**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-Q/A**

**(Amendment No. 3)**

 

**(MarkOne)**

 
| **ý** |       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **For the quarterly period ended July 31, 2003**                                                    |
|       |       |                                                                                                     |
| **or**     |
|       |       |                                                                                                     |
| o          |       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from                    to                   **

 

**Commission file number 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)

 

#### **Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

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 Exchange Act Rule 12b-2).

Yes  ý                                  No  o

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

**45,521,877 Common Shares as of August 29,2003**

 

 

----

 

#### **Explanatory**Note

 

In our filing on Form 10-Q/AAmendment No. 2 for the quarter ended July 31, 2003 filed with theSecurities and Exchange Commission on December 16, 2004 we disclosed thatthe interim financial statements included therein had not been reviewed by anindependent registered public accounting firm, as required by Section 10-01(d) ofRegulation S-X.  This Form 10-Q/AAmendment No. 3 is being filed to remedy that deficiency. This amendedquarterly report has not required any change to the Consolidated FinancialStatements except for a restatement of the Consolidated Statements of CashFlows as discussed in Note 2 to more properly reflect the impact of foreigncurrency exchange rates on cash for fiscal 2003 and fiscal 2004.  No attempt has been made in this Form 10-Q/Ato modify or update any disclosures except as required to reflect the resultsof the restatements discussed above. This Form 10-Q/A does not reflectevents occurring after the filing of the original Form 10-Q or modify orupdate those disclosures affected by subsequent events unless specificallynoted.

** **

**2**

----

 

**BLYTH, INC.**

 

#### **INDEX**

 
| Form 10-Q  Cover Page |                    |
|----------------------------|-------------------------|
|                       |                    |   |   |
| Explanatory Note           |                    |
|                       |                    |   |   |
| Form 10-Q Index       |                    |
|                       |                    |   |   |
| Part I.               | Financial  Information: |   |
|                       |                    |   |   |
|                       | Item 1.                 | Financial Statements: |   |
|                       |                    | Consolidated  Balance Sheets |   |
|                       |                    |   |   |
|                       |                    | Consolidated Statements of  Earnings |   |
|                       |                    |   |   |
|                       |                    | Consolidated  Statements of Stockholders’ Equity |   |
|                       |                    |   |   |
|                       |                    | Consolidated  Statements of Cash Flows |   |
|                       |                    |   |   |
|                       |                    | Notes to Consolidated  Financial Statements |   |
|                       |                    |   |   |
|                       | Item 2.                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                       |                    |   |   |
|                       | Item 4.                 | Controls  and Procedures |   |
|                       |                    |   |   |
| Part II.              | Other  Information      |   |
|                       |                    |   |   |
|                       | Item  5.                | Other  Information |   |
|                       |                    |   |   |
|                       | Item 6.                 | Exhibits |   |
|                       |                    |   |   |
| Signatures                 |                    |   |
|                            |                         |  |  |  |  |

 

3

----

 

Part I.                 FINANCIALINFORMATION

Item I.               FINANCIALSTATEMENTS

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| **(Unaudited, in thousands, except share and per share data)**                                                                 | ** ** | **July 31,  2003** | ** ** | **January 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                     | ** ** | **Restated (Note 2)**   | ** ** | **Restated (Note 2)**      | ** ** |
| **ASSETS**                                                                                                                     |       |                    |       |                       |       |
| **Current assets:**                                                                                                            |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                      |       | $                       | 67,977     |                       | $          | 168,596 |   |
| Accounts receivable, less allowance for doubtful  receivables of $4,163 and $4,093, respectively                               |       | 101,673                 |       | 82,913                     |       |
| Inventories                                                                                                                    |       | 256,121                 |       | 187,935                    |       |
| Prepaid and other                                                                                                              |       | 30,750                  |       | 23,044                     |       |
| Assets held for sale                                                                                                           |       | —                  |       | 690                        |       |
| Deferred income taxes                                                                                                          |       | 16,986                  |       | 14,297                     |       |
| Total current assets                                                                                                           |       | 473,507                 |       | 477,475                    |       |
| **Property, plant and equipment, at cost:**                                                                                    |       |                    |       |                       |       |
| Less accumulated depreciation of $211,296 and  $178,397, respectively                                                          |       | 277,350                 |       | 244,798                    |       |
| **Other assets:**                                                                                                              |       |                    |       |                       |       |
| Investments                                                                                                                    |       | 3,380                   |       | 3,564                      |       |
| Excess of cost over fair value of assets acquired                                                                              |       | 173,095                 |       | 113,534                    |       |
| Other intangible assets, net of accumulated  amortization of $600                                                              |       | 28,719                  |       | 4,219                      |       |
| Deposits and other assets                                                                                                      |       | 12,678                  |       | 16,494                     |       |
|                                                                                                                           |       | 217,872                 |       | 137,811                    |       |
| Total assets                                                                                                                   |       | $                       | 968,729    |                       | $          | 860,084 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                  |       |                    |       |                       |       |
| **Current liabilities:**                                                                                                       |       |                    |       |                       |       |
| Bank lines of credit                                                                                                           |       | $                       | 28,971     |                       | $          | 7,377 |   |
| Current maturities of long-term debt                                                                                           |       | 4,592                   |       | 4,037                      |       |
| Accounts payable                                                                                                               |       | 62,256                  |       | 58,571                     |       |
| Accrued expenses                                                                                                               |       | 72,579                  |       | 80,953                     |       |
| Income taxes                                                                                                                   |       | 2,515                   |       | 2,477                      |       |
| Total current liabilities                                                                                                      |       | 170,913                 |       | 153,415                    |       |
| **Deferred income taxes**                                                                                                      |       | 36,769                  |       | 20,810                     |       |
| **Long-term debt, less current maturities**                                                                                    |       | 210,453                 |       | 165,079                    |       |
| **Minority interest and other**                                                                                                |       | 20,335                  |       | 12,928                     |       |
| **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 49,777,177 shares and 49,703,682 shares, respectively |       | 995                     |       | 994                        |       |
| Additional contributed capital                                                                                                 |       | 103,086                 |       | 101,567                    |       |
| Retained earnings                                                                                                              |       | 521,517                 |       | 496,627                    |       |
| Accumulated other comprehensive income (loss)                                                                                  |       | 1,095                   |       | (4,751                     | )          |
| Treasury stock, at cost, 4,015,300 shares and  3,644,100 shares, respectively                                                  |       | (96,434                 | )          | (86,585                    | )          |
| Total stockholders’ equity                                                                                                |       | 530,259                 |       | 507,852                    |       |
| Total liabilities and stockholders’ equity                                                                                |       | $                       | 968,729    |                       | $          | 860,084 |   |

 

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

 

4

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF EARNINGS**

**(Unaudited)**

 
| **Six months ended July 31****(In  thousands, except per share data)**                                    | ** ** | **2003**   | ** ** | **2002**              | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | ** ** | ** ** | **Restated (note 2)** | ** ** |
| Net sales                                                                                                      |       | $          | 587,259    |                  | $          | 545,917 |   |
| Cost of goods sold                                                                                             |       | 291,311    |       | 263,577               |       |
| Gross profit                                                                                                   |       | 295,948    |       | 282,340               |       |
| Selling                                                                                                        |       | 179,298    |       | 163,642               |       |
| Administrative                                                                                                 |       | 61,673     |       | 54,133                |       |
|                                                                                                           |       | 240,971    |       | 217,775               |       |
| Operating profit                                                                                               |       | 54,977     |       | 64,565                |       |
| Other expense (income):                                                                                        |       |       |       |                  |       |
|  Interest expense                                                                                         |       | 7,102      |       | 7,570                 |       |
|  Interest income and other                                                                                |       | (1,282     | )          | (695                  | )          |
|  Equity in loss of investee                                                                               |       | 199        |       | 190                   |       |
|                                                                                                           |       | 6,019      |       | 7,065                 |       |
|  Earnings before income taxes, minority  interest and cumulative effect of change in accounting principle |       | 48,958     |       | 57,500                |       |
| Income tax expense                                                                                             |       | 18,014     |       | 21,390                |       |
|  Earnings before minority interest and  cumulative effect of change in accounting principle               |       | 30,944     |       | 36,110                |       |
| Minority interest                                                                                              |       | (71        | )          | —                |       |
| Cumulative effect of change in accounting principle,  net of taxes of $2,887                                   |       | —     |       | (31,753               | )          |
|  Net earnings                                                                                             |       | $          | 30,873     |                  | $          | 4,357 |   |
| Basic:                                                                                                         |       |       |       |                  |       |
| Earnings per common share before cumulative effect  of change in accounting principle                          |       | $          | 0.67       |                  | $          | 0.78 |   |
| Cumulative effect of change in accounting principle                                                            |       | —     |       | (0.69                 | )          |
|                                                                                                           |       | $          | 0.67       |                  | $          | 0.09 |   |
| Weighted average number of shares outstanding                                                                  |       | 45,991     |       | 46,310                |       |
|                                                                                                           |       |       |       |                  |       |
| Diluted:                                                                                                       |       |       |       |                  |       |
| Earnings per common share before cumulative effect  of change in accounting principle                          |       | $          | 0.67       |                  | $          | 0.78 |   |
| Cumulative effect of change in accounting principle                                                            |       | —     |       | (0.68                 | )          |
|                                                                                                           |       | $          | 0.67       |                  | $          | 0.10 |   |
| Weighted average number of shares outstanding                                                                  |       | 46,174     |       | 46,591                |       |

 

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

 

5

----

 
| **Three months ended July 31****(In  thousands, except per share data)** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                     |       | $        | 275,268    |     | $          | 268,021 |   |
| Cost of goods sold                                                            |       | 140,716  |       | 130,689  |       |
| Gross profit                                                                  |       | 134,552  |       | 137,332  |       |
| Selling                                                                       |       | 82,229   |       | 75,235   |       |
| Administrative                                                                |       | 31,604   |       | 28,440   |       |
|                                                                          |       | 113,833  |       | 103,675  |       |
| Operating profit                                                              |       | 20,719   |       | 33,657   |       |
| Other expense (income):                                                       |       |     |       |     |       |
|  Interest expense                                                        |       | 3,512    |       | 3,747    |       |
|  Interest income and other                                               |       | (691     | )          | (254     | )          |
|  Equity in loss of investee                                              |       | 64       |       | 218      |       |
|                                                                          |       | 2,885    |       | 3,711    |       |
|  Earnings before income taxes and minority  interest                     |       | 17,834   |       | 29,946   |       |
| Income tax expense                                                            |       | 6,561    |       | 11,140   |       |
|  Earnings before minority interest                                       |       | 11,273   |       | 18,806   |       |
| Minority interest                                                             |       | (27      | )          | —   |       |
|  Net earnings                                                            |       | $        | 11,246     |     | $          | 18,806 |   |
| Basic:                                                                        |       |     |       |     |       |
| Net earnings per common share                                                 |       | $        | 0.25       |     | $          | 0.41 |   |
| Weighted average number of shares outstanding                                 |       | 45,903   |       | 46,330   |       |
|                                                                          |       |     |       |     |       |
| Diluted:                                                                      |       |     |       |     |       |
| Net earnings per common share                                                 |       | $        | 0.24       |     | $          | 0.40 |   |
| Weighted average number of shares outstanding                                 |       | 46,155   |       | 46,710   |       |

