**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WashingtonD.C. 20549**

 

**FORM 10-Q/A**
| **(Mark One)** | **(Amendment No. 1)**                                                                         |
|----------------|-----------------------------------------------------------------------------------------------|
|           |                                                                                          |
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|           |                                                                                          |
| ** **     | **For the quarterly period ended July 31, 2003**                                              |
| ** **     | ** **                                                                                    |
| **or**         |
|           |                                                                                          |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                |                                                                                               |  |

 

**For thetransition period from                            to                           **

 

**Commissionfile****number 1-13026**

 

**BLYTH, INC.**

(Exact name of registrantas 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 telephonenumber, including area code)

 

#### **Not Applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  ý    No  o

 

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

Yes  ý    No  o

 

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

 

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

 

 

----

 

#### **Explanatory Note**

#### ** **

**The purpose for this Amendment No. 1 to Blyth,Inc.’s Quarterly Report on Form 10-Q/A for the period ended July 31, 2003, isto restate our financial statement footnotes to reflect our segments as revisedas of January 31, 2004 based on FASB Statement No. 131, “Disclosures aboutSegments of an Enterprise and Related Information”.**  This revision ofsegments had the related effect of requiring changes in the Company’s reportingunits for purposes of goodwill impairment reviews under SFAS 142, retroactiveto the February 1, 2002 adoption date of SFAS 142.  Thisresulted in the need toperform impairment reviews of several additional reporting units as of February1, 2002 and each subsequent year-end balance sheet date, thereafter. Theseimpairment reviews indicated the need to record additional impairment chargesas of the February 1, 2002 adoption of SFAS 142, specifically to write-off $20.9million in goodwill associated with the 1999 acquisition of the Gies Group and$6.3 million in goodwill associated with the 1999 acquisition of the ColonyGroup.  As a result, we have restated our2003 financial statements as discussed in Note 2 to the Consolidated FinancialStatements to reflect this goodwill impairment charge as a cumulative effect ofaccounting change for the adoption of SFAS 142 as of February 1, 2002 and suchrestatement is reflected throughout management’s discussion and analysis thatis set forth below.

 

**We have restated footnotes 4, 5, 7 and 9 to ourfinancial statements and made changes to Management’s Discussion and Analysisof Financial Condition and Results of Operations as necessary to reflect theresults of the restatements discussed above. No other changes have been made to our Quarterly Report for the periodended July 31, 2003.  No attempt has beenmade in this Form 10-Q/A to modify or update any disclosures except as requiredto reflect the results of the restatements discussed above and any changes madeto prior period financial information for which a Form 10-Q/A was notfiled.  This Form 10-Q/A does not reflectevents occurring after the filing of the original Form 10-Q or modify or updatethose disclosures affected by subsequent events.**

 

2

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**BLYTH,INC.**

** **

#### **INDEX**

#### ** **

| Form 10-Q Cover Page |                                                                                        |
|----------------------|---------------------------------------------------------------------------------------------|
|                 |                                                                                        |
| Explanatory  Note    |                                                                                        |
|                 |                                                                                        |
| Form 10-Q Index      |                                                                                        |
|                 |                                                                                        |
|                 |                                                                                        |
| Part I.              | Financial Information:                                                                      |   |
|                 |                                                                                        |
| Item 1.              | Financial Statements:                                                                       |   |
|                 |                                                                                        |   |
|                 | Consolidated Balance Sheets                                                                 |   |
|                 |                                                                                        |   |
|                 | Consolidated  Statements of Earnings                                                        |   |
|                 |                                                                                        |   |
|                 | Consolidated  Statements of Stockholders’ Equity                                       |   |
|                 |                                                                                        |   |
|                 | Consolidated  Statements of Cash Flows                                                      |   |
|                 |                                                                                        |   |
|                 | Notes to  Consolidated Financial Statements                                                 |   |
|                 |                                                                                        |   |
| Item 2.              | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                 |                                                                                        |   |
| Item 3.              | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|                 |                                                                                        |   |
| Item 4.              | Controls and  Procedures                                                                    |   |
|                 |                                                                                        |   |
|                 |                                                                                        |   |
| Part II.             | Other Information                                                                           |   |
|                 |                                                                                        |   |
| Item 1.              | Legal Proceedings                                                                           |   |
|                 |                                                                                        |   |
| Item 2.              | Changes in Securities                                                                       |   |
|                 |                                                                                        |   |
| Item 3.              | Defaults upon  Senior Securities                                                            |   |
|                 |                                                                                        |   |
| Item 4.              | Submission  of Matters to a Vote of Security Holders                                        |   |
|                 |                                                                                        |   |
| Item 5.              | Other Information                                                                           |   |
|                 |                                                                                        |   |
| Item 6.              | Exhibits and  Reports on Form 8-K                                                           |   |
|                 |                                                                                        |   |
|                 |                                                                                        |   |
| Signatures           |                                                                                        |   |
|                      |                                                                                             |  |  |

 

3

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Part I.   FINANCIAL INFORMATION

Item I.   FINANCIALSTATEMENTS

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| **(In  thousands, except share and per share data)**                                                                            | ** ** | **July 31,  2003** | ** ** | **January 31,  2003**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | **Restated  (Note 2)** | ** ** |
| **ASSETS**                                                                                                                      |       |               |       |                   |       |
| **Current  assets:**                                                                                                            |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                      |       | $                  | 67,977     |                   | $          | 168,596 |   |
| Accounts  receivable, less allowance for doubtful receivables of $4,163 and $4,093,  respectively                               |       | 101,673            |       | 82,913                 |       |
| Inventories                                                                                                                     |       | 256,121            |       | 187,935                |       |
| Prepaid and  other                                                                                                              |       | 30,750             |       | 23,044                 |       |
| Assets held for  sale                                                                                                           |       | —             |       | 690                    |       |
| Deferred income  taxes                                                                                                          |       | 16,986             |       | 14,297                 |       |
| Total current  assets                                                                                                           |       | 473,507            |       | 477,475                |       |
| **Property,  plant and equipment, at cost:**                                                                                    |       |               |       |                   |       |
| Less accumulated  depreciation of $211,296 and $178,397, respectively                                                           |       | 277,350            |       | 244,798                |       |
| **Other  assets:**                                                                                                              |       |               |       |                   |       |
| Investments                                                                                                                     |       | 3,380              |       | 3,564                  |       |
| Excess of cost  over fair value of assets acquired                                                                              |       | 173,095            |       | 113,534                |       |
| Other intangible  assets, net of accumulated amortization of $600                                                               |       | 28,719             |       | 4,219                  |       |
| Deposits and  other assets                                                                                                      |       | 12,678             |       | 16,494                 |       |
|                                                                                                                            |       | 217,872            |       | 137,811                |       |
| Total assets                                                                                                                    |       | $                  | 968,729    |                   | $          | 860,084 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                  |       |               |       |                   |       |
| **Current  liabilities:**                                                                                                       |       |               |       |                   |       |
| Bank lines of  credit                                                                                                           |       | $                  | 28,971     |                   | $          | 7,377 |   |
| Current  maturities of long-term debt                                                                                           |       | 4,592              |       | 4,037                  |       |
| Accounts payable                                                                                                                |       | 62,256             |       | 58,571                 |       |
| Accrued expenses                                                                                                                |       | 72,579             |       | 80,953                 |       |
| Income taxes                                                                                                                    |       | 2,515              |       | 2,477                  |       |
| Total current  liabilities                                                                                                      |       | 170,913            |       | 153,415                |       |
| **Deferred  income taxes**                                                                                                      |       | 36,769             |       | 20,810                 |       |
| **Long-term  debt, less current maturities**                                                                                    |       | 210,453            |       | 165,079                |       |
| **Minority  interest and other**                                                                                                |       | 20,335             |       | 12,928                 |       |
| **Commitments  and contingencies**                                                                                              |       | —             |       | —                 |       |
| **Stockholders’  equity:**                                                                                                 |       |               |       |                   |       |
| Preferred stock  - authorized 10,000,000 shares of $0.01 par value; no shares issued and  outstanding                           |       | —             |       | —                 |       |
| Common stock -  authorized 100,000,000 shares of $0.02 par value; issued 49,777,177 shares  and 49,703,682 shares, respectively |       | 995                |       | 994                    |       |
| Additional  contributed capital                                                                                                 |       | 103,086            |       | 101,567                |       |
| Retained  earnings                                                                                                              |       | 521,517            |       | 496,627                |       |
| Accumulated  other comprehensive income (loss)                                                                                  |       | 1,095              |       | (4,751                 | )          |
| Treasury stock,  at cost, 4,015,300 shares and 3,644,100 shares, respectively                                                   |       | (96,434            | )          | (86,585                | )          |
| Total  stockholders’ equity                                                                                                |       | 530,259            |       | 507,852                |       |
| Total  liabilities and stockholders’ equity                                                                                |       | $                  | 968,729    |                   | $          | 860,084 |   |

