** | **U.S. Dollar**     | ** ** | **Average**       | ** ** | **Estimated**  | ** ** |
|--------------------------------------------------|------------|---------------------|------------|-------------------|------------|----------------|------------|
| **(In thousands, except average contract rate)** | ** ** | **Notional Amount** | ** ** | **Contract Rate** | ** ** | **Fair Value** | ** ** |
| Canadian Dollar                                  |       | $                   | 5,500      |              | 0.85       |           | $          | (38 | ) |
| Pound Sterling                                   |       | 7,744               |       | 1.80              |       | 99             |       |
| Euro                                             |       | 28,175              |       | 1.28              |       | 1,458          |       |
|                                             |       | $                   | 41,419     |              |       |           | $          | 1,519 |   |

 

The foreign exchange contracts outstandinghave maturity dates through 2006.

 

23

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**Item 4.** CONTROLS ANDPROCEDURES

** **

(a) Evaluation ofdisclosure controls and procedures.

 

Our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or15d-15(e)) as of the end of the period covered by this quarterly report asrequired by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principalexecutive officer and our principal financial officer have concluded that ourdisclosure controls and procedures are effective as of July 31, 2005.

 

(b) Remediation ofmaterial weakness.

 

As discussed in Item 9A.Controls and Procedures-Management’s Report on Internal Control over FinancialReporting in our Form 10-K, as of January 31, 2005, there was amaterial weakness in our internal control over financial reporting related toour income tax accounting and reconciliation processes, procedures andcontrols, including the identification of income tax contingencies.  In fiscal 2005, and through the date of thisfiling, we have taken the following steps to improve our internal controlsaround our income tax accounting and reconciliation processes, procedures andcontrols:

 

•                                          Enhanced thelevels of review in and accelerated the timing of the preparation of thequarterly and annual income tax provision;

 

•                                          Formalizedprocesses, procedures and documentation standards relating to income taxprovisions;

 

•                                          Enhanced andrestructured our Tax Department to ensure appropriate segregation of dutiesregarding preparation and review of the quarterly and annual income tax provision;and

 

•                                          Engaged Ernst &Young LLP to assist the Company in its accounting for income taxes.

 

We believe we have takensteps necessary to remediate this material weakness relating to our income taxaccounting and reconciliation processes, procedures and controls, however,certain of the corrective processes, procedures and controls relate to annualcontrols that cannot be tested until the preparation of our 2006 annual incometax provision.  Accordingly, we will continueto monitor the effectiveness of our internal controls over financial reportingrelated to the accounting for income taxes and will make any further changesmanagement determines appropriate.

 

(c) Changes in internalcontrol over financial reporting.

 

Other than the changediscussed in (b) above, there have been no changes in our internal controlover financial reporting identified in connection with the evaluation requiredby paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurredduring our last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

24

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**Part II.**  OTHER INFORMATION

** **

**Item 1.**           Legal Proceedings

** **

None.

 

**Item 2.**           Unregistered Sales ofEquity Securities and Use of Proceeds

** **

The following table sets forth certain informationconcerning the repurchase of the Company’s Common Stock made by the Companyduring the second quarter of the fiscal year ending January 31, 2006.

 

##### **ISSUER PURCHASES OF EQUITYSECURITIES(1)**

 
| **Period**                                  | ** ** | **(a) Total   Number of   Shares   Purchased** | ** ** | **(b)  Average   Price Paid   per Share** | ** ** | **(c) Total   Number of   Shares   Purchased as   Part of Publicly   Announced   Plans or   Programs** | ** ** | **(d) Maximum Number (or   Approximate Dollar   Value) of Shares that May   Yet Be Purchased Under   the Plans or Programs** | ** **       |
|---------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------------|
| May 1, 2005 – May 31, 2005   |       | 0                                                   |       | $                                         | 0          |                                                                                                             | 0          |                                                                                                                                   | 1,373,200 shares |   |
| June 1, 2005 – June 30, 2005 |       | 0                                                   |       | $                                         | 0          |                                                                                                             | 0          |                                                                                                                                   | 1,373,200 shares |   |
| July 1, 2005 – July 31, 2005 |       | 0                                                   |       | $                                         | 0          |                                                                                                             | 0          |                                                                                                                                   | 1,373,200 shares |   |
| Total                                       |       | 0                                                   |       | $                                         | 0          |                                                                                                             | 0          |                                                                                                                                   | 1,373,200 shares |   |

 

