**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WashingtonD.C. 20549**

 

**FORM 10-Q**

 

| **(Mark  One)**                                                                                                                                                                                                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                            |
| **ý**                                                                                                                                                                                                                                                                                            | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                            | ** ** | ** ** |
| ** **                                                                                                                                                                                                                                                                                            | ** ** | **For  the quarterly period ended July 31, 2004** |
| ** **                                                                                                                                                                                                                                                                                            |
| **or**                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                            |
| **o**                                                                                                                                                                                                                                                                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                            | ** ** | ** ** |
| **For  the transition period from                       to                       ** |

 

**Commissionfile number 1-13026**

 

**BLYTH, INC.**

(Exact name ofregistrant 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 Rule 12b-2 of theExchange Act).

Yes   ý             No   o

 

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

 

**40,901,011  Common Shares as of August 31, 2004**

 

 

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**BLYTH,INC.**

 

**INDEX**

 
| Part I.    | Financial  Information                                                                      |   |
|------------|---------------------------------------------------------------------------------------------|--------|
|       |                                                                                        |
| Item  1.   | Financial  Statements:                                                                      |   |
|       | Consolidated Balance Sheets                                                                 |   |
|       |                                                                                        |   |
|       | Consolidated  Statements of Earnings                                                        |   |
|       |                                                                                        |   |
|       | Consolidated  Statements of Stockholders’ Equity                                       |   |
|       |                                                                                        |   |
|       | Consolidated  Statements of Cash Flows                                                      |   |
|       |                                                                                        |   |
|       | Notes to  Consolidated Financial Statements                                                 |   |
|       |                                                                                        |   |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|       |                                                                                        |   |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|       |                                                                                        |   |
| Item 4.    | Controls  and Procedures                                                                    |   |
|       |                                                                                        |
| Part II.   | Other  Information                                                                          |   |
|       |                                                                                        |
| Item 1.    | Legal  Proceedings                                                                          |   |
|       |                                                                                        |   |
| Item  2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|       |                                                                                        |   |
| Item 3.    | Defaults upon Senior  Securities                                                            |   |
|       |                                                                                        |   |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                        |   |
|       |                                                                                        |   |
| Item 5.    | Other Information                                                                           |   |
|       |                                                                                        |   |
| Item 6.    | Exhibits and Reports  on Form 8-K                                                           |   |
|       |                                                                                        |
| Signatures |                                                                                        |
|            |                                                                                             |        |  |

 

2

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Part I.   FINANCIALINFORMATION

Item I.   FINANCIALSTATEMENTS

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| **(In  thousands, except share and per share data)**                                                                            | ** ** | **July 31,  2004** | ** ** | **January 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                      | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                      |       |                    |       |                       |       |
| **Current assets:**                                                                                                             |       |                    |       |                       |       |
| Cash  and cash equivalents                                                                                                      |       | $                       | 84,197     |                       | $          | 229,726 |   |
| Accounts  receivable, less allowance for doubtful receivables of $3,783 and $4,470,  respectively                               |       | 84,640                  |       | 104,502                    |       |
| Inventories                                                                                                                     |       | 274,526                 |       | 208,581                    |       |
| Prepaid  and other                                                                                                              |       | 28,595                  |       | 40,302                     |       |
| Short-term  investment                                                                                                          |       | 10,000                  |       | —                     |       |
| Assets  held for sale                                                                                                           |       | 1,085                   |       | 9,437                      |       |
| Deferred  income taxes                                                                                                          |       | 14,130                  |       | 14,191                     |       |
| Total  current assets                                                                                                           |       | 497,173                 |       | 606,739                    |       |
| **Property, plant and equipment, at cost:**                                                                                     |       |                    |       |                       |       |
| Less  accumulated depreciation of $223,584 and $210,961, respectively                                                           |       | 250,837                 |       | 260,497                    |       |
| **Other assets:**                                                                                                               |       |                    |       |                       |       |
| Investments                                                                                                                     |       | 14,556                  |       | 3,510                      |       |
| Goodwill                                                                                                                        |       | 206,916                 |       | 204,093                    |       |
| Other  intangible assets, net of accumulated amortization of $2,650 and $1,500,  respectively                                   |       | 40,450                  |       | 41,600                     |       |
| Deposits  and other assets                                                                                                      |       | 12,061                  |       | 11,524                     |       |
|                                                                                                                            |       | 273,983                 |       | 260,727                    |       |
| Total  assets                                                                                                                   |       | $                       | 1,021,993  |                       | $          | 1,127,963 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                   |       |                    |       |                       |       |
| **Current liabilities:**                                                                                                        |       |                    |       |                       |       |
| Bank  lines of credit                                                                                                           |       | $                       | 118,360    |                       | $          | 13,621 |   |
| Current  maturities of long-term debt                                                                                           |       | 4,458                   |       | 4,522                      |       |
| Accounts  payable                                                                                                               |       | 58,873                  |       | 78,407                     |       |
| Liabilities  associated with assets held for sale                                                                               |       | —                  |       | 508                        |       |
| Accrued  expenses                                                                                                               |       | 74,364                  |       | 97,395                     |       |
| Income  taxes                                                                                                                   |       | —                  |       | 11,746                     |       |
| Total  current liabilities                                                                                                      |       | 256,055                 |       | 206,199                    |       |
| **Deferred income taxes**                                                                                                       |       | 35,170                  |       | 33,773                     |       |
| **Long-term debt, less current maturities**                                                                                     |       | 271,153                 |       | 275,743                    |       |
| **Minority interest and other**                                                                                                 |       | 23,844                  |       | 23,278                     |       |
| **Commitments and contingencies**                                                                                               |       | —                  |       | —                     |       |
| **Stockholders’ equity:**                                                                                                  |       |                    |       |                       |       |
| Preferred  stock - authorized 10,000,000 shares of $0.01 par value; no shares issued and  outstanding                           |       | —                  |       | —                     |       |
| Common  stock - authorized 100,000,000 shares of $0.02 par value; issued 50,351,927  shares and 49,975,502 shares, respectively |       | 1,007                   |       | 999                        |       |
| Additional  contributed capital                                                                                                 |       | 117,652                 |       | 107,965                    |       |
| Retained  earnings                                                                                                              |       | 589,533                 |       | 570,171                    |       |
| Accumulated  other comprehensive income                                                                                         |       | 11,617                  |       | 15,224                     |       |
| Treasury  stock, at cost, 9,453,416 shares and 4,345,100 shares, respectively                                                   |       | (284,038                | )          | (105,389                   | )          |
| Total  stockholders’ equity                                                                                                |       | 435,771                 |       | 588,970                    |       |
| Total  liabilities and stockholders’ equity                                                                                |       | $                       | 1,021,993  |                       | $          | 1,127,963 |   |

 

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

 

3

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

 
| **Six months ended July 31****(In  thousands, except per share data)** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net  sales                                                                  |       | $        | 648,043    |     | $          | 587,259 |   |
| Cost  of goods sold                                                         |       | 318,921  |       | 291,311  |       |
| Gross  profit                                                               |       | 329,122  |       | 295,948  |       |
| Selling                                                                     |       | 208,702  |       | 179,298  |       |
| Administrative                                                              |       | 67,147   |       | 61,673   |       |
|                                                                        |       | 275,849  |       | 240,971  |       |
| Operating  profit                                                           |       | 53,273   |       | 54,977   |       |
| Other  expense (income):                                                    |       |     |       |     |       |
| Interest  expense                                                           |       | 10,258   |       | 7,102    |       |
| Interest  income and other                                                  |       | (1,302   | )          | (1,282   | )          |
| Equity  in (earnings)/loss of investee                                      |       | (46      | )          | 199      |       |
|                                                                        |       | 8,910    |       | 6,019    |       |
| Earnings  before income taxes and minority interest                         |       | 44,363   |       | 48,958   |       |
| Income  tax expense                                                         |       | 17,243   |       | 18,014   |       |
| Earnings  before minority interest                                          |       | 27,120   |       | 30,944   |       |
| Minority  interest                                                          |       | —   |       | 71       |       |
| Net  earnings                                                               |       | $        | 27,120     |     | $          | 30,873 |   |
| Basic:                                                                      |       |     |       |     |       |
| Net  earnings per common share                                              |       | $        | 0.60       |     | $          | 0.67 |   |
| Weighted  average number of shares                                          |       | 45,381   |       | 45,991   |       |
| Diluted:                                                                    |       |     |       |     |       |
| Net  earnings per common share                                              |       | $        | 0.59       |     | $          | 0.67 |   |
| Weighted  average number of shares                                          |       | 45,804   |       | 46,174   |       |

 

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

 

4

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

**(Unaudited)**

 
| **Three months ended July 31****(In  thousands, except per share data)** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net  sales                                                                    |       | $        | 289,063    |     | $          | 275,268 |   |
| Cost  of goods sold                                                           |       | 142,952  |       | 140,716  |       |
| Gross  profit                                                                 |       | 146,111  |       | 134,552  |       |
| Selling                                                                       |       | 93,627   |       | 82,229   |       |
| Administrative                                                                |       | 33,472   |       | 31,604   |       |
|                                                                          |       | 127,099  |       | 113,833  |       |
| Operating  profit                                                             |       | 19,012   |       | 20,719   |       |
| Other  expense (income):                                                      |       |     |       |     |       |
| Interest  expense                                                             |       | 5,049    |       | 3,512    |       |
| Interest  income and other                                                    |       | (411     | )          | (691     | )          |
| Equity  in (earnings)/loss of investee                                        |       | (69      | )          | 64       |       |
|                                                                          |       | 4,569    |       | 2,885    |       |
| Earnings  before income taxes and minority interest                           |       | 14,443   |       | 17,834   |       |
| Income  tax expense                                                           |       | 5,048    |       | 6,561    |       |
| Earnings  before minority interest                                            |       | 9,395    |       | 11,273   |       |
| Minority  interest                                                            |       | (50      | )          | 27       |       |
| Net  earnings                                                                 |       | $        | 9,445      |     | $          | 11,246 |   |
| Basic:                                                                        |       |     |       |     |       |
| Net  earnings per common share                                                |       | $        | 0.21       |     | $          | 0.25 |   |
| Weighted  average number of shares outstanding                                |       | 45,097   |       | 45,903   |       |
| Diluted:                                                                      |       |     |       |     |       |
| Net  earnings per common share                                                |       | $        | 0.21       |     | $          | 0.24 |   |
| Weighted  average number of shares outstanding                                |       | 45,502   |       | 46,155   |       |

