** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

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|                                | **(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, 2005** |
|                                |            |   |
| **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 Registrantas 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 registeredpursuant 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 registeredpursuant to Section 12(g) of the Act: **None**

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes   ý       No   o

 

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

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of theAct).    Yes ý No o

 

The aggregate market value of thevoting stock held by non-affiliates of the registrant was approximately $932million based on the closing price of the registrant’s Common Stock on the NewYork Stock Exchange on July 31, 2004 and based on the assumption, forpurposes of this computation only, that all of the registrant’s directors andexecutive officers are affiliates.

 

As ofApril 8, 2005, there were 40,923,411 outstanding shares of Common Stock,$0.02 par value.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the 2005 Proxy Statement for the AnnualMeeting of Shareholders to be held on June 8, 2005 (Incorporated intoPart III).

 

 

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**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                                                                           | 17 |
|              |                                                                                                            |   |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     | 18 |
|              |                                                                                                            |   |
| Item 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                                     | 34 |
|              |                                                                                                            |   |
| Item  8.          | Financial  Statements and Supplementary Data                                                                    | 36 |
|              |                                                                                                            |   |
| Item 9.           | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                           | 71 |
|              |                                                                                                            |   |
| Item 9A.          | Controls  and Procedures                                                                                        | 72 |
|              |                                                                                                            |   |
| Item 9B.          | Other  Information                                                                                              | 74 |
|              |                                                                                                            |   |
| **PART III** |                                                                                                            |
|              |                                                                                                            |   |
| Item 10.          | Directors  and Executive Officers of the Registrant                                                             | 74 |
|              |                                                                                                            |   |
| Item 11.          | Executive  Compensation                                                                                         | 74 |
|              |                                                                                                            |   |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                | 74 |
|              |                                                                                                            |   |
| Item 13.          | Certain  Relationships and Related Transactions                                                                 | 74 |
|              |                                                                                                            |   |
| Item 14.          | Principal  Accountant Fees and Services                                                                         | 74 |
|              |                                                                                                            |   |
| **PART IV**  |                                                                                                            |
| ** **        | ** **                                                                                                      | ** ** |
| Item 15.          | Exhibits  and Financial Statement Schedules                                                                     | 75 |

 

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**Part I**

 

**Item 1.****Business**

 

**(a)****          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 Home Expressions company competing primarily in thehome fragrance and decorative accessories industry.  The Company designs, markets and distributesan extensive array of candles, potpourri, decorative accessories, seasonaldecorations and household convenience items, as well as tabletop lighting,accessories and chafing fuel for the Away From Home or foodservice trade.  The Company’s sales and operations take placeprimarily in the United States, Canada and Europe, with additional activity inMexico, Australia and the Far East.

 

Blyth became a publiclytraded company in 1994, at which time net sales were approximately $157.5million.  Internal growth andacquisitions have contributed to significant overall growth since thattime.  Internal growth has been generatedby (a) increased sales of existing Home Expressions products to consumersand retailers, (b) the introduction of new products and product lineextensions and (c) geographic expansion. The Company has also integrated numerous acquisitions into itsoperations since its formation in 1977.

 

Additional information isavailable on our website, www.blyth.com. The Company’s annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and any amendments theretofiled or furnished pursuant to the Securities Exchange Act of 1934 areavailable on our website free of charge as soon as reasonably practicablefollowing submission to the SEC.  Alsoavailable on the Company’s website are its Corporate Governance Guidelines, itsCode of Conduct, and the charters for its Audit Committee, CompensationCommittee and Nominating and Corporate Governance Committee, each of which isavailable in print to any shareholder who makes a request to Blyth, Inc.,One East Weaver Street, Greenwich, CT 06831; Attention Bruce D. Kreiger,Secretary.  The information posted towww.blyth.com, however, is not incorporated herein by reference and is not a partof this Annual Report on Form 10-K.

