** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

 

----

** **

**FORM 10-K**

 

----

 
| **(Mark One)**                                                               |
|------------------------------------------------------------------------------|
|                                                                         |   |
| **ý**                                                                   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                         |   |
|                                                                         | **For the fiscal year ended January 31, 2004** |
|                                                                         |   |
| **or**                                                                       |
|                                                                         |   |
| **o**                                                                        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                         |
| **For the transition period from __________________ to  __________________** |
|                                                                         |
| **Commission File number 1-13026**                                           |

#### ** **

**BLYTH, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Delaware**                                                               |   | **36-2984916**                        |
|----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)            |   | (I.R.S. Employer  Identification No.) |
|                                                                       |   |                                  |
| **One East Weaver Street  Greenwich, Connecticut**                         |   | **06831**                             |
| (Address of Principal Executive Offices)                                   |   | (Zip Code)                            |
|                                                                       |   |                                  |
| Registrant’s telephone number, including area code:**(203) 661-1926** |
|                                                                       |   |                                  |
| Securities registered pursuant to Section 12(b) of the Act:                |

 
| **Title of Each Class**        |   | **Name of Each Exchange on Which Registered** |
|--------------------------------|--------|-----------------------------------------------|
| Common  Stock, $0.02 par value |   | New  York Stock Exchange                      |

 

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

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act). Yes  ý  No  o

 

Asof July 31, 2003, the aggregate market value of the voting stock held bynon-affiliates of the registrant was approximately $853 million based on theclosing price of the registrant’s Common Stock on the New York Stock Exchangeon such date and based on the assumption, for purposes of this computationonly, that all of the registrant’s directors and executive officers areaffiliates.

 

Asof April 27, 2004, there were 45,618,927 outstanding shares of Common Stock,$0.02 par value.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the 2004 Proxy Statement for the Annual Meeting ofShareholders to be held on June 24, 2004 (Incorporated into Part III).

 

 

----

 

**TABLE OF CONTENTS**

 
| **PART I**                                                                                                                          |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                |   |
| Item 1.   Business                                                                                                        | 3      |
|                                                                                                                                |   |
| Item 2.   Properties                                                                                                      | 13     |
|                                                                                                                                |   |
| Item 3.   Legal Proceedings                                                                                               | 14     |
|                                                                                                                                |   |
| Item 4.   Submission of Matters to a Vote of Security Holders                                                             | 14     |
|                                                                                                                                |   |
| **PART  II**                                                                                                                        |   |
|                                                                                                                                |   |
| Item 5.   Market for Company’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities | 14     |
|                                                                                                                                |   |
| Item 6.   Selected Consolidated Financial Data                                                                            | 16     |
|                                                                                                                                |   |
| Item 7.   Management’s Discussion and Analysis of Financial Condition  and Results of Operations                     | 17     |
|                                                                                                                                |   |
| Item 7A. Quantitative and  Qualitative Disclosures about Market Risk                                                                | 37     |
|                                                                                                                                |   |
| Item 8.   Financial Statements and Supplementary Data                                                                     | 39     |
|                                                                                                                                |   |
| Item 9.   Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure                           | 74     |
|                                                                                                                                |   |
| Item 9A. Controls and  Procedures                                                                                                   | 75     |
|                                                                                                                                |   |
| **PART  III**                                                                                                                       |   |
|                                                                                                                                |   |
| Item  10.  Directors and Executive Officers  of the Company                                                                    | 76     |
|                                                                                                                                |   |
| Item 11.  Executive Compensation                                                                                               | 76     |
|                                                                                                                                |   |
| Item  12.  Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 76     |
|                                                                                                                                |   |
| Item  13.  Certain Relationships and Related  Transactions                                                                     | 76     |
|                                                                                                                                |   |
| Item  14.  Principal Accountant Fees and  Services                                                                             | 76     |
|                                                                                                                                |   |
| **PART  IV**                                                                                                                        |   |
|                                                                                                                                |   |
| Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                     | 76     |

 

2

----

 

**Part I**

 

**Item 1. Business**

 

**(a)****         ****General Development of the Business**

 

Blyth, Inc. (together with its subsidiaries,the “Company,” which may be referred to as “we,” “us” or “our”) is a homeexpressions company competing primarily in the home décor, seasonal decorationsand gift industry.  The Company designs,markets and distributes an extensive array of candles, home fragrance products,decorative accessories, seasonal decorations and household convenience items,as well as tabletop lighting and chafing fuel for the Away From Home orfoodservice trade.  Blyth manufacturesmost of its candles and sources nearly all of its other products. The Company’ssales and operations take place primarily in the United States, Canada andEurope, with additional activity in Mexico, Australia and the Far East.

 

Blyth became a publicly traded company in1994, at which time net sales were approximately $157.5 million.  Both internal growth and acquisitions havecontributed to significant overall growth since that time.  Internal growth has been generated by (a)increased sales of existing home expressions products to consumers and retailers,(b) the introduction of new products and product line extensions and (c)geographic expansion.  The Company hasalso integrated numerous acquisitions and investments into its operations sinceits formation in 1977.

 

Additional information is available on ourwebsite, www.blyth.com.  The Company’sannual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and any amendments thereto filed or furnished pursuant to theSecurities Exchange Act of 1934 are available on our website free of charge assoon as reasonably practicable following submission to the SEC.  Also available on the Company’s website areits Corporate Governance Guidelines, its Code of Conduct, and the charters forits Audit Committee, Compensation Committee and Nominating and CorporateGovernance Committee, each of which is available in print to any shareholderwho makes a request to Blyth, Inc., One East Weaver Street, Greenwich, CT06831; Attention Bruce D. Kreiger, Secretary. The information posted to www.blyth.com, however, is not incorporated hereinby reference and is not a part of this Annual Report on Form 10-K.

 

**(b)****         ****Business Segments**

 

The Company reports its financial results infive business segments: the Direct Selling segment, the Wholesale HomeFragrance segment, the Wholesale Creative Expressions segment, the Catalog& Internet segment, and the All Other segment.  These segments accounted for approximately 51%, 25%, 14%, 7% and4% of consolidated net sales, respectively, for the fiscal year ended January31, 2004.*  Financial informationrelating to these business segments for the years ended January 31, 2004, 2003and 2002 appears in Note 18 of the Company’s consolidated financial

 

----

* Percentages do not add up to 100% due torounding.

 

3

----

 

statements and is incorporated herein byreference.

 

# **DirectSelling Segment**

# ** **

In fiscal year 2004, this segment representedapproximately 51% of Blyth’s total sales. Products sold globally in the Direct Selling segment are marketedthrough a network of independent sales consultants using the party plan methodof direct selling.  Products designed,manufactured or sourced, marketed and distributed within this segment includefragranced and non-fragranced candles, bath products and a broad range ofrelated accessories.  These products aresold in North America, Europe and Australia under the brand name PartyLite®.

 

# **UnitedStates Market**

# ** **

Within the United States market, candles,other home fragrance products, bath products and related accessories are solddirectly to consumers through a network of independent sales consultants.  Independent sales consultants arecompensated on the basis of PartyLite® brand product sales at parties organizedby them and parties organized by consultants recruited by them.  Over 36,000 independent sales consultantslocated in the US were selling PartyLite® brand products in the US at fiscal2004 year-end.  Our products aredesigned, packaged and priced in a manner appropriate to the premium nature oftheir quality and exclusivity and distribution channel through which they aresold.

 

# **InternationalMarket**

# ** **

# Blyth continues to focus onbecoming a global home fragrance company in its Direct Selling segment. Infiscal 2004, products were sold internationally in this segment directly to consumersby more than 20,000 independent sales consultants located outside the US, theexclusive distributors of PartyLite® brand products. These products were soldin the following international markets during fiscal year 2004: Australia,Austria, Canada, Finland, France, Germany, Mexico, Switzerland and the UnitedKingdom.

# ** **

We support our independent sales consultantswith inventory management and control and satisfy delivery requirements throughon-line ordering, which is available to all independent sales consultants inthe United States, Canada and Germany.

 

# **WholesaleHome Fragrance Segment**

# ** **

In fiscal year 2004, this segment representedapproximately 25% of Blyth’s total sales. Blyth is a global wholesale homefragrance company.  Products designed,manufactured or sourced, marketed and distributed within this segment includefragranced and non-fragranced candles, potpourri, seasonal decorations,environmental fragrance products such as air fresheners and filters and a broadrange of related accessories.  Theseproducts are sold in multiple channels of distribution in North America andEurope under brand names that include Ambria®, ColonialTM1, ColonialCandle of Cape Cod®, Colonial at HOME®, Carolina®, Florasense®, Gies®1,Kaemingk®1 and Liljeholmens®. Our wholesale home fragrance products are designed, packaged and pricedto satisfy the varying demands of consumers within each distribution channel.

 

4

----

 

# **UnitedStates Market**

# ** **

Products sold in the Wholesale Home Fragrancesegment in the United States are marketed through the premium and mass consumerwholesale channels.  Within thesechannels, we sell candles, home fragrance products and related accessories toindependent gift shops, specialty chains, department stores, food and drugoutlets and mass retailers through independent sales representatives, Companykey account managers and Company sales managers.  This sales force supports the Company’s customers with comprehensiveproduct catalogs and samples, merchandising programs and selectivefixtures.  The independent salesrepresentatives, Company key account managers and Company sales managers alsoreceive training on the marketing and proper use of our products.

 

# **InternationalMarket**

# ** **

# Products sold internationallyin the Wholesale Home Fragrance segment are marketed to retailers in thepremium and mass consumer wholesale channels through independent salesrepresentatives and Company sales managers. Customers include European mass merchants, garden centers, anddepartment and gift stores.

# ** **

In June 2003, Blyth acquired Kaemingk, B.V.,a European wholesaler of premium seasonal decorations.  Its products are sold to more than 3,000garden centers, and department and gift stores in 20 European countries underthe brand name Kaemingk®1. Kaemingk’s customer base and sourcing requirements are similar to thoseof our other Wholesale Home Fragrance businesses, and one management teamhandles oversight responsibility for all businesses in this segment.

 

Blyth’s international wholesale operationsalso include exports of products from the United States and various Europeancountries to Canada, Europe, Latin America and the Pacific Rim.  Exported products are sold through Companysales managers and independent sales representatives to premium and massretailers.  The Company may expand itsinternational presence through the establishment of additional non-US basedmarketing and distribution operations.

 

The Company believes that competing inmultiple distribution channels offers certain advantages.  Successful new ideas and research can beshared among and adapted by Blyth’s marketing groups.  Blyth’s competitive position in these channels is enhanced by itsability to respond quickly to changes in consumer preferences and new producttrends.  Moreover, the Companyeffectively supports customers with inventory management and control andsatisfies delivery requirements through electronic ordering, which is availableto independent sales representatives and sales managers in the premiumwholesale channel.

 

**WholesaleCreative Expressions Segment**

 

In fiscal year 2004, this segment representedapproximately 14% of Blyth’s total sales. Blyth designs, markets and distributes home décor products and seasonaldecorations within this segment.  Theseproducts are sold through multiple distribution channels under brand names thatinclude CBK®, Holiday365TM and Seasons of Cannon FallsTM.

 

5

----

 

Home décor products and seasonal decorationsare sold in the United States to premium and mass retailers.  Premium everyday home décor products andgifts, including decorative metal and wicker accessories, picture frames, lampsand textiles are designed for and marketed and distributed to more than 25,000premium independent retailers.  Blythalso designs, markets and distributes seasonal decorations for the premium andmass distribution channels.  Duringfiscal year 2004, the Impact Plastics seasonal decorations business wasrealigned with that of our other Wholesale Creative Expressions business,Midwest, in order to concentrate these seasonal businesses into one unit.

 

**Catalog& Internet Segment**

 

In fiscal year 2004, this segment representedapproximately 7% of Blyth’s total sales. Blyth designs, markets and distributes a wide range of householdconvenience items, personalized gifts and photo storage products within thissegment.  These products are soldthrough the catalog and Internet distribution channel under brand names thatinclude Exposures®, Miles Kimball®, Walter Drake® and The Home Marketplace®.

 

Blyth acquired the Miles Kimball Company, acatalog and Internet marketer of household convenience products, personalizedgifts, photo albums, frames and holiday cards, in April 2003.  In December 2003, the Company acquiredJackson Acquisition Company, LLC, doing business as Walter Drake, which marketssimilar products through the catalog and Internet distribution channel.  In fiscal year 2005, we began consolidatingthe operations of Walter Drake into those of Miles Kimball in Oshkosh,Wisconsin as the seasonality of the Miles Kimball business is complemented bythe relatively less seasonal selling pattern of Walter Drake, thereby enhancingdistribution center capacity utilization throughout the year.

 

**All OtherSegment**

** **

In fiscal year 2004, this segment representedapproximately 4% of Blyth’s total sales. Within this segment, we manufacture and source chafing fuel and tabletopillumination products sold under brand names including Sterno®, HandyFuel® andAmbria® for the Away From Home or foodservice channel.  These products are sold primarily in theUnited States, as well as in Canada, Europe, Latin America and the Pacific Rimthrough independent sales representatives and foodservice distributors.

 

###### **United States Market**

###### ** **

Products sold in the All Other segment in theUnited States are marketed by the Company to the foodservice industry.  Chafing fuel and tabletop lighting productssuch as candles, liquid fuel lamps and accessories are sold to restaurants,caterers, hotels and other institutional customers.  Sales are solicited by independent sales representatives,independent foodservice distributors and Company sales managers.

 

###### **International Market**

###### ** **

The Company also exports foodservice productsfrom the United States.  Exportedproducts are sold through Company sales managers and

 

6

----

 

independent sales representatives toretailers and foodservice distributors.

 

# **ProductBrand Names**

# ** **

The key brand names under which our DirectSelling segment products are sold are:

 

PartyLite®

Lavish by PartyLiteTM

 

The key brand names under which our WholesaleHome Fragrance segment products are sold are:

 

Asp-Holmblad®(1)

Carolina®

ColonialTM(1)

Colonial Candle of Cape Cod®

Colonial at HOME®

Florasense®

Gies®(1)

Kaemingk®(1)

Liljeholmens®

 

The key brand names under which our WholesaleCreative Expressions segment products are sold are:

 

CBK®

Holiday365TM

JMC ImpactTM

Seasons of Cannon FallsTM

 

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

 

Exposures®

Miles Kimball®

The Home Marketplace®

Walter Drake®

 

The key brand names under which our All Othersegment products are sold are:

 

Ambria®

HandyFuel®

Sterno®

 

# **New ProductDevelopment**

# ** **

Concepts for new products and product lineextensions are directed to the marketing departments of our business units fromwithin all areas of the Company, as well as from the Company’s independentsales representatives and worldwide product manufacturing partners.  The new product development process mayinclude technical research, consumer market research, fragrance studies,comparative analyses, the formulation of engineering specifications,feasibility studies, safety assessments, testing and evaluation which cangenerally require from 3 to 18 months to complete.  Each year, new products typically account for at least 25% of ournet sales in the first full year following their introduction.

 

The Company’s focus on new products andproduct line extensions specific to each distribution channel and segment hasbeen an important element of its efforts to become a leading home expressionsproducts company.  The continualintroduction of new product forms, shapes, fragrances, packaging and presentationis intended to appeal to the changing tastes of consumers and retailers.

 

# **Manufacturing,Sourcing and Distribution**

# ** **

In all of the Company’s business segments,management continuously works to increase value and lower costs throughincreased efficiency in worldwide production, sourcing and distributionpractices, application of new

 

7

----

 

technologies and process control systems, andconsolidation and rationalization of equipment and facilities.  Since our 1994 initial public offering, we haveinvested over $255 million in new facilities and equipment in order to lowermanufacturing costs, improve product quality and increase manufacturingcapacity significantly in order to accommodate expected future sales growth, aswell as to improve the speed to market of new product introductions.  Management has also closed severalfacilities and written down the values of certain machinery and equipment inrecent years in response to changing market conditions.

 

The manufacture of Blyth’s products involvesthe use of highly automated processes and technologies, as well as certain handcrafting and finishing.  Many of theCompany’s products in all of its business segments are manufactured by othersbased on Blyth’s design specifications, making the Company’s global supplychain approach critically important to its new product development process,quality control and cost management. Management has also built a network of stand-alone highly automateddistribution facilities in its core markets.

 

# **TechnologicalAdvancements**

# ** **

The Company continues to see the benefit ofits substantial investment in technological initiatives, particularlyInternet-based ordering technology.  AnInternet-based order-entry and business management system is available to allPartyLite independent sales consultants in the United States, Canada andGermany.  By fiscal year end, showorders placed via the PartyLite Extranet had increased to over 75% of totalshow orders in the United States and over 85% of total show orders in Canada.  The system became available to PartyLiteconsultants in Germany during the third quarter of fiscal 2004, andapproximately 20% of German show orders were being placed via the Extranet byyear-end.  The Extranet’s automatedfeatures eliminate errors common on hand-written paper forms and speed ordersthrough processing and distribution, improving customer service.  Furthermore, by easing the administrativeworkload and providing tools with which to track sales and programs, theExtranet has helped PartyLite independent sales consultants build theirbusinesses more efficiently.  Theimproved accuracy of the automated system also results in administrativesavings for the Company.

 

By fiscal year end, Blyth’s consumerwholesale business in North America introduced UCCnet support with which theCompany now supports automated product information synchronization withretailers in the mass channel.  This newtechnical capability enables us to send immediate, up-to-date productinformation to participating retailers to ensure that they have current Blythproduct information to support their supply chain.  Today Blyth supports over 200 retail customers with various modesand forms of electronic data interchange (EDI).

 

# **Customers**

# ** **

Customers in the Direct Selling segment areindividual consumers served by independent sales consultants.  Sales within the Catalog & Internetsegment are also made directly to consumers. Blyth’s Wholesale Home Fragrance segment and Wholesale CreativeExpressions segment customers include

 

8

----

 

department and independent gift stores, massmerchandisers, specialty chains and food and drug stores.  Within its All Other segment, the Companysells to institutional customers such as hotels, restaurants and foodservicedistributors.  No single customeraccounts for 10% or more of Blyth’s sales.

 

# **Competition**

# ** **

All of the Company’s business segments arevery competitive.  Principle competitivefactors are new product introductions, price, product quality, delivery timeand customer service.  The domestic andinternational markets are very fragmented and served by numerous suppliers inall of Blyth’s business segments. Additional information about ways in which the Company’s business may beaffected by increased competition appears below under the heading “Risk ofIncreased Competition.”

 

# **Employees**

# ** **

As of January 31, 2004, the Company hadapproximately 5,600 full-time employees, of whom approximately 26% are basedoutside of the United States. Approximately 4,200 of the 5,600 employees are non-salaried.  Blyth does not have any unionized employeesin the United States.  Approximately 50employees of the Gies Group are represented by the IG Chemie labor union in theCompany’s German facility and have a General Agreement in place with notermination period.  A Wages Agreementwill be under negotiation for renewal beginning in May 2004 and currently maybe terminated by the union at the end of that month.  Management believes that relations with the Company’s employeesare good.  Since its formation in 1977,Blyth has never experienced a work stoppage.

 

# **RawMaterials**

# ** **

All of the raw materials used by Blyth forits candles, home fragrance products and chafing fuel, principallypetroleum-based wax, fragrance, glass containers and corrugate, havehistorically been available in adequate supply from multiple sources.  Additional information about ways in whichBlyth’s business may be affected by shortages of raw materials appears belowunder the heading “Risk of Shortages of Raw Materials.”

 

# **Trademarksand Patents**

# ** **

The Company owns and has pending numeroustrademark registrations and applications in the United States Patent andTrademark Office related to its products. Blyth also registers certain trademarks in other countries.  While management regards these trademarksand patents as valuable assets to its business, the Company is not dependent onany single trademark or patent or group thereof.

 

# **EnvironmentalLaw Compliance**

# ** **

Most of the Company’s manufacturing, distributionand research operations are affected by federal, state, local and internationalenvironmental laws relating to the discharge of materials or otherwise to theprotection of the environment. Management has made and intends to continue to make the necessaryexpenditures to comply with applicable environmental laws and does not believethat such expenditures will have a material effect on the Company’s

 

9

----

 

capital expenditures, earnings or competitiveposition.

 

# **CautionaryFactors That May Affect Future Results**

# ** **

*Thedisclosure and analysis in this report and in Blyth’s 2004 Annual Report toShareholders contain forward-looking statements that describe the Company’scurrent expectations or forecasts of future events.  One can usually identify these statements by the fact that theydo not relate strictly to historical or current facts.  Forward-looking statements often includewords such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”“believe” and other similar words or terms in connection with any discussion offuture operating or financial performance. These include statements relating to future actions, performance orresults related to current or future products or product approvals, salesefforts, expenses, the outcome of contingencies such as legal proceedings andfinancial results.  From time to time,the Company may provide oral or written forward-looking statements in otherpublic materials.*

 

*Any or allof the forward-looking statements in this report, in our 2004 Annual Report toShareholders and in any other public statements made by management may turn outto be wrong.  They may be affected byinaccurate assumptions or known or unknown risks or uncertainties.  Many factors mentioned in this discussion,such as competition or the competitive environment, are important to theoutcome of future results. Consequently,**no forward-looking statements can be guaranteed, andactual results may vary materially from the Company’s projections.*

 

*Managementundertakes no obligation to update publicly any forward-looking statement,whether as a result of new information, future events or otherwise.  However the public is advised to review anyfuture disclosures the Company makes on related subjects in its quarterlyreports on Form 10-Q, current reports on Form 8-K and annual reports on Form10-K to the SEC.  The Company alsoprovides below the following cautionary discussion of risks, uncertainties andpotentially inaccurate assumptions relevant to its business.  These and other factors could cause actualresults to differ materially from expected and historical results and areprovided as permitted by the Private Securities Litigation Reform Act of 1995.*

 

# •            **Risk of Inability toMaintain Growth Rate**

# ** **

The Company has experienced significant salesgrowth in past years.  While managementexpects continued growth, Blyth’s future growth rate will likely be less thanits historical growth rate.  The Companyexpects faster sales growth in its international market versus its UnitedStates market, particularly in the Direct Selling and Wholesale Home Fragrancebusiness segments.  The market forBlyth’s Away From Home or foodservice products has also grown historically,though at a slower rate, a pattern that is expected to continue.  In recent years, our overall sales for theAway From Home or foodservice products were flat, reflecting a generally weakeconomic environment during these years. The Company’s ability to increase sales depends on numerous factors,including market acceptance of

 

10

----

 

existing products, the successfulintroduction of new products, the ability to recruit new independent salesconsultants, sourcing of raw materials and demand-driven increases inproduction and distribution capacity. Business in all of Blyth’s segments is driven by consumerpreferences.  Accordingly, there can beno assurances that the Company’s current or future products will maintain orachieve market acceptance.  Blyth’ssales and earnings results can be negatively impacted by the worldwide economicenvironment; particularly the Canadian, United States and Europeaneconomies.  There can be no assurancesthat the Company’s financial results will not be materially adversely affectedby these factors in the future.

 

The Company’s historical growth has been duein part to acquisitions and management continues to consider additionalstrategic acquisitions.  There can be noassurances that management will continue to identify suitable acquisitioncandidates, consummate acquisitions on terms favorable to the Company, financeacquisitions or successfully integrate acquired operations.

 

# •            **Risks Associated WithInternational Sales and Foreign-Sourced Products**

# ** **

Blyth’s international sales growth rate hasoutpaced that of its United States growth rate in recent years.  Moreover, the Company sources a portion ofits products in all of its business segments from independent manufacturers inthe Pacific Rim, Europe and Mexico.  Forthese reasons, Blyth is subject to the following risks associated withinternational manufacturing and sales: fluctuations in currency exchange rates, economic or politicalinstability, international public heath 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.

 

# •            **Ability to Respond toIncreased Product Demand**

# ** **

The Company’s ability to meet future productdemand in all of its business segments will depend upon its success in (1)bringing new production and distribution capacity on line in a timely manner,(2) improving its ability to forecast product demand and fulfill customerorders promptly, (3) improving customer service-oriented management informationsystems and (4) training, motivating and managing new employees.  The failure of any of the above could resultin a material adverse effect on Blyth’s financial results.

 

# •            **Risk of Shortages of RawMaterials**

# ** **

Certain raw materials could be in shortsupply due to capacity, availability, a change in requirements, weather orother factors, including supply disruptions due to production or transportationdelays.  Such shortages have not had andare not presently expected to have a material adverse effect on the Company’soperations.  While the price of crudeoil is only one of several factors impacting the price of petroleum wax, it ispossible that recent fluctuations in oil prices may have a material adverseaffect on the cost of petroleum-based products used in the manufacture ortransportation of Blyth’s

 

11

----

 

products, particularly in the Direct Sellingand Wholesale Home Fragrance business segments.

 

# •            **Dependence on Key CorporateManagement Personnel**

# ** **

Blyth’s success depends in part on thecontributions of key corporate management, including its Chairman and ChiefExecutive Officer, Robert B. Goergen. The Company does not have employment contracts with any of its keycorporate management personnel except Mr. Goergen, nor does it maintain any keyperson life insurance policies.  The lossof any of the key corporate management personnel could have a material adverseeffect on the Company.

 

# •            **Risk of IncreasedCompetition**

###### ** **

As noted above under the heading“Competition,” Blyth’s business is highly competitive both in terms of pricingand 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.  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 companiesselling candles manufactured at low cost outside of the United States.  Moreover, certain competitors focus on asingle geographic or product market and attempt to gain or maintain marketshare solely on the basis of price.

 

•            **Risks Associated withTerrorist Attacks or Other Hostilities and the International Political Climate**

 

Geopolitical conflict, including acts of warand terrorist attacks, have and may in the future affect the US and globaleconomies and may increase other risk factors faced by the Company.

 

# •            **Risks Related to InformationTechnology Systems**

# ** **

Blyth’s information technology systems aredependent on global communications providers, telephone systems, hardware,software and other aspects of Internet infrastructure that have experiencedsignificant system failures and outages in the past.  Blyth’s systems are susceptible to outages due to fire, floods,power loss, telecommunications failures, break-ins and similar events.  Despite the implementation of networksecurity measures, the Company’s systems are vulnerable to computer viruses,break-ins and similar disruptions from unauthorized tampering with Companysystems.  The occurrence of these orother events could disrupt or damage Blyth’s information technology systems andinhibit internal operations, the ability to provide customer service or theability of customers or sales personnel to access the Company’s informationsystems.

 

----

(1)   Registered and sold outside the United Statesonly.

12

----

 

**Item 2****.  Properties**

 

Thefollowing table sets forth the location and approximate square footage of theCompany’s major manufacturing and distribution facilities:

 
|                       |   |                                          |   |                                         |   | **Approximate  Square Feet** |   |
|----------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|------------------------------|--------|
| **Location**               |   | **Use**                                       |   | **Business  Segment**                        |   | **Owned**                    |   | **Leased** |   |
| Aalten, Netherlands        |   | Distribution                                  |   | Wholesale Home Fragrance                     |   | 227,500                      |   | 148,000 |   |
| Arndell Park, Australia    |   | Distribution                                  |   | Direct Selling                               |   |                         |   | 10,000 |   |
| Batavia, Illinois          |   | Manufacturing and Research  & Development |   | Direct Selling and  Wholesale Home Fragrance |   | 486,000                      |   |   |   |
| Caldas da Rainha, Portugal |   | Manufacturing and related  distribution       |   | Wholesale Home Fragrance                     |   | 230,000                      |   |   |   |
| Cannon Falls, Minnesota    |   | Distribution                                  |   | Wholesale Creative  Expressions              |   |                         |   | 192,000 |   |
| Carol Stream, Illinois     |   | Distribution                                  |   | Direct Selling                               |   |                         |   | 651,000 |   |
| Clara City, Minnesota      |   | Manufacturing and related  distribution       |   | Wholesale Creative  Expressions              |   | 54,000                       |   | 220,000 |   |
| Colorado Springs, Colorado |   | Manufacturing and related  distribution       |   | Catalog & Internet                       |   | 211,200                      |   |   |   |
| Cumbria, England(1)        |   | Manufacturing and related  distribution       |   | Direct Selling and  Wholesale Home Fragrance |   | 206,200                      |   | 70,000 |   |
| Elkin, North Carolina      |   | Manufacturing and related  distribution       |   | Wholesale Home Fragrance                     |   | 690,000                      |   |   |   |
| Glinde, Germany            |   | Manufacturing and related  distribution       |   | Wholesale Home Fragrance                     |   | 172,000                      |   |   |   |
| Maynard, Minnesota         |   | Manufacturing and related  distribution       |   | Wholesale Creative  Expressions              |   | 54,000                       |   |   |   |
| Hyannis, Massachusetts(2)  |   | Manufacturing                                 |   | Direct Selling and  Wholesale Home Fragrance |   | 69,000                       |   |   |   |
| Memphis, Tennessee         |   | Distribution                                  |   | Wholesale Home Fragrance                     |   |                         |   | 462,000 |   |
| Monterrey, Mexico          |   | Distribution                                  |   | Wholesale Home Fragrance                     |   |                         |   | 45,000 |   |
| Ontario, Canada            |   | Distribution                                  |   | Direct Selling                               |   |                         |   | 25,000 |   |
| Oshkosh, Wisconsin         |   | Distribution                                  |   | Catalog & Internet                       |   |                         |   | 375,000 |   |
| Oskarshamm, Sweden         |   | Manufacturing and related  distribution       |   | Wholesale Home Fragrance                     |   |                         |   | 123,000 |   |
| Plymouth, Massachusetts    |   | Distribution                                  |   | Direct Selling                               |   | 59,000                       |   |   |   |
| Texarkana, Texas           |   | Manufacturing and related  distribution       |   | All Other                                    |   | 154,000                      |   | 65,000 |   |
| Tilburg, Netherlands       |   | Distribution                                  |   | Direct Selling                               |   | 327,000                      |   |   |   |
| Tijuana, Mexico            |   | Manufacturing                                 |   | Wholesale Home Fragrance                     |   |                         |   | 200,800 |   |
| Union City, Tennessee      |   | Distribution                                  |   | Wholesale Creative  Expressions              |   | 360,000                      |   | 60,000 |   |

 

The Company’s executiveoffices, administrative offices and outlet stores are generally located inleased space (except for certain offices located in owned space).  Most of the Company’s properties arecurrently being utilized for their intended purpose except as discussed in thefootnotes below.

