**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

| **(Mark One)**                                      | ** **                                                                                              |
|-----------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| **x**                                               | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended January 31, 2006** |
| **or**                                              |
| **o**                                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                   to                  **

**CommissionFile number 1-13026**

**BLYTH, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **36-2984916**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
| **One East Weaver Street**                |   |                 |
| **Greenwich,  Connecticut**               |   | **06831**            |
| (Address of principal  executive offices) |   | (Zip Code)           |

 

Registrant’s telephonenumber, including area code: (203) 661-1926

Securities registeredpursuant to Section 12(b) of the Act:

|                                          |   | **Name of  each exchange** |
|------------------------------------------|--------|----------------------------|
| **Title of  each class**                 |   | **on which  registered**   |
| Common Stock, par  value $0.02 per share |   | New York Stock  Exchange   |

 

Securities registeredpursuant to Section 12(g) of the Act: None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o   No þ

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o   No þ

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes þ   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. þ

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 ExchangeAct. (Check one):

| Large accelerated filer   þ |   | Accelerated filer   o |   | Non-accelerated  filer   o |
|--------------------------------------------|--------|---------------------------------|--------|--------------------------------------|

 

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

The aggregate market valueof the voting common equity held by non-affiliates of the registrant wasapproximately $776.9 million based on the closing price of the registrant’sCommon Stock on the New York Stock Exchange on July 31, 2005 and based onthe assumption, for purposes of this computation only, that all of theregistrant’s directors and executive officers are affiliates.

As of March 31, 2006,there were 40,994,644 outstanding shares of Common Stock.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portionsof the 2006 Proxy Statement for the Annual Meeting of Shareholders to be heldon June 7, 2006 (Incorporated into Part III).

 

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**TABLE OF CONTENTS**

|            |   | **PART I**                                                                                                 |   |   |
|------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.    |   | Business                                                                                                        |   | 3      |
| Item 1A.   |   | Risk Factors                                                                                                    |   | 8      |
| Item 1B.   |   | Unresolved Staff Comments                                                                                       |   | 10     |
| Item 2.    |   | Properties                                                                                                      |   | 11     |
| Item 3.    |   | Legal Proceedings                                                                                               |   | 12     |
| Item 4.    |   | Submission of Matters to a Vote of Security Holders                                                             |   | 12     |
| ** ** |   | **PART II**                                                                                                |   |   |
| Item 5.    |   | Market for Company’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 12     |
| Item 6.    |   | Selected Financial Data                                                                                         |   | 14     |
| Item 7.    |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                |   | 15     |
| Item 7A.   |   | Quantitative and Qualitative Disclosures about Market  Risk                                                     |   | 30     |
| Item 8.    |   | Financial Statements and Supplementary Data                                                                     |   | 32     |
| Item 9.    |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                      |   | 71     |
| Item 9A.   |   | Controls and Procedures                                                                                         |   | 71     |
| Item  9B.  |   | Other  Information                                                                                              |   | 74     |
| ** ** |   | **PART III**                                                                                               |   |   |
| Item 10.   |   | Directors and Executive Officers of the Registrant                                                              |   | 74     |
| Item 11.   |   | Executive Compensation                                                                                          |   | 74     |
| Item 12.   |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                 |   | 74     |
| Item 13.   |   | Certain Relationships and Related Transactions                                                                  |   | 74     |
| Item 14.   |   | Principal Accountant Fees and Services                                                                          |   | 74     |
|       |   | **PART IV**                                                                                                |   |   |
| Item 15.   |   | Exhibits and Financial Statement Schedules                                                                      |   | 75     |

 

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**PART I**

**Item 1.**                        Business

**(a)   GeneralDevelopment of Business**

Blyth, Inc. (togetherwith its subsidiaries, the “Company,” which may be referred to as “we,” “us” or“our”) is a Home Expressions company competing primarily in the home fragranceand decorative accessories industry. The Company designs, markets anddistributes an extensive array of candles, potpourri, decorative accessories,seasonal decorations and household convenience items, as well as tabletoplighting, accessories and chafing fuel for the Away From Home or foodservicetrade. The Company’s sales and operations take place primarily in the UnitedStates, Canada and Europe, with additional activity in Mexico, Australia andthe Far East.

Blyth was incorporated inthe state of Delaware in 1977 and became a publicly traded company in 1994, atwhich time net sales were approximately $157.5 million. Internal growth andacquisitions have contributed to significant overall growth since that time. Internalgrowth has been generated by increased sales of existing Home Expressionsproducts to consumers and retailers, the introduction of new products andproduct line extensions and geographic expansion. The Company has alsointegrated numerous acquisitions into its operations since its formation in1977.

In September 2005, weannounced our proposed intention to spin off the Wholesale segment to ourstockholders. We requested and received from the Internal Revenue Service aruling on the tax-free status for the transaction. We intend to evaluate additional strategicopportunities that have been identified since the announcement of the spin off.We have engaged outside consultants to advise us on potential opportunitieswithin the Wholesale segment, and we will likely focus on one or more of ourEuropean Wholesale businesses. Believing that substantial upside opportunitiesexist in the North American Wholesale business and having made significantinvestments in sales force integration and productivity, as well as new productdevelopment, we remain committed to the success of these and other initiativesdespite challenging market conditions impacting the Home Expressions industry.

Additional information isavailable on our website, *www.blyth.com*. TheCompany’s annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and any amendments thereto filed orfurnished pursuant to the Securities Exchange Act of 1934 are available on ourwebsite free of charge as soon as reasonably practicable following submissionto the SEC. Also available on the Company’s website are its CorporateGovernance Guidelines, its Code of Conduct, and the charters for its AuditCommittee, Compensation Committee, and Nominating and Corporate GovernanceCommittee, each of which is available in print to any shareholder who makes arequest to Blyth, Inc., One East Weaver Street, Greenwich, CT 06831,Attention: Secretary. The information posted to *www.blyth.com*,however, is not incorporated herein by reference and is not a part of thisAnnual Report on Form 10-K.

**(b)   FinancialInformation about Segments**

The Company reports itsfinancial results in three business segments: the Direct Selling segment, theWholesale segment and the Catalog & Internet segment. These segmentsaccounted for approximately 45%, 43% and 12% of consolidated net sales,respectively, for the fiscal year ended January 31, 2006. Financialinformation relating to these business segments for the years ended January 31,2004, 2005 and 2006 appears in Note 19 of the Company’s consolidated financialstatements and is incorporated herein by reference.

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**(c)   NarrativeDescription of Business**

**Direct SellingSegment**

In fiscal 2006, the DirectSelling segment represented approximately 45% of Blyth’s total sales. TheCompany’s principal Direct Selling business is PartyLite. PartyLiteâ brandproducts are marketed in North America, Europe and Australia through a networkof independent sales consultants using the party plan method of direct selling.These products are designed, manufactured or sourced, marketed and distributedand include fragranced and non-fragranced candles, bath products and a broadrange of related accessories.

In fiscal 2005, theCompany introduced a party plan company called Purple Tree, which is focused onthe craft industry, and, in fiscal 2006, the Company acquired a party plancompany called Two Sisters Gourmet, which is focused on gourmet food. These twobusinesses represent substantially less than 1% of total sales from the DirectSelling segment. In the future, the Company may pursue other direct sellingbusiness opportunities.

***United StatesMarket***

Within the United Statesmarket, PartyLite brand products are sold directly to consumers through anetwork of independent sales consultants. These consultants are compensated onthe basis of PartyLite product sales at parties organized by them and partiesorganized by consultants recruited by them. Over 27,000 independent salesconsultants located in the United States were selling PartyLite products at January 31,2006. PartyLite products are designed, packaged and priced in accordance withtheir premium quality, exclusivity and the distribution channel through whichthey are sold.

***InternationalMarket***

In fiscal 2006, PartyLiteproducts were sold internationally by more than 19,000 independent sales consultantslocated outside the United States. These consultants were the exclusivedistributors of PartyLite brand products internationally. The following werePartyLite’s international markets during fiscal 2006: Australia, Austria,Canada, Denmark, Finland, France, Germany, Mexico, Switzerland and the UnitedKingdom.

We support our independentsales consultants with inventory management and control and satisfy deliveryrequirements through on-line ordering, which is available to all independentsales consultants in the United States and Canada, as well as in most ofEurope.

**Wholesale Segment**

In fiscal 2006, thissegment represented approximately 43% of Blyth’s total sales. Productsdesigned, manufactured or sourced, marketed and distributed within this segmentinclude candles and other home fragrance products, a broad range ofcandle-related accessories, seasonal decorations such as ornaments, artificialtrees and trim, and home décor products such as picture frames, lamps andtextiles. In addition, chafing fuel and tabletop lighting products andaccessories for the Away From Home or foodservice trade are sold in thissegment. Our wholesale products are sold to more than 40,000 retailers inmultiple channels of distribution in North America and Europe under brand namesthat include Ambria®, Asp-Holmblad®(1), Carolina®, CBK®, ColonialTM(1), ColonialCandle of Cape Cod®, Colonial at HOME®, Edelman®, Euro-Decor®(1), Florasense®,Gies®(1), HandyFuelTM, KaemingkTM(2), Liljeholmens®, Seasons of Cannon Falls®,Sterno® and Triumph Tree®(1). Our wholesale products are designed, packaged andpriced to satisfy the varying demands of retailers and consumers within eachdistribution channel.

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(1)             Registered and sold outside the United States only.

(2)             Sold outside the United States only.

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***United States Market***

Products sold in theWholesale segment in the United States are marketed through the premium andmass consumer wholesale channels. Within these channels, our wholesale productsare sold to independent gift shops, specialty chains, department stores, foodand drug outlets, mass retailers, hotels, restaurants and independentfoodservice distributors through independent sales representatives, our keyaccount managers and our sales managers. Our sales force supports our customerswith product catalogs and samples, merchandising programs and selective fixtures.Our sales force also receives training on the marketing and proper use of ourproducts.

***International Market***

Products sold internationally in the Wholesale segmentare marketed to retailers in the premium and mass consumer wholesale channels,as well as to hotels, restaurants and independent foodservice distributorsthrough independent sales representatives and our sales managers. Customersinclude European mass merchants, garden centers, department and gift stores andfoodservice distributors.

Blyth’s international wholesale operations alsoinclude exports of products from the United States and various Europeancountries to Canada, Europe, Latin America and the Pacific Rim. Exportedproducts are sold through our sales managers and independent salesrepresentatives to premium and mass retailers, hotels, restaurants andindependent foodservice distributors. The Company may expand its internationalpresence through the establishment of additional non-U.S. based marketing anddistribution operations.

The Company effectivelysupports customers with inventory management and control and satisfies deliveryrequirements through various management ordering systems. The Company’sindependent sales representatives and sales managers in the premium wholesalechannel are supported by advanced sales tools to support showroom, road andtelephone sales efforts.

***Recent Dispositions***

In January 2006, wesold our Impact Plastics seasonal decorations business to the former owner ofthat business.

**Catalog & Internet Segment**

In fiscal 2006, thissegment represented approximately 12% of Blyth’s total sales. Blyth designs,markets and distributes a wide range of household convenience items,personalized gifts and photo storage products within this segment. Theseproducts are sold through the catalog and Internet distribution channel underbrand names that include Easy ComfortsTM, Exposures®, Home Marketplace®, MilesKimball® and Walter Drake®.

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**Product Brand Names**

The key brand names under which our Direct Sellingsegment products are sold are:

| PartyLite®               |
|-------------------------------|
| Well Being by PartyLiteTM |

 

The key brand names under which our Wholesale segmentproducts are sold are:

| Ambria®                       |   | Florasense®              |
|------------------------------------|--------|-------------------------------|
| Asp-Holmblad®                 |   | Gies®                    |
| Carolina®                     |   | HandyFuelTM               |
| CBK®                          |   | KaemingkTM                |
| ColonialTM                     |   | Liljeholmens®            |
| Colonial Candle of Cape  Cod® |   | Seasons of Cannon Falls® |
| Colonial at HOME®             |   | Sterno®                  |
| Edelman®                      |   | Triumph Tree®            |
| Euro-Decor®                   |   |                          |

 

The key brand names under which our Catalog &Internet segment products are sold are:

| Easy ComfortsTM    |
|------------------------|
| Exposures®        |
| Home Marketplace® |
| Miles Kimball®    |
| Walter Drake®     |

 

**New ProductDevelopment**

Concepts for new productsand product line extensions are directed to the marketing departments of ourbusiness units from within all areas of the Company, as well as from theCompany’s independent sales representatives and worldwide product manufacturingpartners. The new product development process may include technical research,consumer market research, fragrance studies, comparative analyses, theformulation of engineering specifications, feasibility studies, safetyassessments, testing and evaluation. New products typically account for atleast 40%****of our net sales in thefirst full year following their introduction.

**Manufacturing,Sourcing and Distribution**

In all of our business segments, management continuouslyworks to increase value and lower costs through increased efficiency inworldwide production, sourcing and distribution practices, the application ofnew technologies and process control systems, and consolidation andrationalization of equipment and facilities. Capital expenditures over the pastfive years have totaled $86.4 million and are targeted to technologicaladvancements or capital investments with short payback time frames. Managementhas also closed several facilities and written down the values of certainmachinery and equipment in recent years in response to changing marketconditions.

Blyth manufactures most ofits candles and sources nearly all of its other products. In fiscal 2006, Blythsourced approximately 65% of its products from independent manufacturers in thePacific Rim, Europe and Mexico. Blyth manufactures approximately 35% of itsproducts using highly automated processes and technologies, as well as certainhand crafting and finishing. Many of the Company’s products are manufactured byothers based on Blyth’s design specifications, making the Company’s globalsupply chain approach critically important to its new product developmentprocess, quality control and cost 

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management.Management has also built a network of stand-alone highly automateddistribution facilities in its core markets.

**Technological Advancements**

The Company continues tosee the benefit of its substantial investment in technological initiatives,particularly Internet-based ordering technology. An Internet-based order-entryand business management system is available to all PartyLite independent salesconsultants in the United States, Canada and most of Europe. By fiscal 2006year-end, show orders placed via the PartyLite Extranet had increased to over85% of total show orders in North America and over 40% of total show orders inEurope. The Extranet’s automated features eliminate errors common onhand-written paper forms and speed orders through processing and distribution,improving customer service. Furthermore, by easing the administrative workloadand providing tools with which to track sales and programs, the Extranet hashelped PartyLite independent sales consultants build their businesses moreefficiently. The improved accuracy of the automated system also results inadministrative savings for the Company.

**Customers**

Customers in the DirectSelling segment are individual consumers served by independent salesconsultants. Sales within the Catalog & Internet segment are also madedirectly to consumers. Blyth’s Wholesale segment customers include independentgift and department stores, garden centers, mass merchandisers, specialtychains, food and drug stores, foodservice distributors, hotels and restaurants.No single customer accounts for 10% or more of Blyth’s sales.

**Competition**

All of the Company’sbusiness segments are highly competitive both in terms of pricing and newproduct introductions. The worldwide market for Home Expressions products ishighly fragmented with numerous suppliers serving one or more of thedistribution channels served by the Company. In addition, the Company competesfor direct selling consultants with other direct selling companies. Becausethere are relatively low barriers to entry in all of Blyth’s business segments,the Company may face increased competition from other companies, some of whichmay have substantially greater financial or other resources than thoseavailable to Blyth. Competition includes companies selling candles manufacturedat low cost outside of the United States. Moreover, certain competitors focuson a single geographic or product market and attempt to gain or maintain marketshare solely on the basis of price.

**Employees**

As of January 31,2006, we had approximately 5,500 full-time employees, of whom approximately 29%are based outside of the United States. Approximately 75% of our employees arenon-salaried. Blyth does not have any unionized employees in the United States.Approximately 50 employees are represented by the IG Chemie labor union in ourGerman facility at Gies Kerzen and have a General Agreement in place with notermination period. A Wages Agreement is in place for a period of one year fromJuly 2005 until June 2006 and currently may be terminated by eitherparty at the end of that period. Approximately 40 employees are represented bythe Chemical Union in our manufacturing and distribution facility located inPromol, Portugal. The union contract has been terminated and the facility isapplying the general labor law. Liljeholmens, Sweden has approximately 70employees represented by the Industrifacket union, a manufacturing union, andthe SIF union, a management union. Both union agreements each have a three-yearterm (April 2004 to March 2007). Management believes that relationswith the Company’s employees are good. Since its formation in 1977, Blyth hasnever experienced a work stoppage.

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**Raw Materials**

All of the raw materialsused by Blyth for its candles, home fragrance products and chafing fuel,principally petroleum-based wax, fragrance, glass containers and corrugate,have historically been available in adequate supply from multiple sources. Infiscal 2006, substantial cost increases for certain raw materials, such asparaffin, dyethelene glycol (DEG) and ethanol, as well as aluminum and paper,negatively impacted profitability of certain products in all three segments.

**Seasonality**

Our business is highlyseasonal, and our net sales are strongest in the third and fourth fiscalquarters due to increased shipments to meet year-end holiday season demand forour products. For additional information, see “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Seasonality.”

**Trademarks and Patents**

The Company owns and haspending numerous trademark and patent registrations and applications in theUnited States Patent and Trademark Office related to its products. Blyth alsoregisters certain trademarks and patents in other countries. While managementregards these trademarks and patents as valuable assets to its business, theCompany is not dependent on any single trademark or patent or group thereof.

**Environmental Law Compliance**

Most of the Company’smanufacturing, distribution and research operations are affected by federal,state, local and international environmental laws relating to the discharge ofmaterials or otherwise to the protection of the environment. Management hasmade and intends to continue to make expenditures necessary to comply withapplicable environmental laws and does not believe that such expenditures willhave a material effect on the Company’s capital expenditures, earnings orcompetitive position.

**(d)**   FinancialInformation about Geographic Areas

For information on netsales from external customers attributed to the United States and foreigncountries and on long-lived assets located in the United States and outside theUnited States, see Note 19 of Notes to Consolidated Financial Statements.

**Item 1A.**                RiskFactors

**Riskof Inability to Maintain Growth Rate**

The Company has experienced significant sales growthin past years. While management expects continued growth, Blyth’s future growthrate will likely be less than its historical growth rate. The Company expectsfaster sales growth in its international market versus its United States market.The Company’s ability to increase sales depends on numerous factors, includingmarket acceptance of existing products, the successful introduction of newproducts, growth of consumer discretionary spending, the ability to recruit newindependent sales consultants, sourcing of raw materials and demand-drivenincreases in production and distribution capacity. Business in all of Blyth’ssegments is driven by consumer preferences. Accordingly, there can be noassurances that the Company’s current or future products will maintain orachieve market acceptance. Blyth’s sales and earnings results can be negativelyimpacted by the worldwide economic environment, particularly the United States,Canadian and European economies. There can be no assurances that the Company’sfinancial results will not be materially adversely affected by these factors inthe future.

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The Company’s historicalgrowth has been due in part to acquisitions, and management continues toconsider additional strategic acquisitions. There can be no assurances thatmanagement will continue to identify suitable acquisition candidates,consummate acquisitions on terms favorable to the Company, finance acquisitionsor successfully integrate acquired operations.

**RisksAssociated With International Sales and Foreign-Sourced Products**

Blyth’s internationalsales growth rate has outpaced that of its United States growth rate in recentyears. Moreover, the Company sources a portion of its products in all of itsbusiness segments from independent manufacturers in the Pacific Rim, Europe andMexico. For these reasons, Blyth is subject to the following risks associatedwith international manufacturing and sales: fluctuations in currency exchange rates, economic or politicalinstability, international public health crises, transportation costs anddelays, difficulty in maintaining quality control, restrictive governmentalactions, nationalizations, the laws and policies of the United States, Canadaand certain European countries affecting the importation of goods (includingduties, quotas and taxes) and the trade and tax laws of other nations.

**Abilityto Respond to Increased Product Demand**

The Company’s ability tomeet future product demand in all of its business segments will depend upon itssuccess in: sourcing adequate supplies of its products; bringing new productionand distribution capacity on line in a timely manner; improving its ability toforecast product demand and fulfill customer orders promptly; improvingcustomer service-oriented management information systems; and training,motivating and managing new employees. The failure of any of the above couldresult in a material adverse effect on Blyth’s financial results.

**Risk of Shortages of Raw Materials**

Certain raw materialscould be in short supply due to price changes, capacity, availability, a changein requirements, weather or other factors, including supply disruptions due toproduction or transportation delays. Such shortages have not had and are notpresently expected to have a material adverse effect on the Company’soperations. While the price of crude oil is only one of several factorsimpacting the price of petroleum wax, it is possible that recent fluctuationsin oil prices may have a material adverse affect on the cost of petroleum-basedproducts used in the manufacture or transportation of our products,particularly in the Direct Selling and Wholesale business segments.

**Dependenceon Key Corporate Management Personnel**

Blyth’s success depends inpart on the contributions of key corporate management, including its Chairmanand Chief Executive Officer, Robert B. Goergen, as well as the members of theOffice of the Chairman: Robert H. Barghaus, Vice President and Chief FinancialOfficer; Bruce G. Crain, Senior Vice President and President, Wholesale Group;Robert B. Goergen, Jr., Vice President and President, Catalog &Internet Group; and Frank P. Mineo, Senior Vice President and President, DirectSelling Group. The Company does not have employment contracts with any of itskey corporate management personnel except the Chairman and Chief ExecutiveOfficer, nor does it maintain any key person life insurance policies. The lossof any of the key corporate management personnel could have a material adverseeffect on the Company.

**Risk of Increased Competition**

Blyth’s business is highlycompetitive both in terms of pricing and new product introductions. Theworldwide market for Home Expressions products is highly fragmented withnumerous suppliers serving one or more of the distribution channels served bythe Company. In addition, the Company competes for 

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directselling consultants with other direct selling companies. Because there arerelatively low barriers to entry in all of Blyth’s business segments, theCompany may face increased competition from other companies, some of which mayhave substantially greater financial or other resources than those available toBlyth. Competition includes companies selling candles manufactured at low costoutside of the United States. Moreover, certain competitors focus on a singlegeographic or product market and attempt to gain or maintain market sharesolely on the basis of price.

**RisksRelated to Information Technology Systems**

Blyth’s informationtechnology systems are dependent on global communications providers, telephonesystems, hardware, software and other aspects of Internet infrastructure thathave experienced significant system failures and outages in the past. Blyth’ssystems are susceptible to outages due to fire, floods, power loss,telecommunications failures, break-ins and similar events. Despite theimplementation of network security measures, our systems are vulnerable tocomputer viruses, break-ins and similar disruptions from unauthorized tamperingwith our systems. The occurrence of these or other events could disrupt ordamage our information technology systems and inhibit internal operations, theability to provide customer service or the ability of customers or salespersonnel to access our information systems.

**Item 1B.**               UnresolvedStaff Comments.

None.

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**Item 2.**                        Properties

Thefollowing table sets forth the location and approximate square footage of the Company’smajor manufacturing and distribution facilities:

| ** **                      | ** ** | ** **                              | ** ** | ** **                   | ** ** | **Approximate Square Feet** |
|---------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|-----------------------------|
| **Location**                    | ** ** | ** **                              | ** ** | **Use**                      | ** ** | **Business Segment**        | ** ** | **Owned** | ** ** | **Leased** |
| Aalten, Netherlands             |       | Distribution                            |       | Wholesale                    |       | 227,552                     |   | 324,522 |
| Almere-De Vaart, Netherlands(3) |       | Distribution                            |       | Wholesale                    |       | 132,077                     |   | — |
| Arndell Park, Australia         |       | Distribution                            |       | Direct Selling               |       | —                      |   | 18,535 |
| Batavia, Illinois               |       | Manufacturing and                       |       | Direct Selling and           |       | 486,000                     |   | — |
|                            |       | Research &                     |       | Wholesale                    |       |                        |   |   |
|                            |       | Development                             |       |                         |       |                        |   |   |
| Caldas da Rainha,  Portugal     |       | Manufacturing and                       |       | Wholesale                    |       | 230,000                     |   | — |
|                            |       | related distribution                    |       |                         |       |                        |   |   |
| Cannon Falls, Minnesota         |       | Distribution                            |       | Wholesale                    |       | —                      |   | 192,000 |
| Carol Stream, Illinois          |       | Distribution                            |       | Direct Selling               |       | —                      |   | 651,000 |
| Cumbria, England(4)             |       | Manufacturing and                       |       | Direct Selling and           |       | 223,000                     |   | 70,000 |
|                            |       | related distribution                    |       | Wholesale                    |       |                        |   |   |
| Elkin, North Carolina           |       | Manufacturing and                       |       | Wholesale                    |       | 699,000                     |   | — |
|                            |       | related distribution                    |       |                         |       |                        |   |   |
| Glinde, Germany                 |       | Manufacturing and  related distribution |       | Wholesale                    |       | 172,000                     |   | — |
| Heidelberg, Germany             |       | Distribution                            |       | Direct Selling               |       | —                      |   | 6,000 |
| Jacksonville, Florida           |       | Roasting, packaging                     |       | Catalog &  Internet |       | —                      |   | 16,826 |
|                            |       | and distribution                        |       |                         |       |                        |   |   |
| Memphis, Tennessee              |       | Distribution                            |       | Wholesale                    |       | —                      |   | 414,960 |
| Monterrey, Mexico               |       | Distribution                            |       | Direct Selling               |       | —                      |   | 45,000 |
| Montfoort, Netherlands          |       | Distribution                            |       | Wholesale                    |       | —                      |   | 204,521 |
| Ontario, Canada                 |       | Distribution                            |       | Direct Selling               |       | —                      |   | 25,000 |
| Orlando, Florida                |       | Warehouse and                           |       | Direct Selling               |       | —                      |   | 14,048 |
|                            |       | distribution                            |       |                         |       |                        |   |   |
| Oshkosh, Wisconsin              |       | Distribution                            |       | Catalog & Internet  |       | —                      |   | 386,000 |
| Oskarshamm, Sweden              |       | Manufacturing and                       |       | Wholesale                    |       | —                      |   | 122,000 |
|                            |       | related distribution                    |       |                         |       |                        |   |   |
| Plymouth, Massachusetts         |       | Distribution                            |       | Direct Selling               |       | 59,000                      |   | — |
| Reeuwijk, Netherlands           |       | Distribution                            |       | Wholesale                    |       | 59,203                      |   | 204,521 |
| Tampa, Florida                  |       | Warehouse and                           |       | Direct Selling               |       | —                      |   | 12,000 |
|                            |       | distribution                            |       |                         |       |                        |   |   |
| Texarkana, Texas                |       | Manufacturing and                       |       | Wholesale                    |       | 154,000                     |   | 65,000 |
|                            |       | related distribution                    |       |                         |       |                        |   |   |
| Tilburg, Netherlands            |       | Distribution                            |       | Direct Selling               |       | 327,000                     |   | — |
| Tijuana, Mexico                 |       | Manufacturing                           |       | Wholesale                    |       | —                      |   | 201,000 |
| Union City, Tennessee           |       | Distribution                            |       | Wholesale                    |       | 360,000                     |   | 90,350 |
|                                 |            |                                         |            |                              |            |                             |  |  |  |  |

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(3)             Measured in square meters.

(4)             Represents four separate facilities asfollows: 60,000 square feet, 73,000 square feet and 70,000 square feet used byColony Gifts Corporation Limited; 90,000 square feet used by PartyLiteManufacturing Limited.

The Company’s executiveoffices, administrative offices and outlet stores are generally located inleased space (except for certain offices located in owned space).

11

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**Item 3.**                        LegalProceedings

The Company is involved inlitigation arising in the ordinary course of its business. In the opinion ofthe Company’s management, existing litigation will not have a material adverseeffect on the Company’s financial position or results of operations.

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

None

**PART II**

**Item 5.**                        Marketfor the Company’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

OurCommon Stock is traded on the New York Stock Exchange under the symbol BTH. Theprice range for the Company’s Common Stock on the New York Stock Exchange asreported by the New York Stock Exchange was as follows:

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fiscal 2005    |       |     |       |    |       |
| First Quarter  |       | $        | 34.51      |    | $          | 31.28 |   |
| Second Quarter |       | 36.00    |       | 30.46   |       |
| Third Quarter  |       | 35.51    |       | 28.43   |       |
| Fourth Quarter |       | 32.72    |       | 27.80   |       |
| Fiscal 2006    |       |     |       |    |       |
| First Quarter  |       | $        | 33.84      |    | $          | 26.80 |   |
| Second Quarter |       | 29.60    |       | 27.24   |       |
| Third Quarter  |       | 28.48    |       | 17.70   |       |
| Fourth Quarter |       | 23.68    |       | 17.95   |       |

 

As of March 31, 2006, there were 1,921 registeredholders of record of the Company’s Common Stock.

On April 4, 2006, the Company’s Board ofDirectors declared a regular semi-annual cash dividend in the amount of $0.23per share of Common Stock payable in the second quarter of fiscal 2007. Duringfiscal 2006 and 2005, the Company’s Board of Directors declared dividends asfollows: $0.21 per share of Common Stock payable in the second quarter offiscal 2006; $0.23 per share of Common Stock payable in the fourth quarter offiscal 2006; $0.17 per share of Common Stock payable in the second quarter ofthe fiscal 2005; $0.19 per share of Common Stock payable in the fourth quarterof fiscal 2005. Currently, the Company expects to pay comparable cash dividendsin the future.

