**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **ý**                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                           |                                                                                               |
|                                                                                                                                                                                                                                                                           | **For the  quarterly period ended October 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 since last report) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes    ý               No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-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.

 

**45,442,077 Common Shares as ofNovember 30, 2003**

 

 

----

 

**BLYTH,INC.**

 

#### **INDEX**

 
| Form 10-Q Cover  Page |                   |                                                                                        |                                                  |
|-----------------------|------------------------|---------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                  |                   |                                                                                        |                                                  |   |
| Form 10-Q Index       |                   |                                                                                        |                                                  |
|                  |                   |                                                                                        |                                                  |   |
| Part I.               | Financial Information: |                                                                                        |                                                  |   |
|                  |                   |
|                  | Item 1.                | Financial Statements  (Unaudited):                                                          |                                                  |
|                  |                   |                                                                                        | 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  3.               | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                  |
|                  |                   |                                                                                        |                                                  |   |
|                  | Item 4.                | Controls and Procedures                                                                     |                                                  |
|                  |                   |                                                                                        |
| Part II.              |                   | Other Information                                                                           |                                                  |   |
|                  |                   |                                                                                        |                                                  |
|                  | Item  1.               | Legal  Proceedings                                                                          |                                                  |
|                  |                   |                                                                                        |                                                  |   |
|                  | Item  2.               | Changes  in Securities                                                                      |                                                  |
|                  |                   |                                                                                        |                                                  |   |
|                  | Item 3.                | Defaults upon  Senior Securities                                                            |                                                  |
|                  |                   |                                                                                        |                                                  |   |
|                  | Item  4.               | Submission  of Matters to a Vote of Security Holders                                        |                                                  |
|                  |                   |                                                                                        |                                                  |   |
|                  | Item  5.               | Other  Information                                                                          |                                                  |
|                  |                   |                                                                                        |                                                  |   |
|                  | Item 6.                | Exhibits and  Reports on Form 8-K                                                           |                                                  |
|                  |                   |                                                                                        |                                                  |   |
| Signatures            |                   |
|                       |                        |                                                                                             |                                                       |  |  |  |  |  |

 

2

----

 

Part I.   FINANCIAL INFORMATION

Item I.   FINANCIAL STATEMENTS

 

**BLYTH, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| **(In thousands, except share and per share data)**                                                                            |   | **October 31,  2003** |      | **January 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|----------------------------|--------|
|                                                                                                                           |   | **(Unaudited)**            |      |                       |   |
| **ASSETS**                                                                                                                     |   |                       |      |                       |   |
| **Current assets:**                                                                                                            |   |                       |      |                       |   |
| Cash and cash equivalents                                                                                                      |   | $                          | 165,851   |                       | $      | 168,596 |   |
| Accounts receivable, less allowance for doubtful  receivables of $4,587 and $4,093, respectively                               |   | 194,108                    |      | 82,913                     |   |
| Inventories                                                                                                                    |   | 246,078                    |      | 187,935                    |   |
| Prepaid and other                                                                                                              |   | 23,218                     |      | 15,226                     |   |
| Deferred income taxes                                                                                                          |   | 21,061                     |      | 17,767                     |   |
| Total current assets                                                                                                           |   | 650,316                    |      | 472,437                    |   |
| **Property, plant and equipment, at  cost:**                                                                                   |   |                       |      |                       |   |
| Less accumulated depreciation of $219,869 and  $178,397, respectively                                                          |   | 270,905                    |      | 244,798                    |   |
|                                                                                                                           |   |                       |      |                       |   |
| **Other assets:**                                                                                                              |   |                       |      |                       |   |
| Investment                                                                                                                     |   | 3,440                      |      | 3,564                      |   |
| Excess of cost over fair value of assets acquired                                                                              |   | 216,736                    |      | 149,365                    |   |
| Other intangible assets, net of accumulated  amortization of $1,050                                                            |   | 24,050                     |      | —                     |   |
| Deposits and other assets                                                                                                      |   | 12,674                     |      | 16,494                     |   |
|                                                                                                                           |   | 256,900                    |      | 169,423                    |   |
| Total assets                                                                                                                   |   | $                          | 1,178,121 |                       | $      | 886,658 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                 |   |                       |      |                       |   |
| **Current liabilities:**                                                                                                       |   |                       |      |                       |   |
| Bank lines of credit                                                                                                           |   | $                          | 45,826    |                       | $      | 7,377 |   |
| Current maturities of long-term debt                                                                                           |   | 4,533                      |      | 4,037                      |   |
| Accounts payable                                                                                                               |   | 67,681                     |      | 58,571                     |   |
| Accrued expenses                                                                                                               |   | 96,320                     |      | 80,953                     |   |
| Dividend payable                                                                                                               |   | 6,828                      |      | —                     |   |
| Income taxes                                                                                                                   |   | 4,250                      |      | 2,685                      |   |
| Total current liabilities                                                                                                      |   | 225,438                    |      | 153,623                    |   |
| **Deferred income taxes**                                                                                                      |   | 40,828                     |      | 24,280                     |   |
| **Long-term debt, less current  maturities**                                                                                   |   | 311,047                    |      | 165,079                    |   |
| **Minority interest and other**                                                                                                |   | 11,850                     |      | 4,212                      |   |
| **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 49,787,177 shares and 49,703,682 shares, respectively |   | 996                        |      | 994                        |   |
| Additional contributed capital                                                                                                 |   | 103,367                    |      | 101,567                    |   |
| Retained earnings                                                                                                              |   | 576,704                    |      | 523,865                    |   |
| Accumulated other comprehensive income (loss)                                                                                  |   | 10,626                     |      | (377                       | )      |
| Treasury stock, at cost, 4,255,300 shares and  3,644,100 shares, respectively                                                  |   | (102,735                   | )         | (86,585                    | )      |
| Total stockholders’ equity                                                                                                |   | 588,958                    |      | 539,464                    |   |
| Total liabilities and stockholders’ equity                                                                                |   | $                          | 1,178,121 |                       | $      | 886,658 |   |

 

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

 

3

----

 

**BLYTH, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

 

**Ninemonths ended October 31**(In thousands, except per sharedata)

 
|                                                                                                     |   | **2003** |       | **2002** |       |
|----------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                                                                     |   |     | ** ** |     | ** ** |
| Net sales                                                                                                |   | $        | 1,019,160  |     | $          | 908,098 |   |
| Cost of goods sold                                                                                       |   | 526,274  |       | 453,271  |       |
| Gross profit                                                                                             |   | 492,886  |       | 454,827  |       |
| Selling                                                                                                  |   | 283,698  |       | 252,958  |       |
| Administrative                                                                                           |   | 93,676   |       | 85,330   |       |
| Restructuring and impairment charges                                                                     |   | 767      |       | —   |       |
|                                                                                                     |   | 378,141  |       | 338,288  |       |
| Operating profit                                                                                         |   | 114,745  |       | 116,539  |       |
| Other expense (income):                                                                                  |   |     |       |     |       |
| Interest expense                                                                                         |   | 11,795   |       | 11,146   |       |
| Interest income and other                                                                                |   | (1,250   | )          | (753     | )          |
| Equity in earnings of investee                                                                           |   | 141      |       | 120      |       |
|                                                                                                     |   | 10,686   |       | 10,513   |       |
| Earnings before income taxes, minority interest and  cumulative effect of change in accounting principle |   | 104,059  |       | 106,026  |       |
| Income tax expense                                                                                       |   | 38,292   |       | 39,442   |       |
| Earnings before minority interest and cumulative  effect of change in accounting principle               |   | 65,767   |       | 66,584   |       |
| Minority interest                                                                                        |   | (120     | )          | —   |       |
| Cumulative effect of change in accounting principle,  net of tax of $2,887                               |   | —   |       | (4,515   | )          |
| Net earnings                                                                                             |   | $        | 65,647     |     | $          | 62,069 |   |
| Basic:                                                                                                   |   |     |       |     |       |
| Earnings per common share before cumulative effect  of change in accounting principle                    |   | $        | 1.43       |     | $          | 1.44 |   |
| Cumulative effect of change in accounting principle                                                      |   | —   |       | (0.10    | )          |
|                                                                                                     |   | $        | 1.43       |     | $          | 1.34 |   |
| Weighted average number of shares outstanding                                                            |   | 45,836   |       | 46,306   |       |
| Diluted:                                                                                                 |   |     |       |     |       |
| Earnings per common share before cumulative effect  of change in accounting principle                    |   | $        | 1.43       |     | $          | 1.43 |   |
| Cumulative effect of change in accounting principle                                                      |   | —   |       | (0.10    | )          |
|                                                                                                     |   | $        | 1.43       |     | $          | 1.33 |   |
| Weighted average number of shares outstanding                                                            |   | 46,036   |       | 46,589   |       |

 

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

 

4

----

 