 

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

 

6

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Common stock** | ** ** | **Additional  contributed** | ** ** | **Retained** | ** ** | **Treasury stock** | ** ** | **Accumulated  other  comprehensive** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-----------------------------|------------|--------------|------------|--------------------|------------|---------------------------------------|------------|------------|------------|
| **(In thousands, except share data)**                                 | ** ** | **Shares**       | ** ** | **Amount**                  | ** ** | **capital**  | ** ** | **earnings**       | ** ** | **Shares**                            | ** ** | **Amount** | ** ** | **income (loss)** | ** ** | **Total** | ** ** |
| **For the six months ended July 31,  2002:**                     | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **   | ** ** | ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Balance, January 31, 2002                                        |       | 49,509,776       |       | $                           | 990        |         | $          | 97,879             |       | $                                     | 449,038    |       | (2,630,900 | ) | $ | (62,950 | ) | $ | (16,894 | ) | $ | 468,063 |   |
| Net earnings for the period - Restated  (Note 2)                 |       |             |       |                        |       |         |       | 4,357              |       |                                  |       |       |       |   |   | 4,357 |   |
| Foreign currency translation adjustments - Restated  (Note 2)         |       |             |       |                        |       |         |       |               |       |                                  |       |       |       | 6,394 |   | 6,394 |   |
| Unrealized holding losses on certain investments (net  of tax of $20) |       |             |       |                        |       |         |       |               |       |                                  |       |       |       | (34 | ) | (34 | ) |
| Net loss on cash flow hedging instruments (net of tax  of $253)       |       |             |       |                        |       |         |       |               |       |                                  |       |       |       | (427 | ) | (427 | ) |
| Comprehensive income - Restated  (Note 2)                             |       |             |       |                        |       |         |       |               |       |                                  |       |       |       |   |   | 10,290 |   |
| Common stock issued in connection with exercise of stock  options     |       | 149,706          |       | 3                           |       | 2,490        |       |               |       |                                  |       |       |       |   |   | 2,493 |   |
| Tax benefit from stock options                                        |       |             |       |                        |       | 311          |       |               |       |                                  |       |       |       |   |   | 311 |   |
| Dividends                                                             |       |             |       |                        |       |         |       | (5,098             | )          |                                  |       |       |       |   |   | (5,098 | ) |
| Treasury stock purchases                                              |       |             |       |                        |       |         |       |               |       | (712,100                              | )          | (15,709    | )          |   |   | (15,709 | ) |
| Balance, July 31, 2002 - Restated  (Note 2)                      |       | 49,659,482       |       | $                           | 993        |         | $          | 100,680            |       | $                                     | 448,297    |       | (3,343,000 | ) | $ | (78,659 | ) | $ | (10,961 | ) | $ | 460,350 |   |
| **For the six months ended July 31,  2003**                      | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **   | ** ** | ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, January 31, 2003 - Restated (Note 2)                    |       | 49,703,682       |       | $                           | 994        |         | $          | 101,567            |       | $                                     | 496,627    |       | (3,644,100 | ) | $ | (86,585 | ) | $ | (4,751 | ) | $ | 507,852 |   |
| Net earnings for the period                                           |       |             |       |                        |       |         |       | 30,873             |       |                                  |       |       |       |   |   | 30,873 |   |
| Foreign currency translation adjustments - Restated  (Note 2)         |       |             |       |                        |       |         |       |               |       |                                  |       |       |       | 6,266 |   | 6,266 |   |
| Unrealized holding losses on certain investments (net  of tax of $74) |       |             |       |                        |       |         |       |               |       |                                  |       |       |       | (126 | ) | (126 | ) |
| Net loss on cash flow hedging instruments (net of tax  of $171)       |       |             |       |                        |       |         |       |               |       |                                  |       |       |       | (294 | ) | (294 | ) |
| Comprehensive income - Restated  (Note 2)                             |       |             |       |                        |       |         |       |               |       |                                  |       |       |       |   |   | 36,719 |   |
| Common stock issued in connection with exercise of stock  options     |       | 73,495           |       | 1                           |       | 1,419        |       |               |       |                                  |       |       |       |   |   | 1,420 |   |
| Tax benefit from stock options                                        |       |             |       |                        |       | 100          |       |               |       |                                  |       |       |       |   |   | 100 |   |
| Dividends                                                             |       |             |       |                        |       |         |       | (5,983             | )          |                                  |       |       |       |   |   | (5,983 | ) |
| Treasury stock purchases                                              |       |             |       |                        |       |         |       |               |       | (371,200                              | )          | (9,849     | )          |   |   | (9,849 | ) |
| Balance, July 31, 2003 - Restated  (Note 2)                      |       | 49,777,177       |       | $                           | 995        |         | $          | 103,086            |       | $                                     | 521,517    |       | (4,015,300 | ) | $ | (96,434 | ) | $ | 1,095 |   | $ | 530,259 |   |

 

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

 

7

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| **Six months ended July 31 (In thousands)**                                      | ** ** | **2003**              | ** ** | **2002**              | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **Restated (note 2)** | ** ** | **Restated (note 2)** | ** ** |
| Cash flows from operating activities:                                                 |       |                  |       |                  |       |
| Net earnings                                                                          |       | $                     | 30,873     |                  | $          | 4,357 |   |
| Adjustments to reconcile net earnings to net cash used  in operating activities:      |       |                  |       |                  |       |
| Cumulative effect of change in accounting principle,  net of tax                      |       | —                |       | 31,753                |       |
| Depreciation and amortization                                                         |       | 16,633                |       | 15,134                |       |
| Loss on fixed asset disposal                                                          |       | (190                  | )          | —                |       |
| Tax benefit from stock options                                                        |       | 100                   |       | 311                   |       |
| Deferred income taxes                                                                 |       | 119                   |       | 1,812                 |       |
| Equity in loss of investee                                                            |       | 199                   |       | 190                   |       |
| Minority interest                                                                     |       | 71                    |       | —                |       |
| Gain on sales of long-term investment                                                 |       | (497                  | )          | —                |       |
| Changes in operating assets and liabilities, net of effect  of business acquisitions: |       |                  |       |                  |       |
| Accounts receivable                                                                   |       | (13,640               | )          | (14,593               | )          |
| Inventories                                                                           |       | (33,285               | )          | (31,854               | )          |
| Prepaid and other                                                                     |       | 1,489                 |       | (8,443                | )          |
| Deposits and other assets                                                             |       | 22                    |       | (142                  | )          |
| Accounts payable                                                                      |       | (6,009                | )          | 1,670                 |       |
| Accrued expenses                                                                      |       | (14,397               | )          | (9,145                | )          |
| Other liabilities                                                                     |       | 1,542                 |       | 1,463                 |       |
| Income taxes                                                                          |       | (4,011                | )          | (2,020                | )          |
| Total adjustments                                                                     |       | (51,854               | )          | (13,864               | )          |
| Net cash used in operating activities                                                 |       | (20,981               | )          | (9,507                | )          |
| Cash flows from investing activities:                                                 |       |                  |       |                  |       |
| Purchases of property, plant and equipment                                            |       | (9,525                | )          | (9,624                | )          |
| Purchases of long-term investment                                                     |       | (1,377                | )          | —                |       |
| Proceeds from sales of long term investment                                           |       | 1,874                 |       | —                |       |
| Cash impact of Wax Lyrical receivership                                               |       | 1,902                 |       | —                |       |
| Purchase of businesses, net of cash acquired                                          |       | (94,736               | )          | (51,010               | )          |
| Net cash used in investing activities                                                 |       | (101,862              | )          | (60,634               | )          |
| Cash flows from financing activities:                                                 |       |                  |       |                  |       |
| Proceeds from issuance of common stock                                                |       | 1,420                 |       | 2,493                 |       |
| Purchases of treasury stock                                                           |       | (9,849                | )          | (15,709               | )          |
| Borrowings from bank line of credit                                                   |       | 20,095                |       | 36,452                |       |
| Repayments on bank line of credit                                                     |       | (8,368                | )          | (21,892               | )          |
| Borrowings on long-term debt                                                          |       | 30,678                |       | 517                   |       |
| Repayments of long-term debt                                                          |       | (3,853                | )          | (3,880                | )          |
| Dividends paid                                                                        |       | (5,983                | )          | (5,098                | )          |
| Net cash provided by (used in) financing activities                                   |       | 24,140                |       | (7,117                | )          |
| Effect of exchange rate changes on cash                                               |       | (1,916                | )          | (3,127                | )          |
| Net decrease in cash and cash equivalents                                             |       | (100,619              | )          | (80,385               | )          |
| Cash and cash equivalents at beginning of period                                      |       | 168,596               |       | 135,357               |       |
| Cash and cash equivalents at end of period                                            |       | $                     | 67,977     |                  | $          | 54,972 |   |

 

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

 

8

----

 

**BLYTH, INC. ANDSUBSIDIARIES**

**NOTESTO** CONSOLIDATED FINANCIAL STATEMENTS

**(Unaudited)**

 

**1.**                                      Basis of Presentation

 

Blyth is a global competitor in the gift anddecorative accessories market, which the Company calls the Home Expressionscategory.  Within this category, theCompany reports its financial results in five segments – the Direct Sellingsegment, the Wholesale Home Fragrance segment, the Wholesale CreativeExpressions segment, the Catalog & Internet segment, and the All Othersegment.  Miles Kimball, acquired in April 2003is included in the Catalog & Internet segment.  Kaemingk, acquired in June 2003, isincluded in the Wholesale Home Fragrance segment.  Prior to January 31, 2004, the Companyreported its financial results in two reporting segments, the Candles &Home Fragrance segment and the Creative Expressions segment.  The Company reevaluated its operatingsegments based on the application of FASB Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” and determined thatthe appropriate number of reportable segments should have been five in fiscal2004 and four in fiscal 2003 and 2002 (The increase in segments in fiscal 2004was due to acquisitions that were consummated in fiscal 2004.)  The Company’s financial statement footnoteshave been restated to reflect the revised segments. In addition, the revisionof segments had the related effect of requiring changes in the Company’s reportingunits for purposes of goodwill impairment reviews under FASB Statement No. 142,“Goodwill and Other Intangible Assets”, retroactive to the February 1,2002 adoption date of SFAS 142. This resulted in a restatement for anadditional impairment charge as of February 1, 2002. See Notes 2 and 9 tothe financial statements for further details.  The Company’s reportable and operating segments are based on financialinformation regularly evaluated by the chief operating decision maker indetermining resource allocation and assessing performance.  Revenues are not reported by product or groupof similar products, as it is impractical to do so.  The Company has operations outside of theUnited States and sells products in the Direct Selling and Wholesale Home Fragrancesegments worldwide.  The majority ofsales in the Wholesale Creative Expressions, Catalog & Internet andAll Other segments are domestically based.

