**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WashingtonD.C. 20549**

 

**FORM 10-Q**

** **

**(Mark One)**

 
| **x**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
|       | ** **                                                                                    |
|       | **For  the quarterly period ended October 31, 2007**                                          |
| ** ** | ** **                                                                                    |
| ** ** | **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 ofregistrant as specified in its charter) 

 

| **DELAWARE**                                                    | ** ** | **36-2984916**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (IRS Employer  Identification No.) |

 

| **One East Weaver Street, Greenwich, Connecticut  06831** |
|-----------------------------------------------------------|
|                                                      | (Address of principal executive offices) | (Zip Code) |

### ** **

**(203)661-1926**

(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
| Yes     x |   | No     o |   |
|------------------------------------|--------|-----------------------------------|--------|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer     o | Accelerated filer     x | Non-Accelerated filer     o |
|--------------------------------------------------------|--------------------------------------------------|------------------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
| Yes     o |   | No     x |   |
|------------------------------------|--------|-----------------------------------|--------|

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

**37,133,513Common Shares as of November  30, 2007**

 

 

----

 

**BLYTH, INC.**

** **

#### **INDEX**

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

 

2

----

 

Part I. FINANCIAL  INFORMATION

Item I. FINANCIALSTATEMENTS

 

**BLYTH, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                      | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **(In thousands, except share and per share data)**                                          | ** ** | **2007**             | ** ** | **2007**             | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)**      | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                                                      |       |                 |       |                 |       |
| Current assets:                                                                                                                 |       |                 |       |                 |       |
| Cash and cash  equivalents                                                                                                      |       | $                    | 110,113    |                 | $          | 103,808 |   |
| Short-term  investments                                                                                                         |       | 84,806               |       | 129,725              |       |
| Accounts  receivable, less allowance for doubtful receivables of $2,647 and $1,533,  respectively                               |       | 90,223               |       | 35,040               |       |
| Inventories                                                                                                                     |       | 136,309              |       | 148,321              |       |
| Prepaid and  other                                                                                                              |       | 45,986               |       | 33,317               |       |
| Deferred income  taxes                                                                                                          |       | 22,753               |       | 29,707               |       |
| Total current  assets                                                                                                           |       | 490,190              |       | 479,918              |       |
| Property, plant  and equipment, at cost:                                                                                        |       |                 |       |                 |       |
| Less accumulated  depreciation of $220,476 and $209,160, respectively                                                           |       | 146,196              |       | 159,484              |       |
| Other assets:                                                                                                                   |       |                 |       |                 |       |
| Investment in  unconsolidated subsidiaries                                                                                      |       | 2,925                |       | 3,610                |       |
| Goodwill                                                                                                                        |       | 78,682               |       | 78,682               |       |
| Other intangible  assets, net of accumulated amortization                                                                       |       | 34,225               |       | 35,350               |       |
| Deposits and  other assets                                                                                                      |       | 18,241               |       | 17,594               |       |
| Total  non-current assets                                                                                                       |       | 134,073              |       | 135,236              |       |
| Total assets                                                                                                                    |       | $                    | 770,459    |                 | $          | 774,638 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                  |       |                 |       |                 |       |
| Current  liabilities:                                                                                                           |       |                 |       |                 |       |
| Current  maturities of long-term debt                                                                                           |       | $                    | 1,040      |                 | $          | 987 |   |
| Accounts payable                                                                                                                |       | 49,011               |       | 56,450               |       |
| Accrued expenses                                                                                                                |       | 89,242               |       | 77,738               |       |
| Dividends  payable                                                                                                              |       | 10,233               |       | —               |       |
| Income taxes  payable                                                                                                           |       | 3,583                |       | 4,925                |       |
| Total current  liabilities                                                                                                      |       | 153,109              |       | 140,100              |       |
| Deferred income  taxes                                                                                                          |       | 34,185               |       | 35,002               |       |
| Long-term debt,  less current maturities                                                                                        |       | 210,374              |       | 214,792              |       |
| Other  liabilities                                                                                                              |       | 32,069               |       | 21,051               |       |
| Commitments and  contingencies                                                                                                  |       | —               |       | —               |       |
| Stockholders’  equity:                                                                                                     |       |                 |       |                 |       |
| Preferred stock  - authorized 10,000,000 shares of $0.01 par value; no shares issued                                            |       | —               |       | —               |       |
| Common stock -  authorized 100,000,000 shares of $0.02 par value; issued 50,916,460 shares  and 50,637,060 shares, respectively |       | 1,018                |       | 1,013                |       |
| Additional  contributed capital                                                                                                 |       | 137,690              |       | 129,367              |       |
| Retained  earnings                                                                                                              |       | 532,744              |       | 534,897              |       |
| Accumulated  other comprehensive income                                                                                         |       | 28,169               |       | 22,130               |       |
| Treasury stock,  at cost, 13,048,024 shares and 11,335,798 shares, respectively                                                 |       | (358,899             | )          | (323,714             | )          |
| Total  stockholders’ equity                                                                                                |       | 340,722              |       | 363,693              |       |
| Total  liabilities and stockholders’ equity                                                                                |       | $                    | 770,459    |                 | $          | 774,638 |   |
|                                                                                                                                 |            |                      |            |                      |            |  |  |  |  |

 

***The accompanying notes are an integral partof these financial statements.***

 

3

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)**

**(Unaudited)**

 
| **Nine months ended October 31 ****(In thousands, except per share data)** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                                                                    |       | $        | 791,107    |     | $          | 840,775 |   |
| Cost of goods  sold                                                                                                          |       | 383,868  |       | 434,047  |       |
| Gross profit                                                                                                                 |       | 407,239  |       | 406,728  |       |
| Selling                                                                                                                      |       | 273,122  |       | 283,435  |       |
| Administrative  and other                                                                                                    |       | 99,351   |       | 95,501   |       |
| Goodwill  impairment                                                                                                         |       | —   |       | 36,769   |       |
| Total operating  expense                                                                                                     |       | 372,473  |       | 415,705  |       |
| Operating profit  (loss)                                                                                                     |       | 34,766   |       | (8,977   | )          |
| Other expense  (income):                                                                                                     |       |     |       |     |       |
| Interest expense                                                                                                             |       | 10,933   |       | 14,576   |       |
| Interest income                                                                                                              |       | (6,003   | )          | (5,352   | )          |
| Foreign exchange  and other                                                                                                  |       | 334      |       | (614     | )          |
| Total other  expense                                                                                                         |       | 5,264    |       | 8,610    |       |
| Earnings (loss)  from continuing operations before income taxes and minority interest                                        |       | 29,502   |       | (17,587  | )          |
| Income tax  expense (benefit)                                                                                                |       | 7,940    |       | (7,008   | )          |
| Earnings (loss)  from continuing operations before minority interest                                                         |       | 21,562   |       | (10,579  | )          |
| Minority  interest                                                                                                           |       | 81       |       | 114      |       |
| Earnings (loss)  from continuing operations                                                                                  |       | 21,481   |       | (10,693  | )          |
| Loss from  discontinued operations, net of income tax benefit of $1,278                                                      |       | —   |       | (109,504 | )          |
| Net earnings  (loss)                                                                                                         |       | $        | 21,481     |     | $          | (120,197 | ) |
| Basic:                                                                                                                       |       |     |       |     |       |
| Earnings (loss)  from continuing operations per common share                                                                 |       | $        | 0.55       |     | $          | (0.27 | ) |
| Loss from  discontinued operations per common share                                                                          |       | —   |       | (2.74    | )          |
| Net earnings  (loss) per common share                                                                                        |       | $        | 0.55       |     | $          | (3.01 | ) |
| Weighted average  number of shares outstanding                                                                               |       | 39,183   |       | 39,945   |       |
| Diluted:                                                                                                                     |       |     |       |     |       |
| Earnings (loss)  from continuing operations per common share                                                                 |       | $        | 0.54       |     | $          | (0.27 | ) |
| Loss from  discontinued operations per common share                                                                          |       | —   |       | (2.74    | )          |
| Net earnings  (loss) per common share                                                                                        |       | $        | 0.54       |     | $          | (3.01 | ) |
| Weighted average  number of shares outstanding                                                                               |       | 39,525   |       | 39,945   |       |

 

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

 

4

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (LOSS)**

**(Unaudited)**

 
| **Three months ended October 31 ****(In thousands, except per share data)** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                                                                     |       | $        | 285,869    |     | $          | 297,911 |   |
| Cost of goods  sold                                                                                                           |       | 141,704  |       | 160,563  |       |
| Gross profit                                                                                                                  |       | 144,165  |       | 137,348  |       |
| Selling                                                                                                                       |       | 100,477  |       | 99,579   |       |
| Administrative  and other                                                                                                     |       | 33,247   |       | 33,084   |       |
| Total operating  expense                                                                                                      |       | 133,724  |       | 132,663  |       |
| Operating profit                                                                                                              |       | 10,441   |       | 4,685    |       |
| Other expense  (income):                                                                                                      |       |     |       |     |       |
| Interest expense                                                                                                              |       | 3,587    |       | 4,587    |       |
| Interest income                                                                                                               |       | (1,953   | )          | (1,819   | )          |
| Foreign exchange  and other                                                                                                   |       | 485      |       | (22      | )          |
| Total other  expense                                                                                                          |       | 2,119    |       | 2,746    |       |
| Earnings from  continuing operations before income taxes and minority interest                                                |       | 8,322    |       | 1,939    |       |
| Income tax  expense (benefit)                                                                                                 |       | 1,717    |       | (33      | )          |
| Earnings from  continuing operations before minority interest                                                                 |       | 6,605    |       | 1,972    |       |
| Minority  interest                                                                                                            |       | 28       |       | 40       |       |
| Earnings from  continuing operations                                                                                          |       | 6,577    |       | 1,932    |       |
| Loss from  discontinued operations, net of income tax benefit of $237                                                         |       | —   |       | (2,153   | )          |
| Net earnings  (loss)                                                                                                          |       | $        | 6,577      |     | $          | (221 | ) |
| Basic:                                                                                                                        |       |     |       |     |       |
| Earnings from continuing  operations per common share                                                                         |       | $        | 0.17       |     | $          | 0.05 |   |
| Loss from  discontinued operations per common share                                                                           |       | —   |       | (0.05    | )          |
| Net earnings  (loss) per common share                                                                                         |       | $        | 0.17       |     | $          | — |   |
| Weighted average  number of shares outstanding                                                                                |       | 38,748   |       | 39,211   |       |
| Diluted:                                                                                                                      |       |     |       |     |       |
| Earnings (loss)  from continuing operations per common share                                                                  |       | $        | 0.17       |     | $          | 0.05 |   |
| Loss from  discontinued operations per common share                                                                           |       | —   |       | (0.05    | )          |
| Net earnings  (loss) per common share                                                                                         |       | $        | 0.17       |     | $          | — |   |
| Weighted average  number of shares outstanding                                                                                |       | 39,067   |       | 39,531   |       |

 

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

 