**Threemonths ended October 31,**(In thousands, except per sharedata)

 
|                                               |                                          | **2003** |       | **2002** |       |
|----------------------------------------------------|-----------------------------------------------|----------|------------|----------|------------|
|                                               |                                          |     | ** ** |     | ** ** |
| Net sales                                          |                                          | $        | 431,901    |     | $          | 362,181 |   |
| Cost of goods sold                                 |                                          | 234,963  |       | 189,694  |       |
| Gross profit                                       |                                          | 196,938  |       | 172,487  |       |
| Selling                                            |                                          | 104,400  |       | 89,316   |       |
| Administrative                                     |                                          | 32,003   |       | 31,197   |       |
| Restructuring and impairment charges               |                                          | 767      |       | —   |       |
|                                               |                                          | 137,170  |       | 120,513  |       |
| Operating profit                                   |                                          | 59,768   |       | 51,974   |       |
| Other expense (income):                            |                                          |     |       |     |       |
| Interest expense                                   |                                          | 4,693    |       | 3,576    |       |
| Interest income and other                          |                                          | 32       |       | (58      | )          |
| Equity in loss of investee                         |                                          | (58      | )          | (70      | )          |
|                                               |                                          | 4,667    |       | 3,448    |       |
| Earnings before income taxes and minority interest |                                          | 55,101   |       | 48,526   |       |
| Income tax expense                                 |                                          | 20,278   |       | 18,052   |       |
| Earnings before minority interest                  |                                          | 34,823   |       | 30,474   |       |
| Minority interest                                  |                                          | (49      | )          | —   |       |
| Net earnings                                       |                                          | $        | 34,774     |     | $          | 30,474 |   |
| Basic:                                             | Net earnings per common share                 |     | $          | 0.76     |       | $ | 0.66 |   |
|                                               | Weighted average number of shares outstanding |     | 45,526     |     | 46,299     |   |
| Diluted:                                           | Net earnings per common share                 |     | $          | 0.76     |       | $ | 0.65 |   |
|                                               | Weighted average number of shares outstanding |     | 45,764     |     | 46,602     |   |

 

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

 

5

----

 

**BLYTH, INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

(Inthousands, except share data)

 
|                                                                    |   | **Common stock** |       | **Additional  contributed  capital** |       | **Retained  earnings** |       | **Treasury stock** |       | **Accumulated  other  comprehensive  income (loss)** |       | **Total** |       |
|-------------------------------------------------------------------------|--------|------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------|------------|------------------------------------------------------|------------|-----------|------------|
| **Shares**                                                              |   | **Amount**       | **Shares** |                                 | **Amount** |
|                                                                    |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   |   |   |
| **For the  nine months ended  October 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                                             |   |             |       |                                 |       |                   |       | 62,069             |       |                                                 |       |      |       |   |   | 62,069 |   |
| Foreign currency translation  adjustments                               |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       | 8,949 |   | 8,949 |   |
| Unrealized holding losses on  certain investments (net of tax of $26)   |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       | (44 | ) | (44 | ) |
| Net loss on cash flow  hedging instruments (net of tax of $303)         |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       | (512 | ) | (512 | ) |
| Comprehensive income                                                    |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   | 70,462 |   |
| Common stock issued in con -  connection with exercise of stock options |   | 177,506          |       | 4                                    |       | 2,987                  |       |               |       |                                                 |       |      |       |   |   | 2,991 |   |
| Tax benefit from stock  options                                         |   |             |       |                                 |       | 312                    |       |               |       |                                                 |       |      |       |   |   | 312 |   |
| Dividends                                                               |   |             |       |                                 |       |                   |       | (10,184            | )          |                                                 |       |      |       |   |   | (10,184 | ) |
| Treasury stock purchases                                                |   |             |       |                                 |       |                   |       |               |       | (813,300                                             | )          | (18,604   | )          |   |   | (18,604 | ) |
| Balance, October 31,  2002                                         |   | 49,687,282       |       | $                                    | 994        |                   | $          | 101,178            |       | $                                                    | 500,923    |      | (3,444,200 | ) | $ | (81,554 | ) | $ | (8,501 | ) | $ | 513,040 |   |
|                                                                    |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   |   |   |
| **For the  nine months ended  October 31, 2003:**                  |   |             | ** ** |                                 | ** ** |                   | ** ** |               | ** ** |                                                 | ** ** |      | ** ** |   | ** ** |   | ** ** |
|                                                                    |   |             | ** ** |                                 | ** ** |                   | ** ** |               | ** ** |                                                 | ** ** |      | ** ** |   | ** ** |   | ** ** |
| Balance, January 31,  2003                                         |   | 49,703,682       |       | $                                    | 994        |                   | $          | 101,567            |       | $                                                    | 523,865    |      | (3,644,100 | ) | $ | (86,585 | ) | $ | (377 | ) | $ | 539,464 |   |
| Net earnings for the period                                             |   |             |       |                                 |       |                   |       | 65,647             |       |                                                 |       |      |       |   |   | 65,647 |   |
| Foreign currency translation  adjustments                               |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       | 12,021 |   | 12,021 |   |
| Unrealized holding losses on  certain investments (net of tax of $122)  |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       | (210 | ) | (210 | ) |
| Net loss on cash flow  hedging instruments (net of tax of $471)         |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       | (808 | ) | (808 | ) |
| Comprehensive income                                                    |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   | 76,650 |   |
| Common stock issued in  connection with exercise of stock options       |   | 83,495           |       | 2                                    |       | 1,688                  |       |               |       |                                                 |       |      |       |   |   | 1,690 |   |
| Tax benefit from stock  options                                         |   |             |       |                                 |       | 112                    |       |               |       |                                                 |       |      |       |   |   | 112 |   |
| Dividends                                                               |   |             |       |                                 |       |                   |       | (12,808            | )          |                                                 |       |      |       |   |   | (12,808 | ) |
| Treasury stock purchases                                                |   |             |       |                                 |       |                   |       |               |       | (611,200                                             | )          | (16,150   | )          |   |   | (16,150 | ) |
|                                                                    |   |             |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   |   |   |
| Balance, October 31,  2003                                         |   | 49,787,177       |       | $                                    | 996        |                   | $          | 103,367            |       | $                                                    | 576,704    |      | (4,255,300 | ) | $ | (102,735 | ) | $ | 10,626 |   | $ | 588,958 |   |

 

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

 

6

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**BLYTH, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **

 
| **Nine months ended October 31,****(In thousands)**                               |   | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Cash flows from operating activities:                                                  |   |     |    |     |   |
| Net earnings                                                                           |   | $        | 65,647  |     | $      | 62,069 |   |
| Adjustments to reconcile net earnings to net cash  used in operating activities:       |   |     |    |     |   |
| Cummulative effect of change in accounting  principle, net of tax                      |   | —   |    | 4,515    |   |
| Depreciation and amortization                                                          |   | 25,656   |    | 22,740   |   |
| Tax benefit from stock options                                                         |   | 112      |    | 312      |   |
| Deferred income taxes                                                                  |   | 500      |    | 2,386    |   |
| Equity in loss of investee                                                             |   | 141      |    | 120      |   |
| Minority interest                                                                      |   | 120      |    | —   |   |
| Gain on sales of long-term investment                                                  |   | (487     | )       | —   |   |
| Changes in operating assets and liabilities, net of  effect of business acquisitions:  |   |     |    |     |   |
| Accounts receivable                                                                    |   | (107,965 | )       | (85,021  | )      |
| Inventories                                                                            |   | (26,847  | )       | (16,340  | )      |
| Prepaid and other                                                                      |   | 1,839    |    | 4,279    |   |
| Deposits and other assets                                                              |   | 210      |    | (826     | )      |
| Accounts payable                                                                       |   | 2,578    |    | (4,873   | )      |
| Accrued expenses                                                                       |   | 11,501   |    | (9       | )      |
| Other liabilities                                                                      |   | 1,731    |    | 1,713    |   |
| Income taxes                                                                           |   | (2,186   | )       | (1,722   | )      |
| Total adjustments                                                                      |   | (93,097  | )       | (72,726  | )      |
| Net cash used in operating activities                                                  |   | (27,450  | )       | (10,657  | )      |
| Cash flows from investing activities:                                                  |   |     |    |     |   |
| Purchases of property, plant and equipment                                             |   | (15,983  | )       | (11,405  | )      |
| Purchases of long-term investment                                                      |   | (1,377   | )       | —   |   |
| Proceeds from sales of long-term investment                                            |   | 1,874    |    | 26       |   |
| Purchase of businesses, net of cash acquired                                           |   | (94,809  | )       | (51,037  | )      |
| Net cash used in investing activities                                                  |   | (110,295 | )       | (62,416  | )      |
| Cash flows from financing activities:                                                  |   |     |    |     |   |
| Proceeds from issuance of common stock                                                 |   | 1,690    |    | 2,991    |   |
| Purchases of treasury stock                                                            |   | (16,150  | )       | (18,604  | )      |
| Borrowings from bank line of credit                                                    |   | 58,284   |    | 68,071   |   |
| Repayments on bank line of credit                                                      |   | (29,176  | )       | (53,210  | )      |
| Borrowings on long-term debt                                                           |   | 130,463  |    | 517      |   |
| Repayments on long-term debt                                                           |   | (4,131   | )       | (19,648  | )      |
| Dividends paid                                                                         |   | (5,980   | )       | (5,098   | )      |
| Net cash provided by (used in) financing activities                                    |   | 135,000  |    | (24,981  | )      |
| Net decrease in cash and cash equivalents                                              |   | (2,745   | )       | (98,054  | )      |
| Cash and cash equivalents at beginning of period                                       |   | 168,596  |    | 135,357  |   |
| Cash and cash equivalents at end of period                                             |   | $        | 165,851 |     | $      | 37,303 |   |
| Cash dividend declared,  $0.15 per share 3rd quarter 2003 and $0.11 per share in 2002. |   | $        | 6,828   |     | $      | 5,086 |   |

** **

***The accompanyingnotes are an integral part of these financial statements.***

 

7

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**BLYTH, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.**                                      Basis of Presentation

 

Blyth is a global competitor in the gift and decorative accessoriesmarket, which the Company calls the Home Expressions category.  Within this category, the Company reportsits financial results in two segments – the Candles & Home Fragrancesegment and the Creative Expressions segment.