 

Within the Direct Selling segment, the Companydesigns, manufactures and markets an extensive line of products includingscented candles, fragranced bath gels and body lotions and other fragrancedproducts.  It also designs and markets abroad range of related candle accessories. These products are sold direct to the consumer under the PartyLite® brandin North America, Europe and Australia through a network of more than 56,000independent sales consultants.

 

Within the WholesaleHome Fragrance segment, the Company designs, manufactures and markets anextensive line of products including scented candles, potpourri and otherfragranced products.  It also designs andmarkets a wide range of related candle accessories.  In addition, within its Kaemingk businessunit, the Company designs and markets seasonal decorations to independent andspecialty retailers.  Products in thissegment are sold worldwide to retailers in the premium and specialty wholesalechannels under the Ambria®, Carolina®, ColonialTM(1), Colonial Candle of CapeCod®, Colonial at HOMEâ,Gies®(1),Kaemingk®(1), Kate’sTM and Liljeholmens® brands and in the mass retail channelunder the Ambria®, FilterMate®, Florasense® and Gies®(1) brands.

 

Within the Wholesale Creative Expressions segment,the Company designs, sources and markets a broad range of home décor productsunder the CBK® brand, seasonal decorations under the Holiday365Ô, JMC ImpactÔ and Seasons of Cannon FallsÔ brands, and, until Jeanmarie wassold in April 2004, decorative gift bags under the Jeanmarie® brand.  These products are sold primarily in NorthAmerica.

 

Within the Catalog & Internet segment, theCompany designs, sources and markets a broad range of household convenienceitems, premium photo albums, frames, holiday cards and gifts under theExposuresâ and Miles Kimballâ brands.  These products are sold primarily in NorthAmerica.

 

----

(1)  Colonial, Giesand Kaemingk are registered and sold only outside the United States.

 

9

----

** **

**Within the All Other segment, theCompany designs, manufactures or sources and markets a variety of chafing fuel,candles and tabletop lighting products to the Away From Home or foodservicetrade under the brand names Ambria**â, HandyFuelâ and Sternoâ.  These products aresold primarily in North America.

 

The consolidated financial statements include theaccounts of the Company and its direct and indirect subsidiaries.  All significant intercompany accounts andtransactions have been eliminated. Investments in companies that are not majority owned or controlled arereported using the equity method and are recorded in investments.   Interest income and other consists ofinterest income earned from investments, foreign currency gains and losses andgains and losses from sales of investments. Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscalyear 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 consolidated financial statements include all accrualsnecessary for fair presentation of the Company’s consolidated financialposition at July 31, 2003 and the consolidated results of its operationsand cash flows for the six-month periods ended July 31, 2003 and 2002.These interim statements should be read in conjunction with the Company’sconsolidated financial statements for the year ended January 31, 2003, asset forth in the Company’s Annual Report on Form 10-K.  Operating results for the six months ended July 31,2003 are not necessarily indicative of the results that may be expected for theyear ending January 31, 2004.

 

**Reclassifications**

 

Certain reclassifications have been made in prioryears’ financial statements to conform to classifications used in the currentyear.

 

**Employee Stock 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 financialstatements.  Had compensation expense forthe Company’s stock options been determined in accordance with the fair valuemethod in SFAS No. 123, “Accounting for Stock-Based Compensation” and SFASNo. 148, the Company’s reported net income and earnings per share wouldhave been adjusted to the pro forma amounts indicated below:

 
| ** **                                                                                                       | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In thousands except per share data)**                                                                         | ** ** | **2003**                             | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                       | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | **Restated (Note 2)** | ** ** |
| Net earnings:                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                      |       | $                                    | 11,246     |                               | $          | 18,806 |   | $ | 30,873 |   | $ | 4,357 |   |
| Stock-based employee compensation expense determined  under SFAS No. 123 for all awards, net of related tax |       | 908                                  |       | 945                                |       | 1,844 |   | 1,932 |   |
| Pro forma                                                                                                        |       | $                                    | 10,338     |                               | $          | 17,861 |   | $ | 29,029 |   | $ | 2,425 |   |
| Net earnings per common share:                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| As reported:                                                                                                     |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                            |       | $                                    | 0.25       |                               | $          | 0.41 |   | $ | 0.67 |   | $ | 0.09 |   |
| Diluted                                                                                                          |       | 0.24                                 |       | 0.40                               |       | 0.67 |   | 0.10 |   |
| Pro forma:                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                            |       | $                                    | 0.23       |                               | $          | 0.39 |   | $ | 0.63 |   | $ | 0.05 |   |
| Diluted                                                                                                          |       | 0.22                                 |       | 0.37                               |       | 0.61 |   | 0.04 |   |
|                                                                                                                  |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

10

----

 

**2.****                                      Restatement**

 

**Prior to January 31, 2004, the Companyreported its financial results in two reporting segments, the Candles &Home Fragrance segment and the Creative Expressions segment.  The Company reevaluated its operatingsegments based on the application of FASB Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information” (“SFAS 131”), anddetermined that the appropriate number of reportable segments should have beenfive during fiscal 2004 and four during fiscal 2003 and 2002 (The increase insegments in fiscal 2004 was due to the acquisitions that were consummated infiscal 2004.)  See Note 9 for furtherdetails.   This revision of segments hadthe related effect of requiring changes in the Company’s reporting units forpurposes of goodwill impairment reviews under SFAS 142, retroactive to the February 1,2002 adoption date of SFAS 142.    This**resulted in the need to perform impairment reviewsof several additional reporting units as of February 1, 2002 and eachsubsequent year-end balance sheet date, thereafter.  These impairment reviews have indicated theneed to record additional impairment charges as of the February 1, 2002adoption of SFAS 142, specifically to write-off $20.9 million in goodwillassociated with the 1999 acquisition of the Gies Group and $6.3 million ingoodwill associated with the 1999 acquisition of the Colony Group.  Both of these businesses are components ofthe Wholesale Home Fragrance Segment. The Company’s fiscal 2003 financial statements have been restated toreflect the recording of these $27.2 million in goodwill impairment charges as partof the cumulative effect of adopting SFAS 142 as of February 1, 2002.  There was no income tax impact for theseimpairment charges.  A restatement of theConsolidated Statements of Cash Flows has also been made to more properlyreflect the impact of foreign currency exchange rates on cash for fiscal 2003and 2004.   The Company has now presentedthe effect of foreign currency rate changes on cash as a separate line on thecash flow statements, instead of including this effect within cash flows fromoperating, investing and financing activities as previously reported.  Also, fiscal 2004 cash flows have beenrevised to reflect the reporting currency equivalent of foreign currency cashflows using weighted average exchange rates that approximated the actualexchange rates in effect at the time of the cash flows, rather than usingperiod-end exchange rates.

 

Asummary of the effects of the restatements on the Company’s financialstatements is as follows:

 
| ** **                                                                     | ** ** | **As of July 31, 2003** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|
| **(In thousands)**                                                             | ** ** | **As Previously  Reported**  | ** ** | **As Restated** | ** ** |
| **Balance sheet :**                                                            | * *   | * *                     | * *   | * * | * * |
| Excess of cost over fair value of assets acquired                              |       | $                            | 206,453    | *(a)* | $ | 173,095 | *(b)* |
| Total assets                                                                   |       | 1,002,086                    | *(a)*      | 968,729 | * * |
| Retained earnings                                                              |       | 548,758                      |       | 521,517 | * * |
| Accumulated other comprehensive income                                         |       | 7,214                        |       | 1,095 | *(b)* |
| Total stockholders’ equity                                                |       | 563,619                      |       | 530,259 | * * |
| Total liabilities and stockholders’ equity                                |       | 1,002,086                    | *(a)*      | 968,729 |   |
| **Statement of Stockholders’ Equity:**                                    | * *   | * *                     | * *   | * * | * * |
| Retained earnings                                                              |       | $                            | 548,758    |   | $ | 521,517 | * * |
| Foreign currency translation adjustments, six months  ended July 31, 2003 |       | 8,011                        |       | 6,266 | * * |
| Comprehensive income, six months ended July 31,  2003                     |       | 38,464                       |       | 36,719 | * * |
| Accumulated other comprehensive income                                         |       | 7,214                        |       | 1,095 | * * |
| Total stockholders’ equity                                                |       | 563,619                      |       | 530,259 | * * |

 
| ** **                                                               | * *   | **Six months ended July 31, 2003** | * *   |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                               | ** ** | **As Previously  Reported**             | ** ** | **As Restated** | * * |
| **Statement of Cash Flows:**                                             | * *   | * *                                | * *   | * * | * * |
| Total adjustments to reconcile net earnings to net  cash from operations |       | $                                       | (50,811    | ) | $ | (51,854 | ) |
| Net cash used in operating activities                                    |       | (19,938                                 | )          | (20,981 | ) |
| Net cash used in investing activities                                    |       | (105,354                                | )          | (101,862 | ) |
| Net cash provided by financing activities                                |       | 24,673                                  |       | 24,140 |   |
| Effect of exchange rate changes on cash                                  |       | —                                  |       | (1,916 | ) |
|                                                                          |            |                                         |            |  |  |  |  |

 

----

*(a)**            Reflects certain otherreclassifications to conform with current year presentation.*

*(b)**            Includes the reversalof $6,120 of foreign currency translation adjustments on the Gies and Colonygoodwill written off.*

 

11

----

 