5

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                          | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|--------------|------------|------------------|------------|------------------------|------------|------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **Additional**  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common** | ** ** | **Contributed** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Unearned**     | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| **(In thousands)**                                             | ** ** | **Stock**  | ** ** | **Capital**     | ** ** | **Earnings** | ** ** | **Stock**    | ** ** | **Compensation** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| For the nine  months ended October 31, 2006:                        | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance, February  1, 2006                                          |       | $          | 1,010      |            | $          | 127,580      |       | $            | 657,983    |             | $          | (287,744               | )          | $          | (3,070     | ) | $ | (1,935 | ) | $ | 493,824 |   |
| Net loss for the  period                                            |       |       |       |            |       | (120,197     | )          |         |       |             |       |                   |       | (120,197   | )          |
| Foreign currency  translation adjustments                           |       |       |       |            |       |         |       |         |       |             |       | 18,922                 |       | 18,922     |       |
| Unrealized gain  on certain investments (net of tax $115)           |       |       |       |            |       |         |       |         |       |             |       | 187                    |       | 187        |       |
| Net gain on cash  flow hedging instruments (net of tax of $23)      |       |       |       |            |       |         |       |         |       |             |       | 43                     |       | 43         |       |
| Reclassification  of unearned compensation                          |       |       |       | (3,070          | )          |         |       |         |       | 3,070            |       |                   |       | —     |       |
| Comprehensive  loss                                                 |       |       |       |            |       |         |       |         |       |             |       |                   |       | (101,045   | )          |
| Common stock  issued in connection with long-term incentive plan    |       | 3          |       | 2,145           |       |         |       |         |       |             |       |                   |       | 2,148      |       |
| Tax benefit from  stock options                                     |       |       |       | 109             |       |         |       |         |       |             |       |                   |       | 109        |       |
| Cancellation of  restricted stock                                   |       |       |       | 963             |       |         |       | (963         | )          |             |       |                   |       | —     |       |
| Amortization of  unearned compensation                              |       |       |       | 677             |       |         |       |         |       |             |       |                   |       | 677        |       |
| Dividends                                                           |       |       |       |            |       | (19,881      | )          |         |       |             |       |                   |       | (19,881    | )          |
| Treasury stock  purchases                                           |       |       |       |            |       |         |       | (34,988      | )          |             |       |                   |       | (34,988    | )          |
| Balance, October  31, 2006                                          |       | $          | 1,013      |            | $          | 128,404      |       | $            | 517,905    |             | $          | (323,695               | )          | $          | —     |   | $ | 17,217 |   | $ | 340,844 |   |
|                                                                |       |       |       |            |       |         |       |         |       |             |       |                   |       |       |       |
| For the nine  months ended October 31, 2007:                        | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance, February  1, 2007                                          |       | $          | 1,013      |            | $          | 129,367      |       | $            | 534,897    |             | $          | (323,714               | )          | $          | —     |   | $ | 22,130 |   | $ | 363,693 |   |
| FIN 48 adoption  adjustment                                         |       |       |       |            |       | (2,769       | )          |         |       |             |       |                   |       | (2,769     | )          |
| Adjusted Balance,  February 1, 2007:                                |       | $          | 1,013      |            | $          | 129,367      |       | $            | 532,128    |             | $          | (323,714               | )          | $          | —     |   | $ | 22,130 |   | $ | 360,924 |   |
| Net earnings for  the period                                        |       |       |       |            |       | 21,481       |       |         |       |             |       |                   |       | 21,481     |       |
| Foreign currency  translation adjustments                           |       |       |       |            |       |         |       |         |       |             |       | 7,294                  |       | 7,294      |       |
| Unrealized gain  on certain investments (net of tax $208)           |       |       |       |            |       |         |       |         |       |             |       | 340                    |       | 340        |       |
| Net loss on cash  flow hedging instruments (net of tax of $859)     |       |       |       |            |       |         |       |         |       |             |       | (1,595                 | )          | (1,595     | )          |
| Comprehensive  income                                               |       |       |       |            |       |         |       |         |       |             |       |                   |       | 27,520     |       |
| Common stock  issued in connection with long-term incentive plan    |       | 6          |       | 7,073           |       |         |       |         |       |             |       |                   |       | 7,079      |       |
| Common stock  cancelled in connection with long-term incentive plan |       | (1         | )          |            |       |         |       |         |       |             |       |                   |       | (1         | )          |
| Tax benefit from  stock options                                     |       |       |       | 303             |       |         |       |         |       |             |       |                   |       | 303        |       |
| Amortization of  unearned stock compensation                        |       |       |       | 947             |       |         |       |         |       |             |       |                   |       | 947        |       |
| Dividends                                                           |       |       |       |            |       | (20,865      | )          |         |       |             |       |                   |       | (20,865    | )          |
| Treasury stock  purchases                                           |       |       |       |            |       |         |       | (35,185      | )          |             |       |                   |       | (35,185    | )          |
| Balance, October  31, 2007                                          |       | $          | 1,018      |            | $          | 137,690      |       | $            | 532,744    |             | $          | (358,899               | )          | $          | —     |   | $ | 28,169 |   | $ | 340,722 |   |

 

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

 

6

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**BLYTH, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Nine months ended October 31 (In thousands)**                           | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from  operating activities:                                                                  |       |       |       |       |       |
| Net earnings  (loss)                                                                                    |       | $          | 21,481     |       | $          | (120,197 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by (used in) operating  activities:  |       |       |       |       |       |
| Loss on sale of  discontinued operations, net of tax                                                    |       | —     |       | 89,109     |       |
| Depreciation and  amortization                                                                          |       | 22,341     |       | 25,034     |       |
| Loss on  disposition of fixed assets                                                                    |       | 149        |       | 1,093      |       |
| Gain on sale of  assets                                                                                 |       | (594       | )          | —     |       |
| Unrealized gain  on certain investments                                                                 |       | (62        | )          | —     |       |
| Stock-based  compensation expense                                                                       |       | 1,631      |       | 677        |       |
| Deferred income  taxes                                                                                  |       | 8,197      |       | (9,984     | )          |
| Equity (income)  loss of investee                                                                       |       | 685        |       | (75        | )          |
| Minority  interest                                                                                      |       | 23         |       | (222       | )          |
| Goodwill  impairment                                                                                    |       | —     |       | 36,769     |       |
| Loss on sale of  assets held for sale                                                                   |       | —     |       | 79         |       |
| Changes in  operating assets and liabilities, net of effect of business acquisitions and  divestitures: |       |       |       |       |       |
| Accounts  receivable                                                                                    |       | (61,919    | )          | (10,814    | )          |
| Inventories                                                                                             |       | (2,223     | )          | (6,697     | )          |
| Prepaid and  other                                                                                      |       | (12,853    | )          | (15,097    | )          |
| Other long-term  assets                                                                                 |       | 2,515      |       | 958        |       |
| Accounts payable                                                                                        |       | (7,754     | )          | (14,879    | )          |
| Accrued expenses                                                                                        |       | 10,195     |       | 6,432      |       |
| Other  liabilities                                                                                      |       | 1,185      |       | (1,870     | )          |
| Income taxes                                                                                            |       | (1,598     | )          | (11,815    | )          |
| Net cash used in  operating activities                                                                  |       | (18,601    | )          | (31,499    | )          |
| Cash flows from  investing activities:                                                                  |       |       |       |       |       |
| Purchases of  property, plant and equipment                                                             |       | (7,000     | )          | (12,409    | )          |
| Purchases of  short-term investments                                                                    |       | (1,528,700 | )          | (1,074,586 | )          |
| Proceeds from  sales of short-term investments                                                          |       | 1,573,875  |       | 979,586    |       |
| Proceeds from  sale of assets                                                                           |       | 25,423     |       | 5,515      |       |
| Proceeds from  the sales of businesses, net of cash disposed                                            |       | 514        |       | 86,841     |       |
| Purchase of  businesses, net of cash acquired                                                           |       | —     |       | (6,654     | )          |
| Net cash  provided by (used in) investing activities                                                    |       | 64,112     |       | (21,707    | )          |
| Cash flows from  financing activities:                                                                  |       |       |       |       |       |
| Proceeds from  issuance of common stock                                                                 |       | 7,079      |       | 2,148      |       |
| Tax benefit from  stock options                                                                         |       | 303        |       | 109        |       |
| Purchases of  treasury stock                                                                            |       | (35,185    | )          | (34,988    | )          |
| Borrowings from  bank lines of credit                                                                   |       | —     |       | 33,889     |       |
| Repayments on  bank lines of credit                                                                     |       | —     |       | (32,318    | )          |
| Repayments of  long-term debt                                                                           |       | (4,094     | )          | (75,117    | )          |
| Payments on  capital lease obligations                                                                  |       | (330       | )          | (190       | )          |
| Dividends paid                                                                                          |       | (10,631    | )          | (9,303     | )          |
| Net cash used in  financing activities                                                                  |       | (42,858    | )          | (115,770   | )          |
| Effect of  exchange rate changes on cash                                                                |       | 3,652      |       | 8,050      |       |
| Net increase  (decrease) in cash and cash equivalents                                                   |       | 6,305      |       | (160,926   | )          |
| Less:cash and  cash equivalents of discoutinued operations at end of period                             |       |       |       | 527        |       |
| Cash and cash  equivalents at beginning of period                                                       |       | 103,808    |       | 242,068    |       |
| Cash and cash  equivalents at end of period                                                             |       | $          | 110,113    |       | $          | 80,615 |   |

 

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

 

7

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**BLYTH, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**             Basis of Presentation

 

The condensed consolidated financial statements include the accounts ofthe Company and its subsidiaries. All intercompany accounts and transactionshave been eliminated. Our investment in a company that is not majority owned orcontrolled is reported using the equity method and is recorded as an investment.Certain of the Company’s subsidiaries operate on a 52 or 53 week fiscal yearending on the Saturday closest to January 31. European operations maintain acalendar year accounting period, which is consolidated with the Company’sfiscal period. In the opinion of management, the accompanying unauditedcondensed consolidated financial statements include all adjustments (consistingof only normal, recurring adjustments) necessary for fair presentation of theCompany’s consolidated financial position as of October 31, 2007 and theconsolidated results of its operations and cash flows for the nine-months endedOctober 31, 2007 and 2006. These interim statements should be read inconjunction with the Company’s consolidated financial statements for the fiscalyear ended January 31, 2007, as set forth in the Company’s Annual Report onForm 10-K. Operating results for the three and nine months ended October 31,2007 are not necessarily indicative of the results that may be expected for thefiscal year ending January 31, 2008.

 

**2.**             Discontinued Operations and Divestitures

** **

On April 12, 2006, the Company sold its European seasonal decorationsbusiness, Kaemingk B.V. (“Kaemingk”), in the Wholesale segment to an entity controlledby the management of Kaemingk. On June 16, 2006, the Company sold its Europeaneveryday home, garden and seasonal business, Edelman B.V. (“Edelman”), and itsEuropean gift and florist products business, Euro-Decor B.V. (“Euro-Decor”),both in the Wholesale segment to an entity with which members of the managementof Edelman and Euro-Decor are affiliated. On August 17, 2006, the Company soldits European mass candle business, Gies, which was part of the Wholesalesegment. On December 20, 2006, the Company sold its European premium candlebusiness, Colony, which was part of the Wholesale segment. Accordingly, thesebusinesses have all been reported as discontinued operations for all periodspresented in the Condensed Consolidated Statements of Earnings (Loss).

 

Included in the earnings(loss) from discontinued operations in the Condensed Consolidated Statements ofEarnings (Loss) for the three and nine months ended October 31, 2007 and 2006are the following:

 
| ** **                                                  | ** ** | **Three months ended October 31,** | ** ** | **Nine months ended October 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                     | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales                                                   |       | $                                                      | —     |                                                  | $          | 11,699 |   | $ | — |   | $ | 98,294 |   |
| Loss from  discontinued operations, net of tax              |       | —                                                 |       | (5,941                                                | )          | — |   | (20,395 | ) |
| Gain (Loss) on  sale of discontinued operations, net of tax |       | —                                                 |       | 3,788                                                 |       | — |   | (89,109 | ) |
|                                                             |            |                                                        |            |                                                       |            |  |  |  |  |  |  |  |  |

 

Included in the net loss from discontinued operations were operatinglosses related to Kaemingk of $0.0 million and $0.3 million, for the three andnine months ended October 31, 2006, respectively. In the first quarter offiscal 2007 the Company recorded a non-tax deductible loss on sale ofdiscontinued operations of $18.4 million related to the sale of Kaemingk.

 

Included in the net loss from discontinued operations were net operatinglosses related to Edelman and Euro-Decor of $0.0 million and $2.2 million forthe three and nine months ended October 31, 2006, respectively. In the firstquarter of fiscal 2007, the Company recorded a non-tax deductible goodwillimpairment charge of $16.7 million related to these businesses, which has been includedin the net loss on the sale of discontinued operations. For the three and ninemonth periods ended October 31, 2006, the net loss on the sale of discontinuedoperations includes a non-taxable gain on the sale of Edelman and Euro-Decor of$0.2 million and $2.1 million, respectively.