 

----

(1)   Represents four separatefacilities as follows: 60,200 square feet, 56,000 square feet and 70,000 squarefeet used by Colony Gifts Corporation Limited; 90,000 square feet used by CCWManufacturing Limited.

(2)   This facility was closed onJanuary 31, 2004.

 

13

----

 

**Item 3****.  Legal Proceedings**

 

TheCompany is involved in litigation arising in the ordinary course of itsbusiness. In the opinion of the Company’s management, existing litigation willnot have a material adverse effect on the Company’s financial position orresults of operations.

 

OnJune 2, 2003, the Company and its wholly-owned subsidiary, Endar Corp., on theone hand, and Ennio Racinelli, Darlene Racinelli and others, on the other hand,agreed in open court to settle and resolve all matters involving or in any wayrelating to the previously reported legal proceedings by and between them, bymeans of a written settlement and release agreement, without any payment by anyparty.  On August 25, 2003, the case wasdismissed by the Riverside Superior Court.

 

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

 

TheCompany’s 2004 annual meeting of stockholders will be held on June 24,2004.  No matter was submitted to a voteof security holders in the fourth quarter of the fiscal year ended January 31,2004.

 

**PART II**

 

**Item 5****.  Market for the Company’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities**

 

OurCommon Stock is traded on the New York Stock Exchange under the symbolBTH.  The price range for the Company’sCommon Stock on the New York Stock Exchange as reported by the New York StockExchange was as follows:

 
|           |   | **FISCAL  2003  (ENDED JANUARY 31, 2003)** |   |
|----------------|--------|--------------------------------------------|--------|
|           |   | **HIGH**                                   |   | **LOW** |   |
| First Quarter  |   | $                                          | 30.15  |   | $ | 20.85 |   |
| Second Quarter |   | $                                          | 32.80  |   | $ | 25.83 |   |
| Third Quarter  |   | $                                          | 30.34  |   | $ | 23.96 |   |
| Fourth Quarter |   | $                                          | 28.63  |   | $ | 23.91 |   |

 
|           |   | **FISCAL  2004  (ENDED JANUARY 31, 2004)** | ** ** |
|----------------|--------|--------------------------------------------|------------|
|           |   | **HIGH**                                   |       | **LOW** | ** ** |
| First Quarter  |   | $                                          | 26.63      |   | $ | 23.46 |   |
| Second Quarter |   | $                                          | 30.38      |   | $ | 25.36 |   |
| Third Quarter  |   | $                                          | 28.82      |   | $ | 25.95 |   |
| Fourth Quarter |   | $                                          | 33.65      |   | $ | 27.93 |   |

 

As of April 27, 2004, there were 1,983 registered holders of record ofthe Company’s Common Stock.

 

On March 31, 2004, the Company’s Board of Directors declared a regularsemi-annual cash dividend in the amount of $0.17 per share of Common Stockpayable in the second quarter of fiscal year 2005.  During fiscal years 2004 and 2003, the Company’s Board ofDirectors declared dividends as follows: $0.13 per share of Common Stock

 

14

----

 

payablein the second quarter of fiscal year 2004; $0.15 per share of Common Stockpayable in the fourth quarter of fiscal year 2004 and $0.11 per share of CommonStock payable in each of the second and fourth quarters of fiscal year 2003.

 

The following table sets forth certain information concerning therepurchase of the Company’s Common Stock made by the Company during the fourthquarter of the fiscal year ended January 31, 2004.

 

##### **ISSUER PURCHASES OF EQUITY SECURITIES1**

##### ** **

 
| **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, 2003 -  November 30, 2003 |   | 89,800                                      |   | $                                       | 29.55  |                                                                                            |      | 4,345,100                                                                                                                   |              | 1,654,900  shares |   |
| Month #2  December 1, 2003 -  December 31, 2003 |   | 0                                           |   | 0                                       |   |                                                                                            | 4,345,100 |                                                                                                                        | 1,654,900  shares |   |
| Month #3  January 1, 2004 -  January 31, 2004   |   | 0                                           |   | 0                                       |   |                                                                                            | 4,345,100 |                                                                                                                        | 1,654,900  shares |   |
| Total                                           |   | 89,800                                      |   | $                                       | 29.55  |                                                                                            |      | 4,345,100                                                                                                                   |              | 1,654,900  shares |   |

 

_____________________________

 

(1)   On September 10, 1998, the Company’s Board of Directors approvedthe Company’s share repurchase program (the “Repurchase Program”) pursuant towhich the Company can repurchase up to 1,000,000 shares of its issued andoutstanding Common Stock in open market transactions.  On June 8, 1999, the Company’s Board of Directors amended theRepurchase 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 ofDirectors further amended the Repurchase Program and increased the number ofshares of Common Stock to be repurchased by 1,000,000 shares, from 2,000,000 to3,000,000 shares.  On December 14, 2000,the Company’s Board of Directors further amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 1,000,000shares, from 3,000,000 to 4,000,000 shares. On April 4, 2002, the Company’s Board of Directors further amended theRepurchase Program and increased the number of shares of Common Stock to berepurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.  The Repurchase Program does not have anexpiration date.  The Company intends tomake further purchases under the Repurchase Program.

 

15

----

 

**Item 6****.**

** **

**Selected Consolidated Financial Data**

** **

Set forth below are selected summaryconsolidated financial and operating data of the Company for fiscal years 2000through 2004, which have been derived from the Company’s audited financialstatements for those years except for the restatement of fiscal year 2003described in Note 5 below and Note 2 to the Consolidated Financial Statements.  The information presented below should beread in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the Company’s consolidated financialstatements, including the notes thereto, appearing elsewhere in this AnnualReport to Shareholders on Form 10-K.

 
|                                                                                            |   | **Year ended January 31,** |       |
|-------------------------------------------------------------------------------------------------|--------|----------------------------|------------|
| **(In  thousands, except per share and percent data)**                                          |   | **2000**                   |       | **2001** |   | **2002** |   | **2003** |   | **2004** |   |
|                                                                                            |   |                       |       |   |   |   |   | **Restated  (5)** |   |   |   |
| **Statement of Earnings Data: (1)**                                                             |   |                       | ** ** |   | ** ** |   | ** ** |   |   |   | ** ** |
| Net sales (4)                                                                                   |   | $                          | 1,135,875  |   | $ | 1,178,813 |   | $ | 1,178,771 |   | $ | 1,288,583 |   | **$** | **1,505,573** | ** ** |
| Gross profit (4)                                                                                |   | 572,006                    |       | 596,101 |   | 577,005 |   | 640,302 |   | **723,675** | ** ** |
| Operating profit                                                                                |   | 164,001                    |       | 145,244 |   | 120,490 |   | 155,517 |   | **153,077** | ** ** |
| Interest expense                                                                                |   | 12,104                     |       | 15,876 |   | 17,237 |   | 14,664 |   | **17,443** | ** ** |
| Earnings before income taxes, minority interest and cumulative effect  of accounting change (2) |   | 150,390                    |       | 130,690 |   | 108,289 |   | 142,557 |   | **136,893** | ** ** |
| Earnings before minority interest and cumulative effect of accounting  change                   |   | 92,847                     |       | 80,715 |   | 68,006 |   | 89,525 |   | **86,516** | ** ** |
| Net earnings (3)                                                                                |   | 92,389                     |       | 79,562 |   | 68,006 |   | 57,772 |   | **86,351** | ** ** |
| Basic net earnings per common share before cumulative effect of  accounting change              |   | $                          | 1.91       |   | $ | 1.69 |   | $ | 1.45 |   | $ | 1.94 |   | **$** | **1.89** | ** ** |
| Cumulative effect of accounting change (3)                                                      |   | —                     |       | (0.02 | ) | — |   | (0.69 | ) | **—** | ** ** |
|                                                                                            |   | $                          | 1.91       |   | $ | 1.67 |   | $ | 1.45 |   | $ | 1.25 |   | **$** | **1.89** | ** ** |
| Diluted net earnings per common share before cumulative effect of  accounting change            |   | $                          | 1.89       |   | $ | 1.69 |   | $ | 1.44 |   | $ | 1.92 |   | **$** | **1.88** | ** ** |
| Cumulative effect of accounting change                                                          |   | —                     |       | (0.02 | ) | — |   | (0.68 | ) | **—** | ** ** |
|                                                                                            |   | $                          | 1.89       |   | $ | 1.66 |   | $ | 1.44 |   | $ | 1.24 |   | **$** | **1.88** | ** ** |
| Cash dividends paid, per share                                                                  |   | $                          | —     |   | $ | 0.20 |   | $ | 0.20 |   | $ | 0.22 |   | **$** | **0.28** | ** ** |
| Basic weighted average number of common shares outstanding                                      |   | 48,471                     |       | 47,629 |   | 47,056 |   | 46,256 |   | **45,771** | ** ** |
| Diluted weighted average number of common shares outstanding                                    |   | 48,818                     |       | 47,902 |   | 47,205 |   | 46,515 |   | **46,027** | ** ** |
| **Operating Data:**                                                                             |   |                       | ** ** |   | ** ** |   | ** ** |   |   |   | ** ** |
| Gross profit margin                                                                             |   | 50.4                       | %          | 50.6 | % | 48.9 | % | 49.7 | % | **48.1** | **%** |
| Operating profit margin                                                                         |   | 14.4                       | %          | 12.3 | % | 10.2 | % | 12.1 | % | **10.2** | **%** |
| Capital expenditures                                                                            |   | $                          | 47,740     |   | $ | 25,322 |   | $ | 11,901 |   | $ | 14,322 |   | **$** | **21,963** | ** ** |
| Depreciation and amortization                                                                   |   | 28,107                     |       | 33,383 |   | 36,246 |   | 30,212 |   | **35,954** | ** ** |
| **Balance Sheet Data:**                                                                         |   |                       | ** ** |   | ** ** |   | ** ** |   |   |   | ** ** |
| Working capital                                                                                 |   | $                          | 191,257    |   | $ | 224,413 |   | $ | 285,771 |   | $ | 324,060 |   | **$** | **400,540** | ** ** |
| Total assets                                                                                    |   | 714,536                    |       | 770,974 |   | 804,781 |   | 860,084 |   | **1,127,963** | ** ** |
| Total debt                                                                                      |   | 196,222                    |       | 199,968 |   | 191,701 |   | 176,493 |   | **293,886** | ** ** |
| Total stockholders’ equity                                                                 |   | 380,214                    |       | 421,794 |   | 468,063 |   | 507,852 |   | **588,970** | ** ** |

 

----

*(1)**      **Statement of Earnings Dataincludes the results of operations for periods subsequent to the respectivepurchase acquisitions of the remaining 50% of Colony Gift Corporation Limitedin May 1999, which was previously included as an equity investment, Midwest ofCannon Falls, Inc. acquired in April 2001, CBK, Ltd., LLC (now CBK Styles,Inc.) acquired in May 2002, Miles Kimball Company acquired in April 2003,Kaemingk B.V. acquired in June 2003 and Walter Drake acquired in December 2003,none of which had a material effect on the Company’s results of operations inthe period during which they occurred, or thereafter.*

*(2)**      **Fiscal 2001 pre-taxearnings include restructuring and impairment charges of approximately $7.7million related to realignment of the Company’s European operations and USconsumer wholesale organization, decisions to exit certain product lines, andchanges impacting its specialty retail business.  Fiscal 2001 pre-tax earnings also include approximately $9.0million of unusual charges to cost of sales for adjustments to carrying valuesof inventory connected with these initiatives, as well as $2.3 million ofunexpected bad debt expenses associated with certain customer bankruptcyfilings.  Fiscal 2002 pre-tax earningsinclude restructuring and impairment charges of approximately $14.1 millionrelated to closure of the Company’s 62nd Street Chicago facility,other rationalization of the North American consumer wholesale business andcertain changes in the European sector. Fiscal 2002 pre-tax earnings also include approximately $6.3 million and$5.0 million in unusual charges to cost of sales for inventory revaluationsrelated to the US 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 aone-time cumulative effect of accounting change in January 2001 to reflect theadoption of Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition inFinancial Statements.”  The Companyrecorded a one-time cumulative effect of accounting change in February 2002 toreflect the adoption of SFAS 142, “Goodwill and Other Intangible Assets.”  (See Note 1 to the Consolidated FinancialStatements, “Summary of Significant Accounting Policies”).*

*(4)**      **The Company madereclassifications to previously reported net sales and gross profit informationto reflect the adoption of Emerging Issues Task Force Issue No. 01-09.  (See Note 1 to the Consolidated FinancialStatements, “Summary of Significant Accounting Policies”).*

*(5)****      ****The Company has restatedits fiscal 2003 financial statements to reflect an increase in the cumulativeeffect of accounting change  related tothe adoption of SFAS 142, “Goodwill and Other Intangible Assets.”  See Note 2 to the Consolidated FinancialStatements.*

 

16

----

 

**Item 7****.**

** **

**Management’s Discussion and Analysis of**

**Financial Condition and Results of Operations**

** **

The financial and business analysis belowprovides information that we believe is relevant to an assessment andunderstanding of our consolidated financial condition, changes in financialcondition and results of operations. This financial and business analysis should be read in conjunction withour consolidated financial statements and accompanying notes to theconsolidated financial statements set forth in Item 8. below.

 

**OVERVIEW**

 

For the past several years, we have reportedfinancial information for two reporting segments, namely Candles & HomeFragrance and Creative Expressions.  Wehave reevaluated our operating segments pursuant to Statement of FinancialAccounting Standards No. 131, “Disclosures about Segments of an Enterprise andRelated Information”, and determined to report financial information withrespect to five reporting segments, namely Direct Selling, Wholesale HomeFragrance, Wholesale Creative Expressions, Catalog & Internet and AllOther.  This revision of segments hadthe related effect of requiring changes in the Company’s reporting units forpurposes of goodwill impairment reviews under SFAS No. 142, “Goodwill and OtherIntangible Assets,” retroactive to the February 1, 2002 adoption date of SFAS142.  This resulted in the need toperform impairment reviews of several additional reporting units as of February1, 2002 and each subsequent year-end balance sheet date, thereafter.  These impairment reviews indicated the needto record a $27 million goodwill impairment specifically in our Wholesale HomeFragrance segment, which we have recorded as an increase in the cumulativeeffect of accounting change for the adoption of SFAS 142 as of February 1,2002.  As a result, we have restated our2003 financial statements as discussed in Note 2 to the Consolidated FinancialStatements, and such restatement is reflected throughout the remainder ofmanagement’s discussion and analysis that is set forth below.

 

The Company’s fiscal year 2004 financialresults were strong, despite the overall weakness in the home expressionsindustry in which we operate, and included record sales and strong cash flowand earnings.  We believe that thestrength of our results is a reflection of the successful execution of ourgrowth strategy and our ongoing efforts to ensure that our global supply chainis consistent with the needs of our marketplace.  As discussed more fully below, net sales for the fiscal yearended January 31, 2004 increased 17% to a record $1,506 million.  Operating profits were $153 million, afterpre-tax restructuring and impairment charges of $24 million, and net earnings,net of the $15 million after-tax effect of such charges, were $86 million.  Cash flow from operations, at $173 million,was very strong again this year.

 

Towards fiscal year end, we announced aseries of steps that continue the rationalization of our business model,primarily in our wholesale candle business, which began several years ago.  These steps reflect our response to rapidchanges in the marketplace, as well as our determination that a hybrid supplychain strategy of both manufacturing and sourcing is more effective given thesechanges.  While healthy growth continueswithin our European businesses, growth in the home fragrance category hasmoderated in North America, and the ongoing and increasing pressures ofinternational competition necessitate increased efficiency in ouroperations.  Moreover, Blyth has alsorealized significant productivity improvements in its manufacturing facilitiesin recent years.  The evaluation andrationalization of our infrastructure and evolution of our hybrid strategy isof strategic importance and is a major, continuing management focus.

 

During our fiscal 2004 fourth quarter, wedisposed of and wrote off certain equipment in our primary North Americanmanufacturing facilities in response to the above mentioned factors, as well asin response to a continued, consumer-driven product shift from candle formssuch as pillars and tapers towards filled containers, votives and tealights.  We also recognized restructuring andimpairment charges in the fourth quarter in connection with the consolidationof our Temecula, California potpourri operations, and the write down of certainother equipment and severance payments to employees.  In addition, we recognized an impairment related to our fiscal1997 acquisition of the Canterbury® brand.

 

In July 2003, our candle manufacturingfacility in Monterrey, Mexico was destroyed by fire.  After extensive review, we decided to focus our North Americancandle production in our two largest state-of-the-art US facilities and notrebuild in Monterrey.  This review alsoled to the decision to close our Hyannis, Massachusetts plant, Blyth’s smallestmanufacturing facility, which was located in a congested downtown Cape Cod areathat hampered

 

17

----

 

the transportation of raw materials andfinished goods.  Most of the chargesassociated with the Hyannis closure were recorded in the Direct Sellingsegment.  The costs associated with thefire were recorded in the Wholesale Home Fragrance segment and are expected tobe recouped through insurance.

 

We believe that all of these steps havepositioned Blyth to compete more effectively in the changing worldwidemarketplace, and we will continue to evaluate our business model as marketsevolve.

 

We invested $22 million in capital projectsin fiscal year 2004 and an additional $149 million in cash for the acquisitionsof Miles Kimball, Kaemingk and Walter Drake. Annualized net sales of our fiscal 2004 acquisitions are approximately$290 million.  We ended the year with$230 million of cash and cash equivalents on our balance sheet.

 

Building on our healthy financial conditionand strong balance sheet, we took advantage of historically low interest ratesthis year by issuing $100 million of 10-year senior notes in October.  The proceeds will be used for any or all ofinternal reinvestment in our businesses, the funding of strategic acquisitions,the repayment of certain short-term debt, dividend payments and sharerepurchases.

 

**SEGMENTS**

 

Blyth is a global competitor in the gift anddecorative accessories market, which the Company calls the home expressionsindustry.  Within this category, theCompany reports its financial results in five segments - the Direct Sellingsegment, the Wholesale Home Fragrance segment, the Wholesale CreativeExpressions segment, the Catalog & Internet segment, and the All Othersegment.  Miles Kimball Company (“MilesKimball”), acquired in April 2003 and Walter Drake, acquired in December 2003,are included in the Catalog & Internet segment.  Kaemingk B.V. (“Kaemingk”), acquired in June 2003, is included inthe Wholesale Home Fragrance segment. Prior to January 31, 2004, the Company reported its financial results intwo reporting segments, the Candles & Home Fragrance segment and theCreative Expressions segment.  TheCompany has reevaluated its operating segments based on the application of FASBStatement No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” and determined to report financial information with respect tofive reporting segments in fiscal 2004 and four in fiscal 2003 and 2002 (Theincrease in segments in fiscal 2004 was due to the acquisitions that wereconsummated in fiscal 2004).  TheCompany’s financial statement footnotes have been restated to reflect therevised segments.  In addition, due tothe change in the Company’s reportable segments and the resulting change inreporting units under SFAS 142, the Company has restated its fiscal 2003financial statements to reflect the recording of a  $27.2 million goodwill impairment charge related to the WholesaleHome Fragrance segment as of the February 1, 2002 adoption date of SFAS142.  The Company’s reportable and operatingsegments are based on financial information regularly evaluated by the chiefoperating decision maker in determining resource allocation and assessingperformance. The Company has operations outside of the United States and sellsproducts in the Direct Selling and Wholesale Home Fragrance segmentsworldwide.  The majority of sales in theWholesale Creative Expressions, Catalog & Internet and the All Othersegments, are domestically based.

 

Within the Direct Selling segment, theCompany designs, manufactures or sources and markets an extensive line ofproducts including candle accessories, scented candles, fragranced bath gelsand body lotions and other fragranced products.  These products are sold direct to the consumer under thePartyLite® brand in North America, Europe and Australia through a network ofmore than 56,000 independent sales consultants.

 

Within the Wholesale Home Fragrance segment,the Company designs, manufactures or sources and markets an extensive line ofproducts including candle accessories, scented candles, potpourri and otherfragranced products.  In addition, inEurope, the Company designs and markets seasonal decorations to independent andspecialty

 

18

----

 

retailers. Products in this segment are sold worldwide to retailers in the premiumand specialty wholesale channels under the Ambria®, Carolina®, ColonialTM(1),Colonial Candle of Cape Cod®, Colonial at HOME®, Kaemingk®(1), Kate’sTM andLiljeholmens® brands and in the mass retail channel under the Ambria®,FilterMate®, Florasense® and Gies®(1) brands.

 

Within the Wholesale Creative Expressionssegment, the Company designs, sources and markets a broad range of home décorproducts under the CBK® brand, seasonal decorations under the Holiday365TM, JMCImpactTM and Seasons of Cannon FallsTM brands, and until Jeanmarie was sold inApril 2004, decorative gift bags under the Jeanmarie® brand. These products aresold primarily in North America.

 

Within the Catalog & Internet segment,the Company designs, sources and markets a broad range of household convenienceitems, premium photo albums, frames, holiday cards and gifts under theExposures®, Miles Kimball® and Walter Drake® brands.  These products are sold primarily in North America.

 

Within the All Other segment,  the Company designs, manufactures or sourcesand markets a variety of chafing fuel, candles and tabletop lighting productsto the Away From Home or foodservice trade under the brand names Ambria®,HandyFuel® and Sterno®.  These productsare sold primarily in North America.

 

The following table sets forth, for theperiods indicated, the percentage relationship to net sales and the percentageincrease of certain items included in the Company’s consolidated statements ofearnings:

 
|               |   |                        |   |            |   |            |   | **Percentage Increase (Decrease)  from Prior Period** |   |
|--------------------|--------|-----------------------------|--------|-----------------|--------|-----------------|--------|-------------------------------------------------------|--------|
|               |   | **Percentage of Net Sales** |   | **Fiscal 2003** |   | **Fiscal 2004** |   |
|               |   | **Years Ended January 31**  |   | **Compared**    |   | **Compared**    |   |
|               |   |                        |   | **Restated**    |   |            |   | **to Fiscal**                                         |   | **to Fiscal** |   |
|               |   | **2002**                    |   | **2003**        |   | **2004**        |   | **2002**                                              |   | **2003** |   |
| Net sales          |   | 100.0                       |   | 100.0           |   | 100.0           |   | 9.3                                                   |   | 16.8 |   |
| Cost of goods sold |   | 51.1                        |   | 50.3            |   | 51.9            |   | 7.7                                                   |   | 20.6 |   |
| Gross profit       |   | 48.9                        |   | 49.7            |   | 48.1            |   | 11.0                                                  |   | 13.0 |   |
| Selling            |   | 28.4                        |   | 28.2            |   | 27.7            |   | 8.7                                                   |   | 14.8 |   |
| Administrative     |   | 8.7                         |   | 9.2             |   | 8.6             |   | 14.9                                                  |   | 9.0 |   |
| Operating profit   |   | 10.2                        |   | 12.1            |   | 10.2            |   | 29.1                                                  |   | (1.6 | ) |
| Net earnings       |   | 5.8                         |   | 4.5             |   | 5.7             |   | (15.0                                                 | )      | 49.5 |   |

 

**Fiscal 2004Compared to Fiscal 2003**

 

Net sales increased $217.0 million, or 17%,from $1,288.6 million in fiscal 2003 to $1,505.6 million in fiscal 2004.  Approximately 16 percentage points of the17% increase in net sales is attributable to the positive sales impact of MilesKimball, which Blyth acquired in April 2003, Kaemingk, which was acquired inJune 2003, Walter Drake acquired in December 2003, and the positive impact ofapproximately twelve weeks of acquisition-related sales growth of CBK Styles,Inc., which Blyth acquired in May 2002. The loss of sales from Wax Lyrical, which was closed in December 2002,had a negative impact on sales equal to approximately one percentage point.  The relative strength of foreign currenciesversus the US dollar had a positive impact on fiscal 2004 sales growth equal toapproximately 4 percentage points. Management believes that a relatively weak holiday sales season incalendar 2002, geopolitical events including SARS and the outbreak of war inIraq resulted in very cautious buying patterns by retailers, which negativelyimpacted Blyth’s sales throughout fiscal 2004.

 

----

(1)   Colonial, Gies and Kaemingk trademarks are registered and soldonly outside the United States.

 

19

----

 

Net Sales - Direct SellingSegment

 

Net sales in the Direct Selling segment,represented by our PartyLite direct selling unit for candles, home fragranceproducts and related accessories, increased $47.1 million, or 7%, from $717.4million in fiscal 2003 to $764.5 million in fiscal 2004.  The relative strength of foreign currenciesversus the US dollar had a positive impact on sales in the direct sellingsegment equal to approximately 5 percentage points.  In PartyLite’s European markets, fiscal 2004 sales increasedapproximately 33%.  In local currencies,PartyLite’s European sales were 11% above the prior year, driven by salesgrowth in the developing markets of Austria, Switzerland, France and Finland.  In North America, PartyLite’s US sales wereapproximately equal to the prior year, while PartyLite Canada reported a 3%increase versus the prior year.  Inlocal currency, PartyLite Canada’s sales declined 10% from the prior year.  We believe that PartyLite’s sales in the USand Canada were negatively impacted by cautious consumer spending resultingfrom economic and geopolitical concerns.

 

Management has expected and continues toexpect that growth trends within PartyLite’s major markets will varyconsiderably over the long term.  In themore penetrated US and Canadian markets, low to mid-single digit growth isexpected.  Within Europe, establishedcountries such as Germany and the UK may experience single-digit growth,whereas newer markets typically experience double-digit or strong double-digit growth.

 

Net sales in the Direct Selling segmentrepresented approximately 51% of total Blyth sales in fiscal 2004 compared to56% in fiscal 2003.

 

Net Sales - Wholesale Home Fragrance Segment

 

Net sales in the Wholesale Home Fragrancesegment increased $63.3 million, or 20%, from $310.2 million in fiscal 2003 to$373.5 million in fiscal 2004.  Theprimary cause of this increase was the acquisition of Kaemingk in June 2003,which had a positive effect of 23 percentage points.  The loss of sales of Wax Lyrical, which was closed in December2002, had a negative impact on sales of approximately 5 percentage points.  The strengthening of foreign currencyexchange rates versus the US dollar had a positive effect of 7 percentagepoints.  Net sales in the Wholesale HomeFragrance segment represented approximately 25% of total Blyth sales in fiscal2004 compared to 24% in fiscal 2003.

 

In Europe, the Wholesale Home Fragrancesegment experienced a sales increase of approximately 55% in fiscal 2004 versusfiscal 2003.  The acquisition ofKaemingk had a positive effect on sales of approximately 50 percentage points,and the closure of Wax Lyrical had a negative impact of approximately 11percentage points on sales.  Thestrengthening of foreign currency exchange rates versus the US dollar had apositive effect of approximately 15 percentage points.  We believe that the increase in sales frompre-existing businesses was partially attributable to improved sales managementprograms in the European mass channel the effect of which was offset by adecline in the European premium channel, in which a consolidating retailer basewas cautious in ordering inventory due to economic and geopolitical concerns.

 

In North America, the Wholesale HomeFragrance segment experienced a sales decline of 9% versus the prior year. Thiswas principally due to decreased sales in the mass channel as managementdeclined to participate this year in certain holiday programs that hadunacceptable profit margins.  The growthof competitive direct import products also had a negative impact on thissegment’s North American mass channel sales. Segment sales in the premium channel in fiscal 2004 were slightly belowthe prior year, partly due to management’s decision to discontinue certainproduct lines in favor of a streamlined brand and SKU portfolio moreappropriate to current channel and customer sales trends, as well as fromretailer economic cautiousness.  Infiscal 2004, management focused its efforts on marketing the premium ColonialCandle of Cape Cod® brand, and sales of that brand showed positive resultsversus the prior year.

 

20

----

 

Net Sales - Wholesale Creative ExpressionsSegment

 

Net sales in the Wholesale CreativeExpressions segment were flat at approximately $204.0 million in both fiscal2003 and fiscal 2004.  The acquisitionof CBK in May 2002 had a positive impact on sales equal to 10%.  Sales in both the premium and mass channelswere impacted by delayed and reduced ordering by retailers following arelatively weak holiday sales period in calendar year 2002.  Net sales in the Wholesale CreativeExpressions segment accounted for approximately 14% of Blyth’s total net salesin fiscal 2004 compared to 16% in fiscal 2003.

 

Net Sales - Catalog & Internet Segment

 

Net sales in the Catalog & Internetsegment were $110.7 million in fiscal 2004 due entirely to the acquisitions ofMiles Kimball and Walter Drake.  Blythsought to enter this distribution channel for several years, as it was theprimary strategic channel in which we did not yet have a sales presence.  With the initial acquisition of MilesKimball and the addition of Walter Drake, the operations of which are beingintegrated into those of Miles Kimball, Blyth is now operating in all of itsdesired channels and we believe we can now reach consumers however they chooseto shop.

 

Net sales in the Catalog & Internetsegment were modestly below our pre-acquisition assumptions due in part to adelayed pre-holiday catalog drop date, the revamping of Miles Kimball’sExposures® brand and product line and a lower than expected response rate tonew targeted customer lists.  Net salesin the Catalog & Internet segment accounted for approximately 7% of Blyth’stotal net sales in fiscal 2004 compared to 0% in fiscal 2003.

 

Net Sales - All Other Segment

 

Net sales in the All Other segment, which iscomprised of sales of foodservice products in the Away From Home channel, were$52.9 million in fiscal 2004 a decrease of $4.1 million or 7%, when compared to$57.0 million in fiscal 2003.  This wasconsistent with overall sluggishness experienced in the US travel andhospitality market during fiscal year 2004, as well as additional competitionfrom imported products.  Net sales inthe All Other segment accounted for approximately 4% of Blyth’s total net salesin both fiscal 2004 and fiscal 2003.

 

Blyth’s consolidated gross profit increased$83.4 million, or 13%, from $640.3 million in fiscal 2003 to $723.7 million infiscal 2004.  The gross profit margin,however, declined from 49.7% in fiscal 2003 to 48.1% in fiscal 2004 principallydue to the addition of Kaemingk, which has a lower gross margin than Blyth’soverall company average, as well as the sales mix among and within Blyth’svarious businesses.