A summary of theeffects of the restatements on the Company’s financial statements is asfollows:

 
| ** **                                                               | ** ** | **Six months ended July 31,  2002** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                               | ** ** | **As Previously  Reported**              | ** ** | **As Restated** | ** ** |
| **Statement of Earnings:**                                               |       |                                     |       |   |   |
| Earnings before cumulative effect of accounting  change                  |       | $                                        | 36,110     |   | $ | 36,110 |   |
| Cumulative effect of accounting change                                   |       | (4,515                                   | )          | (31,753 | ) |
| Net earnings                                                             |       | $                                        | 31,595     |   | $ | 4,357 |   |
| Basic earnings per share:                                                |       |                                     |       |   |   |
| Before cumulative effect of accounting change                            |       | $                                        | 0.78       |   | $ | 0.78 |   |
| Cumulative effect of accounting change                                   |       | (0.10                                    | )          | (0.69 | ) |
|                                                                     |       | $                                        | 0.68       |   | $ | 0.09 |   |
| Diluted earnings per share:                                              |       |                                     |       |   |   |
| Before cumulative effect of accounting change                            |       | $                                        | 0.78       |   | $ | 0.78 |   |
| Cumulative effect of accounting change                                   |       | (0.10                                    | )          | (0.68 | ) |
|                                                                     |       | $                                        | 0.68       |   | $ | 0.10 |   |
| **Statement of Stockholders’ Equity**                               |       |                                     |       |   |   |
| Retained earnings, as of July 31, 2002                              |       | $                                        | 475,535    |   | $ | 448,297 |   |
| Foreign currency translation adjustments                                 |       | 9,057                                    |       | 6,394 |   |
| Comprehensive income                                                     |       | 40,191                                   |       | 10,290 |   |
| Accumulated other comprehensive loss, as of July 31,  2002          |       | (8,298                                   | )          | (10,961 | ) |
| Total stockholders’ equity, as of July 31, 2002                |       | 490,251                                  |       | 460,350 |   |
| **Statement of Cash Flows:**                                             |       |                                     |       |   |   |
| Total adjustments to reconcile net earnings to net cash  from operations |       | $                                        | (44,229    | ) | $ | (13,864 | ) |
| Net cash used in operating activities                                    |       | (12,634                                  | )          | (9,507 | ) |
| Effect of exchange rate changes on cash                                  |       | —                                   |       | (3,127 | ) |

 

12

----

 

**3.**                                      New AccountingPronouncements

 

In January 2003, the FASB issued FinancialInterpretation No. 46, “Consolidation of Variable Interest Entities,”which is an interpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” and addresses consolidation by business enterprises ofvariable interest entities that have specific characteristics as described inthe Interpretation. This Interpretation was effective immediately with respectto variable interest entities created after January 31, 2003, and tovariable interest entities in which an enterprise obtains an interest afterthat date. It applies in the first fiscal year or interim period beginningafter June 15, 2003, to variable interest entities in which an enterpriseholds a variable interest that it acquired before February 1, 2003.  The implementation of this standard had noimpact on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  This statement amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under FASB Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  This standard is effective for derivativecontracts entered into or modified after June 30, 2003.  The implementation of this standard had noimpact on our financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” This Statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity. It requires that an issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances).  This standard iseffective for financial instruments entered into or modified after May 31,2003. The implementation of this standard had no impact on our financialstatements.

 

**4.**                                      Excess of Cost overFair Value of Assets Acquired

 

Prior to February 1, 2002, excess of costs ofacquisitions over fair value of identifiable net assets acquired lessliabilities assumed (“goodwill”) was being amortized on a straight-line basisover estimated lives ranging from 15-40 years. Amortization of goodwill ceasedon February 1, 2002, upon adoption of the new goodwill rules underSFAS 142.

 

In June 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and any other intangibles deemed tohave indefinite lives are no longer subject to amortization; however, goodwillis subject to an assessment for impairment using a two-step fair value-basedtest and such other intangibles are also subject to impairment reviews, whichmust be performed at least annually, or more frequently if events orcircumstances indicate that goodwill or other indefinite lived intangiblesmight be impaired. The Company performs its annual assessment of impairment inthe fourth fiscal quarter.  For goodwillthe first step compares the fair value of a reporting unit to its carryingamount, including goodwill. If the carrying amount of the reporting unitexceeds its fair value, the second step is performed. The second step comparesthe carrying amount of the goodwill to the fair value of the goodwill.  If fair value is less than the carryingamount, an impairment loss is reported as a reduction to the asset and a chargeto operating expense, except at the transition date, when the loss wasreflected as a cumulative effect of a change in accounting principle.

 

As of January 31, 2002, Blyth’s ConsolidatedBalance Sheets reflected approximately $108.1 million in goodwill net ofaccumulated amortization, including $27.2 million related to the Wholesale HomeFragrance segment businesses, $42.2 million related to the All Other segmentand $38.7 million related to the Wholesale Creative Expressions segmentbusinesses. The Company adopted SFAS 142, effective February 1, 2002. Inaccordance with the new standard, Blyth ceased amortization of goodwill andperformed an assessment for impairment of its goodwill. As a result of theimpairment review, Blyth reduced the carrying value of the goodwill related toits

 

13

----

** **

1997 acquisition of the Sternoâ brand by $7.4 million, which isincluded in the All Other segment.  Inaddition, a revision of its operating and reporting segments by the Company(See Note 2), required changes in the Company’s reporting units for purposes ofgoodwill impairment reviews under SFAS 142, retroactive to the February 1,2002 adoption date of SFAS 142.  Thisresulted in the need to perform impairment reviews of several additionalreporting units as of February 1, 2002 and each subsequent year-endbalance sheet date thereafter.  Theseimpairment reviews have indicated the need to record additional impairmentcharges as of the February 1, 2002 adoption of SFAS 142, specifically towrite-off $20.9 million in goodwill associated with the 1999 acquisition of theGies Group and $6.3 million in goodwill associated with the 1999 acquisition ofthe Colony Group.  Both of thesebusinesses are components of the Wholesale Home Fragrance Segment, and theimpairment charges reduced goodwill in that segment to zero at February 1,2002.  The fair values of the SternoGroup, the Gies Group and the Colony Group were determined through independentvaluations utilizing market-comparable analysis, as well as discounted cashflow models reflecting the expected range of futurecash flow outcomes over the life of the models. These cash flows werediscounted to February 1, 2002 using a risk-adjusted discount rate.  The impairment of the Sterno Group’s goodwill, which was recorded as a cumulative effect of a change inaccounting principle, had the effect of reducing net income by $4.5 million(after tax) or $0.10 per share.  Theimpairments of the Gies Group and Colony Group goodwill, which were notdeductible for tax purposes, were, via restatement of the fiscal 2003 financialstatements, also recorded as a cumulative effect of change in accountingprinciple, and had the effect of reducing net income by $27.2 million or $0.58per share.

 

**5.**                                      Business Acquisitions

 

On May 10, 2002, the Company purchased all ofthe interests in CBK, Ltd., LLC, now known as CBK Styles, Inc. (“CBK”), adesigner and marketer of premium everyday home décor and giftware, forapproximately $51.0 million in cash*.*  The excess of the purchase price over theestimated fair value of the net assets acquired approximated $40.0 million,which will be deductible for income tax purposes over 15 years.  The results of operations of CBK are includedin the Consolidated Statements of Earnings of the Company since May 11,2002.  For segment reporting purposes,CBK is included in the Wholesale Creative Expressions segment.

 

On April 1, 2003, the Company acquired 100% ofthe Miles Kimball Company (“MK”), a direct marketer of giftware, home décor andhousehold convenience items, premium photo albums, frames and holiday cardsunder the Miles Kimball® and Exposures® catalog titles for approximately $66.2million in cash.  The excess of thepurchase price over the estimated fair value of the net assets acquiredapproximated $46.0 million, which will not be deductible for income taxpurposes.  The other intangibles acquiredconsist of $16.1 million of trade names and trademarks, which are deemed tohave an indefinite life and will not be amortized, plus $9.0 million ofcustomer lists, which will be amortized on an accelerated basis over 12years.  Amortization expense was $0.45million for the three months ended July 31, 2003 and $0.6 million for thesix months ended July 31, 2003. Estimated amortization expense for the next 5 fiscal years is asfollows:  $1.5 million, $1.5 million,$1.2 million, $0.9 million and $0.9 million. The results of operations of MK are included in the ConsolidatedStatements of Earnings of the Company since April 2, 2003.  For segment reporting purposes, MK isincluded in the Catalog & Internet segment.

 

14

----

 

The followingprovides an allocation of the purchase price of Miles Kimball (in thousands)

 
| Cash Purchase Price                   |   | $      | 66,219 |   |
|---------------------------------------|--------|--------|--------|--------|
| Less: Assets acquired                 |   |   |   |
| Accounts receivable                   |   | 1,124  |   |
| Inventories                           |   | 9,983  |   |
| Property, plant and equipment         |   | 17,959 |   |
| Intangible assets                     |   | 25,100 |   |
| Other                                 |   | 1,706  |   |
| Total assets acquired                 |   | 55,872 |   |
| Plus: Liabilities assumed             |   |   |   |
| Accounts payable                      |   | 3,610  |   |
| Accrued expenses                      |   | 1,783  |   |
| Deferred income taxes                 |   | 11,155 |   |
| Debt                                  |   | 10,729 |   |
| Other                                 |   | 8,412  |   |
| Total liabilities assumed             |   | 35,689 |   |
| Unallocated purchase price (goodwill) |   | $      | 46,036 |   |

 

On June 20, 2003, the Company acquired a 100%interest in Kaemingk B.V. (“Kaemingk”), a designer and marketer of a wide rangeof premium seasonal decorations. Kaemingk’s product lines feature Christmasdécor, including ornaments, lighting, trim, glassware, candles and plushanimals, as well as spring and summer decorative accents and tabletopproducts.  The cash purchase price wasapproximately $36.2 million less cash acquired of $7.7 million resulting in netcash paid of $28.5 million.  Approximately $30.6 million of the cash purchase price was borrowedunder the Company’s $200 million unsecured revolving credit facility.  The Company also assumed Kaemingk’s long-termdebt of approximately $14.4 million.  Theexcess of the purchase price over the estimated fair value of the net assetsacquired approximated $13.5 million, which will not be deductible for incometax purposes.  In addition to the fixedpurchase price, there is contingent consideration payable in the form of athree-year earn out provision based on a pre-defined formula related to amultiple of earnings before interest and income taxes.  The results of operations of Kaemingk areincluded in the Consolidated Statements of Earnings of the Company since June 21,2003.  For segment reporting purposes,Kaemingk is included in the Wholesale Home Fragrance segment.