 

8

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Included in the net loss from discontinuedoperations were net operating losses related to both Gies and Colony for thethree and nine months ended October 31, 2006, of $5.9 million and $17.9million, respectively.  Also included in the net loss on the sale ofdiscontinued operations for the nine-months ended October 31, 2006 were non-taxdeductible charges for the impairment of the Gies and Colony businesses of$31.1 million and $28.6 million, respectively.  In the third quarter offiscal 2007, due to changes in the net assets of the business and foreigncurrency, the Company recorded a non-taxable gain on the sale of Gies andColony for $2.2 million and $1.4 million, respectively. These gains reflectedthe amount by which the carrying value of the net assets sold exceeded thepreviously estimated fair value of the businesses.

 

On April 27, 2007, the Company sold certain assetsand liabilities of its Blyth HomeScents International North American masschannel candle business (“BHI NA”), which was part of the Wholesale segment. Thenet assets were sold for $25.1 million, inclusive of proceeds from the sale ofoverstock inventory of $1.1 million. Of this amount, $21.8 million was receivedat closing and $3.3 million was received in the second quarter of fiscal 2008. Thesale, including the proceeds received in the second quarter, resulted in apre-tax gain of $0.6 million, and is recorded in Administrative and otherexpenses in the Condensed Consolidated Statements of Earnings (Loss).

 

Included in the sale were working capital net assets, as well as certainfixed assets and leases related to the Memphis, Tennessee distribution facilityand Bentonville, Arkansas operations. The Company retained all other officesand its Elkin, North Carolina manufacturing and distribution facilities, whichproduce the Company’s premium wholesale Colonial Candle brand product andcontinue to manufacture and distribute candles under a transition servicesagreement for the buyer through October 31, 2007. The net assets sold werecomprised primarily of customer relationships, accounts receivable of $7.4million, inventory of $16.6 million and distribution equipment of $1.1 million,less liabilities assumed of $1.7 million.

 

In addition, the Company entered into an overstock inventory agreementwith the buyer that provides for revenue sharing in future sales of excess andobsolete inventory, transferred to the buyer as part of the sale of certainassets and liabilities of BHI NA. The Company is entitled to receive a portionof the proceeds from the sale of the overstock inventory by the buyer. For thenine months ended October 31, 2007, the Company received $1.1 million ofproceeds from this agreement, which were included as part of the pre-tax gainon sale of $0.6 million, described above.

 

Revenue and costs related to operating the retained facilities and certainagreed upon transitional support services will continue to be reported incontinuing operations in the Condensed Consolidated Statements of Earnings(Loss).

 

**3.**             Restructuring

** **

Duringthe third and fourth quarters of fiscal 2007, the Company recordedrestructuring charges related to the restructuring plan for our North Americanmass channel home fragrance business, the major components of which were theclosing of our Tijuana, Mexico manufacturing facility, the elimination of lessprofitable customers, the streamlining of the stock keeping unit (“SKU”) baseof the mass business, the outsourcing of certain products currently beingmanufactured and head count reductions. These charges included $1.4 million ofseverance costs associated with the termination of 149 employees.

 

Also,during the fourth quarter of fiscal 2007, the Company recorded charges relatedto the restructuring of the North American operations of our Direct Selling segmentin recognition of the recent decline in sales in this channel. These costs werecomprised of $1.5 million of severance costs associated with the termination of91 employees and $0.5 million of lease termination costs.

 

9

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** **

Asof January 31, 2007, the Company had an accrual of approximately $2.5 millionfor restructuring charges in the Consolidated Balance Sheet, which related tothe aforementioned severance liabilities and lease obligations. For the nine-monthperiod ended October 31, 2007, an additional $0.9 million of lease terminationcharges were recorded in cost of goods sold and $0.8 million in severancecharges were recorded in Cost of Goods Sold and Administrative and OtherExpense. As a result of payments made during the nine-month period endingOctober 31, 2007 approximately $0.4 million of severance liabilities and $0.8million of lease obligations were remaining on the Consolidated Balance Sheetat October 31, 2007. The remaining severance liability and lease obligationsare expected to be paid within the next twelve months.

 

The following table represents the restructuring activity incurred for theabove described programs recorded during the nine-month period ended October31, 2007:

 
| ** **                       | ** ** | **Wholesale  Segment**   | ** ** | **Direct Selling  Segment** | ** ** | ** **               | ** ** |
|----------------------------------|------------|--------------------------|------------|----------------------------------|------------|--------------------------|------------|
| **(In thousands)**          | ** ** | **Severance Costs** | ** ** | **Lease  Obligation**            | ** ** | **Severance Costs** | ** ** | **Total** | ** ** |
| Balance at  January 31, 2007     |       | $                        | 469        |                             | $          | 450                      |       | $ | 1,541 |   | $ | 2,460 |   |
| Charges incurred  in fiscal 2008 |       | 769                      |       | 888                              |       | —                   |       | $ | 1,657 |   |
| Payments made in  fiscal 2008    |       | (858                     | )          | (588                             | )          | (1,496                   | )          | (2,942 | ) |
| Balance at  October 31, 2007     |       | $                        | 380        |                             | $          | 750                      |       | $ | 45 |   | $ | 1,175 |   |

 

**4.**             Short-term Investments

 

**The Companyinvests in a number of financial securities including debt instruments,preferred and common stocks and a limited liability partnership primarilyinvested in marketable securities and other limited liability partnershipsinvested in real estate investment trusts. The Company accounts for itsmarketable securities in accordance with Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities”.  Certain marketablesecurities are classified as “trading securities”, and are bought and sold on ashort-term basis with the sole purpose of generating a profit on pricedifferences, as such all realized and unrealized gains and losses are recordedin our Condensed Consolidated Statement of Earnings (Loss) as Other expense(income). These investments are valued based on quoted prices in an activemarket. The company intends to buy and sell these instruments regularly,generally holding them for no more then 90 days. The Company also holds otherdebt and equity instruments as “available-for-sale securities”. The estimatedfair value of these equity investments** is based on quoted prices in an active market. Realizedgains and losses on these investments are determined using the specificidentification method and are recognized in our Condensed ConsolidatedStatement of Earnings (Loss) as Other expense (income) based on trade dates. Unrealized gains on theseinstruments are recognized in Accumulated other comprehensive income (loss)within Stockholders’ equity. The Company also invests in a limited partnershipwhich is accounted for under the cost method, as the Company does not influenceany operating and financial policies of the entity in which we invest. TheCompany intends to use the cost method to account for these investments unlessits ownership interest exceeds the point where we do or can be perceived to haveinfluence over the partnership’s operating and financial policies. Inaccordance with Emerging Issues Task Force Topic D-46, “Accounting for Limited Partnerships”, the Company will evaluatethe merit of accounting for this investment using the equity method if and whenour interest ever exceeds three percent. For these investments, if a decline inthe fair value of the investment below its carrying value is determined to beother than temporary, this investment would be written down to its estimatedfair value. The factors that we consider in making these assessments include,but are not limited to, market prices, market conditions, and other third partyinformation. Management’s intent is to hold all the securities identified aboveas liquid assets convertible to cash for applicable operational needs as theymay arise.

 

10

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TheCompany reviews its available-for-sale investments periodically to determinewhether a decline in fair value below the cost basis is other than temporary.If the decline in fair value is judged to be other than temporary, the costbasis of the security is written down to fair value and the amount of thewrite-down is included in the Condensed Consolidated Statements of Earnings(Loss).

 

**Short-termInvestments, by type:**

** **
| **(In thousands)**              | ** ** | **October 31, 2007** | ** ** | **January 31, 2007** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Debt securities                      |       | $                              | 63,250     |                           | $          | 129,725 |   |
| Common stock                         |       | 1,613                          |       | —                         |       |
| Total  available-for-sale securities |       | 64,863                         |       | 129,725                        |       |
| Preferred stock                      |       | 9,926                          |       | —                         |       |
| Other                                |       | 17                             |       | —                         |       |
| Total trading  securities            |       | 9,943                          |       | —                         |       |
| Limited liability  partnership       |       | 10,000                         |       | —                         |       |
| Total short-term  investments        |       | $                              | 84,806     |                           | $          | 129,725 |   |

** **

**As of October 31, 2007 andJanuary 31, 2007, the Company held $63.3 million and $129.7 million,respectively, of marketable debt securities, which consist of auction ratesecurities and variable rate demand obligations classified asavailable-for-sale securities. In general these investments are in AAA ratedtax exempt securities.**The Company’s investment in thesesecurities are recorded at cost, which approximates fair market value due totheir variable interest rates, which typically reset every 7 to 49 days. Despitethe long-term nature of their stated contractual maturities, the Companygenerally has the ability to liquidate these securities in 49 days or less.

** **

**Marketable debt securities bycontractual maturity are as follows:**

** **
| **(In thousands)**        | ** ** | **October 31, 2007** | ** ** | **January 31, 2007** | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Due within one  year           |       | $                              | 10,000     |                           | $          | 7,000 |   |
| Due between one  and ten years |       | 4,000                          |       | —                         |       |
| Due after ten  years           |       | 49,250                         |       | 122,725                        |       |
| Total                          |       | $                              | 63,250     |                           | $          | 129,725 |   |

** **

The following table summarizes unrealized gains and losses related to ourinvestments in marketable securities designated as available-for-sale:

 
| ** **              | ** ** | **October 31, 2007** | ** ** | **January 31, 2007**            | ** ** |
|-------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)** | ** ** | **Cost**                       | ** ** | **Net Unrealized  Gain (Loss)** | ** ** | **Estimated  Fair Value** | ** ** | **Cost** | ** ** | **Net Unrealized  Gain (Loss)** | ** ** | **Estimated  Fair Value** | ** ** |
|                    |       |                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt securities         |       | $                              | 63,250     |                                      | $          | — |   | $ | 63,250 |   | $ | 129,725 |   | $ | — |   | $ | 129,725 |   |
| Common stock            |       | 1,419                          |       | 194                                       |       | 1,613 |   | — |   | — |   | $ | — |   |
| Total                   |       | $                              | 64,669     |                                      | $          | 194 |   | $ | 64,863 |   | $ | 129,725 |   | $ | — |   | $ | 129,725 |   |

 

**None of theunrealized gain (loss) on the available-for-sale securities have been realized,due to the fact that none of these investments have been sold through October31, 2007.**

 

11

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**The totalunrealized gain on those investments classified as trading that is reflected in**our Condensed ConsolidatedStatement of Earnings (Loss) as Other expense (income) for the three and ninemonths ended October 31, 2007 is approximately $62 thousand.

 

There were no cumulative gross unrealized holding gains (losses) or grossrealized gains (losses) from our debt securities. All income generated fromthese investments was recorded as interest income. Actual maturities may differfrom contractual maturities should the borrower have the right to call certainobligations.

 

**5.**             Inventories

 

The components of inventory are as follows:

 
| **(In thousands)** | ** ** | **October 31, 2007** | ** ** | **January 31, 2007** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Raw materials           |       | $                              | 10,438     |                           | $          | 22,462 |   |
| Work in process         |       | 605                            |       | 90                             |       |
| Finished goods          |       | 125,266                        |       | 125,769                        |       |
| Total                   |       | $                              | 136,309    |                           | $          | 148,321 |   |

 

**6.****             Goodwilland Other Intangibles**

 

**Goodwill and other indefinitelived intangibles are subject to an assessment for impairment using a two-stepfair value-based test and other intangibles are also subject to impairmentreviews, which must be performed at least annually or more frequently if eventsor circumstances indicate that goodwill or other indefinite lived intangibles mightbe impaired.**

** **

TheCompany performs its annual assessment of impairment as of January 31, which isour fiscal year-end date. For goodwill, the first step is to identify whether apotential impairment exists. This is done by comparing the fair value of areporting unit to its carrying amount, including goodwill. Fair value for eachof our reporting units is estimated utilizing a combination of valuationtechniques, namely the discounted cash flow methodology and the market multiplemethodology. The discounted cash flow methodology assumes the fair value of anasset can be****estimated by theeconomic benefit or net cash flows the asset will generate over the life of theasset, discounted to its present value. The discounting process uses a rate ofreturn that accounts for both the time value of money and investment riskfactors. The market multiple methodology estimates fair value based on whatother participants in the market have recently paid for reasonably similarassets. Adjustments are made to compensate for differences between thereasonably similar assets and the assets being valued. The fair value of thereporting units is derived by calculating the average of the outcomes of thetwo valuation techniques described above. If the fair value of the reportingunit exceeds the carrying value, no further analysis is necessary. 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 estimated fair value of the goodwill. If fair value is less than thecarrying amount, an impairment loss is reported as a reduction to the goodwilland a charge to operating expense.