12

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The following table setsforth, for the equity compensation plan categories listed below, information asof January 31, 2006:

**EQUITYCOMPENSATION PLAN INFORMATION**

| **Plan Category**                                      | ** ** | ** ** | ** ** | **(a)  Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights(1)** | ** ** | **(b)  Weighted-average  exercise price of   outstanding options,  warrants and rights(1)** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       |       | 1,236,400  |                                                                                                                                                         |       |                                                                                                                      | $          | 26.12                                                                                                                                                                                                                 |       |   |   | 2,137,126 |   |   |
| Equity compensation  plans not approved by security holders |       |       | —     |                                                                                                                                                         |       |                                                                                                                      | —     |                                                                                                                                                                                                                  |       |   | — |   |   |
| Total.                                                      |       |       | 1,236,400  |                                                                                                                                                         |       |                                                                                                                      | $          | 26.12                                                                                                                                                                                                                 |       |   |   | 2,137,126 |   |   |

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(1)    The information in this column excludes 13,000 sharesof restricted stock and 61,475 restricted stock units outstanding as of January 31,2006.

The following table setsforth certain information concerning the repurchase of the Company’s CommonStock made by the Company during the fourth quarter of the fiscal year ended January 31,2006.

**ISSUERPURCHASES OF EQUITY SECURITIES(1)**

| Period                                              | ** ** | ** ** | ** ** | **(a)  Total Number  of Shares  Purchased** | ** ** | **(b)  Average Price  Paid per Share** | ** ** | **(c)  Total Number of  Shares Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **(d)  Maximum Number  (or Approximate Dollar  Value) of Shares that  May Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1                                            |       |       |       |                                                  |       |                                                  |       |                                                                                                                                  |       |                                                                                                                                                                                   |       |   |   |   |   |   |   |
| November 1, 2005–  November 30, 2005 |       |       | 0          |                                                  |       |                                                  | —     |                                                                                                                                  |       |                                                                                                                                                                                   | 0          |   |   |   | 1,373,200 shares |   |   |
| Month #2                                            |       |       |       |                                                  |       |                                                  |       |                                                                                                                                  |       |                                                                                                                                                                                   |       |   |   |   |   |   |   |
| December 1, 2005–  December 31, 2005 |       |       | 0          |                                                  |       |                                                  | —     |                                                                                                                                  |       |                                                                                                                                                                                   | 0          |   |   |   | 1,373,200 shares |   |   |
| Month #3                                            |       |       |       |                                                  |       |                                                  |       |                                                                                                                                  |       |                                                                                                                                                                                   |       |   |   |   |   |   |   |
| January 1, 2006–  January 31, 2006   |       |       | 0          |                                                  |       |                                                  | —     |                                                                                                                                  |       |                                                                                                                                                                                   | 0          |   |   |   | 1,373,200 shares |   |   |
| Total                                               |       |       | 0          |                                                  |       |                                                  | —     |                                                                                                                                  |       |                                                                                                                                                                                   | 0          |   |   |   | 1,373,200 shares |   |   |

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(1)    On September 10, 1998, the Company’s Board ofDirectors approved the Company’s share repurchase program (the “RepurchaseProgram”) pursuant to which the Company was authorized to repurchase up to1,000,000 shares of its issued and outstanding Common Stock in open markettransactions. On June 8, 1999, the Company’s Board of Directors amendedthe Repurchase Program and increased the number of shares of Common Stock to berepurchased by 1,000,000 shares, from 1,000,000 to 2,000,000 shares. On March 30,2000, the Company’s Board of Directors further amended the Repurchase Programand increased the number of shares of Common Stock to be repurchased by1,000,000 shares, from 2,000,000 to 3,000,000 shares. On December 14,2000, the Company’s Board of Directors further amended the Repurchase Programand increased the number of shares of Common Stock to be repurchased by1,000,000 shares, from 3,000,000 to 4,000,000 shares. On April 4, 2002,the Company’s Board of Directors further amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 2,000,000shares, from 4,000,000 to 6,000,000 shares. As of January 31, 2006, theCompany has purchased a total of 4,626,800 shares of Common Stock under theRepurchase Program. The Repurchase Program does not have an expiration date. TheCompany intends to make further purchases under the Repurchase Program fromtime to time.

13

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**Item 6.   SelectedConsolidated Financial Data**

Setforth below are selected summary consolidated financial and operating data ofthe Company for fiscal years 2002 through 2006, which have been derived fromour audited financial statements for those years. The information presentedbelow should be read in conjunction with “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and our consolidated financialstatements, including the notes thereto, appearing elsewhere in this AnnualReport on Form 10-K.

| ** **                                                                                        | ** ** | **Year ended January 31,**                                                | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2002**                                                                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands, except per share and percent data)** | ** ** |
| **Statement of Earnings Data:(1)**                                                                | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                                         |       | $                                                                                        | 1,178,771  |   | $ | 1,288,583 |   | $ | 1,505,573 |   | $ | 1,586,297 | ** ** | **$** | **1,573,076** | ** ** |
| Gross profit                                                                                      |       | 577,005                                                                                  |       | 640,302 |   | 723,675 |   | 771,680 | ** ** | **713,266** | ** ** |
| Operating profit                                                                                  |       | 120,490                                                                                  |       | 155,517 |   | 153,077 |   | 169,330 | ** ** | **56,172** | ** ** |
| Interest expense                                                                                  |       | 17,237                                                                                   |       | 14,664 |   | 17,443 |   | 22,138 | ** ** | **23,701** | ** ** |
| Earnings before income taxes, minority interest and  cumulative effect of accounting change(2)(4) |       | 108,289                                                                                  |       | 142,557 |   | 136,893 |   | 149,076 | ** ** | **32,027** | ** ** |
| Earnings before minority interest and cumulative  effect of accounting change                     |       | 68,006                                                                                   |       | 89,525 |   | 86,516 |   | 96,154 | ** ** | **24,252** | ** ** |
| Net earnings(3)                                                                                   |       | 68,006                                                                                   |       | 57,772 |   | 86,351 |   | 96,514 | ** ** | **24,857** | ** ** |
| Basic net earnings per common share before cumulative  effect of accounting change                |       | $                                                                                        | 1.45       |   | $ | 1.94 |   | $ | 1.89 |   | $ | 2.24 | ** ** | **$** | **0.61** | ** ** |
| Cumulative effect of accounting  change(3)                                                        |       | —                                                                                   |       | (0.69 | ) | — |   | — | ** ** | **—** | ** ** |
|                                                                                              |       | $                                                                                        | 1.45       |   | $ | 1.25 |   | $ | 1.89 | ** ** | $ | 2.24 | ** ** | **$** | **0.61** | ** ** |
| Diluted net earnings per common share before  cumulative effect of accounting change              |       | $                                                                                        | 1.44       |   | $ | 1.92 |   | $ | 1.88 |   | $ | 2.22 | ** ** | **$** | **0.60** | ** ** |
| Cumulative effect of accounting  change(3)                                                        |       | —                                                                                   |       | (0.68 | ) | — |   | — | ** ** | **—** | ** ** |
|                                                                                              |       | $                                                                                        | 1.44       |   | $ | 1.24 |   | $ | 1.88 | ** ** | $ | 2.22 | ** ** | **$** | **0.60** | ** ** |
| Cash dividends paid, per share                                                                    |       | $                                                                                        | 0.20       |   | $ | 0.22 |   | $ | 0.28 |   | $ | 0.36 | ** ** | **$** | **0.44** | ** ** |
| Basic weighted average number of common shares  outstanding                                       |       | 47,056                                                                                   |       | 46,256 |   | 45,771 |   | 43,136 | ** ** | **40,956** | ** ** |
| Diluted weighted average number of common shares  outstanding                                     |       | 47,205                                                                                   |       | 46,515 |   | 46,027 |   | 43,556 | ** ** | **41,176** | ** ** |
| **Operating Data:**                                                                               | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross profit margin                                                                               |       | 48.9                                                                                     | %          | 49.7 | % | 48.1 | % | 48.6 | % | **45.3** | **%** |
| Operating profit margin                                                                           |       | 10.2                                                                                     | %          | 12.1 | % | 10.2 | % | 10.7 | % | **3.6** | **%** |
| Capital expenditures                                                                              |       | $                                                                                        | 11,901     |   | $ | 14,322 |   | $ | 21,963 |   | $ | 20,976 | ** ** | **$** | **17,272** | ** ** |
| Depreciation and amortization                                                                     |       | 36,246                                                                                   |       | 30,212 |   | 35,954 |   | 35,600 | ** ** | **35,875** | ** ** |
| **Balance Sheet Data:**                                                                           | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                                                                                   |       | $                                                                                        | 285,771    |   | $ | 324,060 |   | $ | 400,540 |   | $ | 312,172 | ** ** | **$** | **439,141** | ** ** |
| Total assets                                                                                      |       | 804,781                                                                                  |       | 860,084 |   | 1,127,963 |   | 1,075,820 | ** ** | **1,116,520** | ** ** |
| Total debt                                                                                        |       | 191,701                                                                                  |       | 176,493 |   | 293,886 |   | 287,875 | ** ** | **371,742** | ** ** |
| Total  stockholders’ equity                                                                  |       | 468,063                                                                                  |       | 507,852 |   | 588,970 |   | 521,349 | ** ** | **493,824** | ** ** |

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(1)             Statement of Earnings Data includes theresults of operations for periods subsequent to the respective purchaseacquisitions of Midwest of Cannon Falls, Inc. acquired in April 2001,CBK, Ltd., LLC (now CBK Styles, Inc.) acquired in May 2002, MilesKimball Company acquired in April 2003, Kaemingk B.V. acquired in June 2003,Walter Drake acquired in December 2003 and Edelman B.V. and Euro-DecorB.V. acquired in September 2004, none of which individually had a materialeffect on the Company’s results of operations in the period during which theyoccurred, or thereafter.

(2)             Fiscal 2002 pre-tax earnings includerestructuring and impairment charges of approximately $14.1 million related toclosure of the Company’s 62nd Street Chicago facility, other rationalizationof the North American consumer wholesale business and certain changes in theEuropean sector. Fiscal 2002 pre-tax earnings also include approximately $6.3million and $5.0 million in charges to cost of sales for inventory revaluationsrelated to the U.S. mass market and other marketplace conditions impactingrealizable value of obsolete inventory. Fiscal 2003 pre-tax earnings include animpairment charge of $2.6 million as a result of putting Wax Lyrical intoreceivership. Fiscal 2004 pre-tax earnings include restructuring and impairmentcharges of $23.8 million related to manufacturing equipment impairment, closureof the Company’s Hyannis manufacturing facility, the discontinuance of theCanterbury® brand, and the closure of five of the Company’s candle outletstores.

(3)             The Company recorded a one-time cumulativeeffect of accounting change in February 2002 to reflect the adoption ofSFAS No. 142, “Goodwill and Other Intangible Assets”.

(4)             Fiscal 2006 pre-tax earnings include a goodwillimpairment charge of $53.3 million in the Wholesale segment. (See Note 9 to theConsolidated Financial Statements).

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**Item   7.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

The financial and businessanalysis below provides information that we believe is relevant to anassessment and understanding of our consolidated financial condition, changesin financial condition and results of operations. This financial and businessanalysis should be read in conjunction with our consolidated financialstatements and accompanying notes to the consolidated financial statements setforth in Item 8. below.

**Overview**

Blyth is a designer andmarketer of home fragrance products and accessories, home décor, seasonaldecorations, household convenience items, personalized gifts and products forthe foodservice trade. We compete in the global Home Expressions industry, andour products can be found throughout North America, Europe and Australia. Ourfinancial results are reported in three segments - the Direct Selling segment,the Wholesale segment and the Catalog & Internet segment. Thesereportable segments are based on similarities in distribution channels,customers and management oversight.

Today, on an annualizednet sales basis considering the full year impact of recent acquisitions, Blythis comprised of an approximately $700 million Direct Selling business, anapproximately $700 million Wholesale business and an approximately $200 millionCatalog and Internet business. Sales and earnings growth differ in each segmentdepending on geographic location, market penetration, our relative market shareand product and marketing execution, among other business factors. Over thelong term, all three segments should experience single-digit growth, mostlikely within the low to mid-single digit range, again depending on thebusiness factors previously noted.

Our current focus isdriving sales growth of our brands so we may leverage more fully ourinfrastructure. New product development continues to be critical to all threesegments of our business. In the Direct Selling segment, monthly sales andproductivity incentives are designed to attract, retain and increase theearnings opportunity of independent sales consultants. As part of our strategyto invest in strategic initiatives in the Direct Selling segment, we havedeveloped Purple Tree, a new party plan company, which markets crafts. Inaddition we completed the acquisition of a small gourmet food company, TwoSisters Gourmet, which also markets its products through the Direct Sellingchannel. In the Wholesale segment, we have numerous collaborative initiativesunderway, which we believe will help drive sales and leverage the sales andmarketing talents across this segment. These initiatives include customerinformation sharing and leveraging our in-house sales forces, as well asongoing global sourcing objectives and other organic strategic initiatives intowhich we are investing resources. We entered the Catalog and Internet channelof direct-to-consumer distribution in 2003, giving us a presence in all of ourdesired channels. Our most recent acquisition, Boca Java, a small gourmetcoffee and tea company, was in this segment.

**Recent Developments**

In September 2005,the Company announced its proposed intention to spin off the Wholesale segmentto its stockholders. The Company requested and received from the InternalRevenue Service a ruling on the tax-free status for the transaction. Management intends to evaluateadditional strategic opportunities that have been identified since theannouncement of the spin off, has engaged outside consultants to advise it onstrategic alternatives within the Wholesale segment and will likely focus onone or more of its European Wholesale businesses, believing that substantialupside opportunities exist in the North American Wholesale business despite challengingmarket conditions impacting the Home Expressions industry.

**Segments**

Within the Direct Sellingsegment, the Company designs, manufactures or sources, markets and distributesan extensive line of products including scented candles, candle-relatedaccessories, fragranced bath gels and body lotions and other fragrancedproducts under the PartyLite® brand. The Company also 

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operatestwo small Direct Selling businesses, Purple Tree and Two Sisters Gourmet. Alldirect selling products are sold directly to the consumer through a network ofindependent sales consultants using the party plan method of direct selling. PartyLite®brand products are sold in North America, Europe and Australia. Purple TreeTMand Two Sisters GourmetTM brand products are sold in North America.

Within the Wholesalesegment, the Company designs, manufactures or sources, markets and distributesan extensive line of home fragrance products, candle-related accessories,seasonal decorations such as ornaments, artificial trees and trim, and homedécor products such as picture frames, lamps and textiles. Products in thissegment are sold in North America and Europe to retailers in the premium,specialty and mass channels under the CBK®, Carolina®, ColonialTM(1), ColonialCandle of Cape Cod®, Colonial at HOMEâ,Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), KaemingkTM(2), Liljeholmens®,Seasons of Cannon Falls® and Triumph Tree®(1) brands. In addition, chafing fueland tabletop lighting products and accessories for the Away From Home orfoodservice trade are sold through this segment under the Ambria®, FilterMate®,HandyFuelTM and Sterno® brands.

Within the Catalog &Internet segment, the Company designs, sources and markets a broad range ofhousehold convenience items, premium photo albums, frames, holiday cards,personalized gifts, kitchen accessories and gourmet coffee and tea. Theseproducts are sold directly to the consumer under the Boca JavaTM, EasyComfortsTM, Exposuresâ, HomeMarketplace®, Miles Kimballâ and Walter Drakeâbrands. These products are sold in North America.

Thefollowing table sets forth, for the periods indicated, the percentagerelationship to net sales and the percentage increase or decrease of certainitems included in the Company’s Consolidated Statements of Earnings:

| ** **          | ** ** | ** **                                                                        | ** ** | ** **                                     | ** ** | ** **                                     | ** ** | **Percentage Increase  (Decrease)  from Prior Period** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **          | ** ** | **Percentage of Net Sales  Years Ended January 31** | ** ** | **Fiscal 2005  Compared  to Fiscal** | ** ** | **Fiscal 2006  Compared  to Fiscal** | ** ** |
| ** **          | ** ** | **2004**                                                                          | ** ** | **2005**                                       | ** ** | **2006**                                       | ** ** | **2004**                                                              | ** ** | **2005** | ** ** |
| Net sales           |       | 100.0                                                                             |       | 100.0                                          |       | 100.0                                          |       |                                                                  | 5.4        |   |   |   | (0.8 | ) |   |
| Cost of goods  sold |       | 51.9                                                                              |       | 51.4                                           |       | 54.7                                           |       |                                                                  | 4.2        |   |   |   | 5.5 |   |   |
| Gross profit        |       | 48.1                                                                              |       | 48.6                                           |       | 45.3                                           |       |                                                                  | 6.6        |   |   |   | (7.6 | ) |   |
| Selling             |       | 27.7                                                                              |       | 28.9                                           |       | 29.0                                           |       |                                                                  | 9.8        |   |   |   | (0.7 | ) |   |
| Administrative      |       | 8.6                                                                               |       | 9.1                                            |       | 9.4                                            |       |                                                                  | 11.3       |   |   |   | 3.2 |   |   |
| Operating profit    |       | 10.2                                                                              |       | 10.7                                           |       | 3.6                                            |       |                                                                  | 10.6       |   |   |   | (66.8 | ) |   |
| Net earnings        |       | 5.7                                                                               |       | 6.1                                            |       | 1.6                                            |       |                                                                  | 11.8       |   |   |   | (74.2 | ) |   |

 

**Fiscal2006 Compared to Fiscal 2005**

Net sales decreased $13.2million, or approximately 1%, from $1,586.3 million in fiscal 2005 to $1,573.1million in fiscal 2006. Management believes that a significant increase inparty plan competition within the Direct Selling channel in the United Statesand a weak North American and European consumer environment were exacerbated byhigh energy prices, which negatively impacted our ability to generate salesgrowth throughout fiscal 2006.

**Net Sales—Direct Selling Segment**

Netsales in the Direct Selling segment decreased $31.8 million, or 4%, from $735.9million in fiscal 2005 to $704.1 million in fiscal 2006. PartyLite’s U.S. salesdecreased approximately 11% compared to the prior year, which includes the $5.5million benefit of the reversal of a contingent reserve related to a settlementof a state unclaimed property matter. Management believes that sales in theU.S. market continue to be negatively impacted by increased competition forhostesses and party guests in the Direct 

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(1)             Colonial, Euro-Decor, Gies and TriumphTree trademarks are registered and sold only outside the United States.

(2)             Kaemingk is sold only outside the UnitedStates.

16

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Selling channel. Inaddition, we believe PartyLite’s U.S. operations were negatively impacted by reducedconsumer discretionary income, resulting from higher energy prices.

PartyLite Canada reportedan approximately 13% increase versus the prior year in U.S. dollars. Sales inCanada increased due to a higher number of guests per show and shows perconsultant.

In PartyLite’s Europeanmarkets, sales increased approximately 4% in U.S. dollars, driven by strongsales in the newer markets*.*PartyLiteEurope now represents approximately 32% of PartyLite’s worldwide net sales.

Net sales in the DirectSelling segment represented approximately 45% of total Blyth sales in fiscal2006 compared to 46% in fiscal 2005.

**Net Sales—Wholesale Segment**

Net sales in the Wholesalesegment increased  $24.7 million, or 4%,from $656.9 million in fiscal 2005 to $681.6 million in fiscal 2006. Theprimary reason for this increase was the acquisitions of Edelman and Euro-Decorin September 2004, which contributed an increase in net sales of $59.2million to the segment. This increase was partially offset by sales declines inmost of the other Wholesale businesses, which the Company believes was causedby a reluctance of retailers to make significant purchases in response to thelower level of consumer spending.

In North America, theWholesale segment experienced a sales decline of approximately 4% versus theprior year. This sales decrease was a result of lower sales in home décor andpremium fragrance candle products, which was partially offset by increasedsales of mass channel home fragrance products.

In Europe, the Wholesalesegment experienced a sales increase of approximately 12% in fiscal 2006 versusfiscal 2005, due to the acquisitions of Edelman and Euro-Decor.

Net sales in the Wholesalesegment represented approximately 43% of total Blyth sales in fiscal 2006compared to 42% in fiscal 2005.

**Net Sales—Catalog &Internet Segment**

Net sales in the Catalog &Internet segment decreased $6.2 million, or 3%, from $193.5 million in fiscal2005 to $187.3 million in fiscal 2006. This decline from last year wasattributable to sales shortfalls in our primary catalogs, which the Companybelieves was due to decreased consumer discretionary spending.

Net sales in the Catalog &Internet segment accounted for approximately 12% of Blyth’s total net sales infiscal 2006 and in fiscal 2005.

Blyth’s consolidated grossprofit decreased $58.4 million, or 8%, from $771.7 million in fiscal 2005 to$713.3 million in fiscal 2006. The gross profit margin decreased from 48.6% infiscal 2005 to 45.3% in fiscal 2006. This decrease was primarily due to salesshortfalls within PartyLite U.S., the margins of which are higher than Blyth’soverall average, as well as higher fuel, freight and commodity costs, whichhave adversely impacted a number of Blyth’s businesses.

Blyth’s consolidatedselling expense decreased $3.2 million, or approximately 1%, from $458.7million in fiscal 2005 to $455.5 million in fiscal 2006. Most of the decreasein selling expense relates to the reduced sales in the U.S. Direct Sellingchannel, which was offset by the full year impact of the September 2004acquisitions of Edelman and Euro-Decor. Selling expense as a percentage of netsales increased from 28.9% in fiscal 2005 to 29.0% in fiscal 2006.

Blyth’s consolidatedadministrative expenses increased $4.6 million, or 3%, from $143.7 million infiscal 2005 to $148.3 million in fiscal 2006. The increase in administrativeexpenses versus the prior year was primarily due to the acquisitions of Edelmanand Euro-Decor and the $1.2 million write-down in the book value of theColorado Springs facility, which is currently held for sale. Administrativeexpenses as a percentage of net sales increased from 9.1% in fiscal 2005 to9.4% in fiscal 2006.

17

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A goodwill impairmentcharge of $53.3 million was recognized in the Wholesale segment in January 2006.In fiscal 2006 this segment experienced a substantial decline in operatingperformance when compared to prior years results and budgeted fiscal 2006expectations.

Blyth’s consolidatedoperating profit decreased $113.1 million from $169.3 million in fiscal 2005 to$56.2 million in fiscal 2006 principally due to the impact of lower saleswithin the PartyLite U.S., Wholesale and Catalog & Internet segments,the previously mentioned goodwill impairment, investments in organic strategicinitiatives, such as Purple Tree and Two Sisters Gourmet in the Direct Sellingsegment and flameless technology in the foodservice channel of the Wholesalesegment and higher commodity costs across our businesses.

**Operating Profit/Loss—DirectSelling Segment**

Operating profit in theDirect Selling segment decreased $24.2 million, or 18%, from $131.9 million infiscal 2005 to $107.7 million in fiscal 2006. The decrease was primarily drivenby the previously mentioned sales shortfall of PartyLite U.S. and lower grossprofit due to increased commodity costs, as well as the ongoing investmentbeing made in the organic strategic initiatives, Purple Tree and Two SistersGourmet.

**Operating Profit/Loss—WholesaleSegment**

Operating profit in theWholesale segment decreased from $30.7 million in fiscal 2005 to a loss of$51.1 million in fiscal 2006. The previously mentioned goodwill impairmentcharge, sales shortfalls in most Wholesale businesses, as well as continuedpressure on gross margins due to increased raw material costs, were the primarycontributors to the decrease in operating profit in this segment compared tothe prior year.

**Operating Profit/Loss—Catalog &Internet Segment**

Operating profit in theCatalog & Internet segment decreased from $6.7 million in fiscal 2005to a loss of $0.4 million in fiscal 2006. The decrease in profitabilitycompared to the prior year was primarily due to the impact of the previouslymentioned reduced sales, increased sales promotions and circulation costs andthe write-down of the Colorado Springs facility.

Interest expense increased$1.6 million, or 7%, from $22.1 million in fiscal 2005 to $23.7 million infiscal 2006, due to increases in borrowings, interest rates and interestexpense on state tax settlements.

Other income decreased$2.3 million from $1.9 million in fiscal 2005 to a loss of $0.4 million infiscal 2006. This decrease was primarily due to a loss on the sale of ImpactPlastics and foreign currency exchange losses.

Income tax expensedecreased $45.1 million, or 85%, from $52.9 million in fiscal 2005 to $7.8million in fiscal 2006. The effective income tax rate was 24.3% for fiscal 2006compared to 35.5% in fiscal 2005. This decrease in income tax expense and taxrate was primarily due to the decrease in U.S. earnings versus higher foreignsourced earnings, which are taxed at a lower rate than U.S earnings, thefavorable impact of global audit settlements and a reduction in tax expenseresulting from adjustments to prior years’ income tax items. These decreaseswere offset by the one-time tax charge on the American Job Creations Act of2004 (“AJCA”) dividend as well as the non-tax deductible portion of thegoodwill impairment charge.

As a result of theforegoing, net earnings decreased $71.6 million, or 74%, from $96.5 million infiscal 2005 to $24.9 million in fiscal 2006.

Basic earnings per sharewere $0.61 for fiscal 2006 compared to $2.24 for fiscal 2005*.*Diluted earnings per share were $0.60for fiscal 2006 compared to $2.22 for fiscal 2005. The total of the followingpreviously discussed items: goodwill impairment charge, loss on the sale ofImpact Plastics, tax charge on the AJCA dividend, the favorable impact ofglobal audit settlements and a reduction in tax expense resulting fromadjustments to prior years’ income tax items reduced diluted earnings per shareby approximately $0.96 in fiscal 2006.

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**Fiscal2005 Compared to Fiscal 2004**

Net sales increased $80.7million, or 5%, from $1,505.6 million in fiscal 2004 to $1,586.3 million infiscal 2005. Approximately 10 percentage points of the increase in net sales isattributable to the positive sales impact of Edelman and Euro-Decor, whichBlyth acquired in September 2004, the positive impact of approximately 46weeks of acquisition-related sales growth of Walter Drake, which was acquiredin December 2003, the positive sales impact of approximately 24 weeks ofacquisition-related sales growth of Kaemingk, which was acquired in June 2003,and the positive sales impact of approximately 8 weeks of acquisition-relatedsales growth of Miles Kimball, which was acquired in April 2003. The lossof sales from Jeanmarie Creations, which was divested in April 2004, had anegative impact on sales equal to approximately 2 percentage points. So,excluding the impact of acquisitions and divestitures, sales were down 3% forthe year. The relative strength of foreign currencies versus the U.S. dollarhad a positive impact on fiscal 2005 sales growth equal to approximately 3percentage points. Management believes that a significant increase in partyplan competition in the United States and a weak North American wholesaleenvironment, exacerbated by higher energy prices and economic uncertaintyrelated to the U.S. presidential election, negatively impacted Blyth’s salesthroughout fiscal 2005.

**Net Sales—Direct Selling Segment**

Net sales in the DirectSelling segment decreased $28.6 million, or 4%, from $764.5 million in fiscal2004 to $735.9 million in fiscal 2005. PartyLite’s U.S. sales decreasedapproximately 12% compared to the prior year. PartyLite Canada reported anapproximately 7% decrease versus the prior year in U.S. dollars. Managementbelieves that sales in the U.S. and Canadian markets were negatively impactedby increased competition for hostesses and party guests due to a substantialincrease in channel competition. In addition, we believe PartyLite’s U.S.operations were negatively impacted by reduced discretionary income, resultingfrom higher gasoline prices. The U.S. market also experienced a significantdecrease in third quarter sales in Florida, PartyLite’s fourth largest market,due to the August and September hurricanes. Management believes thatthis situation continued to have a negative impact into the fourth quartergiven the loss of booking momentum due to cancelled parties. In PartyLite’sEuropean markets, sales increased approximately 20% in U.S. dollars (+9% inlocal currencies), driven by strong sales in the newest markets*.*PartyLite Europe now representsapproximately 30% of PartyLite Worldwide’s net sales.

Net sales in the DirectSelling segment represented approximately 46% of total Blyth sales in fiscal2005 compared to 51% in fiscal 2004. This decrease was primarily due to thegrowth of the Catalog & Internet segment.

**NetSales—Wholesale Segment**

Net sales in the Wholesale segment increased $26.6million, or 4%, from $630.3 million in fiscal 2004 to $656.9 million in fiscal2005. The primary reason for this increase was the acquisitions of Edelman andEuro-Decor in September 2004, which had a positive effect on sales of 6percentage points, and the approximately 24 weeks of acquisition-related salesgrowth of Kaemingk, acquired in June 2003, which had a positive effect of3 percentage points. The loss of sales of Jeanmarie Creations, which wasdivested in April 2004, had a negative impact on sales of approximately 4percentage points. So, excluding acquisitions and divestitures, Wholesalesegment sales were down approximately 2%.