 

Thefollowing provides a preliminary allocation of the purchase price of Kaemingk(in thousands)

 
| Cash Purchase Price                   |   | $      | 36,176 |   |
|---------------------------------------|--------|--------|--------|--------|
| Less: Assets acquired                 |   |   |   |
| Cash and cash equivalents             |   | 7,681  |   |
| Accounts receivable                   |   | 2,106  |   |
| Inventories                           |   | 25,514 |   |
| Property, plant and equipment         |   | 18,930 |   |
| Other                                 |   | 606    |   |
| Total assets acquired                 |   | 54,837 |   |
| Plus: Liabilities assumed             |   |   |   |
| Bank lines of credit                  |   | 9,335  |   |
| Accounts payable                      |   | 2,479  |   |
| Accrued expenses                      |   | 2,079  |   |
| Deferred income taxes                 |   | 2,786  |   |
| Debt                                  |   | 14,364 |   |
| Other                                 |   | 1,143  |   |
| Total liabilities assumed             |   | 32,186 |   |
| Unallocated purchase price (goodwill) |   | $      | 13,525 |   |

 

15

----

 

 

The following unaudited pro forma financialinformation summarizes the estimated combined results of operations of theCompany, CBK, MK and Kaemingk assuming that the acquisitions of CBK, MK andKaemingk had taken place on February 1, 2002.  The unaudited pro forma combined results ofoperations were prepared on the basis of information provided to the Company bythe former management of CBK, MK and Kaemingk and no representation is made bythe 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 CBK’s and MK’s property, plant, and equipment,amortization of identifiable intangibles of MK and income tax expense.

 
| ** **                                                                                | ** ** | **Three months ended  July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| **(In thousands except per share data)**                                                  | ** ** | **2003**                              | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                      |       |                                  |       |                               |       |   |   | **Restated (Note 2)** |   |
| Net sales                                                                                 |       | $                                     | 276,575    |                               | $          | 291,789 |   | $ | 610,311 |   | $ | 614,781 |   |
| Earnings before cumulative effect of change in  accounting principle                      |       | 10,793                                |       | 17,109                             |       | 28,562 |   | 34,321 |   |
| Net earnings                                                                              |       | 10,793                                |       | 17,109                             |       | 28,562 |   | 2,568 |   |
| Basic:                                                                                    |       |                                  |       |                               |       |   |   |   |   |
| Earnings per common share before the cumulative  effect of change in accounting principle |       | $                                     | 0.24       |                               | $          | 0.37 |   | $ | 0.62 |   | $ | 0.74 |   |
| Net earnings per common share                                                             |       | 0.24                                  |       | 0.37                               |       | 0.62 |   | 0.06 |   |
| Diluted:                                                                                  |       |                                  |       |                               |       |   |   |   |   |
| Earnings per common share before the cumulative  effect of change in accounting principle |       | $                                     | 0.23       |                               | $          | 0.37 |   | $ | 0.62 |   | $ | 0.74 |   |
| Net earnings per common share                                                             |       | 0.23                                  |       | 0.37                               |       | 0.62 |   | 0.06 |   |

 

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, 2002.

 

At July 31, 2003, theCompany had a total of $173.1 million of excess of cost over fair value ofassets acquired (“goodwill”) on its balance sheet compared to $113.5 million atJanuary 31, 2003.  Goodwillattributable to the Wholesale Home Fragrance segment at July 31, 2003 was$13.5 million as a result of the acquisition of Kaemingk in June 2003.  Goodwill attributable to the WholesaleCreative Expressions segment at July 31, 2003 was $78.8 million unchangedfrom January 31, 2003. Goodwill attributable to the Catalog &Internet segment at July 31, 2003 was $46.0 million as a result of theMiles Kimball acquisition in April 2003. Goodwill attributable to the AllOther segment was $34.8 million at July 31, 2003, unchanged from January 31,2003.

 

16

----

** **

**6.**                                      Inventories

 
| ** **      | ** ** | **July 31, 2003** | ** ** | **January 31, 2003** | ** ** |
|-----------------|------------|------------------------|------------|---------------------------|------------|
| Raw materials   |       | $                      | 29,333     |                      | $          | 33,950 |   |
| Work in process |       | 3,757                  |       | 2,509                     |       |
| Finished goods  |       | 223,031                |       | 151,476                   |       |
|            |       | $                      | 256,121    |                      | $          | 187,935 |   |

 

The components of inventory are as follows (inthousands):

 

**7.**                                      Earnings per Share

 

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

 
| ** **                                             | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2003**                             | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                             | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Restated (Note2)** | ** ** |
| Net earnings                                           |       | $                                    | 11,246     |                               | $          | 18,806 |   | $ | 30,873 |   |   | 4,357 |   |
| Weighted average number of common shares  outstanding: |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                  |       | 45,903                               |       | 46,330                             |       | 45,991 |   | 46,310 |   |
| Dilutive effect of stock options                       |       | 252                                  |       | 380                                |       | 183 |   | 281 |   |
| Weighted average number of common shares  outstanding: |       |                                 |       |                               |       |   |   |   |   |
| Diluted                                                |       | 46,155                               |       | 46,710                             |       | 46,174 |   | 46,591 |   |
|                                                        |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

As of July 31, 2003 and 2002, options topurchase 60,423 and 40,468 shares of common stock, respectively, are notincluded in the computation of earnings per share because the effect would beantidilutive.

 

**8.**                                      Unusual Charges

 

At January 31, 2003, the Company hadapproximately $0.4 million of restructuring charges included in theConsolidated Balance Sheet, which related to lease obligations.  As a result of payments made during thesix-month period ended July 31, 2003, approximately $0.2 million of leaseobligations were remaining on the balance sheet at July 31, 2003.  The lease obligation continues through thethird quarter of fiscal 2005.

 

The following is a tabular roll forward of theunusual charges described above that were recorded in the balance sheet of theCompany:

 
| **(In thousands)**                 | ** ** | **Lease  Obligations** | ** ** |
|------------------------------------|------------|------------------------|------------|
| Balance at January 31, 2003   |       | $                      | 405        |   |
| Payments made against 2002 charges |       | (175                   | )          |
| Balance at July 31, 2003      |       | $                      | 230        |   |

 

17

----

 

**9.**                                      Segment Information

 

Blyth is a global competitor in the gift anddecorative accessories market, which the Company calls the Home Expressionscategory.  Within this category, theCompany reports its financial results in five segments – the Direct Sellingsegment, the Wholesale Home Fragrance segment, the Wholesale CreativeExpressions segment, the Catalog & Internet segment, and the All Othersegment.  Miles Kimball, acquired in April 2003is included in the Catalog & Internet segment.  Kaemingk, acquired in June 2003, isincluded in the Wholesale Home Fragrance segment.  Prior to January 31, 2004, the Companyreported its financial results in two reporting segments, the Candles &Home Fragrance segment and the Creative Expressions segment.  The Company reevaluated its operatingsegments based on the application of FASB Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” and determined thatthe appropriate number of reportable segments should have been five in fiscal2004 and four in fiscal 2003 and 2002 (The increase in segments in fiscal 2004was due to the acquisitions that were consummated in fiscal 2004.)  The Company’s financial statement footnoteshave been restated to reflect the revised segments.  The Company’s reportable and operatingsegments are based on financial information regularly evaluated by the chiefoperating decision maker in determining resource allocation and assessingperformance.  Revenues are not reportedby product or group of similar products, as it is impractical to do so.  The Company has operations outside of theUnited States and sells products in the Direct Selling and Wholesale HomeFragrance segments worldwide.  Themajority of sales in the Wholesale Creative Expressions, Catalog &Internet and All Other segments are domestically based.

 

Within the Direct Selling segment, the Companydesigns, manufactures and markets an extensive line of products includingscented candles, fragranced bath gels and body lotions and other fragrancedproducts.  It also designs and markets abroad range of related candle accessories. These products are sold direct to the consumer under the PartyLite®brand in North America, Europe and Australia through a network of more than56,000 independent sales consultants.

 

Within the WholesaleHome Fragrance segment, the Company designs, manufactures and markets anextensive line of products including scented candles, potpourri and otherfragranced products.  It also designs andmarkets a wide range of related candle accessories.  In addition, within its Kaemingk businessunit, the Company designs and markets seasonal decorations to independent andspecialty retailers.  Products in thissegment are sold worldwide to retailers in the premium and specialty wholesalechannels under the Ambria®, Carolina®, ColonialTM(1),Colonial Candle of Cape Cod®, Colonial at HOMEâ, Gies®(1),Kaemingk®(1), Kate’sTM and Liljeholmens® brands and in the mass retail channelunder the Ambria®, FilterMate®, Florasense® and Gies®(1) brands.

 

Within the Wholesale Creative Expressions segment,the Company designs, sources and markets a broad range of home décor productsunder the CBK® brand, seasonal decorations under the Holiday365Ô, JMC ImpactÔ and Seasons of Cannon FallsÔ brands, and, until Jeanmarie wassold in April 2004, decorative gift bags under the Jeanmarie® brand.  These products are sold primarily in NorthAmerica.

 

Within the Catalog & Internet segment, theCompany designs, sources and markets a broad range of household convenienceitems, premium photo albums, frames, holiday cards and gifts under theExposuresâ and Miles Kimballâ brands.  These products are sold primarily in NorthAmerica.

 

----

(1)  Colonial, Gies and Kaemingkare registered and sold only outside the United States.

 

18

----

 

Within the All Other segment, the Company designs,manufactures or sources and markets a variety of chafing fuel, candles andtabletop lighting products to the Away From Home or foodservice trade under thebrand names Ambriaâ, HandyFuelâ and Sternoâ.  These products aresold primarily in North America.