 

**The following table shows the carrying amount of goodwill,by operating segment, as of October 31, 2007 and January 31, 2007:**

** **
| ** **              | ** ** | ** **              | ** ** | **Catalog &** | ** ** | ** ** | ** ** |
|-------------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **Direct Selling** | ** ** | **Internet**           | ** ** | **Total**  | ** ** |
| Goodwill                |       | $                       | 2,298      |                   | $          | 76,384     |       | $ | 78,682 |   |
|                         |            |                         |            |                        |            |            |            |  |  |  |

 

12

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Other intangible assets,all reported in the Catalog & Internet segment, consisted of the following:

 
| ** **                                   | ** ** | **October 31, 2007** | ** ** | **January 31, 2007** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **(In thousands)**                      | ** ** | **Gross**                      | ** ** | **Accumulated  Amortization**  | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived  trade names and trademarks |       | $                              | 28,100     |                           | $          | — |   | $ | 28,100 |   | $ | 28,100 |   | $ | — |   | $ | 28,100 |   |
| Customer lists                               |       | 15,000                         |       | 8,875                          |       | 6,125 |   | 15,000 |   | 7,750 |   | 7,250 |   |
| Total                                        |       | $                              | 43,100     |                           | $          | 8,875 |   | $ | 34,225 |   | $ | 43,100 |   | $ | 7,750 |   | $ | 35,350 |   |

 

Amortization expense for other intangible assets forthe nine-month periods ended October 31, 2006 and 2007 was $1.4 million and $1.1 million,respectively. The estimated annual amortization expense for fiscal 2008 is $1.5million. The estimated amortization expense for the next five fiscal yearsbeginning with fiscal 2009 is as follows: $1.5 million, $1.1 million, $1.0 million, $0.8 million and $0.6 million.

 

**7.****             Earnings per Share**

 

The components of basic and diluted earnings per share are as follows:

 
| ** **                                              | ** ** | **Three months ended October 31,** | ** ** | **Nine months ended October 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net earnings  (loss)                                    |       | $                                                      | 6,577      |                                                  | $          | (221 | ) | $ | 21,481 |   | $ | (120,197 | ) |
| Weighted average  number of common shares outstanding:  |       |                                                   |       |                                                  |       |   |   |   |   |
| Basic                                                   |       | 38,748                                                 |       | 39,211                                                |       | 39,183 |   | 39,945 |   |
| Dilutive effect  of stock options and restricted shares |       | 319                                                    |       | 320                                                   |       | 342 |   | — |   |
| Weighted average  number of common shares outstanding:  |       |                                                   |       |                                                  |       |   |   |   |   |
| Diluted                                                 |       | 39,067                                                 |       | 39,531                                                |       | 39,525 |   | 39,945 |   |
|                                                         |            |                                                        |            |                                                       |            |  |  |  |  |  |  |  |  |

 

For the three and nine-month periods ended October31, 2007, options to purchase 487,100 and 444,900 shares of common stock, respectively,are not included in the computation of earnings per share because the effectwould be anti-dilutive.  Also, for the three and nine-month periods endedOctober 31, 2006, options to purchase 1,016,500 and 1,401,825 shares of commonstock, respectively, are not included in the computation of earnings per sharebecause the effect would be anti-dilutive.

 

13

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**8.****             Treasury and CommonStock**

 

**Treasury Stock**

 
| **Changes in Treasury Stock were (In thousands,  except shares):** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  February 1, 2006                                       |       | 9,533,416  |       | $          | (287,744   | ) |
| Restricted stock  cancellations                                    |       | —     |       | (963       | )          |
| Treasury stock  purchases                                          |       | 1,802,382  |       | (34,988    | )          |
| Balance at  October 31, 2006                                       |       | 11,335,798 |       | $          | (323,695   | ) |
|                                                               |       |       |       |       |       |
| Balance at  February 1, 2007                                       |       | 11,335,798 |       | $          | (323,714   | ) |
| Treasury stock  purchases                                          |       | 1,712,226  |       | (35,185    | )          |
| Balance at  October 31, 2007                                       |       | 13,048,024 |       | $          | (358,899   | ) |

 

**Common Stock**

 
| **Changes in Common Stock were (In thousands,  except shares):**    | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  February 1, 2006                                        |       | 50,528,060 |       | $          | 1,010      |   |
| Common stock  issued in connection with long-term incentive plan    |       | 94,800     |       | 3          |       |
| Balance at  October 31, 2006                                        |       | 50,622,860 |       | 1,013      |       |
|                                                                |       |       |       |       |       |
| Balance at  February 1, 2007                                        |       | 50,637,060 |       | $          | 1,013      |   |
| Common stock  issued in connection with long-term incentive plan    |       | 283,400    |       | 6          |       |
| Common stock  cancelled in connection with long-term incentive plan |       | (4,000     | )          | (1         | )          |
| Balance at  October 31, 2007                                        |       | 50,916,460 |       | $          | 1,018      |   |

 

**9.****             Bank Lines of Credit**

 

On October 2, 2006, the Company executed Amendment No. 1 (the “Amendment”)to its unsecured revolving credit facility (“Credit Facility”) dated as of June2, 2005. The Amendment (i) reduced the amount available for borrowing under theCredit Agreement from $150.0 million to $75.0 million, (ii) changed the initialtermination date from June 2, 2010 to June 1, 2009, (iii) increased the rate ofinterest applicable to loans under the Credit Agreement and (iv) modified someof the covenants. The Company has the ability to increase the amount availablefor borrowing, under certain circumstances, by an additional $50.0 million. TheCredit Facility may be used for seasonal working capital needs and generalcorporate purposes, including strategic acquisitions. The Credit Facilitycontains, among other provisions, requirements for maintaining certainfinancial ratios and limitations on certain payments. As of October 31, 2007,the Company was in compliance with such provisions. Amounts outstanding underthe amended Credit Facility bear interest, at the Company’s option, at eitherthe JPMorgan Chase Bank’s prime rate or the Eurocurrency rate plus a spreadranging from 0.80% to 1.70% calculated on the basis of the Company’s senior unsecured long-term debt rating. Theamount available for borrowing under this facility was approximately $68.7million as of October 31, 2007, reflecting $6.3 million in outstanding lettersof credit.

 

14

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**10**.          **Income Taxes**

 

The Company adopted theprovisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on February 1,2007.  As a result of the adoption of FIN 48, the Company recognized anincrease of $6.1 million in the liability for unrecognized tax benefits and anasset of $3.3 million.  These amounts were accounted for as a net $2.8million reduction to the Company’s February 1, 2007 retained earnings balance.

 

As of February 1, 2007, thedate of adoption, and October 31, 2007, the Company’s unrecognized tax benefitstotaled $17.1 million and $16.9 million, respectively.  Of the amount ofunrecognized benefits at February 1, 2007, $13.1 million, if recognized, wouldaffect our effective tax rate.  Any prospective adjustments to ourreserves for income taxes will be recorded as an increase or decrease to ourprovision for income taxes and would impact our effective tax rate.

 

The Company will nowrecognize interest and penalties related to unrecognized tax benefits as acomponent of income tax expense. In the past interest and penalties werereflected as part of pre-tax income.  The Company has made a change inaccounting principle related to interest and penalties as part of the adoptionof FIN 48.  During the three and nine months ended October 31, 2007, theCompany recognized $0.1 million and $0.5 million, respectively of interestexpense related to the unrecognized tax benefits.  As of the adoptiondate, the Company had accrued interest of $2.6 million and penalties of $3.3million in relation to the above unrecognized tax benefits.  As of October31, the accrual for interest and penalties was $6.4 million.

 

The company estimates thatwithin the next 12 months the above indicated unrecognized tax benefits willdecreased by approximately $1.0 million as a result of the filing of amendedtax returns, closing of statutes, and audit settlements.

 

Blyth, Inc. files income taxreturns in the U.S. federal jurisdiction, various state and localjurisdictions, and many foreign jurisdictions.   The number of yearswith open tax audits varies depending on the tax jurisdiction.  Our majortaxing jurisdictions include the U.S., including state jurisdictions ofIllinois and Massachusetts, Canada, Germany, and Switzerland.  In the U.S,we are not currently under audit by the Internal Revenue Service but we areopen to examination for the fiscal years 2005 through 2007.  We arecurrently under audit in the state of Illinois for the fiscal years 2003, 2004,and 2005 and are open to examination for the fiscal years 2006 through2007.  We are currently under audit in the state of Massachusetts for thefiscal years 2001, 2002, 2003, and 2004 and are open to examination for thefiscal years 2005 through 2007.   Weare currently under audit in the state of New York for the fiscal years 2004,2005, and 2006, and are open to examination for the fiscal year 2007.  Weare also currently under audit in the state of Wisconsin for the fiscal years2002, 2003, 2004, and 2005 and are open to examination for the fiscal years2006 through 2007.   In Canada, weare currently under audit for fiscal years 2005 and 2006 and are open toexamination for 2007.  In Germany, we are currently under examination forthe fiscal year 2004 and open to examination for fiscal years 2005 through2007.  In Switzerland, we are open to examination for fiscal year2007.  We do not anticipate that the resolution of the Illinois,Massachusetts, Wisconsin, New York, Canadian and German audits will materiallyimpact our financial statements.

 

Of the $2.8 million net FIN48 retained earnings adjustment, $3.6 million liability relates to a potentialtax adjustment for which correlative relief would be available.  Acorresponding tax asset of $3.3 million has separately been established on thebalance sheet to record the benefit that the Company would realize uponresolution of this issue through the competent authority process.  Theadjustment to reflect this asset has been recorded as an increase in retainedearnings concurrent with the FIN 48 retained earnings adjustment.

 

15

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In the first quarter offiscal 2008 the Company recognized a capital gain on the sale of certain assetsand liabilities of the BHI NA business. As a result of this capital gainrecognition, the company reversed a previously established valuation allowanceagainst capital loss carryforwards of $6.5 million. The company’s effective taxrate was favorably impact by $2.3 million as a result of this reversal.

 

**11.**          Stock Based Compensation

** **

**Summary of Plans**

** **

As of October 31, 2007, the Company had oneactive stock-based compensation plan, the 2003 Long-Term Incentive Plan (“2003Plan”), available to grant future awards and two inactive stock-basedcompensation plans (the Amended and Restated 1994 Employee Stock Option Planand the Amended and Restated 1994 Stock Option Plan for Non-EmployeeDirectors), under which vested and unexercised options remain outstanding. Asof October 31, 2007, 6,500,100 shares were authorized and approximately3,700,000 shares were available for grant under these plans. The Company’spolicy is to issue new shares of common stock for all stock options exercisedand restricted stock grants.

 

The Board of Directors andthe stockholders of the Company have approved the adoption and subsequentamendments of the 2003 Plan. The 2003 Plan provides for grants of incentive andnonqualified stock options, stock appreciation rights, restricted stock,restricted stock units, performance shares, performance units, dividendequivalents and other stock unit awards to officers and employees. The 2003Plan also provides for grants of nonqualified stock options to directors of theCompany who are not, and who have not been during the immediately preceding12-month period, officers or employees of the Company or any of itssubsidiaries. Restricted stock and restricted stock units (“RSUs”) are grantedto certain employees to incent performance and retention. RSUs issued under theplans provide that shares awarded may not be sold or otherwise transferreduntil restrictions have lapsed. The release of RSUs on each of the vestingdates is contingent upon continued active employment by the employee until thevesting dates. At the 2007 Annual Meeting, each non-employee director wasgranted 1,500 RSUs vesting in two equal installments beginning on the firstanniversary of the date of grant. In August 2007, in accordance with the 2003Plan, an additional 3,000 RSUs were granted to a new member of our Board ofDirectors.