 

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

 

5

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 

(inthousands, except share date)
| ** **                                                            | ** ** | **Common stock** | ** ** | **Additional  contributed  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury stock** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | ** **       | ** ** | ** **                           | ** ** | ** **             | ** ** |
| ** **                                                            | ** ** | ** **       | ** ** | ** **                           | ** ** | ** **             | ** ** |
| ** **                                                            | ** ** | **Shares**       | ** ** | **Amount**                           | ** ** | ** **             | ** ** | **Shares**         | ** ** | **Amount**                                           | ** ** | ** ** | ** ** |
| **For the six months ended  July 31, 2003:**                     |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       |   |   |   |   |
| Balance, January 31, 2003                                        |       | 49,703,682       |       | $                                    | 994        |                   | $          | 101,567            |       | $                                                    | 496,627    |       | (3,644,100 | ) | $ | (86,585 | ) | $ | (4,751 | ) | $ | 507,852 |   |
| Net earnings for the period                                           |       |             |       |                                 |       |                   |       | 30,873             |       |                                                 |       |       |       |   |   | 30,873 |   |
| Foreign currency translation adjustments                              |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       | 6,266 |   | 6,266 |   |
| Unrealized holding losses on certain investments  (net of tax of $74) |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       | (126 | ) | (126 | ) |
| Net loss on cash flow hedging instruments (net of  tax of $171)       |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       | (294 | ) | (294 | ) |
| Comprehensive income                                                  |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       |   |   | 36,719 |   |
| Common stock issued in connection with long-term  incentive plan      |       | 73,495           |       | 1                                    |       | 1,419                  |       |               |       |                                                 |       |       |       |   |   | 1,420 |   |
| Tax benefit from stock options                                        |       |             |       |                                 |       | 100                    |       |               |       |                                                 |       |       |       |   |   | 100 |   |
| Dividends                                                             |       |             |       |                                 |       |                   |       | (5,983             | )          |                                                 |       |       |       |   |   | (5,983 | ) |
| Treasury stock purchases                                              |       |             |       |                                 |       |                   |       |               |       | (371,200                                             | )          | (9,849     | )          |   |   | (9,849 | ) |
| Balance, July 31, 2003                                           |       | 49,777,177       |       | $                                    | 995        |                   | $          | 103,086            |       | $                                                    | 521,517    |       | (4,015,300 | ) | $ | (96,434 | ) | $ | 1,095 |   | $ | 530,259 |   |
|                                                                  |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       |   |   |   |   |
| **For the six months ended  July 31, 2004**                      |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       |   |   |   |   |
| Balance, January 31, 2004                                        |       | 49,975,502       |       | $                                    | 999        |                   | $          | 107,965            |       | $                                                    | 570,171    |       | (4,345,100 | ) | $ | (105,389 | ) | $ | 15,224 |   | $ | 588,970 |   |
| Net earnings for the period                                           |       |             |       |                                 |       |                   |       | 27,120             |       |                                                 |       |       |       |   |   | 27,120 |   |
| Foreign currency translation adjustments                              |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       | (3,503 | ) | (3,503 | ) |
| Unrealized holding losses on certain investments  (net of tax of $20) |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       | (35 | ) | (35 | ) |
| Net loss on cash flow hedging instruments (net of  tax of $39)        |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       | (69 | ) | (69 | ) |
| Comprehensive income                                                  |       |             |       |                                 |       |                   |       |               |       |                                                 |       |       |       |   |   | 23,513 |   |
| Common stock issued in connection with long-term  incentive plan      |       | 376,425          |       | 8                                    |       | 9,057                  |       |               |       |                                                 |       | —     |       |   |   | 9,065 |   |
| Tax benefit from stock options                                        |       |             |       |                                 |       | 630                    |       |               |       |                                                 |       |       |       |   |   | 630 |   |
| Dividends                                                             |       |             |       |                                 |       |                   |       | (7,758             | )          |                                                 |       |       |       |   |   | (7,758 | ) |
| Treasury stock purchases                                              |       |             |       |                                 |       |                   |       |               |       | (5,108,316                                           | )          | (178,649   | )          |   |   | (178,649 | ) |
| Balance, July 31, 2004                                           |       | 50,351,927       |       | $                                    | 1,007      |                   | $          | 117,652            |       | $                                                    | 589,533    |       | (9,453,416 | ) | $ | (284,038 | ) | $ | 11,617 |   | $ | 435,771 |   |

 

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

 

6

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Six  months ended July 31 (In thousands)**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash  flows from operating activities:                                                |       |     |       |     |       |
| Net  earnings                                                                         |       | $        | 27,120     |     | $          | 30,873 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities:  |       |     |       |     |       |
| Depreciation  and amortization                                                        |       | 17,756   |       | 16,633   |       |
| Loss  on fixed asset disposal                                                         |       | —   |       | (190     | )          |
| Tax  benefit from stock options                                                       |       | 630      |       | 100      |       |
| Deferred  income taxes                                                                |       | 1,679    |       | 119      |       |
| Equity  in (earnings)/loss of investee                                                |       | (46      | )          | 199      |       |
| Minority  interest                                                                    |       | (99      | )          | 71       |       |
| Gain  on sale of assets held for sale                                                 |       | (364     | )          | (497     | )          |
| Changes  in operating assets and liabilities, net of effect of business acquisitions: |       |     |       |     |       |
| Accounts  receivable                                                                  |       | 18,748   |       | (13,640  | )          |
| Inventories                                                                           |       | (67,584  | )          | (33,285  | )          |
| Prepaid  and other                                                                    |       | 3,466    |       | 1,489    |       |
| Deposits  and other assets                                                            |       | (41      | )          | 22       |       |
| Goodwill  disposed of due to sale of assets held for sale                             |       | (3,621   | )          | —   |       |
| Accounts  payable                                                                     |       | (18,858  | )          | (6,009   | )          |
| Accrued  expenses                                                                     |       | (22,276  | )          | (14,397  | )          |
| Other  liabilities                                                                    |       | 684      |       | 1,542    |       |
| Income  taxes                                                                         |       | 251      |       | (4,011   | )          |
| Total  adjustments                                                                    |       | (69,675  | )          | (51,854  | )          |
| Net  cash used in operating activities                                                |       | (42,555  | )          | (20,981  | )          |
| Cash  flows from investing activities:                                                |       |     |       |     |       |
| Purchases  of property, plant and equipment                                           |       | (8,888   | )          | (9,525   | )          |
| Purchases  of investments                                                             |       | (21,000  | )          | —   |       |
| Purchases  of long-term investment                                                    |       | —   |       | (1,377   | )          |
| Proceeds  from sales of long term investments                                         |       | —   |       | 1,874    |       |
| Proceeds  from sale of assets held for sale                                           |       | 9,752    |       | —   |       |
| Cash  impact of Wax Lyrical receivership                                              |       | —   |       | 1,902    |       |
| Purchase  of businesses, net of cash acquired                                         |       | (6,757   | )          | (94,736  | )          |
| Net  cash used in investing activities                                                |       | (26,893  | )          | (101,862 | )          |
| Cash  flows from financing activities:                                                |       |     |       |     |       |
| Proceeds  from issuance of common stock                                               |       | 9,065    |       | 1,420    |       |
| Purchases  of treasury stock                                                          |       | (178,649 | )          | (9,849   | )          |
| Borrowings  from bank line of credit                                                  |       | 121,170  |       | 20,095   |       |
| Repayments  on bank line of credit                                                    |       | (16,321  | )          | (8,368   | )          |
| Borrowings  on long-term debt                                                         |       | —   |       | 30,678   |       |
| Repayments  of long-term debt                                                         |       | (4,468   | )          | (3,853   | )          |
| Dividends  paid                                                                       |       | (7,758   | )          | (5,983   | )          |
| Net  cash provided by (used in) financing activities                                  |       | (76,961  | )          | 24,140   |       |
| Effect  of exchange rate changes on cash                                              |       | 880      |       | (1,916   | )          |
| Net  decrease in cash and cash equivalents                                            |       | (145,529 | )          | (100,619 | )          |
| Cash  and cash equivalents at beginning of period                                     |       | 229,726  |       | 168,596  |       |
| Cash  and cash equivalents at end of period                                           |       | $        | 84,197     |     | $          | 67,977 |   |

 

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

 

7

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**BLYTH,INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMEN****TS**

**(Unaudited)**

** **

**1.**                                      Basis of Presentation

** **

Blyth is a global competitor in the gift anddecorative accessories market, which the Company calls the home expressionsindustry.  At January 31, 2004 theCompany reported its financial results in five segments: Direct Selling,Wholesale Home Fragrance, Wholesale Creative Expressions, Catalog &Internet and All Other.  As a result ofcertain organizational changes we have implemented, we have reevaluated ourreporting segments pursuant to FASB Statement No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” and determined to reportfinancial information with respect to three segments beginning with the periodended April 30, 2004. These new reporting segments are as follows - theDirect Selling segment, the Wholesale segment and the Catalog & Internetsegment.  The Company’s reportablesegments are based on similarities in distribution channels, customers andmanagement oversight.

 

Within the DirectSelling segment, the Company designs, manufactures or sources, markets anddistributes an extensive line of products including scented candles, relatedaccessories, fragranced bath gels and body lotions and other fragrancedproducts.  These products are sold direct to the consumer under thePartyLite® brand in North America, Europe and Australia through a network ofmore than 51,000 active independent sales consultants.