 

Earnings in all segments represent net sales lessoperating expenses directly related to the business segments and corporateexpenses allocated to the business segments. Other income (expense) includes interest expense, interest income andequity in earnings of investees, which are not allocated to the businesssegments.  Identifiable assets for eachsegment consist of assets used directly in its operations and intangibleassets, if any, resulting from purchase business combinations.  Unallocated Corporate within the identifiableassets include corporate cash and cash equivalents, deferred bond costs andother long-term investments, which are not allocated to the business segments.

 
| ** **                                                                                                   | ** ** | **Three months ended  July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| **(In thousands)**                                                                                           | ** ** | **2003**                              | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                   | ** ** | **Restated (Note 2)**                 | ** ** | **Restated (Note 2)**              | ** ** | **Restated (Note 2)** | ** ** | **Restated (Note 2)** | ** ** |
| **Net Sales**                                                                                                |       |                                  |       |                               |       |   |   |   |   |
| Direct Selling                                                                                               |       | $                                     | 143,219    |                               | $          | 144,086 |   | $ | 334,458 |   | $ | 322,001 |   |
| Wholesale Home Fragrance                                                                                     |       | 50,319                                |       | 51,153                             |       | 116,760 |   | 119,871 |   |
| Wholesale Creative Expressions                                                                               |       | 51,570                                |       | 58,611                             |       | 87,496 |   | 76,302 |   |
| Catalog & Internet                                                                                  |       | 17,565                                |       | —                             |       | 23,535 |   | — |   |
| All Other                                                                                                    |       | 12,595                                |       | 14,171                             |       | 25,010 |   | 27,743 |   |
| **Total**                                                                                                    |       | $                                     | 275,268    |                               | $          | 268,021 |   | $ | 587,259 |   | $ | 545,917 |   |
| **Earnings**                                                                                                 |       |                                  |       |                               |       |   |   |   |   |
| Direct Selling                                                                                               |       | $                                     | 25,096     |                               | $          | 31,507 |   | $ | 63,468 |   | $ | 68,644 |   |
| Wholesale Home Fragrance                                                                                     |       | (7,044                                | )          | (9,273                             | )          | (10,516 | ) | (14,660 | ) |
| Wholesale Creative Expressions                                                                               |       | 5,246                                 |       | 10,256                             |       | 5,268 |   | 8,476 |   |
| Catalog & Internet                                                                                  |       | (1,808                                | )          | —                             |       | (2,398 | ) | — |   |
| All Other                                                                                                    |       | (771                                  | )          | 1,167                              |       | (845 | ) | 2,105 |   |
|                                                                                                         |       | 20,719                                |       | 33,657                             |       | 54,977 |   | 64,565 |   |
| Other expense                                                                                                |       | (2,885                                | )          | (3,711                             | )          | (6,019 | ) | (7,065 | ) |
| **Earnings before income taxes, minority interest  and cumulative effect of change in accounting principle** |       | $                                     | 17,834     |                               | $          | 29,946 |   | $ | 48,958 |   | $ | 57,500 |   |

 
| ** **                     | ** ** | **July 31, 2003** | ** ** | **January 31, 2003** | ** ** |
|--------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                     | ** ** | **Restated (Note 2)**  | ** ** | **Restated (Note 2)**     | ** ** |
| **Identifiable Assets**        |       |                   |       |                      |       |
| Direct Selling                 |       | $                      | 258,845    |                      | $          | 246,607 |   |
| Wholesale Home Fragrance       |       | 308,304                |       | 238,829                   |       |
| Wholesale Creative Expressions |       | 197,199                |       | 174,827                   |       |
| Catalog & Internet    |       | 109,989                |       | —                    |       |
| All Other                      |       | 62,254                 |       | 61,816                    |       |
| Unallocated Corporate          |       | 32,139                 |       | 138,005                   |       |
| **Total**                      |       | $                      | 968,730    |                      | $          | 860,084 |   |

 

19

----

** **

**10.**                               Contingencies

 

The Company has contingent liabilities that havearisen in the ordinary course of its business, including pending litigation.  The Company believes the outcome of thesematters will not have a material adverse effect on its consolidated financialposition, results of operations or cash flows.

 

On June 2, 2003, the parties agreed in opencourt to settle and resolve all matters involving or in any way relating to thepreviously reported legal proceedings by and between the Company and itswholly-owned subsidiary, Endar Corp., on the one hand, and Ennio Racinelli,Darlene Racinelli and others, on the other hand, by means of a writtensettlement and release agreement, without any payment by any party.  On August 25, 2003, the case wasdismissed by the Riverside Superior Court.

 

**11.**                               Debt

 

At July 31, 2003, Miles Kimball hadapproximately $10.1 million of long-term debt outstanding under a real estatemortgage note payable to John Hancock Life Insurance Company, which matures June 1,2020.  Under the terms of the note,payments of principal and interest are required monthly at a fixed interestrate of 7.89%.

 

As of June 30, 2003, Kaemingk had availablelines of credit of approximately $39.4 million maturing in March 2004.  The lines of credit are collateralized bycertain real estate and equipment owned by Kaemingk.  At June 30, 2003, approximately $10.9million was outstanding at a weighted average interest rate of 2.7%.

 

At June 30, 2003, Kaemingk had approximately$14.1 million of long-term debt outstanding under seven loans with ING BankN.V. at a weighted average interest rate of 4.9%.  The bank loans have maturity dates ranging from2005 through 2021.  The loans arecollateralized by certain real estate and equipment owned by Kaemingk.

 

**12.**                               Fire Loss

 

In July 2003, the Company’s manufacturingfacility located in Monterrey, Mexico was destroyed by fire.  Products manufactured at this leased facilitywere primarily for the North American mass market.  Customer service disruptions were minimal asother Company facilities and third party suppliers met the productionrequirements and will continue to meet production requirements for the immediatefuture.  The loss of fixed assets andinventory totaled approximately $8.0 million. The Company recorded a charge of $0.6 million in the quarter ended July 31,2003 for the insurance deductible and employee related costs as a result of thefire.  The Company is insured for lossesrelated to this fire.

 

20

----

 

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

 

**RESULTS OFOPERATIONS:**

 

Prior to January 31,2004, the Company reported its financial results in two reporting segments, theCandles & Home Fragrance segment and the Creative Expressionssegment.  The Company reevaluated itsoperating segments based on the application of FASB Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” and determined thatthe appropriate number of reportable segments should have been five in fiscal2004 and four in fiscal 2003 and 2002 (The increase in segments in fiscal 2004was due to acquisitions that were consummated in fiscal 2004.)  The Company’s financial statement footnoteshave been restated to reflect the revised segments, as has the discussion inthis Item 2.  In addition, the revisionof segments had the related effect of requiring changes in the Company’sreporting units for purposes of goodwill impairment reviews under FASBStatement No. 142, “Goodwill and Other Intangible Assets”, retroactive tothe February 1, 2002 adoption date of SFAS 142. This resulted in arestatement for an additional impairment charge as of February 1, 2002.See Notes 2 and 9 to the financial statements for further details.  The Company’s reportable and operatingsegments are based on financial information regularly evaluated by the chiefoperating decision maker in determining resource allocation and assessingperformance.

 

**Net Sales**

 

Net sales increased $41.4 million or 7.6% to $587.3 million in thefirst six months of fiscal 2004 from $545.9 million in the first six months offiscal 2003.  Net sales in the quarterended July 31, 2003 increased $7.3 million or 2.7% to $275.3 millioncompared with $268.0 million a year earlier. There are three primary factors affecting net sales in the secondquarter.  First, the inclusion of salesfrom the acquisitions of Miles Kimball in April 2003 and Kaemingk in June 2003had a favorable impact offset by the exclusion of sales from Wax Lyrical, whichwas closed in December 2002. Second, the continued weakness in the US and European economies and theresulting cautious ordering by retailers had a negative impact on sales.  Third, the favorable foreign exchange ratescompared to the US Dollar had a positive impact on reported sales.

 

Net sales in the Direct Selling segmentdecreased $0.9 million, or 0.6%, to $143.2 million in the quarter ended July 31,2003, compared with $144.1 million in the same period last year. In the UnitedStates, PartyLite’s second quarter sales were negatively impacted by weakenedconsumer demand as well as a timing shift in the introduction of warm weatherproduct lines that benefited PartyLite’s first quarter.  Offsetting this decline in sales in theUnited States, PartyLite’s second quarter sales in Europe increased 20% inlocal currency due to strong sales in April, which were a result of the well-received30th anniversary product offerings.

 

Net sales in the Wholesale Home Fragrancesegment decreased $0.9 million, or 1.8%, to $50.3 million in the quarter ended July 31,2003, compared with $51.2 million in the same period last year. In the quarter endedJuly 31, 2003, net sales increases in Blyth’s European wholesalebusinesses, which include sales of Kaemingk acquired in June 2003, wereoffset by decreases in net sales in our North American wholesale premium andmass channel businesses when compared to the prior year period. The continuedweakness in the US and European economies and the resulting cautious orderingby retailers had a negative impact on sales. The exclusion of sales from WaxLyrical, which was closed in December 2002, also had an unfavorable impacton sales in this segment in the second quarter compared to the prior yearperiod.

 

Net sales in the Wholesale CreativeExpressions segment decreased $7.0 million, or 11.9%, to $51.6 million in thequarter ended July 31, 2003, compared with $58.6 million in the sameperiod last year. Sales in this segment were negatively impacted as a result ofreduced consumer spending and retailers’ caution in placing orders.

 

Net sales in the Catalog & Internetsegment were $17.6 million in the quarter ended July 31, 2003 as a resultof the acquisition of Miles Kimball in April 2003.  This segment did not exist in the prior year.

 

Net sales in the All Other segment decreased$1.6 million, or 11.3%, to 12.6 million in the quarter ended July 31,2003, compared with $14.2 million in the second quarter of fiscal 2003 as thetravel and tourism industry continues to struggle.

 

21

----

** **

**Gross Profit**

 

Gross profit increased $13.6 million or 5.0% from $282.3 million in the firstsix months of fiscal 2003 to $295.9 million in the first six months of fiscal2004.  Gross profit margin decreased from51.8% for the first six months of fiscal 2003 to 50.4% for the first six monthsof fiscal 2004.  Gross profit in thequarter ended July 31, 2003 decreased $2.7 million or 2.1% from $137.3million for the quarter ended July 31, 2002 to $134.6 million for thequarter ended July 31, 2003.  Grossprofit margin decreased from 51.3% for the quarter ended July 31, 2002 to48.9% for the quarter ended July 31, 2003. The decrease in gross profit margin is largely attributable to theinclusion of Miles Kimball, which has a lower gross profit margin than theoverall Company margin, reduced overhead absorption at the manufacturingfacilities due to the decline in sales demand, and a shift in sales among thebusinesses.

 

**Selling Expense**

 

Selling expense increased $15.7 million, or9.6%, from $163.6 million in the first six months of fiscal 2003, when sellingexpense was 30.0% of net sales, to $179.3 million in the first six months offiscal 2004, or 30.6% of net sales. Selling expense increased $7.0 million, or 9.3%, from $75.2 million inthe quarter ended July 31, 2002 to $82.2 million in the quarter ended July 31,2003.  As a percent of sales, sellingexpense was 29.9% in the second quarter of fiscal 2004 compared to 28.1% a yearearlier.  The increase in selling expenseis primarily attributable to the addition of Miles Kimball.  The increase in selling expense as apercentage of net sales from quarter to quarter is a result of the similarlevel of expenses applied against a decreased level of sales.

##### ** **

**Administrative Expense**

 

Administrative expense increased $7.6 million, or 14.0%, from $54.1million in the first six months of fiscal 2003 to $61.7 million in the firstsix months of fiscal 2004. Administrative expense increased $3.2 million or 11.2% from $28.4million in the quarter ended July 31, 2002 to $31.6 million in the quarterended July 31, 2003.  Administrativeexpenses increased due to the addition of Miles Kimball and Kaemingk, as wellas the recording of a $0.6 million charge related to the fire at the Monterreyfacility, as discussed under the heading “Liquidity and Capital Resources.”