 

The total compensation expense related to allstock-based compensation plans for the three and nine-month periods endedOctober 31, 2007 was approximately $0.4 million and $0.9 million, respectively.The total compensation expense related to all stock-based compensation plansfor the three and nine-month periods ended October 31, 2006 was approximately$0.2 million and $0.9 million, respectively. The tax benefit recognized for thethree and nine-month periods ended October 31, 2007 was approximately $0.2million and $0.4 million, respectively. The tax benefit recognized for thethree and nine-month periods ended October 31, 2006 was approximately $0.1million and $0.3 million, respectively.

 

16

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**Impact of Adoption of 123(R)**

 

Stock-based compensation expense recognized during the period is based onthe value of the portion of stock-based payment awards that is ultimatelyexpected to vest during the period. Stock-based compensation expense recognizedin the Company’s Consolidated Statements of Earnings (Loss) for the three andnine months ended October 31, 2007 and 2006 includes compensation expense forrestricted stock, RSUs and other stock-based awards granted subsequent toJanuary 31, 2006 based on the grant date fair value estimated in accordancewith the provisions of SFAS 123(R). The Company recognizes these compensationcosts net of a forfeiture rate for only those awards expected to vest, on astraight-line basis over the requisite service period of the award, which isover periods of 3 years for stock options; 2 to 5 years for employee restrictedstock and RSUs; and 1 to 2 years for non-employee restricted stock and RSUs.SFAS 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates.

 

In accordance with the modified prospective transition method, the Company’sCondensed Consolidated Financial Statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123(R). As a resultof the adoption of SFAS 123(R), $3.1 million of unearned compensation recordedin stockholders’ equity as of February 1, 2006 was reclassified to andreduced the balance of additional contributed capital.

 

**Transactionsinvolving restricted stock and RSUs are summarized as follows:**

 
| ** **                                               | ** ** | ** ** | ** ** | **Weighted Average**                | ** ** | **Aggregate**            | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **Shares** | ** ** | **Grant date Fair Value** | ** ** | **Intrinsic Value** | ** ** |
| ** **                                               | ** ** | ** ** | ** ** | ** **                               | ** ** | **(In thousands)**  | ** ** |
| Nonvested  restricted stock and RSUs at January 31, 2007 |       | 343,430    |       | $                                        | 24.63      |                     |       |   |
| Granted                                                  |       | 15,000     |       | 26.31                                    |       |                     |       |
| Vested                                                   |       | (19,000    | )          | 25.68                                    |       |                     |       |
| Forfeited                                                |       | (54,630    | )          | 26.27                                    |       |                     |       |
| Nonvested  restricted stock and RSUs at October 31, 2007 |       | 284,800    |       | $                                        | 24.34      |                     | $          | 5,437 |   |
| Total restricted  stock and RSUs at October 31, 2007     |       | 315,800    |       | $                                        | 24.78      |                     | $          | 6,029 |   |
|                                                          |            |            |            |                                          |            |                          |            |  |  |  |

 

Compensation expense related to restricted stock andRSUs for the three and nine-month periods ended October 31, 2007 wasapproximately $0.4 million and $0.9 million, respectively. Compensation expenserelated to restricted stock and restricted stock units for the three andnine-month periods ended October 31, 2006 was approximately $0.2 million and$0.9 million, respectively.

 

As of October 31, 2007, there was $3.8 million of unearned compensationexpense related to non-vested restricted stock and RSU awards. This cost isexpected to be recognized over a weighted average period of 1.9 years. As ofOctober 31, 2007, approximately 0.3 million restricted stock awards with aweighted average grant date fair value of $24.34 are expected to vest. Thetotal unrecognized stock-based compensation cost to be recognized in futureperiods as of October 31, 2007 does not consider the effect of stock-basedawards that may be issued in subsequent periods.

 

17

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**Transactionsinvolving stock options are summarized as follows:**

** **
| ** **                       | ** ** | ** ** | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | ** **               | ** ** |
|----------------------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **Option** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** | **Aggregate**            | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Intrinsic Value** | ** ** |
| Outstanding at  January 31, 2007 |       | 877,500    |       | $                         | 26.32      |                      | 4.56       |                     |       |   |
| Options granted                  |       | —     |       | —                    |       |                      |       |                     |       |
| Options  exercised               |       | (283,400   | )          | 24.98                     |       |                      |       |                     |       |
| Options  forfeited and expired   |       | (96,500    | )          | 26.57                     |       |                      |       |                     |       |
| Outstanding at  October 31, 2007 |       | 497,600    |       | $                         | 27.04      |                      | 4.08       |                     | $          | — |   |
| Exercisable at  October 31, 2007 |       | 492,600    |       | $                         | 27.12      |                      | 4.08       |                     | $          | — |   |

** **

At October 31, 2007 and January 31, 2007, options to purchase 492,600 and860,000 shares, respectively, were exercisable. There were no options grantedduring the current fiscal year.

 

The compensation expense for the three and nine months ended October 31,2007 related to stock options was not significant. As of October 31, 2007, $17thousand of total unrecognized compensation cost related to stock options isexpected to be recognized over a period of 1.6 years. All outstanding stockoptions at October 31, 2007 are expected to vest.

 

Authorized unissued shares may be used under the stock-based compensationplans. The Company intends to issue sharesof its common stock to meet the stock requirements of its awards in the future.

 

**12.**          Segment Information

** **

Blyth is a designer and marketer of home fragrance products andaccessories, home décor, seasonal decorations, household convenience items,personalized gifts and products for the foodservice trade. We compete in theglobal Home Expressions industry, and our products can be found throughoutNorth America, Europe and Australia. Our financial results are reported inthree segments - the Direct Selling segment, the Catalog & Internet segmentand the Wholesale segment. These reportable segments are based on similaritiesin distribution channels, customers and management oversight.

 

During fiscal 2007 there was a change in our seniormanagement structure with the departure of our Wholesale segment President. OurCatalog & Internet segment President assumed responsibility for theWholesale segment in addition to his current responsibilities. We refer to thisnew reporting structure as the Multi-channel Group, which includes our Catalog& Internet and Wholesale segments. For segment reporting purposes, Blythcontinues to report individual segment operating results for the DirectSelling, Catalog & Internet and Wholesale segments.

 

**Within the Direct Selling segment, the Companydesigns, manufactures or sources, markets and distributes an extensive line ofproducts including scented candles, candle-related accessories, fragranced bathgels and body lotions and other fragranced products under the PartyLite® brand.The Company also operates a small Direct Selling business, Two Sisters GourmetTM,which is focused on selling gourmet foods. All direct selling products are solddirectly to the consumer through a network of independent sales consultantsusing the party plan method of direct selling. PartyLite® brand products aresold in North America, Europe and Australia. Two Sisters GourmetTM brandproducts are sold in North America.**

 

18

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Within the Catalog & Internet segment, the Company designs, sourcesand markets a broad range of household convenience items, premium photo albums,frames, holiday cards, personalized gifts, kitchen accessories and gourmetcoffee and tea. These products are sold directly to the consumer under the BocaJavaTM, Easy ComfortsTM, Exposuresâ, Home Marketplace®, Miles Kimballâ and Walter Drakeâ brands. These products are sold inNorth America.

 

Within the Wholesale segment, the Company designs, manufactures orsources, markets and distributes an extensive line of home fragrance products,candle-related accessories, seasonal decorations such as ornaments and trim andhome décor products such as picture frames, lamps and textiles. Products inthis segment are sold primarily in North America to retailers in the premiumand specialty channels under the CBK®, Colonial Candle of Cape Cod®, Colonialat HOMEâ and Seasons of CannonFalls® brands. In addition, chafing fuel and tabletop lighting products andaccessories for the Away From Home or foodservice trade are sold through thissegment under the Ambria®, HandyFuelTM and Sterno® brands.

 

Operating profit in all segments represents net sales less operatingexpenses directly related to the business segments and corporate expensesallocated to the business segments. Other expense includes interest expense,interest income and equity in earnings of investee, which are not allocated tothe business segments. Identifiable assets for each segment consist of assetsused directly in its operations and intangible assets, if any, resulting frompurchase business combinations. Unallocated Corporate within the identifiableassets include corporate cash and cash equivalents, short-term investments,prepaid income tax, corporate fixed assets, deferred bond costs and otherlong-term investments, which are not allocated to the business segments.

 
| ** **                                                                                | ** ** | **Three months ended October 31,** | ** ** | **Nine months ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                                                   | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  Sales**                                                                            |       |                                                   |       |                                                  |       |   |   |   |   |
| Direct Selling                                                                            |       | $                                                      | 147,515    |                                                  | $          | 144,898 |   | $ | 437,978 |   | $ | 453,886 |   |
| Multi-channel  Group:                                                                     |       |                                                   |       |                                                  |       |   |   |   |   |
| Catalog &  Internet                                                                   |       | 52,624                                                 |       | 52,708                                                |       | 132,696 |   | 127,620 |   |
| Wholesale                                                                                 |       | 85,730                                                 |       | 100,305                                               |       | 220,433 |   | 259,269 |   |
| Subtotal  Multi-channel Group                                                             |       | 138,354                                                |       | 153,013                                               |       | 353,129 |   | 386,889 |   |
| **Total**                                                                                 |       | $                                                      | 285,869    |                                                  | $          | 297,911 |   | $ | 791,107 |   | $ | 840,775 |   |
| **Operating  profit (loss)**                                                              |       |                                                   |       |                                                  |       |   |   |   |   |
| Direct Selling                                                                            |       | $                                                      | 8,091      |                                                  | $          | 4,177 |   | $ | 50,398 |   | $ | 39,092 |   |
| Multi-channel  Group:                                                                     |       |                                                   |       |                                                  |       |   |   |   |   |
| Catalog &  Internet                                                                   |       | (225                                                   | )          | 2,469                                                 |       | (5,281 | ) | (3,595 | ) |
| Wholesale                                                                                 |       | 2,575                                                  |       | (1,961                                                | )          | (10,351 | ) | (44,474 | ) |
| Subtotal  Multi-channel Group                                                             |       | 2,350                                                  |       | 508                                                   |       | (15,632 | ) | (48,069 | ) |
|                                                                                      |       | 10,441                                                 |       | 4,685                                                 |       | 34,766 |   | (8,977 | ) |
| Other expense                                                                             |       | (2,119                                                 | )          | (2,746                                                | )          | (5,264 | ) | (8,610 | ) |
| **Earnings  (loss) from continuing operations before income taxes and minority interest** |       | $                                                      | 8,322      |                                                  | $          | 1,939 |   | $ | 29,502 |   | $ | (17,587 | ) |

 
| **(In thousands)**       | ** ** | **October 31, 2007** | ** ** | **January 31, 2007** | ** ** |
|-------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Identifiable  Assets**      |       |                           |       |                           |       |
| Direct Selling                |       | $                              | 274,902    |                           | $          | 238,194 |   |
| Multi-channel  Group:         |       |                           |       |                           |       |
| Catalog &  Internet       |       | 164,488                        |       | 152,068                        |       |
| Wholesale                     |       | 183,838                        |       | 181,384                        |       |
| Subtotal  Multi-channel Group |       | 348,326                        |       | 333,452                        |       |
| Unallocated  Corporate        |       | 147,231                        |       | 202,992                        |       |
| **Total**                     |       | $                              | 770,459    |                           | $          | 774,638 |   |

** **

**19**

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**13.**          Contingencies

 

The Company has contingent liabilities that have arisen in the ordinarycourse of its business, including pending litigation. The Company believes theoutcome of these matters will not have a material adverse affect on itsconsolidated financial position, results of operations or cash flows.