 

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

 

4

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

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

 

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

 

5

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

**(Unaudited)**

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

 

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

 

6

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**(Unaudited)**

 

(In thousands, except share data)

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

 

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

 

7

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**BLYTH,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Six  months ended July 31 (In thousands)**                                          | ** ** | **2003**   | ** ** | **2002**               | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | **Restated  (note 2)** | ** ** |
| Cash flows from  operating activities:                                                |       |       |       |                   |       |
| Net earnings                                                                          |       | $          | 30,873     |                   | $          | 4,357 |   |
| Adjustments to  reconcile net earnings to net cash used in operating activities:      |       |       |       |                   |       |
| Cumulative  effect of change in accounting principle, net of tax                      |       | —     |       | 31,753                 |       |
| Depreciation and  amortization                                                        |       | 16,633     |       | 15,134                 |       |
| Loss on fixed  asset disposal                                                         |       | (190       | )          | —                 |       |
| Tax benefit from  stock options                                                       |       | 100        |       | 311                    |       |
| Deferred income  taxes                                                                |       | 119        |       | 1,812                  |       |
| Equity in loss  of investee                                                           |       | 199        |       | 190                    |       |
| Minority  interest                                                                    |       | 71         |       | —                 |       |
| Gain on sales of  long-term investment                                                |       | (497       | )          | —                 |       |
| Changes in  operating assets and liabilities, net of effect of business acquisitions: |       |       |       |                   |       |
| Accounts  receivable                                                                  |       | (13,640    | )          | (14,593                | )          |
| Inventories                                                                           |       | (33,285    | )          | (31,854                | )          |
| Prepaid and  other                                                                    |       | 1,489      |       | (8,443                 | )          |
| Deposits and  other assets                                                            |       | 22         |       | (142                   | )          |
| Accounts payable                                                                      |       | (6,009     | )          | (1,457                 | )          |
| Accrued expenses                                                                      |       | (14,397    | )          | (9,145                 | )          |
| Other  liabilities                                                                    |       | 1,542      |       | 1,463                  |       |
| Income taxes                                                                          |       | (4,011     | )          | (2,020                 | )          |
| Total  adjustments                                                                    |       | (51,854    | )          | (16,991                | )          |
| Net cash used in  operating activities                                                |       | (20,981    | )          | (12,634                | )          |
| Cash flows from  investing activities:                                                |       |       |       |                   |       |
| Purchases of  property, plant and equipment                                           |       | (9,525     | )          | (9,624                 | )          |
| Purchases of  long-term investment                                                    |       | (1,377     | )          | —                 |       |
| Proceeds from  sales of long term investment                                          |       | 1,874      |       | —                 |       |
| Cash impact of  Wax Lyrical receivership                                              |       | 1,902      |       | —                 |       |
| Purchase of  businesses, net of cash acquired                                         |       | (94,736    | )          | (51,010                | )          |
| Net cash used in  investing activities                                                |       | (101,862   | )          | (60,634                | )          |
| Cash flows from  financing activities:                                                |       |       |       |                   |       |
| Proceeds from  issuance of common stock                                               |       | 1,420      |       | 2,493                  |       |
| Purchases of  treasury stock                                                          |       | (9,849     | )          | (15,709                | )          |
| Borrowings from  bank line of credit                                                  |       | 20,095     |       | 36,452                 |       |
| Repayments on  bank line of credit                                                    |       | (8,368     | )          | (21,892                | )          |
| Borrowings on  long-term debt                                                         |       | 30,678     |       | 517                    |       |
| Repayments of  long-term debt                                                         |       | (3,853     | )          | (3,880                 | )          |
| Dividends paid                                                                        |       | (5,983     | )          | (5,098                 | )          |
| Net cash  provided by (used in) financing activities                                  |       | 24,140     |       | (7,117                 | )          |
| Effect of  exchange rate charges on cash                                              |       | (1,916     | )          | —                 |       |
| Net decrease in  cash and cash equivalents                                            |       | (100,619   | )          | (80,385                | )          |
| Cash and cash  equivalents at beginning of period                                     |       | 168,596    |       | 135,357                |       |
| Cash and cash  equivalents at end of period                                           |       | $          | 67,977     |                   | $          | 54,972 |   |

 

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

 

8

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**BLYTH, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**             Basis of Presentation

 

Blyth is a globalcompetitor in the gift and decorative accessories market, which the Companycalls the home expressions industry. Within this category, the Company reports its financial results in fivesegments – the Direct Selling segment, the Wholesale Home Fragrance segment,the Wholesale Creative Expressions segment, the Catalog & Internet segment,and the All Other segment.  MilesKimball, acquired in April 2003 and Walter Drake, acquired in December 2003,are included in the Catalog & Internet segment.  Kaemingk, acquired in June 2003, is includedin the Wholesale Home Fragrance segment. Prior to January 31, 2004, the Company reported its financial results intwo reporting segments, the Candles & Home Fragrance segment and theCreative Expressions segment.  TheCompany reevaluated its operating segments based on the application of FASBStatement No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” and determined that the appropriate number of reportable segmentsshould have been five in fiscal 2004 and four in fiscal 2003 and 2002 (Theincrease in segments in fiscal 2004 was due to the acquisitions that wereconsummated in fiscal 2004.)  TheCompany’s financial statement footnotes have been restated to reflect therevised segments.  The Company’sreportable and operating segments are based on financial information regularlyevaluated by the chief operating decision maker in determining resourceallocation and assessing performance. Revenues are not reported by product or group of similar products, as itis impractical to do so.  The Company hasoperations outside of the United States and sells products in the DirectSelling and Wholesale Home Fragrance segments worldwide.  The majority of sales in the WholesaleCreative Expressions, Catalog & Internet and All Other segments aredomestically based.

 

Within the Direct Sellingsegment, the Company designs, manufactures and markets an extensive line ofproducts including scented candles, fragranced bath gels and body lotions andother fragranced products.  It alsodesigns and markets a broad range of related candle accessories.  These products are sold direct to theconsumer under the PartyLite® brand in North America, Europe and Australiathrough a network of more than 56,000 independent sales consultants.

 

Within the Wholesale HomeFragrance segment, the Company designs, manufactures and markets an extensiveline of products including scented candles, potpourri and other fragrancedproducts.  It also designs and markets awide range of related candle accessories. In addition, within its Kaemingk business unit, theCompany designs and markets seasonal decorations to independent and specialtyretailers.  Products in thissegment are sold worldwide to retailers in the premium and specialty wholesalechannels under the Ambria®, Carolina®, ColonialTM(1), Colonial Candle of CapeCod®, Colonial at HOMEâ, Gies®(1),Kaemingk®(1), Kate’sTM and Liljeholmens® brands and in the mass retail channelunder the Ambria®, FilterMate®, Florasense® and Gies®(1) brands.

 

Within the WholesaleCreative Expressions segment, the Company designs, sources and markets a broadrange of home décor products under the CBK® brand, seasonal decorations underthe Holiday365Ô, JMC ImpactÔ andSeasons of Cannon FallsÔ brands, and, until Jeanmarie was sold inApril 2004, decorative gift bags under the Jeanmarie® brand.  These products are sold primarily in NorthAmerica.

 

Within the Catalog &Internet segment, the Company designs, sources and markets a broad range ofhousehold convenience items, premium photo albums, frames, holiday cards andgifts under the Exposuresâ, Miles Kimballâ andWalter Drakeâ brands. These products are sold primarily in North America.

 

**Withinthe All Other segment, the Company designs, manufactures or sources and marketsa variety of chafing fuel, candles and tabletop lighting products to the AwayFrom Home or foodservice trade under the brand names Ambria**â, HandyFuelâ and Sternoâ. These products are sold primarily in North America.