 

Blyth’s consolidated selling expenseincreased $54.0 million, or 15%, from $363.8 million in fiscal 2003 to $417.8million in fiscal 2004.  Most of theincrease in selling expense is a result of the expenses relating to the previouslydiscussed acquisitions.  Selling expenseas a percentage of net sales decreased from 28.2% in fiscal 2003 to 27.7% infiscal 2004.  This decrease in sellingexpense, as a percentage of net sales, was primarily a result of the impact ofthe business models of recently acquired companies, which have lower sellingexpenses than the overall Company average.

 

21

----

 

Blyth’s consolidated administrative expensesincreased $10.7 million, or 9%, from $118.3 million in fiscal 2003 to $129.0million in fiscal 2004.  Most of suchincrease in administrative expenses relates to administrative expenses incurredin connection with acquisitions made in fiscal 2004.  As a percentage of net sales, administrative expenses decreasedfrom 9.2% in fiscal 2003 to 8.6% in fiscal 2004, which decrease is due to thefact that the Company’s corporate resources have grown at a significantly lowerrate than have the Company’s sales which have grown with acquisitions.

 

In fiscal 2004, the Company recorded pre-taxrestructuring and impairment charges of approximately $23.8 million. Of the$23.8 million charge, $6.7 million related to the Direct Selling segment andthe closure of the Company’s Hyannis, Massachusetts candle manufacturingfacility, $16.7 million related to the Wholesale Home Fragrance segment and$0.4 million related to the Wholesale Creative Expressions segment.  The total charge of $23.8 million wasreported as a component of operating expenses, which reduced operating profitmargin by 1.6 percentage points, compared to a pre-tax charge of $2.6 millionrecorded in fiscal 2003 related to placing Wax Lyrical into administrativereceivership, which reduced operating profit margin by 0.2 percentage points(See Note 5 to the Consolidated Financial Statements).

 

Blyth’s consolidated operating profitdeclined $2.4 million from $155.5 in fiscal 2003 to $153.1 million in fiscal2004 principally due to fiscal 2004 restructuring and impairment charges of$23.8 million.  Restructuring and impairmentcharges of $2.6 million were recorded in fiscal 2003.

 

Operating Profit/Loss - Direct SellingSegment

 

Operating profit in the Direct Sellingsegment decreased $7.4 million, or 5%, from $149.7 million in fiscal 2003 to$142.3 million in fiscal 2004.  Thepre-tax restructuring and impairment charges of $6.7 million in fiscal 2004negatively impacted operating profit in this segment.  Additional promotional and sales incentive expenses, as well ashigher shipping costs, also negatively impacted this segment’s operatingprofit.  Operating profit in the DirectSelling segment represented approximately 92% of total Company operating profitin fiscal 2004 compared to 96% in fiscal 2003.

 

Operating Profit/Loss - Wholesale HomeFragrance Segment

 

Operating loss in the Wholesale HomeFragrance segment improved from a loss of $24.9 million in fiscal 2003 to aloss of $10.7 million in fiscal 2004. Pre-tax restructuring and impairment charges of $16.7 million in fiscalyear 2004 versus $2.6 million in fiscal 2003 negatively impacted this segment’soperating results.  Of the total segmentcharges in fiscal 2004, $7.9 million (pre-tax) related to the write down ofcertain candle manufacturing equipment due to significant productivityincreases in recent years, as well as a product shift from candle forms such aspillars and tapers towards filled containers, votives and tealights.  The moderation of growth in the homefragrance category has also resulted in industry-wide excess capacity and thusimpacted the carrying value of certain equipment.  Of the total segment charges, $4.6 million (pre-tax) relatedprimarily to severance and personnel costs associated with the North Americanrestructuring in this segment, including the consolidation of our Temecula,California potpourri operations and the closure of five candle outletstores.  Of the total segment charges,$4.2 million related to the discontinuation of the Canterbury® brand, one ofseveral consumer wholesale brands acquired over the past decade.  The Company is focusing its sales andmarketing resources on fewer brands.  Inaddition, fiscal 2004 operating profit was negatively impacted by $1.9 millionof expenses related to the fire that destroyed our candle factory in Monterrey,Mexico.  Management expects to recoupthese expenses through insurance in fiscal 2005.

 

22

----

 

Operating Profit/Loss - Wholesale CreativeExpressions Segment

 

Operating profit in the Wholesale CreativeExpressions segment decreased 34% from $26.0 million in fiscal 2003 to $17.2million in fiscal 2004.  The pre-taxrestructuring and impairment charges of $0.4 million in fiscal 2004 negativelyimpacted operating profit in this segment. Moreover, sales volume shortfalls resulting from significant retailercaution throughout 2004 translated into operating profit shortfalls.  These factors were partially offset by thefull year effect of CBK, which was acquired in May 2002, which had a positiveimpact on operating profit.  Operatingprofit in the Wholesale Creative Expressions segment represented approximately11% of total Company operating profit in fiscal 2004 compared to 17% in fiscal2003.

 

Operating Profit/Loss - Catalog &Internet Segment

 

Operating profit in the Catalog &Internet segment was $5.2 million in 2004 due entirely to the fiscal 2004acquisitions of Miles Kimball and Walter Drake.   Operating profit in the Catalog & Internet segmentrepresented approximately 3% of total Company operating profit in fiscal 2004.

 

Operating Profit/Loss - All Other Segment

 

Operating profit in the All Other segmentdeclined from a profit of $4.7 million in fiscal 2003 to a loss of $0.9 millionin fiscal 2004.  Sales volume shortfallsresulting from overall industry sluggishness and a resulting decrease infactory overhead absorption were responsible for most of the decline in thissegment’s operating profit.  Increaseddirect import competition also had a negative impact on this segment’soperating profit.  The All Other segmentrepresented 0% of total Company operating profit in fiscal 2004 compared to 3%in fiscal 2003.

 

Interest expense increased $2.7 million, or18%, from $14.7 million in fiscal 2003 to $17.4 million in fiscal 2004, mostlydue to higher interest costs related to the $100 million of 5.5% Senior Notesissued in October 2003.  In addition,interest expense was impacted by the additions of Miles Kimball and Kaemingk.

 

Interest income and other decreased $0.4million, from $1.7 million in fiscal 2003 to $1.3 million in fiscal 2004.  This decrease was primarily due to lowerinterest rates on short-term investments, as well as foreign currency charges.

 

Income tax expense decreased $2.6 million, or5%, from $53.0 million in fiscal 2003 to $50.4 million in fiscal 2004.  The decrease in income tax expense isattributable to the decrease in pre-tax earnings as a result of therestructuring and impairment charges previously discussed.  The effective income tax rate was 36.8% forfiscal 2004 compared to 37.2% in fiscal 2003. This decease in tax rate is a result of a larger amount of income beinggenerated in jurisdictions with lower tax rates.

 

As a result of the foregoing, net earningsincreased $28.6 million, or 49.5%, from $57.8 million in fiscal 2003 to $86.4million in fiscal 2004.  Net earningsbefore the cumulative effect of change in accounting principle decreased $3.1million, or 3%, from $89.5 million in fiscal 2003 to $86.4 million in fiscal2004.  In the first quarter of fiscal2003, the Company recorded an after-tax impairment charge of $4.5 million toreduce the carrying value of the goodwill related to the acquisition of theSterno® brand in 1997.  The impairmentof the Sterno Group’s goodwill was recorded as a cumulative effect of change inaccounting principle.  In addition, dueto the change in the Company’s reportable segments and the resulting change inreporting units under SFAS 142, the Company has restated its fiscal 2003financial statements to reflect the recording of an additional $27.2 milliongoodwill impairment charge related to the Wholesale Home Fragrance segment asof the February 1, 2002 adoption date of SFAS 142.  This impairment reduced the carrying value of the goodwillrelated to the 1999 acquisition of the Gies Group by $20.9 million and reducedthe carrying value of the goodwill related to the 1999 acquisition of theColony Group by $6.3 million.  Theseimpairment charges reduced the goodwill in the Wholesale Home Fragrance segmentto zero at February 1, 2002.  Theimpairments of the Gies Group and Colony Group goodwill, which were notdeductible for tax purposes, are now also recorded as a cumulative effect ofchange in accounting principle.

 

23

----

 

Basic earnings per share were $1.89 forfiscal 2004 compared to $1.25 for the same period the prior year.  The previously discussed restructuring andimpairment charges in fiscal 2004 and 2003 and the cumulative effect of changein accounting principle in fiscal 2003 reduced earnings per share byapproximately $0.31 in fiscal 2004 and $0.74 in fiscal 2003. Diluted earningsper share, based upon the potential dilution that could occur if options toissue common stock were exercised, were $1.88 for fiscal 2004 compared to $1.24for the same period the prior year.

 

**Fiscal 2003Compared to Fiscal 2002**

** **

Net sales increased $109.8 million, or 9.3%,from $1,178.8 million in fiscal 2002 to $1,288.6 million in fiscal 2003. Thepositive sales impact of CBK, Ltd., LLC, which Blyth acquired in May 2002(“CBK”), and the positive impact of approximately ten weeks of acquisition-relatedsales growth of Midwest of Cannon Falls, Inc., which Blyth acquired in April2001 (“Midwest”), fiscal year 2003 accounted for approximately 5.9 percentagepoints of the increase.  We believe thatseveral key factors affected fiscal year 2003 sales.  First, sales of our PartyLite direct selling business werepositively impacted by the introduction of strong new products and redesignedcatalogs, as well as improved training and recruiting materials and growth ofPartyLite’s total active independent consultant base.  Second, the continued economic sluggishness, which has impactedNorth America and Europe in particular, has resulted in continued caution byindependent, specialty and mass retailers in increasing inventorycommitments.  Geopolitical concerns exacerbatedthis trend and impacted consumer spending in the fourth quarter, which is theCompany’s largest quarter for sales and profits.  Third, the relative strength of European currencies versus the USdollar had a positive impact on fiscal 2003 sales growth equal to one fullpercentage point.  Finally, the SternoGroup, Blyth’s Away From Home business serving the foodservice industry,experienced significant recovery from the negative effects of the slowdown inthe travel and hospitality industries following the tragic events of September11, 2001.

** **

Net Sales - Direct Selling Segment

 

Net sales in the Direct Selling segmentincreased $51.4 million, or 8%, from $666.0 million in fiscal 2002 to $717.4million in fiscal 2003.  PartyLite, ourdirect selling unit, experienced a sales increase in North America ofapproximately 4% in fiscal 2003 compared to the prior year, while sales inPartyLite’s European markets increased approximately 24% in fiscal 2003compared to the prior year.  We believethat PartyLite’s growth was fueled by the introduction of strong new productsand redesigned catalogs, as well as improved training and recruiting materials,which we believe improved the rate of attraction and retention of newindependent sales consultants versus the prior year.  We also believe that sales growth was tempered somewhat by aslowdown in consumer spending resulting from economic and geopoliticalconcerns, particularly in the fourth quarter, which is PartyLite’s largestquarter for sales.  Net sales in the DirectSelling segment represented 56% of total sales in fiscal 2003 compared to 57%in fiscal 2002.

 

Net Sales - Wholesale Home Fragrance Segment

 

The Wholesale Home Fragrance segmentexperienced a total sales decline of $12.1 million, or 4%, from $322.3 millionin fiscal 2002 to $310.2 million in fiscal 2003.  In the North American channels of distribution, sales declined 6%versus prior year. While we believe that overall weak economic conditionsnegatively impacted this segment’s North American sales, we believe that someof the fiscal 2003 sales decline was related to relatively weak new productintroductions and execution in the premium channel.  Mass channel customer bankruptcies and the absence of sales tocertain mass channel customers due to bankruptcy filings last year alsonegatively impacted this segment’s North American sales.  Also, during fiscal year 2003, the NorthAmerican premium and mass channel businesses were integrated, and newmanagement represented four of the five most senior positions.  While we believe the long-term benefits ofthis integration will be positive, the disruption to the business during theintegration period was notable. Net sales in the Wholesale Home Fragrancesegment represented approximately 24% of total Blyth sales in fiscal 2003compared to 27% in fiscal 2002.

 

24

----

 

In the European channels of distributionsales increased approximately 4% in fiscal 2003 versus fiscal 2002.  The European premium and mass channels bothreported sales increases versus the prior year, partially offset by a declineof sales in the Wax Lyrical retail channel.  The strength of European currencies versus the US dollar had a favorableimpact of approximately 5% on reported results.  In local currencies, sales of the premium channel consumerwholesale business increased modestly versus the prior year, with strong newproduct introductions being well received by retailers.  The Colonial at HOME® brand, introduced inEurope at the end of fiscal year 2002, was well received in its first full yearof sales, and distribution was expanded beyond the UK market.  Sales in local currency for the mass channelconsumer wholesale business were flat versus the prior year.  Germany was the largest market for thissegment’s European mass channel business, and sales results were indicative ofthe significant economic challenges facing that country.  The introduction of new fragranced productscontinued to result in positive sales growth in the mass channel in fiscal2003, but sales of fragranced products still accounted for less than 16% oftotal European mass channel sales.

 

In December 2002, following the end of the2002 holiday season, the Company placed its UK-based specialty retail chain WaxLyrical Limited (“Wax Lyrical”) into administrative receivership.  Wax Lyrical had 35 retail stores andannualized net sales of approximately $16 million.  The Company made its initial investment in Wax Lyrical in 1998,acquired majority interest in February 2000 and owned nearly all of itsoutstanding shares.  During that time,Wax Lyrical had been unable to achieve sustained profitability, generatingoperating losses of approximately $2 - 3 million annually, largely due to thefact that distribution of candles and related accessories had becomeincreasingly more mainstream in the UK, with major retail chains and specialtyretailers offering a wide variety of competitive products.  We recorded an after-tax impairment chargeof approximately $2.1 million in the fourth quarter of fiscal year 2003 relatedto placing Wax Lyrical into administrative receivership.  Net sales in the Wholesale Home Fragrancesegment represented approximately 24% of total Blyth sales in fiscal 2003compared to 27% in fiscal 2002.

 

Net Sales - Wholesale Creative ExpressionsSegment

 

Net sales in the Wholesale CreativeExpressions segment increased $68.0 million, or 50.0%, from $136.0 million infiscal 2002 to $204.0 million in fiscal 2003. This increase was primarily due to the inclusion of sales from CBK,which was acquired in May 2002. Sales of CBK and the acquisition-related growthfrom Midwest, which was acquired in April 2001, accounted for most of theincrease in segment sales in fiscal year 2003 as premium channel sales growthat Midwest was offset by declines in JMC Impact, Inc.’s (“JMC Impact”) masschannel sales.  We believe that JMCImpact’s sales decline was due in large part to business lost due to customerbankruptcies and retailer consolidation, as well as to increased importcompetition in this channel.  Net salesin the Wholesale Creative Expressions segment accounted for approximately 16%of Blyth’s total net sales in fiscal 2003 compared to 12% in fiscal 2002.

 

Net Sales - All Other Segment

 

Sales of foodservice products in the All Othersegment, increased approximately 5% in fiscal 2003 compared to fiscal2002.  This business unit experienced astrong recovery after the sharp sales decline that accompanied the downturn inthe travel and hospitality industries that followed the September 11, 2001tragedy.  Net sales in the All Othersegment represented approximately 4% of total Blyth sales in fiscal 2003compared to 5% in fiscal 2002.

 

Gross profit increased $63.3 million, or11.0%, from $577.0 million in fiscal 2002 to $640.3 million in fiscal 2003.Gross profit margin increased from 48.9% for fiscal 2002 to 49.7% for fiscal2003.  The key factors that we believepositively impacted the gross profit margin were a shift in sales mix among ourbusiness units and a decrease versus the prior year in sales of obsoleteinventory.  Partially offsetting thesepositive margin impacts was the effect of margin compression experienced in theNorth American mass channel of both the Wholesale Home Fragrance and WholesaleCreative Expressions segments, as well as the European consumer wholesale masschannel, which impacted the Wholesale Home Fragrance segment.

 

25

----

 

Selling expense increased $29.1 million, or8.7%, from $334.7 million in fiscal 2002 to $363.8 million in fiscal 2003.  The increase in selling expense wasprimarily due to the mix shift towards direct selling channel sales, for whichselling expenses are relatively higher, the addition of CBK and the full yearimpact of Midwest.  Selling expense as apercentage of net sales decreased from 28.4% in fiscal 2002 to 28.2% in fiscal2003.  This decrease in selling expense,as a percent of sales, was a result of sales increasing at a faster rate thanthe selling expenses necessary to support such sales increases.

 

Administrative expenses increased $15.3million, or 14.9%, from $103.0 million in fiscal 2002 to $118.3 million infiscal 2003.  Approximately 5.1percentage points of this increase was attributable to the administrativeexpenses of CBK, acquired in May 2002 while the Company’s continued investmentin research and development and technology also played a role.  In fiscal year 2002, administrative expenseswere lower as the senior management of Blyth and many of the Company’s businessunit managers did not receive bonuses.

 

The Company recorded a pre-tax impairmentcharge of approximately $2.6 million, as a result of putting Wax Lyrical intoadministrative receivership, reported as a component of operating expenses infiscal 2003, which reduced the operating profit margin by 0.2%, compared tocharges of $14.1 million recorded in fiscal 2002, which reduced operatingprofit margin by 1.2%.

 

There was no goodwill amortization recordedin fiscal 2003 compared to $4.7 million in fiscal 2002.  This decrease was a result of the Company’sadoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, which callsfor among other things the cessation of goodwill amortization (See Note 1 tothe Consolidated Financial Statements).

 

Operating Profit/(Loss) - Direct SellingSegment

 

Operating profit in the Direct Sellingsegment increased $10.6 million, or 7.6%, from $139.1 million in fiscal 2002 to$149.7 million in fiscal 2003.  Theincrease in operating profit was due to the same factors that affected net sales.  Operating profit in the Direct Sellingsegment represented approximately 96% of total Company operating profit infiscal 2003 compared to 115% in fiscal 2002.

 

Operating Profit/(Loss) - Wholesale HomeFragrance Segment

 

The Wholesale Home Fragrance segmentexperienced an approximately $10.2 million smaller operating loss, from a $35.1million loss in fiscal 2002 to a $24.9 million operating loss in fiscal2003.  This improvement was due tosubstantially fewer restructuring and impairment charges in fiscal 2003 versusfiscal 2002.  Specifically, operatingprofit in this segment was impacted by the $2.6 million pre-tax impairmentcharge recorded as a result of putting Wax Lyrical into administrativereceivership in fiscal 2003 compared to $12.6 million of fiscal 2002restructuring and impairment charges.

 

Operating Profit/(Loss) - Wholesale CreativeExpressions Segment

 

Operating profit in the Wholesale CreativeExpressions segment increased $10.3 million, or 65.6%, from $15.7 million infiscal 2002 to $26.0 million in fiscal 2003. Operating profit in the Wholesale Creative Expressions segmentrepresented approximately 17% of total Company operating profit in fiscal 2003compared to 13% in fiscal 2002.  The keyfactor affecting operating profit in this segment was the acquisition of CBK inMay 2002.  Additional factors includedorganic growth experienced in the premium consumer wholesale channel of thissegment, which was offset by declines in the mass consumer wholesale channel ofthis segment, as well as overall economic weakness in the US wholesalemarketplace.

 

26

----

 

Operating Profit/(Loss) - All Other Segment

 

Operating profit in the All Other segmentincreased $3.9 million from $0.8 million in fiscal 2002 to $4.7 million infiscal 2003.  The increase in operatingprofit was due to the same factors that affected net sales.  Operating profit in the All Other segmentrepresented approximately 3% of total Company operating profit in fiscal 2003compared to less than 1% in fiscal 2002.

 

Interest expense decreased $2.5 million, or14.5%, from $17.2 million in fiscal 2002 to $14.7 million in fiscal 2003. Thelower interest expense was primarily a result of an interest rate swap enteredinto in March 2002, which accounted for approximately $1.4 million of suchdecrease and a lower level of borrowings during fiscal 2003.

 

Interest income and other decreased $3.3million, from $5.0 million in fiscal 2002 to $1.7 million in fiscal 2003.  This decrease was primarily due to gains onsales of long-term investments of $3.8 million that occurred in fiscal 2002.

 

Income tax expense increased $12.7 million,or 31.5%, from $40.3 million in fiscal 2002 to $53.0 million in fiscal2003.  The increase in income taxexpense was attributable to the increase in pre-tax earnings.  The effective income tax rate was 37.2% forfiscal 2003, the same as fiscal 2002.

 

As a result of the foregoing, net earningsbefore the cumulative effect of change in accounting principle increased $21.5million, or 31.6%, from $68.0 million in fiscal 2002 to $89.5 million in fiscal2003.  In the first quarter of fiscal2003 the Company recorded an after tax impairment charge of $4.5 million toreduce the carrying value of the goodwill related to the acquisition of theSterno® brand in 1997.  The impairmentof the Sterno Group’s goodwill was recorded as a cumulative effect of change inaccounting principle.   In addition, dueto the change in the Company’s reportable segments and the resulting change inreporting units under SFAS 142, the Company has restated its fiscal 2003financial statements to reflect the recording of an additional goodwillimpairment charge of $27.2 million related to the Wholesale Home Fragrancesegment as of the February 1, 2002 adoption date of SFAS 142.  This impairment reduced the carrying valueof the goodwill related to the 1999 acquisition of the Gies Group by $20.9million and reduced the carrying value of the goodwill related to the 1999 acquisitionof the Colony Group by $6.3 million. These impairment charges reduced the goodwill in the Wholesale HomeFragrance segment to zero at February 1, 2002. The impairments of the Gies Group and Colony Group goodwill, which werenot deductible for tax purposes, are now also recorded as a cumulative effectof change in accounting principle.  Netearnings after the cumulative effect of change in accounting principledecreased $10.2 million, or 15%, from $68.0 million in fiscal 2002 to $57.8million in fiscal 2003.

 

Basic earnings per share based upon theweighted average number of shares outstanding were $1.25 for fiscal 2003compared to $1.45 for the same period the prior year.  Diluted earnings per share, based upon the potential dilutionthat could occur if options to issue common stock were exercised, were $1.24for fiscal 2003 compared to $1.44 for the same period the prior year.

 

**Seasonality**

** **

Approximately 39% of the Company’s net salesoccurred in the first and second fiscal quarters of 2004 down from 42% infiscal 2003, with the larger balance experienced in the third and fourth fiscalquarters, generally due to consumer buying patterns. The increase in thepercentage of shipments in the second half of the fiscal year is primarily dueto the timing of the acquisitions made during fiscal 2004 and the seasonalityof the newly acquired businesses.  TheCompany’s net sales are strongest in the third and fourth fiscal quarters dueto increased shipments to meet year-end holiday season demand for the Company’sproducts.

 

27

----

 

**Liquidity and Capital Resources**

** **

Cash and cash equivalents increased  $61.1 million, or 36% from $168.6 million atJanuary 31, 2003 to $229.7 million at January 31, 2004 primarily due toincreased earnings before non-cash restructuring and impairment charges,proceeds from debt issuance, reduced inventory levels and increased accountspayable and accrued expenses.  Inventory increased $20.7 million from $187.9 million at January 31, 2003to $208.6 million at January 31, 2004.  All of such increase in inventory related to the inventory ofacquired businesses, while the inventory of the Company relating to existingbusinesses at January 31, 2004 decreased by $4.8 million.  This decrease in inventory is due to acompany-wide focus on inventory control and reduction.  Accounts receivable increased $21.6 millionfrom $82.9 million at the end of fiscal 2003 to $104.5 million at the end offiscal 2004.  Approximately $15.9million of such increase relates to the accounts receivable from acquiredbusinesses.  Accounts receivable forexisting businesses increased approximately $5.7 million primarily due to theincreased sales in our European mass channel in the fourth quarter of fiscal2004.  The overall level of accountsreceivable at January 31, 2004 was consistent with the Company’s historicalpattern whereby accounts receivable are at or near the low point of the fiscalyear due to the high level of seasonal sales and accounts receivable withdating terms that become due in the fourth fiscal quarter.  Accounts payable and accrued expensesincreased $36.3 million from $139.5 million at the end of fiscal 2003 to $175.8million at the end of fiscal 2004. Approximately $19 million of such increaserelated to accounts payable and accrued expenses for fiscal 2004 acquiredbusinesses.  The increase is also due tohigher interest accruals due to increased debt, accrued severance costs andaccrued selling costs related to higher sales and earnings in the fourthquarter.

 

Capital expenditures for property, plant andequipment were approximately $22.0 million in fiscal 2004 up from $14.3 millionin fiscal 2003.  This increase isprimarily due to spending for information technology and upgrades to machineryand equipment in existing facilities. The Company anticipates total capitalspending of approximately $25 million for fiscal 2005, which will be usedprimarily for upgrades to machinery and equipment in existing manufacturing anddistribution facilities, information technology and research and developmentrelated equipment.

 

The Company has grown in part throughacquisitions and, as part of its growth strategy, the Company expects tocontinue from time to time in the ordinary course of its business to evaluateand pursue acquisition opportunities as appropriate.  Our recent growth has been primarily acquisition related and inthe future acquisitions may continue to contribute more to the Company’soverall sales growth rate than historically. We expect our future growth in the Direct Selling and the Wholesale HomeFragrance segments, to be primarily organic, with the possibility of selectiveacquisitions.  In the Wholesale CreativeExpressions, Catalog & Internet and All Other segments a significantportion of future growth may come through acquisitions.  We continue to pursue strategic acquisitionsprimarily in the following areas: home décor products, seasonal decorativeaccessories, and Foodservice products. The Company acquired the Miles Kimball Company, Kaemingk B.V. and WalterDrake during fiscal 2004 as further described in Note 4 to the ConsolidatedFinancial Statements, “Business Acquisitions.”

 

The Company has a $200 million unsecuredrevolving credit facility, which matures on August 5, 2005 (the “CreditFacility”).  The Company has the abilityto increase the Credit Facility, under certain circumstances, by an additional$50 million.  The Credit Facility may beused for general corporate purposes, which includes funding for strategicacquisitions and seasonal working capital needs.  The Credit Facility contains, among other provisions,requirements for maintaining certain financial ratios including, among others,a minimum level of net worth and a maximum level of leverage.  The Credit Facility also imposes limitationson, among other things, certain payments, the imposition of liens on ourassets, indebtedness that may be incurred by our subsidiaries, investments wemay make and sales of our assets.  AtJanuary 31, 2004, the Company was in compliance with such covenants.  Amounts outstanding under the CreditFacility bear interest, at the Company’s option, at either the JPMorgan ChaseBank’s prime rate (4.0% at January 31, 2004) or at the Eurocurrency rate plus acredit spread ranging from 0.525% to 1.5%, calculated on the basis of a combinationof the Company’s senior unsecured long-term debt rating and the Company’s usageof the Credit Facility.  On January 31,2004, $3.2 million letters of credit were outstanding under the CreditFacility.

 

28

----

 

As of January 31, 2004, the Company had atotal of $15.0 million available under an uncommitted bank line of credit withLaSalle Bank National Association, which matures in June 2004.  Amounts outstanding under the line of creditbear interest at short-term fixed rates. No amounts were outstanding under the uncommitted line of credit atJanuary 31, 2004.

 

AtJanuary 31, 2004, the Company had a total of $10.0 million available under anuncommitted line of credit with Bank of America to be used for letters ofcredit.  At January 31, 2004,approximately $0.1 million of letters of credit were outstanding under thiscredit line.

 

As of December 31, 2003, The Gies Group(“Gies”) had available lines of credit of approximately $44.3 million of whichapproximately $3.3 million was outstanding. The amounts outstanding under the lines of credit bear interest at aweighted average rate of 3.1% at December 31, 2003.  The lines of credit are renewed annually.

 

As of December 31, 2003, Kaemingk hadavailable lines of credit of approximately $34.6 million with ING BankN.V.  The lines of credit arecollateralized by certain real estate and equipment owned by Kaemingk.  At December 31, 2003, approximately $2.2million was outstanding at a weighted average interest rate of 2.75%.

 

ColonyGift Corporation Limited (“Colony”) has a $21.4 million short-term revolvingcredit facility with Barclays Bank, which matures in June 2004.  As of December 31, 2003, Colony hadborrowings under the credit facility of approximately $8.1 million, at aweighted average interest rate of 4.6%.

 

AtJanuary 31, 2004, Miles Kimball had approximately $10.4 million of long-termdebt outstanding under a real estate mortgage note payable to John Hancock LifeInsurance Company, which matures June 1, 2020. Under the terms of the note,payments of principal and interest are required monthly at a fixed interestrate of 7.89%.

 

At December 31, 2003, Kaemingk hadapproximately $8.6 million of long-term debt outstanding under six loans withING Bank N.V. at a weighted average interest rate of 5.8%.  The bank loans have maturity dates rangingfrom 2005 through 2020.  The loans arecollateralized by certain real estate and equipment owned by Kaemingk.

 

In July 1995, the Company privately placed$25.0 million aggregate principal amount of 7.54% Senior Notes due 2005.  As of January 31, 2004, $7.1 million ofprincipal remained outstanding.  Suchsenior notes contain, among other provisions, requirements for maintainingcertain financial ratios and net worth. At January 31, 2004, the Company was in compliance with suchprovisions.  Payment on the notescommenced in June 1999 and annual installments of principal and interest arerequired to be paid through June 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, the Company issued $150.0 million of 7.90% SeniorNotes due October 1, 2009 at a discount of approximately $1.4 million, which isbeing amortized over the life of the notes. Such notes contain, among other provisions, restrictions on liens onprincipal property or stock issued to collateralize debt.  At January 31, 2004, the Company was incompliance with such provisions.  Interest is payable semi-annually on April 1 and October 1.  On October 20, 2003, the Company issued$100.0 million, 5.50% Senior Notes due on November 1, 2013 at a discount ofapproximately $0.2 million, which is being amortized over the life of the notes.  Such notes contain provisions andrestrictions similar to those in the 7.90% Senior Notes.  At January 31, 2004, the Company was incompliance with such covenants. Interest on the notes began accruing on October 23, 2003 and will bepayable semiannually in arrears on May 1 and November 1 of each year,commencing May 1, 2004.  The notes maybe redeemed in whole or in part at any time at a specified redemptionprice.  The proceeds of the debtissuance are used for general corporate purposes, which may include repaymentof certain debt, acquisitions and working capital needs.