 

Within the Wholesale segment, the Company designs,manufactures or sources, markets and distributes an extensive line of homefragrance, home décor, seasonal decorations and Away From Home products.  Products in this segment are sold worldwide toretailers in the premium and specialty retail channels under the Colonial®(1),Colonial Candle of Cape Cod®, Colonial at HOME®, Carolina®, CBK®, Holiday365TM,Kaemingk®(1) and Seasons of Cannon Falls® brands and to retailers in the massretail and foodservice channel under the Ambria®, FilterMate®, Florasense®,Gies®(1), Liljeholmens®, and Sterno® brands.

 

Within the Catalog &Internet segment, the Company designs, sources, markets and distributes a broadrange of household convenience items, premium photo albums, frames, holidaycards and gifts sold direct to the consumer under the Miles Kimball®,Exposures®, Walter Drake®, Home Marketplace® and Directions...The Path To BetterHealth® brands.  These products are sold in North America.

 

The consolidatedfinancial statements include the accounts of the Company and its direct andindirect subsidiaries.  All significantintercompany accounts and transactions have been eliminated.  Investments in companies that are notmajority owned or controlled are reported using the equity method and arerecorded in investments.   Interestincome and other consists of interest income earned from investments, foreigncurrency gains and losses and gains and losses from sales of investments.  Certain of the Company’s subsidiaries operateon a 52 or 53-week fiscal year ending on the Saturday closest toJanuary 31.  European operationsmaintain a calendar year accounting period, which is consolidated with theCompany’s fiscal period.  In the opinionof management, the accompanying unaudited consolidated financial statementsinclude all accruals necessary for fair presentation of the Company’sconsolidated financial position at July 31, 2004 and the consolidatedresults of its operations and cash flows for the six-month periods ended July 31,2004 and 2003.  These interim statementsshould be read in conjunction with the Company’s consolidated financialstatements for the year ended January 31, 2004, as set forth in theCompany’s Annual Report on Form 10-K. Operating results for the six months ended July 31, 2004 are notnecessarily indicative of the results that may be expected for the year endingJanuary 31, 2005.

 

**Reclassifications**

** **

Certainreclassifications have been made in prior years’ financial statements toconform to classifications used in the current year.

 

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

 

8

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**Employee Stock Options**

** **

The Company haselected to adopt the disclosure only provisions of Statement of FinancialAccounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure,” and continues to follow Accounting Principles Board(APB) opinion No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for stock options granted to its employees anddirectors under the intrinsic value method. Accordingly, no compensation expense is recorded for the stock optionsissued to employees unless the option price is below market at the measurementdate.  The Company does not at this time,issue stock options below market value, therefore no compensation expense hasbeen recorded in the financial statements. Had compensation expense for the Company’s stock options been determinedin accordance with the fair value method in SFAS No. 123, “Accounting forStock-Based Compensation” and SFAS No. 148, the Company’s reported net incomeand earnings per share would have been adjusted to the pro forma amounts indicatedbelow:

 
| ** **                                                                                                        | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In  thousands except per share data)**                                                                         | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                              |       |                                 |       |                               |       |   |   |   |   |
| Net  earnings:                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| As  reported                                                                                                      |       | $                                    | 9,445      |                               | $          | 11,246 |   | $ | 27,120 |   | $ | 30,873 |   |
| Stock-based  employee compensation expense determined under SFAS No. 123 for all  awards, net of related tax |       | 598                                  |       | 908                                |       | 1,043 |   | 1,844 |   |
| Pro  forma                                                                                                        |       | $                                    | 8,847      |                               | $          | 10,338 |   | $ | 26,077 |   | $ | 29,029 |   |
| Net  earnings per common share:                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| As  reported:                                                                                                     |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                             |       | $                                    | 0.21       |                               | $          | 0.25 |   | $ | 0.60 |   | $ | 0.67 |   |
| Diluted                                                                                                           |       | 0.21                                 |       | 0.24                               |       | 0.59 |   | 0.67 |   |
| Pro  forma:                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                             |       | $                                    | 0.20       |                               | $          | 0.23 |   | $ | 0.57 |   | $ | 0.63 |   |
| Diluted                                                                                                           |       | 0.19                                 |       | 0.22                               |       | 0.57 |   | 0.63 |   |

 

**2.**                                      **Business Acquisitions**

 

On April 1,2003, the Company acquired 100% of the Miles Kimball Company (“Miles Kimball”),a direct marketer of giftware, home décor and household convenience items,premium photo albums, frames and holiday cards under the Miles Kimball® andExposures® catalog titles for approximately $66.2 million in cash.  The acquisition of Miles Kimball aligns withone component of the Company’s overall growth strategy, which is to growthrough selected acquisitions in the home expressions industry.  The excess of the purchase price over theestimated fair value of the net assets acquired approximated $46.0 million,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 an indefinitelife and will not be amortized, plus $9.0 million of customer lists, which willbe amortized on an accelerated basis over 12 years.  Amortization expense recorded in fiscal 2004totaled $1.4 million.  Estimatedamortization expense for the next 5 fiscal years is as follows:  $1.5 million, $1.5 million, $1.2 million,$0.9 million and $0.9 million.  Theresults of operations of Miles Kimball are included in the ConsolidatedStatements of Earnings of the Company since April 2, 2003.  For segment reporting purposes, Miles Kimballis included in the Catalog & Internet segment.

 

9

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On June 20,2003, the Company acquired a 100% interest in Kaemingk B.V. (“Kaemingk”), adesigner and marketer of a wide range of premium seasonal decorations. Kaemingk’sproduct lines feature Christmas décor, including ornaments, lighting, trim,glassware, candles and plush animals, as well as spring and summer decorativeaccents.  The acquisition of Kaemingkaligns with one component of the Company’s overall growth strategy, which is togrow through selected acquisitions in the home expressions industry.  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 $17.6 million, which will not be deductible for income taxpurposes.  During the quarter endedOctober 31, 2003, an adjustment was recorded to reflect the finalappraised value of the acquired property, plant and equipment.  In addition to the fixed purchase price,there is contingent consideration payable in the form of a three-year earn outprovision based on a pre-defined formula related to a multiple of earningsbefore interest and income taxes. A $3.4 million liability for the first annualearn out payment was recorded in the quarter ended April 30, 2004. Theresults of operations of Kaemingk are included in the Consolidated Statementsof Earnings of the Company since June 21, 2003.  For segment reporting purposes, Kaemingk isincluded in the Wholesale segment.

 

On December 22, 2003, the Company acquired 100% of Walter Drake, adirect marketer of value-priced household products including household gifts,gadgets and convenience products, personalized merchandise, home décor andholiday cards under the Walter Drake and Home Marketplace catalog titles, forapproximately $54.2 million in cash.  The acquisition of Walter Drake alignswith the one component of the Company’s overall growth strategy, which is togrow through selected acquisitions in the home expressions industry.  The excess of the purchaseprice over the estimated fair value of the net assets acquired approximated$25.4 million, which will be deductible for income tax purposes.  During the quarter ended April 30, 2004,the Company recorded an adjustment to record additional liabilities primarilyrelated to severance of employees of the Colorado Springs facility as of theacquisition date.  These additional costsrelate to the integration of the Walter Drake business into Miles Kimball,which is expected to be completed by the end of the third quarter of fiscal2005.  These adjustments increased thegoodwill by approximately $3.1 million to $28.5 million.  The other intangibles acquired consist of approximately$12.0 million of trade names and trademarks, which are deemed to have anindefinite life and will not be amortized, plus approximately $6.0 million ofcustomer lists, which will be amortized on an accelerated basis over 10 years.Estimated amortization expense for the next 5 fiscal years is as follows:  $0.9 million, $0.9 million, $0.9 million,$0.6 million and $0.6 million.  The results ofoperations of Walter Drake are included in the Consolidated Statements ofEarnings of the Company since December 23, 2003.  For segment reporting purposes, Walter Drakeis included in the Catalog & Internet segment.

 

The following provides anallocation of the purchase price of Walter Drake (in thousands)

 
| Cash  Purchase Price                   |   | $      | 54,188 |   |
|----------------------------------------|--------|--------|--------|--------|
| Less:  Assets acquired            |   |   |   |
| Accounts  receivable                   |   | 539    |   |
| Inventories                            |   | 6,010  |   |
| Prepaid  and other                     |   | 5,743  |   |
| Property,  plant and equipment         |   | 4,667  |   |
| Intangible  assets                     |   | 18,000 |   |
|                                   |   | 34,959 |   |
| Plus:  Liabilities assumed        |   |   |   |
| Cash  overdraft                        |   | 580    |   |
| Accounts  payable                      |   | 3,442  |   |
| Accrued  expenses                      |   | 5,057  |   |
| Other                                  |   | 189    |   |
|                                   |   | 9,268  |   |
| Unallocated  purchase price (goodwill) |   | $      | 28,497 |   |

 

10

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The followingunaudited pro forma summary financial information summarizes the estimatedcombined results of operations of the Company, Miles Kimball, Kaemingk andWalter Drake assuming that the acquisitions of Miles Kimball, Kaemingk andWalter Drake had taken place on February 1, 2003.  The unaudited pro forma combined results ofoperations were prepared on the basis of information provided to the Company bythe former management of Miles Kimball, Kaemingk and Walter Drake and norepresentation is made by the Company with respect to the accuracy of suchinformation.  The pro forma combinedresults of operations reflect adjustments for interest income, additionaldepreciation based on the fair market value of Miles Kimball’s and WalterDrake’s property, plant, and equipment, amortization of identifiableintangibles of Miles Kimball and Walter Drake and income tax expense.

 
| ** **                                | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In  thousands except per share data)** | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net  sales                                |       | $                                    | 289,063    |                               | $          | 294,539 |   | $ | 648,043 |   | $ | 649,954 |   |
| Net  earnings                             |       | 9,445                                |       | 10,150                             |       | 27,120 |   | 28,364 |   |
| Basic:                                    |       |                                 |       |                               |       |   |   |   |   |
| Net  earnings per common share            |       | $                                    | 0.21       |                               | $          | 0.22 |   | $ | 0.60 |   | $ | 0.62 |   |
| Diluted:                                  |       |                                 |       |                               |       |   |   |   |   |
| Net  earnings per common share            |       | $                                    | 0.21       |                               | $          | 0.22 |   | $ | 0.59 |   | $ | 0.61 |   |

** **

The unaudited proforma combined results of operations are not necessarily indicative of, and donot purport to represent, what the Company’s results of operations or financialcondition actually would have been had the acquisitions been made as ofFebruary 1, 2003.