 

----

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

 

9

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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 to January31.  European operations maintain acalendar year accounting period, which is consolidated with the Company’sfiscal period.  In the opinion ofmanagement, the accompanying unaudited consolidated financial statementsinclude all accruals necessary for fair presentation of the Company’s consolidatedfinancial position at July 31, 2003 and the consolidated results of itsoperations and cash flows for the six-month periods ended July 31, 2003 and2002. These interim statements should be read in conjunction with the Company’sconsolidated financial statements for the year ended January 31, 2003, as setforth in the Company’s Annual Report on Form 10-K.  Operating results for the six months endedJuly 31, 2003 are not necessarily indicative of the results that may beexpected for the year ending January 31, 2004.

 

**Reclassifications**

** **

Certain reclassificationshave been made in prior years’ financial statements to conform toclassifications used in the current year.

 

**Employee Stock Options**

** **

The Company has electedto adopt the disclosure only provisions of Statement of Financial AccountingStandards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transitionand 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 nocompensation expense has been recorded in the financial statements.  Had compensation expense for the Company’sstock options been determined in accordance with the fair value method in SFASNo. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, theCompany’s reported net income and earnings per share would have been adjustedto the pro forma amounts indicated below:

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

 

10

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**2.**             **Restatement**

 

**Prior to January 31, 2004, the Company reported itsfinancial results in two reporting segments, the Candles & Home Fragrancesegment and the Creative Expressions segment. The Company reevaluated its operating segments based on the applicationof FASB Statement No. 131, “Disclosures about Segments of an Enterprise andRelated Information” (“SFAS 131”), and determined that the appropriate numberof reportable segments should have been five during fiscal 2004 and four duringfiscal 2003 and 2002 (The increase in segments in fiscal 2004 was due to theacquisitions that were consummated in fiscal 2004.)  See Note 9 for further details.   This revision of segments had the relatedeffect of requiring changes in the Company’s reporting units for purposes ofgoodwill impairment reviews under SFAS 142, retroactive to the February 1, 2002adoption date of SFAS 142.    This**resultedin the need to perform impairment reviews of several additional reporting unitsas of February 1, 2002 and each subsequent year-end balance sheet date,thereafter.  These impairment reviewshave indicated the need to record additional impairment charges as of theFebruary 1, 2002 adoption of SFAS 142, specifically to write-off $20.9 millionin goodwill associated with the 1999 acquisition of the Gies Group and $6.3million in goodwill associated with the 1999 acquisition of the ColonyGroup.  Both of these businesses arecomponents of the Wholesale Home Fragrance Segment.  The Company’s fiscal 2003 financialstatements have been restated to reflect the recording of these $27.2 millionin goodwill impairment charges as part of the cumulative effect of adoptingSFAS 142 as of February 1, 2002.  Therewas no income tax impact for these impairment charges.

 

A summary of the effects of the restatement on the Company’sfinancial statements is as follows:

 
| ** **                                              | ** ** | **Six months ended July 31, 2002** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **As Previously  Reported**        | ** ** | **As Restated** | ** ** |
| **Statement  of Earnings:**                             |       |                               |       |   |   |
| Earnings before  cumulative effect of accounting change |       | $                                  | 36,110     |   | $ | 36,110 |   |
| Cumulative  effect of accounting change                 |       | (4,515                             | )          | (31,753 | ) |
| Net earnings                                            |       | $                                  | 31,595     |   | $ | 4,357 |   |
| Basic earnings  per share:                              |       |                               |       |   |   |
| Before  cumulative effect of accounting change          |       | $                                  | 0.78       |   | $ | 0.78 |   |
| Cumulative  effect of accounting change                 |       | (0.10                              | )          | (0.69 | ) |
|                                                    |       | $                                  | 0.68       |   | $ | 0.09 |   |
| Diluted earnings  per share:                            |       |                               |       |   |   |
| Before  cumulative effect of accounting change          |       | $                                  | 0.78       |   | $ | 0.78 |   |
| Cumulative  effect of accounting change                 |       | (0.10                              | )          | (0.68 | ) |
|                                                    |       | $                                  | 0.68       |   | $ | 0.10 |   |
| **Statement  of Stockholders’ Equity**             |       |                               |       |   |   |
| Foreign currency  translation adjustments               |       | $                                  | 9,057      |   | $ | 6,394 |   |
| Comprehensive  income                                   |       | 40,191                             |       | 10,290 |   |

 

**3.**             New Accounting Pronouncements

 

In January 2003, the FASBissued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities,” which is an interpretation of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” and addresses consolidation by businessenterprises of variable interest entities that have specific characteristics asdescribed in the Interpretation. This Interpretation was effective immediatelywith respect to variable interest entities created after January 31, 2003, andto variable interest entities in which an enterprise obtains an interest afterthat date. It applies in the first fiscal year or interim period beginningafter June 15, 2003, to variable interest

 

11

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entities in which an enterprise holds a variableinterest that it acquired before February 1, 2003.  The implementation of this standard had noimpact on our financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  This statementamends and clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  This standard is effectivefor derivative contracts entered into or modified after June 30, 2003.  The implementation of this standard had noimpact on our financial statements.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.” This Statement establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity. It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). This standard is effective for financial instruments entered into ormodified after May 31, 2003. The implementation of this standard had no impacton our financial statements.

 

**4.**             Excess of Cost over Fair Value of Assets Acquired

 

Prior to February 1,2002, excess of costs of acquisitions over fair value of identifiable netassets acquired less liabilities assumed (“goodwill”) was being amortized on astraight-line basis over estimated lives ranging from 15-40 years. Amortizationof goodwill ceased on February 1, 2002, upon adoption of the new goodwill rulesunder SFAS 142.

 

In June 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and any otherintangibles deemed to have indefinite lives are no longer subject toamortization; however, goodwill is subject to an assessment for impairmentusing a two-step fair value-based test and such other intangibles are alsosubject to impairment reviews, which must be performed at least annually, ormore frequently if events or circumstances indicate that goodwill or otherindefinite lived intangibles might be impaired. The Company performs its annualassessment of impairment in the fourth fiscal quarter.  For goodwill the first step compares the fairvalue of a reporting unit to its carrying amount, including goodwill. If thecarrying amount of the reporting unit exceeds its fair value, the second stepis performed. The second step compares the carrying amount of the goodwill tothe fair value of the goodwill.  If fairvalue is less than the carrying amount, an impairment loss is reported as areduction to the asset and a charge to operating expense, except at thetransition date, when the loss was reflected as a cumulative effect of a changein accounting principle.

 

As of January 31, 2002,Blyth’s Consolidated Balance Sheets reflected approximately $108.1 million ingoodwill net of accumulated amortization, including $27.2 million related tothe Wholesale Home Fragrance segment businesses, $42.2 million related to theAll Other segment and $38.7 million related to the Wholesale CreativeExpressions segment businesses. The Company adopted SFAS 142, effectiveFebruary 1, 2002. In accordance with the new standard, Blyth ceasedamortization of goodwill and performed an assessment for impairment of itsgoodwill. As a result of the impairment review, Blyth reduced the carryingvalue of the goodwill related to its 1997 acquisition of the Sternoâbrand by $7.4 million, which is included in the All Other segment.  In addition, a recent revision of itsoperating and reporting segments by the Company (See Note 2), required changesin the Company’s reporting units for purposes of goodwill impairment reviewsunder SFAS 142, retroactive to the February 1, 2002 adoption date of SFAS142.  This resulted in the need toperform impairment reviews of several additional reporting units as of February1, 2002 and each subsequent year-end balance sheet date thereafter.  These impairment reviews have indicated theneed to record additional impairment charges as of the February 1, 2002adoption of SFAS 142, specifically to write-off $20.9 million in goodwillassociated with the 1999 acquisition of the Gies Group and $6.3 million ingoodwill associated with the 1999 acquisition of the Colony

 

12

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Group. Both of these businesses are components of the Wholesale Home FragranceSegment, and the impairment charges reduced goodwill in that segment to zero atFebruary 1, 2002.  The fair values of theSterno Group, the Gies Group and the Colony Group were determined throughindependent valuations utilizing market-comparable analysis, as well asdiscounted cash flow models reflecting the expected range of future cashflow outcomes over the life of the models. These cash flows were discounted toFebruary 1, 2002 using a risk-adjusted discount rate.  The impairment of the Sterno Group’s goodwill, which wasrecorded as a cumulative effect of a change in accounting principle, had theeffect of reducing net income by $4.5 million (after tax) or $0.10 pershare.  The impairments of the Gies Groupand Colony Group goodwill, which were not deductible for tax purposes, were,via restatement of the fiscal 2003 financial statements, also recorded as acumulative effect of change in accounting principle, and had the effect ofreducing net income by $27.2 million or $0.58 per share.