 

At January 31, 2004, CBK had $4.6 million oflong-term debt outstanding under an Industrial Revenue Bond (“IRB”), whichmatures on January 1, 2025.  The bond isbacked by an irrevocable letter of credit issued by La

 

29

----

Salle Bank National Association.  The loan is collateralized by certain ofCBK’s assets.  The amount outstandingunder the IRB bears interest at short-term floating rates, which equaled aweighted average interest rate of 1.2% at January 31, 2004.

 

The estimated fair value of the Company’s$280.3 million and $169.1 million total long-term debt (including currentportion) at January 31, 2004 and 2003 was approximately $290.4 million and$191.6 million, respectively.  The fairvalue is determined by quoted market prices, where available, and from analysesperformed by investment bankers using current interest rates considering creditratings and the remaining terms to maturity.

 

The following table summarizes the maturitydates of the contractual obligations of the Company as of January 31, 2004:

 

**Payments Due by Period**

 

**(In thousands)**

 
| **Contractual Obligations**   |   | **Total** |    | **Less than  1 year** |   | **1 - 3 Years** |   | **3 - 5 Years** |   | **More than  5 Years** |   |
|-------------------------------|--------|-----------|---------|-----------------------|--------|-----------------|--------|-----------------|--------|------------------------|--------|
| Interest                      |   | $         | 153,740 |                  | $      | 21,263          |   | $               | 41,360 |                   | $      | 40,964 |   | $ | 50,153 |   |
| Capital Leases                |   | 336       |    | 163                   |   | 173             |   | —          |   | —                 |   |
| Purchase Obligations (1)      |   | 40,861    |    | 40,861                |   | —          |   | —          |   | —                 |   |
| Long-Term Debt                |   | 280,265   |    | 4,522                 |   | 5,250           |   | 1,654           |   | 268,839                |   |
| Operating Leases              |   | 65,612    |    | 18,421                |   | 25,819          |   | 11,542          |   | 9,830                  |   |
| Lines of Credit               |   | 13,621    |    | 13,621                |   | —          |   | —          |   | —                 |   |
| Total Contractual Obligations |   | $         | 554,435 |                  | $      | 98,851          |   | $               | 72,602 |                   | $      | 54,160 |   | $ | 328,822 |   |

 

----

(1)   Purchase obligations consist of open purchase orders forinventory.

 

The Company does not utilize derivatives fortrading purposes.

 

The Company leases certain office andwarehouse space used in its businesses in the Wholesale Creative Expressionssegment from related parties.  Under theterms of the leases, the Company is responsible for all real estate taxes,maintenance and insurance costs.  Thelease rates were determined based on market rates for comparable property atthe time of entering into the contract.

 

Net cash provided by operating activitiesamounted to $173 million in fiscal 2004 compared to $172 million in fiscal2003, an increase of $1 million.  Although fiscal 2004 net earnings were approximately $29 millionhigher than the prior year, for purposes of determining net cash from operatingactivities, non-cash after tax goodwill impairment charges of $32 million infiscal 2003 were added back to cash flows from operations whereas, in fiscal2004, non-cash restructuring and impairment charges of $20 million were addedback to cash flows from operations. Other items that contributed to cash flows from operations were aninventory reduction of $25 million and increases in accounts payable andaccrued expenses of $10 million, offset by an increase in accounts receivabledue to the timing of sales in our European markets including the accountsreceivable of Kaemingk acquired in June 2003. Fourth quarter cash flow from operations was particularly strong,providing cash in the amount of approximately $200 million, which was primarilyattributable to strong seasonal and acquisition related sales and earnings,accounts receivable collections of $95 million, and an inventory reduction of$52 million.  Cash used in investingactivities amounted to $168 million in fiscal 2004 versus a use of $69 millionin fiscal 2003.  This use was related tothe acquisitions in fiscal 2004 of Miles Kimball, Kaemingk and Walter Drake andcapital spending of $22 million. Cash provided by financing activities amountedto $61 million in fiscal 2004 compared to a use of $68 million in fiscal2003.  The primary source of cash fromfinancing was the proceeds from the issuance of $100 million of senior notes bythe Company in October 2003 partially offset by repayments of long-term debt of$11 million, purchases of treasury stock of $19 million and payment ofdividends of $13 million.  There wereadditional borrowings of $30 million under our Credit Facility during fiscal2004 that were repaid prior to year-end.

 

30

----

 

The Company’s Board ofDirectors has authorized the Company to repurchase up to 6,000,000 shares ofcommon stock under the share repurchase program.  The Company repurchases shares to offset grants of restrictedstock and shares issued upon exercise of stock options and to decrease sharesoutstanding.  During fiscal2004, a total of 701,000 shares were repurchased for a total cost ofapproximately $18.8 million.  As ofJanuary 31, 2004, the Company had cumulatively purchased on the open market4,345,100 common shares for a total cost of approximately $105.4 million.  The acquired shares are held as common stockin treasury at cost.

 

On March 31, 2004, theCompany announced that it has declared a cash dividend of $0.17 per share ofthe Company’s common stock for the six months ended January 31, 2004.  The dividend, authorized at the Company’s March31, 2004 Board of Directors meeting, will be payable to shareholders of recordas of April 30, 2004, and will be paid on May 14, 2004.

 

The Company’s primarycapital requirements are for working capital to fund the levels of inventoryand accounts receivable necessary to sustain the Company’s sales growth, andfor capital expenditures and acquisitions. The Company believes that cash on hand, cash from operations andavailable borrowings under the current Credit Facility and lines of credit willbe sufficient to fund its operating requirements, capital expenditures, stockrepurchase program, dividends, long-term debt repayments and all otherobligations for the foreseeable future.

 

We do not maintain anyoff balance sheet arrangements, transactions, obligations or otherrelationships with unconsolidated entities that would be expected to a have amaterial current or future effect upon our financial statements.

 

**Critical Accounting Policies**

** **

Our discussion andanalysis of our financial condition and results of operations are based upon ourConsolidated Financial Statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those relatedto bad debts, inventories, income taxes, restructuring and impairments andcontingencies and litigation.  We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.  Actual results may differ from these estimates under differentassumptions or conditions.

 

Financial ReportingRelease No. 60 requires all companies to include a discussion of criticalaccounting policies or methods used in the preparation of financialstatements.  Note 1 to the ConsolidatedFinancial Statements, included elsewhere in this Annual Report on Form 10-K,includes a summary of the significant accounting policies and methods used inthe preparation of our Consolidated Financial Statements.  The following is a brief discussion of themore significant accounting policies and methods used by us.

 

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

 

Generally, sales ordersare received via signed customer purchase orders with stated fixed prices basedon published price lists.  The Companyrecords estimated reductions to revenue for customer programs, which mayinclude special pricing agreements for specific customers, volume incentivesand other promotions.  Should marketconditions decline, the Company may increase customer incentives with respectto future sales.  The Company alsorecords estimated reductions to revenue, based primarily on historicalexperience, for customer returns and chargebacks that may arise as a result ofshipping errors, product damage in transit or for other reasons that can only

 

31

----

 

become known subsequentto recognizing the revenue.  If theamount of actual customer returns and chargebacks were to increasesignificantly from the estimated amount, revisions to the estimated allowancewould be required.

 

In some instances, theCompany receives payment in advance of product shipments.  Such advance payments occur primarily in ourdirect selling and direct marketing channels and are recorded as deferredrevenue.  Upon delivery of productshipments for which advance payment has been made, the related deferred revenueis reclassified to revenue.

 

Most of the Company’ssales made on credit are made to an established list of customers.  Although the collectibility of sales made oncredit is reasonably assured, the Company has established an allowance fordoubtful accounts for its trade and note receivables.  The allowance is determined based on the Company’s evaluation ofspecific customers’ ability to pay, aging of receivables, historical experienceand the current economic environment. While the Company believes it has appropriately considered known orexpected outcomes, its customers’ ability to pay their obligations, includingthose to the Company, could be adversely affected by declining sales at retailresulting from such factors as contraction in the economy or a general declinein consumer spending.

 

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 othercustomers, customer orders pursuant to such seasonal dating programs aregenerally received in the form of a written purchase order signed by anauthorized representative of the customer. Sales made pursuant to seasonal dating programs are recorded as revenueonly upon delivery either to the customer or to an agent of the customerdepending on the freight terms for the particular shipment and consistent withthe concept of “risk of loss.”  Thesales price for the Company’s products sold pursuant to such seasonal datingprograms is fixed prior to the time of shipment to the customer.  Customers do not have the right to returnproduct except for rights to return that the Company believes are typical ofour industry for such reasons as damaged goods, shipping errors or similaroccurrences. The Company is not required to repurchase products from itscustomers, nor does the Company have any regular practice of doing so.  The Company believes that it is reasonablyassured of payment for products sold pursuant to such seasonal dating programsbased on its historical experience with the established list of customerseligible 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 during the seasonal selling period should fallsignificantly below expectations, such customers’ financial condition could beadversely affected, increasing the risk of not collecting these seasonal datingreceivables and, possibly, resulting in additional bad debt charges.   The Company does not make any sales underconsignment or similar arrangements.

 

Inventory valuation –Inventories are valued at the lower of cost or market.  Cost is determined by the first-in,first-out method.  The Company writesdown its inventory for estimated obsolescence or unmarketable inventory by anamount equal to the difference between the cost of inventory and the estimatedmarket value based upon assumptions about future demand, market conditions,customer planograms and sales forecasts. If market acceptance of our existing products or the successfulintroduction of new products should significantly decrease, additionalinventory write-downs could be required. Potential additional inventory write-downs could result fromunanticipated additional quantities of obsolete finished goods and rawmaterials, and/or from lower disposition values offered by the parties whonormally purchase surplus inventories. At January 31, 2004 the Company had obsolete inventory reserves totalingapproximately $23.0 million.

 

32

----

 

Restructuring and impairmentcharges – In response to changing market conditions and competition, theCompany’s management regularly updates its business model and marketstrategies, including the evaluation of facilities, personnel and products.  Future adverse changes in economic andmarket conditions could result in additional organizational changes andpossibly additional restructuring and impairment charges.  In fiscal 2004, 2003 and 2002, the Companyrecorded charges related to asset impairments, product line discontinuances,severance payments to employees, lease write-offs, bad debt write-offs andinventory write-downs.  (See Note 5 tothe Consolidated Financial Statements). The Company recorded restructuring and impairment charges in fiscal 2004totaling $23.8 million.  The mostsignificant charges recorded in fiscal 2004 included an asset impairment lossof $8.4 million for long-lived assets disposed of and an impairment loss of$2.3 million for long-lived assets to be held and used in the Company’s primaryNorth American manufacturing facilities, a $4.2 million impairment chargerelated to the Canterbury® brand acquired in 1997 and a $3.9 million impairmenton facilities and equipment and employee severance related to the closing ofour Hyannis manufacturing facility.  Asa result of the asset impairments and employee terminations the Company expectsto realize future annual savings in cost of goods sold in excess of $1.0million. In the fourth quarter of fiscal 2003, the Company recorded a pre-taximpairment charge of $2.6 million as a result of putting Wax Lyrical, its UKretail business, in administrative receivership. Historically, the Company hasreviewed long-lived assets, including property, plant and equipment andgoodwill and other intangibles for impairment periodically and whenever eventsor changes in circumstances indicated that the carrying amount of such an assetmight not be recoverable.  Managementdetermines whether there has been a permanent impairment on fixed assets heldfor use in the business by comparing anticipated undiscounted future cash flowfrom the use and eventual disposition of the asset or asset group, to thecarrying value of the asset.  The amountof any resulting impairment is calculated by comparing the carrying value tothe fair value, which may be estimated using the present value of the same cashflows.  Long-lived assets that meet thedefinition of held for sale are valued at the lower of carrying amount or netrealizable value.

 

Goodwill and otherindefinite lived intangibles - In June 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets.” Prior to February 1, 2002, excess of costs of acquisitions over fairvalue of identifiable net assets acquired less liabilities assumed (“goodwill”)was being amortized on a straight-line basis over estimated lives ranging from15-40 years. Amortization of goodwill ceased on February 1, 2002, upon adoptionof the new goodwill rules under SFAS 142. Under SFAS No. 142, goodwill and any other intangibles deemed to haveindefinite lives are no longer subject to amortization; however, goodwill issubject to an assessment for impairment using a two-step fair value-based testand such other intangibles are also subject to impairment reviews, which mustbe performed at least annually, or more frequently if events or circumstancesindicate that goodwill or other indefinite lived intangibles might be impaired.The Company performs its annual assessment of impairment in the fourth fiscalquarter.  For goodwill the first stepcompares the fair value of a reporting unit to its carrying amount, includinggoodwill. If the carrying amount of the reporting unit exceeds its fair value,the second step is performed. The second step compares the carrying amount ofthe goodwill to the fair value of the 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 of January 31, 2002,Blyth’s Consolidated Balance Sheets reflected approximately $108.1 million ingoodwill net of accumulated amortization, including $27.2 million related tothe Wholesale Home Fragrance segment businesses, $42.2 million related to theAll Other segment and $38.7 million related to the Wholesale CreativeExpressions segment businesses. The Company adopted SFAS 142 effective February1, 2002. In accordance with the new standard, Blyth ceased amortization ofgoodwill and performed an assessment for impairment of its

 

33

----

** **

goodwill. As a result ofthe impairment review, Blyth reduced the carrying value of the goodwill relatedto its 1997 acquisition of the Sternoâ brand by $7.4 million, which is includedin the All Other segment.  In addition,a recent revision of its operating and reporting segments by the Company (SeeNote 2 to the Consolidated Financial Statements), required changes in theCompany’s reporting units for purposes of goodwill impairment reviews underSFAS 142, retroactive to the February 1, 2002 adoption date of SFAS 142.  This resulted in the need to performimpairment reviews of several additional reporting units as of February 1, 2002and each subsequent year-end balance sheet date thereafter.  These impairment reviews have indicated theneed to record additional impairment charges as of the February 1, 2002adoption of SFAS 142, specifically to write-off $20.9 million in goodwillassociated with the 1999 acquisition of the Gies Group and $6.3 million ingoodwill associated with the 1999 acquisition of the Colony Group.  Both of these businesses are components ofthe Wholesale Home Fragrance Segment, and the impairment charges reducedgoodwill in that segment to zero at February 1, 2002. The fair values of theSterno Group, the Gies Group and the Colony Group were determined throughindependent valuations utilizing market-comparable analysis, as well asdiscounted cash flow models reflecting the expected range of future cashflow outcomes over the life of the models. These cash flows were discounted toFebruary 1, 2002 using a risk-adjusted discount rate.  The impairment of the Sterno Group’s goodwill, which wasrecorded as a cumulative effect of a change in accounting principle, had theeffect of reducing net income by $4.5 million (after tax) or $0.10 pershare.  The impairments of the GiesGroup and Colony Group goodwill, which were not deductible for tax purposes,were, via restatement of the fiscal 2003 financial statements, also recorded asa cumulative effect of change in accounting principle, and had the effect ofreducing net income by $27.2 million or $0.58 per share. The carrying amount ofgoodwill on the Company’s Consolidated Balance Sheet increased approximately$5.4 million, from $108.1 million at January 31, 2002 to $113.5 million atJanuary 31, 2003.  The change ingoodwill was the result of the acquisition of CBK (See Note 4 to theConsolidated Financial Statements), which increased goodwill by approximately$40.0 million, offset by the previously discussed impairment charges, whichdecreased goodwill by $34.6 million.

 

As of January 31, 2003,the $113.5 million in goodwill was comprised of $34.8 million related to theAll Other segment and $78.7 million related to the Wholesale CreativeExpressions segment businesses. The carrying amount ofgoodwill on the Company’s Consolidated Balance Sheet increased approximately$90.6 million, from $113.5 million at January 31, 2003 to $204.1 million at January31, 2004.  The change in goodwill wasprimarily the result of the acquisitions of Miles Kimball, Kaemingk and WalterDrake (See Note 4 to the Consolidated Financial Statements), which increasedgoodwill by approximately $45.6 million, $17.6 million and $25.4 million,respectively, together with an increase in goodwill resulting from a foreigncurrency translation adjustment of approximately $2.0 million. Of the $204.1 million of goodwill on the balance sheet as of January 31,2004, $34.8 million is related to the All Other segment, $19.6 million isrelated to the Wholesale Home Fragrance segment, $78.7 million is related tothe Wholesale Creative Expressions segment and $71.0 million is related to theCatalog & Internet segment.

 

Accounting for incometaxes - 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 differencesresult in deferred tax assets and liabilities, which are included within ourconsolidated balance sheets.  We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income.  Actual resultscould differ from this assessment if sufficient taxable income is not generatedin 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 in theaccompanying consolidated statement of operations.  The management of the corporation, along with third-partyadvisers, periodically estimates the probable tax obligations of thecorporation using historical experience in tax jurisdictions and informedjudgments.  There are inherent uncertaintiesrelated to the interpretation of tax regulations in the jurisdictions in whichthe corporation transacts business.  Thejudgments and estimates made at a point in time may change based on the outcomeof tax audits, as well as changes to or further interpretations ofregulations.  If such changes takeplace, there is a risk that the tax rate may increase or decrease in anyperiod.

 

34

----

 

**Impact of Adoption of Recently Issued AccountingStandards**

** **

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  This standard addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies EITF Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs incurred in a Restructuring).”  This standard has been adopted by theCompany for exit and disposal activities initiated after December 31, 2002.

 

In November 2002, theFASB issued Financial Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” which elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder certain guarantees that it has issued. It also clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee. The initialrecognition and initial measurement provisions of this interpretation areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002 and the disclosure requirements in this interpretation areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002. The implementation of this interpretation did not have animpact on our financial statements.

 

In January 2003, theFinancial Accounting Standards Board (FASB) issued Financial Interpretation No.46 (FIN 46), “Consolidation of Variable Interest Entities.  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements.”  FIN 46 requires consolidation of entities inwhich the Company absorbs a majority of the entity’s expected losses, receivesa majority of the entity’s expected residual returns, or both, as a result ofownership, contractual or other financial interests in the entity.  Previously, entities were consolidated onlywhen the Company had a controlling financial interest through ownership of amajority voting interest in an entity. The interpretation was immediately applicable to variable interestentities (“VIEs”) created after January 31, 2003, and to VIEs in which anenterprise obtains an interest after that date.  As originally issued, it applied in the fiscal year or interimperiod beginning after June 15, 2003, for VIEs in which an enterprise acquireda variable interest prior to February 1, 2003. In December 2003, the FASB issued FIN 46R, which defers the effectivedate for FIN 46 to the first interim or annual period ending after December 15,2003 for VIEs created before February 1, 2003.    The implementation of this standard has not had and is notexpected to have a material impact on our financial statements.

 

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

 

**In May2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  As originally issued, SFAS 150 is effectivefor mandatorily redeemable financial instruments of public entities enteredinto or modified after May 31, 2003, and for all other instruments for interimperiods beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position No. 150-3,“Effective Date, Disclosures, and Transition for Mandatorily RedeemableFinancial Instruments of Certain Nonpublic Entities and Certain MandatorilyRedeemable Noncontrolling Interests under FASB Statement No. 150”, which defersindefinitely the classification and measurement provisions for certainmandatorily redeemable noncontrolling interests associated with finite-livedsubsidiaries pending further FASB action. For other mandatorily redeemable noncontrolling interests that wereissued before November 5, 2003, only the measurement provisions of SFAS 150 aredeferred indefinitely, both for the parent in consolidated financial statementsand for the subsidiary that issued the instruments that result in themandatorily redeemable noncontrolling interest, pending further FASBaction.  The original implementation ofSFAS 150 had no impact on our financial statements and we do not expect thedeferral provisions of FSP FAS 150-3 to have a significant impact on ourfinancial statements.**

** **

35

----

 

**Forward-looking and Cautionary Statements**

** **

Certain statementscontained in this Annual Report on Form 10-K may constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  These statements involve anumber of risks, uncertainties and other factors that could cause actualresults to differ materially, as discussed more fully elsewhere in this AnnualReport on Form 10-K and in the Company’s previous filings with the Securitiesand Exchange Commission.

 

36

----

 

**Item 7A.**

** **

**Quantitative and Qualitative Disclosures About MarketRisk**

** **

***Market Risk***

*** ***

The Company hasoperations outside of the United States and sells its products worldwide.  The Company’s activities expose it to avariety of market risks, including the effects of changes in interest rates,foreign currency exchange rates, commodity prices and transportationinterruptions.  These financialexposures are actively monitored and, where considered appropriate, managed bythe Company.

 

***Interest Rate Risk***

*** ***

As of January 31, 2004the Company is subject to interest rate risk on approximately $18.2 million ofvariable rate debt.  Each 1-percentagepoint increase in the interest rate would impact pre-tax earnings byapproximately $0.2 million if applied to the total.

 

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

 

***Foreign Currency Risk***

*** ***

TheCompany uses forward foreign exchange contracts to hedge the impact of foreigncurrency fluctuations on certain committed capital expenditures, certaininventory purchases, Canadian intercompany payables and certain intercompanyloans. The Company does not hold or issue derivative financial instruments fortrading purposes.

 

With regard tocommitments for machinery and equipment in foreign currencies, upon payment ofeach commitment the underlying forward contract is closed and the correspondinggain or loss is included in the measurement of the cost of the acquiredasset.  With regard to forward exchangecontracts used to hedge Canadian intercompany payables and foreign purchases ofinventory, gain or loss on such hedges is recognized in earnings in the periodin which the underlying hedged transaction is settled.  Gains or losses on foreigncurrency forward contracts related to intercompany loans are recognizedcurrently through income and generally offset the transaction gains or lossesin the foreign currency cash flows that they are intended to hedge.  If a hedging instrument is sold or terminated prior tomaturity, gains and losses are deferred until the hedged item is settled.  However, if the hedged item is no longerlikely to occur, the resultant gain or loss on the terminated hedge isrecognized in earnings.  Forconsolidated financial statement presentation, net cash flows from such hedgesare classified in the categories of the cash flow with the items beinghedged.  Approximately $820,000 of hedgelosses are included in accumulated OCI at January 31, 2004, and are expected tobe transferred into earnings within the next twelve months.

 

The following tableprovides information about the Company’s foreign exchange forward contracts atJanuary 31, 2004.

 
| **(In thousands, except average contract rate)** |   | **US Dollar  Notional Amount** |   | **Average  Contract Rate** |   | **Estimated  Fair Value** |   |
|--------------------------------------------------|--------|--------------------------------|--------|----------------------------|--------|---------------------------|--------|
| Canadian Dollar                                  |   | $                              | 8,889  |                       | 1.35   |                      | $      | (154 | ) |
| Euro                                             |   | 32,182                         |   | 1.20                       |   | (1,244                    | )      |
| Pound Sterling                                   |   | 6,546                          |   | 1.64                       |   | (707                      | )      |
|                                             |   | $                              | 47,617 |                       |   |                      | $      | (2,105 | ) |

 

The foreign exchangecontracts outstanding as of January 31, 2004 had maturity dates ranging fromFebruary 2004 through July 2004.

 

37

----

 

### **Report ofIndependent Auditors**

 

To the Board of Directors andStockholders of Blyth, Inc:

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of earnings, stockholders’ equity and cash flows present fairly, inall material respects, the financial position of Blyth, Inc. and Subsidiaries(the “Company”) at January 31, 2004 and January 31, 2003, and the results oftheir operations and their cash flows for each of the three years in the periodended January 31, 2004 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

As discussed in Note 1 to theconsolidated financial statements, the Company changed its method of accountingfor goodwill and intangible assets in fiscal 2003.  As discussed in Note 1 to the consolidated financial statements,the Company changed its method of accounting for derivative instruments andhedging activities in fiscal 2002.

 

As discussed in Note 2 to theconsolidated financial statements, the Company has restated its segmentdisclosures for the years ended January 31, 2003 and January 31, 2002 toreflect a revision in its reportable segments. Additionally, as also discussed in Note 2, the Company has restated itsconsolidated financial statements for the year ended January 31, 2003 toreflect an increase in the cumulative effect of the change in accountingrelating to the adoption of SFAS 142 “Goodwill and Other Intangible Assets.”

 
|                   | /s/  PricewaterhouseCoopers LLP |   |
|------------------------|---------------------------------|--------|
|                   | PRICEWATERHOUSECOOPERS  LLP     |
|                   |
| Stamford,  Connecticut |
| **April  26, 2004**    |

 

38

----

 

**Item 8**.

 

**BLYTH, INC. AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

 
| **January 31,****(In  thousands, except share and per share data)**                                                            |   | **2003**               |    | **2004**     |       |
|--------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------------|------------|
|                                                                                                                           |   | **Restated  (Note 2)** |    |         |       |
| **ASSETS**                                                                                                                     |   |                   |    |         |       |
| **Current assets:**                                                                                                            |   |                   |    |         | ** ** |
| Cash and cash equivalents                                                                                                      |   | $                      | 168,596 |         | **$**      | **229,726** | ** ** |
| Accounts receivable, less allowance for doubtful receivables $4,093  in 2003 and $4,470 in 2004                                |   | 82,913                 |    | **104,502**  | ** ** |
| Inventories                                                                                                                    |   | 187,935                |    | **208,581**  | ** ** |
| Prepaid and other                                                                                                              |   | 23,044                 |    | **40,302**   | ** ** |
| Assets held for sale                                                                                                           |   | 690                    |    | **9,437**    | ** ** |
| Deferred income taxes                                                                                                          |   | 14,297                 |    | **14,191**   | ** ** |
| Total current assets                                                                                                           |   | 477,475                |    | **606,739**  | ** ** |
| **Property, plant and equipment, at cost:**                                                                                    |   |                   |    |         | ** ** |
| Land and buildings                                                                                                             |   | 133,364                |    | **160,920**  | ** ** |
| Leasehold improvements                                                                                                         |   | 15,620                 |    | **20,601**   | ** ** |
| Machinery and equipment                                                                                                        |   | 201,958                |    | **182,472**  | ** ** |
| Office furniture, data processing equipment and software                                                                       |   | 68,984                 |    | **106,426**  | ** ** |
| Construction in progress                                                                                                       |   | 3,269                  |    | **1,039**    | ** ** |
|                                                                                                                           |   | 423,195                |    | **471,458**  | ** ** |
| Less accumulated depreciation                                                                                                  |   | 178,397                |    | **210,961**  | ** ** |
|                                                                                                                           |   | 244,798                |    | **260,497**  | ** ** |
| **Other assets:**                                                                                                              |   |                   |    |         | ** ** |
| Investments                                                                                                                    |   | 3,564                  |    | **3,510**    | ** ** |
| Excess of cost over fair value of assets acquired                                                                              |   | 113,534                |    | **204,093**  | ** ** |
| Other intangible assets, net of accumulated amortization of $1,500 in  2004                                                    |   | 4,219                  |    | **41,600**   | ** ** |
| Deposits and other assets                                                                                                      |   | 16,494                 |    | **11,524**   | ** ** |
|                                                                                                                           |   | 137,811                |    | **260,727**  | ** ** |
| Total assets                                                                                                                   |   | $                      | 860,084 |         | **$**      | **1,127,963** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                  |   |                   |    |         | ** ** |
| **Current liabilities:**                                                                                                       |   |                   |    |         | ** ** |
| Bank lines of credit                                                                                                           |   | $                      | 7,377   |         | **$**      | **13,621** | ** ** |
| Current maturities of long-term debt                                                                                           |   | 4,037                  |    | **4,522**    | ** ** |
| Accounts payable                                                                                                               |   | 58,571                 |    | **78,407**   | ** ** |
| Accrued expenses                                                                                                               |   | 80,953                 |    | **97,395**   | ** ** |
| Liability associated with assets held for sale                                                                                 |   | —                 |    | **508**      | ** ** |
| Income taxes                                                                                                                   |   | 2,477                  |    | **11,746**   | ** ** |
| Total current liabilities                                                                                                      |   | 153,415                |    | **206,199**  | ** ** |
| **Deferred income taxes**                                                                                                      |   | 20,810                 |    | **33,773**   | ** ** |
| **Long-term debt,**less current maturities                                                                                     |   | 165,079                |    | **275,743**  | ** ** |
| **Other liabilities**                                                                                                          |   | 12,928                 |    | **23,278**   | ** ** |
| **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 49,703,682 shares in 2003 and 49,975,502 in 2004 |   | 994                    |    | **999**      | ** ** |
| Additional contributed capital                                                                                                 |   | 101,567                |    | **107,965**  | ** ** |
| Retained earnings                                                                                                              |   | 496,627                |    | **570,171**  | ** ** |
| Accumulated other comprehensive income (loss)                                                                                  |   | (4,751                 | )       | **15,224**   | ** ** |
| Treasury stock, at cost, 3,644,100 shares in 2003 and 4,345,100  shares in 2004                                                |   | (86,585                | )       | **(105,389** | **)**      |
| Total stockholders’ equity                                                                                                |   | 507,852                |    | **588,970**  | ** ** |
| Total liabilities and stockholders’ equity                                                                                |   | $                      | 860,084 |         | **$**      | **1,127,963** | ** ** |

 

***The accompanying notes are anintegral part of these financial statements.***

 

39

----

 