 

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

 

The Company reports itsfinancial results in three business segments: the Direct Selling segment, theWholesale segment, and the Catalog & Internet segment.  These segments accounted for approximately46%, 41% and 12% of consolidated net sales, respectively, for the fiscal yearended January 31, 2005.*  Financialinformation relating to these business segments for the years endedJanuary 31, 2005, 2004 and 2003 appears in Note 18 of the Company’sconsolidated financial statements and is incorporated herein by reference.

 

# **DirectSelling Segment**

 

In fiscal year 2005, thissegment represented approximately 46% of

 

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

 

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Blyth’s total sales.  Products sold globally in the Direct Sellingsegment are marketed through a network of independent sales consultants usingthe party plan method of direct selling. Products designed, manufactured or sourced, marketed and distributedwithin this segment include fragranced and non-fragranced candles, bathproducts and a broad range of related accessories.  These products are sold in North America,Europe and Australia under the PartyLiteâbrand name.

 

# **United States Market**

# ** **

Within the United Statesmarket, PartyLiteâ brand products aresold directly to consumers through a network of independent salesconsultants.  These consultants arecompensated on the basis of PartyLite product sales at parties organized bythem and parties organized by consultants recruited by them.  Over 32,000 independent sales consultantslocated in the U.S. were selling PartyLite products in the U.S. at fiscal 2005year-end.  Our products are designed,packaged and priced in accordance with their premium quality, exclusivity andthe distribution channel through which they are sold.

 

In fiscal year 2005, theCompany introduced a party plan company called Purple Tree, which is focused onthe crafting industry.  In the future,the Company may pursue other direct selling business opportunities.

 

# **International Market**

# ** **

# **In fiscal year 2005, productswere sold internationally in this segment directly to consumers by more than19,000 independent sales consultants located outside the U.S.  These consultants were the exclusivedistributors of PartyLite**â brand products internationally. The following werePartyLite’s international markets during fiscal year 2005: Australia, Austria,Canada, Finland, France, Germany, Mexico, Switzerland and the United Kingdom.

# ** **

We support ourindependent sales consultants with inventory management and control and satisfydelivery requirements through on-line ordering, which is available to allindependent sales consultants in the United States and Canada, as well as inmost of Europe.

 

# **WholesaleSegment**

# ** **

In fiscal year 2005, thissegment represented approximately 41% of Blyth’s total sales. Productsdesigned, manufactured or sourced, marketed and distributed within this segmentinclude candles and other home fragrance products, a broad range ofcandle-related accessories, seasonal decorations such as ornaments, artificialtrees and trim, and home décor products such as picture frames, lamps andtextiles.  In addition, chafing fuel andtabletop lighting products and accessories for the Away From Home orfoodservice trade are sold in this segment. Our wholesale products are sold to more than 40,000 retailers inmultiple channels of distribution in North America and Europe under brand namesthat include Ambriaâ, Asp-Holmbladâ(1),Carolinaâ, CBKâ, ColonialTM(1),Colonial Candle of Cape Codâ, Colonial at HOMEâ,Edelmanâ, Euro-Decorâ,Florasenseâ, Giesâ(1), HandyFuelâ,ImpactTM, KaemingkTM(2), Liljeholmensâ, Seasons of CannonFallsâ, Sternoâ and Triumph Treeâ(1).  Our wholesale products are designed, packagedand priced to satisfy the varying demands of retailers and

 

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consumers within eachdistribution channel.

 

# **United States Market**

# ** **

Products sold in theWholesale segment in the United States are marketed through the premium andmass consumer wholesale channels.  Withinthese channels, our wholesale products are sold to independent gift shops,specialty chains, department stores, food and drug outlets, mass retailers,hotels, restaurants and independent foodservice distributors throughindependent sales representatives, Company key account managers and Companysales managers.  Our sales force supportsthe Company’s customers with product catalogs and samples, merchandisingprograms and selective fixtures.  Oursales force also receives training on the marketing and proper use of ourproducts.