 

**5.**             Business Acquisitions

 

On May 10, 2002, theCompany purchased all of the interests in CBK, Ltd., LLC, now known as CBKStyles, Inc. (“CBK”), a designer and marketer of premium everyday home décorand giftware, for approximately $51.0 million in cash*.*  The excess of thepurchase price over the estimated fair value of the net assets acquired approximated$40.0 million, which will be deductible for income tax purposes over 15years.  The results of operations of CBKare included in the Consolidated Statements of Earnings of the Company sinceMay 11, 2002.  For segment reportingpurposes, CBK is included in the Wholesale Creative Expressions segment.

 

On April 1, 2003, theCompany acquired 100% of the Miles Kimball Company (“MK”), a direct marketer ofgiftware, home décor and household convenience items, premium photo albums,frames and holiday cards under the Miles Kimball® and Exposures® catalog titlesfor approximately $66.2 million in cash. The excess of the purchase price over the estimated fair value of thenet assets acquired approximated $46.0 million, which will not be deductiblefor income tax purposes.  The otherintangibles acquired consist of $16.1 million of trade names and trademarks,which are deemed to have an indefinite life and will not be amortized, plus$9.0 million of customer lists, which will be amortized on an accelerated basisover 12 years.  Amortization expense was$0.45 million for the three months ended July 31, 2003 and $0.6 million for thesix months ended July 31, 2003. Estimated amortization expense for the next 5 fiscal years is asfollows:  $1.5 million, $1.5 million,$1.2 million, $0.9 million and $0.9 million. The results of operations of MK are included in the ConsolidatedStatements of Earnings of the Company since April 2, 2003.  For segment reporting purposes, MK isincluded in the Catalog & Internet segment.

 

The following provides an allocation of the purchaseprice of Miles Kimball (in thousands)

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

 

13

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On June 20, 2003, theCompany acquired a 100% interest in Kaemingk B.V. (“Kaemingk”), a designer andmarketer of a wide range of premium seasonal decorations. Kaemingk’s productlines feature Christmas décor, including ornaments, lighting, trim, glassware,candles and plush animals, as well as spring and summer decorative accents andtabletop products.  The cash purchaseprice was approximately $36.2 million less cash acquired of $7.7 millionresulting in net cash paid of $28.5 million.  Approximately $30.6 million of the cash purchase price was borrowedunder the Company’s $200 million unsecured revolving credit facility.  The Company also assumed Kaemingk’s long-termdebt of approximately $14.4 million.  Theexcess of the purchase price over the estimated fair value of the net assetsacquired approximated $13.5 million, which will not be deductible for incometax purposes.  In addition to the fixedpurchase price, there is contingent consideration payable in the form of athree-year earn out provision based on a pre-defined formula related to amultiple of earnings before interest and income taxes.  The results of operations of Kaemingk areincluded in the Consolidated Statements of Earnings of the Company since June21, 2003.  For segment reportingpurposes, Kaemingk is included in the Wholesale Home Fragrance segment.

 

The following provides a preliminary allocation of thepurchase price of Kaemingk (in thousands)

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

 

14

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The following unauditedpro forma financial information summarizes the estimated combined results ofoperations of the Company, CBK, MK and Kaemingk assuming that the acquisitionsof CBK, MK and Kaemingk had taken place on February 1, 2002.  The unaudited pro forma combined results ofoperations were prepared on the basis of information provided to the Company bythe former management of CBK, MK and Kaemingk and no representation is made bythe Company with respect to the accuracy of such information.  The pro forma combined results of operationsreflect adjustments for interest income, additional depreciation based on thefair market value of CBK’s and MK’s property, plant, and equipment,amortization of identifiable intangibles of MK and income tax expense.

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

 

The unaudited pro formacombined results of operations are not necessarily indicative of, and do notpurport to represent, what the Company’s results of operations or financialcondition actually would have been had the acquisitions been made as ofFebruary 1, 2002.

 

AtJuly 31, 2003, the Company had a total of $173.1 million of excess of cost overfair value of assets acquired (“goodwill”) on its balance sheet compared to $113.5 million atJanuary 31, 2003.  Goodwill attributableto the Wholesale Home Fragrance segment at July 31, 2003 was $13.5 million as aresult of the acquisition of Kaemingk in June 2003.  Goodwill attributable to the WholesaleCreative Expressions segment at July 31, 2003 was $78.8 million unchanged fromJanuary 31, 2003. Goodwill attributable to the Catalog & Internet segmentat July 31, 2003 was $46.0 million as a result of the Miles Kimball acquisitionin April 2003. Goodwill attributable to the All Other segment was $34.8 millionat July 31, 2003, unchanged from January 31, 2003.

 

15

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**6.**             Inventories

 

The components ofinventory are as follows (in thousands):

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

 

**7.**             Earnings per Share

 

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

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

 

As of July 31, 2003 and2002, options to purchase 60,423 and 40,468 shares of common stock,respectively, are not included in the computation of earnings per share becausethe effect would be antidilutive.

 

**8.**             Unusual Charges

 

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

 

The following is a tabular roll forward of the unusual charges described above thatwere recorded in the balance sheet of the Company:

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

 

16

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**9.**             Segment Information

 

Blyth is a globalcompetitor in the gift and decorative accessories market, which the Companycalls the home expressions industry. Within this category, the Company reports its financial results in fivesegments – the Direct Selling segment, the Wholesale Home Fragrance segment, theWholesale Creative Expressions segment, the Catalog & Internet segment, andthe All Other segment.  Miles Kimball,acquired in April 2003 and Walter Drake, acquired in December 2003, areincluded in the Catalog & Internet segment. Kaemingk, acquired in June 2003, is included in the Wholesale HomeFragrance segment.  Prior to January 31,2004, the Company reported its financial results in two reporting segments, theCandles & Home Fragrance segment and the Creative Expressions segment.  The Company reevaluated its operatingsegments based on the application of FASB Statement No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” and determined that theappropriate number of reportable segments should have been five in fiscal 2004and four in fiscal 2003 and 2002 (The increase in segments in fiscal 2004 wasdue to the acquisitions that were consummated in fiscal 2004.)  The Company’s financial statement footnoteshave been restated to reflect the revised segments.  The Company’s reportable and operatingsegments are based on financial information regularly evaluated by the chiefoperating decision maker in determining resource allocation and assessingperformance.  Revenues are not reportedby product or group of similar products, as it is impractical to do so.  The Company has operations outside of theUnited States and sells products in the Direct Selling and Wholesale HomeFragrance segments worldwide.  Themajority of sales in the Wholesale Creative Expressions, Catalog & Internetand All Other segments are domestically based.

 

Within the Direct Sellingsegment, the Company designs, manufactures and markets an extensive line ofproducts including scented candles, fragranced bath gels and body lotions andother fragranced products.  It also designsand markets a broad range of related candle accessories.  These products are sold direct to theconsumer under the PartyLite® brand in North America, Europe and Australiathrough a network of more than 56,000 independent sales consultants.

 

Within the Wholesale HomeFragrance segment, the Company designs, manufactures and markets an extensiveline of products including scented candles, potpourri and other fragrancedproducts.  It also designs and markets awide range of related candle accessories. In addition, within its Kaemingk business unit, theCompany designs and markets seasonal decorations to independent and specialtyretailers.  Products in thissegment are sold worldwide to retailers in the premium and specialty wholesalechannels under the Ambria®, Carolina®, ColonialTM(1), Colonial Candle of Cape Cod®, Colonial atHOMEâ, Gies®(1),Kaemingk®(1), Kate’sTM and Liljeholmens® brands and in the mass retail channelunder the Ambria®, FilterMate®, Florasense® and Gies®(1) brands.