 

**Operating Profit**

 

Operating profit decreased $9.6 million, or14.9%, from $64.6 million in the first six months of fiscal 2003 to $55.0million in the first six months of fiscal 2004. Operating profit decreased $13.0 million, or 38.5%, from $33.7 millionin the quarter ended July 31, 2002 to $20.7 million in the quarter ended July 31,2003.  These decreases were the result ofthe factors described above under “Gross Profit,” “Selling Expense” and “AdministrativeExpense.”

 

**Interest Expense**

 

Interest expense decreased $0.5 million inthe six-month period ended July 31, 2003, as compared with the prioryear.  Interest expense decreased $0.2million in the three months ended July 31, 2003, when compared to the sameperiod last year.  This decrease wasprimarily a result of reduced interest rates associated with the interest rateswap, as described in Item 3, Quantitative and Qualitative Disclosures AboutMarket Risk, under the heading “Interest Rate Risk.”

 

**Interest Income and Other**

 

Interest income and other increased $0.6million in the six-month period ended July 31, 2003, from the six-monthperiod ended July 31, 2002. Interest income and other increased $0.4 million in the quarter ended July 31,2003, when compared to the quarter ended July 31, 2002.  These increases are primarily attributable tothe $0.5 million gain on the sale of marketable securities that was recorded inthe second quarter.

 

22

----

 

**Income Taxes**

 

Income tax expense decreased $3.4 million, or15.8%, from $21.4 million in the first six months of fiscal 2003 to $18.0million in the same period in the current fiscal year.  Income tax expense decreased $4.5 million, or41.1%, from $11.1 million in the quarter ended July 31, 2002, to $6.6million in the quarter ended July 31, 2003.  This decrease is a result of the decreasedlevel of earnings in the current year. The effective tax rate decreased to 36.8% in fiscal 2004 from 37.2% infiscal 2003.

 

**Cumulative Effect of Change inAccounting Principle**

 

The Company recorded a one-time charge of$34.6 million pre-tax, $31.8 million net of income taxes on February 1,2002, which is reflected as the cumulative effect of a change in accountingprinciple, as a result of adopting SFAS No. 142, “Goodwill and OtherIntangible Assets” (See Note 4 to the Consolidated Financial Statements).

 

**Net Earnings**

 

As a result of the foregoing, earnings beforethe cumulative effect of change in accounting principle decreased $5.2 million,or 14.3%, from $36.1 million in the six months ended July 31, 2002 to$30.9 million for the six months ended July 31, 2003.  Net earnings after the cumulative effect ofchange in accounting principle increased $26.5 million from $4.4 million in thefirst six months of fiscal 2003 to $30.9 in the first six months of fiscal2004.  Net earnings decreased $7.6million, or 40.2%, from $18.8 million in the quarter ended July 31, 2002to $11.2 million in the quarter ended July 31, 2003.

 

Basic earnings per share before thecumulative effect of change in accounting principle, based upon the weightedaverage number of shares outstanding for the six months ended July 31,2003, were $0.67, a decrease of $0.11, or 14.1% compared to $0.78 for the sixmonths ended July 31, 2002.  Basicnet earnings per share after the cumulative effect of change in accounting principle,based upon the weighted average number of shares outstanding for the six monthsended July 31, 2003, were $0.67, a decrease of $0.58, compared to $0.09for the six months ended July 31, 2002. Diluted earnings per share before the cumulative effect of change inaccounting principle, based upon the potential dilution that could occur ifoptions to issue common stock were exercised, were $0.67 compared to $0.78 forthe same period the prior year. The cumulative effect of change in accountingprinciple on diluted earnings per share equaled $0.68.  Diluted net earnings per share after thecumulative effect of change in accounting principle, based upon the potentialdilution that could occur if options to issue common stock were exercised, were$0.67, compared to $0.10 for the same period the prior year.

 

**Liquidity and Capital Resources**

 

Compared to January 31, 2003, wheninventory levels are typically at the lowest point of the fiscal year,inventory increased $68.2 million from $187.9 million at January 31, 2003to $256.1 million at July 31, 2003. Of this increase $42.1 million is related to the acquisition of MilesKimball and Kaemingk.  The remaining$26.1 million increase relates to the normal seasonal build of inventory in ourother businesses.

 

Accounts receivable increased $18.8 millionfrom $82.9 million at January 31, 2003 to $101.7 million at July 31,2003.  Excluding the effects of theacquisitions of Miles Kimball and Kaemingk, accounts receivable increased $14.4million due to seasonality.  ExcludingMiles Kimball and Kaemingk, accounts receivable decreased $13.0 million whencompared to July 31, 2002 due to a decrease in sales.

 

Accounts payable and accrued expensesdecreased $4.7 million to $134.8 million at July 31, 2003, from $139.5million at January 31, 2003.  Thisdecrease is primarily related to payments against accruals that existed at January 31,2003.  When compared to July 31,2002, accounts payable and accrued expenses increased $25.3 million due partlyto the inclusion of Miles Kimball and Kaemingk and the recording of thedeferred gain from the termination of the interest rate swap as furtherdiscussed in Item 3, Quantitative and Qualitative Disclosures About MarketRisk, under the heading “Interest Rate Risk.”

 

23

----

 

In July 2003, the Company’smanufacturing facility located in Monterrey, Mexico was destroyed by fire.  Products manufactured at this leased facilitywere primarily for the North American mass market.  Customer service disruptions were minimal asother Company facilities and third party suppliers met the productionrequirements and will continue to meet production requirements for theimmediate future.  The loss of fixedassets and inventory totaled approximately $8.0 million.  The Company recorded a charge of $0.6 millionin the quarter ended July 31, 2003 for the insurance deductible andemployee related costs as a result of the fire. The Company is insured for losses related to this fire. Capitalexpenditures for property, plant, and equipment were $9.5 million for the sixmonths ended July 31, 2003, as compared with $9.6 million in the prioryear period.  Capital expendituresconsisted primarily of investments in information technology and upgrades ofequipment and facilities.  The Companyexpects total capital spending of approximately $25.0 million for fiscal 2004.

 

The Company has a $200 million unsecuredrevolving credit facility having a three-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, general corporate purposes and funding forstrategic acquisitions.  The CreditFacility contains, among other provisions, requirements for maintaining certainfinancial ratios and limitations on certain payments.  At July 31, 2003, the Company was incompliance with such covenants.  Amountsoutstanding under the Credit Facility bear interest, at the Company’s option,at JPMorgan Chase Bank’s prime rate (4.0% at July 31, 2003) or at theEurocurrency rate plus a credit spread ranging from 0.525% to 1.5%, calculatedon the basis of a combination of the Company’s senior unsecured long-term debtrating and the Company’s usage of the Credit Facility.  At July 31, 2003, the weighted averageinterest rate was 3.07%.  On July 31,2003, approximately $32.3 million was outstanding (including $3.2 million ofoutstanding letters of credit) under the Credit Facility.

 

As of July 31, 2003, the Company had atotal of $15.0 million available under an uncommitted bank line of credit withLa Salle Bank National Association, which matures in June 2004.  Amounts outstanding under the line of creditbear interest at short-term fixed rates. No amounts were outstanding under the uncommitted line of credit at July 31,2003.

 

At July 31, 2003, the Company had atotal of $10.0 million available under an uncommitted line of credit with Bankof America to be used for letters of credit. At July 31, 2003, approximately $0.5 million of letters of creditwere outstanding under this credit line.

 

As of June 30, 2003, The Gies Group (“Gies”)had available lines of credit of approximately $40.2 million of whichapproximately $13.2 million was outstanding. The amounts outstanding under the lines of credit bear interest at aweighted average rate of 4.0% at June 30, 2003.  The lines of credit are renewed annually.

 

Colony Gift Corporation Limited (“Colony”)has a $24.8 million short-term revolving credit facility with Barclays Bank,which matures in June 2004.  As of June 30,2003, Colony had borrowings under the credit facility of approximately $4.8million, at a weighted average interest rate of 4.14%.

 

At July 31, 2003, CBK had $4.7 millionof long-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 BankNational Association.  The amountoutstanding under the IRB bears interest at short-term floating rates, whichequaled a weighted average interest rate of 1.2% at July 31, 2003.

 

At July 31, 2003, Miles Kimball hadapproximately $10.1 million of long-term debt outstanding under a real estatemortgage note payable to John Hancock Life Insurance Company, which matures June 1,2020. Under the terms of the note, payments of principal and interest arerequired monthly at a fixed interest rate of 7.89%.

 

As of June 30, 2003, Kaemingk hadavailable lines of credit of approximately $39.4 million maturing in March 2004.  The lines of credit are collateralized bycertain real estate and equipment owned by Kaemingk.  At June 30, 2003, approximately $10.9million was outstanding at a weighted average interest rate of 2.7%.

 

24

----

 

At June 30, 2003, Kaemingk hadapproximately $14.1 million of long-term debt outstanding under seven loanswith ING Bank N.V. at a weighted average interest rate of 4.9%.  The bank loans have maturity dates rangingfrom 2005 through 2021.  The loans arecollateralized by certain real estate and equipment owned by Kaemingk.

 

Net cash used in operating activitiesamounted to $21.0 million for the six months ended July 31, 2003, comparedto $9.5 million used in operating activities for the six months ended July 31,2002.  The decrease in cash flow fromoperations relates primarily to changes in the Company’s working capital andlower earnings before cumulative effect of change in accounting principle.

 

The Company’s Board of Directors hasauthorized the Company to repurchase up to 6,000,000 shares of common stockunder the share repurchase program.  Inthe second quarter of fiscal 2004, the Company purchased 259,400 shares on theopen market for a cost of $7.0 million, bringing the year-to-date total to371,200 shares at a cost of $9.8 million. Since the program inception, the Company has purchased 4,015,300 sharesat a total cost of $96.4 million.  The acquiredshares are held as common stock in the treasury at cost.

 

On September 4, 2003, the Companydeclared a cash dividend of $0.15 per share of the Company’s common stock forthe six months ended July 31, 2003. This represents an increase of $0.02 per share or 15%, above the mostrecent dividend.  The dividend is payableto shareholders of record as of October 31, 2003 and will be paid on November 14,2003.

 

**Critical Accounting Policies**

 

For a discussion of the Company’s criticalaccounting policies see our Annual Report on Form 10-K for the fiscal yearended January 31, 2003.