 

**The following table shows changes in the carrying amount ofgoodwill for the quarter ended July 31, 2004, by operating segment:**

 
| ** **                                                            | ** ** | **Wholesale** | ** ** | **Catalog &  Internet** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------|------------|
| Goodwill  at April 30, 2004                                      |       | $             | 132.5      |                        | $          | 74.6      |       | $ | 207.1 |   |
| Foreign  currency translation adjustment related to Kaemingk goodwill |       | (0.2          | )          | —                      |       | (0.2      | )          |
| Total  adjustments                                                    |       | (0.2          | )          | —                      |       | (0.2      | )          |
| Goodwill  at July 31, 2004                                       |       | $             | 132.3      |                        | $          | 74.6      |       | $ | 206.9 |   |

 

**3.**                                      Inventories

 

The components ofinventory are as follows (in thousands):

 
| ** **       | ** ** | **July 31, 2004** | ** ** | **January 31, 2004** | ** ** |
|------------------|------------|------------------------|------------|---------------------------|------------|
| Raw  materials   |       | $                      | 32,742     |                      | $          | 25,104 |   |
| Work  in process |       | 1,489                  |       | 915                       |       |
| Finished  goods  |       | 240,295                |       | 182,562                   |       |
|             |       | $                      | 274,526    |                      | $          | 208,581 |   |

 

11

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**4.**                                      Earnings per Share

** **

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

 
| ** **                                             | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net  earnings                                          |       | $                                    | 9,445      |                               | $          | 11,246 |   | $ | 27,120 |   | $ | 30,873 |   |
| Weighted  average number of common shares outstanding: |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                  |       | 45,097                               |       | 45,903                             |       | 45,381 |   | 45,991 |   |
| Dilutive  effect of stock options                      |       | 405                                  |       | 252                                |       | 423 |   | 183 |   |
| Weighted  average number of common shares outstanding: |       |                                 |       |                               |       |   |   |   |   |
| Diluted                                                |       | 45,502                               |       | 46,155                             |       | 45,804 |   | 46,174 |   |
|                                                        |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

For the three andsix month periods ended July 31, 2004 and 2003, options to purchase 3,000,13,000, 460,300 and 912,500 shares of common stock, respectively, are notincluded in the computation of earnings per share because the effect would beantidilutive.

 

**5.**                                      Restructuring Charges

** **

During the thirdand fourth quarters of fiscal 2004 the Company recorded severance payments toemployees of $0.5 million pre-tax related to the closure of its Hyannis, MAmanufacturing facility. In conjunction with the closing, the Company eliminated43 jobs comprised of manufacturing and management positions. This manufacturingfacility, which was the Company’s smallest, is located in a busy downtown areaof Cape Cod, making transportation of raw materials and finished products toand from the location challenging. Operations are being consolidated intoBlyth’s manufacturing facility in Batavia, Illinois.

 

During the fourthquarter of fiscal 2004, the Company recorded additional pre-tax restructuringcharges.  These charges consist of $2.1million related to severance costs primarily associated with the restructuringof Blyth HomeScents International – North America and the consolidation of theCompany’s Temecula, California potpourri operations, and $0.9 million of leasetermination costs associated with the closure of five of the Company’s candleoutlet stores.  As a result of theserestructuring activities, the Company eliminated 40 jobs, comprised ofadministrative and management positions.

 

AtJanuary 31, 2004, the Company had approximately $3.3 million ofrestructuring charges included in the Consolidated Balance Sheet, which relatedto the aforementioned severance liabilities and lease obligations.  As a result of payments made during thequarter ended July 31, 2004 approximately $0.8 million of severanceliabilities and $0.6 million of lease obligations were remaining on the balancesheet at July 31, 2004.  Theremaining severance liability and lease obligations will be paid within thenext twelve months.

 
| **(In  thousands)**                 | ** ** | **Lease  Obligations** | ** ** | **Severence  Costs** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
|                                |       |                   |       |                 |       |      |       |
| Balance  at January 31, 2004   |       | $                      | 905        |                 | $          | 2,395     |       | $ | 3,300 |   |
| Payments  made against 2004 charges |       | (321                   | )          | (1,594               | )          | (1,915    | )          |
| Balance  at July 31, 2004      |       | $                      | 584        |                 | $          | 801       |       | $ | 1,385 |   |

 

12

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**6.**                                      Segment Information

** **

Blyth is a global competitor in the gift anddecorative accessories market, which the Company calls the home expressionsindustry.  At January 31, 2004 the Company reported its financialresults in five segments: Direct Selling, Wholesale Home Fragrance, WholesaleCreative Expressions, Catalog & Internet and All Other.  As a result of certain organizational changeswe have implemented, we have reevaluated our reporting segments pursuant toFASB Statement No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” and determined to report financial information withrespect to three segments beginning with the period ended April 30, 2004.These new reporting segments are as follows - the Direct Selling segment, theWholesale segment and the Catalog & Internet segment.  As required by FASB Statement No.131, we haverestated the corresponding information for the prior year to report in thecurrent composition of our reportable segments. The Company’s reportable segments are based on similarities indistribution channels, customers and management oversight.  Revenues are not reported by product or groupof similar products, as it is impractical to do so.

 

Within the Direct Selling segment, the Companydesigns, manufactures or sources, markets and distributes an extensive line ofproducts including scented candles, related accessories, fragranced bath gelsand body lotions and other fragranced products.  These products are solddirect to the consumer under the PartyLite® brand in North America, Europe andAustralia through a network of more than 51,000 active independent salesconsultants.

 

Within the Wholesale segment, the Company designs,manufactures or sources, markets and distributes an extensive line of homefragrance, home décor, seasonal decorations and Away From Home products.  Products in this segment are sold worldwideto retailers in the premium and specialty retail channels under theColonial®(1), Colonial Candle of Cape Cod®, Colonial at HOME®, Carolina®, CBK®,Holiday365TM, Kaemingk®(1), and Seasons of Cannon Falls® brands and to retailersin the mass retail and foodservice channel under the Ambria®, FilterMate®,Florasense®, Gies®(1), Liljeholmens®, and Sterno® brands.

 

Within the Catalog &Internet segment, the Company designs, sources, markets and distributes a broadrange of household convenience items, premium photo albums, frames, holidaycards and gifts sold direct to the consumer under the Miles Kimball®,Exposures®, Walter Drake®, Home Marketplace® and Directions...The Path To BetterHealth® brands.  These products are sold in North America.

 

Earnings in allsegments represent net sales less operating expenses directly related to thebusiness segments and corporate expenses allocated to the businesssegments.  Other income (expense)includes interest expense, interest income and equity in earnings of investees,which are not allocated to the business segments.  Identifiable assets for each segment consistof assets used directly in its operations and intangible assets, if any,resulting from purchase business combinations. Unallocated Corporate within the identifiable assets include corporatecash and cash equivalents, deferred bond costs and other long-term investments,which are not allocated to the business segments.

 

----

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

 

13

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| ** **                                             | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In  thousands)**                                    | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Net Sales**                                          |       |                                 |       |                               |       |   |   |   |   |
| Direct  selling                                        |       | $                                    | 150,309    |                               | $          | 143,219 |   | $ | 340,172 |   | $ | 334,458 |   |
| Wholesale                                              |       | 103,313                              |       | 114,484                            |       | 231,076 |   | 229,266 |   |
| Catalog  & Internet                                |       | 35,441                               |       | 17,565                             |       | 76,795 |   | 23,535 |   |
| **Total**                                              |       | $                                    | 289,063    |                               | $          | 275,268 |   | $ | 648,043 |   | $ | 587,259 |   |
| **Earnings**                                           |       |                                 |       |                               |       |   |   |   |   |
| Direct  Selling                                        |       | $                                    | 25,051     |                               | $          | 23,845 |   | $ | 63,053 |   | $ | 61,250 |   |
| Wholesale                                              |       | (4,255                               | )          | (1,631                             | )          | (6,934 | ) | (4,280 | ) |
| Catalog  & Internet                                |       | (1,784                               | )          | (1,495                             | )          | (2,846 | ) | (1,993 | ) |
|                                                   |       | 19,012                               |       | 20,719                             |       | 53,273 |   | 54,977 |   |
| Other  expense                                         |       | (4,569                               | )          | (2,885                             | )          | (8,910 | ) | (6,019 | ) |
| **Earnings before income taxes and minority interest** |       | $                                    | 14,443     |                               | $          | 17,834 |   | $ | 44,363 |   | $ | 48,958 |   |

 
| ** **              | ** ** | ** ** | ** ** | **July 31, 2004** | ** ** | ** ** | ** ** | **January 31, 2004** | ** ** |
|-------------------------|------------|------------|------------|------------------------|------------|------------|------------|---------------------------|------------|
| **Identifiable Assets** |       |       |       |                   |       |       |       |                      |       |
| Direct  Selling         |       |       |       | $                      | 274,013    |       |       |                      | $          | 273,900 |   |
| Wholesale               |       |       |       | 532,232                |       |       |       | 526,133                   |       |
| Catalog  & Internet |       |       |       | 167,193                |       |       |       | 160,380                   |       |
| Unallocated Corporate   |       |       |       | 48,555                 |       |       |       | 167,550                   |       |
| **Total**               |       |       |       | $                      | 1,021,993  |       |       |                      | $          | 1,127,963 |   |

** **

**7.**                                      Assets Held for Sale

** **

During the fourthquarter of fiscal 2004, the Company decided to divest of its decorative giftbag business, Jeanmarie Creations, in the Wholesale segment through a sale toJeanmarie’s senior management. Therefore, the assets of Jeanmarie were classified as assets held forsale in the Company’s Consolidated Balance Sheet as of January 31, 2004.  The assets held for sale related to Jeanmariewere comprised principally of accounts receivable of $3.1 million, inventory of$3.4 million and property, plant and equipment of $1.7 million.  The operating results related to Jeanmariewere immaterial to the consolidated operating results of the Company.  On April 6, 2004 the Company sold thebusiness to Jeanmarie’s management and associated investors for $10.0 millionin cash.  The sale resulted in a taxablegain of approximately $4.0 million.  Inaddition, $3.6 million of goodwill attributable to Jeanmarie, which was not taxdeductible, was disposed of.