**BLYTH, INC. AND SUBSIDIARIES**

**Consolidated Statements of Earnings**

 
| **Year ended January 31,********(In thousands, except per share data)**                                  |   | **2002**               |       | **2003** |   | **2004**    |       |
|----------------------------------------------------------------------------------------------------------|--------|------------------------|------------|----------|--------|-------------|------------|
|                                                                                                     |   | **Restated  (Note 2)** |       |
| Net sales                                                                                                |   | $                      | 1,178,771  |     | $      | 1,288,583   |       | **$** | **1,505,573** | ** ** |
| Cost of goods sold                                                                                       |   | 601,766                |       | 648,281  |   | **781,898** | ** ** |
| Gross profit                                                                                             |   | 577,005                |       | 640,302  |   | **723,675** | ** ** |
| Selling                                                                                                  |   | 334,715                |       | 363,835  |   | **417,768** | ** ** |
| Administrative                                                                                           |   | 103,014                |       | 118,329  |   | **129,021** | ** ** |
| Amortization of goodwill                                                                                 |   | 4,702                  |       | —   |   | **—**  | ** ** |
| Restructuring and impairment charges                                                                     |   | 14,084                 |       | 2,621    |   | **23,809**  | ** ** |
|                                                                                                     |   | 456,515                |       | 484,785  |   | **570,598** | ** ** |
| Operating profit                                                                                         |   | 120,490                |       | 155,517  |   | **153,077** | ** ** |
| Other expense (income):                                                                                  |   |                   | ** ** |     |   |        | ** ** |
| Interest expense                                                                                         |   | 17,237                 |       | 14,664   |   | **17,443**  | ** ** |
| Interest income and other                                                                                |   | (5,014                 | )          | (1,737   | )      | **(1,330**  | **)**      |
| Equity in earnings of investees                                                                          |   | (22                    | )          | 33       |   | **71**      | ** ** |
|                                                                                                     |   | 12,201                 |       | 12,960   |   | **16,184**  | ** ** |
| Earnings before income taxes, minority interest and cumulative effect  of change in accounting principle |   | 108,289                |       | 142,557  |   | **136,893** | ** ** |
| Income tax expense                                                                                       |   | 40,283                 |       | 53,032   |   | **50,377**  | ** ** |
| Earnings before minority interest and cumulative effect of change in  accounting principle               |   | 68,006                 |       | 89,525   |   | **86,516**  | ** ** |
| Minority Interest                                                                                        |   | —                 |       | —   |   | **165**     | ** ** |
| Earnings before cumulative effect of change in accounting principle                                      |   | 68,006                 |       | 89,525   |   | **86,351**  | ** ** |
| Cumulative effect of change in accounting principle, net of taxes of  $2,887 in 2003                     |   | —                 |       | (31,753  | )      | **—**  | ** ** |
| Net earnings                                                                                             |   | $                      | 68,006     |     | $      | 57,772      |       | **$** | **86,351** | ** ** |
| Basic:                                                                                                   |   |                   | ** ** |     |   |        | ** ** |
| Net earnings per common share before cumulative effect of change in  accounting principle                |   | $                      | 1.45       |     | $      | 1.94        |       | **$** | **1.89** | ** ** |
| Cumulative effect of change in accounting principle                                                      |   | —                 |       | (0.69    | )      | **—**  | ** ** |
|                                                                                                     |   | $                      | 1.45       |     | $      | 1.25        |       | **$** | **1.89** | ** ** |
| Weighted average number of shares outstanding                                                            |   | 47,056                 |       | 46,256   |   | **45,771**  | ** ** |
|                                                                                                     |   |                   | ** ** |     |   |        | ** ** |
| Diluted:                                                                                                 |   |                   | ** ** |     |   |        | ** ** |
| Net earnings per common share before cumulative effect of change in  accounting principle                |   | $                      | 1.44       |     | $      | 1.92        |       | **$** | **1.88** | ** ** |
| Cumulative effect of change in accounting principle                                                      |   | —                 |       | (0.68    | )      | **—**  | ** ** |
|                                                                                                     |   | $                      | 1.44       |     | $      | 1.24        |       | **$** | **1.88** | ** ** |
| Weighted average number of shares outstanding                                                            |   | 47,205                 |       | 46,515   |   | **46,027**  | ** ** |

 

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

 

40

----

 

**BLYTH, INC. AND SUBSIDIARIES**

**Consolidated Statements of Stockholders’ Equity**

 

(In thousands, except share and per share data)

 
|                                                                               |   |             |   |            |   | **Additional** |   |               |   |              |    |       |       | **Accumulated  other** |   |      |   |
|------------------------------------------------------------------------------------|--------|------------------|--------|-----------------|--------|----------------|--------|--------------------|--------|-------------------|---------|------------|------------|------------------------|--------|-----------|--------|
|                                                                               |   | **Common stock** |   | **contributed** |   | **Retained**   |   | **Treasury stock** |   | **comprehensive** |    |       |       |
|                                                                               |   | **Shares**       |   | **Amount**      |   | **capital**    |   | **earnings**       |   | **Shares**        |    | **Amount** |       | **income (loss)**      |   | **Total** |   |
| Balance at January 31, 2001                                                        |   | 49,431,576       |   | $               | 989    |           | $      | 96,912             |   | $                 | 390,447 |       | (2,356,800 | )                      | $      | (56,959   | )      | $ | (9,595 | ) | $ | 421,794 |   |
| Net earnings for the year                                                          |   |             |   |            |   |           |   | 68,006             |   |              |    |       |       |                   |   | 68,006    |   |
| Foreign currency translation adjustments                                           |   |             |   |            |   |           |   |               |   |              |    |       |       | (6,003                 | )      | (6,003    | )      |
| Reclassification adjustment for gains included in net income (net of  tax of $737) |   |             |   |            |   |           |   |               |   |              |    |       |       | (1,244                 | )      | (1,244    | )      |
| Unrealized loss on certain investments (net of tax of $94)                         |   |             |   |            |   |           |   |               |   |              |    |       |       | (159                   | )      | (159      | )      |
| Net gain on cash flow hedging instruments (net of tax of $63)                      |   |             |   |            |   |           |   |               |   |              |    |       |       | 107                    |   | 107       |   |
| Comprehensive income                                                               |   |             |   |            |   |           |   |               |   |              |    |       |       |                   |   | 60,707    |   |
| Common stock issued in connection with long-term incentive plan                    |   | 78,200           |   | 1               |   | 584            |   |               |   |              |    |       |       |                   |   | 585       |   |
| Tax benefit from stock options                                                     |   |             |   |            |   | 383            |   |               |   |              |    |       |       |                   |   | 383       |   |
| Dividends paid ($0.20 per share)                                                   |   |             |   |            |   |           |   | (9,415             | )      |              |    |       |       |                   |   | (9,415    | )      |
| Treasury stock purchases                                                           |   |             |   |            |   |           |   |               |   | (274,100          | )       | (5,991     | )          |                   |   | (5,991    | )      |
| Balance at January 31, 2002                                                        |   | 49,509,776       |   | 990             |   | 97,879         |   | 449,038            |   | (2,630,900        | )       | (62,950    | )          | (16,894                | )      | 468,063   |   |
| Net earnings for the year - Restated (Note 2)                                      |   |             |   |            |   |           |   | 57,772             |   |              |    |       |       |                   |   | 57,772    |   |
| Foreign currency translation                                                       |   |             |   |            |   |           |   |               |   |              |    |       |       |                   |   |      |   |
| adjustments  - Restated (Note  2)                                             |   |             |   |            |   |           |   |               |   |              |    |       |       | 12,470                 |   | 12,470    |   |
| Unrealized loss on certain                                                         |   |             |   |            |   |           |   |               |   |              |    |       |       |                   |   |      |   |
| investments (net of tax of $33)                                                    |   |             |   |            |   |           |   |               |   |              |    |       |       | (56                    | )      | (56       | )      |
| Net loss on cash flow hedging                                                      |   |             |   |            |   |           |   |               |   |              |    |       |       |                   |   |      |   |
| instruments (net of tax of $160)                                                   |   |             |   |            |   |           |   |               |   |              |    |       |       | (271                   | )      | (271      | )      |
| Comprehensive income - Restated (Note 2)                                           |   |             |   |            |   |           |   |               |   |              |    |       |       |                   |   | 69,915    |   |
| Common stock issued in connection with long-term incentive plan                    |   | 193,906          |   | 4               |   | 3,367          |   |               |   |              |    |       |       |                   |   | 3,371     |   |
| Tax benefit from stock options                                                     |   |             |   |            |   | 321            |   |               |   |              |    |       |       |                   |   | 321       |   |
| Dividends paid ($0.22 per share)                                                   |   |             |   |            |   |           |   | (10,183            | )      |              |    |       |       |                   |   | (10,183   | )      |
| Treasury stock purchases                                                           |   |             |   |            |   |           |   |               |   | (1,013,200        | )       | (23,635    | )          |                   |   | (23,635   | )      |
| Balance at January 31, 2003-Restated  (Note 2)                                     |   | 49,703,682       |   | 994             |   | 101,567        |   | 496,627            |   | (3,644,100        | )       | (86,585    | )          | (4,751                 | )      | 507,852   |   |
| Net earnings for the 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                    |   | 271,820          |   | 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                                                           |   |             |   |            |   |           |   |               |   | (701,000          | )       | (18,804    | )          |                   |   | (18,804   | )      |
| Balance at January 31, 2004                                                        |   | 49,975,502       |   | $               | 999    |           | $      | 107,965            |   | $                 | 570,171 |       | (4,345,100 | )                      | $      | (105,389  | )      | $ | 15,224 |   | $ | 588,970 |   |

 

***The accompanying notes are anintegral part of these financial statements.***

 

41

----

 

**BLYTH, INC. AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows**

 
| **Year ended January 31,****(In thousands)**                                          |   | **2002**               |       | **2003** |   | **2004**     |       |
|---------------------------------------------------------------------------------------|--------|------------------------|------------|----------|--------|--------------|------------|
|                                                                                  |   | **Restated  (Note 2)** |       |
| Cash flows from operating activities:                                                 |   |                   |       |     |   |         |       |
| Net earnings                                                                          |   | $                      | 68,006     |     | $      | 57,772       |       | **$** | **86,351** | ** ** |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:  |   |                   | ** ** |     |   |         | ** ** |
| Cumulative effect of change in accounting principle, net of tax                       |   | —                 |       | 31,753   |   | **—**   | ** ** |
| Depreciation and amortization                                                         |   | 36,246                 |       | 30,212   |   | **35,954**   | ** ** |
| Loss on disposition of fixed assets                                                   |   | —                 |       | —   |   | **2,739**    | ** ** |
| Tax benefit from stock options                                                        |   | 383                    |       | 321      |   | **558**      | ** ** |
| Deferred income taxes                                                                 |   | (2,640                 | )          | 4,711    |   | **(584**     | **)**      |
| Equity in earnings of investees                                                       |   | (22                    | )          | 33       |   | **71**       | ** ** |
| Minority interest                                                                     |   | —                 |       | —   |   | **165**      | ** ** |
| Restructuring and impairment charges                                                  |   | 9,292                  |       | 2,621    |   | **20,229**   | ** ** |
| Gain on sale of long-term investments                                                 |   | (1,981                 | )          | —   |   | **(497**     | **)**      |
| Changes in operating assets and liabilities, net of effect of  business acquisitions: |   |                   | ** ** |     |   |         | ** ** |
| Accounts receivable                                                                   |   | (3,828                 | )          | 14,896   |   | **(12,935**  | **)**      |
| Inventories                                                                           |   | 35,592                 |       | (1,109   | )      | **24,718**   | ** ** |
| Prepaid and other                                                                     |   | 2,174                  |       | 1,452    |   | **(2,422**   | **)**      |
| Deposits and other assets                                                             |   | (3,266                 | )          | 913      |   | **5,611**    | ** ** |
| Accounts payable                                                                      |   | 751                    |       | 8,407    |   | **3,236**    | ** ** |
| Accrued expenses                                                                      |   | 1,961                  |       | 11,970   |   | **6,937**    | ** ** |
| Other liabilities                                                                     |   | 1,701                  |       | 9,356    |   | **2,093**    | ** ** |
| Income taxes                                                                          |   | (10,960                | )          | (1,121   | )      | **833**      | ** ** |
| Total adjustments                                                                     |   | 65,403                 |       | 114,415  |   | **86,706**   | ** ** |
| Net cash provided by operating activities                                             |   | 133,409                |       | 172,187  |   | **173,057**  | ** ** |
| Cash flows from investing activities:                                                 |   |                   | ** ** |     |   |         | ** ** |
| Purchases of property, plant and equipment                                            |   | (11,901                | )          | (14,322  | )      | **(21,963**  | **)**      |
| Purchases of long-term investments                                                    |   | —                 |       | —   |   | **(1,377**   | **)**      |
| Proceeds from sale of long-term investments                                           |   | 11,734                 |       | 26       |   | **1,874**    | ** ** |
| Cash impact of Wax Lyrical receivership                                               |   | —                 |       | (3,253   | )      | **1,902**    | ** ** |
| Purchase of businesses, net of cash acquired                                          |   | (61,735                | )          | (51,658  | )      | **(148,584** | **)**      |
| Net cash used in investing activities                                                 |   | (61,902                | )          | (69,207  | )      | **(168,148** | **)**      |
| Cash flows from financing activities:                                                 |   |                   | ** ** |     |   |         | ** ** |
| Proceeds from issuance of common stock                                                |   | 585                    |       | 3,371    |   | **5,845**    | ** ** |
| Purchases of treasury stock                                                           |   | (5,991                 | )          | (23,635  | )      | **(18,804**  | **)**      |
| Borrowings from bank line of credit                                                   |   | 61,634                 |       | 71,961   |   | **67,833**   | ** ** |
| Repayments on bank line of credit                                                     |   | (75,685                | )          | (90,655  | )      | **(70,931**  | **)**      |
| Borrowings on long-term debt                                                          |   | 4,791                  |       | 517      |   | **130,506**  | ** ** |
| Repayments on long-term debt                                                          |   | —                 |       | (19,872  | )      | **(40,663**  | **)**      |
| Dividends paid                                                                        |   | (9,415                 | )          | (10,183  | )      | **(12,807**  | **)**      |
| Net cash provided by (used in) financing activities                                   |   | (24,081                | )          | (68,496  | )      | **60,979**   | ** ** |
| Effect of exchange rate changes on cash                                               |   | (5,105                 | )          | (1,245   | )      | **(4,758**   | **)**      |
| Net increase in cash and cash equivalents                                             |   | 42,321                 |       | 33,239   |   | **61,130**   | ** ** |
| Cash and cash equivalents at beginning of year                                        |   | 93,036                 |       | 135,357  |   | **168,596**  | ** ** |
| Cash and cash equivalents at end of year                                              |   | $                      | 135,357    |     | $      | 168,596      |       | **$** | **229,726** | ** ** |
| Supplemental disclosure of cash flow information:                                     |   |                   | ** ** |     |   |         | ** ** |
| Cash paid during the year for:                                                        |   |                   | ** ** |     |   |         | ** ** |
| Interest                                                                              |   | $                      | 17,237     |     | $      | 15,355       |       | **$** | **10,800** | ** ** |
| Income taxes, net of refunds                                                          |   | 43,635                 |       | 47,741   |   | **47,460**   | ** ** |

 

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

 

42

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

** **

**Note  1.**                               Summary of Significant Accounting Policies

** **

A summary of thesignificant accounting policies applied in the preparation of the accompanyingconsolidated financial statements follows:

 

**Principles of Consolidation**

** **

The consolidated financialstatements include the accounts of Blyth, Inc. and its direct and indirectsubsidiaries,  (the “Company”).  The company consolidates entities in which it owns or controls more than50% of the voting shares.  The unownedportion is reflected as minority interest. Investments in companies that are not consolidated are reported usingthe equity method and are recorded in other assets in the ConsolidatedBalance Sheet.  All significant inter-company balances and transactions have beeneliminated in consolidation.  In January2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin No. 51”(FIN 46).  FIN 46 requires that factorsin addition to the voting interest in an entity be considered in determiningwhether an entity should be consolidated. In preparing these financial statements, the company was requiredto apply the provisions of FIN 46.

 

Certain of the Company’ssubsidiaries operate on a 52 or 53-week fiscal year ending on the Saturdaynearest to January 31.  Europeanoperations maintain a calendar year accounting period, which is consolidatedwith the Company’s fiscal period.

 

**Estimates**

** **

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Areas of the financialstatements involving significant estimates include inventory reserves, bad debtreserves, chargeback reserves, impairment charges, taxes, and other accruedliabilities.

 

**Credit Concentration**

** **

The Company’s creditsales are principally to department and gift stores, mass merchandisers anddistributors, which purchase the Company’s products for resale.  The Company performs ongoing credit evaluationsof its customers and generally does not require collateral.  The Company makes provisions for estimatedcredit losses.

 

**Foreign Currency Translation**

** **

The Company’sinternational subsidiaries use their local currency as their functionalcurrency.  Therefore, all balance sheetaccounts of international subsidiaries are translated into US dollars at theyear-end rate of exchange, and statement of earnings items are translated atthe weighted average exchange rates for the period.  Resulting translation adjustments are included in accumulatedother comprehensive income (loss). Gains and losses on foreign currencytransactions, which are included in income, were not material.

 

**Reclassifications**

** **

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

 

**Investments**

** **

The Company makesinvestments from time to time in the ordinary course of its business that mayinclude selected assets and product lines, long-term investments and/or jointventures that either complement or expand 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.

 

43

----

 

**Derivatives and Other Financial Instruments**

** **

The Company applies theprovisions of Financial Accounting Standards Board Statement No. 133 (SFAS133), “Accounting for Derivative and Hedging Activities” and its correspondingamendment under SFAS 138. These statements establish the accounting andreporting standards for derivative instruments and hedging activities andrequire that all derivative instruments be recorded on the balance sheet atfair value.  The Company uses forwardforeign exchange contracts to hedge the impact of foreign currency fluctuationson certain committed capital expenditures, certain inventory purchases, Canadianintercompany payables and certain intercompany loans. The Company does not holdor issue derivative financial instruments for trading purposes.

 

With regard tocommitments for machinery and equipment in foreign currencies, upon payment ofeach commitment the underlying forward contract is closed and the correspondinggain or loss is included in the measurement of the cost of the acquiredasset.  With regard to forward exchangecontracts used to hedge Canadian intercompany payables and foreign purchases ofinventory, gain or loss on such hedges is recognized in earnings in the periodin which the underlying hedged transaction is settled.  Gains or losses on foreigncurrency forward contracts related to intercompany loans are recognizedcurrently through income and generally offset the transaction gains or lossesin the foreign currency cash flows which they are intended to hedge.  If a hedging instrument is sold or terminated prior tomaturity, gains and losses are deferred until the hedged item is settled.  However, if the hedged item is no longerlikely to occur, the resultant gain or loss on the terminated hedge isrecognized in earnings.  Forconsolidated financial statement presentation, net cash flows from such hedgesare classified in the categories of the cash flow with the items being hedged.  Approximately $820,000 of hedge losses areincluded in accumulated OCI at January 31, 2004, and are expected to betransferred into earnings within the next twelve months.

 

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

 

**Fair Value of Financial Instruments**

** **

The Company’s financialinstruments include accounts receivable, accounts payable, short-term andlong-term debt.  Management believes thecarrying value of these items approximates their estimated fair values, exceptfor long-term debt, as discussed in Note 11 to the Consolidated FinancialStatements.

 

**Cash Equivalents**

** **

The Company considers allhighly liquid debt instruments purchased with an original maturity of threemonths or less to be cash equivalents.

 

**Inventories**

** **

Inventories are valued atthe lower of cost or market.  Cost isdetermined by the first-in, first-out method. The elements of cost are primarily material, labor and overhead.

 

**Shipping and Handling**

** **

The Company classifiesshipping and handling fees billed to customers in revenue, and shipping andhandling costs are classified as cost of goods sold.

 

44

----

 

**Property, Plant and Equipment**

** **

Property, plant andequipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are providedprincipally by use of the straight-line method for financial reportingpurposes.  Leasehold improvements areamortized over the lives of the respective leases or the service lives of theimprovements, whichever is shorter.  TheCompany records gains and losses from the sale of property, plant and equipmentin interest income and other.

 

The principal estimatedlives used in determining depreciation and amortization are as 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    |   |

 

**Excessof Cost Over Fair Value of Assets Acquired**

 

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

 

In June 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and any otherintangibles deemed to have indefinite lives are no longer subject to amortization;however, goodwill is subject to an assessment for impairment using a two-stepfair value-based test and such other intangibles are also subject to impairmentreviews, which must be performed at least annually, or more frequently ifevents or circumstances indicate that goodwill or other indefinite livedintangibles might be impaired. The Company performs its annual assessment ofimpairment in the fourth fiscal quarter. For goodwill the first step compares the fair value of a reporting unitto its carrying amount, including goodwill. If the carrying amount of thereporting unit exceeds its fair value, the second step is performed. The secondstep compares the carrying amount of the goodwill to the fair value of thegoodwill.  If fair value is less thanthe carrying amount, an impairment loss is reported as a reduction to the assetand a charge to operating expense, except at the transition date, when the losswas reflected as a cumulative effect of a change in accounting principle.

 

As of January 31, 2002,Blyth’s Consolidated Balance Sheets reflected approximately $108.1 million ingoodwill net of accumulated amortization, including $27.2 million related tothe Wholesale Home Fragrance segment businesses, $42.2 million related to theAll Other segment and $38.7 million related to the Wholesale CreativeExpressions segment businesses. The Company adopted SFAS 142, effectiveFebruary 1, 2002. In accordance with the new standard, Blyth ceasedamortization of goodwill and performed an assessment for impairment of itsgoodwill. As a result of the impairment review, Blyth reduced the carryingvalue of the goodwill related to its 1997 acquisition of the Sternoâbrand  by $7.4 million, which isincluded in the All Other segment.  Inaddition, a recent revision of its operating and reporting segments by theCompany (See Note 2), required changes in the Company’s reporting units forpurposes of goodwill impairment reviews under SFAS 142, retroactive to theFebruary 1, 2002 adoption date of SFAS 142. This resulted in the need to perform impairment reviews of severaladditional reporting units as of February 1, 2002 and each subsequent year-endbalance sheet date thereafter.  Theseimpairment reviews have indicated the need to record additional impairmentcharges as of the February 1, 2002 adoption of SFAS 142, specifically towrite-off $20.9 million in goodwill associated with the 1999 acquisition of theGies Group and $6.3 million in goodwill associated with the 1999 acquisition ofthe Colony Group.   Both of these businessesare components of the Wholesale Home Fragrance Segment, and the impairmentcharges reduced goodwill in that segment to zero at February 1, 2002.  The fair values of the Sterno Group, theGies Group and the Colony Group were determined through independent valuationsutilizing market-comparable analysis, as well as

 

45

----

** **

discounted cash flowmodels reflecting the expected range of future cash flow outcomesover the life of the models. These cash flows were discounted to February 1,2002 using a risk-adjusted discount rate. The impairment of the Sterno Group’s goodwill, which was recorded as a cumulative effectof a change in accounting principle, had the effect of reducing net income by$4.5 million (after tax) or $0.10 per share. The impairments of the Gies Group and Colony Group goodwill, which werenot deductible for tax purposes, were, via restatement of the fiscal 2003financial statements, also recorded as a cumulative effect of change in accountingprinciple, and had the effect of reducing net income by $27.2 million or $0.58per share. The carrying amount of goodwill on the Company’s ConsolidatedBalance Sheet increased approximately $5.4 million, from $108.1 million atJanuary 31, 2002 to $113.5 million at January 31, 2003.  The change in goodwill was the result of theacquisition of CBK (See Note 4 to the Consolidated Financial Statements), whichincreased goodwill by approximately $40.0 million, offset by the previouslydiscussed impairment charges, which decreased goodwill by $34.6 million.

 

As of January 31, 2003,the $113.5 million in goodwill was comprised of $34.8 million related to theAll Other segment and $78.7 million related to the Wholesale CreativeExpressions segment businesses. The carrying amount ofgoodwill on the Company’s Consolidated Balance Sheet increased approximately$90.6 million, from $113.5 million at January 31, 2003 to $204.1 million atJanuary 31, 2004.  The change in goodwillwas primarily the result of the acquisitions of Miles Kimball, Kaemingk andWalter Drake (See Note 4 to the Consolidated Financial Statements), whichincreased goodwill by approximately $45.6 million, $17.6 million and $25.4million, respectively, together with an increase in goodwill resulting from aforeign currency translation adjustment of approximately $2.0 million. Of the $204.1 million of goodwill on the balance sheet as of January 31,2004, $34.8 million is related to the All Other segment, $19.6 million isrelated to the Wholesale Home Fragrance segment, $78.7 million is related tothe Wholesale Creative Expressions segment and $71.0 million is related to theCatalog & Internet segment.

 

46

----

 

The following table setsforth Blyth’s net income and earnings per share adjusted to exclude fiscal 2002amortization expense related to goodwill and certain other intangibles that areno longer being amortized and to reflect the cumulative effect of change inaccounting principle related to the adoption of SFAS 142 recorded in fiscal2003.

 
| **Year ended January 31, (In thousands, except per share  data)**                    |   | **2002**               |   | **2003** |   | **2004** |   |
|--------------------------------------------------------------------------------------|--------|------------------------|--------|----------|--------|----------|--------|
|                                                                                 |   | **Restated  (Note 2)** |   |
| Reported earnings before cumulative effect of change in accounting  principle        |   | $                      | 68,006 |     | $      | 89,525   |   | $ | 86,351 |   |
| Cumulative effect of change in accounting principle, net of taxes of  $2,887 in 2003 |   | —                 |   | (31,753  | )      | —   |   |
| Reported net income                                                                  |   | 68,006                 |   | 57,772   |   | 86,351   |   |
| Goodwill amortization, net of taxes of $1,749 in 2002                                |   | 2,953                  |   | —   |   | —   |   |
| Adjusted net income                                                                  |   | $                      | 70,959 |     | $      | 57,772   |   | $ | 86,351 |   |
| Basic earnings per common share:                                                     |   |                   |   |     |   |     |   |
| Reported earnings before cumulative effect of change in accounting  principle        |   | $                      | 1.45   |     | $      | 1.94     |   | $ | 1.89 |   |
| Cumulative effect of change in accounting principle, net of taxes                    |   | —                 |   | (0.69    | )      | —   |   |
| Reported net income                                                                  |   | 1.45                   |   | 1.25     |   | 1.89     |   |
| Goodwill amortization, net of taxes                                                  |   | 0.06                   |   | —   |   | —   |   |
| Adjusted earnings per share                                                          |   | $                      | 1.51   |     | $      | 1.25     |   | $ | 1.89 |   |
| Diluted earnings per common share:                                                   |   |                   |   |     |   |     |   |
| Reported earnings before cumulative effect of change in accounting  principle        |   | $                      | 1.44   |     | $      | 1.92     |   | $ | 1.88 |   |
| Cumulative effect of change in accounting principle, net of taxes                    |   | —                 |   | (0.68    | )      | —   |   |
| Reported net income                                                                  |   | 1.44                   |   | 1.24     |   | 1.88     |   |
| Goodwill amortization, net of taxes                                                  |   | 0.06                   |   | —   |   | —   |   |
| Adjusted earnings per share                                                          |   | $                      | 1.50   |     | $      | 1.24     |   | $ | 1.88 |   |

 

47

----

 

**Impairment of Long-Lived Assets**

** **

We review long-livedassets, including property, plant and equipment for impairment whenever eventsor changes in circumstances indicate that the carrying amount of such an assetmay not be recoverable.  Management willdetermine whether there has been a permanent impairment on such assets held foruse in the business by comparing anticipated undiscounted future cash flowsfrom the use and eventual disposition of the asset or asset group to thecarrying value of the asset.  The amountof any resulting impairment will be calculated by comparing the carrying valueto the fair value, which may be estimated using the present value of the samecash flows.  Long-lived assets that meetthe definition of held for sale are valued at the lower of carrying amount ornet realizable value.

 

**Comprehensive Income**

** **

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 and the net gains andlosses on cash flow hedging instruments. 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.

 

**Thefollowing table presents the components of the Company’s accumulated othercomprehensive income (loss), net of tax, for the years ended January 31, 2002,2003 and 2004:**

 
| **(In thousands)**                                                              |   | **Foreign  currency  translation  adjustments** |    | **Unrealized  gain (loss)  on certain  investments** |   | **Net  gain (loss)  on cash flow  hedges** |   | **Total** |   |
|---------------------------------------------------------------------------------|--------|-------------------------------------------------|---------|------------------------------------------------------|--------|--------------------------------------------|--------|-----------|--------|
|                                                                            |   |                                            |    |                                                 |   |                                       |   |      |   |
| Balance at January 31, 2001                                                     |   | $                                               | (10,839 | )                                                    | $      | 1,244                                      |   | $         | — |   | $ | (9,595 | ) |
| Foreign currency translation adjustments                                        |   | (6,003                                          | )       |                                                 |   |                                       |   | (6,003    | )      |
| Reclassification adjustment for gains included in net income (net of  tax $737) |   |                                            |    | (1,244                                               | )      |                                       |   | (1,244    | )      |
| Unrealized loss on certain investments (net of tax $94)                         |   |                                            |    | (159                                                 | )      |                                       |   | (159      | )      |
| Net gain on cash flow hedging instruments (net of tax $63)                      |   |                                            |    |                                                 |   | 107                                        |   | 107       |   |
| Balance at January 31, 2002                                                     |   | (16,842                                         | )       | (159                                                 | )      | 107                                        |   | (16,894   | )      |
| Foreign currency translation adjustments - Restated  (Note 2)                   |   | 12,470                                          |    |                                                 |   |                                       |   | 12,470    |   |
| Unrealized loss on certain investments (net of tax $33)                         |   |                                            |    | (56                                                  | )      |                                       |   | (56       | )      |
| Net loss on cash flow hedging instruments (net of tax $160)                     |   |                                            |    |                                                 |   | (271                                       | )      | (271      | )      |
| Balance at January 31, 2003 - Restated (Note 2)                                 |   | (4,372                                          | )       | (215                                                 | )      | (164                                       | )      | (4,751    | )      |
| Foreign currency translation adjustments                                        |   | 21,120                                          |    |                                                 |   |                                       |   | 21,120    |   |
| Unrealized loss on certain investments (net of tax $189)                        |   |                                            |    | (325                                                 | )      |                                       |   | (325      | )      |
| Net loss on cash flow hedging instruments (net of tax $477)                     |   |                                            |    |                                                 |   | (820                                       | )      | (820      | )      |
| Balance at January 31, 2004                                                     |   | $                                               | 16,748  |                                                 | $      | (540                                       | )      | $         | (984   | ) | $ | 15,224 |   |

 

48

----

 

**Income Taxes**

** **

Income tax expense isbased on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected taxconsequences of temporary differences between the tax basis of assets andliabilities and their reported amounts. 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 are inherent uncertainties related tothe interpretation of tax regulations in the jurisdictions in which thecorporation transacts business.  Thejudgments and estimates made at a point in time may change based on the outcomeof tax audits, as well as changes to or further interpretations ofregulations.  If such changes takeplace, there is a risk that the tax rate may increase or decrease in anyperiod.