 

Within the Candles & Home Fragrance segment, the Company designs,manufactures and markets an extensive line of products including scentedcandles, potpourri and other fragranced products.  It also designs and markets a broad range of related candleaccessories, as well as tabletop illumination products and chafing fuel.  These products are sold direct to theconsumer under the PartyLite® brand, to retailers in the premium and specialtyretail channels under the Colonial Candle of Cape Cod®, Colonial at HOMEâ,Carolina®, and Kate’sTM brands, in the mass retail channel under theFlorasense®, Ambria®, and FilterMate® brands and to the foodservice, or AwayFrom Home, industry under the Sterno®, Ambria®, and HandyFuel® brandnames.  In Europe, these products arealso sold under the Colonial, Ambria®, Carolina®, Gies® (1)and Liljeholmens®brands.

 

Within the Creative Expressions segment, the Company designs, sourcesand markets a broad range of home décor, household convenience items, premiumphoto albums, frames, holiday cards and gifts under the CBK®, Miles Kimballâand Exposuresâ brands, seasonal accents under the Seasons ofCannon FallsÔ and ImpactÔbrands, and decorative gift bags under the Jeanmarie® brand.  In Europe, a wide range of premium seasonaldecorations are sold under the Kaemingk brand.

 

The consolidated financial statements include the accounts of theCompany and its direct and indirect subsidiaries.  All significant intercompany accounts and transactions have beeneliminated.  Investments in companiesthat are not majority-owned or controlled are reported using the equity methodand are recorded in investment.  Interest income and other consists of interest income earned frominvestments, foreign currency gains and losses and gains and losses from salesof investments.  Certain of theCompany’s subsidiaries operate on a 52 or 53-week fiscal year ending on theSaturday closest to January 31. European operations maintain a calendar year accounting period, which isconsolidated with the Company’s fiscal period. In the opinion of management, the accompanying unaudited consolidatedfinancial statements include all adjustments necessary for fair presentation ofthe Company’s consolidated financial position at October 31, 2003 and theconsolidated results of its operations and cash flows for the nine-monthperiods ended October 31, 2003 and 2002. These interim statements shouldbe read in conjunction with the Company’s consolidated financial statements forthe year ended January 31, 2003, as set forth in the Company’s Annual Reporton Form 10-K.  Operating results for thenine months ended October 31, 2003 are not necessarily indicative of theresults that may be expected for the year ending January 31, 2004.

 

**Reclassifications**

 

Certain reclassifications have been made in prior years’ financialstatements to conform to classifications used in the current year.

 

**Employee Stock Options**

 

The Company has elected to adopt the disclosure only provisions ofStatement of Financial Accounting Standards (SFAS) No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure,” and continues to followAccounting Principles Board (APB) opinion No. 25, “Accounting for Stock Issuedto Employees” and related interpretations in accounting for stock optionsgranted to its employees and directors under the intrinsic value method.  Accordingly, no compensation expense isrecorded for the stock options issued to employees unless the option price isbelow market at the measurement date. The Company does not at

 

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(1) Gies is registeredand sold only outside the United States.

 

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this time, issue stock options below market value, therefore nocompensation expense has been recorded in the financial statements.  Had compensation expense for the Company’sstock options been determined in accordance with the fair value method in SFASNo. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, theCompany’s reported net income and earnings per share would have been adjustedto the pro forma amounts indicated below:

 
|                                                                                                        |   | **Three  months ended October 31,** |   | **Nine  months ended October 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
| **(In  thousands except per share data)**                                                                   |   | **2003**                                 |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                                                                                        |   |                                     |   |                                    |   |   |   |   |   |
| Net earnings:                                                                                               |   |                                     |   |                                    |   |   |   |   |   |
| As reported                                                                                                 |   | $                                        | 34,774 |                                    | $      | 30,474 |   | $ | 65,647 |   | $ | 62,069 |   |
| Stock-based employee compensation expense determined  under SFAS No. 123 for all awards, net of related tax |   | 645                                      |   | 652                                     |   | 1,962 |   | 1,727 |   |
| Pro forma                                                                                                   |   | $                                        | 34,129 |                                    | $      | 29,822 |   | $ | 63,685 |   | $ | 60,342 |   |
| Net earnings per common share:                                                                              |   |                                     |   |                                    |   |   |   |   |   |
| As reported:                                                                                                |   |                                     |   |                                    |   |   |   |   |   |
| Basic                                                                                                       |   | $                                        | 0.76   |                                    | $      | 0.66 |   | $ | 1.43 |   | $ | 1.34 |   |
| Diluted                                                                                                     |   | 0.76                                     |   | 0.65                                    |   | 1.43 |   | 1.33 |   |
| Pro forma:                                                                                                  |   |                                     |   |                                    |   |   |   |   |   |
| Basic                                                                                                       |   | $                                        | 0.75   |                                    | $      | 0.64 |   | $ | 1.39 |   | $ | 1.30 |   |
| Diluted                                                                                                     |   | 0.72                                     |   | 0.62                                    |   | 1.34 |   | 1.26 |   |

 

**2.**                                      New Accounting Pronouncements

 

In January 2003, the Financial Accounting Standards Board (FASB)issued Financial Interpretation No. 46 (FIN 46), “Consolidation of VariableInterest Entities.  FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements.”  The interpretation wasimmediately applicable to variable interest entities (“VIEs”) created afterJanuary 31, 2003, and to VIEs in which an enterprise obtains an interestafter that date.  As originally issued,it applied in the fiscal year or interim period beginning after June 15,2003, for VIEs in which an enterprise acquired a variable interest prior toFebruary 1, 2003.  InOctober 2003, the FASB issued FASB Staff Position No. 46-6, which defersthe effective date for FIN 46 to the first interim or annual period endingafter December 15, 2003 for VIEs created before February 1,2003.  FIN 46 requires consolidation ofentities in which the Company absorbs a majority of the entity’s expectedlosses, receives a majority of the entity’s expected residual returns, or both,as a result of ownership, contractual or other financial interests in theentity.  Currently, entities areconsolidated when the Company has a controlling financial interest throughownership of a majority voting interest in an entity.  The implementation of this standard is not expected to have amaterial impact on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.”  This statement amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under FASB Statement No.133, “Accounting for 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.

 

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In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  As originally issued, SFAS 150is effective for mandatorily redeemable financial instruments of publicentities entered into or modified after May 31, 2003, and for all otherinstruments for interim periods beginning after June 15, 2003.  In November 2003, the FASB issued FASBStaff Position No. 150-3, “Effective Date, Disclosures, and Transition forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities andCertain Mandatorily Redeemable Noncontrolling Interests under FASB StatementNo. 150”, which defers indefinitely the classification and measurementprovisions for certain mandatorily redeemable noncontrolling interestsassociated with finite-lived subsidiaries pending further FASB action.  For other mandatorily redeemablenoncontrolling interests that were issued before November 5, 2003, onlythe measurement provisions of SFAS 150 are deferred indefinitely, both for theparent in consolidated financial statements and for the subsidiary that issuedthe instruments that result in the mandatorily redeemable noncontrollinginterest, pending further FASB action. The original implementation of SFAS 150 had no impact on our financialstatements and we do not expect the deferral provisions of FSP FAS 150-3 tohave a significant impact on our financial statements.

** **

**3.**                                      Goodwill Impairment

 

The Company adopted SFAS No. 142, “Goodwill and Other IntangibleAssets,” effective February 1, 2002. In accordance with the new standard,Blyth ceased amortization of goodwill and performed an assessment forimpairment of its goodwill. As a result of the impairment review, Blyth reducedthe carrying value of the goodwill related to its acquisition of the Sternoâbrand in 1997 by $7.4 million.  The fairvalue of the Sterno Group was determined through an independent valuationutilizing market comparable analysis, as well as discounted cash flow models reflectingthe expected range of future cash flow outcomes over the life of themodel.  These cash flows were discountedto January 31, 2002 using a risk-adjusted discount rate.  The impairment of the Sterno Group’sgoodwill, which was recorded as a cumulative effect of a change in accountingprinciple, had the effect of reducing net income in the quarter endedApril 30, 2002 by $4.5 million (after tax) or $0.10 per share.

 

**4.**                                      Business Acquisitions

 

On May 10, 2002, the Company purchased all of the interests inCBK, Ltd., LLC, now known as CBK Styles, Inc. (“CBK”), a designer and marketerof premium everyday home décor and gifts, for approximately $51.0 million incash*.*  The excess of the purchase price over the estimated fair value ofthe net assets acquired approximated $40.0 million, which will be deductiblefor income tax purposes over 15 years. The results of operations of CBK are included in the ConsolidatedStatements of Earnings of the Company since May 11, 2002.  For segment reporting purposes, CBK isincluded in the Creative Expressions segment.

 

On April 1, 2003, the Company acquired 100% of the Miles KimballCompany (“MK”), a direct marketer of gifts, home décor and householdconvenience items, premium photo albums, frames and holiday cards under theMiles Kimball® and Exposures® catalog titles for approximately $66.2 million incash.  The excess of the purchase priceover the estimated fair value of the net assets acquired approximated $46.0million, which will not be deductible for income tax purposes.  The other intangibles acquired consist of$16.1 million of trade names and trademarks, which are deemed to have anindefinite life and will not be amortized, plus $9.0 million of customer lists,which will be amortized on an accelerated basis over 12 years.  Amortization expense was $0.45 million forthe three months ended October 31, 2003 and $1.05 million for the ninemonths ended October 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 Creative Expressions segment.