 

Within the WholesaleCreative Expressions segment, the Company designs, sources and markets a broadrange of home décor products under the CBK® brand, seasonal decorations underthe Holiday365Ô, JMC ImpactÔ andSeasons of Cannon FallsÔ brands, and, until Jeanmarie was sold inApril 2004, decorative gift bags under the Jeanmarie® brand.  These products are sold primarily in NorthAmerica.

 

Within the Catalog &Internet segment, the Company designs, sources and markets a broad range ofhousehold convenience items, premium photo albums, frames, holiday cards andgifts under the Exposuresâ, Miles Kimballâ andWalter Drakeâ brands. These products are sold primarily in North America.

 

----

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

 

17

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Within the All Othersegment, the Company designs, manufactures or sources and markets a variety ofchafing fuel, candles and tabletop lighting products to the Away From Home orfoodservice trade under the brand names Ambriaâ,HandyFuelâ and Sternoâ.  These products are sold primarily in NorthAmerica.

 

Earnings in all segmentsrepresent net sales less operating expenses directly related to the businesssegments and corporate expenses allocated to the business segments.  Other income (expense) includes interestexpense, interest income and equity in earnings of investees, which are notallocated to the business segments. Identifiable assets for each segment consist of assets used directly inits operations and intangible assets, if any, resulting from purchase businesscombinations.  Unallocated Corporatewithin the identifiable assets include corporate cash and cash equivalents,deferred bond costs and other long-term investments, which are not allocated tothe business segments.

 
| ** **                                                                                                    | ** ** | **Three months ended July 31,** | ** ** | **Six months ended July 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(In  thousands)**                                                                                           | ** ** | **2003**                        | ** ** | **2002**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Net  Sales**                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Direct Selling                                                                                                |       | $                               | 143,219    |                          | $          | 144,086 |   | $ | 334,458 |   | $ | 322,001 |   |
| Wholesale Home  Fragrance                                                                                     |       | 50,319                          |       | 51,153                        |       | 116,760 |   | 119,871 |   |
| Wholesale  Creative Expressions                                                                               |       | 51,570                          |       | 58,611                        |       | 87,496 |   | 76,302 |   |
| Catalog &  Internet                                                                                       |       | 17,565                          |       | —                        |       | 23,535 |   | — |   |
| All Other                                                                                                     |       | 12,595                          |       | 14,171                        |       | 25,010 |   | 27,743 |   |
| **Total**                                                                                                     |       | $                               | 275,268    |                          | $          | 268,021 |   | $ | 587,259 |   | $ | 545,917 |   |
| **Earnings**                                                                                                  |       |                            |       |                          |       |   |   |   |   |
| Direct Selling                                                                                                |       | $                               | 25,096     |                          | $          | 31,507 |   | $ | 63,468 |   | $ | 68,644 |   |
| Wholesale Home  Fragrance                                                                                     |       | (7,044                          | )          | (9,273                        | )          | (10,516 | ) | (14,660 | ) |
| Wholesale  Creative Expressions                                                                               |       | 5,246                           |       | 10,256                        |       | 5,268 |   | 8,476 |   |
| Catalog &  Internet                                                                                       |       | (1,808                          | )          | —                        |       | (2,398 | ) | — |   |
| All Other                                                                                                     |       | (771                            | )          | 1,167                         |       | (845 | ) | 2,105 |   |
|                                                                                                          |       | 20,719                          |       | 33,657                        |       | 54,977 |   | 64,565 |   |
| Other expense                                                                                                 |       | (2,885                          | )          | (3,711                        | )          | (6,019 | ) | (7,065 | ) |
| **Earnings  before income taxes, minority interest and cumulative effect of change in  accounting principle** |       | $                               | 17,834     |                          | $          | 29,946 |   | $ | 48,958 |   | $ | 57,500 |   |
| ** **                                                                                                    |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| ** **                                                                                                    | ** ** | ** **                      | ** ** | **July 31, 2003**             | ** ** | ** ** | ** ** | **January 31, 2003** | ** ** |
| ** **                                                                                                    | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | **Restated (Note 2)** | ** ** |
| **Identifiable  Assets**                                                                                      |       |                            |       |                          |       |   |   |   |   |
| Direct Selling                                                                                                |       |                            |       | $                             | 258,845    |   |   |   | $ | 246,607 |   |
| Wholesale Home  Fragrance                                                                                     |       |                            |       | 308,304                       |       |   |   | 238,829 |   |
| Wholesale  Creative Expressions                                                                               |       |                            |       | 197,199                       |       |   |   | 174,827 |   |
| Catalog &  Internet                                                                                       |       |                            |       | 109,989                       |       |   |   | — |   |
| All Other                                                                                                     |       |                            |       | 62,254                        |       |   |   | 61,816 |   |
| Unallocated  Corporate                                                                                        |       |                            |       | 32,139                        |       |   |   | 138,005 |   |
| **Total**                                                                                                     |       |                            |       | $                             | 968,730    |   |   |   | $ | 860,084 |   |

 

18

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**10.**          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.

 

On June 2, 2003, theparties agreed in open court to settle and resolve all matters involving or inany way relating to the previously reported legal proceedings by and betweenthe Company and its wholly-owned subsidiary, Endar Corp., on the one hand, andEnnio Racinelli, Darlene Racinelli and others, on the other hand, by means of awritten settlement and release agreement, without any payment by anyparty.  On August 25, 2003, the case wasdismissed by the Riverside Superior Court.

 

**11.**          Debt

 

At July 31, 2003, MilesKimball had approximately $10.1 million of long-term debt outstanding under areal estate mortgage note payable to John Hancock Life Insurance Company, whichmatures June 1, 2020.  Under the terms ofthe note, payments of principal and interest are required monthly at a fixedinterest rate of 7.89%.

 

As of June 30, 2003,Kaemingk had available lines of credit of approximately $39.4 million maturingin March 2004.  The lines of credit arecollateralized by certain real estate and equipment owned by Kaemingk.  At June 30, 2003, approximately $10.9 millionwas outstanding at a weighted average interest rate of 2.7%.

 

At June 30, 2003,Kaemingk had approximately $14.1 million of long-term debt outstanding under seven loans with ING Bank N.V. at a weighted averageinterest rate of 4.9%.  The bank loanshave maturity dates ranging from 2005 through 2021.  The loans are collateralized by certain realestate and equipment owned by Kaemingk.

 

**12.**          Fire Loss

 

In July 2003, theCompany’s manufacturing facility located in Monterrey, Mexico was destroyed byfire.  Products manufactured at thisleased facility were primarily for the North American mass market.  Customer service disruptions were minimal asother Company facilities and third party suppliers met the productionrequirements and will continue to meet production requirements for theimmediate future.  The loss of fixedassets and inventory totaled approximately $8.0 million.  The Company recorded a charge of $0.6 millionin the quarter ended July 31, 2003 for the insurance deductible and employeerelated costs as a result of the fire. The Company is insured for losses related to this fire.

 

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

** **

**RESULTS OF OPERATIONS:**

** **

**Net Sales**

** **

Netsales increased $41.4 million or 7.6% to $587.3 million in the first six monthsof fiscal 2004 from $545.9 million in the first six months of fiscal 2003.  Net sales in the quarter ended July 31, 2003increased $7.3 million or 2.7% to $275.3 million compared with $268.0 million ayear earlier.  There are three primaryfactors affecting net sales in the second quarter.  First, the inclusion of sales from theacquisitions of Miles Kimball in April 2003 and Kaemingk in June 2003 had afavorable impact offset by the exclusion of sales from Wax Lyrical, which wasclosed in December 2002.  Second, thecontinued weakness in the US and European economies and the resulting cautiousordering by retailers had a negative impact on sales.  Third, the favorable foreign exchange ratescompared to the US Dollar had a positive impact on reported sales.

 

Netsales in the Direct Selling segment decreased $0.9 million, or 0.6%, to $143.2million in the quarter ended July 31, 2003, compared with $144.1 million in thesame period last year. In the United States, PartyLite’s second quarter saleswere negatively impacted by weakened consumer demand as well as a timing shift inthe introduction of warm weather product lines that benefited PartyLite’s firstquarter.  Offsetting this decline insales in the United States, PartyLite’s second quarter sales in Europeincreased 20% in local currency due to strong sales in April, which were aresult of the well-received 30th anniversary product offerings.