 

**Revenue Recognition**

** **

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

 

Generally, sales ordersare received via signed customer purchase orders with stated fixed prices basedon published price lists.  The Companyrecords estimated reductions to revenue for customer programs, which mayinclude special pricing agreements for specific customers, volume incentivesand other promotions.  Should marketconditions decline, the Company may increase customer incentives with respectto future sales.  The Company alsorecords estimated reductions to revenue, based primarily on historicalexperience, for customer returns and chargebacks that may arise as a result ofshipping errors, product damage in transit or for other reasons that can onlybecome known subsequent to recognizing the revenue.  If the amount of actual customer returns and chargebacks were toincrease significantly from the estimated amount, revisions to the estimatedallowance would be required.

 

In some instances, theCompany receives payment in advance of product shipments.  Such advance payments occur primarily in ourdirect selling and direct marketing channels and are recorded as deferredrevenue.  Upon delivery of productshipments for which advance payment has been made, the related deferred revenueis reclassified to revenue.

 

Most of the Company’ssales made on credit are made to an established list of customers.  Although the collectibility of sales made oncredit is reasonably assured, the Company has established an allowance fordoubtful accounts for its trade and note receivables.  The allowance is determined based on the Company’s evaluation ofspecific customers’ ability to pay, aging of receivables, historical experienceand the current economic environment. While the Company believes it has appropriately considered known orexpected outcomes, its customers’ ability to pay their obligations, includingthose to the Company, could be adversely affected by declining sales at retailresulting from such factors as contraction in the economy or a general declinein consumer spending.

 

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 othercustomers, customer orders pursuant to such seasonal dating programs aregenerally received in the form of a written purchase order signed by anauthorized representative of the customer. Sales made pursuant to seasonal dating programs are recorded as revenueonly upon delivery either to the customer or to an agent of the customerdepending on the freight terms for the particular shipment and consistent withthe concept of “risk of loss.”  Thesales price for the

 

49

----

 

Company’s products soldpursuant to such seasonal dating programs is fixed prior to the time ofshipment to the customer.  Customers donot have the right to return product except for rights to return that theCompany believes are typical of our industry for such reasons as damaged goods,shipping errors or similar occurrences. The Company is not required torepurchase products from its customers, nor does the Company have any regularpractice of doing so.  The Companybelieves that it is reasonably assured of payment for products sold pursuant tosuch seasonal dating programs based on its historical experience with the establishedlist of customers eligible for such programs. In addition, the Company minimizes its exposure to bad debts byutilizing established credit limits for each customer.  If, however, product sales by our customersduring the seasonal selling period should fall significantly belowexpectations, such customers’ financial condition could be adversely affected,increasing the risk of not collecting these seasonal dating receivables and,possibly, resulting in additional bad debt charges.  The Company does not make any sales under consignment or similararrangements.

 

**Earnings per Common and Common Equivalent Share**

** **

Earnings per common andcommon equivalent share are computed based upon the weighted average number ofshares outstanding during the period, which includes outstanding options forcommon stock, when dilutive.

 

**Employee Stock Option Plans**

** **

 The Company has elected to adopt thedisclosure only provisions of Statement of Financial Accounting Standards(SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure,” and continues to follow Accounting Principles Board (APB) opinionNo. 25, “Accounting for Stock Issued to Employees” and related interpretationsin accounting for stock options granted to its employees and directors underthe intrinsic value method. Accordingly, no compensation expense is recorded for the stock optionsissued to employees unless the option price is below market at the measurementdate.  The Company does not at this timeissue stock options below market value; therefore no compensation expense hasbeen recorded in the financial statements. Had compensation expense for the Company’s stock options been determinedin accordance with the fair value method in SFAS No. 123, “Accounting forStock-Based Compensation” and SFAS No. 148, the Company’s reported net incomeand earnings per share would have been adjusted to the pro forma amountsindicated below:

 
| **Year ended January 31,****(In thousands, except per share data)**                                         |   | **2002**               |   | **2003** |   | **2004** |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|----------|--------|----------|--------|
|                                                                                                        |   | **Restated  (Note 2)** |   |
| Net earnings:                                                                                               |   |                   |   |     |   |     |   |
| As reported                                                                                                 |   | $                      | 68,006 |     | $      | 57,772   |   | $ | 86,351 |   |
| Stock-based employee compensation expense determined under SFAS No.  123 for all awards, net of related tax |   | 931                    |   | 2,202    |   | 2,428    |   |
| Pro forma                                                                                                   |   | $                      | 67,075 |     | $      | 55,570   |   | $ | 83,923 |   |
| Net earnings per common share:                                                                              |   |                   |   |     |   |     |   |
| As reported:                                                                                                |   |                   |   |     |   |     |   |
| Basic                                                                                                       |   | $                      | 1.45   |     | $      | 1.25     |   | $ | 1.89 |   |
| Diluted                                                                                                     |   | 1.44                   |   | 1.24     |   | 1.88     |   |
| Pro forma:                                                                                                  |   |                   |   |     |   |     |   |
| Basic                                                                                                       |   | $                      | 1.43   |     | $      | 1.20     |   | $ | 1.83 |   |
| Diluted                                                                                                     |   | 1.41                   |   | 1.16     |   | 1.77     |   |

 

50

----

 

The fair value of eachoption is estimated on the date of grant, using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

 
|                     |   | **2002** |   | **2003** |   | **2004** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|
|                     |   |     |   |     |   |     |   |
| Expected volatility      |   | 41.40    | %      | 43.26    | %      | 41.48    | %      |
| Risk free interest rates |   | 4.72     | %      | 4.48     | %      | 2.73     | %      |
| Expected lives           |   | 7        |   | 5        |   | 5        |   |
| Expected dividend yield  |   | 0.87     | %      | 0.74     | %      | 0.87     | %      |

 

**Classification of Sales Incentives**

** **

In November 2001, theEmerging Issues Task Force issued EITF Issue No. 01-09, “Accounting forConsideration Given by a Vendor to a Customer/Reseller,” which addresses theaccounting for consideration given by a vendor to a customer, including both areseller of the vendor’s products and an entity that purchases the vendor’sproducts from a reseller. EITF 01-09 also codifies and reconciles relatedguidance issued by the EITF including EITF Issue No. 00-25, “Vendor IncomeStatement Characterization of Consideration Paid to a Reseller of the Vendor’sProducts”, and EITF Issue No. 00-14, “Accounting for Certain SalesIncentives.”  Effective February 1,2002, the company adopted EITF 01-09, EITF 00-14 and EITF 00-25.  These statements require that the Companyclassify certain sales incentives as a reduction of net sales rather thanselling expenses.  Prior year amountswere reclassified to conform with the new presentation.

 

**Advertising and Catalog Costs**

** **

The Company expenses the costsof advertising as incurred, except the costs for direct-response advertising,which are capitalized and amortized over the expected period of futurebenefits.

 

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 capitalizedproduction costs are amortized for each specific catalog mailing over theperiod following catalog distribution in proportion to revenues (orders)received, compared to total estimated revenues for that particular catalogmailing.  The amortization period isgenerally from three to six months and does not exceed twelve months.  Deferred direct-response advertising costsof $7.4 million and $0 were reported as assets at January 31, 2004 and January31, 2003, respectively.

 

In certain of the Company’swholesale businesses, catalog production costs are capitalized and expensed asthe catalogs are distributed, generally over less than a twelve monthperiod.  The Consolidated Balance Sheetsreflect $0.5 million and $0.6 million of these costs at January 31, 2004 and2003, respectively.

 

**Note 2.   Restatement**

** **

Prior to January 31,2004, the Company reported its financial results in two reporting segments, theCandles & Home Fragrance segment and the Creative Expressions segment.  The Company has reevaluated its operatingsegments based on the application of FASB Statement No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFAS 131”), and determinedthat the appropriate number of reportable segments should have been five duringfiscal 2004 and four during fiscal 2003 and 2002 (The increase in segments infiscal 2004 was due to the acquisitions that were consummated in fiscal2004).  See Note 18 for further details.   This revision of segments had the relatedeffect of requiring changes in the Company’s reporting units for purposes ofgoodwill impairment reviews under SFAS 142, retroactive to the February 1, 2002adoption date of SFAS 142.  This

 

51

----

 

**resulted in the need to perform impairmentreviews of several additional reporting units as of February 1, 2002 and eachsubsequent year-end balance sheet date, thereafter.  These impairment reviews have indicated the need to recordadditional impairment charges as of the February 1, 2002 adoption of SFAS 142,specifically to write-off $20.9 million in goodwill associated with the 1999acquisition of the Gies Group and $6.3 million in goodwill associated with the1999 acquisition of the Colony Group. Both of these businesses are components of the Wholesale Home FragranceSegment.  The Company’s fiscal 2003financial statements have been restated to reflect the recording of these $27.2million in goodwill impairment charges as part of the cumulative effect ofadopting SFAS 142 as of February 1, 2002.  There was no income tax impact for these impairment charges.**

 

A summary of the effects of the restatement on the Company’s financialstatements is as follows:

 
|                                              |   | **As of January 31, 2003** |    |
|---------------------------------------------------|--------|----------------------------|---------|
|                                              |   | **As Previously**          |    |   |   |
| **(In  thousands)**                               |   | **Reported*****(a)***      |    | **As Restated** |   |
| **Balance sheet :**                               |   |                       |    |   |   |
| Excess of cost over fair value of assets acquired |   | $                          | 145,146 |   | $ | 113,534 | *(b)* |
| Total non-current assets                          |   | 169,423                    |    | 137,811 | * * |
| Total assets                                      |   | 891,696                    |    | 860,084 | * * |
| Retained earnings                                 |   | 523,865                    |    | 496,627 | * * |
| Accumulated other comprehensive loss              |   | (377                       | )       | (4,751 | *)(b)* |
| Total stockholders’ equity                   |   | 539,464                    |    | 507,852 |   |
| Total liabilities and stockholders’ equity   |   | 891,696                    |    | 860,084 |   |
|                                                   |        |                            |         |  |  |  |  |

 
|                                                                     |   | **Year ended January 31, 2003** |   |
|--------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                     |   | **As Previously**               |   |   |   |
|                                                                     |   | **Reported**                    |   | **As Restated** |   |
| **Statement of Earnings:**                                               |   |                            |   |   |   |
| Earnings before cumulative effect of accounting change                   |   | $                               | 89,525 |   | $ | 89,525 |   |
| Cumulative effect of accounting change                                   |   | (4,515                          | )      | (31,753 | ) |
| Net earnings                                                             |   | $                               | 85,010 |   | $ | 57,772 |   |
| Basic earnings per share:                                                |   |                            |   |   |   |
| Before cumulative effect of accounting change                            |   | $                               | 1.94   |   | $ | 1.94 |   |
| Cumulative effect of accounting change                                   |   | (0.10                           | )      | (0.69 | ) |
|                                                                     |   | $                               | 1.84   |   | $ | 1.25 |   |
| Diluted earnings per share:                                              |   |                            |   |   |   |
| Before cumulative effect of accounting change                            |   | $                               | 1.93   |   | $ | 1.92 |   |
| Cumulative effect of accounting change                                   |   | (0.10                           | )      | (0.68 | ) |
|                                                                     |   | $                               | 1.83   |   | $ | 1.24 |   |
| **Statement of Stockholders’ Equity**                               |   |                            |   |   |   |
| Foreign currency translation adjustments                                 |   | $                               | 16,844 |   | $ | 12,470 |   |
| Comprehensive income                                                     |   | 101,527                         |   | 69,915 |   |
| **Statement of Cash Flows:**                                             |   |                            |   |   |   |
| Total adjustments to reconcile net earnings to net cash from  operations |   | $                               | 87,177 |   | $ | 114,415 |   |

 

----

*(a)  Reflectscertain other reclassifications to conform with current year presentation.*

*(b)  Reflectsthe reversal of $4,374 of foreign currency translation adjustments on the Giesand Colony goodwill being written off.*

 

52

----

 

**Note 3.   New AccountingPronouncements**

** **

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  This standard addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies EITF Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs incurred in a Restructuring).”  This standard has been adopted by theCompany for exit and disposal activities initiated after December 31, 2002.

 

In November 2002, theFASB issued Financial Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” which elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder certain guarantees that it has issued. It also clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee. The initialrecognition and initial measurement provisions of this interpretation are applicableon a prospective basis to guarantees issued or modified after December 31, 2002and the disclosure requirements in this interpretation are effective forfinancial statements of interim or annual periods ending after December 15,2002. The implementation of this interpretation did not have an impact on ourfinancial statements.

 

In January 2003, theFinancial Accounting Standards Board (FASB) issued Financial Interpretation No.46 (FIN 46), “Consolidation of Variable Interest Entities.  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements.”  FIN 46 requires consolidation of entities inwhich the Company absorbs a majority of the entity’s expected losses, receivesa majority of the entity’s expected residual returns, or both, as a result ofownership, contractual or other financial interests in the entity.  Previously, entities were consolidated onlywhen the Company had a controlling financial interest through ownership of amajority voting interest in an entity. The interpretation was immediately applicable to variable interestentities (“VIEs”) created after January 31, 2003, and to VIEs in which anenterprise obtains an interest after that date.  As originally issued, it applied in the fiscal year or interimperiod beginning after June 15, 2003, for VIEs in which an enterprise acquireda variable interest prior to February 1, 2003. In December 2003, the FASB issued FIN 46R, which defers the effectivedate for FIN 46 to the first interim or annual period ending after December 15,2003 for VIEs created before February 1, 2003.    The implementation of this standard has not had and is notexpected to have a material impact on our financial statements.

 

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

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.”  As originally issued, SFAS 150 is effective for mandatorilyredeemable financial instruments of public entities entered into or modifiedafter May 31, 2003, and for all other instruments for interim periods beginningafter June 15, 2003.  In November 2003,the FASB issued FASB Staff Position No. 150-3, “Effective Date, Disclosures,and Transition for Mandatorily Redeemable Financial Instruments of CertainNonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interestsunder FASB Statement No. 150”, which defers indefinitely the classification andmeasurement provisions for certain mandatorily redeemable noncontrollinginterests associated with finite-lived subsidiaries pending further FASBaction.  For other mandatorilyredeemable noncontrolling interests that were issued before November 5, 2003,only the measurement provisions of SFAS 150 are deferred indefinitely, both forthe parent in consolidated financial statements and for the subsidiary thatissued the instruments that result in the mandatorily redeemable noncontrollinginterest, pending further FASB action. The original implementation of SFAS 150 had no impact on our financialstatements and we do not expect the deferral provisions of FSP FAS 150-3 tohave a significant impact on our financial statements.

 

53

----

 

**Note 4.   BusinessAcquisitions**

** **

On April 11, 2001, the Company acquired 100% ofMidwest of Cannon Falls, Inc. (“Midwest”), a leading Wholesale CreativeExpressions company in the seasonal decorative products and giftware industryfor approximately $61.0 million in cash. The excess of the purchase price over the estimated fair value of thenet assets acquired approximated $25.4 million.  Midwest is included in the Wholesale Creative Expressionssegment.  The Consolidated FinancialStatements include the results of operations of Midwest since the date ofacquisition.

 

OnMay 10, 2002, the Company purchased all of the interests in CBK, Ltd., LLC(“CBK”), now known as CBK Styles, Inc., a designer and marketer of premium everydayhome décor, for approximately $51.5 million in cash*.*  The excess of thepurchase price over the estimated fair value of the net assets acquiredapproximated $40.0 million, which will be deductible for income tax purposesover 15 years.  CBK is also included inthe Wholesale Creative Expressions segment. The Consolidated Financial Statements include the results of operationsof CBK since the date of acquisition.

 

On April 1, 2003, theCompany acquired 100% of the Miles Kimball Company (“MK”), a direct marketer ofgiftware, home décor and household convenience items, premium photo albums,frames and holiday cards under the Miles Kimball® and Exposures® catalog titlesfor approximately $66.2 million in cash. The acquisition of “MK” aligns with the Company’s growth strategy, whichincludes selected acquisitions.  Theexcess of the purchase price over the estimated fair value of the net assetsacquired approximated $45.6 million, which will not be deductible for incometax purposes.  The other intangibles acquiredconsist of $16.1 million of trade names and trademarks, which are deemed tohave an indefinite life and will not be amortized, plus $9.0 million ofcustomer lists, which will be amortized on an accelerated basis over 12 years.  Amortization expense recorded in fiscal 2004totaled $1.4 million.  Estimatedamortization expense for the next 5 fiscal years is as follows:  $1.5 million, $1.5 million, $1.2 million,$0.9 million and $0.9 million.  Theresults of operations of MK are included in the Consolidated Statements ofEarnings of the Company since April 2, 2003. For segment reporting purposes, MK is included in the Catalog &Internet segment.

 

The following provides an allocation of thepurchase price of Miles Kimball (In thousands):

 
| Cash Purchase Price                   |   | $      | 66,219 |   |
|---------------------------------------|--------|--------|--------|--------|
| Less:  Assets acquired           |   |   |   |
| Accounts receivable                   |   | 1,124  |   |
| Inventories                           |   | 9,983  |   |
| Property, plant and equipment         |   | 17,959 |   |
| Intangible assets                     |   | 25,100 |   |
| Other                                 |   | 1,706  |   |
| Total assets acquired                 |   | 55,872 |   |
| Plus:  Liabilities assumed       |   |   |   |
| Accounts payable                      |   | 3,610  |   |
| Accrued expenses                      |   | 1,351  |   |
| Deferred income taxes                 |   | 11,155 |   |
| Debt                                  |   | 10,729 |   |
| Other                                 |   | 8,412  |   |
| Total liabilities assumed             |   | 35,257 |   |
| Unallocated purchase price (goodwill) |   | $      | 45,604 |   |

 

54

----

 

**On June 20, 2003, the Companyacquired a 100% interest in Kaemingk B.V. (“Kaemingk”), a designer and marketerof a wide range of premium seasonal decorations. Kaemingk’s product linesfeature Christmas décor, including ornaments, lighting, trim, glassware, candlesand plush animals, as well as spring and summer decorative accents**. The acquisition of Kaemingk aligns with the Company’s growth strategy,which includes selected acquisitions. The cash purchase price was approximately $36.2 million less cash acquiredof $7.7 million resulting in net cash paid of $28.5 million.   Approximately $30.6 million of the cashpurchase price was borrowed under the Company’s $200 million unsecuredrevolving credit facility.  The Companyalso assumed Kaemingk’s long-term debt of approximately $14.4 million.  The excess of the purchase price over theestimated fair value of the net assets acquired approximated $17.6 million,which will not be deductible for income tax purposes.  During the quarter ended October 31, 2003, an adjustment wasrecorded to reflect the final appraised value of the acquired property, plantand equipment.  In addition to the fixedpurchase price, there is contingent consideration payable in the form of athree-year earn out provision based on a pre-defined formula related to amultiple of earnings before interest and income taxes.  The results of operations of Kaemingk areincluded in the Consolidated Statements of Earnings of the Company since June21, 2003.  For segment reportingpurposes, Kaemingk is included in the Wholesale Home Fragrance segment.

** **

The following provides anallocation of the purchase price of Kaemingk (In thousands):

 
| Cash Purchase Price                   |   | $      | 36,237 |   |
|---------------------------------------|--------|--------|--------|--------|
| Less:  Assets acquired           |   |   |   |
| Cash and cash equivalents             |   | 7,681  |   |
| Accounts receivable                   |   | 2,106  |   |
| Inventories                           |   | 25,514 |   |
| Property, plant and equipment         |   | 14,647 |   |
| Other                                 |   | 606    |   |
| Total assets acquired                 |   | 50,554 |   |
| Plus:  Liabilities assumed       |   |   |   |
| Bank lines of credit                  |   | 9,335  |   |
| Accounts payable                      |   | 2,479  |   |
| Accrued expenses                      |   | 1,760  |   |
| Deferred income taxes                 |   | 2,786  |   |
| Debt                                  |   | 14,364 |   |
| Other                                 |   | 1,143  |   |
| Total liabilities assumed             |   | 31,867 |   |
| Unallocated purchase price (goodwill) |   | $      | 17,550 |   |

 

55

----

 

OnDecember 22, 2003, the Company acquired 100% of Walter Drake (“WD”), a directmarketer of value-priced household products including household gifts, gadgetsand convenience products, personalized merchandise, home décor and holidaycards under the Walter Drake and The Home Marketplace catalog titles, forapproximately $53.8 million.  The acquisition of WD aligns with theCompany’s growth strategy, which includes selected acquisitions.  The excess of the purchaseprice over the estimated fair value of the net assets acquired approximated$25.4 million, which will be deductible for income tax purposes.  The other intangibles acquired consist ofapproximately $12.0 million of trade names and trademarks, which are deemed tohave an indefinite life and will not be amortized, plus approximately $6.0million of customer lists, which will be amortized on an accelerated basis over10 years. Estimated amortization expense for the next 5 fiscal years is asfollows:  $0.9 million, $0.9 million,$0.9 million, $0.6 million and $0.6 million. The results of operations of WD are included in the ConsolidatedStatements of Earnings of the Company since December 23, 2003.  For segment reporting purposes, WD isincluded in the Catalog & Internet segment.

 

Thefollowing provides a preliminary allocation of the purchase price of WalterDrake (In thousands):

 
| Cash Purchase Price                   |   | $      | 53,809 |   |
|---------------------------------------|--------|--------|--------|--------|
| Less:  Assets acquired           |   |   |   |
| Accounts Receivable                   |   | 539    |   |
| Inventories                           |   | 6,010  |   |
| Prepaid and other                     |   | 5,743  |   |
| Property, plant and equipment         |   | 4,667  |   |
| Intangible assets                     |   | 18,000 |   |
| Total assests acquired                |   | 34,959 |   |
| Plus:  Liabilities assumed       |   |   |   |
| Cash overdraft                        |   | 580    |   |
| Accounts Payable                      |   | 3,442  |   |
| Accrued expenses                      |   | 2,382  |   |
| Other                                 |   | 189    |   |
| Total liabilities assumed             |   | 6,593  |   |
| Unallocated purchase price (goodwill) |   | $      | 25,443 |   |

 

56

----

 

The following unaudited pro forma summary financialinformation summarizes the estimated combined results of operations of theCompany and CBK, Miles Kimball, Kaemingk and Walter Drake assuming that theacquisitions of CBK, Miles Kimball, Kaemingk and Walter Drake had taken placeon February 1, 2002.  The unaudited proforma combined results of operations were prepared on the basis of informationprovided to the Company by the former management of CBK, Miles Kimball,Kaemingk and Walter Drake and no representation is made by the Company withrespect to the accuracy of such information. The pro forma combined results of operations reflect adjustments forinterest income, additional depreciation based on the fair market value ofCBK’s, Miles Kimball’s and Walter Drake’s property, plant and equipment,amortization of identifiable intangibles of Miles Kimball and Walter Drake andincome tax expense.

 
| **Year ended  January 31,****(In thousands except  per share data) (Unaudited)**          |   | **2003**               |      | **2004** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|-----------|----------|--------|
|                                                                                      |   | **Restated  (Note 2)** |      |     |   |
| Net sales                                                                                 |   | $                      | 1,583,759 |     | $      | 1,604,833 |   |
| Earnings before cumulative effect of change in accounting principle                       |   | 98,786                 |      | 83,932   |   |
| Net earnings                                                                              |   | 67,033                 |      | 83,932   |   |
| Basic:                                                                                    |   |                   |      |     |   |
| Earnings per common share before the cumulative effect of change in  accounting principle |   | $                      | 2.14      |     | $      | 1.83 |   |
| Net earnings per common share                                                             |   | 1.45                   |      | 1.83     |   |
| Diluted:                                                                                  |   |                   |      |     |   |
| Earnings per common share before the cumulative effect of change in  accounting principle |   | $                      | 2.12      |     | $      | 1.82 |   |
| Net earnings per common share                                                             |   | 1.44                   |      | 1.82     |   |

 

Theunaudited pro forma combined results of operations are not necessarilyindicative of, and do not purport to represent, what the Company’s results ofoperations or financial condition actually would have been had the acquisitionsbeen made as of February 1, 2002.

 

**Note 5.   Restructuringand Impairment Charges**

** **

The Company recordedrestructuring and impairment charges of $23.8 million pre-tax during fiscal2004 of which $23.0 was recorded in the fourth quarter and $0.8 million wasrecorded in the third quarter. These charges were primarily a result of ongoingefforts by the Company to rationalize and align its Wholesale Home Fragrancesegment operations with the changing marketplace and global supply chainrequirements.  The following summarizesthe components of these charges:

 

The Company recognizedpre-tax impairment losses of $8.4 million for long-lived assets disposed of and$2.3 million for long-lived assets to be held and used, during the fourthquarter of fiscal 2004 on certain equipment in the Company’s primary NorthAmerican manufacturing facilities. The Company anticipates cost savings in theform of reduced depreciation expense related to the assets disposed of somewhatoffset by increased depreciation due to reductions in remaining useful lives ofassets 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.

 

57

----

 

The Company also recordedan impairment charge of $4.2 million pre-tax related to the Canterbury® brandacquired in fiscal 1997.  Within itshome fragrance business, the Company acquired several consumer wholesale brandsover the past decade and is focusing its sales and marketing resources to fewerbrands.  In the fourth quarter of fiscal2004 the Company decided to discontinue the Canterbury® brand.

 

During the third andfourth quarters of fiscal 2004 the Company recorded asset impairments offacilities and equipment totaling $3.4 million pre-tax and severance paymentsto employees of $0.5 million pre-tax related to the closure of its Hyannis,manufacturing facility. In conjunction with the closing, the Company eliminated43 jobs, comprised of manufacturing and management positions. Thismanufacturing facility, which was the Company’s smallest, is located in a busydowntown area of Cape Cod, making transportation of raw materials and finishedproducts to and from the location challenging. Operations are beingconsolidated into Blyth’s manufacturing facility in Batavia, Illinois.

 

During the fourth quarter, theCompany recorded additional pre-tax charges of $5.0 million.  These charges consist of $2.1 millionrelated to severance costs primarily associated with the restructuring of BlythHomeScents International – North America and the consolidation of the Company’sTemecula, California potpourri operations, $0.9 million of lease terminationcosts associated with the closure of five of the Company’s candle outletstores, and $2.0 million of fixed asset write-downs primarily associated withthe aforementioned changes.   As aresult of these restructuring activities, the Company eliminated 40 jobs,comprised of administrative and management positions.

 

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

 

During the fourth quarterof fiscal 2003, the Company recorded an impairment charge of $2.6 millionpre-tax as a result of putting Wax Lyrical, our UK specialty retailer, intoadministrative receivership.  WaxLyrical had cash balances of approximately $3.3 million, which were required tobe turned over to the receiver.  WaxLyrical has been included in the consolidated financial statements of theCompany since fiscal 2001 during which time Wax Lyrical had annual revenues ofapproximately $16 - 18 million and incurred annual operating losses ofapproximately $2 - 3 million.

 

During the fourth quarterof fiscal 2002, the Company recorded restructuring and impairment charges ofapproximately $14.1 million pre-tax. The following summarizes the components of these charges:

 

TheCompany recorded a charge of approximately $7.3 million pre-tax related to theclosure of the Company’s 62nd Street Chicago facility effected to addressoverall manufacturing over-capacity. This charge includes asset impairments of facilities and equipmenttotaling $6.7 million and severance payments to employees of $0.6 million.

 

Chargesof $5.2 million pre-tax were recorded relating primarily to otherrationalization within Blyth’s North American consumer wholesale businesses andincluded severance payments following several changes in management of $2.0million, lease write-offs of $1.6 million and asset impairments of $1.6 million.

 

Theremainder of the fourth quarter charges of approximately $1.6 million wereassociated with the Company’s European activities, including an assetimpairment charge of $1.0 million on property held for sale at one of our GiesGroup units and redundancy payments made to employees and lease exit costs atour Colony Group in the UK.

 

Fiscal 2002 results alsoinclude $5.0 million in cost of sales charges in the fourth quarter, reflectingthe impact of marketplace conditions on the realizable value of obsoleteinventory.

 

In addition to the fourthquarter charges the Company recorded a $6.3 million pre-tax unusual charge tocost of sales in the second quarter of fiscal 2002 relating to the revaluationof US mass market inventory, due in large part to Wal-Mart’s change to aprivate label candle program.

 

58

----

 

The following is atabular rollforward of the restructuring charges described above that wererecorded on the balance sheet of the Company:

 
|                                                                                |   | **Lease**       |   | **Severence** |   |      |   |
|-------------------------------------------------------------------------------------|--------|-----------------|--------|---------------|--------|-----------|--------|
| **(In thousands)**                                                                  |   | **Obligations** |   | **Costs**     |   | **Total** |   |
| Balance at January 31, 2002                                                         |   | $               | 1,463  |          | $      | 1,753     |   | $ | 3,216 |   |
| Payments made against 2002 charges                                                  |   | (533            | )      | (1,753        | )      | (2,286    | )      |
| Reversal of over accrual to income of 2002 charges following  agreement of sublease |   | (525            | )      | —        |   | (525      | )      |
| Balance at January 31, 2003                                                         |   | 405             |   | —        |   | 405       |   |
| Payments made against 2003 charges                                                  |   | (405            | )      | —        |   | (405      | )      |
| Fiscal 2004 charges                                                                 |   | 967             |   | 2,615         |   | 3,582     |   |
| Payments made against 2004 charges                                                  |   | (62             | )      | (220          | )      | (282      | )      |
| Balance at January 31, 2004                                                         |   | $               | 905    |          | $      | 2,395     |   | $ | 3,300 |   |

 

**Note 6.   Assets Heldfor Sale**

** **

During the fourth quarter offiscal 2004, the Company decided to divest of one of its business units in theWholesale Creative Expressions segment through a sale to the business unit’ssenior management.  Therefore the assetsof this business unit are classified as assets held for sale in the Company’sConsolidated Balance Sheet as of January 31, 2004.  The assets held for sale related to this business divestiture arecomprised principally of accounts receivable of $3 million, inventory of $3million and property, plant and equipment of $2 million.  The operating results related to thisbusiness unit were immaterial to the consolidated operating results of theCompany.  On April 6, 2004 the Companysold the business to the unit’s management and associated investors for $10million in cash.

 

There is an additional $1million classified as assets held for sale in the Consolidated Balance Sheet asof January 31, 2004 related to the Hyannis, MA manufacturing facility asdiscussed in Note 5.

 

The amount classified as assetsheld for sale in the Consolidated Balance Sheet as of January 31, 2003 relatedto property located in Thomasville, GA, which was sold during fiscal 2004 at anamount approximately equal to the asset’s carrying value.