 

In October 2007, U.S. Customs and Border Protection(“Customs”) made a demand to the Company for payment of duties allegedly owedby one of its subsidiaries. In November 2007, the Company filed a petitiondisputing Customs’ claims. During the three and nine months ended October 31,2007, the Company established a reserve for this matter that it believes isadequate based on existing facts and circumstances. Although the finalresolution of this proceeding is uncertain, based on currently availableinformation, the Company believes that the ultimate outcome will not have amaterial adverse effect on its financial position, cash flows or results ofoperations.

 

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

 

**RESULTS OF OPERATIONS:**

 

**Overview**

 

Blyth is a designer and marketer of home fragrance products andaccessories, home décor, seasonal decorations, household convenience items,personalized gifts and products for the foodservice trade. We compete in theglobal Home Expressions industry, and our products can be found throughoutNorth America, Europe and Australia. Our financial results are reported inthree segments - the Direct Selling segment, the Catalog & Internet segmentand the Wholesale segment. These reportable segments are based on similaritiesin distribution channels, customers and management oversight.

 

Today, annualized net sales are comprised of an approximately $700 millionDirect Selling business, an approximately $200 million Catalog & Internetbusiness and an approximately $250 million Wholesale business. Sales and earningsgrowth differ in each segment depending on geographic location, marketpenetration, our relative market share and product and marketing execution,among other business factors. Over the long term, all three segments shouldexperience single-digit growth, most likely within the low to mid-single digitrange, again depending on the business factors previously noted in the Form10-K, for the  fiscal year ended January31, 2007.

 

Ourcurrent focus is driving sales growth of our brands so we may leverage morefully our infrastructure. New product development continues to be critical toall three segments of our business. In the Direct Selling segment, monthlysales and productivity incentives are designed to attract, retain and increasethe earnings opportunity of independent sales consultants. In the Catalog &Internet segment, product, merchandising and circulation strategy are designedto drive strong sales growth in newer brands and expand further the sales andcustomer base of our flagship brands. In the Wholesale segment, salesinitiatives are targeted to independent retailers and national accounts.

 

**Recent Developments**

 

In September 2005, we announced our proposed intention to spin off theWholesale segment. We requested and received from the Internal Revenue Servicea ruling on the tax-free status for the transaction. In March 2006, weannounced our intention to evaluate additional strategic alternatives that hadbeen identified since the announcement of the spin off, which would likelyfocus on one or more of our European Wholesale businesses, believing thatsubstantial upside opportunities exist in the North American Wholesalebusinesses despite challenging market conditions impacting the Home Expressionsindustry.

 

In accordance with this intention to explore strategic alternatives withrespect to our European Wholesale businesses, (a) on April 12, 2006, we soldKaemingk B.V. (“Kaemingk”) to an entity controlled by the management of thisbusiness, (b) on June 16, 2006, we sold Edelman B.V. (“Edelman”) and Euro-DecorB. V. (“Euro-Decor”) to an entity with which members of the management ofEdelman and Euro-Decor are affiliated, (c) on August 17, 2006, we sold the GiesGroup and (d) on December 20, 2006, we sold Colony Gifts Corporation Ltd. (“Colony”).Accordingly, the results of operations for Kaemingk, Edelman, Euro-Decor, Giesand Colony have been classified as discontinued operations for all periodspresented.

 

On April 27, 2007, the Company sold certain assets and liabilities of itsBHI NA mass channel candle business, which was part of the Wholesale segment. Thenet assets were sold for $25.1 million, inclusive of proceeds from the sale ofoverstock inventory of $1.1 million. Of this amount, $21.8 million was receivedat closing and $3.3 million was received in the second quarter of fiscal 2008. Thesale, including the proceeds received in the second quarter, resulted in apre-tax gain of $0.6 million, and is recorded in Administrative and otherexpenses in the Condensed Consolidated Statements of Earnings (Loss).

 

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**NetSales**

 

Net sales in the nine months ended October 31, 2007 decreased $49.7 million, or approximately 6%, to $791.1 million from$840.8 million in the first nine months of the comparable prior year period. Thedecrease is primarily a result of a shortfall of sales within PartyLite’s U.S.market and the Wholesale segment, partially offset by increased sales inPartyLite’s international markets and the Catalog and Internet segment.

 

Net sales decreased $12.0million, or 4%, to $285.9 million in the quarter ended October 31, 2007 from$297.9 million in the comparable prior year period, as a result of the salesdecline in PartyLite’s U.S. market and the Wholesale segment, partially offset by higher sales within PartyLite’sinternational markets.

 

Net Sales - Direct SellingSegment

 

Net sales in theDirect Selling segment for the nine months ended October 31, 2007 decreased$15.9 million, or 4%, to $438.0 million from $453.9 million in the comparable prior year period.PartyLite’s U.S. sales decreased approximately 14% compared to the prior yearprimarily due to a decline in the number of active independent salesconsultants. PartyLite Canada reported an approximate 15% increase in sales asmeasured in U.S. Dollars, a 9% increase in sales in local currency, versus theprior year. In PartyLite’s European markets, sales increased approximately 10%in U.S. Dollars, a 2% increase in local currency.

 

Net sales in the Direct Sellingsegment for the quarter ended October 31, 2007 increased $2.6 million, or 2%,to $147.5 million from $144.9 million in the comparableprior year period. PartyLite Canada reported a 36% increase in sales asmeasured in U.S. Dollars, a 22% increase in sales in local currency, versus theprior year, primarily due to an increase in active independent salesconsultants. In PartyLite’s European markets, sales increased approximately 11%as measured in U.S. Dollars, a increase of 2% in sales in local currency,versus the prior year. PartyLite’s U.S. sales decreased approximately 8%compared to the prior year mainly due to a decline in active independent salesconsultants.

 

Net Sales - Catalog &Internet Segment

 

Net sales in the Catalog& Internet segment increased $5.1 million, or 4%, to $132.7 million in thenine months ended October 31, 2007, from $127.6. million in the comparableprior year period. This increase was primarily due to increased sales in ourBoca Java business as a result of investment in new club memberships.

 

Net salesin the Catalog & Internet segment remained flat, reporting $52.6 million inthe quarter ended October 31, 2007, compared with $52.7 million in thecomparable prior year period.

 

Net Sales - Wholesale Segment

 

**Net sales in the** Wholesalesegment in the nine months ended October 31, 2007 decreased $38.9 million, orapproximately 15%, to $220.4 million from $259.3 million in the comparable prior year period. The decreasein sales is primarily due to a planned sales reduction in the mass candlebusiness, followed by the sale of the BHI NA business, as well as the declinein the home décor sector, reflecting a soft housing market, partially offset byincreased sales of our seasonal decor.

** **

**Net sales in the Wholesale segment in the quarter endedOctober 31, 2007 decreased $14.6 million, or approximately 15% to $85.7 millionfrom $100.3 million in the**comparable prior year period. The decreasein sales is primarily due to a planned sales reduction in the mass candle business,the sale of the BHI NA business, as well as the decline in the  home décor sector, partially offset byincreased sales of our seasonal decor and premium channel candle business.

** **

**22**

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**Gross Profit**

 

Gross profit increased $0.5 million, to$407.2 million in the nine months ended October 31, 2007 from $406.7 million inthe comparable prior year period. The increase in gross profit is principallyattributable to the improved cost control, product mix and pricing strategiesin most operations, offset by the impairment and accelerated depreciation ofcertain fixed assets of $3.7 million, resulting from the sale of the BHI NAbusiness, in addition to the impact of reduced sales within the Direct Sellingand Wholesale Segments. Gross profit margin increased to 51.5% for thenine months ended October 31, 2007 from 48.4% in the comparable prior year period. Thegross profit margin improvement is the result of the sale of our low margin BHINA business, as well as price increases, favorable product mix and therealization of cost savings from the prior year’s initiatives, partially offsetby a continued increase in commodity costs.

 

Gross profit increased $6.9 million, or 5%, to $144.2 million in thequarter ended October 31, 2007 from $137.3 million in the comparable prior year period. This increase in gross profit is primarily due to the impact ofincreased sales within the international markets within the Direct Sellingsegment and our seasonal decor business. Gross profit margin increasedto 50.4% for the quarter ended October 31, 2007 from 46.1% in the comparable prior year period. Thegross profit marginimprovement is the result of the sale of our lowmargin BHI NA business, as well as price increases, favorable product mix, andeffective cost control efforts, partially offset by a continued increase incommodity costs.

 

**Selling Expense**

** **

**Selling expense decreased $10.3 million, or 4%, to $273.1million in the nine months ended October 31, 2007, from $283.4 million in thecomparable prior year period. The decrease in selling expense is primarily dueto reduced sales. As a percentage of net sales, selling expense increased to34.5% of net sales for the nine months ended October 31, 2007, compared to33.7% of net sales during the comparable prior year period.**

** **

Selling expense increased$0.9 million, or 1%, to $100.5 million in the quarter ended October 31, 2007,from $99.6 million in the comparable prior year period. The increase in sellingexpense is primarily due to increased promotional spending in the Catalog &Internet segment during the third quarter. As a percentage of net sales,selling expense increased to 35.1% of net sales for the quarter ended October31, 2007, compared to 33.4% for the comparable prior year period.

 

**Administrative and Other Expense**

** **

**Administrativeand other expense increased $3.9 million, or 4%, to $99.4 million in the ninemonths ended October 31, 2007 from $95.5 million in the**comparable prior year period. As a percent of sales,administrative expense was 12.6% in the nine months ended October 31, 2007versus 11.4% in the comparableprior year period. The increase in administrative expense includes severance and relatedbenefits expense associated with termination of certain employees, and thetermination of an office lease and related assets, as a result of the sale ofthe BHI NA business, of $3.0 million and $2.4 million, respectively. Theincrease was also affected by the amendment to an executive employment agreement, partially offset by the gain on the saleof the BHI NA business of $0.6 million.

** **

**Administrative and otherexpense increased $0.2 million, or 1%, to $33.3 million in the quarter endedOctober 31, 2007 from $33.1 million in the**comparable prior year period. As a percent of sales, administrative expense was 11.6% for the quarterended October 31, 2007 and 11.1% for the comparable prior year period. The increase in administrative expense includes an asset impairmentcharge associated with the sale of the BHI NA business of $2.4 million,partially offset by cost reduction initiatives taken within each segment.

 

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**Operating**Profit (Loss)

 

Operating profit increased$43.8 million to $34.8 million in the nine months ended October 31, 2007 from aloss of $9.0 million in the comparable prior year period. This increase wasprimarily due to the non-repeating goodwill impairment charge of $36.8 millionrecorded in the Wholesale segment in the second quarter of the prior year and$5.2 million in restructuring charges taken in the third quarter of the prioryear. Excluding the prior year goodwill impairment and restructuring charges,the Company’s operating profit improvement was offset by an increase inoperating losses in the Wholesale segment as a result of the sale of the BHI NAbusiness, and lower operating profit within the Catalog and Internet segment.

 

Operating profit increased$5.7 million to $10.4 million in the quarter ended October 31, 2007 from $4.7million in the comparable prior year period.  This increase was primarilydue to higher operating profit from the Company’s Direct Selling and Wholesalesegments, offset with lower operating profit from the Catalog & Internetsegment.

 

Operating Profit - Direct SellingSegment

 

Operating profit in the Direct Selling segment****for the nine months ended October31, 2007 increased $11.3 million, or 29%, to $50.4 million from $39.1 millionin comparable prior year period. The increase is primarily due to grossmargin improvement from a combination of price increases, product mix and costsaving initiatives throughout the PartyLite businesses, as well as higher sales in PartyLite Europe and Canada.

 

Operating profit in the quarter ended October 31, 2007 inthe Direct Selling segment increased $3.9 million, or 93%, to $8.1 million from$4.2 million in the comparable prior year period.  This increase wasprimarily driven by the higher gross margin due to a combination of priceincreases, product mix and cost saving initiatives throughout the PartyLitebusinesses and increased sales in PartyLite Europe and Canada.