 

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Thefollowing provides an allocation of the purchase price of Miles Kimball (inthousands):

 
| 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 KaemingkB.V. (“Kaemingk”), a designer and marketer of a wide range of premium seasonaldecorations. Kaemingk’s product lines feature Christmas décor, includingornaments, lighting, trim, glassware, candles and plush animals, as well asspring and summer decorative accents and tabletop products.  The cash purchase price was approximately$36.2 million less cash acquired of $7.7 million resulting in net cash paid of$28.5 million.   Approximately $30.6million of the cash purchase price was borrowed under the Company’s $200million unsecured revolving credit facility. The Company also assumed Kaemingk’s long-term debt of approximately$14.4 million.  The excess of thepurchase price over the estimated fair value of the net assets acquiredapproximated $17.9 million, which will not be deductible for income taxpurposes.  During the quarter ended October 31,2003, an adjustment was recorded to reflect the final appraised value of theacquired property, plant and equipment. In addition to the fixed purchase price, there is contingentconsideration payable in the form of a three-year earn out provision based on apre-defined formula related to a multiple of earnings before interest andincome taxes.  The results of operationsof Kaemingk are included in the Consolidated Statements of Earnings of theCompany since June 21, 2003.  Forsegment reporting purposes, Kaemingk is included in the Creative Expressionssegment.

 

Thefollowing provides an allocation of the purchase price of Kaemingk (inthousands):

 
| Cash Purchase Price                   |   | $      | 36,237 |   |
|---------------------------------------|--------|--------|--------|--------|
| Less:  Assets  acquired          |   |   |   |
| Cash and cash equivalents             |   | 7,681  |   |
| Accounts receivable                   |   | 2,106  |   |
| Inventories                           |   | 25,514 |   |
| Property, plant and equipment         |   | 14,647 |   |
| Other                                 |   | 606    |   |
| Total assets acquired                 |   | 50,554 |   |
| 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) |   | $      | 17,869 |   |

 

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The following unaudited pro forma financial information summarizes theestimated combined results of operations of the Company, CBK, MK and Kaemingkassuming that the acquisitions of CBK, MK and Kaemingk had taken place onFebruary 1, 2002.  The unauditedpro forma combined results of operations were prepared on the basis ofinformation provided to the Company by the former management of CBK, MK andKaemingk and no representation is made by the Company with respect to theaccuracy of such information.  The proforma combined results of operations reflect adjustments for interest income,additional depreciation based on the fair market value of CBK’s and MK’sproperty, plant, and equipment, amortization of identifiable intangibles of MKand income tax expense.

 
|                                                                                      |   | **Three  months ended October 31,** |    | **Nine  months ended October 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|-----------------------------------------|--------|
| **(In  thousands except per share data)**                                                 |   | **2003**                                 |    | **2002**                                |   | **2003** |   | **2002** |   |
| Net sales                                                                                 |   | $                                        | 431,901 |                                    | $      | 434,767 |   | $ | 1,042,212 |   | $ | 1,049,548 |   |
| Earnings before cumulative effect of change in  accounting principle                      |   | 34,774                                   |    | 37,817                                  |   | 63,336 |   | 72,138 |   |
| Net earnings                                                                              |   | 34,774                                   |    | 37,817                                  |   | 63,336 |   | 67,623 |   |
|                                                                                      |   |                                     |    |                                    |   |   |   |   |   |
| Basic:                                                                                    |   |                                     |    |                                    |   |   |   |   |   |
| Earnings per common share before the cumulative  effect of change in accounting principle |   | $                                        | 0.76    |                                    | $      | 0.82 |   | $ | 1.38 |   | $ | 1.56 |   |
| Net earnings per common share                                                             |   | 0.76                                     |    | 0.82                                    |   | 1.38 |   | 1.46 |   |
| Diluted:                                                                                  |   |                                     |    |                                    |   |   |   |   |   |
| Earnings per common share before the cumulative  effect of change in accounting principle |   | $                                        | 0.76    |                                    | $      | 0.81 |   | $ | 1.38 |   | $ | 1.55 |   |
| Net earnings per common share                                                             |   | 0.76                                     |    | 0.81                                    |   | 1.38 |   | 1.45 |   |
|                                                                                           |        |                                          |         |                                         |        |  |  |  |  |  |  |  |  |  |

 

The unaudited pro forma combined results of operations are notnecessarily indicative of, and do not purport to represent, what the Company’sresults of operations or financial condition actually would have been had theacquisitions been made as of February 1, 2002.

 

At October 31, 2003, the Company had atotal of $216.7 million of excess of cost over fair value of assetsacquired  (“goodwill”) on its balancesheet compared to $149.4 million at January 31, 2003.  Goodwill attributable to the Candles &Home Fragrance segment at October 31, 2003 was $73.5 million, an increaseof $2.8 million from $70.7 million at January 31, 2003.  Such increase is a result of the effects offoreign currency exchange rate increases versus the US dollar on our Europeanbusinesses goodwill.  Goodwill attributableto the Creative Expressions segment at October 31, 2003 was $143.2million, an increase of $64.5 million, from $78.7 million at January 31,2003.  Such increase is a result of thegoodwill from the acquisitions of Miles Kimball and Kaemingk of $46.0 millionand $17.9 million respectively, and the effects of a foreign currency exchangerate increase versus the US dollar on Kaemingk’s goodwill.

 

**5.**                                      Inventories

 

The components of inventory consist of the following (in thousands):

 
|             |   | **October 31,  2003** |    | **January 31,  2003** |   |
|------------------|--------|----------------------------|---------|----------------------------|--------|
| Raw materials    |   | $                          | 25,487  |                       | $      | 33,950 |   |
| Work in procress |   | 2,798                      |    | 2,509                      |   |
| Finished goods   |   | 217,793                    |    | 151,476                    |   |
|             |   | $                          | 246,078 |                       | $      | 187,935 |   |

 

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**6.**                                      Earnings per Share

 

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

 
|                                                   |   | **Three  months ended October 31,** |   | **Nine  months ended October 31,** |   |
|--------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
|                                                   |   | **2003**                                 |   | **2002**                                |   | **2003** |   | **2002** |   |
| Net earnings                                           |   | $                                        | 34,774 |                                    | $      | 30,474 |   | $ | 65,647 |   | $ | 62,069 |   |
| Weighted average number of common shares outstanding:  |   |                                     |   |                                    |   |   |   |   |   |
| Basic                                                  |   | 45,526                                   |   | 46,299                                  |   | 45,836 |   | 46,306 |   |
| Dilutive effect of stock options                       |   | 238                                      |   | 303                                     |   | 200 |   | 283 |   |
| Weighted average number of common shares  outstanding: |   |                                     |   |                                    |   |   |   |   |   |
| Diluted                                                |   | 45,764                                   |   | 46,602                                  |   | 46,036 |   | 46,589 |   |
|                                                        |        |                                          |        |                                         |        |  |  |  |  |  |  |  |  |

 

As of October 31, 2003 and 2002, options to purchase 51,291 and38,313 shares of common stock, respectively, are not included in thecomputation of earnings per share because the effect would be antidilutive.

### ** **

**7.**                                      Restructuring and Impairment Charges

 

At January 31, 2003, the Company had approximately $0.4 million ofrestructuring changes related to lease obligations included in the ConsolidatedBalance Sheet.  As a result of paymentsmade during the nine month period ended October 31, 2003, the leaseobligations have been satisfied in full as of the end of the third quarter offiscal 2004.

 

On September 30, 2003, the Company announced its decision to closeits Hyannis, Massachusetts candle manufacturing facility.  This closure was the final phase of thewind-down of the Hyannis operation, and is consistent with the Company’songoing attempts to rationalize its operations.  The Company was able to move the production associated with theHyannis facility to another existing facility, and expects to incur loweroperating costs in the Candles & Home Fragrance segment as a result of theclosure.   The shutdown of this facilityis expected to be complete in the fourth quarter of fiscal 2004.  In conjunction with the closing, the Companyeliminated 43 jobs, comprised of manufacturing and management positions.

 

During the three months ended October 31, 2003, $0.8 million ofcosts were incurred related to the Hyannis plant closure including $0.6 millionof severance and related costs and $0.2 million of equipment impairmentcharges.  The Company expects additionalcharges in the fourth quarter of  $0.04to $0.06 per share, related primarily to the impairment of equipment.

 

The following is a tabular roll forward of the restructuring andimpairment charges described above that were recorded in the balance sheet ofthe Company:

 
| **(In thousands)**                 |   | **Lease  Obligations** |   | **Severence  Costs** |   | **Total** |    |
|------------------------------------|--------|------------------------|--------|----------------------|--------|-----------|---------|
|                               |   |                   |   |                 |   |      |    |
| Balance at January 31, 2003   |   | $                      | 405    |                 | $      | —    |    | $ | 405 |   |
| Payments made against 2002 charges |   | (405                   | )      |                 |   | (405      | )  |
| Charges recorded in third quarter  |   | —                 |   | 580                  |   | 580       |    |
| Balance at October 31, 2003   |   | $                      | — |                 | $      | 580       |    | $ | 580 |   |

 

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**8.**                                      Segment Information

 

Blyth is a global competitor in the gift and decorative accessoriesmarket, which the Company calls the Home Expressions category.  Within this category, the Company reportsits financial results in two segments – the Candles & Home Fragrancesegment and the Creative Expressions segment. Miles Kimball, acquired in April 2003 and Kaemingk, acquired inJune 2003 are included in the Creative Expressions segment.  The Company has operations both inside andoutside the United States and sells its products worldwide.