 

**Impact of Adoption of RecentlyIssued Accounting Standards**

 

In January 2003, the FASB issuedFinancial Interpretation No. 46, “Consolidation of Variable InterestEntities,” which is an interpretation of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” and addresses consolidation by businessenterprises of variable interest entities that have specific characteristics asdescribed in the Interpretation. This Interpretation was effective immediatelywith respect to variable interest entities created after January 31, 2003,and to variable interest entities in which an enterprise obtains an interestafter that date. It applies in the first fiscal year or interim periodbeginning after June 15, 2003, to variable interest entities in which anenterprise holds a variable interest that it acquired before February 1,2003.  The implementation of thisstandard had no impact on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  This statement amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under FASB Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  This standard is effective for derivativecontracts entered into or modified after June 30, 2003. The implementationof this standard had no impact on our financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” This Statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity.  It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). This standard is effective for financial instruments entered into ormodified after May 31, 2003. The implementation of this standard had noimpact on our financial statements.

 

25

----

 

**Item4.****Controls andProcedures**

 

(a) Evaluation of disclosure controls andprocedures.

 

Our management, with the participation of ourprincipal executive officer and our principal financial officer, evaluated theeffectiveness of our disclosure controls and procedures (as defined inSecurities 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 were effective at the reasonable assurancelevel as of the end of the period covered by this quarterly report.

 

Nonetheless, we note that, as discussed in Item 4(b) below,we have made changes in our internal controls after the end of the periodcovered by this quarterly report in response to the fact that, as discussed inItem 9 “Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure” in our fiscal 2004 Form 10-K, on April 21,2004, PricewaterhouseCoopers (“PwC”) advised the Company that it had identifiedan internal control issue which PwC considered to be a material weakness inthat changes in circumstances, internal reporting and management structures appearednot to have been properly evaluated by management or considered in connectionwith ongoing compliance with SFAS 131 and SFAS 142 guidance.  PwC recommended that the Company should (A) havea process in place to evaluate changes in management structure and reporting tothe chief operating decision maker that would effect segment determination, (B) strengthenprocedures to monitor all changes in operations that impact accounting andreporting matters and (C) ensure that it has sufficient staffing in itsfinancial reporting function, with appropriate technical qualifications andtasked with ensuring ongoing compliance with relevant accounting and financialreporting requirements.

 

(b) Changes in internal control over financialreporting.

 

There was no change in our internal control overfinancial reporting identified in connection with the evaluation required byparagraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurredduring our last fiscal quarter covered by this report that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

In response to the matter discussed in Item 9A. “Controlsand Procedures” in our fiscal 2004 Form 10-K, whereby PwC had identifiedan internal control issue which they considered to be a material weakness, theCompany in fiscal 2005 now reviews and evaluates more carefully the informationthat is presented to the Board of Directors and the chief operating decisionmaker (“CODM”) on a monthly and quarterly basis, as well as the informationthat is provided on its website and to investors, with a view toward ensuringthat such information is consistent with the Company’s segment reporting andhow the CODM reviews operating results in order to make decisions about theallocation of resources.  Moreover, theCompany believes that, by reason of the Company’s experience in connection withits change in reporting segments for fiscal 2004, the Company’s financialpersonnel, as well as its other members of management, are particularly wellinformed as to the issues that may arise under SFAS 131 and 142 and aresensitive to the need to ensure that such issues are properly and promptlyaddressed and resolved.

 

26

----

 

**PART II.******  **OTHERINFORMATION**

 

**Item5.** **Other Information**

 

In our filing on Form 10-Q/A Amendment No. 2for the quarter ended July 31, 2003 filed with the Securities and ExchangeCommission on December 16, 2004 we disclosed that the interim financialstatements included therein had not been reviewed by an independent registeredpublic accounting firm, as required by Section 10-01(d) of RegulationS-X.  This Form 10-Q/A Amendment No. 3is being filed to remedy that deficiency. This amended quarterly report has not required any change to theConsolidated Financial Statements except for a restatement of the ConsolidatedStatements of Cash Flows as discussed in Note 2 to more properly reflect theimpact of foreign currency exchange rates on cash for fiscal 2003 and fiscal2004.

 

The staff of the Commission may take the position thatbecause certain information relating to our Quarterly Reports for fiscal 2004had not been reviewed by any independent public accountants prior to filing asrequired by Section 10–01(d) of Regulation S–X, we would not havebeen viewed as having made all required filings until the reports were amendedto reflect the required review, and even then that the filings were not filedtimely.  Therefore, we could be ineligibleto use Forms S–2 and S–3 to register securities (or amend an existingregistration statement) until all required reports under the Exchange Act havebeen timely filed for the 12 months prior to the filing of the registrationstatement or amendment.  Whileineligibility to use Form S–2 or S–3 would involve additional expenseshould we need to file or amend a registration statement, we do not viewineligibility as having a material adverse effect on our access to capitalresources.

 

The Company is including the following cautionary statementin this Report to make applicable, and to take advantage of, the safe harborprovisions of the Private Securities Litigation Reform Act of 1995 for anyforward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives,goals, strategies, future events or performance and underlying assumptions andother statements, which are other than statements of historical facts. From time to time, the Company and its representatives may publish or otherwisemake available forward-looking statements of this nature.  All suchforward-looking statements, whether written or oral, and whether made by or onbehalf of the Company, are expressly qualified by the following cautionarystatements.  Forward-looking statements involve risks and uncertainties,which could cause actual results or outcomes to differ materially from thoseexpressed in the forward-looking statements.  Such forward-lookingstatements are expected to be based on various assumptions, many of which arebased, in turn, upon further assumptions.  There can be no assurance thatmanagement’s expectations, beliefs or projections will occur or be achieved oraccomplished.  In addition to other factors and matters discussedelsewhere in this Report and in the Company’s other public filings andstatements, the following are important factors that, in the view of theCompany, could cause actual results to differ materially from those discussedin the Company’s forward-looking statements.  The Company disclaims anyobligation to update any forward-looking statements, or the following factors,to reflect events or circumstances after the date of this Report.

 

#### **Risk of Inability toMaintain Sales Growth Rate**

 

The Company has experienced significant sales growthin past years.  While management expects continued growth, our futuregrowth rate will likely be less than our historical growth rate.  TheCompany expects faster sales growth in its international market versus itsUnited States market, particularly in the Direct Selling and Wholesalesegments.  The Company’s ability to increase sales depends on numerousfactors, including market acceptance of existing products, the successfulintroduction of new products, the increase in consumers’ discretionaryspending, the ability to recruit new independent sales consultants, sourcing ofraw materials and demand-driven increases in production and distributioncapacity.  Business in all of our segments is driven by consumerpreferences.  Accordingly, there can be no assurances that the Company’scurrent or future products will maintain or achieve market acceptance. Oursales and earnings results can be negatively impacted by the worldwide economicenvironment, particularly the Canadian, United States and European economies.There can be no assurances that the Company’s financial results will not bematerially adversely affected by these factors in the future. The Company’shistorical growth has been due in part to acquisitions and management continuesto consider additional strategic acquisitions.  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.

 

27

----

 

#### **Risks Associated withInternational Sales and Foreign-Sourced Products**

 

Our international sales growth rate has outpaced ourUnited States growth rate in recent years.  Moreover, the Company sourcesa portion of its products in all of its business segments from independentmanufacturers in the Pacific Rim, Europe and Mexico.  For these reasons,we are subject to the following risks associated with internationalmanufacturing and sales:  fluctuations in currency exchange rates,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 toIncreased Product Demand**

 

The Company’s ability to meet future product demand inall of its business segments will depend upon its success in (1) bringingnew production and distribution capacity on line in a timely manner, (2) improvingits ability to forecast product demand and fulfill customer orders promptly, (3) improvingcustomer service-oriented management information systems and (4) training,motivating and managing new employees.  The failure of any of the abovecould result in a material adverse effect on our financial results.

Risk of Shortages of Raw Materials

 

Certain raw materials could be in short supply due tocapacity, availability, a change in requirements, weather or other factors,including supply disruptions due to production or transportation delays. Such shortages have not had and are not presently expected to have a materialadverse effect on the Company’s operations.  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 segments.

 

#### **Dependence on Key CorporateManagement Personnel**

 

Our success depends in part on the contributions ofkey corporate management, including our Chairman and Chief Executive Officer,Robert B. Goergen.  The Company does not have employment contracts withany of its key corporate management personnel except Mr. Goergen, nor doesit maintain any key person life insurance policies.  The loss of any ofthe key corporate management personnel could have a material adverse effect onthe Company.

 

#### **Risk of IncreasedCompetition**

 

Ourbusiness is highly competitive both in terms of pricing and new productintroductions.  The worldwide market for home expressions products ishighly fragmented with numerous suppliers serving one or more of thedistribution channels served by the Company.  In addition, the Companycompetes for direct selling consultants with other direct sellingcompanies.  Because there are relatively low barriers to entry in all ofour business segments, the Company may face increased competition from othercompanies, some of which may have substantially greater financial or other resourcesthan those available to us.  Competition includes companies sellingcandles manufactured at low cost outside of the United States.  Moreover,certain competitors focus on a single geographic or product market and attemptto gain or maintain market share solely on the basis of price.

 

**Risks Related to InformationTechnology Systems**

 

Our informationtechnology systems are dependent on global communications providers, telephonesystems, hardware, software and other aspects of Internet infrastructure thathave experienced significant system failures and outages in the past.  Oursystems are susceptible to outages due to fire, floods, power loss,telecommunications failures, break-ins and similar events.  Despite theimplementation of network security measures, the Company’s systems arevulnerable to computer viruses, break-ins and similar disruptions fromunauthorized tampering with Company systems.  The occurrence of these orother events could disrupt or damage our information technology systems and inhibitinternal operations, the ability to provide customer service or the ability ofcustomers or sales personnel to access the Company’s information systems.

 

28

----

 

**Item 6.**           Exhibits

** **

a)              Exhibits

 
| 31.1   |   | Certification of Chairman, Chief Executive Officer  and President 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, Chief Executive Officer and President 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.                      |

 

29

----

 

**SIGNATURES**

 

**Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.**

 

 
|   |   |   |                | BLYTH, INC.                                 |   |
|--------|--------|--------|---------------------|---------------------------------------------|--------|
|   |   |   |                |                                        |   |
|   |   |   |                |                                        |   |
|   |   | Date:  | April 14, 2005 |                                        | By:    | /s/Robert B.  Goergen |   |   |
|   |   |   |                | Robert B.  Goergen                          |   |
|   |   |   |                | Chairman and  Chief Executive Officer       |   |
|   |   |   |                |                                        |   |
|   |   |   |                |                                        |   |
|   |   | Date:  | April 14, 2005 |                                        | By:    | /s/Robert H.  Barghaus |   |   |
|   |   |   |                | Robert H. Barghaus                          |   |
|   |   |   |                | Vice President  and Chief Financial Officer |   |
|        |        |        |                     |                                             |        |  |  |  |  |

 

30

----