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In North America, theWholesale segment experienced a sales decline of 10% versus the prior year. Managementbelieves softness was seen in the sales of premium home fragrance products andseasonal decorations as a result of independent retailers’ cautiousness inpurchasing throughout the year. Management also believes sales of home décorproducts in fiscal 2005 were slightly below the prior year due to retailers’cautiousness. In addition, the divestiture of Jeanmarie Creations had anegative impact on sales of approximately 6 percentage points. In fiscal 2005,sales of chafing fuel and tabletop lighting to the foodservice trade improvedsignificantly compared to the prior year, as the hospitality industry continuedto rebound.

In Europe, the Wholesalesegment experienced a sales increase of approximately 30% in fiscal 2005 versusfiscal 2004, due in part to the effect of the Edelman and Euro-Decoracquisitions and the full year of sales from Kaemingk, which had a positiveeffect on sales of 27 percentage points. Increased sales of mass channelcandles in fiscal 2005 offset sales declines in premium candles in Europe.

Net sales in the Wholesalesegment represented approximately 42% of total Blyth sales in fiscal 2005 andin fiscal 2004.

**NetSales—Catalog & Internet Segment**

Net sales in the Catalog &Internet segment increased $82.8 million, or 75%, from $110.7 million in fiscal2004 to $193.5 million in fiscal 2005 due to the December 2003 acquisitionof Walter Drake. Net sales in this segment were modestly below our expectationsdue to decreased consumer discretionary spending and increased returnsresulting from integration-related order processing delays.

Net sales in the Catalog &Internet segment accounted for approximately 12% of Blyth’s total net sales infiscal 2005 compared to 7% in fiscal 2004.

Blyth’s consolidated grossprofit increased $48.0 million, or 7%, from $723.7 million in fiscal 2004 to$771.7 million in fiscal 2005. The gross profit margin increased from 48.1% infiscal 2004 to 48.6% in fiscal 2005 as a result of the favorable sales mixamong and within Blyth’s various businesses, reduced shipping and handlingcharges and the positive impact of an insurance recovery related to ourMonterrey facility.

Blyth’s consolidatedselling expense increased $40.9 million, or 10%, from $417.8 million in fiscal2004 to $458.7 million in fiscal 2005. Most of the increase in selling expenserelates to the addition of selling expenses from the previously discussedfiscal 2005 acquisitions. Selling expense as a percentage of net salesincreased from 28% in fiscal 2004 to 29% in fiscal 2005. This increase inselling expense, as a percentage of net sales, is principally due to increasedpromotional spending in the Direct Selling segment relative to sales, as well asthe impact of Walter Drake’s business, which has a higher selling expense ratiothan the overall Company average.

Blyth’s consolidatedadministrative expenses increased $14.7 million, or 11%, from $129.0 million infiscal 2004 to $143.7 million in fiscal 2005. Most of the increase relates toadministrative expenses associated with acquisitions made in fiscal 2005*.*As a percentage of net sales,administrative expenses remained relatively flat at 9% despite the Company’s spendingfor organic strategic initiatives and compliance costs associated with theSarbanes-Oxley Act of 2002.

In fiscal 2004, theCompany recorded pre-tax restructuring and impairment charges of approximately$23.8 million. Of the $23.8 million charge, $6.7 million related to the Direct Sellingsegment and the closure of the Company’s Hyannis, Massachusetts candlemanufacturing facility and $17.1 million related to the Wholesale segment. TheWholesale segment charges principally related to the write down of certaincandle manufacturing assets, severance and personnel charges related to therestructuring in North America, and the discontinuation of one brand. The totalcharge of $23.8 million was reported as a component of operating expenses.

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Blyth’s consolidatedoperating profit increased $16.2 million from $153.1 in fiscal 2004 to $169.3million in fiscal 2005 principally due to the impact of the fiscal 2004restructuring and impairment charges on the year-to-year comparison.

**Operating Profit/Loss - DirectSelling Segment**

Operatingprofit in the Direct Selling segment decreased $4.5 million, or 3%, from $136.4million in fiscal 2004 to $131.9 million in fiscal 2005. The decrease resultedfrom the sales shortfalls in North America. Additional promotional and salesincentive expenses also negatively impacted this segment’s operating profit. Operatingprofit in the Direct Selling segment represented approximately 78% of totalCompany operating profit in fiscal 2005 compared to 89% in fiscal 2004.

**Operating Profit/Loss—WholesaleSegment**

Operating profit in theWholesale segment increased from $10.0 million in fiscal 2004 to $30.7 millionin fiscal 2005. Fiscal 2004 includes restructuring and impairment charges of$17.1 million. Additional increases in operating profit were attributable toprofit improvements in the North American home fragrance business, the fiscal2005 acquisitions of Edelman and Euro-Decor, and as previously mentioned, a$2.2 million insurance recovery benefit related to the fiscal 2004 Monterreyfire claim received in fiscal 2005 versus the negative impact of $1.9 millionof expense recorded in fiscal 2004 for the fire. Operating profit in theWholesale segment represented approximately 18% of total Company operatingprofit in fiscal 2005 compared to 7% in fiscal 2004.

**Operating Profit/Loss—Catalog &Internet Segment**

Operating profit in theCatalog & Internet segment increased from $6.6 million in fiscal 2004to $6.7 million in fiscal 2005. Operating profit in the Catalog &Internet segment represented approximately 4% of total Company operating profitin both fiscal 2004 and fiscal 2005.

Interest expense increased$4.7 million, or 27%, from $17.4 million in fiscal 2004 to $22.1 million infiscal 2005, primarily due to higher interest costs related to the $100 millionof 5.5% Senior Notes issued in October 2003 and borrowings associated withthe July 2004 Dutch tender offer.

Interest income and otherincreased $0.3 million, from $1.3 million in fiscal 2004 to $1.6 million infiscal 2005. This increase was primarily due to favorable foreign currencyexchange gains.

Income tax expenseincreased $2.5 million, or 5%, from $50.4 million in fiscal 2004 to $52.9million in fiscal 2005. The increase in income tax expense is attributable tothe increase in pre-tax earnings. The effective income tax rate was 35.5% forfiscal 2005 compared to 36.8% in fiscal 2004. This decrease in tax rate is aresult of more income being earned in lower tax jurisdictions.

As a result of theforegoing, net earnings increased $10.1 million, or 12%, from $86.4 million infiscal 2004 to $96.5 million in fiscal 2005.

Basic earnings per sharewere $2.24 for fiscal 2005 compared to $1.89 for fiscal 2004. The previouslydiscussed restructuring and impairment charges**reduced earnings per share by approximately $0.31 in fiscal 2004*.*Diluted earnings per share were $2.22for fiscal 2005 compared to $1.88 for fiscal 2004.

**Seasonality**

Approximately 41% of theCompany’s net sales occurred in the first and second fiscal quarters of 2006. Thisis approximately equal to the Company’s net sales that occurred in the firstand second fiscal quarters of 2005. The Company’s net sales are strongest inthe third and fourth fiscal quarters due to increased shipments to meetyear-end holiday season demand for the Company’s products.

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**Liquidityand Capital Resources**

Cash and cash equivalentsincreased $150.4 million, or 164%, from $91.7 million at January 31, 2005to $242.1 million at January 31, 2006. The increase in cash during fiscal2006 was primarily due to cash generated from operations and increasedborrowing in Europe to fully fund the dividend paid under the AJCA.

The Company typicallygenerates positive cash flow from operations due to favorable gross margins andthe variable nature of selling expenses, which constitute a significantpercentage of operating expenses. The Company generated $106.8 million in cashfrom operations in fiscal 2006 compared to $138.5 million in fiscal 2005. Thisdecrease was primarily due to the reduction in net earnings and an increase ininventory in the North American candles and home fragrance business to meetmass-market customer needs.

Capital expenditures forproperty, plant and equipment were approximately $17.3 million in fiscal 2006down from $21.0 million in fiscal 2005. The decrease from historical levels isdue to the Company continuing to reduce spending on manufacturing facilities,while moving to more of an outsourced product supply model. The Companyanticipates total capital spending of approximately $25.0 million for fiscal2007, primarily for the expansion of the Direct Selling European distributioncenter in support of ongoing growth, information technology and research anddevelopment-related equipment and upgrades to machinery and equipment inexisting manufacturing and distribution facilities.

The Company has grown inpart through acquisitions and, as part of its growth strategy, the Companyexpects to continue from time to time in the ordinary course of its business toevaluate and pursue acquisition opportunities as appropriate. Our recent growthhas been primarily acquisition related and in the future, acquisitions maycontinue to contribute more to the Company’s overall sales growth rate thanhistorically. As part of our strategy to invest in strategic initiatives wehave developed Purple Tree, a new Direct Selling company, which markets crafts.In addition we completed the acquisition of a small gourmet food company, TwoSisters Gourmet, that also markets its products through the Direct Sellingchannel. In the Wholesale segment, we have numerous collaborative initiativesunderway, which we believe will help drive sales and leverage the sales andmarketing talents across this segment. These initiatives include customerinformation sharing and leveraging our in-house sales forces, as well asongoing global sourcing objectives and other organic strategic initiatives intowhich we are investing resources. The Company acquired Edelman B.V. andEuro-Decor B.V. during fiscal 2005, which added the home décor product to theEuropean Wholesale business. The Company entered the Catalog and Internetchannel of direct-to-consumer distribution in 2003, giving us a presence in allof our desired channels. Our latest acquisition, Boca Java, a small gourmetcoffee and tea company, was in this segment.

As of January 31,2006, the Company had a total of $15.0 million available under an uncommittedbank line of credit with LaSalle Bank National Association, which matures in June 2006.Amounts outstanding under the line of credit bear interest at prime or LIBORplus 0.90%. No amounts were outstanding under the uncommitted line of credit atJanuary 31, 2006.

As of January 31,2006, the Company had a total of $10.0 million available under an uncommittedline of credit with Bank of America to be used for letters of credit. Since theline of credit is uncommitted, there is no maturity date. At January 31,2006, approximately $0.5 million of letters of credit were outstanding underthis credit line.

As of December 31,2005, The Gies Group (“Gies”) had available lines of credit of approximately$40.4 million of which approximately $18.8 million was outstanding. The amountsoutstanding under the lines of credit bear interest at a weighted average rateof 3.2% at December 31, 2005. The lines of credit have maturity dates thruDecember 2006 and are renewed annually.

As of December 31,2005, Kaemingk had an available line of credit of approximately $32.6 millionwith ING Bank N.V, which expires December 31, 2006. No amounts wereoutstanding at December 31, 2005. The line of credit is collateralized bycertain real estate and equipment owned by Kaemingk.

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As of December 31,2005, Colony Gift Corporation Limited (“Colony”) had an $8.6 million short-termrevolving credit facility with Barclays Bank, which matures in August 2006.Colony had borrowings under the credit facility of approximately $7.0 million,at a weighted average interest rate of 5.6%, as of December 31, 2005.

As of December 31, 2005, Edelman B.V. andEuro-Decor B.V. had available lines of credit of approximately $29.6 millionwith ABN Amro Bank N.V, which mature September 2007. The lines of creditare collateralized by inventory and receivables owned by Edelman B.V. andEuro-Decor B.V. At December 31, 2004, $6.9 million was outstanding at aweighted average interest rate of 3.0%. At December 31, 2005,approximately $6.4 million was outstanding at a weighted average interest rateof 3.5%.

On June 2, 2005, the Company replaced its prior$200 million credit facility with a new $150 million unsecured revolving creditfacility having a five year term; the “Credit Facility” matures June 2010.The Company has the ability to increase the Credit Facility, under certaincircumstances, by an additional $50 million. The Credit Facility may be usedfor seasonal working capital needs and general corporate purposes, includingstrategic acquisitions. The Credit Facility contains, among other provisions,requirements for maintaining certain financial ratios and limitations oncertain payments. Amounts outstanding under the Credit Facility bear interest,at the Company’s option, at JPMorgan Chase Bank’s prime rate or at theEurocurrency rate plus a credit spread ranging from 0.360% to 0.800%,calculated on the basis of the Company’s senior unsecured long-term debt rating.At January 31, 2005, $3.3 million letters of credit were outstanding underthe prior Credit Facility. As of January 31, 2006, approximately $73.0million (including letters of credit) was outstanding under the CreditFacility.

As of January 31, 2005 and January 31, 2006,Miles Kimball had approximately $9.9 million and $9.4 million, respectively oflong-term debt outstanding under a real estate mortgage note payable to JohnHancock Life Insurance Company, which matures June 1, 2020. Under theterms of the note, payments of principal and interest are required monthly at afixed interest rate of 7.89%.

As of December 31, 2004, Kaemingk hadapproximately $8.8 million of long-term debt outstanding under six loans withING Bank N.V. at a weighted average interest rate of 5.1%. As of December 31,2005, approximately $7.0 million of long-term debt was outstanding under sixloans with ING Bank N.V. at a weighted average interest rate of 4.9%. The bankloans have maturity dates ranging from 2008 through 2020. The loans arecollateralized by certain real estate and equipment owned by Kaemingk.

In July 1995, the Company privately placed $25.0million aggregate principal amount of 7.54% Senior Notes due June 2005. Thefinal payment on the notes was made on June 30, 2005.

In May 1999, the Company filed a shelfregistration statement for issuance of up to $250.0 million in debt securitieswith the Securities and Exchange Commission. On September 24, 1999, theCompany issued $150.0 million of 7.90% Senior Notes due October 1, 2009 ata discount of approximately $1.4 million, which is being amortized over thelife of the notes. Such notes contain, among other provisions, restrictions onliens on principal property or stock issued to collateralize debt. At January 31,2006, the Company was in compliance with such provisions. Interest is payablesemi-annually in arrears on April 1 and October 1. On October 20,2003, the Company issued $100.0 million 5.50% Senior Notes due on November 1,2013 at a discount of approximately $0.2 million, which is being amortized overthe life of the notes. Such notes contain provisions and restrictions similarto those in the 7.90% Senior Notes. At January 31, 2006, the Company wasin compliance with such provisions. Interest is payable semi-annually inarrears on May 1 and November 1. The notes may be redeemed in wholeor in part at any time at a specified redemption price. The proceeds of thedebt issuance were used for general corporate purposes.

As of January 31, 2005 and January 31, 2006,CBK had $4.5 million and $4.4 million, respectively of long-term debtoutstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1,

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2025. The bond is backedby an irrevocable letter of credit issued by La Salle Bank National Association.The loan is collateralized by certain of CBK’s assets. The amount outstandingunder the IRB bears interest at short-term floating rates, which equaled aweighted average interest rate of 4.6% at January 31, 2006. Payments ofprincipal are required annually and interest payments are required monthlyunder the terms of the bond.

The estimated fair value of the Company’s $276.1million and $346.0 million total long-term debt (including current portion) at January 31,2005 and 2006 was approximately $303.0 million and $330.7 million, respectively.The fair value is determined by quoted market prices, where available, and fromanalyses performed by investment bankers using current interest ratesconsidering credit ratings and the remaining terms to maturity.

The following tablesummarizes the maturity dates of the contractual obligations of the Company asof January 31, 2006:

| ** **                                       | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations  (In thousands)** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1–3 Years** | ** ** | **3–5 Years** | ** ** | **More than  5 Years** | ** ** |
| Interest(3)                                      |       | $                                         | 93,642     |   | $ | 18,187 |   |   | $ | 36,272 |   |   |   | $ | 20,316 |   |   | $ | 18,867 |   |
| Capital Leases                                   |       | 52                                        |       | 20 |   |   | 31 |   |   |   | 1 |   |   | — |   |
| Purchase Obligations(1)                          |       | 31,279                                    |       | 31,219 |   |   | 60 |   |   |   | — |   |   | — |   |
| Long-Term Debt(3)                                |       | 345,970                                   |       | 1,049 |   |   | 9,872 |   |   |   | 223,480 |   |   | 111,569 |   |
| Operating Leases                                 |       | 65,724                                    |       | 19,209 |   |   | 24,332 |   |   |   | 14,071 |   |   | 8,112 |   |
| Lines of Credit                                  |       | 25,772                                    |       | 25,772 |   |   | — |   |   |   | — |   |   | — |   |
| Other(2)                                         |       | 6,134                                     |       | 5,357 |   |   | 681 |   |   |   | 96 |   |   | — |   |
| Total Contractual  Obligations                   |       | $                                         | 568,573    |   | $ | 100,813 |   |   | $ | 71,248 |   |   |   | $ | 257,964 |   |   | $ | 138,548 |   |
|                                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Purchase obligations primarily consist of open purchaseorders for inventory.

(2)             Other primarily consists of 401(k), profit sharing andpension obligations.

(3)             Long-term debt includes: 7.90% Senior Notes dueOctober 1, 2009, 5.50% Senior Notes due November 1, 2013, a mortgagenote payable-maturity June 1, 2020, an Industrial Revenue Bond(“IRB”)-maturity January 1, 2025 and six bank loans maturing from 2008 to2020. The Company also has credit facilities with maturity dates beyond oneyear with variable interest rates that are not included in the table due to theinability to calculate future interest payments. (See Note 12 to theConsolidated Financial Statements).

TheCompany does not utilize derivatives for trading purposes.

TheCompany’s Board of Directors has authorized the Company to repurchase up to6,000,000 shares of common stock under the Company’s share repurchase program. SinceJanuary 31, 2005, the Company has purchased 65,000 shares on the openmarket for a cost of $2.1 million, bringing the cumulative total purchasedshares to 4,626,800 as of January 31, 2006 for a total cost ofapproximately $115.1 million. The acquired shares are held as common stock intreasury at cost.

On June 7,2004, the Company announced that its Board of Directors approved a repurchaseof up to 4,000,000 outstanding shares of the Company’s common stock, with theright to repurchase up to an additional 2% of the Company’s outstanding shares,at a price per share not greater than $35.00 nor less than $30.00 through aDutch auction cash tender offer. The final number of shares repurchased underthe tender offer, which expired on July 9, 2004, was 4,906,616 shares foran aggregate purchase price of $172.6 million including fees and expenses. Thetender offer was funded with $86.1 million of available cash and $86.5 millionof borrowings against the Company’s prior $200 million credit facility.

On April 4,2006, the Company announced that it has declared a cash dividend of $0.23 pershare of the Company’s common stock for the six months ended January 31,2006. The dividend, authorized at the Company’s April 4, 2006 Board ofDirectors meeting, will be payable to shareholders of record as of May 1,2006, and will be paid on May 15, 2006.

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TheCompany does not maintain any off balance sheet arrangements, transactions,obligations or other relationships with unconsolidated entities that would beexpected to a have a material current or future effect upon our financialstatements.

On December 9,2005, the Board of Directors of the Company approved the acceleration of thevesting of all unvested stock options. Stock option awards granted from December 10,2000 through the date of acceleration with respect to approximately 350,000shares of the Company’s common stock, which represented 100% of the unvestedoptions, were subject to this acceleration, which was effective as of December 9,2005. Virtually all of these options had exercise prices in excess of thecurrent market values and were not fully achieving their original objectives ofincentive compensation and employee retention. Additional expense of $1.7million associated with the acceleration is included in the year ended January 31,2006 pro forma disclosure presented in Note 1 to the Consolidated FinancialStatements. The acceleration also eliminates future compensation expense theCompany would otherwise recognize in its Consolidated Statement of Earningsupon adoption of SFAS 123R. The Company believes the implementation of thisstandard will not have a material impact on the financial statements.

On January 24,2006, the Board of Directors approved a domestic reinvestment plan for theapproximately $130 million in foreign earnings, which were previouslyconsidered permanently reinvested in non-U.S. legal entities, which the Companyrepatriated under the AJCA. The funds were brought back to the United Stateslate in the fourth quarter and received the favorable tax treatment provided bythe Act. The Company recorded a one-time tax expense of $9.1 million, which is reflected in the Company’scurrent year effective tax rate.  As part of its repatriation plan, the Companyintends to make a domestic investment of the repatriated amount in a wide rangeof initiatives, including the hiring and training of U.S. workers, research anddevelopment efforts, qualified retirement plan funding, capital expenditures tosupport the U.S. businesses, advertising and marketing with respect to itsvarious trademarks, brand names and rights to intangible property, andacquisitions of U.S.-based businesses, all consistent with the requirements ofthe legislation.

**CriticalAccounting Policies**

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our Consolidated Financial Statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to bad debts, inventories, income taxes, restructuring andimpairments and contingencies and litigation. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

FinancialReporting Release No. 60 requires all companies to include a discussion ofcritical accounting policies or methods used in the preparation of financialstatements. Note 1 to the Consolidated Financial Statements, included elsewherein this Annual Report on Form 10-K, includes a summary of thesignificant accounting policies and methods used in the preparation of ourConsolidated Financial Statements. The following is a brief discussion of themore significant accounting policies and methods used by us.

Revenuerecognition—Revenues consist of sales to customers, net of returns andallowances. The Company recognizes revenue upon delivery, when both title andrisk of loss are transferred to the customer.

Generally,sales orders are received via signed customer purchase orders with stated fixedprices based on published price lists. The Company records estimated reductionsto revenue for customer programs, 

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which may include special pricing agreements forspecific customers, volume incentives and other promotions. Should market conditionsdecline, the Company may increase customer incentives with respect to futuresales. The Company also records estimated reductions to revenue, basedprimarily on historical experience, for customer returns and chargebacks thatmay arise as a result of shipping errors, product damage in transit or forother reasons that can only become known subsequent to recognizing the revenue.If the amount of actual customer returns and chargebacks were to increasesignificantly from the estimated amount, revisions to the estimated allowancewould be required.

Insome instances, the Company receives payment in advance of product shipments. Suchadvance payments occur primarily in our direct selling and direct marketingchannels and are recorded as deferred revenue. Upon delivery of productshipments for which advance payment has been made, the related deferred revenueis reclassified to revenue.

Mostof the Company’s sales made on credit are made to an established list ofcustomers. Although the collectibility of sales made on credit is reasonablyassured, the Company has established an allowance for doubtful accounts for itstrade and note receivables. The allowance is determined based on the Company’sevaluation of specific customers’ ability to pay, aging of receivables,historical experience and the current economic environment. While the Companybelieves it has appropriately considered known or expected outcomes, itscustomers’ ability to pay their obligations, including those to the Company,could be adversely affected by declining sales at retail resulting from suchfactors as contraction in the economy or a general decline in consumerspending.

Someof the Company’s business units offer seasonal dating programs pursuant towhich customers that qualify for such programs are offered extended paymentterms for seasonal product shipments. As with other customers, customer orderspursuant to such seasonal dating programs are generally received in the form ofa written purchase order signed by an authorized representative of the customer.Sales made pursuant to seasonal dating programs are recorded as revenue onlyupon delivery either to the customer or to an agent of the customer dependingon the freight terms for the particular shipment and consistent with the conceptof “risk of loss.”  The sales price forthe Company’s products sold pursuant to such seasonal dating programs is fixedprior to the time of shipment to the customer. Customers do not have the rightto return product except for rights to return that the Company believes aretypical of our industry for such reasons as damaged goods, shipping errors orsimilar occurrences. The Company is not required to repurchase products fromits customers, nor does the Company have any regular practice of doing so. TheCompany believes that it is reasonably assured of payment for products soldpursuant to such seasonal dating programs based on its historical experiencewith the established list of customers eligible for such programs. In addition,the Company minimizes its exposure to bad debts by utilizing established creditlimits for each customer. If, however, product sales by our customers duringthe seasonal selling period should fall significantly below expectations, suchcustomers’ financial condition could be adversely affected, increasing the riskof not collecting these seasonal dating receivables and, possibly, resulting inadditional bad debt charges. The Company does not make any sales underconsignment or similar arrangements.

Inventoryvaluation—Inventories are valued at the lower of cost or market. Cost isdetermined by the first-in, first-out method. The Company writes down itsinventory for estimated obsolescence or unmarketable inventory by an amountequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand, market conditions, customerplanograms and sales forecasts. If market acceptance of our existing productsor the successful introduction of new products should significantly decrease,additional inventory write-downs could be required. Potential additionalinventory write-downs could result from unanticipated additional quantities ofobsolete finished goods and raw materials, and/or from lower disposition valuesoffered by the parties who normally purchase surplus inventories. At January 31,2006 the Company had obsolete inventory reserves totaling approximately $21.6million.

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Restructuringand impairment charges on long-lived assets—In response to changing marketconditions and competition, the Company’s management regularly updates itsbusiness model and market strategies, including the evaluation of facilities,personnel and products. Future adverse changes in economic and marketconditions could result in additional organizational changes and possiblyadditional restructuring and impairment charges. The Company recorded anapproximately $1.0 million impairment charge related to equipment in its NorthAmerican Wholesale manufacturing facility, which is included in cost of goodssold in the fiscal 2006 financial statements. The Company did not record anyrestructuring and impairment charges in fiscal 2005. In fiscal 2004 the Companyrecorded charges related to long-lived asset impairments, product linediscontinuances, severance payments to employees, lease write-offs, bad debtwrite-offs and inventory write-downs. (See Note 5 to the Consolidated FinancialStatements). The Company recorded restructuring and impairment charges infiscal 2004 totaling $23.8 million. Historically, the Company has reviewedlong-lived assets, including property, plant and equipment and otherintangibles with definite lives for impairment periodically and whenever eventsor changes in circumstances indicated that the carrying amount of such an assetmight not be recoverable. Management determines whether there has been apermanent impairment on long-lived assets held for use in the business bycomparing anticipated undiscounted future cash flow from the use and eventualdisposition of the asset or asset group, to the carrying value of the asset. Theamount of any resulting impairment is calculated by comparing the carryingvalue to the fair value, which may be estimated using the present value of thesame cash flows. Long-lived assets that meet the definition of held for saleare valued at the lower of carrying amount or net realizable value.

Goodwilland other indefinite lived intangibles—Goodwill and other indefinite livedintangibles are subject to an assessment for impairment using a two-step fair value-basedtest and such other intangibles are also subject to impairment reviews, whichmust be performed at least annually, or more frequently if events orcircumstances indicate that goodwill or other indefinite lived intangiblesmight be impaired. The Company performs its annual assessment of impairment inthe fourth fiscal quarter. For goodwill, the first step compares the fair valueof a reporting unit to its carrying amount, including goodwill. For each of thereporting units, the estimated fair value is determined utilizing a combinationof valuation techniques, namely the discounted cash flow methodology and themarket multiple methodology. If the fair value of the reporting unit exceedsthe carrying value, no further analysis is necessary. If the carrying amount ofthe reporting unit exceeds its fair value, the second step is performed. Thesecond step compares the carrying amount of the goodwill to the fair value ofthe goodwill. If fair value is less than the carrying amount, an impairmentloss is reported as a reduction to the asset and a charge to operating expense,except at the transition date, when the loss was reflected as a cumulativeeffect of a change in accounting principle. As a result of our 2006 goodwillimpairment analysis, we recognized a goodwill impairment charge of $53.3million in the Wholesale segment. (See 9 to the Consolidated FinancialStatements).

Accountingfor income taxes—As part of the process of preparing our Consolidated FinancialStatements, we are required to estimate our actual current tax exposure (state,federal and foreign), together with assessing permanent and temporarydifferences resulting from differing bases and treatment of items for tax andaccounting purposes, such as the carrying value of intangibles, deductibilityof expenses, depreciation of property and equipment, and valuation ofinventories. Temporary differences result in deferred tax assets andliabilities, which are included within our consolidated balance sheets. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income. Actual results could differ from this assessment ifsufficient taxable income is not generated in future periods. To the extent wedetermine the need to establish a valuation allowance or increase suchallowance in a period, we must include an expense within the tax provision inthe accompanying consolidated statement of operations. The management of theCompany, along with third-party advisers, periodically estimates the probable taxobligations of the Company using historical experience in tax jurisdictions andinformed judgments. There are inherent uncertainties related to theinterpretation of tax regulations in the jurisdictions in which the Companytransacts business. The judgments and estimates made at a point in 

27

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time may change based on the outcome of tax audits, aswell as changes to or further interpretations of regulations. If such changestake place, there is a risk that the tax rate may increase or decrease in anyperiod.

**Impactof Adoption of Recently Issued Accounting Standards**

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for theForeign Earnings Repatriation Provision within the American Jobs Creations Actof 2004” (“AJCA”). The AJCA introduces a limited time 85% dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. taxpayer(repatriation provision), provided certain criteria are met. FAS 109-2provides accounting and disclosure guidance for the repatriation provision.  On January 24,2006, the Board of Directors approved a domestic reinvestment plan for theapproximately $130 million in foreign earnings, which were previouslyconsidered permanently reinvested in non-U.S. legal entities, which the Companyrepatriated under the AJCA. Thefunds were brought back to the United States late in the fourth quarter andreceived the favorable tax treatment provided by the Act. The Company recorded a one-time tax expense ofapproximately $9.1 million, which is reflected in the Company’s currentyear effective tax rate. As part of itsrepatriation plan, the Company intends to make a domestic investment of therepatriated amount in a wide range of initiatives, including the hiring andtraining of U.S. workers, research and development efforts, qualifiedretirement plan funding, capital expenditures to support the U.S. businesses,advertising and marketing with respect to its various trademarks, brand namesand rights to intangible property, and acquisitions of U.S.-based businesses,all consistent with the requirements of the legislation.