 

There is anadditional $1.1 million classified as assets held for sale in the ConsolidatedBalance Sheet as of January 31, 2004 and July 31, 2004 related to theHyannis, MA manufacturing facility the closure of which is discussed in Note 5.

 

**8.****                                     ****Tender Offer**

 

On June 7, 2004 theCompany announced that its Board of Directors approved a repurchase of up to4,000,000 outstanding shares of the Company’s common stock, with the right torepurchase up to an additional 2% of the Company’s outstanding shares, at aprice per share not greater than $35.00 nor less than $30.00 through a Dutchauction cash tender offer.  The finalnumber of shares repurchased under the tender offer, which expired onJuly 9, 2004, was 4,906,616 shares for an aggregate purchase price of$171.9 million including fees and expenses paid to date.  The tender offer was funded with $85.4million of available cash and $86.5 million of borrowings against our $200million Credit Facility.  The Company doesnot expect the tender offer to affect its share repurchase program, capitalexpenditures, dividend policy or acquisitions.

 

14

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**9.**                                      Contingencies

** **

The Company hascontingent liabilities that have arisen in the ordinary course of its business,including pending litigation.  TheCompany believes the outcome of these matters will not have a material adverseeffect on its consolidated financial position, results of operations or cashflows.

 

15

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**Item 2.**    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

** **

**RESULTSOF OPERATIONS:**

** **

**Overview**

 

Blyth is a designer and marketer of home fragranceproducts and accessories, home décor, seasonal decorations, householdconvenience items, personalized gifts and products such as chafing fuel andtabletop lighting for the Away From Home trade. As a competitor in the global home expressions industry, the Company’sproducts can be found throughout North America, Europe and Australia.  TheCompany reports its financial results in three segments - the Direct Sellingsegment, the Wholesale segment and the Catalog & Internet segment. The Company’s reportable segments are based on similarities in distributionchannels, customers and management oversight.

 

Today, on an annualized net sales basis, the Companyis comprised of an approximately $750 million direct selling business, anapproximately $650 million wholesale business and an approximately $200 millioncatalog and Internet business.  Sales and earnings growth differ in eachsegment depending on geographic location, market penetration, our relativemarket share, and product and marketing execution, among other businessfactors.  Over the long term, all threesegments should experience single-digit growth, most likely within the low tomid-single digit range, again depending on the business factors previouslynoted.

 

Our current focus isdriving sales growth of our brands so we may more fully leverage ourinfrastructure, particularly in the Wholesale segment.  As a result, wehave numerous collaborative initiatives underway within this segment, which webelieve will help drive sales and maximize the sales and marketing talentsacross this segment.  These initiatives include joint trade showpromotions, customer information sharing and leveraging our in-house salesforces, as well as ongoing global sourcing objectives and other organicstrategic initiatives into which we are investing resources.

 

With the acquisitions of Miles Kimball inApril 2003 and Walter Drake in December 2003, we entered the catalogand Internet channel of distribution, giving us a presence in all of ourdesired channels.  We are beginning tobenefit from the operational efficiencies of integrating the Walter Drakebusiness into Miles Kimball, particularly in the areas of distribution andcustomer service.  We expect some ofthese efficiencies to be offset by one-time costs associated with theintegration of Walter Drake’s operations into Miles Kimball, which is nearcompletion.

 

16

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**Net Sales**

** **

Net sales increased $60.7million, or 10.3%, to $648.0 million in the first six months of fiscal 2005from $587.3 million in the first six months of fiscal 2004.  Net sales in the quarter ended July 31,2004 increased $13.8 million or 5.0% to $289.1 million compared with $275.3million a year earlier.  Sales in thequarter ended July 31, 2004 were affected by three main factors.  First, approximately 5 percentage points ofthe increase in net sales may be attributed to the net effect of the inclusionof sales of Kaemingk, acquired in June 2003, and Walter Drake, acquired inDecember 2003, which was partially offset by the divestiture of Jeanmarie Creationsin April 2004.  Second, a 10% salesshortfall in our North American Wholesale business had a negative impact ontotal sales of approximately 4 percentage points. Third, sales increases in ourPartyLite Direct Selling business segment had a positive sales impact ofapproximately 3 percentage points.

 

Net Sales - Direct SellingSegment

 

Net sales in the Direct Selling segment increased $7.1million, or 5.0%, to $150.3 million in the quarter ended July 31, 2004,compared with $143.2 million in the same period last year.  In North America, PartyLite’s US sales wereapproximately even with the prior year. In both dollars and local currency, PartyLite Canada reported an approximately15% decrease versus the prior year. Canada is PartyLite’s most heavily penetrated market, and generatingpositive sales momentum has been challenging in recent years.  Booking shows has become more competitive inthis market as a result of an increase in Direct Selling companies using theParty Plan method of selling.  In PartyLite’sEuropean markets, sales increased approximately 24% in US dollars (16% in localcurrencies), on account of continued positive momentum following a 10-monthleadership program in Germany, PartyLite’s largest European market, whichresulted in a net increase of nearly 1,000 consultants.  Corresponding activity improvement resultedin a higher number of reactivations and fewer inactive consultants inGermany.  In addition, the new 2004spring catalog and product line was well received throughout Europe.

 

NetSales – Wholesale Segment

 

Net sales in the Wholesalesegment decreased $11.2 million, or 9.8%, to $103.3 million in the quarterended July 31, 2004, compared with $114.5 million in the same period infiscal 2004.  The decrease in this segmentis primarily a result of a significant sales shortfall in the North AmericanWholesale business.   Feedback from ourindependent retailers at the 2004 trade shows indicated apprehension anduncertainty relative to the expected sales trends for the upcoming holidayselling season.  These retailers are veryconcerned that reduced discretionary income, resulting from the recent severespike in gasoline prices, will negatively impact holiday season sales, makingthem reluctant to commit to holiday inventory purchases.  Similar trends are also occurring in thespecialty and mass retail channels.  Netsales were also negatively impacted by the divestiture of Jeanmarie Creationsin April 2004, which approximately offset the benefit of a full quarter ofnet sales from Kaemingk, acquired in June 2003.  Our European wholesale businesses experienceddouble digit sales growth in the second quarter, driven by increases inseasonal decorations and mass channel candles.

 

NetSales - Catalog & Internet Segment

 

Net sales in the Catalog & Internet Segment increased $17.8 millionto $35.4 million in the quarter ended July 31, 2004, compared with $17.6million in the same period in fiscal 2004. Sales in this segment more than doubled due to the addition of WalterDrake in December 2003.  Theintegration of Walter Drake’s operations into those of Miles Kimball is nearlycomplete.  All second quarter shipmentstook place from the Miles Kimball distribution center, telephone orders werehandled by our two Miles Kimball call centers and Internet orders were allprocessed by the Miles Kimball team.

 

17

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**Gross Profit**

** **

Gross profitincreased $33.2 million, or 11.2% from $295.9 million in the first six monthsof fiscal 2004 to $329.1 million in the first six months of fiscal 2005.  Gross profit margin increased from 50.4% forthe first six months of fiscal 2004 to 50.8% for the first six months of fiscal2005.  Gross profit in the quarter endedJuly 31, 2004 increased $11.6 million, or 8.6% from $134.5 million for thequarter ended July 31, 2003 to $146.1 million for the quarter endedJuly 31, 2004.  Gross profit marginincreased from 48.9% for the quarter ended July 31, 2003 to 50.5% for thequarter ended July 31, 2004.  Thisimprovement was due to favorable product mix and improvements in the DirectSelling segment related to reduced shipping and handling expenses, andprofitability improvements due to the recent restructuring efforts of our NorthAmerican home fragrance operations, offset somewhat by commodity cost increasesexperienced by some of our businesses. In addition, a mix shift due to recent acquisitions also had a negativeimpact on gross profit margin.  Theseacquired businesses are quite profitable but have lower gross margins than theoverall Company average.

 

**Selling Expense**

** **

Selling expenseincreased $29.4 million, or 16.4%, from $179.3 million in the first six monthsof fiscal 2004, when selling expense was 30.6% of net sales, to $208.7 millionin the first six months of fiscal 2005, or 32.2% of net sales.  Selling expense increased $11.4 million, or13.9%, from $82.2 million in the quarter ended July 31, 2003 to $93.6million in the quarter ended July 31, 2004.  As a percent of sales, selling expense was32.4% in the most recent fiscal quarter compared to 29.9% a year earlier.  The increase in selling expense is primarilydue to the addition of Walter Drake as its selling expense to sales ratio ishigher than Blyth’s overall average. Second, the sales mix shift to the Direct Selling segment, which alsohas a higher selling expense, impacted Blyth’s selling expense to salesratio.  In addition, promotion andprogram spending, particularly in the Wholesale segment, was reduced at a ratebelow the rate of the sales shortfall, which further negatively impactedBlyth’s selling expense to sales ratio.