_____________________________

(1) On September 10,1998, the Company’s Board of Directors approved the Company’s share repurchaseprogram (the “Repurchase Program”) pursuant to which the Company was authorizedto repurchase up to 1,000,000 shares of its issued and outstanding Common Stockin open market transactions.  On June 8,1999, the Company’s Board of Directors amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 1,000,000shares, from 1,000,000 to 2,000,000 shares. On March 30, 2000, the Company’s Board of Directors further amendedthe Repurchase Program and increased the number of shares of Common Stock to berepurchased by 1,000,000 shares, from 2,000,000 to 3,000,000 shares.  On December 14, 2000, the Company’sBoard of Directors further amended the Repurchase Program and increased thenumber of shares of Common Stock to be repurchased by 1,000,000 shares, from3,000,000 to 4,000,000 shares.  On April 4,2002, the Company’s Board of Directors further amended the Repurchase Programand increased the number of shares of Common Stock to be repurchased by2,000,000 shares, from 4,000,000 to 6,000,000 shares.  As of July 31, 2005, the Company haspurchased a total of 4,626,800 shares of Common Stock under the RepurchaseProgram.  The Repurchase Program does nothave an expiration date.  The Companyintends to make further purchases under the Repurchase Program.

 

25

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**Item 3.**           Defaults upon SeniorSecurities

** **

None

 

**Item 4.**           Submission of Mattersto a Vote of Security Holders

** **

The following matters were voted upon at the AnnualMeeting of Stockholders held on June 8, 2005, and received the votes setforth below:

 

1)              Eachof the following persons nominated was elected to serve as director andreceived the number of votes set forth opposite their name.

 
| ** **       | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstentions** | ** ** |
|------------------|------------|------------|------------|-------------|------------|--------------|------------|-----------------|------------|
| John W. Burkhart |       | 38,289,434 |       | 0           |       | 893,253      |       | 0               |       |
| Wilma H. Jordan  |       | 38,532,442 |       | 0           |       | 650,245      |       | 0               |       |
| Jim McTaggart    |       | 38,533,530 |       | 0           |       | 649,157      |       | 0               |       |

 

Inaddition to the directors elected at the meeting, the directors of the Companywhose terms of office continued after the meeting are:  Roger A. Anderson, Robert B. Goergen, PamelaM. Goergen, Neal I. Goldman, Carol J. Hochman and Howard E. Rose.

 

2)              Aproposal to ratify the appointment of Deloitte & Touche LLP asindependent auditors received 38,868,391 votes for, 257,815 votes against, 0votes withheld and 56,481 abstentions.

 

**Item 5.****           Other Information**

 

The Company is including the following cautionarystatement in this Report to make applicable, and to take advantage of, the safeharbor provisions of the Private Securities Litigation Reform Act of 1995 forany forward-looking statements made by, or on behalf of, the Company.  Forward-looking statements include statementsconcerning plans, objectives, goals, strategies, future events or performanceand underlying assumptions and other statements, which are other than statementsof historical facts.  From time to time,the Company and its representatives may publish or otherwise make availableforward-looking statements of this nature. All such forward-looking statements, whether written or oral, andwhether made by or on behalf of the Company, are expressly qualified by thefollowing cautionary statements. Forward-looking statements involve risks and uncertainties, which couldcause actual results or outcomes to differ materially from those expressed inthe forward-looking statements.  Suchforward-looking statements are expected to be based on various assumptions,many of which are based, in turn, upon further assumptions.

 

There can be no assurance that management’sexpectations, beliefs or projections will occur or be achieved oraccomplished.  In addition to otherfactors and matters discussed elsewhere in this Report and in the Company’sother public filings and statements, the following are important factors that,in the view of the Company, could cause actual results to differ materiallyfrom those discussed in the Company’s forward-looking statements.  The Company disclaims any obligation toupdate any forward-looking statements, or the following factors, to reflectevents or circumstances after the date of this Report.

 

26

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Risk of Inability to Maintain Sales Growth Rate

 

TheCompany has experienced significant sales growth in past years.  While management expects continued growth,our future growth rate will likely be less than our historical growth rate.  The Company expects faster sales growth inits international market versus its United States market.  The Company’s ability to increase salesdepends on numerous factors, including market acceptance of existing products,the successful introduction of new products, growth of consumer discretionaryspending, the ability to recruit new independent sales consultants, sourcing ofraw materials and demand-driven increases in production and distributioncapacity.  Business in all of oursegments is driven by consumer preferences. Accordingly, there can be no assurances that the Company’s current orfuture products will maintain or achieve market acceptance.  Our sales and earnings results can benegatively impacted by the worldwide economic environment, particularly theCanadian, United States and European economies. There can be no assurances that the Company’s financial results will notbe materially adversely affected by these factors in the future.

 

The Company’s historical growth has been due in partto acquisitions and management continues to consider additional strategicacquisitions.  There can be no assurancesthat management will continue to identify suitable acquisition candidates,consummate acquisitions on terms favorable to the Company, finance acquisitionsor successfully integrate acquired operations.