 

Operating Loss - Catalog &Internet Segment

 

Operating loss in the ninemonths ended October 31, 2007 in the Catalog & Internet segment increasedby $1.7 million, or 47% to $5.3 million compared to a $3.6 million loss in thecomparable prior year period. The decrease is primarily related to thecontinued investment in new memberships within the Boca Java business.

 

Operating loss in thequarter ended October 31, 2007 in the Catalog & Internet segment increased$2.7 million to $0.2 million versus an operating profit of $2.5 million in thecomparable prior year period.  The increase in operating loss over theprior year reflects higher postage costs and a shift in circulation into thefourth quarter for Miles Kimball, as well as the continued investment in new clubmemberships in Boca Java during the quarter.

 

Operating Loss - WholesaleSegment

 

Operating loss in the nine months ended October 31, 2007 inthe Wholesale segment was $10.4 million versus $44.5 million in the comparableprior year period. Included in the prior year was a goodwill impairment chargeof $36.8 million and a restructuring charge of $5.2 million. In fiscal2008, additional costs were incurred due to the sale of the BHI NA business,which included severance of $3.8 million, the impairment of certain fixedassets and accelerated depreciation of $6.1 million.

 

24

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Operating profit in thequarter ended October 31, 2007 in the Wholesale segment increased $4.6 millionto $2.6 million versus a loss of $2.0 million in the comparable prior yearperiod.  This is primarily the result of restructuring charges incurred inthe mass candle business of $5.2 million recorded in the third quarter of thecomparable prior year period. Also incurred in the mass candle business duringthe three-months ended October 31, 2007, were severance and impairment chargestotaling  $4.1 million.

 

**InterestExpense and Interest Income**

** **

Interest expense decreased approximately $3.7million, or 25%, to $10.9 million in the nine months ended October 31, 2007from $14.6 million in the comparable prior year period, due to the partialreduction of public debt.

 

Interest expense decreased approximately $1.0million, or 22% to $3.6 million in the quarter ended October 31, 2007 from $4.6million in the comparable prior year period, due to the partial reduction ofpublic debt.

 

Interest income increasedapproximately $0.6 million to $6.0 million in the nine months ended October 31,2007 from $5.4 million in the comparable prior year period, due to higher cashand short-term investment balances and an increase in interest rates.

 

Interest income increasedapproximately $0.1 million to 1.9 million in the quarter ended October 31,2007, from $1.8 million in the comparable prior year period, due to higher cashand short-term investment balances and an increase in interest rates.

 

**IncomeTaxes**

** **

Income tax expense(benefit) increased $14.9 million, to an expense of $7.9 million in the ninemonths ended October 31, 2007 from a benefit of $7.0 million in the same periodin the prior fiscal year.  The effective tax rate for the nine monthsended October 31, 2007 was approximately 26.9% compared to a benefit of 39.8%in the prior year.  The effective tax rate for the first nine months offiscal 2008 was favorably impacted by $2.3 million as the result of thereversal of a previously established valuation allowance against capital losscarryforwards, and $0.8 million of provision-to-tax return adjustments made asa result of filing the company’s U.S. federal income tax return. This favorableimpact was partially offset by income taxes provided on unremitted foreignearnings. The valuation allowance was reversed as a result of a capital gaingenerated on the sale of certain assets and liabilities of the BHI NAbusiness.  The tax benefit in the prior year was a result of $10.6 millionof tax benefit related to $28.0 million of the goodwill impairment charge.

 

Income tax expense increased$1.7 million to an expense of $1.7 million in the three months ended October31, 2007 from a benefit of approximately $30 thousand in the three months endedOctober 31, 2006. Last year's tax benefit was a result of the $10.6 million oftax benefit related to $28.0 million of the goodwill impairment charge.  Theeffective tax rate for the three months ended October 31, 2007 was an expenseof 20.6% compared to a benefit of 1.7% in the prior year*.* The increase in the effective tax ratefor the current quarter, versus the comparable prior year’s period, is due inpart to the increase in taxes on unremitted foreign earnings offset in part bythe provision-to-return adjustments of $0.8 million.

 

**Earnings(Loss) from Continuing Operations**

** **

Earnings from continuing operations increased $32.2million to $21.5 million, or $0.54 per diluted share, in the nine months endedOctober 31, 2007 from a loss of $10.7 million, or $0.27 per diluted share, forthe comparable prior year period. The improvement is primarily the result ofprior year charges relating to the goodwill impairment and restructuringcharges recorded in the prior year and this year’s improved operating profitwithin the Direct Selling Segment, offset by costs incurred with the sale ofthe BHI NA business, as mentioned previously.

 

25

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Earnings from continuing operations for three monthsended October 31, 2007 was $6.6 million, or $0.17 per diluted share, anincrease of $4.7 million, compared to $1.9 million, or $0.05 per diluted share,for the comparable prior year period. The improvement is primarily the resultimproved sales and operating profit within the Direct Selling segment, $3.2million in after-tax restructuring charges taken in the prior year, partlyoffset by asset impairment and severance charges incurred during the quarterdue to the sale of the BHI NA business.

 

**Lossfrom Discontinued Operations**

** **

**Theloss from discontinued operations, net of tax, for the nine months endedOctober 31, 2006 was $109.5 million, or $2.74 per diluted share. The lossincludes a non-tax deductible loss of $18.4 million on the sale of Kaemingk, aloss on sale of $14.5 million for the Edelman and Euro-Decor businesses, whichincludes a goodwill impairment charge of $16.7 million and a non-tax deductibleloss on sale of the Gies business of $28.9 million, which includes a non-taxdeductible impairment charge of $31.1 million.**The loss from discontinued operations also includes anon-tax deductible impairment charge of $27.2 million for the Colony business. Also, the loss includesoperating losses for the combined discontinued businesses of $20.4 million forthe nine months ended October 31, 2006. There was no income or loss fromdiscontinued operations for the nine months ended October 31, 2007.

** **

Lossfrom discontinued operations, net of tax, for the three months ended October31, 2006 was $2.2 million, or $0.05 per diluted share. Included in loss fromdiscontinued operations were non-taxable gains of $2.3 million for the sales ofthe Gies, Edelman and Euro-Decor****businessesand a non-taxable gain of $1.4 million to adjust the carrying value of theColony net assets to the estimated fair value of the business offset byoperating losses of $5.9 million in the quarter ended October 31, 2006. There was no income or loss from discontinuedoperations for the three months ended October 31, 2007.

 

**Liquidityand Capital Resources**

** **

Cash and cash equivalents increased $6.3 million in the first nine monthsended October 31, 2007 from $103.8 million at January 31, 2007.

 

Net cash used by operations was $18.6 million for the nine months endedOctober 31, 2007 compared to $31.4 million in the comparableprior year period. The Company had earnings from operations of $21.5 millionduring the nine months ended October 31, 2007. The net changes in workingcapital affecting cash flows from operating activity was a net decrease inoperating cash flows of $72.5 million in the current year, compared to a netdecrease of $53.8 million in the prior year. This change was primarily theresult of the divesture of the European Wholesale businesses in fiscal 2007. Alsoincluded in earnings from continuing operations were non-cash charges fordepreciation and amortization of $22.3 million and amortization of unearnedcompensation of $1.6 million.

 

Net cash provided by investing activities was $64.1 million for the ninemonths ended October 31, 2007. The Company received proceeds from the sale ofshort-term investments of $45.2 million. Capital expenditures for property,plant and equipment were $7.0 million for the nine months ended October 31,2007 compared to $12.4 million in the prior year period. In the comparable prior year period, the capital expenditures includedthe expansion of PartyLite’s European distribution center. The Company receivedproceeds from the sale of certain assets and liabilities of the BHI NA businessof $25.1 million and proceeds from the sale of one of our European Wholesalediscontinued operations of $0.5 million in the nine months ended October 31,2007.

 

Net cash used in financing activities was $42.9 million for the ninemonths ended October 31, 2007. This was primarily due to the purchase ofTreasury Stock of $35.2 million, the payment of our semi-annual dividend of $10.6million and the reduction of long-term debt and capital lease obligations of$4.4 million. This was partially offset by the proceeds from the issuance ofthe Company’s common stock upon exercise of stock options of $7.1 million.

 

26

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The Company anticipates total capital spending of approximately $12.0million for fiscal 2008 or approximately $6.0 million less than fiscal year2007 due to the reduced spending requirements on the Company’s manufacturingfacilities.

 

The Company has grown in part through acquisitions and, as part of itsgrowth strategy, the Company expects to continue from time to time in theordinary course of its business to evaluate and pursue acquisitionopportunities as appropriate.

 

The Company believes our financing needs in the short and long term can bemet from cash generated internally and through our borrowing capacity from ourexisting credit agreements.

 

On October 2, 2006, the Company executed Amendment No. 1 (the “Amendment”)to its unsecured revolving credit facility (“Credit Facility”) dated as of June2, 2005. The Amendment (i) reduced the amount available for borrowing under theCredit Agreement from $150.0 million to $75.0 million, (ii) changed the initialtermination date from June 2, 2010 to June 1, 2009, (iii) increased the rate ofinterest applicable to loans under the Credit Agreement and (iv) modified someof the covenants. The Company has the ability to increase the amount availablefor borrowing, under certain circumstances, by an additional $50.0 million. TheCredit Facility may be used for seasonal working capital needs and generalcorporate purposes, including strategic acquisitions. The Credit Facilitycontains, among other provisions, requirements for maintaining certainfinancial ratios and limitations on certain payments. As of October 31, 2007,the Company was in compliance with such provisions. Amounts outstanding underthe amended Credit Facility bear interest, at the Company’s option, at eitherthe JPMorgan Chase Bank’s prime rate or the Eurocurrency rate plus a spreadranging from 0.80% to 1.70% calculated on the basis of the Company’s senior unsecured long-term debt rating. Amountsavailable for borrowing under this facility were approximately $68.7 million asof October 31, 2007, reflecting $6.3 million in outstanding letters of credit.

 

As of October 31, 2007, the Company had a total of $4.0 million availableunder an uncommitted facility with Bank of America. Of these facilities, $2.0million are to be used for letters of credit through November 30, 2007 and theremaining $2.0 million are to be used for letters of credit through January 31,2008. As of October 31, 2007, no letters of credit were outstanding under thesefacilities.

 

In May 1999, the Companyfiled a shelf registration statement for issuance of up to $250.0 million indebt securities with the Securities and Exchange Commission. On September 24,1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1,2009 at a discount of approximately $1.4 million, which is being amortized overthe life of the notes. In fiscal 2007, the Company repurchased $52.1 million ofthese notes. Such notes contain, among other provisions, restrictions on lienson principal property or stock issued to collateralize debt. At October 31,2007, the Company was in compliance with such provisions. Interest is payablesemi-annually in arrears on April 1 and October 1. On October 20, 2003, theCompany issued $100.0 million of 5.50% Senior Notes due on November 1, 2013 ata discount of approximately $0.2 million, which is being amortized over thelife of the notes. Such notes contain provisions and restrictions similar tothose in the 7.90% Senior Notes. At October 31, 2007, the Company was incompliance with such provisions. Interest is payable semi-annually in arrearson May 1 and November 1. The notes may be redeemed in whole or in part at anytime at a specified redemption price. The proceeds of the debt issuances wereused for general corporate purposes.

 

As of October 31, 2007,Miles Kimball had approximately $8.7 million of long-term debt outstandingunder a real estate mortgage note payable to John Hancock Life InsuranceCompany, which matures June 1, 2020. Under the terms of the note, payments ofprincipal and interest are required monthly at a fixed interest rate of 7.89%.

 

27

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As of October 31, 2007, CBK had $4.2 million of long-term debt outstandingunder an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025. Thebond is backed by an irrevocable letter of credit issued by LaSalle BankNational Association. The loan is collateralized by certain of CBK’s assets. Theamount outstanding under the IRB bears interest at short-term floating rates, whichequaled a weighted average interest rate of 4.6% at October 31, 2007. Paymentsof principal are required annually and interest payments are required monthlyunder the terms of the bond.