 

**Administrative Expense**

** **

Administrativeexpense increased $5.4 million, or 8.8%, from $61.7 million in the first sixmonths of fiscal 2004 to $67.1 million in the first six months of fiscal2005.  Administrative expense increased$1.9 million or 6.0% from $31.6 million in the quarter ended July 31, 2003to $33.5 million in the quarter ended July 31, 2004.  As a percent of sales, administrative expensewas 11.6% in the second quarter of fiscal 2005 versus 11.5% in the same periodlast year.* *Administrative expenses increased due to the addition ofWalter Drake, investment spending in various organic strategic initiatives andcompliance costs associated with the Sarbanes-Oxley Act of 2002.

 

**Operating Profit**

** **

Operating profitdecreased $1.7 million, or 3.1%, from $55.0 million in the first six months offiscal 2004 to $53.3 million in the first six months of fiscal 2005.  Operating profit decreased $1.7 million, or8.2%, from $20.7 million in the quarter ended July 31, 2003 to $19.0million in the quarter ended July 31, 2004.  The sales shortfall in the Wholesale segmentis the primary reason for the decrease in operating profit.  We believe this shortfall to be the result ofretailer caution and, specifically, their reluctance to commit to holidayproduct orders, which typically begin shipping in the second quarter.  Secondly, operating profit was negativelyimpacted by expenses related to compliance with the Sarbanes-Oxley Act of2002.  The decline also reflects thenegative impact of the seasonality of our recent Catalog & Internet segmentacquisitions, the impact of higher raw material costs as well as our investmentin a number of organic strategic initiatives.

 

Operating Profit/Loss - DirectSelling Segment

 

**Operating profit in**the quarter ended July 31, 2004 in the Direct Selling segment increased $1.3million, or 5.5%, to $25.1 million when compared to $23.8 million a yearearlier.  The improved profitabilityresulted from reduced shipping and handling expenses in North America as wellas from efficiencies gained as a result of increased scale in PartyLite’sEuropean operations.

 

18

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OperatingProfit/Loss - Wholesale Segment

 

Operating loss in the quarter ended July 31, 2004in the Wholesale segment was $4.3 million versus a loss of $1.6 million a yearearlier.  A profitability decline due tolower sales in our North American wholesale business, as discussed earlier,across all products and distribution channels, more than offset theprofitability improvements we have been making due to the recent restructuringof our North American home fragrance operations.  Increased raw material costs also negativelyimpacted this segment’s operating profit.

 

OperatingProfit/Loss - Catalog & Internet Segment

 

Operating loss in thequarter ended July 31, 2004 in the Catalog & Internet segment was $1.8million versus a loss of $1.5 million a year earlier.  The operating loss was expected given theseasonal nature of this segment and includes expenses associated with theintegration of Walter Drake into Miles Kimball. The major facets of the infrastructure transition, including that ofWalter Drake’s call center and distribution center, are nearly complete.

 

**Interest Expense**

** **

Interest expenseincreased approximately $3.2 million from $7.1 million in the first six monthsof fiscal 2004 to $10.3 million in the first six months of fiscal 2005.  Interest expense increased approximately $1.5million from $3.5 million in the quarter ended July 31, 2003 to $5.0million in the quarter ended July 31, 2004.  This increase is mostly due to higherinterest costs related to the $100 million of 5.5% Senior Notes issued in October 2003.

 

**Income Taxes**

** **

Income tax expensedecreased $0.8 million, or 4.4%, from $18.0 million in the first six months offiscal 2004 to $17.2 million in the same period in the current fiscalyear.  Income tax expense decreased $1.6million, or 24.2 %, from $6.6 million in the quarter ended July 31, 2003to $5.0 million in the quarter ended July 31, 2004.  This decrease is primarily due to thedecrease in earnings and to a lower expected effective tax rate for fiscal2005.  The effective tax rate for thequarter ended July 31, 2004 was approximately 35% compared to 36.8% in thesecond quarter of fiscal 2004. We anticipate that our full year effectiveincome tax rate for fiscal 2005 will be approximately 36.0%.

 

**Net Earnings**

** **

As a result of theforegoing, net earnings decreased $3.8 million, or 12.3%, from $30.9 million inthe six months ended July 31, 2003 to $27.1 million for the six monthsended July 31, 2004.  Net earningsdecreased $1.8 million, or 16.1%, from $11.2 million in the second quarter offiscal 2004 to $9.4 million in the second quarter of fiscal 2005.

 

Basic earnings per share based upon the weighted average number ofshares outstanding for the six months ended July 31, 2004, were $0.60, adecrease of $0.07, or 10.4%, compared to $0.67 for the six months endedJuly 31, 2003.  Basic earnings pershare based upon the weighted average number of shares outstanding for thequarter ended July 31, 2004, were $0.21, a decrease of $0.04, or 16.0%,compared to $0.25 for the quarter ended July 31, 2003.  Diluted earnings per share based upon thepotential dilution that could occur if options to issue common stock wereexercised, were $0.59 for the six months ended July 31, 2004, compared to$0.67 for the same period the prior year. Diluted earnings per share were $0.21 for the quarter endedJuly 31, 2004, compared to $0.24 for the same period last year, a decreaseof $0.03 or 12.5%.

 

19

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**Liquidity and CapitalResources**

** **

Inventoryincreased from $208.6 million at January 31, 2004 to $274.5 million atJuly 31, 2004.  The increase ininventory is primarily due to normal inventory purchases of seasonal product inour Direct Selling and Wholesale segment and to the weak sales in the NorthAmerican Wholesale segment in the quarter ended July 31, 2004.** Accounts receivable decreased $19.9 millionfrom $104.5 million at the end of fiscal 2004 to $84.6 million at July 31,2004.* *The decrease in accounts receivable is due to the collectionsof accounts receivable related to seasonal sales in the third and fourth quarterof fiscal 2004 and weak sales in the North American Wholesale segment in thefirst six months of fiscal 2005. * *Accounts payable and accruedexpenses decreased $42.5 million from $175.8 million at the end of fiscal 2004to $133.3 million at July 31, 2004.* *The decrease in accounts payableand accrued expenses is attributable to normal patterns of payment of operatingexpenses including the semi-annual payment of accrued interest and incentivebonuses.

 

Capitalexpenditures for property, plant and equipment were $5.9 million in the quarterended July 31, 2004 compared to $6.6 million in the prior year period*.*Capital expenditures consisted primarilyof investments in information technology and upgrades of equipment andfacilities.  The Company expects totalcapital spending of approximately $20.0 million for fiscal 2005.

 

The Company has a$200 million unsecured revolving credit facility, which matures onAugust 5, 2005 (the “Credit Facility”). The Company has the ability to increase the Credit Facility, undercertain circumstances, by an additional $50 million.  The Credit Facility may be used for generalcorporate purposes, which includes funding for strategic acquisitions andseasonal working capital needs.  TheCredit Facility contains, among other provisions, requirements for maintainingcertain financial ratios including, among others, a minimum level of net worthand a maximum level of financial leverage. The Credit Facility also imposes limitations on, among other things,certain payments, the imposition of liens on our assets, indebtedness that maybe incurred by our subsidiaries, investments we may make and sales of ourassets.  At July 31, 2004, theCompany was in compliance with such covenants. Amounts outstanding under the Credit Facility bear interest, at theCompany’s option, at either JPMorgan Chase Bank’s prime rate (4.25% atJuly 31, 2004) or at the Eurocurrency rate plus a credit spread rangingfrom 0.525% to 1.5%, calculated on the basis of a combination of the Company’ssenior unsecured long-term debt rating and the Company’s usage of the CreditFacility.  On July 31, 2004,approximately $95.5 million (including letters of credit) was outstanding underthe Credit Facility.

 

As of July 31, 2004, the Company had a total of $15.0 million availableunder an uncommitted bank line of credit with LaSalle Bank NationalAssociation, which matures in June 2005. Amounts outstanding under the line of credit bear interest at short-termfixed rates.  No amounts were outstandingunder the uncommitted line of credit at July 31, 2004.

 

At July 31, 2004, the Company had atotal of $10.0 million available under an uncommitted line of credit with Bankof America to be used for letters of credit. At July 31, 2004, approximately $0.1 million of letters of creditwere outstanding under this credit line.

 

As of June 30, 2004, The Gies Group (“Gies”) had available linesof credit of approximately $38.6 million of which approximately $13.5 millionwas outstanding.  The amounts outstandingunder the lines of credit bear interest at a weighted average rate of 3.23% atJune 30, 2004.  The lines of creditare renewed annually.

 

As ofJune 30, 2004, Kaemingk had available lines of credit of approximately$33.5 million with ING Bank N.V.  Thelines of credit are collateralized by certain real estate and equipment ownedby Kaemingk.  At June 30, 2004,approximately $7.7 million was outstanding at a weighted average interest rateof 2.75%.

 

Colony Gift Corporation Limited (“Colony”)has a $21.8 million short-term revolving credit facility with Barclays Bank,which matures in June 2005.  As ofJune 30, 2004, Colony had borrowings under the credit facility ofapproximately $5.0 million, at a weighted average interest rate of 5.23%.

 

20

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At July 31, 2004, Miles Kimball hadapproximately $10.1 million of long-term debt outstanding under a real estatemortgage note payable to John Hancock Life Insurance Company, which maturesJune 1, 2020. Under the terms of the note, payments of principal andinterest are required monthly at a fixed interest rate of 7.89%.

 

At June 30,2004, Kaemingk had approximately $8.1 million of long-term debt outstandingunder six loans with ING Bank N.V. at a weighted average interest rate of5.1%.  The bank loans have maturity datesranging from 2005 through 2020.  Theloans are collateralized by certain real estate and equipment owned byKaemingk.