 

# **International Market**

# ** **

# **Products sold internationally inthe Wholesale segment are marketed to retailers in the premium and massconsumer wholesale channels, as well as to hotels, restaurants and independentfoodservice distributors through independent sales representatives and Companysales managers.  Customers includeEuropean mass merchants, garden centers, department and gift stores andfoodservice distributors.**

# ** **

Blyth’s internationalwholesale operations also include exports of products from the United Statesand various European countries to Canada, Europe, Latin America and the PacificRim.  Exported products are sold throughCompany sales managers and independent sales representatives to premium andmass retailers, hotels, restaurants and independent foodservicedistributors.  The Company may expand itsinternational presence through the establishment of additional non-U.S. basedmarketing and distribution operations.

 

The Company believes thatcompeting in multiple 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 thesechannels is enhanced by its ability to respond quickly to changes in consumerpreferences and new product trends. Moreover, the Company effectively supports customers with inventorymanagement and control and satisfies delivery requirements through variousmanagement ordering systems. The Company’s independent sales representativesand sales managers in the premium wholesale channel are supported by advancedsales tools to support showroom, road and telephone sales efforts.

 

**Recent Acquisitions**

** **

In September 2004,Blyth acquired Edelman B.V., a designer and marketer of everyday home, gardenand seasonal décor, and Euro-Decor B.V., a designer and marketer of traditionaland contemporary gift and florist products. Edelman designs and sources more than 12,000 products including indoorand outdoor planters, candle accessories, tabletop items and a broad range ofChristmas products, such as lighting, ornaments, collectibles and artificialtrees.  Edelman sells to more than 4,800active customers across Europe through showrooms, European trade shows, salesmanagers and independent sales agents. Euro-Decor’s product lines feature

 

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decorative supplies forthe florist industry, glass and ceramic vases, baskets, floral arrangements, tablecenterpieces, wall decorations and plush animals.  Euro-Decor designs and sources more than10,000 products for over 1,200 active customers.  Similar to Edelman, Euro-Decor markets itsproducts through showrooms, European trade shows, independent sales agents anddistributors.  The customer base of theseacquisitions are similar to those of our other Wholesale businesses.

 

**Catalog &Internet Segment**

 

In fiscal year 2005, thissegment represented approximately 12% of Blyth’s total sales.  Blyth designs, markets and distributes a widerange of household convenience items, personalized gifts and photo storageproducts within this segment.  Theseproducts are sold through the catalog and Internet distribution channel underbrand names that include Exposuresâ,Miles Kimballâ, Walter Drakeâ,The Home Marketplaceâ and Directions...thepath to better healthâ.

 

In fiscal year 2005, wecompleted the consolidation of the operations of Walter Drake into those ofMiles Kimball.  The seasonality of theMiles Kimball business is complemented by the relatively less seasonal sellingpattern of Walter Drake, thereby enhancing distribution center capacityutilization throughout the year.

 

# **ProductBrand Names**

 

The key brand names underwhich our Direct Selling segment products are sold are:

 

PartyLiteâ

Lavish by PartyLiteä

 

The key brand names underwhich our Wholesale segment products are sold are:

 

Ambriaâ

Asp-Holmblad®(1)

Carolinaâ

CBKâ

Colonialä(1)

Colonial Candle of CapeCodâ

Colonial at HOMEâ

Edelmanâ

Euro-Decorâ

Florasenseâ

Giesâ(1)

HandyFuelâ

ImpactTM

Kaemingkä(2)

Liljeholmensâ

Seasons of Cannon Fallsâ

Sternoâ

Triumph Treeâ(1)

 

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

 

Exposuresâ

Miles Kimballâ

The Home Marketplaceâ

Walter Drakeâ

Directions...the path tobetter healthâ

 

# **NewProduct Development**

 

Concepts for new productsand product line extensions are directed to the marketing departments of ourbusiness units from within all areas of the Company, as well as from theCompany’s independent sales representatives and worldwide product manufacturingpartners.  The new product developmentprocess may

 

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include technicalresearch, consumer market research, fragrance studies, comparative analyses,the formulation of engineering specifications, feasibility studies, safetyassessments, testing and evaluation.  Newproducts typically account for at least 35%****ofour net sales in the first full year following their introduction.