 

Netsales in the Wholesale Home Fragrance segment decreased $0.9 million, or 1.8%,to $50.3 million in the quarter ended July 31, 2003, compared with $51.2million in the same period last year. In the quarter ended July 31, 2003, netsales increases in Blyth’s European wholesale businesses, which include salesof Kaemingk acquired in June 2003, were offset by decreases in net sales in ourNorth American wholesale premium and mass channel businesses when compared tothe prior year period. The continued weakness in the US and European economiesand the resulting cautious ordering by retailers had a negative impact onsales. The exclusion of sales from Wax Lyrical, which was closed in December2002, also had an unfavorable impact on sales in this segment in the secondquarter compared to the prior year period.

 

Netsales in the Wholesale Creative Expressions segment decreased $7.0 million, or11.9%, to $51.6 million in the quarter ended July 31, 2003, compared with $58.6million in the same period last year. Sales in this segment were negativelyimpacted as a result of reduced consumer spending and retailers’ caution inplacing orders.

 

Netsales in the Catalog & Internet segment were $17.6 million in the quarterended July 31, 2003 as a result of the acquisition of Miles Kimball in April2003.  This segment did not exist in theprior year.

 

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

 

**Gross Profit**

** **

Grossprofit increased $13.6 million or 5.0% from $282.3 million in the first sixmonths of fiscal 2003 to $295.9 million in the first six months of fiscal2004.  Gross profit margin decreased from51.8% for the first six months of fiscal 2003 to 50.4% for the first six monthsof fiscal 2004.  Gross profit in thequarter ended July 31, 2003 decreased $2.7 million or 2.1% from $137.3 millionfor the quarter ended July 31, 2002 to $134.6 million for the quarter endedJuly 31, 2003.  Gross profit margindecreased from 51.3% for the quarter ended July 31, 2002 to 48.9% for thequarter ended July 31, 2003.  Thedecrease in gross profit margin is largely attributable to the inclusion ofMiles Kimball, which has a lower gross profit margin than the overall Companymargin, reduced overhead absorption at the manufacturing facilities due to thedecline in sales demand, and a shift in sales among the businesses.

 

20

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**Selling Expense**

** **

Sellingexpense increased $15.7 million, or 9.6%, from $163.6 million in the first sixmonths of fiscal 2003, when selling expense was 30.0% of net sales, to $179.3million in the first six months of fiscal 2004, or 30.6% of net sales.  Selling expense increased $7.0 million, or9.3%, from $75.2 million in the quarter ended July 31, 2002 to $82.2 million inthe quarter ended July 31, 2003.  As apercent of sales, selling expense was 29.9% in the second quarter of fiscal2004 compared to 28.1% a year earlier. The increase in selling expense is primarily attributable to theaddition of Miles Kimball.  The increasein selling expense as a percentage of net sales from quarter to quarter is aresult of the similar level of expenses applied against a decreased level ofsales.

 

**Administrative Expense**

** **

Administrativeexpense increased $7.6 million, or 14.0%, from $54.1 million in the first sixmonths of fiscal 2003 to $61.7 million in the first six months of fiscal2004.  Administrative expense increased  $3.2million or 11.2% from $28.4 million in the quarter ended July 31, 2002 to $31.6million in the quarter ended July 31, 2003. Administrative expenses increased due to the addition of Miles Kimballand Kaemingk, as well as the recording of a $0.6 million charge related to thefire at the Monterrey facility, as discussed under the heading “Liquidity andCapital Resources.”

 

**Operating Profit**

** **

Operatingprofit decreased $9.6 million, or 14.9%, from $64.6 million in the first sixmonths of fiscal 2003 to $55.0 million in the first six months of fiscal2004.  Operating profit decreased $13.0million, or 38.5%, from $33.7 million in the quarter ended July 31, 2002 to$20.7 million in the quarter ended July 31, 2003.  These decreases were the result of thefactors described above under “Gross Profit,” “Selling Expense” and“Administrative Expense.”

 

**Interest Expense**

** **

Interestexpense decreased $0.5 million in the six-month period ended July 31, 2003, ascompared with the prior year.  Interestexpense decreased $0.2 million in the three months ended July 31, 2003, whencompared to the same period last year. This decrease was primarily a result of reduced interest ratesassociated with the interest rate swap, as described in Item 3, Quantitativeand Qualitative Disclosures About Market Risk, under the heading “Interest RateRisk.”

 

**Interest Income and Other**

** **

Interestincome and other increased $0.6 million in the six-month period ended July 31,2003, from the six-month period ended July 31, 2002.  Interest income and other increased $0.4million in the quarter ended July 31, 2003, when compared to the quarter endedJuly 31, 2002.  These increases areprimarily attributable to the $0.5 million gain on the sale of marketablesecurities that was recorded in the second quarter.

 

**Income Taxes**

** **

Incometax expense decreased $3.4 million, or 15.8%, from $21.4 million in the firstsix months of fiscal 2003 to $18.0 million in the same period in the currentfiscal year.  Income tax expensedecreased $4.5 million, or 41.1%, from $11.1 million in the quarter ended July31, 2002, to $6.6 million in the quarter ended July 31, 2003.  This decrease is a result of the decreasedlevel of earnings in the current year. The effective tax rate decreased to 36.8% in fiscal 2004 from 37.2% infiscal 2003.

 

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**Cumulative Effect of Change in Accounting Principle**

** **

TheCompany recorded a one-time charge of $34.6 million pre-tax, $31.8 million netof income taxes on February 1, 2002, which is reflected as the cumulativeeffect of a change in accounting principle, as a result of adopting SFAS No.142, “Goodwill and Other Intangible Assets” (See Note 4 to the ConsolidatedFinancial Statements).

 

**Net Earnings**

** **

Asa result of the foregoing, earnings before the cumulative effect of change inaccounting principle decreased $5.2 million, or 14.3%, from $36.1 million inthe six months ended July 31, 2002 to $30.9 million for the six months endedJuly 31, 2003.  Net earnings after thecumulative effect of change in accounting principle increased $26.5 millionfrom $4.4 million in the first six months of fiscal 2003 to $30.9 in the firstsix months of fiscal 2004.  Net earningsdecreased $7.6 million, or 40.2%, from $18.8 million in the quarter ended July31, 2002 to $11.2 million in the quarter ended July 31, 2003.

 

Basicearnings per share before the cumulative effect of change in accountingprinciple, based upon the weighted average number of shares outstanding for thesix months ended July 31, 2003, were $0.67, a decrease of $0.11, or 14.1%compared to $0.78 for the six months ended July 31, 2002.  Basic net earnings per share after thecumulative effect of change in accounting principle, based upon the weightedaverage number of shares outstanding for the six months ended July 31, 2003,were $0.67, a decrease of $0.58, compared to $0.09 for the six months endedJuly 31, 2002.  Diluted earnings per sharebefore the cumulative effect of change in accounting principle, based upon thepotential dilution that could occur if options to issue common stock wereexercised, were $0.67 compared to $0.78 for the same period the prior year. Thecumulative effect of change in accounting principle on diluted earnings pershare equaled $0.68.  Diluted netearnings per share after the cumulative effect of change in accountingprinciple, based upon the potential dilution that could occur if options toissue common stock were exercised, were $0.67, compared to $0.10 for the sameperiod the prior year.

 

**Liquidity and Capital Resources**

** **

Comparedto January 31, 2003, when inventory levels are typically at the lowest point ofthe fiscal year, inventory increased $68.2 million from $187.9 million atJanuary 31, 2003 to $256.1 million at July 31, 2003.  Of this increase $42.1 million is related tothe acquisition of Miles Kimball and Kaemingk. The remaining $26.1 million increase relates to the normal seasonalbuild of inventory in our other businesses.

 

Accountsreceivable increased $18.8 million from $82.9 million at January 31, 2003 to$101.7 million at July 31, 2003. Excluding the effects of the acquisitions of Miles Kimball and Kaemingk,accounts receivable increased $14.4 million due to seasonality.  Excluding Miles Kimball and Kaemingk,accounts receivable decreased $13.0 million when compared to July 31, 2002 dueto a decrease in sales.