 

In July 1995,the Company privately placed $25.0 million aggregate principal amount of 7.54%Senior Notes due 2005.  As ofJuly 31, 2004, $3.6 million of principal remained outstanding.  Such senior notes contain, among otherprovisions, requirements for maintaining certain financial ratios and networth.  At July 31, 2004, theCompany was in compliance with such provisions. Payment on the notes commenced in June 1999 and annual installmentsof principal and interest are required to be paid through June 2005.

 

In May 1999, theCompany filed a shelf registration statement for issuance of up to $250.0million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Companyissued $150.0 million of 7.90% Senior Notes due October 1, 2009 at adiscount of approximately $1.4 million, which is being amortized over the lifeof the notes.  Such notes contain, amongother provisions, restrictions on liens on principal property or stock issuedto collateralize debt.  At July 31,2004, the Company was in compliance with such provisions.  Interest is payable semi-annually onApril 1 and October 1.  OnOctober 20, 2003, the Company issued $100.0 million, 5.50% Senior Notesdue on November 1, 2013 at a discount of approximately $0.2 million, whichis being amortized over the life of the notes. Such notes contain provisions and restrictions similar to those in the7.90% Senior Notes.  At July 31,2004, the Company was in compliance with such covenants.  Interest on the notes began accruing onOctober 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 in partat any time at a specified redemption price.

 

At July 31,2004, CBK had $4.6 million of long-term debt outstanding under an IndustrialRevenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letterof credit issued by La Salle Bank National Association.  The loan is collateralized by certain ofCBK’s assets.  The amount outstanding underthe IRB bears interest at short-term floating rates, which equaled a weightedaverage interest rate of 1.5% at July 31, 2004.

 

The Company’sBoard of Directors has authorized the Company to repurchase up to 6,000,000shares of common stock under the Company’s share repurchase program.  There were no repurchases under this share repurchaseprogram in the quarter ended July 31, 2004.  Since January 31, 2004, the Company haspurchased an additional 201,700 shares on the open market for a cost of $6.7million, bringing the cumulative total purchased shares to 4,546,800 as ofJuly 31, 2004 for a total cost of approximately $112.0 million.  The acquired shares are held as common stockin treasury at cost.

 

21

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On June 7,2004 the Company announced that its Board of Directors approved a repurchase ofup to 4,000,000 outstanding shares of the Company’s common stock, with theright to repurchase up to an additional 2% of the Company’s outstanding shares,at a price per share not greater than $35.00 nor less than $30.00 through aDutch auction cash tender offer.  Thefinal number of shares repurchased under the tender offer, which expired onJuly 9, 2004, was 4,906,616 shares for an aggregate purchase price of$171.9 million including fees and expenses paid to date.  The tender offer was funded with $85.4million of available cash and $86.5 million of borrowings against our $200million Credit Facility.  The Companydoes not expect the tender offer to affect its share repurchase program,capital expenditures, dividend policy or acquisitions.

 

**Critical AccountingPolicies**

** **

There were nochanges to our critical accounting policies in the second quarter of fiscal2005.  For a discussion of the Company’scritical accounting policies see our Annual Report on Form 10-K for the fiscalyear ended January 31, 2004.

 

22

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**Item 3.**             QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

** **

**Market Risk**

** **

The Company hasoperations outside of the United States and sells its products worldwide.  The Company’s activities expose it to avariety of market risks, including the effects of changes in foreign currencyexchange rates, interest rates and commodity prices.  These financial exposures are activelymonitored and, where considered appropriate, managed by the Company.

 

**Interest Rate Risk**

** **

As ofJuly 31, 2004, the Company is subject to interest rate risk onapproximately $123.0 million of variable rate debt.  Each 1-percentage point increase in theinterest rate would impact pre-tax earnings by approximately $1.23 million ifapplied to the total.

 

On July 10,2003, the Company terminated the interest rate swap agreement in relation to$50.0 million of our outstanding 7.90% Senior Notes, which mature onOctober 1, 2009.  This terminationresulted in a deferred gain of approximately $5.0 million, which will beamortized over the remaining term of the Notes.

 

**Foreign Currency Risk**

** **

The Company uses forward foreign exchange contracts to hedge the impactof foreign currency fluctuations on certain committed capital expenditures,certain inventory purchases, certain intercompany payables and certainintercompany loans.  The Company does nothold or issue derivative financial instruments for trading purposes.

 

The Company hasdesignated its forward exchange contracts on Canadian intercompany purchasesand forecasted future purchase commitments as cash flow hedges and, as such, aslong as the hedge remains effective and the underlying transaction remainsprobable, the effective portion of the changes in the fair value of these contractswill be recorded in accumulated other comprehensive income (loss) (“OCI”) untilearnings are affected by the variability of the cash flows being hedged.  With regard to commitments for machinery andequipment and inventory purchases, upon payment of each commitment, theunderlying forward contract is closed and the corresponding gain or loss istransferred from accumulated OCI and is included in the measurement cost of theacquired asset.  If a hedging instrumentis sold or terminated prior to maturity, gains and losses are deferred inaccumulated OCI until the hedged item is settled.  However, if the hedged item is no longerlikely to occur, the resultant gain or loss on the terminated hedge isrecognized into earnings immediately. Approximately $69,000 of hedge losses are included in accumulated OCI atJuly 31, 2004, and are expected to be transferred into earnings within thenext twelve months.

 

The Company hasdesignated its foreign currency forward contracts related to intercompany loansas fair value hedges. The gains or losses on the fair value hedges arerecognized into earnings and generally offset the transaction gains or lossesin the foreign denominated loans that they are intended to hedge.

 

For consolidatedfinancial statement presentation, net cash flows from such hedges areclassified in the categories of the cash flow with the items being hedged.

 

23

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The following table provides information about the Company’s foreignexchange forward contracts at July 31, 2004.

 
| **(In  thousands, except average contract rate)** | ** ** | **U.S. Dollar  Notional Amount** | ** ** | **Average  Contract Rate** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|---------------------------|------------|
| Canadian  Dollar                                  |       | $                                | 4,418      |                       | 1.32       |                      | $          | 28 |   |
| Euro                                              |       | 23,080                           |       | 1.22                       |       | (129                      | )          |
| Australian  Dollar                                |       | 684                              |       | 1.00                       |       | (7                        | )          |
|                                              |       | $                                | 28,182     |                       |       |                      | $          | (108 | ) |

 

The foreign exchange contracts outstanding as of June 30, 2004,have maturity dates ranging from July 2004 through December 2004.

 

24

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**Item 4.**CONTROLSAND PROCEDURES

** **

(a)Evaluation of 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 in internal control over financial reporting.

 

Therewas no change in our internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules13a-15 or 15d-15 that occurred during our last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

25

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**Part II.** OTHER INFORMATION

** **

**Item 1.**           LegalProceedings

** **

None.

 

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

** **

The followingtable sets forth certain information concerning the repurchase of the Company’sCommon Stock made by the Company during the second quarter of the fiscal yearended January 31, 2005.

 

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

 
| **Period**                                         | ** ** | **(a) Total  Number  of Shares  Purchased** | ** ** | **(b)  Average  Price Paid  per Share** | ** ** | **(c) Total  Number of  Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d) Maximum Number (or  Approximate Dollar  Value) of Shares that May  Yet Be Purchased Under  the Plans or Programs** | ** **       |
|----------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------------|
|                                               |       |                                        |       |                                    |       |                                                                                            |       |                                                                                                                     |             |
| Month  #1

May  1, 2004 -May 31, 2004              |       | 0                                           |       | 0                                       |       | 0                                                                                               |       | 1,453,200 shares                                                                                                         |             |
|                                               |       |                                        |       |                                    |       |                                                                                            |       |                                                                                                                     |             |
| Month  #2

June 1,  2004 -June 30, 2004  |       | 0                                           |       | 0                                       |       | 0                                                                                               |       | 1,453,200 shares                                                                                                         |             |
|                                               |       |                                        |       |                                    |       |                                                                                            |       |                                                                                                                     |             |   |
| Month  #3

July 1,  2004 - July 31, 2004 |       | 4,906,616                                   | (2)        | $                                       | 35.00      |                                                                                            | 0          |                                                                                                                     | 1,453,200 shares |   |
|                                               |       |                                        |       |                                    |       |                                                                                            |       |                                                                                                                     |             |   |
| Total                                              |       | 4,906,616                                   |       | $                                       | 35.00      |                                                                                            | 0          |                                                                                                                     | 1,453,200 shares |   |

 

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(1) On September 10,1998, the Company’s Board of Directors approved the Company’s share repurchaseprogram (the “Repurchase Program”) pursuant to which the Company can repurchaseup to 1,000,000 shares of its issued and outstanding Common Stock in openmarket transactions.  On June 8,1999, the Company’s Board of Directors amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 1,000,000shares, from 1,000,000 to 2,000,000 shares. On March 30, 2000, the Company’s Board of Directors further amendedthe Repurchase Program and increased the number of shares of Common Stock to berepurchased by 1,000,000 shares, from 2,000,000 to 3,000,000 shares.  On December 14, 2000, the Company’sBoard of Directors further amended the Repurchase Program and increased thenumber of shares of Common Stock to be repurchased by 1,000,000 shares, from3,000,000 to 4,000,000 shares.  OnApril 4, 2002, the Company’s Board of Directors further amended theRepurchase Program and increased the number of shares of Common Stock to berepurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.  As of July 31, 2004, the Company haspurchased a total of 4,546,800 shares of Common Stock under the RepurchaseProgram.  The Repurchase Program does nothave an expiration date.  The Companyintends to make further purchases under the Repurchase Program.

 

(2) On June 7, 2004the Company announced that its Board of Directors approved a repurchase of upto 4,000,000 outstanding shares of the Company’s common stock, with the rightto repurchase up to an additional 2% of the Company’s outstanding shares, at aprice per share not greater than $35.00 nor less than $30.00 through a Dutchauction cash tender offer.  The finalnumber of shares repurchased under the tender offer, which expired onJuly 9, 2004, was 4,906,616 shares for an aggregate purchase price of $171.9 million including fees and expenses paid to date.  The tender offer was funded with $85.4million of available cash and $86.5 million of borrowings against our $200million Credit Facility.  The Companydoes not expect the tender offer to affect its share repurchase program,capital expenditures, dividend policy or acquisitions.