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43”.This standard requires abnormal amounts of idle facility expense, freight,handling costs and wasted material (spoilage) to be recognized as currentperiod charges. Additionally, it requires that allocation of fixed productionoverhead costs be allocated to inventory based on the normal capacity of theproduction facility. The provisions of this standard apply prospectively andare effective for the Company for inventory costs incurred after February 1,2006. The Company believes this standard will not have a material effect on itsfinancial statements.

In December 2004,the FASB issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”), “Share-BasedPayment”. This standard requires companies to measure share-based payments atgrant-date fair value and recognize the compensation expense in their financialstatements. While we previously adopted, for disclosure purposes only, the fairvalue based method of accounting pursuant to SFAS No. 123, “Accounting forStock Based Compensation”, SFAS No. 123R requires a forfeiture assumptionfor our unvested awards. Additionally, SFAS No. 123R amends thepresentation of the statement of cash flows and requires additional annualdisclosures. On December 9, 2005, the Board of Directors of the Companyapproved the acceleration of the vesting of all unvested stock options. Stockoption awards granted from December 10, 2000 through the date ofacceleration with respect to approximately 350,000 shares of the Company’scommon stock, which represented 100% of the unvested options, were subject tothis acceleration, which was effective as of December 9, 2005. Virtuallyall of these options had exercise prices in excess of the current market valuesand were not fully achieving their original objectives of incentivecompensation and employee retention. Additional expense of $1.7 millionassociated with the acceleration is included in the year ended January 31,2006 pro forma disclosure presented in Note 1 to the Consolidated FinancialStatements. The acceleration also eliminates future compensation expense theCompany would otherwise recognize in its Consolidated Statement of Earningsupon adoption of SFAS 123R. The Company believes the implementation of thisstandard will not have a material impact on the financial statements.

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, aReplacement of APB No. 20 and FASB No. 3” (“SFAS No. 154”). SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it is 

28

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impracticable. APB Opinion No. 20 “AccountingChanges,” previously required that most voluntary changes in accountingprinciple be recognized by including in net income of the period of the changethe cumulative effect of changing to the new accounting principle. Thisstandard did not impact the Company for the year ended January 31, 2006.

In March 2005, the FASB issued Interpretation No. 47(“FIN 47”) to clarify the guidance included in SFAS No. 143, “Accountingfor Asset Retirement Obligations”. FIN 47 requires companies to recognize aliability for the fair value of a legal obligation to perform asset retirementactivities that are conditional on a future event if the amount can bereasonably estimated. If amounts cannot be reasonably estimated, certaindisclosures are required about the unrecognized asset retirement obligations. Thisstandard did not impact the Company for the year-ended January 31, 2006.

**Forward-looking andCautionary Statements**

Certain statements contained in this Annual Report on Form 10-Kmay constitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements involve a number ofrisks, uncertainties and other factors that could cause actual results todiffer materially, as discussed more fully elsewhere in this Annual Report on Form 10-Kand in the Company’s previous filings with the Securities and ExchangeCommission.

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**Item 7A.   Quantitative and QualitativeDisclosures About Market Risk**

*Market Risk*

The Company has operationsoutside of the United States and sells its products worldwide. The Company’sactivities expose it to a variety of market risks, including the effects ofchanges in interest rates, foreign currency exchange rates and commodity prices.These financial exposures are actively monitored and, where consideredappropriate, managed by the Company.

*Interest Rate Risk*

As of January 31,2006, the Company is subject to interest rate risk on approximately $108.6million of variable rate debt. Each 1-percentage point increase in theinterest rate would impact pre-tax earnings by approximately $1.1 million ifapplied to the total.

On July 10, 2003, theCompany terminated the interest rate swap agreement in relation to $50.0million of its outstanding 7.90% Senior Notes, which mature on October 1,2009. This termination resulted in a deferred gain of approximately $5.0million, which is being amortized over the remaining term of the Notes.

*Foreign Currency Risk*

The Company uses foreignexchange forward and options contracts to hedge the impact of foreign currencyfluctuations on foreign denominated inventory purchases, intercompany payablesand certain intercompany loans. The Company does not hold or issue derivativefinancial instruments for trading purposes.

The Company hedged the netassets of certain of its foreign operations through foreign currency forwardcontracts during fiscal 2006. Any increase or decrease in the fair value of theforwards related to changes in the spot foreign exchange rates is offset by thechange in the value of the hedged net assets of the foreign operations relatingto changes in spot foreign exchange rates. The net after-tax gain related tothe derivative net investment hedge instruments recorded in accumulated othercomprehensive income (loss) (“OCI”) totaled $1.8 million at January 31,2006.

The Company has designatedits forward exchange and options contracts on forecasted intercompany purchasesand future purchase commitments as cash flow hedges and, as such, as long asthe hedge remains effective and the underlying transaction remains probable,the effective portion of the changes in the fair value of these contracts willbe recorded in OCI until earnings are affected by the variability of the cashflows being hedged. With regard to commitments for inventory purchases, uponpayment of each commitment, the underlying forward contract is closed and thecorresponding gain or loss is transferred from accumulated OCI and is includedin the measurement of the cost of the acquired asset. If a hedging instrumentis sold or terminated prior to maturity, gains and losses are deferred inaccumulated OCI until the hedged item is settled. However, if the hedged itemis no longer likely to occur, the resultant gain or loss on the terminatedhedge is recognized into earnings immediately. Amounts included in accumulatedOCI at January 31, 2006 are immaterial and are expected to be transferredinto earnings within the next twelve months upon payment of the underlyingcommitment.

The Company has designatedits foreign currency forward contracts related to intercompany loans andintercompany payables as fair value hedges. The gains or losses on the fairvalue hedges are recognized into earnings and generally offset the transactiongains or losses in the foreign denominated loans that they are intended tohedge.

30

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For consolidated financialstatement presentation, net cash flows from such hedges are classified in thecategories of the Consolidated Statement of Cash Flows with the items beinghedged.

Thefollowing table provides information about the Company’s foreign exchangeforward and options contracts at January 31, 2006:

| ** **      | ** ** | **US Dollar**                                                        | ** ** | **Average**            | ** ** | **Estimated**       | ** ** |
|-----------------|------------|---------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **      | ** ** | **Notional Amount**                                                  | ** ** | **Contract Rate** | ** ** | **Fair Value** | ** ** |
| ** **      | ** ** | **(In thousands, except average contract rate)** | ** ** |
| Canadian Dollar |       |                                                                      | $          | 7,050                  |       |                |       | 0.86 |   |   |   | $ | (181 | ) |   |
| Euro            |       |                                                                      | 13,625     |                   |       |                | 1.20       |   |   |   | 139 |   |   |
| Pound Sterling  |       |                                                                      | 725        |                   |       |                | 1.74       |   |   |   | 8 |   |   |
|            |       |                                                                      | $          | 21,400                 |       |                |       |   |   |   |   | $ | (34 | ) |   |

 

The foreign exchange contracts outstanding havematurity dates through September 2006.

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**Item 8.**                        FinancialStatements and Supplementary Data

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders of Blyth, Inc.:

We have audited the accompanying consolidated balancesheets of Blyth, Inc. and subsidiaries (the “Company”) as of January 31,2006 and 2005, and the related consolidated statements of earnings,stockholders’ equity, and cash flows for the fiscal years then ended. Ouraudits also included the financial statement schedule for the fiscal years endedJanuary 31, 2006 and 2005 listed in the Index at Item 15. These financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thefinancial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of January 31, 2006 and 2005, and the results of its operations and itscash flows for the fiscal years ended January 31, 2006 and 2005, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of January 31,2006, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated April 12,2006 expressed an unqualified opinion on management’s assessment of the effectivenessof the Company’s internal control over financial reporting and an unqualifiedopinion on the effectiveness of the Company’s internal control over financialreporting.
|                     | /s/ DELOITTE &  TOUCHE LLP |
|---------------------|-------------------------------------|
|                | DELOITTE & TOUCHE LLP      |
| Chicago, Illinois   |                                |
| April 12, 2006 |                                |

 

32

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders of Blyth, Inc.:

In our opinion, theaccompanying consolidated statements of earnings, stockholders’ equity and cashflows for the year ended January 31, 2004 present fairly, in all materialrespects, the results of operations and cash flows of Blyth, Inc. andSubsidiaries (the “Company”) for the year ended January 31, 2004, inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit. We conducted our audit of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

| /s/ PRICEWATERHOUSECOOPERS  LLP |
|---------------------------------|
| PRICEWATERHOUSECOOPERS LLP      |

 

Stamford, ConnecticutApril 26, 2004, except for Note 19, as to which the date is April 8,2005

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**BLYTH, INC. ANDSUBSIDIARIES**

**ConsolidatedBalance Sheets**

| ** **                                                                                                                           | ** ** | **January 31, **                                                         | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2005**                                                                           | ** ** | **2006** | ** ** |
| ** **                                                                                                                           | ** ** | **(In thousands, except share  and per share data)** | ** ** |
| **ASSETS**                                                                                                                           |       |                                                                               |       |   |   |
| **Current assets:**                                                                                                                  | ** ** | ** **                                                                         | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                            |       | $                                                                                  | 91,695     | ** ** | **$** | **242,068** | ** ** |
| Accounts receivable, less allowance for doubtful  receivables  $4,028 in 2005 and $3,892 in 2006                                     |       | 124,603                                                                            | ** ** | **109,857** | ** ** |
| Inventories                                                                                                                          |       | 234,984                                                                            | ** ** | **237,753** | ** ** |
| Prepaid and other                                                                                                                    |       | 43,832                                                                             | ** ** | **35,643** | ** ** |
| Assets held for sale                                                                                                                 |       | 3,949                                                                              | ** ** | **3,027** | ** ** |
| Deferred income taxes                                                                                                                |       | 15,068                                                                             | ** ** | **20,645** | ** ** |
| Total current assets                                                                                                                 |       | 514,131                                                                            | ** ** | **648,993** | ** ** |
| **Property, plant and equipment,  at cost:**                                                                                         | ** ** | ** **                                                                         | ** ** | ** ** | ** ** |
| Land and buildings                                                                                                                   |       | 190,198                                                                            | ** ** | **173,526** | ** ** |
| Leasehold improvements                                                                                                               |       | 19,797                                                                             | ** ** | **18,303** | ** ** |
| Machinery and equipment                                                                                                              |       | 210,674                                                                            | ** ** | **204,138** | ** ** |
| Office furniture, data processing equipment and  software                                                                            |       | 97,750                                                                             | ** ** | **92,834** | ** ** |
| Construction in progress                                                                                                             |       | 3,162                                                                              | ** ** | **1,966** | ** ** |
|                                                                                                                                 | ** ** | 521,581                                                                            | ** ** | **490,767** | ** ** |
| Less accumulated depreciation                                                                                                        |       | 262,685                                                                            | ** ** | **264,941** | ** ** |
|                                                                                                                                 | ** ** | 258,896                                                                            | ** ** | **225,826** | ** ** |
| **Other assets:**                                                                                                                    | ** ** | ** **                                                                         | ** ** | ** ** | ** ** |
| Investments                                                                                                                          |       | 3,446                                                                              | ** ** | **3,397** | ** ** |
| Excess of cost over fair value of assets acquired                                                                                    |       | 246,182                                                                            | ** ** | **185,127** | ** ** |
| Other intangible assets, net of accumulated  amortization of $3,867 in 2005 and $5,917 in 2006                                       |       | 39,233                                                                             | ** ** | **37,183** | ** ** |
| Deposits and other assets                                                                                                            |       | 13,932                                                                             | ** ** | **15,994** | ** ** |
|                                                                                                                                 | ** ** | 302,793                                                                            | ** ** | **241,701** | ** ** |
| Total assets                                                                                                                         |       | $                                                                                  | 1,075,820  | ** ** | **$** | **1,116,520** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                       | ** ** | ** **                                                                         | ** ** | ** ** | ** ** |
| **Current liabilities:**                                                                                                             | ** ** | ** **                                                                         | ** ** | ** ** | ** ** |
| Bank lines of credit                                                                                                                 |       | $                                                                                  | 11,813     | ** ** | **$** | **25,772** | ** ** |
| Current maturities of long-term debt                                                                                                 |       | 4,489                                                                              | ** ** | **1,049** | ** ** |
| Accounts payable                                                                                                                     |       | 81,333                                                                             | ** ** | **75,735** | ** ** |
| Accrued expenses                                                                                                                     |       | 94,847                                                                             | ** ** | **93,000** | ** ** |
| Income taxes                                                                                                                         |       | 9,477                                                                              | ** ** | **14,296** | ** ** |
| Total current liabilities                                                                                                            |       | 201,959                                                                            | ** ** | **209,852** | ** ** |
| **Deferred income taxes**                                                                                                            |       | 47,740                                                                             | ** ** | **39,383** | ** ** |
| **Long-term debt,**less current maturities                                                                                           |       | 271,573                                                                            | ** ** | **344,921** | ** ** |
| **Other liabilities**                                                                                                                |       | 33,199                                                                             | ** ** | **28,540** | ** ** |
| **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  50,367,827 shares in 2005 and 50,528,060 shares in 2006 |       | 1,007                                                                              | ** ** | **1,010** | ** ** |
| Additional contributed capital                                                                                                       |       | 118,148                                                                            | ** ** | **127,580** | ** ** |
| Retained earnings                                                                                                                    |       | 651,156                                                                            | ** ** | **657,983** | ** ** |
| Accumulated other comprehensive income (loss)                                                                                        |       | 36,102                                                                             | ** ** | **(1,935** | **)** |
| Treasury stock, at cost, 9,468,416 shares in 2005 and  9,533,416 shares in 2006                                                      |       | (285,064                                                                           | )          | **(287,744** | **)** |
| Unearned compensation on restricted stock                                                                                            |       | —                                                                             | ** ** | **(3,070** | **)** |
| Total stockholders’ equity                                                                                                      |       | 521,349                                                                            | ** ** | **493,824** | ** ** |
| Total liabilities  and stockholders’ equity                                                                                     |       | $                                                                                  | 1,075,820  | ** ** | **$** | **1,116,520** | ** ** |

 

The accompanying notes are an integral part of these financial statements.

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**BLYTH, INC. ANDSUBSIDIARIES**

**ConsolidatedStatements of Earnings**

| ** **                                         | ** ** | **Year ended January 31,**                          | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per share data)** | ** ** |
| Net sales                                          |       | $                                                                  | 1,505,573  |   | $ | 1,586,297 | ** ** | **$** | **1,573,076** | ** ** |
| Cost of goods  sold                                |       | 781,898                                                            |       | 814,617 | ** ** | **859,810** | ** ** |
| Gross profit                                       |       | 723,675                                                            |       | 771,680 | ** ** | **713,266** | ** ** |
| Selling                                            |       | 417,768                                                            |       | 458,690 | ** ** | **455,507** | ** ** |
| Administrative                                     |       | 129,021                                                            |       | 143,660 | ** ** | **148,326** | ** ** |
| Restructuring and  impairment charges              |       | 23,809                                                             |       | — | ** ** | **53,261** | ** ** |
|                                               |       | 570,598                                                            | ** ** | 602,350 | ** ** | **657,094** | ** ** |
| Operating profit                                   |       | 153,077                                                            |       | 169,330 | ** ** | **56,172** | ** ** |
| Other expense (income):                            |       |                                                               |       |   | ** ** | ** ** | ** ** |
| Interest expense                                   |       | 17,443                                                             |       | 22,138 | ** ** | **23,701** | ** ** |
| Other (income) loss, net                           |       | (1,259                                                             | )          | (1,884 | ) | **444** | ** ** |
|                                               |       | 16,184                                                             | ** ** | 20,254 | ** ** | **24,145** | ** ** |
| Earnings before income taxes and minority interest |       | 136,893                                                            |       | 149,076 | ** ** | **32,027** | ** ** |
| Income tax expense                                 |       | 50,377                                                             |       | 52,922 | ** ** | **7,775** | ** ** |
| Earnings before minority interest                  |       | 86,516                                                             |       | 96,154 | ** ** | **24,252** | ** ** |
| Minority Interest                                  |       | 165                                                                |       | (360 | ) | **(605** | **)** |
| Net earnings                                       |       | $                                                                  | 86,351     |   | $ | 96,514 | ** ** | **$** | **24,857** | ** ** |
| Basic:                                             |       |                                                               |       |   | ** ** | ** ** | ** ** |
| Net earnings per common share                      |       | $                                                                  | 1.89       |   | $ | 2.24 | ** ** | **$** | **0.61** | ** ** |
| Weighted average number of shares outstanding      |       | 45,771                                                             |       | 43,136 | ** ** | **40,956** | ** ** |
| Diluted:                                           |       |                                                               |       |   | ** ** | ** ** | ** ** |
| Net earnings per common share                      |       | $                                                                  | 1.88       |   | $ | 2.22 | ** ** | **$** | **0.60** | ** ** |
| Weighted average  number of shares outstanding     |       | 46,027                                                             |       | 43,556 | ** ** | **41,176** | ** ** |

 

The accompanying notes are an integral part of these financial statements.

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BLYTH, INC. AND SUBSIDIARIES

**ConsolidatedStatements of Stockholders’ Equity**

| ** **                                                          | ** ** | ** **              | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|--------------|------------|------------------|------------|------------------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **              | ** ** | **Additional**  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **other**              | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common**              | ** ** | **contributed** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Unearned**     | ** ** | **comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **stock**               | ** ** | **capital**     | ** ** | **earnings** | ** ** | **stock**    | ** ** | **compensation** | ** ** | **income (loss)** | ** ** | **Total**  | ** ** |
| ** **                                                          | ** ** | **(In thousands)** | ** ** |
| Balance at February 1, 2003                                    |       | $                       | 994        |            | $          | 101,567      |       | $            | 496,627    |             | $          | (86,585                | )          |       | $          | — |   |   |   | $ | (4,751 | ) |   | $ | 507,852 |   |
| Net earnings for the year                                           |       |                    |       |            |       | 86,351       |       |         |       |             |       |                   |       |       |       |   |   | 86,351 |   |
| Foreign currency translation adjustments                            |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | 21,120     |   |   | 21,120 |   |
| Unrealized loss on certain investments (net of tax of  $189)        |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | (325       | ) |   | (325 | ) |
| Net loss on cash flow hedging instruments (net of tax  of $477)     |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | (820       | ) |   | (820 | ) |
| Comprehensive income                                                |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       |       |   |   | 106,326 |   |
| Common stock issued in connection with long-term incentive  plan    |       | 5                       |       | 5,840           |       |         |       |         |       |             |       |                   |       |       |       |   |   | 5,845 |   |
| Tax benefit from stock options                                      |       |                    |       | 558             |       |         |       |         |       |             |       |                   |       |       |       |   |   | 558 |   |
| Dividends paid ($0.28 per share)                                    |       |                    |       |            |       | (12,807      | )          |         |       |             |       |                   |       |       |       |   |   | (12,807 | ) |
| Treasury stock purchases                                            |       |                    |       |            |       |         |       | (18,804      | )          |             |       |                   |       |       |       |   |   | (18,804 | ) |
| Balance at January 31, 2004                                    |       | 999                     |       | 107,965         |       | 570,171      |       | (105,389     | )          |             | —     |                   |       |       | 15,224     |   |   | 588,970 |   |
| Net earnings for the year                                           |       |                    |       |            |       | 96,514       |       |         |       |             |       |                   |       |       |       |   |   | 96,514 |   |
| Foreign currency translation adjustments                            |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | 21,311     |   |   | 21,311 |   |
| Unrealized gain on certain investments (net of tax of  $75)         |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | 135        |   |   | 135 |   |
| Net loss on cash flow hedging  instruments (net of tax of $280)     |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | (568       | ) |   | (568 | ) |
| Comprehensive income                                                |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       |       |   |   | 117,392 |   |
| Common stock issued in connection with long-term  incentive plan    |       | 8                       |       | 9,463           |       |         |       |         |       |             |       |                   |       |       |       |   |   | 9,471 |   |
| Tax benefit from stock options                                      |       |                    |       | 720             |       |         |       |         |       |             |       |                   |       |       |       |   |   | 720 |   |
| Dividends paid ($0.36 per share)                                    |       |                    |       |            |       | (15,529      | )          |         |       |             |       |                   |       |       |       |   |   | (15,529 | ) |
| Treasury stock purchases                                            |       |                    |       |            |       |         |       | (179,675     | )          |             |       |                   |       |       |       |   |   | (179,675 | ) |
| Balance at January 31, 2005                                    |       | 1,007                   |       | 118,148         |       | 651,156      |       | (285,064     | )          |             | —     |                   |       |       | 36,102     |   |   | 521,349 |   |
| Net earnings for the year                                           |       |                    |       |            |       | 24,857       |       |         |       |             |       |                   |       |       |       |   |   | 24,857 |   |
| Foreign currency translation adjustments                            |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | (40,946    | ) |   | (40,946 | ) |
| Minimum pension liability adjustment (net of tax  $578)             |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | (1,347     | ) |   | (1,347 | ) |
| Unrealized gain on certain investments (net of tax of  $167)        |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | 948        |   |   | 948 |   |
| Net gain on cash flow hedging instruments (net of tax  of $842)     |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | 1,530      |   |   | 1,530 |   |
| Net gain on net investment hedging instruments (net  of tax $1,090) |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       | 1,778      |   |   | 1,778 |   |
| Comprehensive income (loss)                                         |       |                    |       |            |       |         |       |         |       |             |       |                   |       |       |       |   |   | (13,180 | ) |
| Common stock issued in connection with long-term  incentive plan    |       | 3                       |       | 3,570           |       |         |       |         |       |             |       |                   |       |       |       |   |   | 3,573 |   |
| Tax benefit from stock options                                      |       |                    |       | 315             |       |         |       |         |       |             |       |                   |       |       |       |   |   | 315 |   |
| Issuance of restricted stock, net of cancellations                  |       |                    |       | 5,547           |       |         |       | (609         | )          |             | (4,938     | )                      |       |       |       |   |   | — |   |
| Amortization of unearned compensation                               |       |                    |       |            |       |         |       |         |       |             | 1,868      |                   |       |       |       |   |   | 1,868 |   |
| Dividends paid ($0.44 per share)                                    |       |                    |       |            |       | (18,030      | )          |         |       |             |       |                   |       |       |       |   |   | (18,030 | ) |
| Treasury stock purchases                                            |       |                    |       |            |       |         |       | (2,071       | )          |             |       |                   |       |       |       |   |   | (2,071 | ) |
| Balance at  January 31, 2006                                   |       | $                       | 1,010      |            | $          | 127,580      |       | $            | 657,983    |             | $          | (287,744               | )          |       | $          | (3,070 | ) |   |   | $ | (1,935 | ) |   | $ | 493,824 |   |

 

The accompanying notes are an integral part of these financial statements.

36

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**BLYTH, INC. ANDSUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

| ** **                                                                             | ** ** | **Year ended January 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(In thousands)**                   | ** ** |
| Cash flows from operating  activities:                                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                                                           |       | $                                         | 86,351     |   | $ | 96,514 | ** ** | **$** | **24,857** | ** ** |
| Adjustments to  reconcile net earnings to net cash  provided by operating activities:  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                          |       | 35,954                                    |       | 35,600 | ** ** | **35,875** | ** ** |
| Loss on disposition of fixed assets                                                    |       | 2,739                                     |       | 1,070 | ** ** | **3,212** | ** ** |
| (Gain)/loss on sale of business                                                        |       | —                                    |       | (364 | ) | **1,620** | ** ** |
| Tax benefit from stock options                                                         |       | 558                                       |       | 720 | ** ** | **315** | ** ** |
| Amortization of unearned compensation on restricted  stock                             |       | —                                    |       | — | ** ** | **1,868** | ** ** |
| Deferred income taxes                                                                  |       | (584                                      | )          | 12,407 | ** ** | **(12,923** | **)** |
| Equity in (earnings)/losses of investees                                               |       | 71                                        |       | (319 | ) | **50** | ** ** |
| Minority interest                                                                      |       | 165                                       |       | (528 | ) | **(767** | **)** |
| Restructuring and impairment charges, including  goodwill                              |       | 20,229                                    |       | — | ** ** | **53,261** | ** ** |
| (Gain)/loss on sale of long-term investments                                           |       | (497                                      | )          | — | ** ** | **—** | ** ** |
| (Gain)/loss on assets held for sale                                                    |       | —                                    |       | (128 | ) | **1,159** | ** ** |
| Changes  in operating assets and liabilities, net of  effect of business acquisitions: | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts receivable                                                                    |       | (12,935                                   | )          | 10,106 | ** ** | **2,490** | ** ** |
| Inventories                                                                            |       | 24,718                                    |       | (3,391 | ) | **(13,841** | **)** |
| Prepaid and other                                                                      |       | (2,422                                    | )          | (14,050 | ) | **6,676** | ** ** |
| Deposits and other assets                                                              |       | 5,611                                     |       | (1,235 | ) | **(248** | **)** |
| Accounts payable                                                                       |       | 3,236                                     |       | (3,199 | ) | **(1,406** | **)** |
| Accrued expenses                                                                       |       | 6,937                                     |       | (12,496 | ) | **3,042** | ** ** |
| Other liabilities                                                                      |       | 2,093                                     |       | 6,565 | ** ** | **(4,029** | **)** |
| Income taxes                                                                           |       | 833                                       |       | 11,250 | ** ** | **5,612** | ** ** |
| Net cash provided by operating activities                                              |       | 173,057                                   |       | 138,522 | ** ** | **106,823** | ** ** |
| Cash flows from investing  activities:                                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of property, plant and equipment                                             |       | (21,963                                   | )          | (20,976 | ) | **(17,272** | **)** |
| Purchases of long-term investments                                                     |       | (1,377                                    | )          | (21,000 | ) | **—** | ** ** |
| Proceeds from sale of long-term investments                                            |       | 1,874                                     |       | 21,000 | ** ** | **—** | ** ** |
| Proceeds from sale of assets held for sale                                             |       | —                                    |       | 3,718 | ** ** | **—** | ** ** |
| Proceeds from sale of business                                                         |       | —                                    |       | 9,752 | ** ** | **7,645** | ** ** |
| Cash impact of Wax Lyrical receivership                                                |       | 1,902                                     |       | — | ** ** | **—** | ** ** |
| Purchase of businesses, net of cash acquired                                           |       | (148,584                                  | )          | (54,221 | ) | **(7,121** | **)** |
| Net cash used in investing activities                                                  |       | (168,148                                  | )          | (61,727 | ) | **(16,748** | **)** |
| Cash flows from financing  activities:                                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                                 |       | 5,845                                     |       | 9,471 | ** ** | **3,706** | ** ** |
| Purchases of treasury stock                                                            |       | (18,804                                   | )          | (179,675 | ) | **(2,071** | **)** |
| Borrowings from bank line of credit                                                    |       | 67,833                                    |       | 158,761 | ** ** | **140,794** | ** ** |
| Repayments on bank line of credit                                                      |       | (70,931                                   | )          | (187,649 | ) | **(117,950** | **)** |
| Borrowings on long-term debt                                                           |       | 130,506                                   |       | — | ** ** | **69,406** | ** ** |
| Repayments on long-term debt                                                           |       | (40,663                                   | )          | (5,044 | ) | **(4,944** | **)** |
| Dividends paid                                                                         |       | (12,807                                   | )          | (15,529 | ) | **(18,030** | **)** |
| Net cash provided by (used in) financing activities                                    |       | 60,979                                    |       | (219,665 | ) | **70,911** | ** ** |
| Effect of exchange rate changes on cash                                                |       | (4,758                                    | )          | 4,839 | ** ** | **(10,613** | **)** |
| Net increase/(decrease) in cash and cash equivalents                                   |       | 61,130                                    |       | (138,031 | ) | **150,373** | ** ** |
| Cash and cash  equivalents at beginning of year                                        |       | 168,596                                   |       | 229,726 | ** ** | **91,695** | ** ** |
| Cash and cash  equivalents at end of year                                              |       | $                                         | 229,726    |   | $ | 91,695 | ** ** | **$** | **242,068** | ** ** |
| Supplemental disclosure  of cash flow information:                                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for:                                                        | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest                                                                               |       | $                                         | 10,800     |   | $ | 22,380 | ** ** | **$** | **23,976** | ** ** |
| Income taxes, net of refunds                                                           |       | 47,460                                    |       | 37,270 | ** ** | **23,565** | ** ** |
| Non-cash  transactions:                                                                |       |                                      |       |   |   |   |   |
| Note received for  sale of assets                                                      |       | $                                         | —     |   | $ | — |   | **$** | **2,000** |   |

 

The accompanying notes are an integral part of these financial statements.

37

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements**

**Note 1.**   Summary ofSignificant Accounting Policies

A summary of the significant accounting policiesapplied in the preparation of the accompanying consolidated financialstatements follows:

**Principles of Consolidation**

The consolidated financial statements include theaccounts of Blyth, Inc. and its direct and indirect subsidiaries,  (the “Company”). The Company consolidates entities in which itowns or controls more than 50% of the voting shares and investments where theCompany has been determined to be the primary beneficiary. The unowned portionis reflected as minority interest. Investments in companies that are notconsolidated are reported using the equity method and are recorded in otherassets in the Consolidated Balance Sheet. All significant inter-company balances and transactions have beeneliminated in consolidation.