 

Accountspayable and accrued expenses decreased $4.7 million to $134.8 million at July31, 2003, from $139.5 million at January 31, 2003.  This decrease is primarily related topayments against accruals that existed at January 31, 2003.  When compared to July 31, 2002, accountspayable and accrued expenses increased $25.3 million due partly to theinclusion of Miles Kimball and Kaemingk and the recording of the deferred gainfrom the termination of the interest rate swap as further discussed in Item 3,Quantitative and Qualitative Disclosures About Market Risk, under the heading“Interest Rate Risk.”

 

22

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InJuly 2003, the Company’s manufacturing facility located in Monterrey, Mexicowas destroyed by fire.  Productsmanufactured at this leased facility were primarily for the North American massmarket.  Customer service disruptionswere minimal as other Company facilities and third party suppliers met theproduction requirements and will continue to meet production requirements forthe immediate future.  The loss of fixedassets and inventory totaled approximately $8.0 million.  The Company recorded a charge of $0.6 millionin the quarter ended July 31, 2003 for the insurance deductible and employeerelated costs as a result of the fire. The Company is insured for losses related to this fire.  Capital expenditures for property, plant, andequipment were $11.1 million for the six months ended July 31, 2003, ascompared with $9.6 million in the prior year period.  Capital expenditures consisted primarily of investmentsin information technology and upgrades of equipment and facilities.  The Company expects total capital spending ofapproximately $25.0 million for fiscal 2004.

 

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

 

Asof July 31, 2003, the Company had a total of $15.0 million available under anuncommitted bank line of credit with La Salle Bank National Association, whichmatures in June 2004.  Amountsoutstanding under the line of credit bear interest at short-term fixedrates.  No amounts were outstanding underthe uncommitted line of credit at July 31, 2003.

 

AtJuly 31, 2003, the Company had a total of $10.0 million available under anuncommitted line of credit with Bank of America to be used for letters ofcredit.  At July 31, 2003, approximately$0.5 million of letters of credit were outstanding under this credit line.

 

Asof June 30, 2003, The Gies Group (“Gies”) had available lines of credit ofapproximately $40.2 million of which approximately $13.2 million wasoutstanding.  The amounts outstandingunder the lines of credit bear interest at a weighted average rate of 4.0% atJune 30, 2003.  The lines of credit arerenewed annually.

 

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

 

AtJuly 31, 2003, CBK had $4.7 million of long-term debt outstanding under anIndustrial Revenue 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 amount outstanding under the IRB bearsinterest at short-term floating rates, which equaled a weighted averageinterest rate of 1.2% at July 31, 2003.

 

AtJuly 31, 2003, Miles Kimball had approximately $10.1 million of long-term debtoutstanding under a real estate mortgage note payable to John Hancock LifeInsurance Company, which matures June 1, 2020. Under the terms of the note,payments of principal and interest are required monthly at a fixed interestrate of 7.89%.

 

Asof June 30, 2003, Kaemingk had available lines of credit of approximately $39.4million maturing in March 2004.  Thelines of credit are collateralized by certain real estate and equipment ownedby Kaemingk.  At June 30, 2003, approximately$10.9 million was outstanding at a weighted average interest rate of 2.7%.

 

23

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AtJune 30, 2003, Kaemingk had approximately $14.1 million of long-term debtoutstanding under seven loans with ING Bank N.V. at aweighted average interest rate of 4.9%. The bank loans have maturity dates ranging from 2005 through 2021.  The loans are collateralized by certain realestate and equipment owned by Kaemingk.

 

Netcash used in operating activities amounted to $19.9 million for the six monthsended July 31, 2003, compared to $12.6 million used in operating activities forthe six months ended July 31, 2002.  Thedecrease in cash flow from operations relates primarily to changes in theCompany’s working capital and the absence of the $4.5 million cumulative effectadjustment related to the goodwill impairment at the Sterno Group that wasrecorded in fiscal 2003.

 

TheCompany’s Board of Directors has authorized the Company to repurchase up to6,000,000 shares of common stock under the share repurchase program.  In the second quarter of fiscal 2004, theCompany purchased 259,400 shares on the open market for a cost of $7.0 million,bringing the year-to-date total to 371,200 shares at a cost of $9.8million.  Since the program inception,the Company has purchased 4,015,300 shares at a total cost of $96.4million.  The acquired shares are held ascommon stock in the treasury at cost.

 

OnSeptember 4, 2003, the Company declared a cash dividend of $0.15 per share ofthe Company’s common stock for the six months ended July 31, 2003.  This represents an increase of $0.02 pershare or 15%, above the most recent dividend. The dividend is payable to shareholders of record as of October 31, 2003and will be paid on November 14, 2003.

 

**Critical Accounting Policies**

** **

Fora discussion of the Company’s critical accounting policies see our AnnualReport on Form 10-K for the fiscal year ended January 31, 2003.

 

**Impact of Adoption of Recently Issued AccountingStandards**

** **

InJanuary 2003, the FASB issued Financial Interpretation No. 46, “Consolidationof Variable Interest Entities,” which is an interpretation of AccountingResearch Bulletin No. 51, “Consolidated Financial Statements,” and addressesconsolidation by business enterprises of variable interest entities that havespecific characteristics as described in the Interpretation. ThisInterpretation was effective immediately with respect to variable interestentities created after January 31, 2003, and to variable interest entities inwhich an enterprise obtains an interest after that date. It applies in thefirst fiscal year or interim period beginning after June 15, 2003, to variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003.  Theimplementation of this standard had no impact on our financial statements.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reportingfor derivative instruments, including certain derivative instruments embeddedin other contracts (collectively referred to as derivatives) and for hedgingactivities under FASB Statement No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  This standardis effective for derivative contracts entered into or modified after June 30,2003. The implementation of this standard had no impact on our financialstatements.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.” ThisStatement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  Thisstandard is effective for financial instruments entered into or modified afterMay 31, 2003. The implementation of this standard had no impact on ourfinancial statements.

 

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**Item 3.** QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET 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 of July 31, 2003, theCompany is subject to interest rate risk on approximately $71.0 million ofvariable rate debt.  Each 1 – percentagepoint increase in the interest rate would impact pre-tax earnings by approximately$0.7 million if applied to the total.

 

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

 

**Foreign Currency Risk**

** **

TheCompany uses forward foreign exchange contracts to hedge the impact of foreigncurrency fluctuations on certain committed capital expenditures, certain inventorypurchases, Canadian intercompany payables and certain intercompany loans.  The Company does not hold or issue derivativefinancial 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 thesecontracts will be recorded in accumulated other comprehensive income (loss)(“OCI”) until earnings are affected by the variability of the cash flows beinghedged.  With regard to commitments formachinery and equipment and inventory purchases, upon payment of each commitment,the underlying 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 $294,000 of hedge losses are included in accumulated OCIat July 31, 2003, 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.

 

The following table provides information about the Company’s foreignexchange forward contracts at July 31, 2003.

 
| **(In  thousands, except average contract rate)** | ** ** | **U.S. Dollar  Notional Amount** | ** ** | **Average  Contract Rate** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|---------------------------|------------|
| Canadian Dollar                                   |       | $                                | 12,821     |                       | 1.47       |                      | $          | (483 | ) |
| Euro                                              |       | 40,831                           |       | 1.09                       |       | (888                      | )          |
| Pound Sterling                                    |       | 12,740                           |       | 1.59                       |       | (119                      | )          |
|                                              |       | $                                | 66,392     |                       |       |                      | $          | (1,490 | ) |

 

The foreign exchange contracts outstanding as of July 31, 2003, havematurity dates ranging from August 2003 through March 2004.

 

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**Item 4.** CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls andprocedures.

 

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

 

(b) Changes in internal control overfinancial reporting.

 

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

 

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**Part II**.  OTHER INFORMATION

** **

**Item 1.**    Legal Proceedings

** **

On June 2, 2003, theparties agreed in open court to settle and resolve all matters involving or inany way relating to the previously reported legal proceedings by and betweenthe Company and its wholly-owned subsidiary, Endar Corp., on the one hand, andEnnio Racinelli, Darlene Racinelli and others, on the other hand, by means of awritten settlement and release agreement, without any payment by anyparty.  On August 25, 2003, the case wasdismissed by the Riverside Superior Court.