 

26

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**Part II.** OTHER INFORMATION

** **

**Item 3.**           Defaultsupon Senior Securities

** **

None

 

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

** **

The followingmatters were voted upon at the Annual Meeting of Stockholders held onJune 24, 2004, and received the votes set forth below:

 

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

 
| ** **         | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstentions** | ** ** |
|--------------------|------------|------------|------------|-------------|------------|--------------|------------|-----------------|------------|
| Robert  B. Goergen |       | 42,708,808 |       | 0           |       | 256,839      |       | 0               |       |
| Neal  I. Goldman   |       | 42,845,983 |       | 0           |       | 119,754      |       | 0               |       |
| Howard  E. Rose    |       | 34,052,632 |       | 0           |       | 8,913,015    |       | 0               |       |

 

 

In addition to thedirectors elected at the meeting, the directors of the Company whose terms of officecontinued after the meeting are:  RogerA. Anderson, John W. Burkhart, Pamela M. Goergen, Phillip Greer (Mr. Greerresigned on June 25, 2004), Carol J. Hochman, Wilma H. Jordan and John E.Preschlack.

 

2)              Aproposal to ratify the appointment of Deloitte & Touche LLP as independentcertified public accountants received 41,987,269 votes for, 962,347 votesagainst, 0 votes withheld and 16,031 abstentions.

 

3)              Aresolution to adopt Amendment No. 1 to the Company’s 2003 Long-Term IncentivePlan received 35,473,414 votes for, 4,811,403 votes against, 0 votes withheldand 571,576 abstentions.  In additionthere were 2,109,255 broker non-votes with respect to this resolution.

 

27

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**Item 5.**           Other Information

 

The Company isincluding the following cautionary statement in this Report to make applicable,and to take advantage of, the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995 for any forward-looking statements made by, or onbehalf of, the Company.  Forward-lookingstatements include statements concerning plans, objectives, goals, strategies,future events or performance and underlying assumptions and other statements,which are other than statements of historical facts.  From time to time, the Company and itsrepresentatives 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-looking statementsare expected to be based on various assumptions, many of which are based, inturn, upon further assumptions.

 

There can be noassurance that management’s expectations, beliefs or projections will occur orbe achieved or accomplished.  In additionto other factors and matters discussed elsewhere in this Report and in theCompany’s other public filings and statements, the following are importantfactors that, in the view of the Company, could cause actual results to differmaterially from those discussed in the Company’s forward-lookingstatements.  The Company disclaims anyobligation to update any forward-looking statements, or the following factors,to reflect events or circumstances after the date of this Report.

 

Risk of Inability to Maintain Growth Rate

 

The Company hasexperienced significant sales growth in past years.  While management expects continued growth,our future growth rate will likely be less than our historical growth rate.  The Company expects faster sales growth inits international market versus its United States market, particularly in theDirect Selling and Wholesale segments. The market for our Away From Home or foodservice products has also grownhistorically, though at a slower rate, a pattern that is expected tocontinue.  In recent years, our overallsales for the Away From Home or foodservice products were flat, reflecting agenerally weak economic environment during these years.  The Company’s ability to increase salesdepends on numerous factors, including market acceptance of existing products,the successful introduction of new products, the ability to recruit newindependent sales consultants, sourcing of raw materials and demand-drivenincreases in production and distribution capacity.  Business in all of our segments is driven byconsumer preferences.  Accordingly, therecan be no assurances that the Company’s current or future products willmaintain or achieve market acceptance. Our sales and earnings results can be negatively impacted by theworldwide economic environment, particularly the Canadian, United States andEuropean economies.  There can be noassurances that the Company’s financial results will not be materiallyadversely affected by these factors in the future.

 

The Company’shistorical growth has been due in part to acquisitions and management continuesto consider additional strategic acquisitions. There can be no assurances that management will continue to identifysuitable acquisition candidates, consummate acquisitions on terms favorable tothe Company, finance acquisitions or successfully integrate acquired operations

 

Risks Associated with International Sales and Foreign-Sourced Products

 

Our internationalsales growth rate has outpaced our United States growth rate in recentyears.  Moreover, the Company sources aportion of its products in all of its business segments from independentmanufacturers in the Pacific Rim, Europe and Mexico.  For these reasons, we are subject to thefollowing risks associated with international manufacturing and sales:  fluctuations in currency exchange rates,economic or political instability, international public heath crises,transportation costs and delays, difficulty in maintaining quality control,restrictive governmental actions, nationalizations, the laws and policies ofthe United States, Canada and certain European countries affecting theimportation of goods (including duties, quotas and taxes) and the trade and taxlaws of other nations.

 

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Ability to Respond to Increased Product Demand

 

The Company’sability to meet future product demand in all of its business segments willdepend upon its success in (1) bringing new production and distributioncapacity on line in a timely manner, (2) improving its ability to forecastproduct demand and fulfill customer orders promptly, (3) improving customerservice-oriented management information systems and (4) training, motivatingand managing new employees.  The failureof any of the above could result in a material adverse effect on our financialresults.

 

Risk of Shortages of Raw Materials

 

Certain rawmaterials could be in short supply due to capacity, availability, a change inrequirements, weather or other factors, including supply disruptions due toproduction or transportation delays. Such shortages have not had and are not presently expected to have amaterial adverse effect on the Company’s operations.  While the price of crude oil is only one ofseveral factors impacting the price of petroleum wax, it is possible thatrecent fluctuations in oil prices may have a material adverse affect on thecost of petroleum-based products used in the manufacture or transportation ofour products, particularly in the Direct Selling and Wholesale segments.

 

Dependence on Key Corporate Management Personnel

 

Our successdepends in part on the contributions of key corporate management, including itsChairman and Chief Executive Officer, Robert B. Goergen.  The Company does not have employmentcontracts with any of its key corporate management personnel except Mr.Goergen, nor does it maintain any key person life insurance policies.  The loss of any of the key corporatemanagement personnel could have a material adverse effect on the Company.

 

Risk of Increased Competition

 

Our business ishighly competitive both in terms of pricing and new product introductions.  The worldwide market for home expressionsproducts is highly fragmented with numerous suppliers serving one or more ofthe distribution channels served by the Company.  Because there are relatively low barriers toentry in all of our business segments, the Company may face increasedcompetition from other companies, some of which may have substantially greaterfinancial or other resources than those available to us.  Competition includes companies sellingcandles manufactured at low cost outside of the United States.  Moreover, certain competitors focus on asingle geographic or product market and attempt to gain or maintain marketshare solely on the basis of price.

 

RisksAssociated with Terrorist Attacks or Other Hostilities and the InternationalPolitical Climate

 

Geopolitical conflict,including acts of war and terrorist attacks, have and may in the future affectthe US and global economies and may increase other risk factors faced by theCompany.

 

# **RisksRelated to Information Technology Systems**

# ** **

Our informationtechnology systems are dependent on global communications providers, telephonesystems, hardware, software and other aspects of Internet infrastructure thathave experienced significant system failures and outages in the past.  Our systems are susceptible to outages due tofire, floods, power loss, telecommunications failures, break-ins and similarevents.  Despite the implementation ofnetwork security measures, the Company’s systems are vulnerable to computerviruses, break-ins and similar disruptions from unauthorized tampering withCompany systems.  The occurrence of theseor other events could disrupt or damage our information technology systems andinhibit internal operations, the ability to provide customer service or theability of customers or sales personnel to access the Company’s informationsystems.

 

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**Item 6.**           Exhibitsand Reports on Form 8-K

** **

a)              Exhibits

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

 

b)             Reportson Form 8-K

 

During the fiscal quarterended July 31, 2004, the Company filed the following Current Reports onForm 8-K:

 

Current Report on Form8-K on May 3, 2004 to announce that the Company’s fiscal 2003 financialstatements have been restated to reflect the recording of goodwill impairmentcharges. The restated financial statements appeared in the Company’s annualreport on Form 10-K for the fiscal year ended January 31, 2004, which wasfiled with the Commission on April 30, 2004.

 

Current Report on Form8-K/A on May 6, 2004 to announce the blackout period for the fiscal quarterended April 30, 2004 with respect to the purchase or sale of the Company’scommon stock by employees, directors and officers.

 

Current Report on Form8-K on June 7, 2004 to announce a new record date for its Annual Meetingof Stockholders held on June 24, 2004.

 

Current Report on Form8-K on June 8, 2004 to file as an exhibit the press release reporting theCompany’s results of operations for the fiscal quarter ended April 30,2004.

 

Current Report on Form8-K on June 8, 2004 to announce the commencement of a Dutch auctionself-tender offer.

 

Current Report on Form8-K on July 12, 2004 to announce the preliminary results of its Dutchauction self-tender offer.

 

Current Report on Form8-K on July 16, 2004 to announce the final results of its Dutch auctionself-tender offer.

 

Current Report on Form8-K on July 16, 2004 to announce the blackout period for the fiscalquarter ended July 31, 2004 with respect to the purchase or sale of theCompany’s common stock by employees, directors and officers.

 

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**SIGNATURES**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |                    | BLYTH, INC.                                 |
|--------|-------------------------|---------------------------------------------|
|   |                    |                                        |
|   |                    |                                        |
| Date:  | September 9,  2004 |                                        | By: | /s/Robert B. Goergen |   |
|   |                    | Robert B. Goergen                           |
|   |                    | Chairman and Chief  Executive Officer       |
|   |                    |                                        |
|   |                    |                                        |
| Date:  | September 9,  2004 |                                        | By: | /s/Robert H. Barghaus |   |
|   |                    | Robert H. Barghaus                          |
|   |                    | Vice President and  Chief Financial Officer |

 

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