 

In the segment summary table below, earnings represent net sales lessoperating expenses directly related to the business segments and corporateexpenses allocated to the business segments. Other expense includes interest expense, interest income and equity inearnings of investee, which are not allocated to the business segments duringinterim periods.  Identifiable assetsfor each segment consist of assets used directly in its operations andintangible assets, if any, resulting from purchase business combinations.  Other identifiable assets include corporatelong-term investments and deferred bond costs, which are not allocated to thebusiness segments.

 
|                                                                                                         |   | **Three  months ended October 31,** |    | **Nine  months ended October 31,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|-----------------------------------------|--------|
| **(In  thousands)**                                                                                          |   | **2003**                                 |    | **2002**                                |   | **2003** |   | **2002** |   |
| **Net Sales**                                                                                                |   |                                     |    |                                    |   |   |   |   |   |
| Candles & Home Fragrance                                                                                 |   | $                                        | 267,251 |                                    | $      | 267,905 |   | $ | 741,949 |   | $ | 737,520 |   |
| Creative Expressions                                                                                         |   | 164,650                                  |    | 94,276                                  |   | 277,211 |   | 170,578 |   |
| **Total**                                                                                                    |   | $                                        | 431,901 |                                    | $      | 362,181 |   | $ | 1,019,160 |   | $ | 908,098 |   |
| **Earnings**                                                                                                 |   |                                     |    |                                    |   |   |   |   |   |
| Candles & Home Fragrance                                                                                 |   | $                                        | 33,078  |                                    | $      | 32,032 |   | $ | 84,843 |   | $ | 88,026 |   |
| Creative Expressions                                                                                         |   | 26,690                                   |    | 19,942                                  |   | 29,902 |   | 28,513 |   |
|                                                                                                         |   | 59,768                                   |    | 51,974                                  |   | 114,745 |   | 116,539 |   |
| Other expense                                                                                                |   | (4,667                                   | )       | (3,448                                  | )      | (10,686 | ) | (10,513 | ) |
| **Earnings before income taxes,  minority interest and cumulative effect of change in accounting principle** |   | $                                        | 55,101  |                                    | $      | 48,526 |   | $ | 104,059 |   | $ | 106,026 |   |

 
|                         |   | **October 31,  2003** |      |   | **January 31,  2003** |   |
|------------------------------|--------|----------------------------|-----------|--------|----------------------------|--------|
| **Identifiable Assets**      |   |                       |      |   |                       |   |
| Candles & Home Fragrance |   | $                          | 748,863   |   |                       | $      | 693,082 |   |
| Creative Expressions         |   | 416,219                    |      |   | 180,339                    |   |
| Other                        |   | 13,039                     |      |   | 13,237                     |   |
| **Total**                    |   | $                          | 1,178,121 |   |                       | $      | 886,658 |   |

 

**9.**                                      Contingencies

 

The Company has contingent liabilities that have arisen in the ordinarycourse of its business, including pending litigation.  The Company believes the outcome of these matters will not have amaterial adverse effect on its consolidated financial position, results ofoperations or cash flows.

 

On June 2, 2003, the parties agreed in open court to settle andresolve all matters involving or in any way relating to the previously reportedlegal proceedings by and between the Company and its wholly-owned subsidiary,Endar Corp., on the one hand, and Ennio Racinelli, Darlene Racinelli andothers, on the other hand, by means of a written settlement and releaseagreement, without any payment by any party. On August 25, 2003, the case was dismissed by the RiversideSuperior Court.

 

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**10.**                               Debt

 

At October 31, 2003, Miles Kimball had approximately $10.4 millionof long-term debt outstanding under a real estate mortgage note payable to JohnHancock Life Insurance Company, which matures June 1, 2020.  Under the terms of the note, payments ofprincipal and interest are required monthly at a fixed interest rate of 7.89%.

 

As of September 30, 2003, Kaemingk had available lines of creditof approximately $39.4 million maturing in March 2004.  The lines of credit are collateralized bycertain real estate and equipment owned by Kaemingk.  At September 30, 2003, approximately $10.6 million wasoutstanding at a weighted average interest rate of 3.38%.

 

At September 30, 2003, Kaemingk had approximately $14.2 million oflong-term debt outstanding under seven loans with ING Bank N.V. at a weightedaverage interest rate of 4.9%.  The bankloans have maturity dates ranging from 2005 through 2021.  The loans are collateralized by certain realestate and equipment owned by Kaemingk.

 

In May 1999, the Company filed a shelf registration statement forissuance of up to $250.0 million in debt securities with the Securities andExchange Commission.  OnSeptember 24, 1999, the Company issued $150.0 million of 7.90% SeniorNotes due October 1, 2009 at a discount of approximately $1.4 million,which is being amortized over the life of the notes.  Such notes contain, among other provisions, restrictions on lienson principal property or stock issued to collateralize debt.  At October 31, 2003, the Company was incompliance with such provisions. Interest is payable semi-annually on April 1 and October 1.  On October 20, 2003, the Company issued$100.0 million, 5.50% Senior Notes due on November 1, 2013 at a discountof approximately $0.2 million, which is being amortized over the life of thenotes.  Such notes contain provisionsand restrictions similar to those in the 7.9% Senior Notes.  At October 31, 2003, the Company was incompliance with such covenants. Interest on the notes will accrue from October 23, 2003 and will bepayable semiannually in arrears on May 1 and November 1 of each year,commencing May 1, 2004.  The notesmay be redeemed in whole or in part at any time at a specified redemptionprice.  The proceeds of the debtissuance will be used for general corporate purposes, which may includerepayment of certain debt.

 

**11.**                               Fire Loss

 

In July 2003, the Company’s manufacturing facility located inMonterrey, Mexico was destroyed by fire. Products manufactured at this leased facility were primarily for theNorth American mass market.  Customerservice disruptions were minimal as other Company facilities and third partysuppliers met the production requirements and are expected to meet productionrequirements for the immediate future and therefore, the Company has decidednot to rebuild the Monterrey facility. The loss of fixed assets and inventory totaled approximately $8.0million.  The Company incurredadditional costs of $1.3 million in the quarter ended October 31, 2003,primarily for the additional production costs of manufacturing product atdifferent facilities.   Some of thesecosts remain in ending inventory at October 31, 2003.   The cumulative charges related to the fireamount to $1.9 million for the year. The Company is insured for losses related to this fire.

 

**12.**                               401(k) and Profit Sharing Plan

 

During the third quarter, the Company became aware of an issueinvolving its 401(k) and profit sharing plan. This issue arose effective April 1, 2002 when the Company amendedthe plan to allow participants to direct voluntary contributions to be investedin the Company’s common stock, and to permit other investments in the plan tobe transferred into the Company’s common stock.  These amendments may have caused the continued operation of theplan since April 1, 2002 to be deemed to be an offering of securities thatshould have been registered under the Securities Act of 1933  (the “1933 Act”).  If interests should have been registered, the failure of theCompany to register interests in the plan may entitle participants to remediesunder the 1933 Act,

 

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including rescission or damages. The Company has ceased allowing participants to make new investments inCompany common stock.  The Company isalso investigating its obligations to undertake any curative action, which maybe required under the applicable securities laws, the Internal Revenue Code andERISA.  While the Company cannot predictthe possible effect of federal or state remedial action, the Company does notbelieve that remediation of its possible failure to register the interests inthe plan will have a material adverse effect on the Company’s financialposition or results of operations.

 

**13.**                               Termination of Interest Rate Swap

 

On July 10, 2003, the Company terminated the interest rate swapagreement in relation to $50.0 million of our outstanding 7.90% Senior Notes,which mature on October 1, 2009. This termination resulted in a deferred gain of approximately $5.0million, which will be amortized over the remaining term of the Notes.

 

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

 

**RESULTS OFOPERATIONS:**

 

**Net Sales**

 

Net sales increased$111.1 million or 12.2% to $1,019.2 million in the first nine months of fiscal2004 from $908.1 million in the first nine months of fiscal 2003.  Net sales in the quarter endedOctober 31, 2003 increased $69.7 million or 19.3% to $431.9 millioncompared with $362.2 million a year earlier. There were three primary factors that affected net sales in the thirdquarter.  First, the inclusion of salesfrom the acquisitions of Miles Kimball in April 2003 and Kaemingk inJune 2003 had a favorable impact, which was partially offset by theexclusion of sales from Wax Lyrical, which was closed inDecember 2002.  Second, thecontinued uncertainty in the US and European economies and the resultingcautious ordering by retailers had a negative impact on sales.  Third, the favorable impact of foreigncurrency exchange rates compared to the US Dollar had a positive impact on thereported sales.  International salesaccounted for 28% of total sales for the quarter ended October 31, 2003compared to 19% for the same period a year earlier.  This increase is primarily a result of the acquisition ofKaemingk in Europe.  Excluding the effectof the acquisitions of Miles Kimball and Kaemingk, the closure of Wax Lyrical,and the favorable foreign exchange effects, net sales in the quarter endedOctober 31, 2003 decreased approximately 4% compared to the same period ayear earlier.

 

Net sales in the Candlesand Home Fragrance segment were essentially even with last year at approximately$267 million for the quarter ended October 31, 2003.  PartyLite Worldwide net sales in the thirdquarter increased 6.2% compared with the prior year period.  Offsetting this increase was the decrease innet sales in Blyth’s wholesale businesses in the quarter ended October 31,2003 compared with the prior year period. Net sales of the Sterno Group, or Away From Home business, wereessentially even with the same period a year earlier.

 

Net sales in the CreativeExpressions segment increased $70.4 million, or 74.7%, to $164.7 million in thequarter ended October 31, 2003, compared with $94.3 million in the sameperiod last year.  This increase isattributable to the inclusion of sales from Miles Kimball and Kaemingk and isconsistent with the strategic direction to grow this segment throughacquisition.  Excluding theseacquisitions, this segment’s sales declined approximately 12% as a result ofwholesalers’ caution in placing orders given the uncertain retail environment.