 

**Item 2.**    Changes in Securities

** **

None

 

**Item 3.**    Defaults upon Senior Securities

** **

None

 

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

** **

The following matterswere voted upon at the Annual Meeting of Stockholders held on June 4, 2003, andreceived 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** | ** ** |
|--------------------|------------|------------|------------|-------------|------------|--------------|------------|-----------------|------------|
| Roger A.  Anderson |       | 36,324,630 |       | 0           |       | 6,299,499    |       | 0               |       |
| Pamela M.  Goergen |       | 42,239,726 |       | 0           |       | 384,403      |       | 0               |       |
| Carol J. Hochman   |       | 42,441,336 |       | 0           |       | 182,793      |       | 0               |       |

 

In addition to thedirectors elected at the meeting, the directors of the Company whose terms ofoffice continued after the meeting are: John W. Burkhart, Robert B. Goergen, Neal I. Goldman, Phillip Greer,John E. Preschlack and Howard E. Rose.

 

2)     Aproposal to ratify the appointment of PricewaterhouseCoopers LLP as independentcertified public accountants received 34,468,292 votes for, 8,140,781 votesagainst, 0 votes withheld and 15,056 abstentions.

 

3)     Aresolution to adopt the Company’s 2003 Long-Term Incentive Plan received33,087,013 votes for, 6,787,506 votes against, 0 votes withheld and 275,538abstentions.  In addition there were2,474,072 broker non-votes with respect to this resolution.

 

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**Item 5.**    Other Information

 

On July 16, 2003, theCompany provided notice to all of its directors, officers and employeesregarding a blackout period for trading in the Company’s stock.  The blackout period was imposed in order toensure that directors, officers and employees of the Company would not besubject to claims that they traded on the basis of inside information.  The blackout period began on July 31, 2003,the last business day of the Company’s second fiscal quarter, and continueduntil three business days after the release of the Company’s quarterly earningsreport to the public, or September 2, 2003. The information contained in this Item 5 is being furnished pursuant toItem 11 of Form 8-K.

 

The Company is includingthe following cautionary statement in this Report to make applicable, and totake 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-lookingstatements are expected to be based on various assumptions, many of which arebased, in turn, upon further assumptions.

 

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

 

Risk of Inabilityto Maintain Growth Rate

 

The Company has grownsubstantially in past years.  While weexpect continued growth, we expect that our future rate of growth will be lessthan our historical growth rate.  In theCandles & Home Fragrance segment, we expect the international market togrow faster than the domestic market. The market for our foodservice, or Away From Home products has grown,but more slowly, and we expect it will continue to do so.  Our ability to continue to grow depends onseveral factors, including the following: market acceptance of existing products, the successful introduction ofnew products, our ability to recruit new independent sales consultants,sourcing of raw materials, and increases in production and distributioncapacity to meet demand.  The Candles& Home Fragrance and Creative Expressions industries are driven by consumertastes.  Accordingly, there can be noassurance that our existing or future products will maintain or achieve marketacceptance.  Our sales and earningsresults have recently been impacted negatively by a slowing of the UnitedStates economy and the economies of certain European countries and by a drop inconsumer confidence at both the individual and retailer levels.  There can be no assurance that our sales andearnings results will not be materially adversely affected by these factors inthe future.  If the United States economyand/or the economies in certain European countries in which we sell ourproducts slow further and/or consumer confidence drops further, our operatingresults may be materially adversely affected. Our past growth in both the Candles & Home Fragrance segment and theCreative Expressions segment has been due, in part, to acquisitions.  We expect our future growth in the Candles& Home Fragrance segment to be primarily organic, with the possibility ofselective acquisitions, and we continue to pursue strategic acquisitions in theCreative Expressions segment.  There canbe no assurance that we will be able to continue to identify suitableacquisition candidates, to consummate acquisitions on terms favorable to theCompany, to finance acquisitions or to integrate successfully acquiredoperations.  In the future, acquisitionsmay contribute more to the overall Company’s sales growth rate thanhistorically.

 

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Ability to Respondto Increased Product Demand

 

Our ability to meetfuture demand for candles and home fragrance products and creative expressionsproducts will be dependent upon success in (1) bringing new production anddistribution capacity on line in a timely manner, (2) improving our ability toforecast anticipated product demand in order to continue to fill customerorders promptly, (3) improving management information systems in order torespond promptly to customer orders and (4) training, motivating and managingnew employees.  If we are unable to meetfuture demand for products in a timely and efficient manner, our operatingresults could be materially adversely affected.

 

Risks Associatedwith International Sales and Foreign-Sourced Products

 

Our internationalbusiness has grown at a faster rate than sales in the United States in recentyears.  In addition, we source a portionof our candles, accessories and decorative gift bags and home and seasonaldécor products from independent manufacturers in the Pacific Rim, Europe andMexico.  For these reasons, we are subjectto the following risks associated with foreign manufacturing and sales:fluctuations in currency exchange rates, economic and political instability,international public health crises, transportation delays, difficulty inmaintaining quality control, restrictive actions by foreign governments,nationalizations, the laws and policies of the United States and certainEuropean markets affecting importation of goods (including duties, quotas andtaxes and trade and foreign tax laws).

 

Raw Materials

 

For certain rawmaterials, there may be temporary shortages due to capacity, availability, achange in raw material requirements, weather or other factors, includingdisruptions in supply caused by raw material transportation or productiondelays.  Such raw material shortages havenot previously had, and are not presently expected to have, a material adverseeffect on the Company’s operations.  Itis possible, however, that recent increases in oilprices may have a material adverse effect on availability of petroleum-basedproducts used in the manufacture of our candles and home fragrance products.

 

Dependence on KeyCorporate Management Personnel

 

Our success depends uponthe contributions of key corporate management personnel, including ourChairman, Chief Executive Officer and President, Robert B. Goergen.  We do not have employment contracts with anyof our key corporate management personnel except for Mr. Goergen, nor do wemaintain any key person life insurance policies.  The loss of any of the key corporatemanagement personnel could have a material adverse effect on the Company.

 

Competition

 

Our business is highlycompetitive, both in terms of price and new product introductions. Theworldwide market for candles and home fragrance products and creative 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 to the Candles & Home Fragrance and Creative Expressions segments, wemay face increased future competition from other companies, some of which mayhave substantially greater financial and marketing resources than thoseavailable to us.  We compete withcompanies offering candles manufactured in foreign countries.  In addition, certain competitors focus on aparticular geographic or single-product market and attempt to gain or maintainmarket share solely on the basis of price.

 

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

 

a)     Exhibits

 

31.1         Certificationof Chairman, Chief Executive Officer and President pursuant to Rule 13a-14(a)under the Securities Exchange Act of 1934.

 

31.2         Certificationof Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) underthe Securities Exchange Act of 1934.

 

32.1         Certificationof Chairman, Chief Executive Officer and President pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002.

 

32.2         Certificationof Vice President and Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

b)    Reportson Form 8-K

 

During the fiscal quarterended July 31, 2003, the Company filed the following Current Reports on Form8-K:

 

Current Report on Form8-K on June 4, 2003 to file as an exhibit the press release reporting theCompany’s results of operations for the fiscal quarter ended April 30, 2003.

 

Current Report on Form8-K on July 10, 2003 to file as an exhibit the press release announcing theCompany’s acquisition of Kaemingk B.V.

 

Current Report on Form8-K on July 25, 2003 to file as an exhibit the press release reporting thesecond quarter earnings expectations and full year outlook for the fiscal yearended January 31, 2004.

 

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**SIGNATURES**

 

**Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.**

 

 
|   |            |   | BLYTH, INC.                                 |
|--------|-----------------|--------|---------------------------------------------|
|   |            |   |                                        |   |
|   |            |   |                                        |   |
| Date:  | August  4, 2004 |   | By:                                         | /s/Robert B. Goergen |   |
|   |            |   | Robert B. Goergen                           |
|   |            |   | Chairman and Chief Executive Officer        |
|   |            |   |                                        |   |
|   |            |   |                                        |   |
| Date:  | August  4, 2004 |   | By:                                         | /s/Robert H. Barghaus |   |
|   |            |   | Robert H. Barghaus                          |
|   |            |   | Vice President and  Chief Financial Officer |

 

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