Certain of the Company’s subsidiaries operate on a 52or 53-week fiscal year ending on the Saturday nearest to January 31.Most foreign operations maintain a calendar year accounting period, which isconsolidated with the Company’s fiscal period.

**Estimates**

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates. Areasof the financial statements involving significant estimates include inventoryreserves, bad debt reserves, chargeback reserves, impairment charges, taxes,and other accrued liabilities.

**Credit Concentration**

The Company’s credit sales are principally to departmentand gift stores, mass merchandisers and distributors, which purchase theCompany’s products for resale. The Company performs ongoing credit evaluationsof its customers and generally does not require collateral. The Company makesprovisions for estimated credit losses.

**Foreign Currency Translation**

The Company’s international subsidiaries use theirlocal currency as their functional currency. Therefore, all balance sheetaccounts of international subsidiaries are translated into U.S. dollars at theyear-end rate of exchange, and statement of earnings items are translated atthe weighted average exchange rates for the period. Resulting translationadjustments are included in accumulated other comprehensive income (loss).Gains and losses on foreign currency transactions, which are included inincome, were not material.

**Investments**

The Company makes investments from time to time in theordinary course of its business that may include selected assets and productlines, long-term investments and/or joint ventures that either complement orexpand its existing business. The equity method of accounting is used toaccount for investments in common stock in which the Company has the ability toexercise significant influence over the operating and financial policies of theinvestee.

38

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 1.**   Summary of SignificantAccounting Policies (Continued)

**Derivatives andOther Financial Instruments**

The Company applies the provisions of Statement ofFinancial Accounting Standards No. 133 (SFAS No. 133), “Accountingfor Derivative and Hedging Activities” and its corresponding amendment underSFAS No. 138. These statements establish the accounting and reportingstandards for derivative instruments and hedging activities and require thatall derivative instruments be recorded on the balance sheet at fair value. TheCompany uses foreign exchange forward and options contracts to hedge the impactof foreign currency fluctuations on foreign denominated inventory purchases,intercompany payables and certain intercompany loans. The Company does not holdor issue derivative financial instruments for trading purposes.

The Company hedged the net assets of certain of itsforeign operations through foreign currency forward contracts during fiscal2006. Any increase or decrease in the fair value of the forwards related tochanges in the spot foreign exchange rates is offset by the change in the valueof the hedged net assets of the foreign operations relating to changes in spotforeign exchange rates. The net after-tax gain related to the derivative netinvestment hedge instruments recorded in accumulated other comprehensive income(loss) (“OCI”) totaled $1.8 million at January 31, 2006.

The Company has designated its forward exchange andoptions contracts on forecasted intercompany purchases and future purchasecommitments as cash flow hedges and, as such, as long as the hedge remainseffective and the underlying transaction remains probable, the effectiveportion of the changes in the fair value of these contracts will be recorded inOCI until earnings are affected by the variability of the cash flows beinghedged. With regard to commitments for inventory purchases, upon payment ofeach commitment, the underlying forward contract is closed and thecorresponding gain or loss is transferred from accumulated OCI and is includedin the measurement of the cost of the acquired asset. If a hedging instrumentis sold or terminated prior to maturity, gains and losses are deferred inaccumulated OCI until the hedged item is settled. However, if the hedged itemis no longer likely to occur, the resultant gain or loss on the terminatedhedge is recognized into earnings immediately. Amounts included in accumulatedOCI at January 31, 2006 are immaterial and are expected to be transferredinto earnings within the next twelve months upon payment of the underlyingcommitment.

The Company has designated its foreign currencyforward contracts related to intercompany loans and intercompany payables asfair value hedges. The gains or losses on the fair value hedges are recognizedinto earnings and generally offset the transaction gains or losses in theforeign denominated loans that they are intended to hedge.

For consolidated financial statement presentation, netcash flows from such hedges are classified in the categories of theConsolidated Statements of Cash Flows with the items being hedged.

On July 10, 2003, the Company terminated theinterest rate swap agreement in relation to $50.0 million of its outstanding7.90% Senior Notes, which mature on October 1, 2009. This terminationresulted in a deferred gain of approximately $5.0 million, which is beingamortized over the remaining term of the Notes.

39

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 1.**   Summary of Significant Accounting Policies (Continued)

**Fair Value ofFinancial Instruments**

The Company’s financial instruments include accountsreceivable, accounts payable, short-term and long-term debt. Managementbelieves the carrying values of these items approximate their estimated fairvalues, except for long-term debt, as discussed in Note 12 to the ConsolidatedFinancial Statements.

**Cash Equivalents**

The Company considers all highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents.

**Inventories**

Inventories are valued at the lower of cost or market.Cost is determined by the first-in, first-out method. The elements of cost areprimarily material, labor and overhead.

**Shipping and Handling**

The Company classifies shipping and handling feesbilled to customers in revenue, and shipping and handling costs are classifiedas cost of goods sold.

**Property, Plant and Equipment**

Property, plant and equipment are stated at cost, lessaccumulated depreciation and amortization. Depreciation and amortization areprovided principally by use of the straight-line method for financial reportingpurposes. Leasehold improvements are amortized over the lives of the respectiveleases or the service lives of the improvements, whichever is shorter. TheCompany records gains and losses from the sale of property, plant and equipmentin operating profit.

Theprincipal estimated lives used in determining depreciation and amortization areas follows:

| Buildings                                                 |   | 27 to 40 years |   |
|-----------------------------------------------------------|--------|----------------|--------|
| Leasehold  improvements                                   |   | 5 to 10 years  |   |
| Machinery and  equipment                                  |   | 5 to 12 years  |   |
| Office furniture, data  processing equipment and software |   | 3 to7 years    |   |

 

**Goodwilland Other Indefinite Lived Intangibles**

Goodwill and otherindefinite lived intangibles are subject to an assessment for impairment usinga two-step fair value-based test and such other intangibles are also subject toimpairment reviews, which must be performed at least annually, or morefrequently if events or circumstances indicate that goodwill or otherindefinite lived intangibles might be impaired. The Company performs its annualassessment of impairment in the fourth fiscal quarter. For goodwill, the firststep compares the fair value of a reporting unit to its carrying amount,including goodwill. For each of the reporting units, the estimated fair valueis determined utilizing a combination of valuation techniques, namely thediscounted cash flow methodology and the market multiple methodology. If thefair value of the reporting unit exceeds the carrying value, no furtheranalysis is necessary. If the carrying amount of the reporting unit exceeds itsfair value, the second step is performed. The second step compares the carryingamount of the goodwill to the fair value of the goodwill. If fair value is lessthan the carrying amount, an impairment loss is reported as a reduction to theasset and a charge to operating expense, except at the transition date, whenthe loss was reflected as a 

40

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 1.**   Summary of Significant Accounting Policies (Continued)

cumulative effect of achange in accounting principle. As a result of our 2006 goodwill impairmentanalysis, we recognized a goodwill impairment charge of $53.3 million in theWholesale segment. (See Note 9 to the Consolidated Financial Statements).

**Impairment of Long-Lived Assets**

We review long-lived assets, including property, plantand equipment for impairment whenever events or changes in circumstancesindicate that the carrying amount of such an asset may not be recoverable. Managementwill determine whether there has been a permanent impairment on such assetsheld for use in the business by comparing anticipated undiscounted future cashflows from the use and eventual disposition of the asset or asset group to thecarrying value of the asset. The amount of any resulting impairment will becalculated by comparing the carrying value to the fair value, which may beestimated using the present value of the same cash flows. Long-lived assetsthat meet the definition of held for sale are valued at the lower of carryingamount or net realizable value.

**ComprehensiveIncome (Loss)**

Comprehensive income (loss) includes net income (loss)and other comprehensive income (loss). Other comprehensive income (loss) isclassified separately into foreign currency items, unrealized gains and losseson certain investments in debt and equity securities, the net gains and losseson cash flow hedging instruments and net investment hedges and minimum pensionliability. The Company reports, by major components and as a single total, thechange in comprehensive income (loss) during the period as part of theConsolidated Statements of Stockholders’ Equity.

The following tablepresents the components of the Company’s accumulated other comprehensive income(loss), net of tax, for the years ended January 31, 2004, 2005 and 2006:

| ** **                        | ** ** | **Foreign**             | ** ** | **Unrealized**       | ** ** | **Net**                    | ** ** | **Net**                   | ** ** | **Minimum**    | ** ** | **Accumulated**   | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------|------------|----------------------------|------------|---------------------------|------------|----------------|------------|-------------------|------------|
| ** **                        | ** ** | **currency**            | ** ** | **gain (loss)** | ** ** | **gain (loss)**       | ** ** | **gain on net** | ** ** | **pension**    | ** ** | **other**         | ** ** |
| ** **                        | ** ** | **translation**         | ** ** | **on certain**  | ** ** | **on cash flow** | ** ** | **investment**            | ** ** | **liability**  | ** ** | **comprehensive** | ** ** |
| ** **                        | ** ** | **adjustments**         | ** ** | **investments**      | ** ** | **hedges**                 | ** ** | **hedges**                | ** ** | **adjustment** | ** ** | **income (loss)** | ** ** |
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Balance at February 1, 2003  |       |                    | $          | (4,372               | )          |                       |       | $                         | (215       | )              |       |              | $          | (164 | ) |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | (4,751 | ) |   |
| Other comprehensive income (loss) |       |                    | 21,120     |                 |       |                       | (325       | )                         |       |           | (820       | )                 |       |   |   |   |   |   |   |   |   |   | 19,975 |   |   |
| Balance at January 31, 2004  |       |                    | 16,748     |                 |       |                       | (540       | )                         |       |           | (984       | )                 |       |   | — |   |   |   | — |   |   |   | 15,224 |   |   |
| Other comprehensive income (loss) |       |                    | 21,311     |                 |       |                       | 135        |                      |       |           | (568       | )                 |       |   |   |   |   |   |   |   |   |   | 20,878 |   |   |
| Balance at January 31, 2005  |       |                    | 38,059     |                 |       |                       | (405       | )                         |       |           | (1,552     | )                 |       |   | — |   |   |   | — |   |   |   | 36,102 |   |   |
| Other comprehensive income (loss) |       |                    | (40,946    | )                    |       |                       | 948        |                      |       |           | 1,530      |              |       |   | 1,778 |   |   |   | (1,347 | ) |   |   | (38,037 | ) |   |
| Balance at  January 31, 2006 |       |                    | $          | (2,887               | )          |                       |       | $                         | 543        |           |       |              | $          | (22 | ) |   |   | $ | 1,778 |   |   |   | $ | (1,347 | ) |   |   | $ | (1,935 | ) |   |

 

**IncomeTaxes**

Income tax expense is based on taxable income,statutory tax rates and the impact of non-deductible items. Deferred tax assetsand liabilities are recognized for the expected tax consequences of temporarydifferences between the tax basis of assets and liabilities and their reportedamounts. The management of the corporation, along with third-party advisers,periodically estimates the probable tax obligations of the corporation usinghistorical experience in tax jurisdictions and informed judgments. There areinherent uncertainties related to the interpretation of tax regulations in thejurisdictions in which the corporation transacts business. The judgments andestimates made at a point in time may change based on the outcome of taxaudits, as well as changes to or further interpretations of regulations. Ifsuch changes take place, there is a risk that the tax rate may increase ordecrease in any period.

41

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note1.**   Summary of SignificantAccounting Policies (Continued)

**Revenue Recognition**

Revenue recognition—Revenues consist of sales tocustomers, net of returns and allowances. The Company recognizes revenue upondelivery, when both title and risk of loss are transferred to the customer.

Generally, sales orders are received via signedcustomer purchase orders with stated fixed prices based on published pricelists. The Company records estimated reductions to revenue for customerprograms, which may include special pricing agreements for specific customers,volume incentives and other promotions. Should market conditions decline, theCompany may increase customer incentives with respect to future sales. TheCompany also records estimated reductions to revenue, based primarily onhistorical experience, for customer returns and chargebacks that may arise as aresult of shipping errors, product damage in transit or for other reasons thatcan only become known subsequent to recognizing the revenue. If the amount ofactual customer returns and chargebacks were to increase significantly from theestimated amount, revisions to the estimated allowance would be required.

In some instances,the Company receives payment in advance of product shipments. Such advancepayments occur primarily in our direct selling and direct marketing channelsand are recorded as deferred revenue. Upon delivery of product shipments forwhich advance payment has been made, the related deferred revenue isreclassified to revenue.

Most of the Company’ssales made on credit are made to an established list of customers. Although thecollectibility of sales made on credit is reasonably assured, the Company hasestablished an allowance for doubtful accounts for its trade and note receivables.The allowance is determined based on the Company’s evaluation of specificcustomers’ ability to pay, aging of receivables, historical experience and thecurrent economic environment. While the Company believes it has appropriatelyconsidered known or expected outcomes, its customers’ ability to pay theirobligations, including those to the Company, could be adversely affected bydeclining sales at retail resulting from such factors as contraction in theeconomy or a general decline in consumer spending.

42

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note1.**   Summary of Significant AccountingPolicies (Continued)

Some of the Company’sbusiness units offer seasonal dating programs pursuant to which customers thatqualify for such programs are offered extended payment terms for seasonalproduct shipments. As with other customers, customer orders pursuant to suchseasonal dating programs are generally received in the form of a writtenpurchase order signed by an authorized representative of the customer. Salesmade pursuant to seasonal dating programs are recorded as revenue only upondelivery either to the customer or to an agent of the customer depending on thefreight terms for the particular shipment and consistent with the concept of“risk of loss.”  The sales price for theCompany’s products sold pursuant to such seasonal dating programs, is fixedprior to the time of shipment to the customer. Customers do not have the rightto return product except for rights to return that the Company believes aretypical of our industry for such reasons as damaged goods, shipping errors orsimilar occurrences. The Company is not required to repurchase products fromits customers, nor does the Company have any regular practice of doing so. TheCompany believes that it is reasonably assured of payment for products sold pursuantto such seasonal dating programs based on its historical experience with theestablished list of customers eligible for such programs. In addition, theCompany minimizes its exposure to bad debts by utilizing established creditlimits for each customer. If, however, product sales by our customers duringthe seasonal selling period should fall significantly below expectations, suchcustomers’ financial condition could be adversely affected, increasing the riskof not collecting these seasonal dating receivables and, possibly, resulting inadditional bad debt charges. The Company does not make any sales underconsignment or similar arrangements.

**Earnings per Common and Common Equivalent Share**

Earnings per common andcommon equivalent share-basic are computed based upon the weighted averagenumber of shares outstanding during the period. Earnings per common and commonequivalent share-diluted reflects the potential dilution that could occur ifoptions and fixed awards to be issued under stock-based compensationarrangements were converted into common stock.

**Employee StockOption Plans**

The Company has elected toadopt the disclosure only provisions of SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure,” and continues to followAccounting Principles Board (APB) opinion No. 25, “Accounting for StockIssued to Employees” and related interpretations in accounting for stockoptions granted to its employees and directors under the intrinsic valuemethod. Accordingly, no compensation expense is recorded for the stock optionsissued to employees unless the option price is below market at the measurementdate. The Company does not at this time issue stock options below market valueat the date of grant; therefore, no compensation expense has been recorded inthe financial statements.

On December 9, 2005,the Board of Directors of the Company approved the acceleration of the vestingof all unvested stock options. Stock option awards granted from December 10,2000 through the date of acceleration with respect to approximately 350,000shares of the Company’s common stock, which represented 100% of the unvestedoptions, were subject to this acceleration, which was effective as of December 9,2005. Virtually all of these options had exercise prices in excess of thecurrent market values and were not fully achieving their original objectives ofincentive compensation and employee retention. Additional expense of $1.7million associated with the acceleration is included in the year ended January 31,2006 pro forma disclosure presented in the following table. The accelerationalso eliminates 

43

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 1.**   Summary of SignificantAccounting Policies (Continued)

futurecompensation expense the Company would otherwise recognize in its ConsolidatedStatement of Earnings upon adoption of SFAS 123R. The Company believes theimplementation of this standard will not have a material impact on thefinancial statements.

Had compensation expense for the Company’s stock optionsbeen determined in accordance with the fair value method in SFAS No. 123, “Accountingfor Stock-Based Compensation” and SFAS No. 148, the Company’s reported netincome and earnings per share would have been adjusted to the pro forma amountsindicated in the following table. These pro forma effects may not berepresentative of future stock compensation expense since the estimated fairvalue of stock options on the date of grant is amortized to expense over thevesting period and all options were fully vested upon the accelerated vestingof options on December 9, 2005.

| **Year ended January 31, **                                                                         | ** ** | ** **                                                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                                                              | ** ** | **(In thousands, except per share data)** | ** ** |
| Net earnings:                                                                                                           |       |                                                               |       |     |       |     |       |
| As reported                                                                                                             |       | $                                                                  | 86,351     |     | $          | 96,514   |       | $        | 24,857     |   |
| Stock-based  employee compensation expense determined under SFAS No. 123 for all  awards, net of related tax  |       | 2,428                                                              |       | 2,409    |       | 2,873    |       |
| Pro forma                                                                                                               |       | $                                                                  | 83,923     |     | $          | 94,105   |       | $        | 21,984     |   |
| Net earnings per common  share:                                                                                         |       |                                                               |       |     |       |     |       |
| As reported:                                                                                                            |       |                                                               |       |     |       |     |       |
| Basic                                                                                                                   |       | $                                                                  | 1.89       |     | $          | 2.24     |       | $        | 0.61       |   |
| Diluted                                                                                                                 |       | 1.88                                                               |       | 2.22     |       | 0.60     |       |
| Pro forma:                                                                                                              |       |                                                               |       |     |       |     |       |
| Basic                                                                                                                   |       | $                                                                  | 1.83       |     | $          | 2.18     |       | $        | 0.54       |   |
| Diluted                                                                                                                 |       | 1.82                                                               |       | 2.16     |       | 0.53     |       |

 

Thefair value of each option is estimated on the date of grant, using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:

| ** **                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected  volatility      |       | 41.48    | %          | 32.0     | %          | N/A      |       |
| Risk free  interest rates |       | 2.73     | %          | 3.80     | %          | N/A      |       |
| Expected lives            |       | 5        |       | 5        |       | N/A      |       |
| Expected dividend yield   |       | 0.87     | %          | 1.40     | %          | N/A      |       |

 

The Company did not issue any options during the yearended January 31, 2006.

**Advertisingand Catalog Costs**

The Company expenses thecosts of advertising as incurred, except the costs for direct-responseadvertising, which are capitalized and amortized over the expected period offuture benefits.

Direct-response advertisingrelates to the Company’s Miles Kimball and Walter Drake businesses and consistsprimarily of the costs to produce direct-mail order catalogs that include orderforms for the Company’s products. The capitalized production costs areamortized for each specific catalog mailing over the period following catalogdistribution in proportion to revenues (orders) received, compared to totalestimated revenues for that particular catalog mailing. The amortization periodis generally from three to 

44

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 1.**   Summary of Significant Accounting Policies (Continued)

six months and does not exceed twelve months. Deferreddirect-response advertising costs of $5.6 million and $5.0 million werereported as assets at January 31, 2005 and January 31, 2006,respectively.

Incertain of the Company’s Wholesale and Direct Selling businesses, catalogproduction costs are capitalized and expensed as the catalogs are distributed,generally over less than a twelve month period. The Consolidated Balance Sheetsreflect $1.6 million and $1.0 million of these costs at January 31, 2005and 2006, respectively.

**Note2.**   New Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs—an amendment of ARB No. 43”. This standard requiresabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage) to be recognized as current period charges. Additionally,it requires that allocation of fixed production overhead costs be allocated toinventory based on the normal capacity of the production facility. Theprovisions of this standard apply prospectively and are effective for theCompany for inventory costs incurred after February 1, 2006. The Companybelieves this standard will not have a material effect on its financialstatements.

In December 2004, theFASB issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”), “Share-BasedPayment”. This standard requires companies to measure share-based payments atgrant-date fair value and recognize the compensation expense in their financialstatements. While we previously adopted, for disclosure purposes only, the fairvalue based method of accounting pursuant to SFAS No. 123, “Accounting forStock Based Compensation”, SFAS No. 123R requires a forfeiture assumptionfor our unvested awards. Additionally, SFAS No. 123R amends thepresentation of the statement of cash flows and requires additional annualdisclosures. On December 9, 2005, the Board of Directors of the Companyapproved the acceleration of the vesting of all unvested stock options. Stockoption awards granted from December 10, 2000 through the date ofacceleration with respect to approximately 350,000 shares of the Company’scommon stock, which represented 100% of the unvested options, were subject tothis acceleration, which was effective as of December 9, 2005. Virtuallyall of these options had exercise prices in excess of the current market valuesand were not fully achieving their original objectives of incentivecompensation and employee retention. Additional expense of $1.7 millionassociated with the acceleration is included in the year ended January 31,2006 pro forma disclosure presented in Note 1 to the Consolidated FinancialStatements. The acceleration also eliminates future compensation expense theCompany would otherwise recognize in its Consolidated Statement of Earningsupon adoption of SFAS 123R. The Company believes the implementation ofthis standard will not have a material impact on the financial statements.

In December 2004, theFASB issued Staff Position No. FAS 109-2 (“FAS 109-2”), “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creations Act of 2004” (“AJCA”). The AJCA introduces alimited time 85% dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer (repatriation provision), provided certaincriteria are met. FAS 109-2 provides accounting and disclosure guidancefor the repatriation provision.  On January 24, 2006, theBoard of Directors approved a domestic reinvestment plan for the approximately$130 million in foreign earnings, which were previously consideredpermanently reinvested in non-U.S. legal entities, which the Companyrepatriated under the AJCA. Thefunds were brought back to the United States late in the fourth quarter andreceived the favorable tax treatment provided by the Act. The 

45

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 2.**   New Accounting Pronouncements (Continued)

Company recorded a one-time tax expense ofapproximately $9.1 million, which is reflected in the Company’s currentyear effective tax rate. As part of its repatriation plan, the Company intendsto make a domestic investment of the repatriated amount in a wide range ofinitiatives, including the hiring and training of U.S. workers, research anddevelopment efforts, qualified retirement plan funding, capital expenditures tosupport the U.S. businesses, advertising and marketing with respect to itsvarious trademarks, brand names and rights to intangible property, andacquisitions of U.S.-based businesses, all consistent with the requirements ofthe legislation.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections, aReplacement of APB No. 20 and FASB No. 3” (“SFAS No. 154”). SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it isimpracticable. APB Opinion No. 20 “Accounting Changes,” previouslyrequired that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. This standard did not impact theCompany for the year ended January 31, 2006.

In March 2005, theFASB issued Interpretation No. 47 (“FIN 47”) to clarify the guidanceincluded in SFAS No. 143, “Accounting for Asset Retirement Obligations”. FIN47 requires companies to recognize a liability for the fair value of a legalobligation to perform asset retirement activities that are conditional on afuture event if the amount can be reasonably estimated. If amounts cannot bereasonably estimated, certain disclosures are required about the unrecognizedasset retirement obligations. This standard did not impact the Company for theyear-ended January 31, 2006.

**Note3.**   Business Acquisitions

On April 1, 2003, theCompany acquired 100% of the Miles Kimball Company (“Miles Kimball”), a directmarketer of giftware, home décor and household convenience items, premium photoalbums, frames and holiday cards under the Miles Kimball® and Exposures®catalog titles for approximately $66.2 million in cash. The acquisition ofMiles Kimball aligns with one component of the Company’s overall growthstrategy, which is to grow through selected acquisitions in the HomeExpressions industry. The excess of the purchase price over the estimated fairvalue of the net assets acquired approximated $46.0 million, which will not bedeductible for income tax purposes. The other intangibles acquired consist of$16.1 million of trade names and trademarks, which are deemed to have anindefinite life and will not be amortized, plus $9.0 million of customer lists,which will be amortized on an accelerated basis over 12 years. The results ofoperations of Miles Kimball are included in the Consolidated Statements ofEarnings of the Company since April 2, 2003. For segment reportingpurposes, Miles Kimball is included in the Catalog & Internet segment.

On June 20, 2003, theCompany acquired a 100% interest in Kaemingk B.V. (“Kaemingk”), a designer andmarketer of a wide range of premium seasonal decorations. Kaemingk’s productlines feature Christmas décor, including ornaments, lighting, trim, glassware,candles and plush animals, as well as spring and summer decorative accents. Theacquisition of Kaemingk aligns with one component of the Company’s overallgrowth strategy, which is to grow through selected acquisitions in the HomeExpressions industry. The cash purchase price was approximately $36.2 millionless cash acquired of $7.7 million resulting in net cash paid of $28.5 million.Approximately $30.6 million of the cash purchase price was borrowed under theCompany’s prior $200 million unsecured revolving credit facility. The Companyalso assumed Kaemingk’s long-term debt of approximately $14.4 million. Theexcess of the purchase price 

46

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 3.**   Business Acquisitions (Continued)

over theestimated fair value of the net assets acquired of approximately $17.6 millionwill not be deductible for income tax purposes. In addition to the fixedpurchase price, there is contingent consideration payable in the form of athree-year earn out provision based on a pre-defined formula related to amultiple of earnings before interest and income taxes. The first annual earnout of $3.4 million was recorded in the first quarter and paid in the secondquarter of fiscal 2005, and increased the goodwill to approximately $21.0million. The second annual earn out of $3.9 million was paid in the secondquarter of fiscal 2006, and increased goodwill to $24.6 million. The results ofoperations of Kaemingk are included in the Consolidated Statements of Earningsof the Company since June 21, 2003. For segment reporting purposes,Kaemingk is included in the Wholesale segment.

On December 22, 2003, the Company acquired 100%of Walter Drake, a direct marketer of value-priced household products includinghousehold gifts, gadgets and convenience products, personalized merchandise,home décor and holiday cards under the Walter Drake® and Home Marketplace®catalog titles, for approximately $54.2 million in cash. The acquisition ofWalter Drake aligns with one component of the Company’s overall growthstrategy, which is to grow through selected acquisitions in the HomeExpressions industry. The excess of the purchase price over the estimated fairvalue of the net assets acquired approximated $25.4 million, which will bedeductible for income tax purposes over 15 years. During the quarter ended April 30,2004, the Company made an adjustment to the preliminary purchase price foradditional liabilities primarily related to severance of employees of theColorado Springs facility as of the acquisition date. These additional costsrelated to the integration of the Walter Drake business into Miles Kimball,which is complete as of January 31, 2006. These adjustments increased thegoodwill by approximately $3.1 million to $28.5 million. Approximately $0.1million remains on the balance sheet at January 31, 2006, for propertytaxes on the Colorado Springs facility, which is held for sale. The otherintangibles acquired consist of approximately $12.0 million of trade names andtrademarks, which are deemed to have an indefinite life and will not beamortized, plus approximately $6.0 million of customer lists, which will beamortized on an accelerated basis over 10 years. The results of operations ofWalter Drake are included in the Consolidated Statements of Earnings of theCompany since December 23, 2003. For segment reporting purposes, WalterDrake is included in the Catalog & Internet segment.

On September 10,2004, the Company acquired 100% interests in Edelman B.V. (“Edelman”), adesigner and marketer of everyday home, garden and seasonal décor, andEuro-Decor B.V. (“Euro-Decor”), a designer and marketer of traditional andcontemporary gift and florist products. The acquisitions align with onecomponent of the Company’s overall growth strategy, which is to grow throughselected acquisitions in the Home Expressions industry. The cash purchase pricewas approximately $48.6 million less cash acquired of $1.1 million resulting innet cash paid of $47.5 million. Included in the purchase price is a $9.2million earn out based on a multiple of 2004 earnings before interest andincome taxes that the combined companies have achieved. The Company alsoassumed Edelman and Euro-Decor’s long-term debt of approximately $7.2 million. Duringthe fourth quarter of fiscal 2005, an adjustment was recorded to reflect thefinal appraised value of the acquired property, plant and equipment for $3.8million, as well as the net pension asset of $0.6 million. During the fourthquarter of fiscal 2006, an adjustment was recorded to reflect deferred taxesrelated to a net pension liability of $1.4 million. The excess of the purchaseprice over the estimated fair value of the net assets acquired approximated$34.3 million, which will not be deductible for income tax purposes. Theresults of operations of Edelman and Euro-Decor are included in theConsolidated Statements of Earnings of the Company since September 11,2004. For segment reporting purposes, Edelman and Euro-Decor are included inthe Wholesale segment.