 

**Note 7.   Inventories**

** **

The major components ofinventories are as follows: 

 
| **January 31, (In thousands)** |   | **2003** |    | **2004** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Raw materials                  |   | $        | 33,950  |     | $      | 25,104 |   |
| Work in process                |   | 2,509    |    | 915      |   |
| Finished goods                 |   | 151,476  |    | 182,562  |   |
|                           |   | $        | 187,935 |     | $      | 208,581 |   |

 

**Note 8.   Prepaid and Other**

 

Prepaid and otherconsists of the following:

 
| **January 31, (In thousands)** |   | **2003** |   | **2004** |   |
|--------------------------------|--------|----------|--------|----------|--------|
| Taxes                          |   | $        | 8,508  |     | $      | 15,194 |   |
| Catalogs                       |   | 588      |   | 7,928    |   |
| Other                          |   | 13,948   |   | 17,180   |   |
|                           |   | $        | 23,044 |     | $      | 40,302 |   |

 

59

----

**Note 9.       AccruedExpenses**

 

Accrued expenses consistof the following:

 
| **January 31, (In thousands)**    |   | **2003** |   | **2004** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
| Compensation and certain benefits |   | $        | 23,124 |     | $      | 21,146 |   |
| Deferred revenue                  |   | 15,562   |   | 13,095   |   |
| Promotional expenses              |   | 19,903   |   | 23,307   |   |
| Taxes, other than income          |   | 9,953    |   | 10,019   |   |
| Interest payable                  |   | 3,539    |   | 13,207   |   |
| Restructuring charges             |   | 405      |   | 3,300    |   |
| Insurance payable                 |   | 964      |   | 2,921    |   |
| Other                             |   | 7,503    |   | 10,400   |   |
|                              |   | $        | 80,953 |     | $      | 97,395 |   |

 

**Note 10.       BankLines of Credit**

** **

Asof January 31, 2004, the Company had a total of $15.0 million available underan uncommitted bank line of credit with LaSalle Bank National Association,which matures in June 2004.  Amountsoutstanding under the line of credit bear interest at short-term fixedrates.  No amounts were outstandingunder the uncommitted line of credit at January 31, 2004.

 

AtJanuary 31, 2004, the Company had a total of $10.0 million available under anuncommitted line of credit with Bank of America to be used for letters ofcredit.  At January 31, 2004,approximately $0.1 million of letters of credit were outstanding under thiscredit line.

 

Asof December 31, 2003, The Gies Group (“Gies”) had available lines of credit ofapproximately $44.3 million of which approximately $3.3 million was outstanding.  The amounts outstanding under the lines ofcredit bear interest at a weighted average rate of 3.1% at December 31,2003.  The lines of credit are renewedannually.

 

ColonyGift Corporation Limited (“Colony”) has a $21.4 million short-term revolvingcredit facility with Barclays Bank, which matures in June 2004.  As of December 31, 2003, Colony hadborrowings under the credit facility of approximately $8.1 million, at aweighted average interest rate of 4.6%.

 

As of December 31, 2003,Kaemingk had available lines of credit of approximately $34.6 million maturingin November 2004.  The lines of creditare collateralized by certain real estate and equipment owned by Kaemingk.  At December 31, 2003, approximately $2.2million was outstanding at a weighted average interest rate of 2.75%.

 

60

----

 

**Note 11.      Long-Term Debt**

** **

Long-term debt consistsof the following:

 
| **January  31, (In thousands)** |   | **2003** |    | **2004** |   |
|---------------------------------|--------|----------|---------|----------|--------|
| 7.54% Senior Notes              |   | $        | 10,714  |     | $      | 7,143 |   |
| 7.90% Senior Notes              |   | 149,267  |    | 149,358  |   |
| 5.50% Senior Notes              |   | —   |    | 99,792   |   |
| Other                           |   | 9,135    |    | 23,972   |   |
|                            |   | 169,116  |    | 280,265  |   |
| Less current maturities         |   | (4,037   | )       | (4,522   | )      |
|                            |   | $        | 165,079 |     | $      | 275,743 |   |

 

In July 1995, the Companyprivately placed $25.0 million aggregate principal amount of 7.54% Senior Notesdue 2005.  As of January 31, 2004, $7.1million of principal remained outstanding. Such senior notes contain, among other provisions, requirements formaintaining certain financial ratios and net worth.  At January 31, 2004, the Company was in compliance with suchprovisions.  Payment on the notescommenced in June 1999 and annual installments of principal and interest arerequired to be paid through June 2005.

 

In May 1999, the Companyfiled a shelf registration statement for issuance of up to $250.0 million indebt securities with the Securities and Exchange Commission.  On September 24, 1999, the Company issued$150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount ofapproximately $1.4 million, which is being amortized over the life of thenotes.  Such notes contain, among otherprovisions, restrictions on liens on principal property or stock issued tocollateralize debt.  At January 31,2004, the Company was in compliance with such provisions.  Interest is payable semi-annually on April 1and October 1.  On October 20, 2003, theCompany issued $100.0 million, 5.50% Senior Notes due on November 1, 2013 at adiscount of approximately $0.2 million, which is being amortized over the lifeof the notes.  Such notes containprovisions and restrictions similar to those in the 7.90% Senior Notes.  At January 31, 2004, the Company was incompliance with such covenants. Interest on the notes will accrue from October 23, 2003 and will bepayable semiannually in arrears on May 1 and November 1 of each year,commencing May 1, 2004.  The notes maybe redeemed in whole or in part at any time at a specified redemptionprice.  The proceeds of the debtissuance will be used for general corporate purposes, which may includerepayment of certain debt.

 

The Company has a $200million unsecured revolving credit facility, which matures on August 5, 2005(the “Credit Facility”).  The Companyhas the ability to increase the Credit Facility, under certain circumstances,by an additional $50 million.  TheCredit Facility may be used for general corporate purposes, which includesfunding for strategic acquisitions and seasonal working capital needs.  The Credit Facility contains, among otherprovisions, requirements for maintaining certain financial ratios including,among others, a minimum level of net worth and a maximum level ofleverage.  The Credit Facility alsoimposes limitations on, among other things, certain payments, the imposition ofliens on our assets, indebtedness that may be incurred by our subsidiaries,investments we may make and sales of our assets.  At January 31, 2004, the Company was in compliance with suchcovenants.  Amounts outstanding underthe Credit Facility bear interest, at the Company’s option, at JPMorgan ChaseBank’s prime rate (4.0% at January 31, 2004) or at the Eurocurrency rate plus acredit spread ranging from 0.525% to 1.5%, calculated on the basis of acombination of the Company’s senior unsecured long-term debt rating and theCompany’s usage of the Credit Facility. On January 31, 2004, $3.2 million letters of credit were outstandingunder the Credit Facility.

 

AtJanuary 31, 2004, Miles Kimball had approximately $10.4 million of long-termdebt outstanding under a real estate mortgage note payable to John Hancock LifeInsurance Company, which matures June 1, 2020. Under the terms of the note,payments of principal and interest are required monthly at a fixed interestrate of 7.89%.

 

At December 31, 2003,Kaemingk had approximately $8.6 million of long-term debt outstanding under sixloans with ING Bank N.V. at a weighted average interest rate of 5.8%.  The bank loans have maturity dates rangingfrom 2005 through 2020.  The loans arecollateralized by certain real estate and equipment owned by Kaemingk.

 

 

61

----

 

At January 31, 2004, CBKhad $4.6 million of long-term debt outstanding under an Industrial Revenue Bond(“IRB”), which matures on January 1, 2025. The bond is backed by an irrevocable letter of credit issued by La SalleBank National Association.  The loan iscollateralized by certain of CBK’s assets. The amount outstanding under the IRB bears interest at short-term floatingrates, which equaled a weighted average interest rate of 1.2% at January 31,2004.

 

Maturities under debt obligations for the fiscal years ending January31 are as follows (Inthousands):

 
| 2005       |   | $       | 4,522   |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 4,468   |    |
| 2007       |   | 782     |    |
| 2008       |   | 806     |    |
| 2009       |   | 848     |    |
| Thereafter |   | 268,839 |    |
|       |   | $       | 280,265 |   |

 

Theestimated fair value of the Company’s $280.3 million and $169.1 million totallong-term debt (including current portion) at January 31, 2004 and 2003 wasapproximately $290.4 million and $191.6 million, respectively.  The fair value is determined by quotedmarket prices, where available, and from analyses performed by investmentbankers using current interest rates considering credit ratings and theremaining terms to maturity.

 

62

----

 

**Note 12.      Employee Benefit Plans**

** **

Substantially all employees of Miles Kimball are covered by the MilesKimball Company Retirement Plan (the Plan). This non-contributory, defined benefit retirement plan provides benefitsbased on years of service and employee compensation for specified periods.  When the Company acquired Miles Kimball onApril 1, 2003, a decision was made to cease the accrual of benefits for allPlan participants, except to the extent that a benefit accrual is required tocomply with Section 416 of the Internal Revenue Code.  The Plan was frozen effective May 31, 2003.  All vested benefits that have been accruedas of May 31, 2003 will continue to be held for participants under the terms ofthe Plan.

 

**The following provides areconciliation of the benefit obligation, plan assets and funded status of thePlan:**

 

(In thousands)

 
| **Benefit Obligation**                                                                                       |   |   |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Benefit Obligation - April 1, 2003                                                                           |   | $      | 15,167 |   |
| Interest cost                                                                                                |   | 604    |   |
| Actuarial loss                                                                                               |   | 147    |   |
| Benefits paid                                                                                                |   | (663   | )      |
| Benefit obligation - January 31, 2004                                                                        |   | $      | 15,255 |   |
|                                                                                                         |   |   |   |
| **Fair Value of Plan Assets**                                                                                |   |   |   |
| Assets - April 1, 2003                                                                                       |   | $      | 8,698  |   |
| Actual return on plan assets                                                                                 |   | 1,673  |   |
| Employer contributions                                                                                       |   | 800    |   |
| Benefits paid                                                                                                |   | (663   | )      |
| Fair value of plan assets - January 31, 2004                                                                 |   | $      | 10,508 |   |
|                                                                                                         |   |   |   |
| **Funded Status of Plan**                                                                                    |   |   |   |
| Projected benefit obligation in excess of plan assets                                                        |   | $      | 4,747  |   |
| Unrecognized actuarial gain                                                                                  |   | 973    |   |
| Accrued benefit  cost  recognized in the balance sheet                                                  |   | $      | 5,720  |   |
|                                                                                                         |   |   |   |
| Net periodic pension cost consisted of the following for the period  April 1, 2003 through January 31, 2004: |   |   |   |
|                                                                                                         |   |   |   |
| **Net Periodic Pension Cost**                                                                                |   |   |   |
| Interest cost                                                                                                |   | $      | 604    |   |
| Expected return on plan assets                                                                               |   | (553   | )      |
| Recognized net actuarial loss                                                                                |   | $      | 51     |   |

 

The following weighted average assumptions were used to determine thebenefit obligation and net periodic pension cost of the Plan:

 
| **Assumptions**                                  |   |   |   |
|--------------------------------------------------|--------|--------|--------|
| Discount rate                                    |   | 5.00   | %      |
| Rate of increase in compensation levels          |   | 2.50   | %      |
| Expected long-term rate of return on plan assets |   | 8.00   | %      |

 

**The Plan’s assets at January 31,2004 consist of 71.5% equity securities, 26.8% fixed income securities and 1.7%of cash equivalents.**

 

63

----

 

The Company has definedcontribution employee benefit plans in both the United States and certain ofits foreign locations, covering substantially all eligible non-unionemployees.  Contributions to all suchplans are principally at the Company’s discretion except for the Section 401(k)Company matching contributions, which became guaranteed effective April 1, 2002.  The Gies Group contributes to a Swedishgovernment-sponsored retirement system, which provides retirement benefits tocertain of its employees.  The Companyhas a supplemental pension benefit agreement with one of its key corporateexecutives.  Benefits pursuant to theagreement will be provided by a purchased annuity insurance policy.  Total expense related to all definedcontribution plans for the years ended January 31, 2002, 2003 and 2004 was $3.8million, $5.0 million and $6.0 million, respectively.

 

**Note 13.      Commitments and Contingencies**

 

The Company utilizesoperating leases for a portion of its facilities and equipment.  Generally, the leases provide that theCompany pay real estate taxes, maintenance, insurance and other occupancyexpenses applicable to leased premises. Certain leases provide for renewal for various periods at stipulatedrates.

 

The minimum future rental commitments under operating leases are asfollows (In thousands):

 
| **For the years ending January 31,** |   |   |   |
|--------------------------------------|--------|--------|--------|
| 2005                                 |   | $      | 18,421 |   |
| 2006                                 |   | 14,392 |   |
| 2007                                 |   | 11,427 |   |
| 2008                                 |   | 7,255  |   |
| 2009                                 |   | 4,287  |   |
| Thereafter                           |   | 9,830  |   |
| Total minimum payments  required     |   | $      | 65,612 |   |

 

Rent expense for theyears ended January 31, 2002, 2003 and 2004 was $21.6 million, $26.0 millionand $21.2 million, respectively.

 

The Company leasescertain office and warehouse space used in its businesses in the WholesaleCreative Expressions segment from related parties.  Under the terms of the leases, the Company is responsible for allreal estate taxes, maintenance and insurance costs.  The lease rates were determined based on market rates forcomparable property at the time of entering into the contract.  At January 31, 2004 the total future leasecommitments under the related party leases were approximately $3.2 million andthe leases expire on various dates through fiscal 2008.

 

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

 

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

 

The Company has enteredinto an employment agreement with its Chairman and CEO, Mr. Robert Goergen,dated as of August 1, 2000, as amended by Amendment No. 1 dated as of June 15,2002 and Amendment No. 2 dated as of March 31, 2004 (sometimes herein referredto as “agreement” or “employment agreement”). Pursuant to the employment agreement, upon the death of both Mr. Goergenand his spouse, the Company will, upon the demand of the estate of either Mr.Goergen or his spouse, buy back from such estate up to 7,500,000 shares ofCompany Common Stock within 90 days of such demand at the fair market valuethereof (as defined in the employment agreement) or register the public offerand sale by such estate of up to 7,500,000 shares of Company Common Stock.

 

64

----

 

In connection with theemployment agreement, the Company and Mr. Goergen entered into a registrationrights agreement relating to the registration of up to 7,500,000 shares ofCompany Common Stock as described above in the event that the Company choosesnot to purchase such shares upon the death of both Mr. Goergen and hisspouse.  There is no specified effectivedate or stock price requirement in the agreements.  The Company will not be obligated to purchase or register suchshares, notwithstanding the death of both Mr. Goergen and his spouse, if thesurvivor’s estate, or his or her beneficiaries, as the case may be, can thensell all of the shares of the Company Common Stock owned by them withoutregistration.

 

The Company engagedindependent consultants to perform a valuation to determine the fair value ofthe potential obligation under the share buy back provision in Mr. Goergen’semployment agreement.  The results of thevaluation indicated that the current value of the buy back provision wasdeminimus and therefore no liability has been recorded.

 

**Note 14.       401(k) and Profit Sharing Plan**

** **

During the third quarterof fiscal 2004, the Company became aware of an issue involving its 401(k) andprofit sharing plan.  This issue aroseeffective April 1, 2002 when the Company amended the plan to allow participantsto direct voluntary contributions to be invested in the Company’s common stock,and to permit other investments in the plan to be transferred into theCompany’s common stock.  Theseamendments may have caused the continued operation of the plan since April 1,2002 to be deemed to be an offering of securities that should have beenregistered under the Securities Act of 1933 (the “1933 Act”).  If interestsshould have been registered, the failure of the Company to register interestsin the plan may entitle participants to remedies under the 1933 Act, includingrescission or damages.  The Companyceased allowing participants to make new investments in Company common stockeffective October 17, 2003.  The Companyhas elected to adopt the so-called “restorative” approach with respect topersons who invested in the Plan on or after April 1, 2002 and on or beforeOctober 17, 2003, the last day on which participants in the Plan could makeinvestments in the Company Stock Fund. Under the restorative approach the Company will make additionalcontributions to the Plan accounts of 179 participants in the total amount ofapproximately $3,000.  In the case of alimited number of former participants, payments in the amount of contributionsthat were due to be made to such participants’ Plan accounts will be maileddirectly to such former participants.

 

**Note 15.       Guarantees**

** **

**From time to time, the Company isparty to agreements under which it may be obligated to indemnify a third partywith respect to certain matters. Typically, these obligations arise as a result of leases entered into bythe subsidiaries, under which Blyth agrees to indemnify a third party againstlosses arising from a breach of representations related to lease obligationsassumed.  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 Blyth to challenge the other party’sclaims.  In addition, Blyth’sobligations under these agreements may be limited in terms of time and amount.Historically, payments made by Blyth under these arrangements have not had amaterial effect on the business, financial condition or results ofoperations.  Blyth believes that if itwere to incur a loss in any of these matters, such loss would not have amaterial effect on the Company’s business, financial condition or results ofoperations.  The maximum potentialamount of future payments due under these lease arrangements, approximate $22.5million.  These amounts are included aspart of the Company’s consolidated lease commitments as reported in Note 13,Commitments and Contingencies.**

 

65

----

 

**Note 16.       IncomeTaxes**

** **

Earnings before provisionfor income taxes:

 
| **Year ended  January 31, (In thousands)** |   | **2002** |    | **2003** |   | **2004** |   |
|--------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| United States                              |   | $        | 90,609  |     | $      | 118,912  |   | $ | 79,809 |   |
| Foreign                                    |   | 17,680   |    | 23,645   |   | 57,084   |   |
|                                       |   | $        | 108,289 |     | $      | 142,557  |   | $ | 136,893 |   |

 

Incometax expense consists of the following:

 
| **Year ended January 31, (In thousands)** |   | **2002** |   | **2003** |   | **2004** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current  income tax expense:         |   |     |   |     |   |     |   |
| Federal                                   |   | $        | 33,475 |     | $      | 36,319   |   | $ | 28,943 |   |
| State                                     |   | 4,298    |   | 5,739    |   | 4,710    |   |
| Foreign                                   |   | 5,150    |   | 6,263    |   | 17,308   |   |
|                                      |   | 42,923   |   | 48,321   |   | 50,961   |   |
| Deferred income tax  expense (benefit):   |   |     |   |     |   |     |   |
| Federal                                   |   | (2,000   | )      | 4,390    |   | (565     | )      |
| State                                     |   | (300     | )      | 775      |   | (160     | )      |
| Foreign                                   |   | (340     | )      | (454     | )      | 141      |   |
|                                      |   | (2,640   | )      | 4,711    |   | (584     | )      |
|                                      |   | $        | 40,283 |     | $      | 53,032   |   | $ | 50,377 |   |

 

Significant components ofthe Company’s deferred tax assets and liabilities are as follows:

 
| **January  31, (In thousands)**                        |   | **2003** |   | **2004** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets:                                   |   |     |   |     |   |
| Accrued expenses and other                             |   | $        | 114    |     | $      | 410 |   |
| Allowance for doubtful  receivables                    |   | 1,967    |   | 1,473    |   |
| Employee benefit plans                                 |   | 1,173    |   | 1,052    |   |
| Inventory reserves                                     |   | 7,156    |   | 6,364    |   |
| Net operating loss and  other tax credit carryforwards |   | 5,782    |   | 5,756    |   |
| Restructuring reserves                                 |   | 2,592    |   | 3,871    |   |
| Valuation allowance                                    |   | (1,017   | )      | (2,673   | )      |
|                                                   |   | 17,767   |   | 16,253   |   |
| Deferred tax liabilities:                              |   |     |   |     |   |
| Depreciation and  amortization                         |   | (24,280  | )      | (35,835  | )      |
| Net deferred tax liability                             |   | $        | (6,513 | )        | $      | (19,582 | ) |

 

66

----

 

The valuation allowancerelates to certain non-US tax loss carryforwards, for which the Companybelieves, due to various limitations in these foreign jurisdictions, it is morelikely than not that such benefits will not be realized and to a US losscarryforward where the benefit is limited by the US tax regulations.  The increase in the valuation allowance fromthe prior year is due principally to the net operating loss received as part ofa recent US acquisition.  At January 31,2004, the Company has a $16.4 million net operating loss carryforward, whichconsists of approximately $7.9 million of federal net operating loss thatexpires on January 31, 2023 and foreign net operating losses of $8.5 million,which have an indefinite expiration.

 

As of January 31, 2004,undistributed earnings of foreign subsidiaries considered permanently investedfor which deferred income taxes have not been provided were approximately $68.9million.

 

Areconciliation of the provision for income taxes to the amount computed at thefederal statutory rate is as follows:

 
| **Year ended  January 31, (In thousands)**  |   | **2002** |   | **2003** |   | **2004** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Tax provision at statutory  rate            |   | $        | 37,901 |     | $      | 49,895   |   | $ | 47,913 |   |
| Tax effect of:                              |   |     |   |     |   |     |   |
| State income taxes, net of  federal benefit |   | 2,793    |   | 4,234    |   | 2,958    |   |
| Foreign rate differential                   |   | (1,378   | )      | (2,667   | )      | (2,530   | )      |
| Other, net                                  |   | 967      |   | 1,570    |   | 2,036    |   |
|                                        |   | $        | 40,283 |     | $      | 53,032   |   | $ | 50,377 |   |

 

**Note 17.       StockBased Compensation**

** **

At****January 31, 2004, the Company had threestock-based compensation plans, which are described below.

 

The Company’s Amended andRestated 1994 Employee Stock Option Plan (the “Employee Option Plan”), providesfor the grant to officers and employees of both “incentive stock options” andstock options that are non-qualified for Federal income tax purposes.  The total number of shares of common stockfor which options may be granted pursuant to the Employee Option Plan shall notexceed the sum of 2,880,000 shares plus an additional number of shares, whichwere to be added on February 1, 2001, and each anniversary thereof during theterm of Employee Option Plan, equal to the lesser of (x) 0.75% of the totaloutstanding shares of common stock of the Company on the applicable anniversarydate and (y) 600,000 shares up to a maximum of 5,280,000 shares.

 

The exercise price ofincentive stock options granted under the Employee Option Plan may not be lessthan 100% of the fair market value of the common stock at the time of grant,and the term of any option may not exceed 10 years.  Options generally become exercisable over a five-yearperiod.  With respect to any employeewho owns stock representing more than 10% of the voting power of theoutstanding capital stock of the Company, the exercise price of any incentivestock option may not be less than 110% of the fair market value of such sharesat the time of grant, and the term of such option may not exceed fiveyears.  On April 1, 2003, the Board ofDirectors of the Company unanimously approved an amendment to the Employee OptionPlan providing that no awards will be made under such plan after May 31, 2003.

 

The Company has alsoadopted the Amended and Restated 1994 Stock Option Plan for Non-EmployeeDirectors (the “Non-Employee Director Plan”). A total of 270,000 shares of common stock may be issued through the exerciseof options granted pursuant to the Non-Employee Director Plan.  No option may be granted under theNon-Employee Director Plan after May 31, 2003.

 

67

----

 

Options granted pursuantto the Non-Employee Director Plan become exercisable as follows: each InitialGrant vests over a two year period at the rate of 50% on each anniversary ofthe date of grant and each Annual Grant vests in full on the sooner of (x) thefirst anniversary of the date of the grant or (y) the date of the next AnnualMeeting of shareholders of Blyth.  OnApril 1, 2003, the Board of Directors of the Company unanimously approved anamendment to the Non-Employee Director Plan providing that no awards will bemade under such plan after May 31, 2003.

 

On April 1, 2003, the Board of Directors of the Company unanimouslyapproved 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 incentiveand nonqualified stock options, stock appreciation rights, restricted stock,performance shares, performance units, dividend equivalents and other stockunit awards to officers and employees. The 2003 Plan also provides for grants of nonqualified stock options todirectors of the Company who are not, and who have not been during theimmediately preceding 12-month period officers or employees of the Company orany of its subsidiaries.

 

Currently, eachnon-employee director who is elected to office for the first time is, upon suchdate, automatically granted an option to acquire 10,000 shares of common stock(“Initial Grant”).  Each non-employeedirector who is in office with at least six months of service receives, on thedate of the Annual Meeting of Shareholders of Blyth beginning in June 2003 andthereafter, an option to acquire 5,000 shares of common stock (“AnnualGrant”).  The price of shares that maybe purchased upon exercise of an option is the fair market value of the commonstock on the date of grant.

 

OnMarch 31, 2004, the Board of Directors of the Company unanimously approvedAmendment No. 1 to the 2003 Plan.  Ifthe stockholders approve Amendment No. 1 to the 2003 Plan at the Annual Meetingof Stockholders on June 24, 2004 (the “2004 Annual Meeting”), effective as ofsuch approval, non-employee directors will no longer receive formulaic optiongrants.  Instead, annual awards will bedetermined by the Company’s full Board of Directors, subject to an annual limitof awards of 5,000 shares of Common Stock or share equivalents for newnon-employee directors and 2,500 shares of Common Stock or share equivalentsfor continuing non-employee directors. At the 2004 Annual Meeting, if the stockholders approve Amendment No. 1to the Long-Term Incentive Plan, each non-employee director with at least sixmonths service will be granted 1,500 restricted stock units vesting in twoequal installments beginning on the first anniversary of the date of grantinstead of the Annual Grant.

 

Transactions involvingstock options are summarized as follows:

 
|                             |   | **Option  Shares** |   | **Weighted Average  Exercise Price** |   |
|----------------------------------|--------|--------------------|--------|--------------------------------------|--------|
| Outstanding at January 31,  2001 |   | 1,833,450          |   | $                                    | 23.72  |   |
| Options granted                  |   | 504,000            |   | 22.71                                |   |
| Options exercised                |   | (78,200            | )      | 7.49                                 |   |
| Options cancelled                |   | (349,199           | )      | 31.85                                |   |
| Outstanding at January 31,  2002 |   | 1,910,051          |   | 22.63                                |   |
| Options granted                  |   | 538,500            |   | 27.30                                |   |
| Options exercised                |   | (193,906           | )      | 17.38                                |   |
| Options cancelled                |   | (178,800           | )      | 25.05                                |   |
| Outstanding at January 31,  2003 |   | 2,075,845          |   | 24.87                                |   |
| Options granted                  |   | 388,000            |   | 26.31                                |   |
| Options exercised                |   | (253,820           | )      | 22.81                                |   |
| Options cancelled                |   | (130,700           | )      | 25.77                                |   |
| Outstanding at January 31,  2004 |   | 2,079,325          |   | $                                    | 25.34  |   |

 

At January 31, 2002, 2003and 2004, options to purchase 764,351, 806,677 and 920,724 shares,respectively, were exercisable.

 

68

----

 

Options outstanding andexercisable as of January 31, 2004, by price range:

 
|                         |   | **Outstanding** |   | **Exercisable**                                   |      |
|------------------------------|--------|-----------------|--------|---------------------------------------------------|-----------|
| **Range of  Exercise Price** |   | **Shares**      |   | **Weighted Average  Remaining  Contractual Life** |      | **Weighted Average  Exercise Price** |   | **Shares** |   | **Weighted Average  Exercise Price** |   |
| $                            | 3.60   | -               | 14.40  |                                              | 68,500    |   | 0.84 |   | $ | 8.56 |   | 68,500 |   | $ | 8.56 |   |
|                         | 14.40  | -               | 25.20  |                                              | 657,800   |   | 6.09 |   | 22.93 |   | 326,800 |   | 23.02 |   |
|                         | 25.20  | -               | 36.00  |                                              | 1,353,025 |   | 6.95 |   | 27.30 |   | 525,424 |   | 28.34 |   |
|                         |   | 2,079,325       |   |                                              |      |   |   | 920,724 |   |   |   |
|                              |        |                 |        |                                                   |           |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average fairvalue of options granted during the years ended January 31, 2002, 2003 and 2004was  $10.53, $11.29 and $9.68,respectively.

 

Certainmembers of the Company’s management have been granted phantom stockappreciation rights (“SARs”). These SARs vest in equal installments as of theend of each fiscal year and are subject to a term as specified in eachindividual agreement.  Upon exercise ofthe SARs, the participant is entitled to receive a payout amount as defined inthe agreement.  At the expiration of theterm, any outstanding portion of vested SARs is deemed to be exercised, and theparticipant is entitled to a payout. The Company’s Consolidated Balance Sheets reflect a liability for theseSARs in the amount of $0.5 million and $0.2 million at January 31, 2004 and2003, respectively.

 

**Note 18.       SegmentInformation**

** **

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

 

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

 

69

----

** **

Within the Wholesale Home Fragrance segment, the Companydesigns, manufactures and markets an extensive line of products includingscented candles, potpourri and other fragranced products.  It also designs and markets a wide range ofrelated candle accessories.  Inaddition, within its Kaemingk business unit, the Company designs and marketsseasonal decorations to independent and specialty retailers.  Products in this segment are sold worldwideto retailers in the premium and specialty wholesale channels under the Ambria®,Carolina®, ColonialTM(1), Colonial Candle of Cape Cod®, Colonial at HOMEâ,Gies®(1), Kaemingk®(1), Kate’sTM and Liljeholmens® brands andin the mass retail channel under the Ambria®, FilterMate®, Florasense® andGies®(1) brands.

 

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

 

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

 

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

 

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

 

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.