 

On June 7, 2006, the Company’s Board of Directors amended the stockrepurchase program and increased the number of shares of common stockauthorized to be repurchased by 6,000,000 shares to 12,000,000 shares. TheCompany repurchased 1,712,226 shares during the ninemonths ended October 31, 2007. As of October 31, 2007, the Company haspurchased a cumulative total 8,141,408 shares for approximately $184.8 million.Additionally, 4,906,616 shares were repurchased in fiscal 2005, through a Dutchauction cash tender offer for an aggregate purchase price of $172.6 million, includingfees and expenses. The acquired shares are held as common stock in treasury atcost.

 

On September 6, 2007, theCompany announced that it had declared a cash dividend of $0.27 per share ofcommon stock for the six months ended July 31, 2007.  The dividend,authorized at the Company’s September 6, 2007 Board of Directors meeting, waspayable to shareholders of record as of November 1, 2007, and was paid onNovember 15, 2007. The total payment was $10.2 million.

 

**CriticalAccounting Policies**

** **

There were no changes to our critical accounting policies in the thirdquarter of fiscal 2008. For a discussion of the Company’s critical accountingpolicies see our Annual Report on Form 10-K for the fiscal year ended January31, 2007.

 

**RecentAccounting Pronouncements**

** **

During the first quarterof fiscal 2007, the FASB issued Statements of Financial AccountingStandards No. 155, “Accounting for Certain Hybrid Financial Instruments — anamendment of FASB Statements No. 133 and 140” (“FAS No. 155”) and SFASNo. 156, “Accounting for Servicing of Financial Instruments — an amendmentof FASB Statement No. 140” (“FAS No. 156”). SFAS No. 155requires that interests in securitized financial assets be evaluated todetermine whether they contain embedded derivatives, and permits the accountingfor any such hybrid financial instruments as single financial instruments atfair value with changes in fair value recognized directly in earnings. SFASNo. 156 specifies that servicing assets or liabilities recognized upon thesale of financial assets must be initially measured at fair value, andsubsequently either measured at fair value or amortized in proportion to andover the period of estimated net servicing income or loss. The Company adoptedboth standards on February 1, 2007 and there was no impact on the Company’s consolidatedfinancial position,  results ofoperations or cash flows.

 

InJuly 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes.”  This Interpretation requires that arecorded tax benefit must be more likely than not to be sustained uponexamination by tax authorities based upon its technical merits.  Theamount of benefit recorded is the largest amount of benefit that is greaterthan 50 percent likely of being realized upon ultimate settlement.  Uponadoption, any adjustment will be recorded directly to beginning retainedearnings. The Company adopted the Interpretation as of February 1, 2007 and theeffect on the financial statements is disclosed in Note 10 to the Condensed ConsolidatedFinancial Statements.

 

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In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“FAS No. 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures regarding fair valuemeasurements. SFAS No. 157 applies under other accounting pronouncements thatrequire or permit fair value measurements. Accordingly, SFAS No. 157 does notrequire any new fair value measurements. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. The Company has not yet adopted thestandard and the effect, if any, on the Company’s consolidated financialposition, results of operations or cash flows has not been determined.

 

In February 2007, the FASB issued FASB No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statements No. 115” (SFAS No. 159). SFAS No. 159 permitsentities to choose, at specified election dates, to measure eligible items atfair value (the “fair value option”). A business entity shall report unrealizedgains and losses on items for which the fair value option has been elected inearnings at each subsequent reporting period. This accounting standard iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. The effect, if any, of adopting SFAS No. 159 on theCompany’s consolidated financial position, results of operations or cash flowshas not yet been determined.

 

29

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

** **

**MarketRisk**

** **

The Company has operations outside of the United States and sells itsproducts worldwide. The Company’s activities expose it to a variety of marketrisks, including the effects of changes in foreign currency exchange rates,interest rates and commodity prices. These financial exposures are activelymonitored and, where considered appropriate, managed by the Company.

 

**InterestRate Risk**

** **

The Company is subject to interest rate risk on bothvariable rate debt and its investments in auction rate securities. As ofOctober 31, 2007, the company is subject to interest rate risk on approximately$4.2 million of variable rate debt. A one-percentage point increase in theinterest rate would impact pre-tax earnings by approximately $42 thousand ifapplied to the total. As of October 31, 2007, the Company held $63.3 million ofshort-term investments, which consist of auction rate securities and variablerate demand obligations. A one-percentage point decrease in the rate of returnwould impact pre-tax earnings by approximately $0.6 million if applied to thetotal.

 

On July 10, 2003, the Company terminated the interest rate swap agreementin relation to $50.0 million of its outstanding 7.90% Senior Notes, whichmature on October 1, 2009. This termination resulted in a deferred gain ofapproximately $5.0 million, which is being amortized over the remaining term ofthe notes. As of October 31, 2007, there was $1.5 million remaining to beamortized.

 

**ForeignCurrency Risk**

** **

The Company uses foreign exchange forward contracts to hedge the impact offoreign currency fluctuations on foreign denominated inventory purchases,intercompany payables and certain foreign denominated loans. The Company doesnot hold or issue derivative financial instruments for trading purposes.

 

The Company has designated its forward exchange contracts on forecastedintercompany purchases and future purchase commitments as cash flow hedges and,as such, as long as the hedge remains effective and the underlying transactionremains probable, the effective portion of the changes in the fair value ofthese contracts will be recorded in Accumulated Other Comprehensive Income (“OCI”)until earnings are affected by the variability of the cash flows being hedged. Withregard to commitments for 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 of the costof the acquired asset. If a hedging instrument is sold or terminated prior tomaturity, gains and losses are deferred in accumulated OCI until the hedgeditem is settled. However, if the hedged item is no longer likely to occur, theresultant gain or loss on the terminated hedge is recognized into earningsimmediately. Amounts included in accumulated OCI at October 31, 2007 is anunrealized loss of $1.5 million (net of taxes) and are expected to betransferred into earnings within the next twelve months upon payment of theunderlying commitment.

 

The Company has designated its foreign currency forward contracts relatedto certain foreign denominated loans and intercompany payables as fair valuehedges. The gains or losses on the fair value hedges are recognized intoearnings and generally offset the transaction gains or losses in the foreigndenominated loans that they are intended to hedge.

 

For consolidated financial statement presentation, net cash flows fromsuch hedges are classified in the categories of the Condensed ConsolidatedStatement of Cash Flows with the items being hedged.

 

30

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The following table providesinformation about the Company’s foreign exchange forward contracts at October31, 2007:

 
| ** **                                                                | ** ** | **U.S. Dollar**     | ** ** | **Average**            | ** ** | **Unrealized**       | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|----------------------|------------|
| **(In thousands, except average contract rate)** | ** ** | **Notional Amount** | ** ** | **Contract Rate** | ** ** | **Gain (Loss)** | ** ** |
| Canadian Dollar                                                           |       | $                        | 11,425     |                   | 0.91       |                 | $          | (1,847 | ) |
| Euro                                                                      |       | 10,040                   |       | 1.36                   |       | (504                 | )          |
|                                                                      |       | $                        | 21,465     |                   |       |                 | $          | (2,351 | ) |

 

The foreign exchangecontracts outstanding have maturity dates through August 2008.

 

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**Item 4.** CONTROLS AND PROCEDURES

** **

(a) Evaluation of disclosure controls andprocedures.

 

Ourmanagement, with the participation of our principal executive officer and ourprincipal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Securities Exchange Act of 1934 (“ExchangeAct”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by thisquarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or15d-15. Based upon this evaluation, our principal executive officer and ourprincipal financial officer have concluded that our disclosure controls andprocedures are effective as of October 31, 2007.

 

(b) Changes in internal control over financialreporting.

 

Therehave been no changes in our internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 that occurred during the third quarter offiscal 2008 that has materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**Part II.  **OTHERINFORMATION

** **

**Item 1.  Legal Proceedings**

** **

None.

 

**Item 1A. RiskFactors**

 

There have been no changes to the risks described in the Company’s AnnualReport on Form 10-K for the fiscal year ended January 31, 2007 except asfollows:

 

Dependence on Key Corporate Management Personnel

 

Our success depends in part on the contributions of key corporatemanagement, including our Chairman and Chief Executive Officer, Robert B.Goergen, as well as members of the Office of the Chairman:  Robert H. Barghaus, Vice President and ChiefFinancial Officer; Robert B. Goergen Jr., Vice President of the Company and President,Multi-Channel Group; and Anne M. Butler, Vice President of the Company andPresident PartyLite Worldwide. We do not have employment contracts with any ofour key corporate management personnel, except the Chairman and Chief ExecutiveOfficer, nor do we maintain any key person life insurance policies. The loss ofany of the key corporate management personnel could have a material adverseeffect on us.

 

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

** **

The following table sets forth certain information concerning therepurchase of the Company’s Common Stock made by the Company during the thirdquarter of the fiscal year ending January 31, 2008.

 

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

##### ** **

| **Period**                                     | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b)  Average  Price Paid  per Share** | ** ** | **(c) Total  Number of  Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d) Maximum Number (or  Approximate Dollar  Value) of Shares that May  Yet Be Purchased Under  the Plans or Programs** | ** **       |
|------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------------|
| August 1, 2007 –    August 31, 2007       |       | 0                                           |       | —                                  |       | 0                                                                                               |       | 5,470,818 shares                                                                                                         |             |
| September 1,  2007 –   September 30, 2007 |       | 577,906                                     |       | $                                       | 20.84      |                                                                                            | 577,906    |                                                                                                                     | 4,892,912 shares |   |
| October 1, 2007 –    October 31, 2007     |       | 1,034,320                                   |       | $                                       | 19.76      |                                                                                            | 1,034,320  |                                                                                                                     | 3,858,592 shares |   |
| Total                                          |       | 1,612,226                                   |       | $                                       | 20.15      |                                                                                            | 1,612,226  |                                                                                                                     | 3,858,592 shares |   |

 

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(1) On September 10, 1998, the Company’s Board of Directors approvedthe Company’s share repurchase program (the “Repurchase Program”) pursuant towhich the Company was authorized to repurchase up to 1,000,000 shares of itsissued and outstanding Common Stock in open market transactions. On June 8,1999, the Company’s Board of Directors amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 1,000,000shares, from 1,000,000 to 2,000,000 shares. On March 30, 2000, the Company’sBoard of Directors further amended the Repurchase Program and increased thenumber of shares of Common Stock to be repurchased by 1,000,000 shares, from2,000,000 to 3,000,000 shares. On December 14, 2000, the Company’s Board ofDirectors further amended the Repurchase Program and increased the number ofshares of Common Stock to be repurchased by 1,000,000 shares, from 3,000,000 to4,000,000 shares. On April 4, 2002, the Company’s Board of Directors furtheramended the Repurchase Program and increased the number of shares of CommonStock to be repurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.On June 7, 2006, the Company’s Board of Directors further amended theRepurchase Program and increased the number of shares of common stockauthorized to be repurchased by 6,000,000 shares, from 6,000,000 shares to12,000,000 shares. As of October 31, 2007, the Company has purchased a total of8,141,408 shares of Common Stock under the Repurchase Program. The RepurchaseProgram does not have an expiration date. The Company intends to make furtherpurchases under the Repurchase Program from time to time.

 

**Item 3.  Defaultsupon Senior Securities**

** **

None

 

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

** **

None

 

**Item 5.  OtherInformation**

 

None

 

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**Item 6.  Exhibits**

** **

Exhibits

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

 

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**SIGNATURES**

** **

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

 

 
|   | BLYTH, INC.                                 |
|--------|---------------------------------------------|
|   |                                        |
|   |                                        |
| Date:  | December 7, 2007                            |   | By: | /s/ Robert B.  Goergen |   |
|   | Robert B.  Goergen                          |
|   | Chairman and  Chief Executive Officer       |
|   |                                        |
|   |                                        |
| Date:  | December 7, 2007                            |   | By: | /s/ Robert H.  Barghaus |   |
|   | Robert H.  Barghaus                         |
|   | Vice President  and Chief Financial Officer |

 

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