47

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 3.**   BusinessAcquisitions (Continued)

The following provides anallocation of the purchase price of Edelman and Euro-Decor:

| ** **                             | ** ** | **(In thousands)** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| Cash Purchase Price                    |       |                    | $          | 48,609 |   |   |
| Less: Assets acquired                  |       |                    |       |   |   |
| Cash                                   |       |                    | 1,112      |   |   |
| Accounts receivable                    |       |                    | 23,684     |   |   |
| Inventories                            |       |                    | 16,964     |   |   |
| Prepaid and other                      |       |                    | 4,044      |   |   |
| Property, plant and  equipment         |       |                    | 10,109     |   |   |
| Other assets                           |       |                    | 624        |   |   |
| Total assets acquired                  |       |                    | 56,537     |   |   |
| Plus: Liabilities assumed              |       |                    |       |   |   |
| Bank line of credit                    |       |                    | 18,523     |   |   |
| Accounts payable                       |       |                    | 3,227      |   |   |
| Accrued expenses                       |       |                    | 11,911     |   |   |
| Other liabilities                      |       |                    | 1,399      |   |   |
| Debt                                   |       |                    | 7,195      |   |   |
| Total liabilities  assumed             |       |                    | 42,255     |   |   |
| Unallocated purchase  price (goodwill) |       |                    | $          | 34,327 |   |   |

 

On August 15, 2005, the Company acquired a 100%interest in Boca Java, a small gourmet coffee and tea company. The results ofoperations of Boca Java, which were not material, are included in theConsolidated Statements of Earnings of the Company since August 16, 2005. Forsegment reporting purposes, Boca Java is included in the Catalog & Internetsegment.

The following unauditedpro forma summary financial information summarizes the estimated combinedresults of operations of the Company, Edelman and Euro-Decor assuming that theacquisitions of Edelman and Euro-Decor had taken place on February 1, 2004.The unaudited pro forma combined results of operations were prepared on thebasis of information provided to the Company by the former management ofEdelman and Euro-Decor and no representation is made by the Company withrespect to the accuracy of such information. The pro forma combined results ofoperations reflect adjustments for interest income, additional depreciationbased on the fair market value of Edelman’s and Euro-Decor’s property, plant,and equipment and income tax expense.

| ** **                     | ** ** | ** **                                                                           | ** ** | **Year ended  January 31,   2005** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                     | ** ** | **(In thousands   except per share data)**

**(Unaudited)** | ** ** |
| Net sales                      |       |                                                                                 | $          | 1,648,622                                              |       |   |
| Net earnings                   |       |                                                                                 | 97,574     |                                                   |       |
| Basic:                         |       |                                                                                 |       |                                                   |       |
| Net earnings per  common share |       |                                                                                 | $          | 2.26                                                   |       |   |
| Diluted:                       |       |                                                                                 |       |                                                   |       |
| Net earnings per common  share |       |                                                                                 | $          | 2.24                                                   |       |   |

 

48

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

 

**Note 3.**   Business Acquisitions (Continued)

The unaudited pro forma combined results of operationsare not necessarily indicative of, and do not purport to represent, what theCompany’s results of operations or financial condition actually would have beenhad the acquisitions been made as of February 1, 2004.

**Note4.**   Business Divestitures

On April 6, 2004, the Company divested itsdecorative gift bag business, Jeanmarie Creations, in the Wholesale segmentthrough a sale to Jeanmarie’s senior management. The business was sold toJeanmarie’s management and associated investors for $10.0 million in cash. Thesale resulted in a taxable gain of approximately $4.0 million. In addition,$3.6 million of goodwill attributable to Jeanmarie, which was not taxdeductible, was disposed of as part of this divesture.

During the fourth quarter of fiscal 2006, the Companydivested its seasonal decorations business, Impact Plastics, in the Wholesalesegment through a sale. The operating results of Impact Plastics wereimmaterial to the consolidated operating results of the Company. On January 20,2006, the Company sold the business for approximately $7.6 million in cash anda promissory note of $2.0 million. The sale resulted in a pre-tax loss ofapproximately $1.6 million. In addition, $7.8 million of goodwill attributableto Impact, which was tax deductible, was disposed of as part of thisdivestiture.

**Note5.**   Restructuring and Impairment Charges

The Company recorded anapproximately $1.0 million impairment charge related to equipment in its NorthAmerican Wholesale manufacturing facility, which is included in cost of goodssold in the fiscal 2006 financial statements. The Company did not record anyrestructuring and impairment charges in fiscal 2005.

During fiscal 2004, theCompany recorded restructuring and impairment charges of $23.8 million pre-taxof which $23.0 was recorded in the fourth quarter and $0.8 million was recordedin the third quarter. These charges were primarily a result of ongoing effortsby the Company to rationalize and align its Wholesale segment operations withthe changing marketplace and global supply chain requirements. The following summarizesthe components of these charges:

The Company recognized pre-tax impairment losses of$8.4 million for long-lived assets disposed of and $2.3 million for long-livedassets to be held and used, during the fourth quarter of fiscal 2004 on certainequipment in the Company’s primary North American manufacturing facilities. TheCompany anticipates cost savings in the form of reduced depreciation expenserelated to the assets disposed of somewhat offset by increased depreciation dueto reductions in remaining useful lives of assets held and used. The assetdisposals resulted from significant productivity increases in recent years, aswell as product shift from candle forms such as pillars and tapers towardsfilled containers, votives and tealights.

The Company also recordedan impairment charge of $4.2 million pre-tax related to the Canterbury® brandacquired in fiscal 1997. Within its home fragrance business, the Companyacquired several consumer wholesale brands over the past decade and is focusingits sales and marketing resources to fewer brands. In the fourth quarter offiscal 2004 the Company decided to discontinue the Canterbury® brand.

**During the third and fourthquarters of fiscal 2004, the Company recorded asset impairments of facilitiesand equipment totaling $3.4 million pre-tax and severance payments to employeesof $0.5 million pre-tax related to the closure of its Hyannis, Massachusettsmanufacturing facility. In conjunction with the closing, the Company eliminated43 jobs, comprised of manufacturing and management positions. Thismanufacturing facility, which was the Company’s smallest, was located in a busydowntown area of Cape**

49

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 5.**   Restructuring and Impairment Charges (Continued)

**Cod,making transportation of raw materials and finished products to and from thelocation challenging. Operations have been consolidated into Blyth’smanufacturing facility in Batavia, Illinois.**

During the fourth quarter,the Company recorded additional pre-tax charges of $5.0 million. These chargesconsist of $2.1 million related to severance costs primarily associated withthe restructuring of Blyth HomeScents International—North America and theconsolidation of the Company’s Temecula, California potpourri operations, $0.9million of lease termination costs associated with the closure of five of theCompany’s candle outlet stores, and $2.0 million of fixed asset write-downsprimarily associated with the aforementioned changes.  As a result of these restructuring activities,the Company eliminated 40 jobs, comprised of administrative and managementpositions.

In total, approximately15% or $3.6 million of the $23.8 million in charges were cash charges.

The reversal of $0.4million of restructuring charges in fiscal 2005 was primarily due to thefavorable settlement of lease obligations, lower than estimated bonus paymentsand lower outplacement services costs associated with the fiscal 2004restructuring.

The following is a tabularrollforward of the restructuring charges described above that were recorded onthe balance sheet of the Company:

| ** **                                         | ** ** | **Lease**               | ** ** | **Severance** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|---------------|------------|------------|------------|
| ** **                                         | ** ** | **Obligations**         | ** ** | **Costs**     | ** ** | **Total**  | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| Balance at  January 31, 2004                  |       |                    | $          | 905           |       |       |       | $ | 2,395 |   |   | $ | 3,300 |   |
| Payments made against 2004 charges                 |       |                    | (766       | )             |       |       | (2,155     | ) |   | (2,921 | ) |
| Reversal of over accrual to income of 2004 charges |       |                    | (139       | )             |       |       | (228       | ) |   | (367 | ) |
| Balance at  January 31, 2005                  |       |                    | —     |          |       |       | 12         |   |   | 12 |   |
| Payments made against 2004 charges                 |       |                    | —     |          |       |       | (12        | ) |   | (12 | ) |
| Balance at  January 31, 2006                  |       |                    | $          | —        |       |       |       | $ | — |   |   | $ | — |   |

 

**Note 6.**   AssetsHeld for Sale

Certain assets in theWholesale segment associated with the Maynard, Minnesota manufacturing facilitywere classified as assets held for sale in the third quarter of fiscal 2005 andsold in the fourth quarter of fiscal 2005 to a senior manager of the Company. Thesale price of $1.6 million, which was paid in full, was the Company’s bestoffer, and so considered to be on terms equivalent to those that prevail in anarm’s-length transaction. The sale resulted in a loss of $0.3 million.

During the third quarter of fiscal 2005, the ColoradoSprings facility, purchased as part of the Walter Drake acquisition in theCatalog & Internet segment (see Note 3 to the Consolidated FinancialStatements), became available for sale and management maintains an activeprogram to locate a buyer. During the third quarter of fiscal 2006, the Companyrecorded an impairment charge in relation to the facility of $1.2 million,which was due to the deterioration of local real estate market conditions. Thenet realizable value of the building as of January 31, 2006 is $3.0million, which approximates the carrying value less selling costs. The buildingis classified as assets held for sale in the Consolidated Balance Sheet as of January 31,2005 and January 31, 2006.

50

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 7.**   Inventories

Themajor components of inventories are as follows:

| ** **      | ** ** | ** **              | ** ** | **January 31,** | ** ** |
|-----------------|------------|-------------------------|------------|----------------------|------------|
| ** **      | ** ** | ** **              | ** ** | **2005**             | ** ** | **2006** | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
| Raw materials   |       | $                       | 27,286     |                 | $          | 31,954 |   |
| Work in process |       | 2,641                   |       | 361                  |       |
| Finished goods  |       | 205,057                 |       | 205,438              |       |
| Total           |       | $                       | 234,984    |                 | $          | 237,753 |   |

 

**Note 8.**   Prepaid and Other

Prepaidand other consists of the following:

| ** ** | ** ** | ** **              | ** ** | **January 31,** | ** ** |
|------------|------------|-------------------------|------------|----------------------|------------|
| ** ** | ** ** | ** **              | ** ** | **2005**             | ** ** | **2006** | ** ** |
| ** ** | ** ** | **(In thousands)** | ** ** |
| Taxes      |       | $                       | 15,457     |                 | $          | 5,285 |   |
| Catalogs   |       | 7,186                   |       | 6,053                |       |
| Other      |       | 21,189                  |       | 24,305               |       |
| Total      |       | $                       | 43,832     |                 | $          | 35,643 |   |

 

**Note 9.**   Other Intangiblesand Goodwill

Otherintangible assets consisted of the following (In thousands):

| ** **                                         | ** ** | **January 31, 2005** | ** ** | **January 31, 2006** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **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                         |       |                           | 3,867      |   |   | 11,133 |   | 15,000 |   |   | 5,917 |   |   | 9,083 |   |
| Total                                              |       | $                              | 43,100     |                           |       | $ | 3,867 |   |   | $ | 39,233 |   | $ | 43,100 |   |   | $ | 5,917 |   |   | $ | 37,183 |   |

 

Amortization is beingrecorded on an accelerated basis over the estimated lives of the customer listsranging from 10 to 12 years. Amortization expense was $2.4 million in fiscal2005 and $2.1 million in fiscal 2006. Estimated amortization expense for thenext five fiscal years is as follows: $1.8 million, $1.5 million, $1.5 million, $1.2 million, and $1.0 million.The weighted average remaining life of the Company’s customer lists was 8.6years at January 31, 2006.

Goodwill and otherindefinite lived intangibles are subject to an assessment for impairment usinga two-step fair value-based test and such other intangibles are also subject toimpairment reviews, which must be performed at least annually, or morefrequently if events or circumstances indicate that goodwill or otherindefinite lived intangibles might be impaired. The Company performs its annualassessment of impairment in the fourth fiscal quarter. For goodwill, the firststep compares the fair value of a reporting unit to its carrying amount,including goodwill. For each ofthe reporting units, the estimated fair value is determined utilizing acombination of valuation techniques, namely the discounted cash flowmethodology and the market multiple methodology. If the fair value of thereporting unit exceeds the carrying value, no further analysis is necessary. Ifthe carrying amount of the reporting unit exceeds its fair value, the second 

51

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 9.**   Other Intangibles and Goodwill (Continued)

step isperformed. The second step compares the carrying amount of the goodwill to thefair value of the goodwill. If fair value is less than the carrying amount, animpairment loss is reported as a reduction to the asset and a charge tooperating expense, except at the transition date, when the loss was reflectedas a cumulative effect of a change in accounting principle.

As a result of the Company’sannual fourth quarter impairment analysis in fiscal 2006, the Companydetermined that goodwill balances existing at reporting units in the Wholesalesegment were impaired. In fiscal 2006 the reporting units experienced asubstantial decline in operating performance when compared to prior years’results and budgeted fiscal 2006 expectations. Therefore, the Company recordeda non-cash pre-tax goodwill impairment charge of $53.3 million in the Wholesalesegment. The fair values of those reporting units were estimated using acombination of valuation techniques, namely the discounted cash flowmethodology and the market multiple methodology.

The following table showschanges in the carrying amount of goodwill for the years ended January 31,2005 and 2006, by operating segment:

| ** **                                                       | ** ** | ** **              | ** ** | ** **    | ** ** | **Catalog &** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Direct Selling** | ** ** | **Wholesale** | ** ** | **Internet**           | ** ** | **Total**  | ** ** |
| ** **                                                       | ** ** | **(In thousands)** | ** ** |
| Goodwill at  February 1, 2004                               |       |                    | $          | —        |       |                   | $          | 133,033    |       |   | $ | 71,060 |   |   | $ | 204,093 |   |
| Edelman and  Euro-Decor acquisitions                             |       |                    |       |          |       | 32,928                 |       |       |       |   |   | 32,928 |   |
| Kaemingk earn out  payment                                       |       |                    |       |          |       | 3,448                  |       |       |       |   |   | 3,448 |   |
| Goodwill disposed  of related to the sale of Jeanmarie Creations |       |                    |       |          |       | (3,621                 | )          |       |       |   |   | (3,621 | ) |
| Walter Drake  integration and acquisition costs                  |       |                    |       |          |       |                   |       |       | 3,054      |   |   | 3,054 |   |
| Miles Kimball  pension liability adjustment                      |       |                    |       |          |       |                   |       |       | 408        |   |   | 408 |   |
| Initial  investment in Two Sisters Gourmet                       |       |                    | 307        |          |       |                   |       |       |       |   |   | 307 |   |
| Foreign currency  translation adjustment                         |       |                    |       |          |       | 5,565                  |       |       |       |   |   | 5,565 |   |
| Total adjustments                                                |       |                    | 307        |          |       | 38,320                 |       |       | 3,462      |   |   | 42,089 |   |
| Goodwill at  January 31, 2005                               |       |                    | 307        |          |       | 171,353                |       |       | 74,522     |   |   | 246,182 |   |
| Kaemingk earn out  payment                                       |       |                    |       |          |       | 3,932                  |       |       |       |   |   | 3,932 |   |
| Goodwill disposed  of related to the sale of Impact Plastics     |       |                    |       |          |       | (7,839                 | )          |       |       |   |   | (7,839 | ) |
| Impairment charge                                                |       |                    |       |          |       | (53,261                | )          |       |       |   |   | (53,261 | ) |
| Edelman and  Euro-Decor deferred tax adjustments                 |       |                    |       |          |       | 1,377                  |       |       |       |   |   | 1,377 |   |
| Edelman and  Euro-Decor acquisition costs                        |       |                    |       |          |       | 22                     |       |       |       |   |   | 22 |   |
| Additional  investment in Two Sisters Gourmet                    |       |                    | 1,991      |          |       |                   |       |       |       |   |   | 1,991 |   |
| Boca Java  acquisition                                           |       |                    |       |          |       |                   |       |       | 1,786      |   |   | 1,786 |   |
| Foreign currency  translation adjustment                         |       |                    |       |          |       | (9,063                 | )          |       |       |   |   | (9,063 | ) |
| Total adjustments                                                |       |                    | 1,991      |          |       | (64,832                | )          |       | 1,786      |   |   | (61,055 | ) |
| Goodwill at  January 31, 2006                               |       |                    | $          | 2,298         |       |                   | $          | 106,521    |       |   | $ | 76,308 |   |   | $ | 185,127 |   |

 

52

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 10.**   Accrued Expenses

Accruedexpenses consist of the following:

| ** **                         | ** ** | **January 31,**    | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **2005**                | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** |
| Compensation and  certain benefits |       | $                       | 26,298     |   | $ | 17,800 |   |
| Deferred revenue                   |       | 13,724                  |       | 17,085 |   |
| Promotional  expenses              |       | 26,849                  |       | 18,429 |   |
| Taxes, other than  income          |       | 7,960                   |       | 9,491 |   |
| Interest payable                   |       | 8,630                   |       | 8,243 |   |
| Self-insurance  reserves           |       | 2,452                   |       | 4,038 |   |
| Other                              |       | 8,934                   |       | 17,914 |   |
| Total                              |       | $                       | 94,847     |   | $ | 93,000 |   |

 

**Note 11.**   BankLines of Credit

As of January 31,2006, the Company had a total of $15.0 million available under an uncommittedbank line of credit with LaSalle Bank National Association, which matures in June 2006.Amounts outstanding under the line of credit bear interest at prime or LIBORplus 0.90%. No amounts were outstanding under the uncommitted line of credit atJanuary 31, 2006.

As of January 31,2006, the Company had a total of $10.0 million available under an uncommittedline of credit with Bank of America to be used for letters of credit. Since theline of credit is uncommitted, there is no maturity date. At January 31,2006, approximately $0.5 million of letters of credit were outstanding underthis credit line.

As of December 31,2005, The Gies Group (“Gies”) had available lines of credit of approximately$40.4 million of which approximately $18.8 million was outstanding. The amountsoutstanding under the lines of credit bear interest at a weighted average rateof 3.2% at December 31, 2005. The lines of credit have maturity dates thruDecember 2006 and are renewed annually.

As of December 31,2005, Colony Gift Corporation Limited (“Colony”) had an $8.6 million short-termrevolving credit facility with Barclays Bank, which matures in August 2006.Colony had borrowings under the credit facility of approximately $7.0 million,at a weighted average interest rate of 5.6%, as of December 31, 2005.

As of December 31,2005, Kaemingk had an available line of credit of approximately $32.6 millionwith ING Bank N.V, which expires December 31, 2006. No amounts wereoutstanding at December 31, 2005. The line of credit is collateralized bycertain real estate and equipment owned by Kaemingk.

53

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 12.**   Long-Term Debt

Long-termdebt consists of the following:

| ** **               | ** ** | **January 31,**    | ** ** |
|--------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **2005**                | ** ** | **2006** | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| 7.54% Senior  Notes      |       | $                       | 3,571      |   | $ | — |   |
| 7.90% Senior  Notes      |       | 149,496                 |       | 149,633 |   |
| 5.50% Senior  Notes      |       | 99,814                  |       | 99,835 |   |
| Credit Facilities        |       | —                  |       | 75,777 |   |
| Other                    |       | 23,181                  |       | 20,725 |   |
|                     |       | 276,062                 |       | 345,970 |   |
| Less current  maturities |       | (4,489                  | )          | (1,049 | ) |
|                     |       | $                       | 271,573    |   | $ | 344,921 |   |

 

In July 1995, the Company privately placed $25.0million aggregate principal amount of 7.54% Senior Notes due June 2005. Thefinal payment on the notes was made on June 30, 2005.

In May 1999, theCompany filed a shelf registration statement for issuance of up to $250.0million in debt securities with the Securities and Exchange Commission. On September 24,1999, the 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. Such notes contain, among other provisions, restrictionson liens on principal property or stock issued to collateralize debt. At January 31,2006, the Company was in compliance with such provisions. Interest is payablesemi-annually in arrears on April 1 and October 1. On October 20,2003, the Company issued $100.0 million 5.50% Senior Notes due on November 1,2013 at a discount of approximately $0.2 million, which is being amortized overthe life of the notes. Such notes contain provisions and restrictions similarto those in the 7.90% Senior Notes. At January 31, 2006, the Company wasin compliance with such provisions. Interest is payable semi-annually inarrears on May 1 and November 1. The notes may be redeemed in wholeor in part at any time at a specified redemption price. The proceeds of thedebt issuance were used for general corporate purposes.

On June 2, 2005, theCompany replaced its prior $200 million credit facility with a new $150 millionunsecured revolving credit facility having a five year term; the “CreditFacility” matures June 2010. The Company has the ability to increase theCredit Facility, under certain circumstances, by an additional $50 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. Amounts outstanding underthe Credit Facility bear interest, at the Company’s option, at JPMorgan ChaseBank’s prime rate or at the Eurocurrency rate plus a credit spread ranging from0.360% to 0.800%, calculated on the basis of the Company’s senior unsecuredlong-term debt rating. At January 31, 2005, $3.3 million letters of creditwere outstanding under the prior Credit Facility. As of January 31, 2006,approximately $73.0 million (including letters of credit) was outstanding underthe Credit Facility.

As of December 31,2005, Edelman B.V. and Euro-Decor B.V. had available lines of credit ofapproximately $29.6 million with ABN Amro Bank N.V, which mature September 2007.The lines of credit are collateralized by inventory and receivables owned byEdelman B.V. and Euro-Decor B.V. At December 31, 2004, $6.9 million wasoutstanding at a weighted average interest rate of 3.0%. At 

54

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 12.**   Long-Term Debt(Continued)

December 31,2005, approximately $6.4 million was outstanding at a weighted average interestrate of 3.5%.

As of January 31, 2005and January 31, 2006, Miles Kimball had approximately $9.9 million and$9.4 million, respectively of long-term debt outstanding under a real estatemortgage note payable to John Hancock Life Insurance Company, which matures June 1,2020. Under the terms of the note, payments of principal and interest arerequired monthly at a fixed interest rate of 7.89%.

As of December 31,2004, Kaemingk had approximately $8.8 million of long-term debt outstandingunder six loans with ING Bank N.V. at a weighted average interest rate of 5.1%.As of December 31, 2005, approximately $7.0 million of long-term debt wasoutstanding under six loans with ING Bank N.V. at a weighted average interestrate of 4.9%. The bank loans have maturity dates ranging from 2008 through 2020.The loans are collateralized by certain real estate and equipment owned byKaemingk.

As of January 31,2005 and January 31, 2006, CBK had $4.5 million and $4.4 million,respectively of long-term debt outstanding under an Industrial Revenue Bond (“IRB”),which matures on January 1, 2025. The bond is backed by an irrevocableletter of credit issued by La Salle Bank National Association. The loan iscollateralized by certain of CBK’s assets. The amount outstanding under the IRBbears interest at short-term floating rates, which equaled a weighted averageinterest rate of 4.6% at January 31, 2006. Payments of principal arerequired annually and interest payments are required monthly under the terms ofthe bond.

**Maturitiesunder debt obligations for the fiscal years ending January 31 are asfollows**(In thousands):

| 2007       |   | $       | 1,049   |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 7,120   |    |
| 2009       |   | 2,752   |    |
| 2010       |   | 150,617 |    |
| 2011       |   | 72,863  |    |
| Thereafter |   | 111,569 |    |
|       |   | $       | 345,970 |   |

 

The estimated fair valueof the Company’s $276.1 million and $346.0 million total long-term debt(including current portion) at January 31, 2005 and 2006 was approximately$303.0 million and $330.7 million, respectively. The fair value is determinedby quoted market prices, where available, and from analyses performed byinvestment bankers using current interest rates considering credit ratings andthe remaining terms to maturity.

**Note 13.**   Employee BenefitPlans

Certain employees of MilesKimball are covered by the Miles Kimball Company Retirement Plan (“the Plan”). Thisnon-contributory, defined benefit retirement plan provides benefits based onyears of service and employee compensation for specified periods. When theCompany acquired Miles Kimball on April 1, 2003, a decision was made tocease the accrual of benefits for all Plan participants, except to the 

55

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 13.**   Employee Benefit Plans (Continued)

extentthat a benefit accrual is required to comply with Section 416 of theInternal Revenue Code. The Plan was frozen effective May 31, 2003. Allvested benefits that have been accrued as of May 31, 2003 will continue tobe held for participants under the terms of the Plan.

The Company has additionaldefined benefit retirement plans outside the U.S. following the acquisitions ofEdelman and Euro-Decor in September 2004. The benefits provided underthese plans are based primarily on years of service and compensation levels.

The Company’s definedbenefit pension plan in the United States uses a January 31 measurementdate. The Company’s defined benefit pension plans in the Netherlands use a September 30measurement date.

As of the measurementdates (September 30 and January 31), the status of the Company’sdefined benefit pension plans was as follows (In thousands):

| ** **                             | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Change in benefit obligations:**     |       |     |       |     |       |     |       |
| Benefit  obligation, beginning of year |       | $        | —     |     | $          | 15,255   |       | $ | 24,792 |   |
| Benefit  obligation acquired           |       | 15,167   |       | 10,879   |       | —   |       |
| Interest cost                          |       | 604      |       | 742      |       | 1,295    |       |
| Service cost                           |       | —   |       | —   |       | 796      |       |
| Actuarial  (gain)/loss                 |       | 147      |       | (1,321   | )          | 3,820    |       |
| Benefits paid                          |       | (663     | )          | (917     | )          | (899     | )          |
| Foreign currency  rate changes         |       | —   |       | 154      |       | (611     | )          |
| Benefit obligation, end  of year       |       | $        | 15,255     |     | $          | 24,792   |       | $ | 29,193 |   |

 

| ** **                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Change in plan assets:**                    |       |     |       |     |       |     |       |
| Fair value of  plan assets, beginning of year |       | $        | —     |     | $          | 10,508   |       | $ | 21,792 |   |
| Plan assets  acquired                         |       | 8,698    |       | 11,481   |       | —   |       |
| Actual return on  plan assets                 |       | 1,673    |       | 412      |       | 915      |       |
| Employer  contributions                       |       | 800      |       | 145      |       | 1,453    |       |
| Benefits paid                                 |       | (663     | )          | (917     | )          | (899     | )          |
| Foreign currency  rate changes                |       | —   |       | 163      |       | (478     | )          |
| Fair value of  plan assets, end of year       |       | $        | 10,508     |     | $          | 21,792   |       | $ | 22,783 |   |
| Funded status                                 |       | $        | (4,747     | )        | $          | (3,000   | )          | $ | (6,410 | ) |
| Unrecognized  actuarial (gain)/loss           |       | (973     | )          | (1,895   | )          | 2,139    |       |
| Net amount recognized                         |       | $        | (5,720     | )        | $          | (4,895   | )          | $ | (4,271 | ) |

 

56

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 13.**   Employee Benefit Plans (Continued)

Amounts recognized in thestatement of financial position consist of (In thousands):

| ** **                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Non-current asset           |       | $        | —     |     | $          | 633      |       | $ | 892 |   |
| Non-current  liability      |       | (5,720   | )          | (5,528   | )          | (7,037   | )          |
| Other  comprehensive income |       | —   |       | —   |       | 1,874    |       |
| Net amount recognized       |       | $        | (5,720     | )        | $          | (4,895   | )          | $ | (4,271 | ) |

 

Weighted averageassumptions used to determine projected benefit obligations at September 30and January 31, were as follows:

| ** **                               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  discount rate          |       | 5.00     | %          | 5.28     | %          | 4.74     | %          |
| Rate of increase in  compensation levels |       | 2.50     | %          | 2.50     | %          | 2.50     | %          |

 

Theaccumulated benefit obligations of the Company’s pension plans as of themeasurement dates in fiscal 2004, 2005 and 2006 were $15.3 million, $23.8million and $27.9 million, respectively. The projected benefit obligation,accumulated benefit obligation and fair value of plan assets for pension planswith accumulated benefit obligations in excess of plan assets were (Inthousands):

| ** **                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Projected benefit  obligation   |       | $        | 15,255     |     | $          | 13,759   |       | $ | 25,651 |   |
| Accumulated  benefit obligation |       | 15,255   |       | 13,759   |       | 25,282   |       |
| Fair value of plan  assets      |       | 10,508   |       | 10,148   |       | 19,802   |       |
|                                 |            |          |            |          |            |          |            |  |  |  |

 

Componentsof the net periodic benefit cost of the Company’s noncontributory definedbenefit pension plan for the years ended January 31, were as follows (Inthousands):

| ** **                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                    |       | $        | —     |     | $          | 210      |       | $ | 768 |   |
| Interest cost                   |       | 604      |       | 890      |       | 1,272    |       |
| Expected return  on plan assets |       | (553     | )          | (1,076   | )          | (1,272   | )          |
| Amortization of  actuarial gain |       | —   |       | —   |       | (28      | )          |
| Net periodic benefit  cost      |       | $        | 51         |     | $          | 24       |       | $ | 740 |   |

 

Weightedaverage assumptions used to determine net periodic benefit cost for the yearsended January 31, were as follows:

| ** **                               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                            |       | 5.00     | %          | 5.17     | %          | 4.74     | %          |
| Expected return  on plan assets          |       | 8.00     | %          | 5.86     | %          | 5.75     | %          |
| Rate of increase in  compensation levels |       | 2.50     | %          | 2.50     | %          | 2.50     | %          |

 

 

57

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 13.**   EmployeeBenefit Plans (Continued)

**Thedefined benefit pension plan asset allocation as of the measurement dates (September 30and January 31), presented as a percentage of total plan assets, were asfollows:**

| ** **        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Equity securities |       | 71.5     | %          | 33.4     | %          | 26.5     | %          |
| Debt securities   |       | 26.8     | %          | 66.0     | %          | 16.2     | %          |
| Other             |       | 1.7      | %          | 0.6      | %          | 57.3     | %          |
| Total             |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |

 

For fiscal 2006, the Company’s weighted averageexpected long-term rate of return on assets was 5.75%. In developing thisassumption, the Company evaluated input from its third party pension plan assetmanagers, including their review of asset class return expectations andlong-term inflation assumptions. The shift in plan assets from equity to debtsecurities is a result of the plan assets acquired in fiscal 2005.