 

**Gross Profit**

 

Gross profit increased$38.1 million or 8.4% from $454.8 million in the first nine months of fiscal2003 to $492.9 million in the first nine months of 2004.  Gross profit margin decreased from 50.1% forthe first nine months of 2003 to 48.4% for the first nine months of 2004.  Gross profit in the quarter endedOctober 31, 2003 increased $24.5 million or 14.2% from $172.5 million forthe quarter ended October 31, 2002 to $196.9 million for the quarter endedOctober 31, 2003.  Gross profitmargin decreased from 47.6% for the quarter ended October 31, 2002 to45.6% for the quarter ended October 31, 2003.  The decrease in gross profit margin is largely attributable tothe addition of Kaemingk, which has a lower gross margin than the overallCompany average.  Further contributingto the decline was the shift in the sales among the businesses.

 

**Selling Expense**

 

Selling expense increased$30.7 million, or 12.2%, from $253.0 million in the first nine months of fiscal2003, when selling expense was 27.9% of net sales, to $283.7 million in thefirst nine months of fiscal 2004, or 27.8% of net sales.  Selling expense increased $15.1 million, or16.9%, from $89.3 million in the quarter ended October 31, 2002 to $104.4million in the quarter ended October 31, 2003.  As a percent of sales, selling expense was 24.2% in the thirdquarter of fiscal 2004 compared to 24.7% a year earlier.  The increase in selling expenses quarterover quarter is attributable to the addition of Miles Kimball and Kaemingk.  The reduction in selling expenses as apercentage of net sales reflects the impact of the business models of therecently acquired companies, which have lower selling expenses than the overallCompany average.

 

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**Administrative Expense**

 

Administrative expense increased $8.3 million, or9.8%, from $85.3 million in the first nine months of fiscal 2003 to $93.7million in the first nine months of fiscal 2004.  Administrative expense increased $0.8 million or 2.6% from $31.2million in the quarter ended October 31, 2002 to $32.0 million in thequarter ended October 31, 2003.  Asa percent of sales, administrative expense was 7.4% in the third quarter offiscal 2004 compared to 8.6% a year earlier. Administrative expenses increased due to the addition of Miles Kimballand Kaemingk.  The reduction inadministrative expenses as a percentage of net sales results from the fact thatthe Company’s corporate resources have remained fairly level as the businesshas grown through acquisition.

 

**Restructuring and ImpairmentCharges**

 

On September 30, 2003, the Company announced its decision to closeits Hyannis, Massachusetts candle manufacturing facility.  This closure was the final phase of thewind-down of the Hyannis operation, and is consistent with the Company’songoing attempts to rationalize its operations.  The Company was able to move the production associated with theHyannis facility to another existing facility, and expects to incur loweroperating costs in the Candles & Home Fragrance segment as a result of theclosure.   The shutdown of this facilitywill be complete in the fourth quarter of fiscal 2004.  In conjunction with the closing, the Companyeliminated 43 jobs, comprised of manufacturing and management positions.

 

During the three months ended October 31, 2003, $0.8 million of costswere incurred related to the Hyannis plant closure including $0.6 million ofseverance and related costs and $0.2 million of equipment impairmentcharges.  The Company expects additionalcharges in the fourth quarter of  $0.04to $0.06 per share, related primarily to the impairment of equipment.

 

**Operating Profit**

 

Operating profit decreased $1.8 million, or 1.5%,from $116.5 million in the first nine months of fiscal 2003 to $114.7 millionin the first nine months of fiscal 2004. The decrease in operating profit in the nine months endedOctober 31, 2003 was a result of the same factors affecting netsales.  Operating profit increased $7.8million, or 15.0%, from $52.0 million in the quarter ended October 31,2002 to $59.8 million in the quarter ended October 31, 2003.  This increase in operating profit in thequarter ended October 31, 2003 is largely driven by the acquisitions ofMiles Kimball and Kaemingk.

 

**Interest Expense**

 

Interest expense increased $0.6 million in thenine-month period ended October 31, 2003 as compared with the prioryear.  Interest expense increased $1.1million in the current fiscal year third quarter from the prior year.  This increase is primarily related to thedebt assumed in the Kaemingk acquisition.

 

**Interest Income and Other**

 

Interest income and other, including interest income,foreign exchange gains and losses and the gain on the sale of an investment,increased $0.5 million in the nine-month period ended October 31, 2003versus the same period in the prior year. This increase is primarily related to the gain on the sale of aninvestment recorded in the quarter ended July 31, 2003.

 

**Income Taxes**

 

Income tax expense decreased $1.2 million, or 2.9%,from $39.4 million in the first nine months of fiscal 2003 to $38.3 million inthe same period in the current fiscal year. Income tax expense increased $2.2 million, or 12.3%, from $18.1

 

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million in the quarter ended October 31, 2002 to$20.3 million in the quarter ended October 31, 2003.  The income tax expense amounts fluctuate inconjunction with the increases and decreases in income before income taxes atany given period.   The effective taxrate decreased to 36.8% in fiscal 2004 from 37.2% in the prior period.  This decrease is a result of a larger amountof income being generated in jurisdictions with lower tax rates.

 

**Cumulative Effect of Change inAccounting Principle**

 

**As a result of adopting SFAS No. 142, “Goodwill and Other IntangibleAssets,” the Company recorded a one-time charge of $7.4 million pre-tax, $4.5million net of income taxes, on February 1, 2002, which is reflected asthe cumulative effect of a change in accounting principle (See Note 2 to theConsolidated Financial Statements).**

** **

**Net Earnings**

 

As a result of the foregoing, earnings before thecumulative effect of change in accounting principle decreased $0.8 million, or1.2%, from $66.6 million in the nine months ended October 31, 2002 to$65.8 million for the nine months ended October 31, 2003.  Net earnings after the cumulative effect ofchange in accounting principle increased $3.6 million, or 5.8%, from $62.1million in the first nine months of fiscal 2003 to $65.6 in the first ninemonths of fiscal 2004.    Net earningsincreased $4.3 million, or 14.1%, from $30.5 million in the quarter endedOctober 31, 2002 to $34.8 million in the quarter ended October 31,2003.

 

Basic earnings per share before the cumulative effectof change in accounting principle, based upon the weighted average number ofshares outstanding for the nine months ended October 31, 2003, were $1.43,a decrease of $0.01, or 0.4% compared to $1.44 for the nine months endedOctober 31, 2002.  Basic netearnings per share after the cumulative effect of change in accountingprinciple, based upon the weighted average number of shares outstanding for thenine months ended October 31, 2003, were $1.43, an increase of $0.09,compared to $1.34 for the nine months ended October 31, 2002.  Diluted earnings per share before thecumulative effect of change in accounting principle, based upon the potentialdilution that could occur if options to issue common stock were exercised, were$1.43 for the current and prior year nine month periods. The cumulative effect ofchange in accounting principle on diluted earnings per share equaled $0.10 forthe nine months ended October 31, 2002. Diluted net earnings per share after the cumulative effect of change inaccounting principle, based upon the potential dilution that could occur ifoptions to issue common stock were exercised, were $1.43, compared to $1.33 forthe same period the prior year.

 

**Liquidity and Capital Resources**

 

Compared to January 31, 2003, when inventorylevels are typically at the lowest point of the fiscal year, inventoryincreased $58.2 million from $187.9 million at January 31, 2003 to $246.1million at October 31, 2003.  Thisincrease is driven in part by the acquisitions of Miles Kimball and Kaemingk.  Excluding these acquisitions, inventoryincreased $29.7 million from January 31, 2003, which is expected due tothe seasonal nature of the business. Excluding Miles Kimball and Kaemingk, inventory levels atOctober 31, 2003 increased by $3.5 million when compared toOctober 31, 2002.

 

Accounts receivable increased $111.2 million from$82.9 million at January 31, 2003 to $194.1 million at October 31,2003.  Excluding the effects of theacquisitions of Miles Kimball and Kaemingk, accounts receivable increased $73.2million.  This increase is consistentwith the seasonality of the business. Excluding Miles Kimball and Kaemingk, accounts receivable decreased$24.6 million when compared to October 31, 2002, reflecting the lowersales in our wholesale businesses.

 

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Accounts payable and accrued liabilities increased$24.5 million to $164.0 million at October 31, 2003 from $139.5 million atJanuary 31, 2003.  This increase isrelated to seasonality, the effects of foreign currency exchange rates, and thepreviously mentioned acquisitions.

 

In July 2003, the Company’s manufacturingfacility located in Monterrey, Mexico was destroyed by fire.  Products manufactured at this leasedfacility were primarily for the North American mass market.  Customer service disruptions were minimal asother Company facilities and third party suppliers met the productionrequirements and are expected to meet production requirements for the immediatefuture and therefore, the Company has decided not to rebuild the Monterreyfacility.  The loss of fixed assets andinventory totaled approximately $8.0 million. The Company incurred additional costs of $1.3 million in the quarterended October 31, 2003, primarily for the additional production costs ofmanufacturing product at different facilities. Some of these costs remain in ending inventory at October 31,2003.  The cumulative charges related tothe fire amount to $1.9 million for the year. The Company is insured for losses related to this fire.

 

Capital expenditures forproperty, plant, and equipment were $16.0 million for the nine months endedOctober 31, 2003 as compared with $11.4 million in the prior yearperiod.  Capital expenditures consistedprimarily of investments in information technology and upgrades of equipmentand facilities.  The Company expectstotal capital spending of approximately $25.0 million for fiscal 2004.

 

The Company has a $200 millionunsecured revolving credit facility having a three-year term (the “CreditFacility”).  The Company has the abilityto increase the Credit Facility, under certain circumstances, by an additional$50 million.  The Credit Facility may beused for seasonal working capital needs, general corporate purposes and fundingfor strategic acquisitions.  The CreditFacility contains, among other provisions, requirements for maintaining certainfinancial ratios and limitations on certain payments.  At October 31, 2003, the Company was in compliance with suchcovenants.  Amounts outstanding underthe Credit Facility bear interest, at the Company’s option, at JPMorgan ChaseBank’s prime rate (4.0% at October 31, 2003) or at the Eurocurrency rateplus a credit spread ranging from 0.525% to 1.5%, calculated on the basis of acombination of the Company’s senior unsecured long-term debt rating and the Company’susage of the Credit Facility.  AtOctober 31, 2003, the weighted average interest rate was 3.07%.  On October 31, 2003, approximately$33.1 million was outstanding (including $3.2 million of outstanding letters ofcredit) under the Credit Facility.