 

----

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

 

70

----

 

**Operating Segment Information**

 
| **Year ended January 31, (In  thousands)**                                   |   | **2002**              |      | **2003**              |   | **2004**  |   |
|------------------------------------------------------------------------------|--------|-----------------------|-----------|-----------------------|--------|-----------|--------|
|                                                                         |   | **Restated (Note 2)** |      | **Restated (Note 2)** |   |      |   |
| **Net Sales**                                                                |   |                  |      |                  |   |      |   |
| Direct  Selling                                                         |   | $                     | 666,036   |                  | $      | 717,442   |   | $ | 764,527 |   |
| Wholesale Home Fragrance                                                     |   | 322,310               |      | 310,171               |   | 373,527   |   |
| Wholesale  Creative  Expressions                                        |   | 135,968               |      | 203,980               |   | 203,906   |   |
| Catalog & Internet                                                       |   | —                |      | —                |   | 110,728   |   |
| All Other                                                                    |   | 54,457                |      | 56,990                |   | 52,885    |   |
| **Total**                                                                    |   | $                     | 1,178,771 |                  | $      | 1,288,583 |   | $ | 1,505,573 |   |
|                                                                         |   |                  |      |                  |   |      |   |
| **Earnings**                                                                 |   |                  |      |                  |   |      |   |
| Direct Selling (1), (3)                                                      |   | $                     | 139,147   |                  | $      | 149,657   |   | $ | 142,296 |   |
| Wholesale Home Fragrance (1),(2),(3)                                         |   | (35,093               | )         | (24,851               | )      | (10,702   | )      |
| Wholesale Creative Expressions (1), (3)                                      |   | 15,674                |      | 25,995                |   | 17,179    |   |
| Catalog & Internet                                                       |   | —                |      | —                |   | 5,199     |   |
| All Other (1)                                                                |   | 762                   |      | 4,716                 |   | (895      | )      |
|                                                                         |   | 120,490               |      | 155,517               |   | 153,077   |   |
| Other income (expense)                                                       |   | (12,201               | )         | (12,960               | )      | (16,184   | )      |
| **Earnings  before income taxes and cumulative effect of accounting change** |   | $                     | 108,289   |                  | $      | 142,557   |   | $ | 136,893 |   |
|                                                                         |   |                  |      |                  |   |      |   |
| **Identifiable Assets**                                                      |   |                  |      |                  |   |      |   |
| Direct  Selling                                                         |   | $                     | 222,794   |                  | $      | 246,607   |   | $ | 273,900 |   |
| Wholesale Home Fragrance                                                     |   | 298,788               |      | 238,829               |   | 299,882   |   |
| Wholesale  Creative  Expressions                                        |   | 97,584                |      | 174,827               |   | 165,699   |   |
| Catalog & Internet                                                       |   | —                |      | —                |   | 160,380   |   |
| All Other                                                                    |   | 69,435                |      | 61,816                |   | 60,552    |   |
| Unallocated  Corporate                                                  |   | 116,180               |      | 138,005               |   | 167,550   |   |
| **Total**                                                                    |   | $                     | 804,781   |                  | $      | 860,084   |   | $ | 1,127,963 |   |
|                                                                         |   |                  |      |                  |   |      |   |
| **Capital Expenditures**                                                     |   |                  |      |                  |   |      |   |
| Direct  Selling                                                         |   | $                     | 6,016     |                  | $      | 5,321     |   | $ | 5,333 |   |
| Wholesale Home Fragrance                                                     |   | 1,758                 |      | 4,694                 |   | 7,492     |   |
| Wholesale  Creative  Expressions                                        |   | 940                   |      | 2,140                 |   | 5,987     |   |
| Catalog & Internet                                                       |   | —                |      | —                |   | 1,399     |   |
| All Other                                                                    |   | 1,087                 |      | 575                   |   | 618       |   |
| Unallocated Corporate                                                        |   | 2,100                 |      | 1,592                 |   | 1,134     |   |
| **Total**                                                                    |   | $                     | 11,901    |                  | $      | 14,322    |   | $ | 21,963 |   |
|                                                                         |   |                  |      |                  |   |      |   |
| **Depreciation and Amortization**                                            |   |                  |      |                  |   |      |   |
| Direct  Selling                                                         |   | $                     | 12,260    |                  | $      | 12,386    |   | $ | 12,174 |   |
| Wholesale Home Fragrance                                                     |   | 16,035                |      | 12,888                |   | 15,488    |   |
| Wholesale  Creative  Expressions                                        |   | 3,738                 |      | 2,165                 |   | 2,617     |   |
| Catalog & Internet                                                       |   | —                |      | —                |   | 2,858     |   |
| All Other                                                                    |   | 2,968                 |      | 1,820                 |   | 1,785     |   |
| Unallocated Corporate                                                        |   | 1,245                 |      | 953                   |   | 1,032     |   |
| **Total**                                                                    |   | $                     | 36,246    |                  | $      | 30,212    |   | $ | 35,954 |   |
|                                                                         |   |                  |      |                  |   |      |   |
| **GEOGRAPHIC INFORMATION**                                                   |   |                  |      |                  |   |      |   |
| **Net Sales**                                                                |   |                  |      |                  |   |      |   |
| United States                                                                |   | $                     | 866,916   |                  | $      | 943,009   |   | $ | 1,026,275 |   |
| Germany                                                                      |   | 115,967               |      | 134,983               |   | 177,443   |   |
| Other International                                                          |   | 195,888               |      | 210,591               |   | 301,855   |   |
| **Total**                                                                    |   | $                     | 1,178,771 |                  | $      | 1,288,583 |   | $ | 1,505,573 |   |
|                                                                         |   |                  |      |                  |   |      |   |
| **Long Lived Assets**                                                        |   |                  |      |                  |   |      |   |
| United States                                                                |   | $                     | 258,127   |                  | $      | 288,617   |   | $ | 391,517 |   |
| International                                                                |   | 72,426                |      | 77,498                |   | 118,183   |   |
| **Total**                                                                    |   | $                     | 330,553   |                  | $      | 366,115   |   | $ | 509,700 |   |

 

----

*(1)*       2002 Wholesale HomeFragrance segment includes restructuring and impairment charges ofapproximately $12.6 million and inventory revaluation charges of $11.3 million.Direct Selling segment includes restructuring and impairment charges of $0.8million.  Wholesale Creative Expressionssegment includes restructuring and impairment charges of $0.4 million and theAll Other segment includes restructuring and impairment charges of $0.3million.  (See Note 5 to the ConsolidatedFinancial Statements).

*(2)*       2003 Wholesale HomeFragrance segment includes an impairment charge of approximately $2.6 millionas a result of placing Wax Lyrical into administrative receivership (See Note 5to the Consolidated Financial Statements).

*(3)*       2004 earnings include $23.8million of restructuring and impairment charges of which $16.7 million relatesto the Wholesale Home Fragrance segment, $6.7 million relates to the DirectSelling segment and $0.4 million relates to the Wholesale Creative Expressionssegment (See Note 5 to the Consolidated Financial Statements).

 

71

----

 

**Note 19.       StockRepurchase Plan**

** **

The Company’s Board ofDirectors has authorized the Company to repurchase up to 6,000,000 shares ofcommon stock under the share repurchase program.  The Company repurchases shares to offset grants of restrictedstock and shares issued upon exercise of stock options and to decrease sharesoutstanding.  During fiscal2004, a total of 701,000 shares were repurchased for a total cost of approximately$18.8 million.  As of January 31, 2004,the Company had cumulatively purchased on the open market 4,345,100 commonshares for a total cost of approximately $105.4 million.  The acquired shares are held as common stockin treasury at cost.

 

**Note 20.      Earnings Per Share**

** **

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

 
| **Year ended  January 31, (In thousands)**                 |   | **2002**              |   | **2003** |   | **2004** |   |
|------------------------------------------------------------|--------|-----------------------|--------|----------|--------|----------|--------|
|                                                       |   | **Restated (Note 2)** |   |
| Net earnings                                               |   | $                     | 68,006 |     | $      | 57,772   |   | $ | 86,351 |   |
| Weighted average number of  common shares outstanding:     |   |                  |   |     |   |     |   |
| Basic                                                      |   | 47,056                |   | 46,256   |   | 45,771   |   |
| Dilutive effective of  stock options and restricted shares |   | 149                   |   | 259      |   | 256      |   |
| Weighted average number of  common shares outstanding:     |   |                  |   |     |   |     |   |
| Diluted                                                    |   | 47,205                |   | 46,515   |   | 46,027   |   |
|                                                            |        |                       |        |          |        |          |        |  |  |  |

 

As of January 31, 2002,2003 and 2004, options to purchase 236,529, 37,395 and 31,954 shares of commonstock, respectively, are not included in the computation of diluted earningsper share because the effect would be antidilutive.

 

**Note 21.       FireLoss**

** **

In July 2003, theCompany’s manufacturing facility located in Monterrey, Mexico was destroyed byfire.  Products manufactured at thisleased facility were primarily for the North American mass market.  Customer service disruptions were minimal asother Company facilities and third party suppliers met the productionrequirements and are expected to meet production requirements for theforeseeable future.  The Company hasdecided not to rebuild the Monterrey facility. The loss of fixed assets and inventory totaled approximately $8.0million.  The Company incurredadditional costs of $1.9 million through January 31, 2004, primarily for theadditional production costs of manufacturing product at differentfacilities.   Some of these costs remainin ending inventory at January 31, 2004. The Company is insured for losses related to this fire and has received$7.6 million in insurance proceeds as of February 6, 2004.

 

72

----

 

**Note 22.       SelectedQuarterly Financial Data**(Unaudited)

** **

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

 
|                                                    |   | **2003  Quarter Ended**                    |    |
|---------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                    |   | **(In  thousands, except per share data)** |    |
|                                                    |   | **As  Previously  Reported  April 30**     |    | **As  Restated****(2)****April 30** |   | **July 31** |   | **October 31** |   | **January 31** |   |
| Net sales                                               |   | $                                          | 277,896 |   | $ | 277,896 |   | $ | 268,021 |   | $ | 362,181 |   | $ | 380,485 |   |
| Gross profit                                            |   | 145,008                                    |    | 145,008 |   | 137,332 |   | 172,487 |   | 185,475 |   |
| Earnings before cumulative effect of  accounting change |   | 17,304                                     |    | 17,304 |   | 18,806 |   | 30,474 |   | 22,941 |   |
| Cumulative effect of accounting change                  |   | (4,515                                     | )       | (31,753 | ) | — |   | — |   | — |   |
| Net earnings                                            |   | $                                          | 12,789  |   | $ | (14,449 | ) | $ | 18,806 |   | $ | 30,474 |   | $ | 22,941 |   |
| Basic earnings per share: (1), (3)                      |   |                                       |    |   |   |   |   |   |   |   |   |
| Before  cumulative effect of accounting change          |   | $                                          | 0.37    |   | $ | 0.37 |   | $ | 0.41 |   | $ | 0.66 |   | $ | 0.50 |   |
| Cumulative effect of accounting change                  |   | (0.10                                      | )       | (0.69 | ) | — |   | — |   | — |   |
|                                                    |   | $                                          | 0.28    |   | $ | (0.32 | ) | $ | 0.41 |   | $ | 0.66 |   | $ | 0.50 |   |
| Diluted earnings per share: (1), (3)                    |   |                                       |    |   |   |   |   |   |   |   |   |
| Before  cumulative effect of accounting change          |   | $                                          | 0.37    |   | $ | 0.37 |   | $ | 0.40 |   | $ | 0.65 |   | $ | 0.50 |   |
| Cumulative effect of accounting change                  |   | (0.10                                      | )       | (0.68 | ) | — |   | — |   | — |   |
|                                                    |   | $                                          | 0.28    |   | $ | (0.31 | ) | $ | 0.40 |   | $ | 0.65 |   | $ | 0.50 |   |

 
|                                                       |   | **2004  Quarter Ended**                    |    |
|------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                       |   | **(In thousands, except per share  data)** |    |
|                                                       |   | **April 30**                               |    | **July 31** |   | **October 31** |   | **January 31** |   |
| Net sales                                                  |   | $                                          | 311,991 |   | $ | 275,268 |   | $ | 431,901 |   | $ | 486,413 |   |
| Gross profit                                               |   | 161,396                                    |    | 134,552 |   | 196,938 |   | 230,789 |   |
| Net earnings                                               |   | 19,627                                     |    | 11,246 |   | 34,774 |   | 20,704 |   |
| Net earnings  per common and common  equivalent share: (1) |   |                                       |    |   |   |   |   |   |   |
| Basic                                                      |   | $                                          | 0.43    |   | $ | 0.25 |   | $ | 0.76 |   | $ | 0.45 |   |
| Diluted                                                    |   | 0.42                                       |    | 0.24 |   | 0.76 |   | 0.45 |   |

 

----

*(1)**      **The sum of per share amountsfor the quarters does not necessarily equal that reported for the year becausethe computations are made independently.*

*(2)**      **The Company has restated itsfiscal 2003 financial statements  toincrease the cumulative effect of accounting change for the adoption of SFAS142, “Goodwill and Other Intangible Assets.” See Note 2 to the ConsolidatedFinancial Statements.*

*(3)**      **Net earnings per shareamounts for the three months ended April 30, 2002 do not foot due to rounding.*

 

73

----

 

**Item9****.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

(a) Previous independentaccountants

 

OnMarch 16, 2004, the Board of Directors of the Company, acting upon therecommendation of the Audit Committee, dismissed PricewaterhouseCoopers LLP(“PwC”) as the independent accountants of the Company, effective as ofApril 26, 2004, the date of its report on the financial statements of theCompany as of January 31, 2004 and for the year then ended, whichfinancial statements are included in this Annual Report on Form 10-K.

 

PwC’sreports on the financial statements of the Company for the fiscal years endedJanuary 31, 2003 and 2004 did not contain any adverse opinion ordisclaimer of opinion and were not qualified or modified as to uncertainty,audit scope or accounting principle.

 

Inconnection with its audits of the financial statements of the Company for thetwo most recent fiscal years ended January 31, 2004, and throughApril 30, 2004, there were no disagreements with PwC on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure, which disagreements, if not resolved to PwC’s satisfaction,would have caused PwC to make reference thereto in their reports on theCompany’s financial statements for such fiscal years, except as follows:  In connection with its audit of the financialstatements of the Company as of January 31, 2004 and for the year thenended, PwC advised the Company in early April, 2004, that it believed that theCompany’s then current designation of two reporting segments did not complywith the requirements of Statement of Financial Accounting Standards No. 131(“Disclosures about Segments of an Enterprise and Related Information”), aposition with which the Company did not agree. The Audit Committee has discussed the subject of the designation ofoperating segments with PwC.  TheCompany has authorized PwC to respond fully to the inquiries of Deloitte &Touche LLP, the Company’s independent accountants for the fiscal year endingJanuary 31, 2005, concerning this disagreement.

 

Inresponse to PwC’s advice that it believed that the Company’s designation of tworeporting segments did not comply with the requirements of SFAS 131, theCompany reevaluated its reporting segments as at the end of each of its fiscalyears ended January 31, 2004, 2003 and 2002.  As a result of such reevaluation, the Company determined toreport its financial results in five reporting segments in fiscal 2004, andfour reporting segments in fiscal 2003 and fiscal 2002.  This revision of segments had the relatedeffect of requiring changes in the Company’s reporting units for purposes ofgoodwill impairment reviews under Statement of Financial Accounting StandardsNo. 142 (“Goodwill and Other Intangible Assets”), retroactive to theFebruary 1, 2002 adoption date of SFAS 142.  This resulted in the need to perform impairment reviews ofseveral additional reporting units as of February 1, 2002, and eachsubsequent year-end balance sheet date thereafter.  These impairment reviews have indicated the need to recordadditional impairment charges as of the February 1, 2002 adoption of SFAS142, specifically to write off $20.9 million in goodwill associated with the1999 acquisition of the Gies Group and $6.3

 

74

----

 

million in goodwill associated with the 1999acquisition of the Colony Group.  Bothof these businesses are components of the Wholesale Home Fragrance reportingsegment.  The Company’s fiscal 2003financial statements have been restated to reflect the recording of these $27.2million in goodwill impairment charges as part of the cumulative effect ofadopting SFAS 142 as of February 1, 2002.

 

Duringeach of the two years in the period ended January 31, 2004, and throughApril 30, 2004, there were no reportable events (as defined in RegulationS-K Item 304(a)(1)(v)), except for the following event:  On April 21, 2004, PwC advised theCompany that it had identified an internal control issue which PwC consideredto be a material weakness in that changes in circumstances, internal reportingand management structures appeared not to have been properly evaluated bymanagement or considered in connection with ongoing compliance with SFAS 131and SFAS 142 guidance.  PwC recommendedthat the Company should (A) have a process in place to evaluate changes inmanagement structure and reporting to the chief operating decision maker thatwould effect segment determination, (B) strengthen procedures to monitor allchanges in operations that impact accounting and reporting matters and (C)ensure that it has sufficient staffing in its financial reporting function,with appropriate technical qualifications and tasked with ensuring ongoingcompliance with relevant accounting and financial reporting requirements.

 

(b) New independentaccountants

 

On March 16, 2004, the Board ofDirectors of the Company, acting upon the recommendation of the AuditCommittee, appointed Deloitte & Touche LLP as the independent accountantsof the Company for the fiscal year ending January 31, 2005.

 

**Item 9A. Controls and Procedures**

 

(a)Evaluation of disclosure controls and procedures.

 

TheCompany’s management, with the participation of its principal executive officerand its principal financial officer, evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Securities Exchange Act of1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the periodcovered by this report as required by paragraph (b) of Exchange Act Rules13a-15 or 15d-15.  Based upon thisevaluation, the Company’s principal executive officer and its principalfinancial officer have concluded that our disclosure controls and proceduresare effective as of the end of the period covered by this report.  Nonetheless, in light of PwC’s advice to theCompany that it has identified an internal control issue which PwC considers tobe a material weakness, as described in Item 9(a) above, the Company, and itsprincipal executive officer and its principal financial officer, recognize thatthe Company may need to make improvements in its internal controls,particularly insofar as they relate to ongoing compliance with SFAS 131 andSFAS 142 guidance, having in mind the recommendations that have been made byPwC, as described in Item 9(a) above. However, the Company and its principal executive officer and itsprincipal financial officer have not yet determined what action, if any, theCompany should take in response to PwC’s recommendations.

 

75

----

 

(b)Changes in internal control over financial reporting.

 

Therewas no change in the Company’s internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 that occurred during the fourth fiscalquarter of fiscal year 2004 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART III**

 

**Item10.  Directors and Executive Officers ofthe Registrant**

**Item 11.  Executive Compensation**

**Item12.  Security Ownership of CertainBeneficial Owners and Management**

**Item13.  Certain Relationships and RelatedTransactions**

**Item14.  Principal Accountant Fees andServices**

 

The information required byItems 10 through 14 is incorporated herein by reference to the Company’sDefinitive Proxy Statement to be filed with the Commission within 120 daysafter January 31, 2004.

 

#### ***PART IV***

 

**Item 15.****  Exhibits, Financial Statement Schedules andReports on Form 8-K**

 

(a)(1).*  Financial Statements*

 

The following consolidatedfinancial statements are contained on the indicated pages of this report:

 
|   |                                                             | **Page No.** |
|--------|------------------------------------------------------------------|--------------|
|   | Report  of Independent Auditors                                  | 38           |
|   |                                                             |         |
|   | Statements:                                                      |         |
|   |                                                             |         |
|   | Consolidated  Balance Sheets (Restated)                          | 39           |
|   | Consolidated  Statements of Earnings (Restated)                  | 40           |
|   | Consolidated  Statements of Stockholders’ Equity (Restated) | 41           |
|   | Consolidated  Statements of Cash Flows (Restated)                | 42           |
|   | Notes  to Consolidated Financial Statements (Restated)           | 43           |

 

(a)(2).*  FinancialStatement Schedules*

 

The following financialstatement schedules are contained on the indicated pages of this report:

 
|   |                            | **Page No.** |
|--------|---------------------------------|--------------|
|   | Report  of Independent Auditors | S-1          |

 

76

----

 
|   | Valuation and Qualifying Accounts | S-2 |
|--------|-----------------------------------|-----|

 

All other schedules are omittedbecause they are inapplicable or the requested information is shown in theconsolidated financial statements or related notes.

 

(a)(3).*  Exhibits*

 
| **Exhibit No.** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1*            |   | Restated Certificate of Incorporation of  the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2*            |   | Restated By-laws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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            |   | Note  Purchase Agreement, dated July 7, 1995 (the “Note Purchase Agreements”),  relating to the 7.54% Senior Notes due June 30, 2005, among Candle  Corporation Worldwide, Inc., Candle Corporation of America, and PartyLite  Gifts, Inc., as Issuers, the Registrant, as guarantor, and the Purchasers  named therein (incorporated by reference to Exhibit 10.2 to the Registrant’s  Quarterly Report on Form 10-Q for the fiscal quarter ended July 31,  1995) |
| 10.1(a)         |   | Fourth  Amendment, dated as of October 17, 1997, to Note Purchase Agreements  (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly  Report on Form 10-Q for the fiscal quarter ended October 31, 1997)                                                                                                                                                                                                                                                        |
| 10.1(b)         |   | Assumption Agreement,  dated as of October 17, 1997, of Note Purchase Agreements, among Candle  Corporation Worldwide, Inc., Candle Corporation of America, and PartyLite  Gifts, Inc., as assignors, and the Registrant, as assignee (incorporated by  reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the fiscal quarter ended October 31, 1997)                                                                                               |
| 10.1(c)         |   | Guaranty Agreement, dated as of  October 17, 1997, by Candle Corporation Worldwide, Inc. (incorporated by  reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q  for the fiscal quarter ended October 31, 1997)                                                                                                                                                                                                                                            |
| 10.1(d)         |   | Form of 7.54% Senior Notes due  June 30, 2005 (incorporated by reference to Exhibit 10.5 to the  Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended  October 31, 1997)                                                                                                                                                                                                                                                                                       |

 

77

----

 
| 10.1(e) |   | Fifth Amendment, dated as of May 17, 1999,  to Note Purchase Agreements (incorporated by reference to Exhibit 10.2(e) to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  January 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2*   |   | Standard Form Industrial Lease dated  April 22, 1993, between Carol Point Builders I General Partnership and  PartyLite Gifts, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2(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)                                                                                                                                                                                                                                                                                                                                          |
| 10.2(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 10.4(a) to the Registrant’s Annual Report on Form 10-K for the fiscal  year ended January 31, 1996) (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)                                                                                                                                                                                     |
| 10.2(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 10.4(a) to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended January 31, 1996)  (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) |
| 10.3    |   | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.3(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)                                                                                                                                                                                                                                                                        |

 

78

----

 
| 10.4*+     |   | Form of Indemnity Agreement between the  Registrant and each of its directors                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5+      |   | 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)                                                                                                                                                                                                                                                                                       |
| 10.6+      |   | 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)                                                                                                                                                                                                                  |
| 10.6(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)                                                                                                                                                                     |
| 10.6(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                                                                                                                                                                                                                                                                                                                         |
| 10.7+      |   | Registration Rights Agreement dated as of  August 1, 2000 by and between the Registrant and Robert B. Goergen  (incorporated by reference to Exhibit A to the Employment Agreement filed as  Exhibit 10.10 to Registrant’s Annual Report on Form 10-K for the fiscal year  ended January 31, 2001)                                                                                                                                                                         |
| 10.7(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                                                                                                                                                                                                                                                                                                                |
| 10.8+      |   | Credit Agreement, dated as of  August 5, 2002, among the Registrant, the Banks listed therein, JPMorgan  Chase Bank, as Administrative Agent, Bank of America, N.A. and LaSalle Bank,  National Association, as Co-Syndication Agents and Fleet National Bank and  Wachovia Bank, National Association, as Co-Documentation Agents (incorporated  by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended January 31, 2003) |
| 10.9+      |   | Amended and Restated 1994 Employee Stock  Option Plan of the Registrant (incorporated by reference to Exhibit 4.1 to  the Registrant’s Report on Form 8-K filed April 17, 2000)                                                                                                                                                                                                                                                                                                 |
| 10.9(a)+** |   | Amendment No. 1 to the Amended and Restated  1994 Employee Stock Option Plan of the Registrant                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10+     |   | 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)                                                                                                                                                                                          |
| 10.11+     |   | 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)                                                                                                                                                                                      |

 

79

----

 
| 10.12+      |   | 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 Report on Form 8-K filed April 19, 2002) |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12(a)+** |   | Amendment No. 1 to the Amended and Restated  1994 Stock Option Plan for Non-Employee Directors of the Registrant                                                                                            |
| 10.13*+     |   | Form of Stock Option Agreement under the  1994 Stock Option Plan for Non-Employee Directors of the Registrant                                                                                               |
| 10.14+      |   | 2003 Long-Term Incentive Plan of the  Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s  Report on Form 8-K/A filed April 17, 2003)                                       |
| 10.14(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 Report on Form 8-K filed April 27, 2004)                  |
| 16.**       |   | Letter re Change in Certifying Accountant                                                                                                                                                                   |
| 21.**       |   | List of Subsidiaries                                                                                                                                                                                        |
| 23.**       |   | Consent of PricewaterhouseCoopers LLP,  independent accountants                                                                                                                                             |
| 24.1**      |   | Power of Attorney                                                                                                                                                                                           |
| 24.2**      |   | Certified Resolutions of the Board of  Directors of the Registrant                                                                                                                                          |
| 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                                                                                |

 

----

*             Included as anexhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-77458)and incorporated herein by reference.

**                        Filedherewith.

+             Management contractor compensatory plan required to be filed by Item 15(c) of this report.

 

(b)*  Reports on Form 8-K*

 

The following reports on Form8-K were filed or furnished during the fourth quarter of the fiscal year ended January 31,2004:

 

Current Report on Form 8-K,furnished November 12, 2003, attaching the Company’s presentation at theWall Street Analyst Forum; management reiteration of full year earnings pershare guidance of in excess of $2.10 press release.

 

Current Report on Form 8-K,furnished December 5, 2003, attaching third quarter sales and earningspress release.

 

Current Report on Form 8-K, filed January 15, 2004 regarding thetemporary suspension of trading under the Company’s employee benefit plans.

 

Current Report on Form 8-K,furnished January 30, 2004, attaching estimates of fourth quarter and fullyear earnings per share; acquisition of Walter Drake press releases.

 

80

----

 

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
| Date:  April 30, 2004 | BLYTH, INC.                                 |
|---------------------------------|---------------------------------------------|
|                            |                                        |
|                            |                                        |
|                            | By:                                         | /s/ Robert B. Goergen |   |
|                            | Name: Robert B. Goergen                     |
|                            | Title: Chairman and Chief Executive Officer |

 

81

----

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**          |   | **Title**                                     |   | **Date**            |
|------------------------|--------|-----------------------------------------------|--------|---------------------|
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Robert B. Goergen  |   | Chairman and Chief Executive Officer;         |   | April 30, 2004 |
| Robert B.  Goergen     |   | Director (Principal Executive Officer)        |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Robert H. Barghaus |   | Vice President and Chief Financial Officer    |   | April 30, 2004 |
| Robert H.  Barghaus    |   | (Principal Financial and Accounting  Officer) |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Roger A. Anderson  |   | Director                                      |   | April 30, 2004 |
| Roger A.  Anderson     |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ John W. Burkhart   |   | Director                                      |   | April 30, 2004 |
| John W.  Burkhart      |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Pamela M. Goergen  |   | Director                                      |   | April 30, 2004 |
| Pamela M.  Goergen     |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Neal I. Goldman    |   | Director                                      |   | April 30, 2004 |
| Neal I.  Goldman       |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Philip Greer       |   | Director                                      |   | April 30, 2004 |
| Philip Greer           |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Carol J. Hochman   |   | Director                                      |   | April 30, 2004 |
| Carol J.  Hochman      |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Wilma H. Jordan    |   | Director                                      |   | April 30, 2004 |
| Wilma H.  Jordan       |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ John E. Preschlack |   | Director                                      |   | April 30, 2003 |
| John E.  Preschlack    |   |                                          |   |                |
|                   |   |                                          |   |                |
|                   |   |                                          |   |                |
| /s/ Howard E. Rose     |   | Director                                      |   | April 30, 2004 |
| Howard E.  Rose        |   |                                          |   |                |

 

82

----

 

**Report of Indep****endentAuditors onFinancial Statement Schedule**

 

To the Board of Directors andStockholders of Blyth, Inc.:

 

Our audits of the consolidated financial statements referred to in ourreport dated April 26, 2004, appearing in the 2004 Annual Report toStockholders of Blyth, Inc. and Subsidiaries on Form 10-K, also included anaudit of the financial statement schedule listed in Item 15(a)(2) of thisForm 10-K.  In our opinion, thisfinancial statement schedule presents fairly, in all material respects,the information set forth therein when read in conjunction with the relatedconsolidated financial statements.

 

 
|                   | /s/  PricewaterhouseCoopers LLP |   |
|------------------------|---------------------------------|--------|
|                   | PRICEWATERHOUSECOOPERS  LLP     |
|                   |
|                   |
| Stamford,  Connecticut |
| April 26, 2004    |

 

S-1

----

 

**BLYTH, INC. AND SUBSIDIARIESSCHEDULE II – VALUATION AND QUALIFYING ACCOUNTSFor the years ended January 31, 2002, 2003 and 2004(In thousands)**

 
| **Description**                  |   | **Balance atBeginning  of Period** |   | **Acquired  Balances** |   | **Charged toCosts and  Expenses** |   | **Deductions** |   | **Balance atEnd of  Period** |   |
|----------------------------------|--------|------------------------------------|--------|------------------------|--------|-----------------------------------|--------|----------------|--------|------------------------------|--------|
|                             |   |                               |   |                   |   |                              |   |           |   |                         |   |
| **2002**                         |   |                               |   |                   |   |                              |   |           |   |                         |   |
|                             |   |                               |   |                   |   |                              |   |           |   |                         |   |
| Allowance  for doubtful accounts |   | $                                  | 2,120  |                   | $      | 1,835                             |   | $              | 2,705  |                         | $      | (3,856 | ) | $ | 2,804 |   |
| Income tax  valuation allowance  |   | 1,730                              |   | 111                    |   | —                            |   | —         |   | 1,841                        |   |
| Inventory  reserve               |   | 9,701                              |   | 2,290                  |   | 21,312                            |   | (12,801        | )      | 20,502                       |   |
|                             |   |                               |   |                   |   |                              |   |           |   |                         |   |
| **2003**                         |   |                               |   |                   |   |                              |   |           |   |                         |   |
|                             |   |                               |   |                   |   |                              |   |           |   |                         |   |
| Allowance  for doubtful accounts |   | $                                  | 2,804  |                   | $      | 255                               |   | $              | 3,853  |                         | $      | (2,819 | ) | $ | 4,093 |   |
| Income tax  valuation allowance  |   | 1,841                              |   | —                 |   | 500                               |   | (1,324         | )      | 1,017                        |   |
| Inventory  reserve               |   | 20,502                             |   | 400                    |   | 22,709                            |   | (16,466        | )      | 27,145                       |   |
|                             |   |                               |   |                   |   |                              |   |           |   |                         |   |
| **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                       |   |

 

S-2

----

----