Substantially all pension benefit payments are madefrom assets of the pension plans. Using foreign exchange rates as of December 31,2005 and expected future service, it is anticipated that the future benefitpayments will be as follows:  $1.0million in fiscal 2007, $1.0 million in fiscal 2008, $1.0 million in fiscal2009, $1.0 million in fiscal 2010, $1.0 million in fiscal 2011 and $6.3 millionin fiscal 2012 to 2016.

The Company makes periodic cash contributions to its definedbenefit plans. The level of these contributions is within minimum required andmaximum allowable government prescribed levels for the jurisdictions in whichthe Company operates. In fiscal 2007, the Company expects to contribute $1.2million of cash to these plans.

The Company has defined contribution employee benefitplans in both the United States and certain of its foreign locations, coveringsubstantially all eligible non-union employees. Contributions to all such plansare principally at the Company’s discretion except for the Section 401(k) Companymatching contributions, which became guaranteed effective April 1, 2002. TheGies Group contributes to a Swedish government-sponsored retirement system,which provides retirement benefits to certain of its employees. Total expenserelated to all defined contribution plans for the years ended January 31,2004, 2005 and 2006 was $6.0 million, $9.3 million and $8.6 million,respectively.

The Company has asupplemental pension benefit agreement with one of its key corporate executives.Benefits pursuant to the agreement will be provided by a purchased annuityinsurance policy.

**Note 14.**   Commitmentsand Contingencies

The Company utilizes operating leases for a portion ofits facilities and equipment. Generally, the leases provide that the Companypay real estate taxes, maintenance, insurance and other occupancy expensesapplicable to leased premises. Certain leases provide for renewal for variousperiods at stipulated rates.

58

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 14.**   Commitments and Contingencies (Continued)

The minimum future rental commitments under operatingleases are as follows (In thousands):

| For the years  ending January 31, |   |   |   |
|----------------------------------------|--------|--------|--------|
| 2007                                   |   | $      | 19,209 |   |
| 2008                                   |   | 14,249 |   |
| 2009                                   |   | 10,083 |   |
| 2010                                   |   | 8,445  |   |
| 2011                                   |   | 5,626  |   |
| Thereafter                             |   | 8,112  |   |
| Total minimum  payments required       |   | $      | 65,724 |   |

 

Rent expense for the years ended January 31,2004, 2005 and 2006 was $21.2 million, $29.3 million and $24.7 million,respectively.

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

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

The Company has enteredinto an employment agreement with its Chairman and CEO, Mr. Robert B.Goergen, dated as of August 1, 2000, as amended by Amendment No. 1dated as of June 15, 2002 and Amendment No. 2 dated as of March 31,2004 (sometimes herein referred to as “agreement” or “employment agreement”). Pursuantto the employment agreement, upon the death of both Mr. Goergen and hisspouse, the Company will, upon the demand of the estate of either Mr. Goergenor his spouse, buy back from such estate up to 7,500,000 shares of CompanyCommon Stock within 90 days of such demand at the fair market value thereof (asdefined in the employment agreement) or register the public offer and sale bysuch estate of up to 7,500,000 shares of Company Common Stock. In connectionwith the employment agreement, the Company and Mr. Goergen entered into aregistration rights agreement relating to the registration of up to 7,500,000shares of Company Common Stock as described above in the event that the Companychooses not to purchase such shares upon the death of both Mr. Goergen andhis spouse. There is no specified effective date or stock price requirement inthe agreements. The Company will not be obligated to purchase or register suchshares, notwithstanding the death of both Mr. Goergen and his spouse, ifthe survivor’s estate, or his or her beneficiaries, as the case may be, canthen sell all of the shares of the Company Common Stock owned by them withoutregistration. The Company has recorded a liability of approximately $69,000 at January 31,2006 related to the future costs to register the securities.

**Note 15.**   401(k) andProfit Sharing Plan

During the third quarterof fiscal 2004, the Company became aware of an issue involving its 401(k) andprofit sharing plan. This issue arose effective April 1, 2002 when theCompany amended the plan to allow participants to direct voluntarycontributions to be invested in the Company’s common stock, 

59

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 15.**   401(k) and Profit Sharing Plan (Continued)

and topermit other investments in the plan to be transferred into the Company’scommon stock. These amendments may have caused the continued operation of theplan since April 1, 2002 to be deemed to be an offering of securities thatshould have been registered under the Securities Act of 1933  (the “1933 Act”). If interests should havebeen registered, the failure of the Company to register interests in the planmay entitle participants to remedies under the 1933 Act, including rescissionor damages. The Company ceased allowing participants to make new investments inCompany common stock effective October 17, 2003. The Company has electedto adopt the so-called “restorative” approach with respect to persons whoinvested in the Plan on or after April 1, 2002 and on or before October 17,2003, the last day on which participants in the Plan could make investments inthe Company Stock Fund. Under the restorative approach the Company performs acalculation each October to determine potential restorative payments; asof January 31, 2006 the Company made additional cumulative contributionsto the Plan accounts of participants in the total amount of approximately$3,391. Due to the statute of limitations, based on each individual participant’sstate of residence, future restorative payments may be required if additionallosses were incurred after December 1, 2003.

**Note 16.**   Guarantees

From time to time, theCompany is party to agreements under which it may be obligated to indemnify athird party with respect to certain matters. Typically, these obligations ariseas a result of leases entered into by the subsidiaries, under which Blythagrees to indemnify a third party against losses arising from a breach ofrepresentations related to lease obligations assumed. In these circumstances,payment by Blyth is conditioned on the other party making a claim pursuant tothe procedures specified in the lease. These procedures generally allow Blythto challenge the other party’s claims. In addition, Blyth’s obligations underthese agreements may be limited in terms of time and amount. Historically,payments made by Blyth under these arrangements have not had a material effecton the business, financial condition or results of operations. Blyth believesthat if it were to incur a loss in anyof these matters, such loss would not have a material effect on the Company’sbusiness, financial condition or results of operations. The maximum potentialamount of future payments due under these lease arrangements, approximate $14.6million. These amounts are included as part of the Company’s consolidated leasecommitments as reported in Note 14, Commitments and Contingencies. The leaseguarantees have expiration dates through fiscal 2014.

**Note 17.**   IncomeTaxes

Earnings (loss) before provision for income taxes:

| ** **    | ** ** | **Year ended January 31,** | ** ** |
|---------------|------------|-------------------------------------------|------------|
| ** **    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **(In thousands)**                   | ** ** |
| United States |       | $                                         | 79,809     |   | $ | 72,632 |   | $ | (27,049 | ) |
| Foreign       |       | 57,084                                    |       | 76,444 |   | 59,076 |   |
|          |       | $                                         | 136,893    |   | $ | 149,076 |   | $ | 32,027 |   |

 

60

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 17.**   Income Taxes (Continued)

Income tax expense consists of the following:

| ** **                             | ** ** | **Year ended January 31,** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **(In thousands)**                   | ** ** |
| Current income tax expense:            |       |                                      |       |   |   |   |   |
| Federal                                |       | $                                         | 28,943     |   | $ | 21,592 |   | $ | 306 |   |
| State                                  |       | 4,710                                     |       | 3,393 |   | 791 |   |
| Foreign                                |       | 17,308                                    |       | 15,530 |   | 19,601 |   |
|                                   |       | 50,961                                    |       | 40,515 |   | 20,698 |   |
| Deferred income tax expense (benefit): |       |                                      |       |   |   |   |   |
| Federal                                |       | (565                                      | )          | 11,456 |   | (9,116 | ) |
| State                                  |       | (160                                      | )          | 981 |   | (781 | ) |
| Foreign                                |       | 141                                       |       | (30 | ) | (3,026 | ) |
|                                   |       | (584                                      | )          | 12,407 |   | (12,923 | ) |
|                                   |       | $                                         | 50,377     |   | $ | 52,922 |   | $ | 7,775 |   |

 

Significantcomponents of the Company’s deferred tax assets and liabilities are as follows:

| ** **                                             | ** ** | **January 31,**    | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **2005**                | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **(In thousands)** | ** ** |
| Deferred tax assets:                                   |       |                    |       |   |   |
| Accrued expenses and  other                            |       | $                       | 294        |   | $ | 1,555 |   |
| Allowance for doubtful  receivables                    |       | 1,150                   |       | 1,018 |   |
| Employee benefit plans                                 |       | 2,588                   |       | 2,693 |   |
| Inventory reserves                                     |       | 6,135                   |       | 6,295 |   |
| Net operating loss and  other tax credit carryforwards |       | 5,926                   |       | 8,998 |   |
| Other reserves                                         |       | 3,013                   |       | 4,790 |   |
| Valuation allowance                                    |       | (4,038                  | )          | (4,704 | ) |
|                                                   |       | 15,068                  |       | 20,645 |   |
| Deferred tax  liabilities:                             |       |                    |       |   |   |
| Prepaids                                               |       | (3,892                  | )          | (4,074 | ) |
| Depreciation and  amortization                         |       | (43,848                 | )          | (35,309 | ) |
|                                                   |       | (47,740                 | )          | (39,383 | ) |
| Net deferred tax liability                             |       | $                       | (32,672    | ) | $ | (18,738 | ) |

 

The valuation allowance relates to certain non-U.S.tax loss carryforwards, for which the Company believes, due to variouslimitations in these foreign jurisdictions, it is more likely than not thatsuch benefits will not be realized, and to a U.S. loss carryforward where thebenefit is limited by the U.S. tax regulations. The increase in the valuationallowance from the prior year is principally due to a change in the Company’sbelief that a certain non-U.S. tax loss carryforward would not give rise to abenefit. At January 31, 2006, the Company has a $26.0 million netoperating loss carryforward, which consists of approximately $7.2 million offederal net operating loss that will expire on January 31, 2023 and 2026and foreign net operating losses of $18.8 million, which have an indefiniteexpiration.

As of January 31, 2006, undistributed earnings offoreign subsidiaries considered permanently invested for which deferred incometaxes have not been provided were approximately $66.8 million.

61

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 17.**   Income Taxes (Continued)

A reconciliation of theprovision for income taxes to the amount computed at the federal statutory rateis as follows:

| ** **                                 | ** ** | **Year ended January 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                   | ** ** |
| Tax provision at  statutory rate           |       | $                                         | 47,913     |   | $ | 52,176 |   | $ | 11,209 |   |
| Tax effect of:                             |       |                                      |       |   |   |   |   |
| State income taxes, net of federal benefit |       | 2,958                                     |       | 6,618 |   | 964 |   |
| Foreign rate differential                  |       | (2,530                                    | )          | (5,663 | ) | (10,901 | ) |
| Foreign dividend and Subpart F income      |       | —                                    |       | — |   | 10,336 |   |
| Reversal of tax contingencies              |       | —                                    |       | — |   | (6,051 | ) |
| Non-deductible goodwill impairment         |       | —                                    |       | — |   | 5,407 |   |
| Adjustments to prior years’ tax items |       | —                                    |       | — |   | (2,476 | ) |
| Other, net                                 |       | 2,036                                     |       | (209 | ) | (713 | ) |
|                                       |       | $                                         | 50,377     |   | $ | 52,922 |   | $ | 7,775 |   |

 

The management of theCompany, along with third-party advisers, periodically estimates the probabletax obligations of the Company using historical experience in tax jurisdictionsand informed judgments. There are inherent uncertainties related to theinterpretation of tax regulations in the jurisdictions in which the Companytransacts business. The judgments and estimates made at a point in time maychange based on the outcome of tax audits, as well as changes to or furtherinterpretations of regulations. If such changes take place, there is a riskthat the tax rate may increase or decrease in any period. Due to the settlementand resolution of various global tax matters during fiscal 2006 the Companyreversed tax contingencies by $6.1 million. Amounts accrued for thepotential tax assessments, primarily recorded in long-term liabilities total$17.0 million and $9.2 million at January 31, 2005 and 2006, respectively.Accruals relate to tax issues for U.S. federal, domestic state and taxation offoreign earnings. The amounts provided are included in the appropriatecategories in the table above.  A $2.5million reduction in tax expense resulting from adjustments to prior years’income tax items was recorded in the fourth quarter of fiscal 2006.

In December 2004, the FASB issued Staff Position No. FAS109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creations Act of 2004”(“AJCA”). The AJCA introduces a limited time 85% dividends received deductionon the repatriation of certain foreign earnings to a U.S. taxpayer(repatriation provision), provided certain criteria are met. FAS 109-2provides accounting and disclosure guidance for the repatriation provision.  On January 24,2006, the Board of Directors approved a domestic reinvestment plan for theapproximately $130 million in foreign earnings, which were previouslyconsidered permanently reinvested in non-U.S. legal entities, which the Companyrepatriated under the AJCA. Thefunds were brought back to the United States late in the fourth quarter andreceived the favorable tax treatment provided by the Act. The Company recorded a one-time tax expense ofapproximately $9.1 million, which is reflected in the Company’s currentyear effective tax rate. As part of itsrepatriation plan, the Company intends to make a domestic investment of the repatriatedamount in a wide range of initiatives, including the hiring and training ofU.S. workers, research and development efforts, qualified retirement planfunding, capital expenditures to support the U.S. businesses, advertising andmarketing with respect to its various trademarks, brand names and rights tointangible property, and acquisitions of U.S.-based businesses, all consistentwith the requirements of the legislation.

62

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 18.**   Stock BasedCompensation

At January 31, 2006, the Company had threestock-based compensations plans, which are described below.

The Company’s Amended and Restated 1994 Employee StockOption Plan (the “Employee Option Plan”) provides for the grant to officers andemployees of both “incentive stock options” and stock options that arenon-qualified for Federal income tax purposes. The total number of shares ofcommon stock for which options may be granted pursuant to the Employee OptionPlan shall not exceed the sum of 2,880,000 shares plus an additional number ofshares, which were to be added on February 1, 2001, and each anniversarythereof during the term of Employee Option Plan, equal to the lesser of (x) 0.75%of the total outstanding shares of common stock of the Company on theapplicable anniversary date and (y) 600,000 shares up to a maximum of5,280,000 shares.

The exercise price of incentive stock options grantedunder the Employee Option Plan may not be less than 100% of the fair marketvalue of the common stock at the time of grant, and the term of any option maynot exceed 10 years. Options generally become exercisable over a five-yearperiod. With respect to any employee who owns stock representing more than 10%of the voting power of the outstanding capital stock of the Company, theexercise price of any incentive stock option may not be less than 110% of thefair market value of such shares at the time of grant, and the term of suchoption may not exceed five years. On April 1, 2003, the Board of Directorsof the Company unanimously approved an amendment to the Employee Option Planproviding that no awards will be made under such plan after May 31, 2003.

The Company has also adopted the Amended and Restated1994 Stock Option Plan for Non-Employee Directors (the “Non-Employee DirectorPlan”). A total of 270,000 shares of common stock may be issued through theexercise of options granted pursuant to the Non-Employee Director Plan.

Options granted pursuant to the Non-Employee DirectorPlan become exercisable as follows: each Initial Grant vests over a two yearperiod at the rate of 50% on each anniversary of the date of grant and eachAnnual Grant vests in full on the sooner of (x) the first anniversary ofthe date of the grant or (y) the date of the next Annual Meeting ofshareholders of Blyth. On April 1, 2003, the Board of Directors of theCompany unanimously approved an amendment to the Non-Employee Director Planproviding that no awards will be made under such plan after May 31, 2003.

On April 1, 2003, the Board of Directors of theCompany unanimously approved the adoption of the 2003 Long-Term Incentive Plan(the “2003 Plan”) and the stockholders approved the 2003 Plan on June 4,2003. The 2003 Plan provides for grants of incentive and nonqualified stockoptions, stock appreciation rights, restricted stock, performance shares,performance units, dividend equivalents and other stock unit awards to officersand employees. The 2003 Plan also provides for grants of nonqualified stockoptions to directors of the Company who are not, and who have not been duringthe immediately preceding 12-month period officers or employees of theCompany or any of its subsidiaries.

On March 31, 2004, the Board of Directors of theCompany unanimously approved Amendment No. 1 to the 2003 Plan, and thestockholders approved Amendment No. 1 to the 2003 Plan at the AnnualMeeting of Stockholders on June 24, 2004 (the “2004 Annual Meeting”),effective as of such approval, non-employee directors will no longer receive optiongrants. Instead, annual awards will be determined by the Company’s full Boardof Directors, subject to an annual limit of awards of 5,000 shares of CommonStock or share equivalents for new non-employee directors and 2,500 shares ofCommon Stock or share equivalents for continuing non-employee directors. At the2004 Annual Meeting, each non-employee 

63

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 18.**   Stock Based Compensation (Continued)

director with at least sixmonths service was granted 1,500 restricted stock units vesting in two equalinstallments beginning on the first anniversary of the date of grant instead ofthe Annual Grant. At the 2005 Annual Meeting, each non-employee director wasgranted 1,500 restricted stock units (except one non-employee director wasgranted 2,500 restricted stock units) vesting in two equal installmentsbeginning on the first anniversary of the date of grant.

On December 9, 2005,the Board of Directors of the Company approved the acceleration of the vestingof all unvested stock options. Stock option awards granted from December 10,2000 through the date of acceleration with respect to approximately 350,000shares of the Company’s common stock, which represented 100% of the unvestedoptions, were subject to this acceleration, which was effective as of December 9,2005. Virtually all of these options had exercise prices in excess of thecurrent market values and were not fully achieving their original objectives ofincentive compensation and employee retention.

Restricted stock units (RSUs) are granted to certainemployees to incent performance and retention. RSUs issued under the plansprovide that shares awarded may not be sold or otherwise transferred untilrestrictions have lapsed. The release of RSUs on each of the Vesting Dates iscontingent upon continued active employment by the employee until the VestingDates. Restricted stock granted under the plans totaled 74,475 shares, 83,795shares, and 18,000 shares in the years ended January 31, 2006, 2005, 2004respectively. The weighted-average grant date fair value of restricted stockgranted during the years ended January 31, 2006, 2005, and 2004 was $32,$33, and $29 respectively. Compensation expense for restricted stock plans infiscal 2006, 2005, and 2004 totaled $1.2 million, $0.6 million, and $ 50,000respectively.

Transactionsinvolving stock options are summarized as follows:

| ** **                            | ** ** | **Option** | ** ** | **Weighted Average** | ** ** |
|---------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                            | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding at  February 1, 2003 |       | 2,075,845  |       |                      | $          | 24.87 |   |   |
| Options granted                       |       | 396,000    |       |                      | 26.14      |   |   |
| Options exercised                     |       | (253,820   | )          |                      | 22.81      |   |   |
| Options cancelled                     |       | (133,700   | )          |                      | 25.54      |   |   |
| Outstanding at  January 31, 2004 |       | 2,084,325  |       |                      | 25.26      |   |   |
| Options granted                       |       | 8,500      |       |                      | 31.69      |   |   |
| Options exercised                     |       | (397,325   | )          |                      | 23.62      |   |   |
| Options cancelled                     |       | (170,067   | )          |                      | 24.59      |   |   |
| Outstanding at  January 31, 2005 |       | 1,525,433  |       |                      | 25.80      |   |   |
| Options granted                       |       | —     |       |                      | —     |   |   |
| Options exercised                     |       | (158,733   | )          |                      | 23.35      |   |   |
| Options cancelled                     |       | (130,300   | )          |                      | 26.68      |   |   |
| Outstanding at  January 31, 2006 |       | 1,236,400  |       |                      | $          | 26.12 |   |   |

 

At January 31, 2004, 2005 and 2006, options topurchase 920,724, 874,066 and 1,236,400 shares, respectively, were exercisable.

64

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 18.**   Stock Based Compensation (Continued)

Options outstanding andexercisable as of January 31, 2006, by price range:

|                   | ** **              | **Outstanding**  | ** ** | **Exercisable**           | ** ** |
|-------------------|-------------------------|------------------|------------|---------------------------|------------|
| ** **        | ** **              | ** **       | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Range of** | ** **              | ** **       | ** ** | **Remaining**             | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
| ** **        | **Exercise Price** | ** **       | ** ** | **Shares**                | ** ** | **Contractual Life** | ** ** | **Exercise Price** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
|                   | $                       | 19.89–24.97 |       |                      | 357,100    |   |   | 4.08 |   |   |   | $ | 23.11 |   |   | 357,100 |   |   | $ | 23.11 |   |   |
|              | 25.03–29.97        |             |       | 766,300                   |       |   | 5.74 |   |   |   | 26.68 |   |   | 766,300 |   |   | 26.68 |   |   |
|                   | 30.44–36.00        |             |       | 113,000                   |       |   | 4.68 |   |   |   | 31.86 |   |   | 113,000 |   |   | 31.86 |   |   |
|              |                    |             |       | 1,236,400                 |       |   |   |   |   |   |   |   |   | 1,236,400 |   |   |   |   |   |
|                   |                         |                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average fairvalue of options granted during the years ended January 31, 2004 and 2005was $9.68 and $9.52, respectively. No stock options were granted by the Companyduring the year ended January 31, 2006.

**Note19.**   Segment Information

Blyth is a designer andmarketer of home fragrance products and accessories, home décor, seasonaldecorations, household convenience items, personalized gifts and products forthe foodservice trade. We compete in the global Home Expressions industry, andour products can be found throughout North America, Europe and Australia. Ourfinancial results are reported in three segments - the Direct Selling segment,the Wholesale segment and the Catalog & Internet segment. Thesereportable segments are based on similarities in distribution channels,customers and management oversight.

Within the Direct Sellingsegment, the Company designs, manufactures or sources, markets and distributesan extensive line of products including scented candles, candle-relatedaccessories, fragranced bath gels and body lotions and other fragrancedproducts under the PartyLite® brand. The Company also operates two small DirectSelling businesses, Purple Tree and Two Sisters Gourmet. All direct sellingproducts are sold directly to the consumer through a network of independentsales consultants using the party plan method of direct selling. PartyLite®brand products are sold in North America, Europe and Australia. Purple TreeTMand Two Sisters GourmetTM brand products are sold in North America.

Within the Wholesalesegment, the Company designs, manufactures or sources, markets and distributesan extensive line of home fragrance products, candle-related accessories,seasonal decorations such as ornaments, artificial trees and trim, and homedécor products such as picture frames, lamps and textiles. Products in thissegment are sold in North America and Europe to retailers in the premium,specialty and mass channels under the CBK®, Carolina®, ColonialTM(1), ColonialCandle of Cape Cod®, Colonial at HOMEâ,Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), KaemingkTM(2), Liljeholmens®,Seasons of Cannon Falls® and Triumph Tree®(1) brands. In addition, chafing fueland tabletop lighting products and accessories for the Away From Home orfoodservice trade are sold through this segment under the Ambria®, FilterMate®,HandyFuelTM and Sterno® brands.

----

(1)             Colonial, Euro-Decor, Gies and Triumph Tree trademarksare registered and sold only outside the United States.

(2)             Kaemingk is sold only outside the United States.

65

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 19.**   Segment Information (Continued)

Within the Catalog &Internet segment, the Company designs, sources and markets a broad range ofhousehold convenience items, premium photo albums, frames, holiday cards,personalized gifts, kitchen accessories and gourmet coffee and tea. Theseproducts are sold directly to the consumer under the Boca JavaTM, EasyComfortsTM, Exposuresâ, HomeMarketplace®, Miles Kimballâ and Walter Drakeâbrands. These products are sold in North America.

Earnings in all segmentsrepresent net sales less operating expenses directly related to the businesssegments and corporate expenses allocated to the business segments. Other income(expense) includes interest expense, interest income and equity in earnings ofinvestees, which are not allocated to the business segments. Identifiableassets for each segment consist of assets used directly in its operations andintangible assets, if any, resulting from purchase business combinations. UnallocatedCorporate within the identifiable assets include corporate cash and cashequivalents, prepaid income tax, corporate fixed assets, deferred bond costs,deferred income taxes and other long-term investments, which are not allocatedto the business segments.

The geographic area dataincludes net trade sales based on product shipment destination and long-livedassets (which consists of fixed assets, goodwill and long-term investments)based on physical location.

66

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 19.**   Segment Information(Continued)

**Operating Segment Information**

| ** **                                              | ** ** | **Year ended January 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **(In thousands)**                   | ** ** |
| **Net  Sales**                                          |       |                                      |       |   |   |   |   |
| Direct Selling                                          |       | $                                         | 764,527    |   | $ | 735,863 |   | $ | 704,143 |   |
| Wholesale                                               |       | 630,318                                   |       | 656,921 |   | 681,614 |   |
| Catalog & Internet                             |       | 110,728                                   |       | 193,513 |   | 187,319 |   |
| **Total**                                               |       | $                                         | 1,505,573  |   | $ | 1,586,297 |   | $ | 1,573,076 |   |
| **Earnings**                                            |       |                                      |       |   |   |   |   |
| Direct Selling (1)                                      |       | $                                         | 136,423    |   | $ | 131,930 |   | $ | 107,692 |   |
| Wholesale (1),(2)                                       |       | 10,026                                    |       | 30,699 |   | (51,092 | ) |
| Catalog & Internet                             |       | 6,628                                     |       | 6,701 |   | (428 | ) |
| Operating profit                                        |       | 153,077                                   |       | 169,330 |   | 56,172 |   |
| Other income (expense)                                  |       | (16,184                                   | )          | (20,254 | ) | (24,145 | ) |
| **Earnings before income taxes  and minority interest** |       | $                                         | 136,893    |   | $ | 149,076 |   | $ | 32,027 |   |
| **Identifiable  Assets**                                |       |                                      |       |   |   |   |   |
| Direct Selling                                          |       | $                                         | 273,900    |   | $ | 249,126 |   | $ | 230,097 |   |
| Wholesale                                               |       | 519,647                                   |       | 613,819 |   | 522,386 |   |
| Catalog & Internet                             |       | 160,380                                   |       | 164,237 |   | 165,672 |   |
| Unallocated Corporate                                   |       | 174,036                                   |       | 48,638 |   | 198,365 |   |
| **Total**                                               |       | $                                         | 1,127,963  |   | $ | 1,075,820 |   | $ | 1,116,520 |   |
| **Capital  Expenditures**                               |       |                                      |       |   |   |   |   |
| Direct Selling                                          |       | $                                         | 5,333      |   | $ | 8,196 |   | $ | 6,351 |   |
| Wholesale                                               |       | 14,097                                    |       | 9,611 |   | 7,514 |   |
| Catalog & Internet                             |       | 1,399                                     |       | 2,235 |   | 3,086 |   |
| Unallocated Corporate                                   |       | 1,134                                     |       | 934 |   | 321 |   |
| **Total**                                               |       | $                                         | 21,963     |   | $ | 20,976 |   | $ | 17,272 |   |
| **Depreciation  and Amortization**                      |       |                                      |       |   |   |   |   |
| Direct Selling                                          |       | $                                         | 12,174     |   | $ | 11,964 |   | $ | 12,326 |   |
| Wholesale                                               |       | 19,890                                    |       | 17,937 |   | 17,479 |   |
| Catalog & Internet                             |       | 2,858                                     |       | 4,482 |   | 5,080 |   |
| Unallocated Corporate                                   |       | 1,032                                     |       | 1,217 |   | 990 |   |
| **Total**                                               |       | $                                         | 35,954     |   | $ | 35,600 |   | $ | 35,875 |   |
| **GEOGRAPHIC  INFORMATION**                             |       |                                      |       |   |   |   |   |
| **Net  Sales**                                          |       |                                      |       |   |   |   |   |
| United States                                           |       | $                                         | 1,026,275  |   | $ | 1,015,992 |   | $ | 946,833 |   |
| Germany                                                 |       | 177,443                                   |       | 203,796 |   | 177,293 |   |
| The Netherlands                                         |       |                                      |       |   |   | 167,868 |   |
| Other International                                     |       | 301,855                                   |       | 366,509 |   | 281,082 |   |
| **Total**                                               |       | $                                         | 1,505,573  |   | $ | 1,586,297 |   | $ | 1,573,076 |   |
| **Long  Lived Assets**                                  |       |                                      |       |   |   |   |   |
| United States                                           |       | $                                         | 391,517    |   | $ | 376,209 |   | $ | 302,245 |   |
| International                                           |       | 118,183                                   |       | 171,548 |   | 149,288 |   |
| **Total**                                               |       | $                                         | 509,700    |   | $ | 547,757 |   | $ | 451,533 |   |

----

(1)             2004 earnings include $23.8 million of restructuringand impairment charges of which $17.1 million relates to the Wholesale segmentand $6.7 million relates to the Direct Selling segment. (See Note 5 to theConsolidated Financial Statements).

(2)             2006 earnings include a goodwill impairment charge of$53.3 million. (See Note 9 to the Consolidated Financial Statements).