 

As of October 31, 2003, the Company hada total of $15.0 million available under an uncommitted bank line of creditwith La 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 atOctober 31, 2003.

 

At October 31, 2003, theCompany had a total of $10.0 million available under an uncommitted line ofcredit with Bank of America to be used for letters of credit.  At October 31, 2003, approximately $0.3million of letters of credit were outstanding under this credit line.

 

As of September 30,2003, The Gies Group (“Gies”) had available lines of credit of approximately$42.4 million of which approximately $28.0 million was outstanding.  The amounts outstanding under the lines ofcredit bear interest at a weighted average rate of 3.5% at September 30,2003.  The lines of credit are renewedannually.

 

Colony Gift Corporation Limited(“Colony”) has a $25.0 million short-term revolving credit facility withBarclays Bank, which matures in June 2004.  As of September 30, 2003, Colony had borrowings under thecredit facility of approximately $7.2 million, at a weighted average interestrate of 3.4%.

 

At October 31, 2003, CBKhad $4.7 million of long-term debt outstanding under an Industrial Revenue Bond(“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letter of credit issued by LaSalle Bank

 

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National Association.  The amount outstanding under the IRB bearsinterest at short-term floating rates, which equaled a weighted averageinterest rate of 1.2% at October 31, 2003.

 

At October 31, 2003, MilesKimball had approximately $10.4 million of long-term debt outstanding under areal estate mortgage note payable to John Hancock Life Insurance Company, whichmatures June 1, 2020. Under the terms of the note, payments of principaland interest are required monthly at a fixed interest rate of 7.89%.

 

As of September 30, 2003, Kaemingk had availablelines of credit of approximately $39.4 million maturing inMarch 2004.  The lines of creditare collateralized by certain real estate and equipment owned by Kaemingk.  At September 30, 2003, approximately$10.6 million was outstanding at a weighted average interest rate of 3.38%.

 

At September 30, 2003, Kaemingk had approximately$14.2 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 from 2005 through2021.  The loans are collateralized bycertain real estate and equipment owned by Kaemingk.

 

In May 1999, the Company filed a shelfregistration statement for issuance of up to $250.0 million in debt securitieswith the Securities and Exchange Commission. On September 24, 1999, the Company issued $15.0 million of 7.90%Senior Notes due October 1, 2009 at a discount of approximately $1.4million, which is being amortized over the life oaf the notes.  Such notes contain, among other provisions,restrictions on liens on principal property or stock issued to collateralizedebt.  At October 31, 2003, theCompany was in compliance with such provisions.  Interest is payable semi-annually on April 1 andOctober 1.  On October 20,2003, the Company issued $100.0 million, 5.50% Senior Notes due onNovember 1, 2013 at a discount of approximately $0.2 million, which isbeing amortized over the life of the notes. Such notes contain provisions and restrictions similar to those in the7.9% Senior Notes.  At October 31,2003, the Company was in compliance with such covenants.  Interest on the notes will accrue from October 23,2003 and will be payable semiannually in arrears on May 1 andNovember 1 of each year, commencing May 1, 2004.  The notes may be redeemed in whole or inpart at any time at a specified redemption price.  The proceeds of the debt issuance will be used for generalcorporate purposes, which may include repayment of certain debt.

 

Net cash used in operating activities amounted to$27.5 million for the nine months ended October 31, 2003 compared to a useof $10.7 million for the nine months ended October 31, 2002.  The decrease in cash flows from operationsrelates primarily to changes in the Company’s working capital, the absence ofthe $4.5 million cumulative effect adjustment related to the goodwillimpairment at the Sterno Group that was recorded in fiscal 2003, the $0.5million gain on the sale of a long-term investment recorded in 2004, andchanges in the Company’s deferred income taxes offset by increased depreciationand amortization expense related to the new acquisitions in fiscal 2004.

 

The Company’s Board of Directors has authorized theCompany to repurchase up to 6,000,000 shares of common stock under the sharerepurchase program.  In the thirdquarter of fiscal 2004, the Company purchased 240,000 shares on the open marketfor a cost of $6.3 million, bringing the year-to-date total to 611,200 sharesat a cost of $16.2 million.  Since theprogram inception, the Company has purchased 4,255,300 shares at a total costof $102.7 million.  The acquired sharesare held as common stock in treasury at cost.

 

**Critical Accounting Policies**

 

For a discussion of the Company’s critical accountingpolicies see our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2003.

 

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**Impactof Adoption of Recently Issued Accounting Standards (Continued)**

 

In January 2003, the Financial AccountingStandards Board (FASB) issued Financial Interpretation No. 46 (FIN 46),“Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements.” The interpretation was immediately applicable to variable interestentities (“VIEs”) created after January 31, 2003, and to VIEs in which anenterprise obtains an interest after that date.  As originally issued, it applied in the fiscal year or interimperiod beginning after June 15, 2003, for VIEs in which an enterpriseacquired a variable interest prior to February 1, 2003.  In October 2003, the FASB issued FASBStaff Position No. 46-6, which defers the effective date for FIN 46 to thefirst interim or annual period ending after December 15, 2003 for VIEscreated before February 1, 2003. FIN 46 requires consolidation, for fiscal periods ending afterDecember 15, 2003, of entities in which the Company absorbs a majority of theentity’s expected losses, receives a majority of the entity’s expected residualreturns, or both, as a result of ownership, contractual or other financialinterests in the entity.  Currently,entities are consolidated when the Company has a controlling financial interestthrough ownership of a majority voting interest in an entity.  The implementation of this standard is notexpected to have a material impact on our financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  This statementamends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activitiesunder FASB Statement No. 133, “Accounting for Derivative Instruments andHedging Activities.”  This standard iseffective for derivative contracts entered into or modified after June 30,2003. The implementation of this standard had no impact on our financialstatements.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.” As originally issued, SFAS 150is effective for mandatorily redeemable financial instruments of public entitiesentered into or modified after May 31, 2003, and for all other instrumentsfor interim periods beginning after June 15, 2003.  In November 2003, the FASB issued FASBStaff Position No. 150-3, “Effective Date, Disclosures, and Transition forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities andCertain Mandatorily Redeemable Noncontrolling Interests under FASB StatementNo. 150”, which defers indefinitely the classification and measurementprovisions for certain mandatorily redeemable noncontrolling interestsassociated with finite-lived subsidiaries pending further FASB action.  For other mandatorily redeemablenoncontrolling interests that were issued before November 5, 2003, onlythe measurement provisions of SFAS 150 are deferred indefinitely, both for theparent in consolidated financial statements and for the subsidiary that issuedthe instruments that result in the mandatorily redeemable noncontrollinginterest, pending further FASB action. The original implementation of SFAS 150 had no impact on our financialstatements and we do not expect the deferral provisions of FSP FAS 150-3 tohave a significant impact on our financial statements.

 

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**Item 3.****           QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Market Risk**

 

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

 

**Interest Rate Risk**

 

As of October 31, 2003 the Company is subject tointerest rate risk on approximately $88.8 million of variable rate debt,including the subsidiary debt of Gies, Colony Gift, CBK and Kaemingk.  Each 1 percentage point increase in theinterest rate would impact pre-tax earnings by approximately $0.9 million ifapplied to the total.

 

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

 

**Foreign Currency Risk**

 

The Company uses forward foreign exchange contracts tohedge the impact of foreign currency fluctuations on certain committed capitalexpenditures, Canadian intercompany payables and on certain intercompanyloans.  The Company does not hold orissue derivative financial instruments for trading purposes.

 

With regard to commitments for machinery and equipmentin foreign currencies, upon payment of each commitment the underlying forwardcontract is closed and the corresponding gain or loss is included in themeasurement of the cost of the acquired asset. With regard to forward exchange contracts used to hedge Canadianintercompany payables, gain or loss on such hedges is recognized in earnings inthe period in which the underlying hedged transaction is settled.  Gains or losses on foreign currency forward contracts related tointercompany loans are recognized currently through income and generally offsetthe transaction gains or losses in the foreign currency cash flows which theyare intended to hedge.  If ahedging instrument is sold or terminated prior to maturity, gains and lossesare deferred until the hedged item is settled. However, if the hedged item is no longer likely to occur, the resultantgain or loss on the terminated hedge is recognized in earnings.  For consolidated financial statementpresentation, net cash flows from such hedges are classified in the categoriesof the cash flow with the items being hedged.

 

The following tableprovides information about the Company’s foreign exchange forward contracts atOctober 31, 2003.

 
| **(In  thousands, except average contract rate)** |   | **U.S.  Dollar  Notional Amount** |   | **Average  Contract Rate** |   | **Estimated  Fair Value** |   |
|---------------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|---------------------------|--------|
| Canadian Dollar                                   |   | $                                 | 12,809 |                       | 1.44   |                      | $      | (1,069 | ) |
| Euro                                              |   | 17,924                            |   | 1.12                       |   | (623                      | )      |
| Pound Sterling                                    |   | 6,546                             |   | 1.64                       |   | (146                      | )      |
|                                              |   | $                                 | 37,279 |                       |   |                      | $      | (1,838 | ) |

 

The foreignexchange contracts outstanding as of October 31, 2003 have maturity datesranging from November 2003 through May 2004.

 

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**Item 4.****           CONTROLS AND PROCEDURES**

 

(a) Evaluationof disclosure controls and procedures.