 

Risks Associated with International Sales andForeign-Sourced Products

 

Our international sales growth rate has outpaced ourUnited States growth rate in recent years. Moreover, the Company sources a portion of its products in all of itsbusiness segments from independent manufacturers in the Pacific Rim, Europe andMexico.  For these reasons, we aresubject to the following risks associated with international manufacturing andsales:  fluctuations in currency exchangerates, economic or political instability, international public heath crises,transportation costs and delays, difficulty in maintaining quality control,restrictive governmental actions, nationalizations, the laws and policies ofthe United States, Canada and certain European countries affecting theimportation of goods (including duties, quotas and taxes) and the trade and taxlaws of other nations.

 

Ability to Respond to Increased Product Demand

 

The Company’s ability to meet future product demandin all of its business segments will depend upon its success in (1) sourcingadequate supplies of its products, (2) bringing new production anddistribution capacity on line in a timely manner, (3) improving itsability to forecast product demand and fulfill customer orders promptly, (4) improvingcustomer service-oriented management information systems and (5) training,motivating and managing new employees. The failure of any of the above could result in a material adverseeffect on our financial results.

 

Risk of Shortages of Raw Materials

 

Certain raw materials could be in short supply dueto price changes, capacity, availability, a change in requirements, weather orother factors, including supply disruptions due to production or transportationdelays.  Such shortages have not had andare not presently expected to have a material adverse effect on the Company’soperations.  While the price of crude oilis only one of several factors impacting the price of petroleum wax, it ispossible that recent fluctuations in oil prices may have a material adverseaffect on the cost of petroleum-based products used in the manufacture ortransportation of our products, particularly in the Direct Selling andWholesale business segments.

 

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Dependence on Key Corporate Management Personnel

 

Our success depends in part on the contributions ofkey corporate management, including our Chairman and Chief Executive Officer,Robert B. Goergen, as well as the members of the Office of the Chairman:  Robert H. Barghaus, Vice President and ChiefFinancial Officer; Bruce G. Crain, Senior Vice President and PresidentWholesale Group; Robert B. Goergen, Jr., Vice President and President,Catalog & Internet Group; and Frank P. Mineo, Senior Vice Presidentand President, Direct Selling Group.  TheCompany does not have employment contracts with any of its key corporatemanagement personnel except the Chairman and Chief Executive Officer, nor doesit maintain any key person life insurance policies.  The loss of any of the key corporatemanagement personnel could have a material adverse effect on the Company.

 

Risk of Increased Competition

 

Our business is highly competitive both in terms ofpricing and new product introductions.  Theworldwide market for Home Expressions products is highly fragmented withnumerous suppliers serving one or more of the distribution channels served bythe Company.  In addition, the Companycompetes for direct selling consultants with other direct sellingcompanies.  Because there are relativelylow barriers to entry in all of our business segments, the Company may faceincreased competition from other companies, some of which may havesubstantially greater financial or other resources than those available tous.  Competition includes companiesselling candles manufactured at low cost outside of the United States.  Moreover, certain competitors focus on asingle geographic or product market and attempt to gain or maintain marketshare solely on the basis of price.

 

# **RisksRelated to Information Technology Systems**

# ** **

Our information technology systems are dependent onglobal communications providers, telephone systems, hardware, software andother aspects of Internet infrastructure that have experienced significantsystem failures and outages in the past. Our systems are susceptible to outages due to fire, floods, power loss,telecommunications failures, break-ins and similar events.  Despite the implementation of networksecurity measures, the Company’s systems are vulnerable to computer viruses,break-ins and similar disruptions from unauthorized tampering with Companysystems.  The occurrence of these orother events could disrupt or damage our information technology systems andinhibit internal operations, the ability to provide customer service or theability of customers or sales personnel to access the Company’s informationsystems.

 

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**Item 6.**           Exhibits

** **

Exhibits

 
| 31.1   |   | Certification of Chairman and Chief Executive  Officer pursuant to Rule 13a-14(a) under the Securities Exchange  Act of 1934.       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| 31.2   |   | Certification of Vice President and Chief Financial  Officer pursuant to Rule 13a-14(a) under the Securities Exchange  Act of 1934. |
|   |   |                                                                                                                                          |
| 32.1   |   | Certification  of Chairman and Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                       |
|   |   |                                                                                                                                          |
| 32.2   |   | Certification  of Vice President and Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                 |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |   |                   | BLYTH, INC.                                 |                                  |
|--------|--------|------------------------|---------------------------------------------|---------------------------------------|
|   |   |                   |                                        |                                  |
|   |   |                   |                                        |                                  |
|   | Date:  | September 9, 2005 |                                        | By:                                   | /s/Robert B.  Goergen |   |
|   |   |                   |                                        | Robert B.  Goergen                    |   |
|   |   |                   |                                        | Chairman and  Chief Executive Officer |
|   |   |                   |                                        |                                  |   |
|   |   |                   |                                        |                                  |   |
|   | Date:  | September 9, 2005 |                                        | By:                                   | /s/Robert H.  Barghaus |   |
|   |   |                   | Robert H.  Barghaus                         |                                  |
|   |   |                   | Vice President  and Chief Financial Officer |

 

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