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note20.**   Stock Repurchase Plan

The Company’s Board ofDirectors has authorized the Company to repurchase up to 6,000,000 shares ofcommon stock under the Company’s share repurchase program. Since January 31,2005, the Company has purchased 65,000 shares on the open market for a cost of$2.1 million, bringing the cumulative total purchased shares to 4,626,800 as ofJanuary 31, 2006 for a total cost of approximately $115.1 million. Theacquired shares are held as common stock in treasury at cost.

On June 7, 2004 the Company announced that itsBoard of Directors approved a repurchase of up to 4,000,000 outstanding sharesof the Company’s common stock, with the right to repurchase up to an additional2% of the Company’s outstanding shares, at a price per share not greater than$35.00 nor less than $30.00 through a Dutch auction cash tender offer. Thefinal number of shares repurchased under the tender offer, which expired on July 9,2004, was 4,906,616 shares for an aggregate purchase price of $172.6 millionincluding fees and expenses. The tender offer was funded with $86.1 million ofavailable cash and $86.5 million of borrowings against the Company’s prior $200million Credit Facility. The Company does not expect the tender offer to affectits share repurchase program, capital expenditures, dividend policy oracquisitions.

**Note21.**   Earnings Per Share

The following tablepresents the components of basic and diluted net earnings per common share:

| ** **                                              | ** ** | **Year ended January 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **(In  thousands)**                       | ** ** |
| Net earnings                                            |       | $                                         | 86,351     |   | $ | 96,514 |   | $ | 24,857 |   |
| Weighted average number  of common shares outstanding:  |       |                                      |       |   |   |   |   |
| Basic                                                   |       | 45,771                                    |       | 43,136 |   | 40,956 |   |
| Dilutive effect of stock options and restricted  shares |       | 256                                       |       | 420 |   | 220 |   |
| Weighted average number  of common shares outstanding:  |       |                                      |       |   |   |   |   |
| Diluted                                                 |       | 46,027                                    |       | 43,556 |   | 41,176 |   |
|                                                         |            |                                           |            |  |  |  |  |  |  |  |

 

As of January 31, 2004, 2005 and 2006, options topurchase 456,800, 50,200 and 675,943 shares of common stock, respectively, arenot included in the computation of diluted earnings per share because theeffect would be antidilutive.

68

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note22.   Treasury and Common Stock**

| **Treasury Stock**           | ** ** | ** **                                       | ** ** | **     Shares     ** | ** ** | **     Amount     ** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **(In thousands, except shares)** | ** ** |
| Changes in  Treasury Stock were:  | ** ** |                                             | ** ** | ** **                                                             |       |                                                                   | ** ** | ** ** |   |
| Balance at  February 1, 2003 |       |                                             | 3,644,100  | ** **                                                             |       |                                                                   | $          | (86,585 | ) |   |
| Treasury stock  purchases         |       |                                             | 701,000    | ** **                                                             |       |                                                                   | (18,804    | ) |   |
| Balance at  January 31, 2004 |       |                                             | 4,345,100  | ** **                                                             |       |                                                                   | (105,389   | ) |   |
| Treasury stock  purchases         |       |                                             | 5,123,316  | ** **                                                             |       |                                                                   | (179,675   | ) |   |
| Balance at  January 31, 2005 |       |                                             | 9,468,416  | ** **                                                             |       |                                                                   | (285,064   | ) |   |
| Restricted stock  cancellations   |       |                                             |       | ** **                                                             |       |                                                                   | (609       | ) |   |
| Treasury stock  purchases         |       |                                             | 65,000     | ** **                                                             |       |                                                                   | (2,071     | ) |   |
| Balance at  January 31, 2006 |       |                                             | 9,533,416  | ** **                                                             |       |                                                                   | $          | (287,744 | ) |   |

 

| **Common Stock**                                            | ** ** | ** **                                       | ** ** | **       Shares      ** | ** ** | **    Amount    ** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(In thousands, except shares)** | ** ** |
| Changes in Common  Stock were:                                   | ** ** |                                             | ** ** | ** **                                                                               |       |                                                       | ** ** | ** ** |   |
| Balance at  February 1, 2003                                |       |                                             | 49,703,682 | ** **                                                                               |       |                                                       | $          | 994 | ** ** |   |
| Common stock  issued in connection with long-term incentive plan |       |                                             | 271,820    | ** **                                                                               |       |                                                       | 5          | ** ** |   |
| Balance at  January 31, 2004                                |       |                                             | 49,975,502 | ** **                                                                               |       |                                                       | 999        | ** ** |   |
| Common stock  issued in connection with long-term incentive plan |       |                                             | 392,325    | ** **                                                                               |       |                                                       | 8          | ** ** |   |
| Balance at  January 31, 2005                                |       |                                             | 50,367,827 | ** **                                                                               |       |                                                       | 1,007      | ** ** |   |
| Common stock  issued in connection with long-term incentive plan |       |                                             | 158,733    | ** **                                                                               |       |                                                       | 3          | ** ** |   |
| Issuance of  restricted stock, net of cancellations              |       |                                             | 1,500      | ** **                                                                               |       |                                                       |       | ** ** |   |
| Balance at  January 31, 2006                                |       |                                             | 50,528,060 | ** **                                                                               |       |                                                       | $          | 1,010 | ** ** |   |

 

**Note23.   Fire Loss**

In July 2003, the Company’s manufacturingfacility located in Monterrey, Mexico was destroyed by fire. Productsmanufactured at this leased facility were primarily for the North American massmarket. Customer service disruptions were minimal as other Company facilitiesand third party suppliers met the production requirements. The Company decidednot to rebuild the Monterrey facility. The loss of fixed assets and inventorytotaled approximately $8.0 million. The Company incurred additional costs of$1.9 million through January 31, 2004, primarily for the additionalproduction costs of manufacturing product at different facilities.  Some of these costs remained in endinginventory at January 31, 2004. The Company is insured for losses relatedto this fire and has received $13.0 million in insurance proceeds as of January 31,2006. The final insurance payment was received during fiscal 2006.

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**BLYTH, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)**

**Note 24.**   SelectedQuarterly Financial Data (Unaudited)

A summary of selectedquarterly information for the years ended January 31 is as follows:

| ** **                                               | ** ** | **2005 Quarter Ended**                                   | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **April 30**                                                  | ** ** | **July 31** | ** ** | **October 31** | ** ** | **January 31** | ** ** |
| ** **                                               | ** ** | **(In thousands, except per share data)** | ** ** |
| Net sales                                                |       | $                                                                  | 358,980    |   | $ | 289,063 |   | $ | 439,444 |   | $ | 498,810 |   |
| Gross profit                                             |       | 183,011                                                            |       | 146,111 |   | 200,680 |   | 241,878 |   |
| Net earnings                                             |       | 17,675                                                             |       | 9,445 |   | 30,243 |   | 39,151 |   |
| Net earnings per  common and common equivalent share:(1) |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                    |       | $                                                                  | 0.39       |   | $ | 0.21 |   | $ | 0.74 |   | $ | 0.96 |   |
| Diluted                                                  |       | 0.38                                                               |       | 0.21 |   | 0.73 |   | 0.95 |   |

 

| ** **                                                      | ** ** | **2006 Quarter Ended**                                   | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **April 30**                                                  | ** ** | **July 31** | ** ** | **October 31** | ** ** | **January 31** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| Net sales                                                       |       | $355,768                                                           |       | $292,154 | (3) | $444,527 |   | $480,627 |   |
| Gross profit                                                    |       | 168,345                                                            |       | 139,061 |   | 185,919 |   | 219,942 |   |
| Net earnings  (loss)                                            |       | 9,960                                                              |       | 4,154 |   | 23,041 |   | (12,299 | )(2)(4) |
| Net earnings  (loss) per common and common equivalent share:(1) |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                           |       | $0.24                                                              |       | $0.10 |   | $0.56 |   | $(0.30 | )(4) |
| Diluted                                                         |       | 0.24                                                               |       | 0.10 |   | 0.56 |   | (0.30 | )(4) |

----

(1)             The sum of per share amounts for the quarters does notnecessarily equal that reported for the year because the computations  are made independently.

(2)             Fourth quarter, fiscal 2006 net loss,includes a goodwill impairment charge of $53.3 million in the Wholesalesegment. (See Note 9 to the Consolidated Financial Statements).

(3)             Second quarter, fiscal 2006, net sales,include a $5.5 million reversal of a contingent reserve related to settlementof a state unclaimed property matter.

(4)             Fourth quarter, fiscal 2006, net loss and loss percommon share, include a $2.5 million reduction in tax expense resulting fromadjustments to prior years’ income tax items.

**Note 25.**   SubsequentEvent

On April 12, 2006, the Company sold its premiumseasonal decorations business located in Europe in a cash transaction. Thisbusiness was part of the Wholesale segment.

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

**None.**

**Item 9A.**                Controlsand Procedures 

(a)           Evaluationof Disclosure Controls and Procedures.

Our management, with the participation of ourprincipal executive officer and our principal financial officer, evaluated theeffectiveness of our disclosure controls and procedures (as defined inSecurities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e))as of the end of the period covered by this report as required by paragraph (b)of Exchange Act Rules 13a-15 or 15d-15. Based upon this evaluation, our principal executive officer and ourprincipal financial officer have concluded that the Company’s disclosure controlsand procedures were effective as of January 31, 2006.  

(b)**         **Management’sReport on Internal Control over Financial Reporting.

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f)and 15d-15(f). The Company’s internal control over financial reporting is aprocess designed under the supervision of the principal executive and financialofficers, and effected by the board of directors and management, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of consolidated financial statements for external purposes inaccordance with generally accepted accounting principles in the United Statesof America. Because of its inherent limitations, such as human judgment, errorsor mistakes, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Weperformed an assessment of the effectiveness of the Company’s internal controlover financial reporting as of January 31, 2006 based on the criteria set forthin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.The objective of this assessment is to determine whether the Company’s internalcontrol over financial reporting was effective as of January 31, 2006.  Based on its assessment, management believesthat, as of January 31, 2006, the Company’s internal control over financialreporting was effective based on the criteria in the framework.

Our management’s assessment of the effectiveness ofthe Company’s internal control over financial reporting as of January 31, 2006has been audited by Deloitte & Touche LLP, an independent registered publicaccounting firm, as stated in their report, which appears in this Annual Reporton page 32 and below in Item 9A(e) which express an unqualified opinion onmanagement’s assessment and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting as of January 31, 2006.

(c)**          **Changesin Internal Control over Financial Reporting.

Except as described below, in Item 9A(d), there havebeen no changes in our internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules13a-15 or 15d-15 that occurred during the fourth quarter of fiscal year 2006that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

(d)**         **Remediationof material weakness.

As discussed in “Item9A(b) Controls and Procedures – Management’s Report on Internal Control overFinancial Reporting” in our Annual Report on Form 10-K for the fiscal yearended January 31, 2005, there was a material weakness in our internal controlover financial reporting related to our income tax accounting andreconciliation processes, procedures and controls, including the identificationof income tax contingencies.  In fiscal2006, and through the date of this filing, we have taken the following steps to

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improve our internalcontrols around our income tax accounting and reconciliation processes,procedures and controls:

**·****     **Enhancedthe levels of review in and accelerated the timing of the preparation of thequarterly and annual income tax provision;

**·****     **Formalizedprocesses, procedures and documentation standards relating to income taxaccounting, specifically: (1) the process to identify, quantify and account forincome tax contingencies; (2) the reconciliation of the recorded amounts in theprior year of our tax accounts and balances to its tax return; and (3) controlsover the reconciliation of our effective tax rate to our statutory rate; 

**·****     **Enhancedand restructured our Tax Department to ensure appropriate segregation of dutiesregarding preparation and review of the quarterly and annual income taxprovision; and

**·****     **EngagedErnst & Young LLP to assist the Company in its accounting for income taxes.

The steps above haveassisted the Company in improving its internal controls in its income taxaccounting and reconciliation processes, procedures and controls.  As a result of implementing these additionalcontrols and enhanced procedures we believe that we have successfullyremediated the material weakness identified in fiscal 2005.  

(e)**          **Reportof Independent Registered Public Accounting Firm

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of Blyth,Inc.:

We have audited management’s assessment, included inthe accompanying Report of Management on Internal Controls Over FinancialReporting, that Blyth, Inc. and subsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of January 31, 2006, based on the criteria established in*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all materialrespects.  Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable 

72

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assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as ofJanuary 31, 2006, is fairly stated, in all material respects, based on thecriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of January 31, 2006,based on the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule of Blyth, Inc. and subsidiaries as of and for the year ended January31, 2006 and our report dated April 12, 2006 expressed an unqualified opinionon those financial statements and financial statement schedule.

|        | /s/ Deloitte & Touche LLP |
|--------|-------------------------------|
|   | DELOITTE & TOUCHE LLP     |

 

Chicago,IllinoisApril 12, 2006

73

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**Item9B.**               Other Information

None

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

The information requiredby this Item is set forth in our Proxy Statement for our annual meeting ofstockholders scheduled to be held on June 7, 2006 (the “Proxy Statement”)under the captions “Nominees for Election at the 2006 Annual Meeting for TermsExpiring in 2009,” “Continuing Directors with Terms Expiring in 2007”, “ContinuingDirectors with Terms Expiring in 2008” and “Executive Officers” and isincorporated herein by reference.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item is set forth in our Proxy Statement under the captions “ExecutiveCompensation,” “Employment Contracts and Severance Arrangements” and “PensionPlans” and is incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information requiredby this Item is set forth in our Proxy Statement under the caption “SecurityOwnership of Management and Certain Beneficial Owners” and is incorporatedherein by reference.

**Item 13.**                 CertainRelationships and Related Transactions

The information requiredby this Item is set forth in our Proxy Statement under the caption “CertainRelationships and Related Transactions” and is incorporated herein byreference.

**Item 14.**                 PrincipalAccountant Fees and Services

The information required by this Item is set forth inour Proxy Statement under the caption “Independent Accountant Fees” and isincorporated herein by reference.

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)(1).           *Financial Statements*

Thefollowing consolidated financial statements are contained on the indicated pages ofthis report:

|                                                            | ** ** | **Page No.** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|
| Reports of  Independent Registered Public Accounting Firms |       |              | 32         |   |   |
| Statements:                                                |       |              |       |   |   |
| Consolidated Balance Sheets                                |       |              | 34         |   |   |
| Consolidated Statements of Earnings                        |       |              | 35         |   |   |
| Consolidated Statements of Stockholders’ Equity       |       |              | 36         |   |   |
| Consolidated Statements of Cash Flows                      |       |              | 37         |   |   |
| Notes to Consolidated  Financial Statements                |       |              | 38-70      |   |   |

 

(a)(2).           *Financial Statement Schedules*

Thefollowing financial statement schedules are contained on the indicated pages ofthis report:

|                                                                                           | ** ** | **Page No.** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|
| Report of  Independent Registered Public Accounting Firm  on Financial Statement Schedule |       |              | S-1        |   |   |
| Valuation and Qualifying  Accounts                                                        |       |              | S-2        |   |   |

 

All other schedulesare omitted because they are inapplicable or the requested information is shownin the consolidated financial statements or related notes.

(a)(3).           *Exhibits*

| Exhibit No. | ** ** | **Description   of Exhibit**                                                                                                                                                                                                                                                                     | ** ** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1              |       | Restated Certificate of Incorporation (incorporated  by reference to the Registrant’s Registration Statement on Form S-1  (No. 33-77458))                                                                                                                                         |
| 3.2              |       | Restated By-laws  (incorporated by reference to the Registrant’s Registration Statement on  Form S-1 (No. 33-77458))                                                                                                                                                              |
| 4.1(a)           |       | Form of Indenture,  dated as of May 20, 1999, between the Registrant and First Union  National Bank, as Trustee (incorporated by reference to the Registrant’s  Registration Statement on Form S-3 (Reg. No. 333-77721)  filed on May 4, 1999)                     |
| 4.1(b)           |       | Form of First  Supplemental Indenture dated as of September 29, 1999 between the  Registrant and First Union National Bank, Trustee (incorporated by reference  to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K  filed on September 28, 1999)        |
| 4.1(c)           |       | Form of Second  Supplemental Indenture dated as of October 23, 2003 between the  Registrant and Wachovia Bank, National Association, Trustee (incorporated by  reference to Exhibit 4.1 to the Registrant’s Current Report on  Form 8-K filed on October 22, 2003) |
| 10.1             |       | Standard  Form Industrial Lease dated April 22, 1993, between Carol Point  Builders I General Partnership and PartyLite Gifts, Inc. (incorporated  by reference to the Registrant’s Registration Statement on Form S-1  (No. 33-77458))                            |

75

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| 10.1(a)  |   | First Amendment,  dated August 21, 1995, between ERI-CP, Inc., a Delaware  corporation, as successor to Carol Point Builders I General Partnership, and  PartyLite Gifts, Inc., to Standard Form Industrial Lease dated  April 22, 1993, between Carol Point Builders I General Partnership and  PartyLite Gifts, Inc. (incorporated by reference to  Exhibit 10.4(a) to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended January 31, 1996)                                                                                                                                                                                          |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1(b)  |   | Second Amendment, dated  August 4, 2000, between Carol Point LLC, a Massachusetts limited  liability company, as successor landlord to ERI-CP Inc., and PartyLite  Gifts, Inc., to Standard Form Industrial Lease dated April 22,  1993, between Carol Point Builders I General Partnership and PartyLite  Gifts, Inc. (incorporated by reference to Exhibit 10.3(b) to  the Registrant’s Annual Report on Form 10-K for the fiscal year  ended January 31, 2002)                                                                                                                                                                                               |
| 10.1(c)  |   | Third Amendment, dated  February 28, 2001, between Carol Point LLC, a Massachusetts limited  liability company, as successor landlord to ERI-CP Inc., and PartyLite  Worldwide, Inc., as tenant, pursuant to Assignment and Assumption  Agreement, dated January 31, 2001, between PartyLite Gifts, Inc.  (assignor) and PartyLite Worldwide, Inc. (assignee), to Standard  Form Industrial Lease dated April 22, 1993, between Carol Point  Builders I General Partnership and PartyLite Gifts, Inc. (incorporated  by reference to Exhibit 10.3(c) to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended January 31, 2002) |
| 10.2     |   | Lease Agreement, dated  June 25, 1997, between Carol Stream I Development Company, as landlord,  PartyLite Gifts, Inc., as tenant, and the Registrant, as guarantor  (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended January 31,  1998)                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2(a)  |   | First Amendment to  Lease, dated February 1, 2001, between MP 437 Tower CS, Inc. by  RREEF Management Company, as landlord, as successor to Carol Stream I  Development Company, and PartyLite Worldwide, Inc., as tenant, pursuant  to Assignment and Assumption Agreement, dated January 31, 2001, between  PartyLite Gifts, Inc. (assignor) and PartyLite Worldwide, Inc. (assignee)  (incorporated by reference to Exhibit 10.4(a) to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  January 31, 2002)                                                                                                                        |
| 10.3+    |   | Form of Indemnity  Agreement between the Registrant and each of its directors (incorporated by  reference to the Registrant’s Registration Statement on Form S-1  (No. 33-77458))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4+    |   | Blyth  Industries, Inc. Non-Qualified Deferred Compensation Plan (incorporated  by reference to Exhibit 4.1 to the Registrant’s Current Report on  Form 8-K as filed on December 21, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5+    |   | Employment Agreement  dated as of August 1, 2000 by and between the Registrant and Robert B.  Goergen (incorporated by reference to Exhibit 10.10 to the Registrant’s  Quarterly Report on Form 10-Q for the fiscal quarter ended  October 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5(a)+ |   | Amendment No. 1  dated as of June 15, 2002 to the Employment Agreement dated as of  August 1, 2000 by and between the Registrant and Robert B. Goergen  (incorporated by reference to Exhibit 10.6(a) to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  January 31, 2003)                                                                                                                                                                                                                                                                                                                                                                        |

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| 10.5(b)+  |   | Amendment  No. 2 dated as of March 31, 2004 to the Employment Agreement dated  as of August 1, 2000 by and between the Registrant and Robert B. Goergen  (incorporated by reference to Exhibit 10.6(b) to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  January 31, 2004)                                                          |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6+     |   | Registration Rights  Agreement dated as of August 1, 2000 by and between the Registrant and  Robert B. Goergen (incorporated by reference to Exhibit 10.10 to the  Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter  ended October 31, 2000)                                                                                                               |
| 10.6(a)+  |   | Amendment No. 1  dated as of March 12, 2004 to the Registration Rights Agreement dated as  of August 1, 2000 by and between the Registrant and Robert B. Goergen (incorporated  by reference to Exhibit 10.7(a) to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended January 31, 2004)                                                  |
| 10.7      |   | Credit Agreement, dated  June 2, 2005 among the Registrant, PartyLite Trading, SA, the Lenders  listed therein, JPMorgan Chase Bank, N.A. as Administrative Agent and Bank of  America, N.A. and LaSalle Bank National Association as Co-Syndication Agents  (incorporated by reference to Exhibit 10.1 to the Registrant’s Current  Report on Form 8-K filed June 6, 2005) |
| 10.8+     |   | Amended and Restated  1994 Employee Stock Option Plan of the Registrant (incorporated by reference  to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K  filed April 17, 2000)                                                                                                                                                                                         |
| 10.8(a)+  |   | Amendment No. 1 to  the Amended and Restated 1994 Employee Stock Option Plan of the Registrant  (incorporated by reference to Exhibit 10.9(a) to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  January 31, 2004)                                                                                                                             |
| 10.9+     |   | Form of  Non-transferable Incentive Stock Option Agreement under the Amended and Restated  1994 Employee Stock Option Plan of the Registrant (incorporated by reference  to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q  for the fiscal quarter ended July 31, 1996)                                                                                      |
| 10.10+    |   | Form of  Non-transferable Non-Qualified Stock Option Agreement under the Amended and  Restated 1994 Employee Stock Option Plan of the Registrant (incorporated by  reference to Exhibit 4.3 to the Registrant’s Quarterly Report on  Form 10-Q for the fiscal quarter ended July 31, 1996)                                                                                  |
| 10.11+    |   | Amended and Restated 1994  Stock Option Plan for Non-Employee Directors of the Registrant (incorporated  by reference to Exhibit 4.1 to the Registrant’s Current Report on  Form 8-K filed April 19, 2002)                                                                                                                                                                       |
| 10.11(a)+ |   | Amendment No. 1 to  the Amended and Restated 1994 Stock Option Plan for Non-Employee Directors of  the Registrant (incorporated by reference to Exhibit 10.12(a) to  the Registrant’s Annual Report on Form 10-K for the fiscal year  ended January 31, 2004)                                                                                                          |
| 10.12+    |   | Form of Stock  Option Agreement under the 1994 Stock Option Plan for Non-Employee Directors  of the Registrant (incorporated by reference to the Registrant’s Registration  Statement on Form S-1 (No. 33-77458))                                                                                                                                                                |
| 10.13+    |   | 2003 Long-Term Incentive  Plan of the Registrant (incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K/A filed April 17,  2003)                                                                                                                                                                                                             |
| 10.13(a)+ |   | Amendment No. 1 to  the 2003 Long-Term Incentive Plan of the Registrant (incorporated by  reference to Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K filed April 27, 2004)                                                                                                                                                                                   |

77

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| 10.14+ |   | Director Compensation  (incorporated by reference to Exhibit 10.15 to the Registrant’s Annual  Report on Form 10-K filed April 15, 2005)                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15+ |   | Salaries of Named  Executive Officers for fiscal 2007 (incorporated by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed  on April 10, 2006) |
| 21.1*  |   | List of Subsidiaries                                                                                                                                                                           |
| 23.1*  |   | Consent of  Deloitte & Touche LLP                                                                                                                                                     |
| 23.2*  |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                                         |
| 31.1*  |   | Section 302  Certification of Chairman and Chief Executive Officer                                                                                                                        |
| 31.2*  |   | Section 302  Certification of Vice President and Chief Financial Officer                                                                                                                  |
| 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                                                                   |

----

*                     Filed herewith.

+                  Management contract or compensatory plan required to befiled by Item 15(a)(3) of this report.

78

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

| Date: April 12, 2006 | BLYTH, INC. |
|---------------------------|-------------|
|                      | By:         | /s/ ROBERT B. GOERGEN |
|                      |        | Name: Robert B. Goergen |
|                      |        | Title: Chairman and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

|                         | **Signature** | ** **                                    | ** ** |                | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------|---------------|-----------------------------------------------|------------|----------------|-----------|------------|------------|--|----------|------------|
| /s/ ROBERT B.  GOERGEN  |          | Chairman and  Chief Executive Officer;        |       | April 12, 2006 |
| Robert B. Goergen       |          | Director (Principal  Executive Officer)       |       |           |
| /s/ ROBERT H.  BARGHAUS |          | Vice President  and Chief Financial Officer   |       | April 12, 2006 |
| Robert H. Barghaus      |          | (Principal Financial and  Accounting Officer) |       |           |
| /s/ ROGER A.  ANDERSON  |          | Director                                      |       | April 12, 2006 |
| Roger A. Anderson       |          |                                          |       |           |
| /s/ JOHN W.  BURKHART   |          | Director                                      |       | April 12, 2006 |
| John W. Burkhart        |          |                                          |       |           |
| /s/ PAMELA M.  GOERGEN  |          | Director                                      |       | April 12, 2006 |
| Pamela M. Goergen       |          |                                          |       |           |
| /s/ NEAL I.  GOLDMAN    |          | Director                                      |       | April 12, 2006 |
| Neal I. Goldman         |          |                                          |       |           |
| /s/ CAROL J.  HOCHMAN   |          | Director                                      |       | April 12, 2006 |
| Carol J. Hochman        |          |                                          |       |           |
| /s/ WILMA H.  JORDAN    |          | Director                                      |       | April 12, 2006 |
| Wilma H. Jordan         |          |                                          |       |           |
| /s/ JAMES M.  MCTAGGART |          | Director                                      |       | April 12, 2006 |
| James M. McTaggart      |          |                                          |       |           |
| /s/ HOWARD E.  ROSE     |          | Director                                      |       | April 12, 2006 |
| Howard E. Rose          |          |                                          |       |           |

 

79

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**Report ofIndependent Registered Public Accounting Firm on Financial Statement Schedule**

To the Board of Directors and Stockholders ofBlyth, Inc.:

Our audit of the consolidated financial statementsreferred to in our report dated April 26, 2004, appearing in this AnnualReport on Form 10-K of Blyth, Inc. and Subsidiaries alsoincluded an audit of the financial statement schedule listed in Item15(a)(2) of this Form 10-K. In our opinion, this financialstatement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.

|        | /s/ PRICEWATERHOUSECOOPERS  LLP |
|--------|---------------------------------|
|   | PRICEWATERHOUSECOOPERS LLP      |

 

Stamford, ConnecticutApril 26, 2004

S-1

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**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTSFor the years ended January 31, 2004, 2005 and 2006(In thousands)**

| ** **                       | ** ** | **Balance at** | ** ** | ** **         | ** ** | **Charged to** | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|----------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|
| ** **                       | ** ** | **Beginning**       | ** ** | **Acquired**       | ** ** | **Costs and**  | ** ** | ** **   | ** ** | **End of**     | ** ** |
| **Description**                  | ** ** | ** **          | ** ** | **of Period** | ** ** | **Balances**        | ** ** | **Expenses** | ** ** | **Deductions**      | ** ** | **Period** | ** ** |
| **2004**                         |       |                |       |               |       |                |       |         |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                | $          | 4,093              |       |                |       | $            | 623        |                |       |   | $ | 1,809 |   |   |   | $ | (2,055 | ) |   |   | $ | 4,470 |   |   |
| Income tax  valuation allowance  |       |                | 1,017      |               |       |                | 1,656      |         |       |                | —     |   |   |   | — |   |   |   | 2,673 |   |   |
| Inventory reserve                |       |                | 27,145     |               |       |                | 1,343      |         |       |                | 15,462     |   |   |   | (20,970 | ) |   |   | 22,980 |   |   |
| **2005**                         |       |                |       |               |       |                |       |         |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                | $          | 4,470              |       |                |       | $            | 538        |                |       |   | $ | 1,371 |   |   |   | $ | (2,351 | ) |   |   | $ | 4,028 |   |   |
| Income tax  valuation allowance  |       |                | 2,673      |               |       |                | —     |         |       |                | 1,565      |   |   |   | (200 | ) |   |   | 4,038 |   |   |
| Inventory reserve                |       |                | 22,980     |               |       |                | 1,730      |         |       |                | 14,130     |   |   |   | (16,407 | ) |   |   | 22,433 |   |   |
| **2006**                         |       |                |       |               |       |                |       |         |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                | $          | 4,028              |       |                |       | $            | (78        | )                   |       |   | $ | 2,189 |   |   |   | $ | (2,247 | ) |   |   | $ | 3,892 |   |   |
| Income tax  valuation allowance  |       |                | 4,038      |               |       |                | —     |         |       |                | 767        |   |   |   | (101 | ) |   |   | 4,704 |   |   |
| Inventory reserve                |       |                | 22,433     |               |       |                | —     |         |       |                | 16,961     |   |   |   | (17,075 | ) |   |   | 22,319 |   |   |
|                                  |            |                     |            |                    |            |                     |            |              |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

S-2

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