 

Ourmanagement, with the participation of our principal executive officer and ourprincipal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Securities Exchange Act of 1934(“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the periodcovered by this quarterly report as required by paragraph (b) of Exchange ActRules 13a-15 or 15d-15.  Based upon thisevaluation, our principal executive officer and our principal financial officerhave concluded that our disclosure controls and procedures are effective as ofthe end of the period covered by this quarterly report.

 

(b) Changes ininternal control over financial reporting.

 

There was no change inour internal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15that occurred during our last fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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**Part II.**          OTHER INFORMATION

 

**Item 1.**           LegalProceedings

 

On June 2, 2003, the parties agreed in open court to settle andresolve all matters involving or in any way relating to the previously reportedlegal proceedings by and between the Company and its wholly-owned subsidiary,Endar Corp., on the one hand, and Ennio Racinelli, Darlene Racinelli andothers, on the other hand, by means of a written settlement and releaseagreement, without any payment by any party. On August 25, 2003, the case was dismissed by the RiversideSuperior Court.

 

**Item 2.**           Changes in Securities and Use of Proceeds

None

 

**Item 3.**           Defaults upon Senior Securities

None

 

**Item 4.**           Submission of Matters to a Vote of Security Holders

None

 

**Item 5.**           OtherInformation

 

The Company is including the following cautionary statement in this Reportto make applicable, and to take advantage of, the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995 for any forward-lookingstatements made by, or on behalf of, the Company.  Forward-looking statements include statements concerning plans,objectives, goals, strategies, future events or performance and underlyingassumptions and other statements, which are other than statements of historicalfacts.  From time to time, the Companyand its representatives may publish or otherwise make available forward-lookingstatements 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 statementsinvolve risks and uncertainties, which could cause actual results or outcomesto differ materially from those expressed in the forward-lookingstatements.  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 that management’s expectations, beliefs orprojections will occur or be achieved or accomplished.  In addition to other factors and mattersdiscussed elsewhere in this Report and in the Company’s other public filingsand statements, 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 any obligation to update any forward-lookingstatements, or the following factors, to reflect events or circumstances afterthe date of this Report.

 

Risk of Inability to Maintain Growth Rate

 

The Company has grown substantially in past years.  While we expect continued growth, we expectthat our future rate of growth will be less than our historical growthrate.  In the Candles & HomeFragrance segment we expect the international market to grow faster than thedomestic market.  Historically, the marketfor our foodservice, or Away From Home products has grown, but more slowly, andwe expect it will continue to do so. Our ability to continue to grow depends on several factors, includingthe following:  market acceptance ofexisting products, the successful introduction of new products, our ability torecruit new independent sales consultants, and the sourcing of rawmaterials.  The Candles & HomeFragrance and Creative Expressions industries are driven by consumertastes.  Accordingly, there can be noassurance that our existing or future products will maintain or achieve marketacceptance.  Our sales and earningsresults have recently been impacted negatively by economic and geopoliticaluncertainties in North America and Europe. There can be no assurance that our sales and earnings results will notbe materially adversely affected by these factors in the future.  If the economic recovery in our majormarkets stalls or reverses, or if retailer confidence drops further, ouroperating results may be materially adversely affected.

 

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Our past growth in both the Candles & Home Fragrance segment andthe Creative Expressions segment has been due, in part, to acquisitions.  We expect our future growth in the Candles& Home Fragrance segment to be primarily organic, with the possibility ofselective acquisitions, and we continue to pursue strategic acquisitions incertain areas of the Creative Expressions segment.  There can be no assurance that we will be able to continue toidentify suitable acquisition candidates, to consummate acquisitions on termsfavorable to the Company, to finance acquisitions or to integrate successfullyacquired operations.  In the future,acquisitions may contribute more to the Company’s overall sales growth ratethan historically.

 

Ability to Respond to Increased Product Demand

 

Our ability to meet future demand for Candles & Home Fragrance andCreative Expressions products will be dependent upon success in (1) bringingnew or alternative production and distribution capacity on line in a timelymanner, (2) improving our ability to forecast anticipated product demand inorder to continue to fill customer orders promptly, (3) improving managementinformation systems in order to respond promptly to customer orders and (4)training, motivating and managing new employees.  If we are unable to meet future demand for products in a timelyand efficient manner, our operating results could be materially adverselyaffected.

 

Risks Associated with International Sales andForeign-Sourced Products

 

Our international business has grown at a faster rate than sales in theUnited States in recent years.  Inaddition, we source a portion of our candles, accessories and CreativeExpressions products from independent manufacturers in the Pacific Rim, Europeand Mexico.  For these reasons we aresubject to the following risks associated with foreign manufacturing and sales:fluctuations in currency exchange rates, economic and political instability,international public health crises, transportation delays, difficulty inmaintaining quality control, restrictive actions by foreign governments,nationalizations, the laws and policies of the United States and certainEuropean markets affecting importation of goods (including duties, quotas andtaxes and trade and foreign tax laws).

 

Risks of Shortages of Raw Materials

 

For certain raw materials, there may be temporary shortages due tocapacity availability, a change in raw material requirements, weather or otherfactors, including disruptions in supply caused by raw material transportationor production delays.  Such raw materialshortages have not previously had, and are not presently expected to have, amaterial adverse effect on the Company’s operations.  It is possible, however, that recent increases in oil prices mayhave a material adverse effect on availability of petroleum-based products usedin the manufacture of our candles and home fragrance products.

 

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Dependence on Key Corporate Management Personnel

 

Our success depends upon the contributions of key corporate managementpersonnel, particularly our Chairman, Chief Executive Officer and President,Robert B. Goergen.  We do not haveemployment contracts with any of our key corporate management personnel exceptfor Mr. Goergen, nor do we maintain any key person life insurancepolicies.  The loss of any of the keycorporate management personnel could have a material adverse effect on theCompany.

 

Risk of Increased Competition

 

Our business is highly competitive, both in terms of price and newproduct introductions. The worldwide market for Candles & Home Fragranceand Creative Expressions products is highly fragmented, with numerous suppliersserving one or more of the distribution channels served by the Company.  Because there are relatively low barriers toentry into the Candles & Home Fragrance and Creative Expressionsindustries, we may face increased future competition from other companies, someof which may have substantially greater financial and marketing resources thanthose available to us.  We compete withcompanies offering candles manufactured at low cost in foreign countries.  In addition, certain competitors focus on aparticular geographic or single-product market and attempt to gain or maintainmarket share solely on the basis of price.

 

Risks Associated with Terrorist Attacks or OtherHostilities and the International Political Climate

 

The September 11, 2001 terrorist attacks affected and may continueto affect the US and the global economy and may increase other risks faced byour business, as may the war with Iraq, tensions relating to other countriesand changes in international political conditions as a result of these eventsand conditions.

 

Risks Related to Our Information Technology Systems

 

Our information technology systems are dependent upon globalcommunications providers, web browsers, telephone systems and other aspects ofthe Internet Infrastructure that have experienced significant system failuresand outages in the past.  Our systemsare susceptible to outages due to fire, floods, power loss, telecommunicationsfailures, break-ins and similar events. Despite our implementation of network security measures, our servers arevulnerable to computer viruses, break-ins and similar disruptions fromunauthorized tampering with our computer systems.  The occurrence of any of these events could disrupt or damage ourinformation technology systems and inhibit our internal operations, our abilityto provide services to our customers and the ability of our customers and salespersonnel to access our information technology systems.

 

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**Item 6.**           Exhibits and Reports on Form 8-K

 

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             |

 

b)             Reports on Form 8-K

 

During the fiscal quarter ended October 31, 2003, the Companyfiled the following Current Reports on Form 8-K:

 
| Current Report  on Form 8-K on August 27, 2003 to file as an exhibit the press release  reporting the Company’s results of operations for the fiscal quarter ended  July 31, 2003.                                                                                                            |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                         |
| Current Report  on Form 8-K on September 9, 2003 to file as an exhibit the press release  announcing the Company’s declaration of a semi-annual dividend.                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                         |
| Current Report  on Form 8-K on October 17, 2003 to announce the issue related to  employee contributions to the 401(k) and profit sharing plan that were being  directed into the Company’s common stock.                                                                                          |
|                                                                                                                                                                                                                                                                                                         |
| Current Report on Form 8-K on October 17, 2003  to announce the blackout period for the fiscal quarter ended October 31,  2003 with respect to purchases of the Company’s common stock by employees,  directors and officers.                                                                 |
|                                                                                                                                                                                                                                                                                                         |
| Current Report  on Form 8-K on October 21, 2003 to file as an exhibit the press release  announcing the sale of $100 million of 10-year senior notes.                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                         |
| Current Report  on Form 8-K on October 22, 2003 in conjunction with the filing of the  Prospectus Supplement dated October 20, 2003 for the issuance and sale  of up to $100 million of 5.50% Senior Notes due 2013 to file as exhibits  certain information related to the Prospectus Supplement. |

 

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**SIGNATURES**

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.**

 
|   |   |                    | BLYTH, INC.                                |
|--------|--------|-------------------------|--------------------------------------------|
|   |   |                    |                                       |
|   |   |                    |                                       |
|   | Date:  | December 15,  2003 |                                       |   | By: | /s/Robert B.  Goergen |   |
|   |   |                    | Robert B. Goergen                          |
|   |   |                    | President and Chief Executive Officer      |
|   |   |                    |                                       |
|   |   |                    |                                       |
|   | Date:  | December 15,  2003 |                                       |   | By: | /s/Robert H.  Barghaus |   |
|   |   |                    | Robert H. Barghaus                         |
|   |   |                    | Vice President and Chief Financial Officer |
|        |        |                         |                                            |  |  |  |  |  |

 

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