 

# **Manufacturing,Sourcing and Distribution**

 

In all of the Company’sbusiness segments, management continuously works to increase value and lowercosts through increased efficiency in worldwide production, sourcing anddistribution practices, the application of new technologies and process controlsystems, and consolidation and rationalization of equipment andfacilities.  Capital expenditures overthe past five years have totaled $94.4 million and are targeted totechnological advancements or capital investments with short payback timeframes.  Management has also closedseveral facilities and written down the values of certain machinery andequipment in recent years in response to changing market conditions.

 

Blyth manufactures mostof its candles and sources nearly all of its other products.  In fiscal year 2005, Blyth sourcedapproximately 70% of its products from independent manufacturers in the PacificRim, Europe and Mexico.  Blythmanufactures approximately 30% of its products using highly automated processesand technologies, as well as certain hand crafting and finishing.  Many of the Company’s products aremanufactured by others based on Blyth’s design specifications, making theCompany’s global supply chain approach critically important to its new productdevelopment process, quality control and cost management.  Management has also built a network ofstand-alone highly automated distribution facilities in its core markets.

 

# **TechnologicalAdvancements**

 

The Company continues tosee the benefit of its substantial investment in technological initiatives,particularly Internet-based ordering technology.  An Internet-based order-entry and businessmanagement system is available to all PartyLite independent sales consultantsin the United States, Canada and most of Europe.  By fiscal 2005 year-end, show orders placedvia the PartyLite Extranet had increased to over 85% of total show orders inthe United States and over 90% of total show orders in Canada.  The system became available to additionalPartyLite consultants in Europe throughout fiscal year 2005, and an average ofapproximately 40% of European 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.  The improvedaccuracy of the automated system also results in administrative savings for theCompany.

 

In fiscal year 2005, Blyth’s consumer wholesale business in NorthAmerica introduced two new technological advancements.  The first technological

 

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advancement is a newbusiness intelligence technology platform to support information gathering anddata warehousing for sales and inventory and capture point-of-sale informationat the retail store level for Blyth HomeScents International – NorthAmerica.  This new technical capabilityenables BHI-NA to respond more quickly to retailers’ changing sales andinventory needs, track off-the-shelf product movement, and forecast productdemand.  The second technological advancementis an Internet-based sales force automation initiative used by salesrepresentatives of CBK Styles to expedite the order-writing process and improveaccuracy while eliminating the need to key in orders manually and reducing thechance for errors.  As a result, ordersare processed faster and sales representatives are able to focus on thecustomers’ needs and the products available to satisfy them.  This automation also provides customers withmore accurate and up-to-date pricing information, product availability and thestatus of their order. In addition to improved order fulfillment, the systemallows for improved customer marketing and re-ordering.  These new technological advancements,together with our multiple modes and forms of electronic data interchange(EDI), enable Blyth to respond quickly and accurately to the business needs ofour retail customers.

 

# **Customers**

 

Customers in the DirectSelling segment are individual consumers served by independent salesconsultants.  Sales within theCatalog & Internet segment are also made directly to consumers.  Blyth’s Wholesale segment customers includeindependent gift and department stores, garden centers, mass merchandisers,specialty chains, food and drug stores, foodservice distributors, hotels and restaurants.  No single customer accounts for 10% or moreof Blyth’s sales.

 

# **Competition**

 

All of the Company’sbusiness segments are very competitive. Principal competitive factors are new product introductions, price,product quality, delivery time and customer service.  The domestic and international markets arevery fragmented and served by numerous suppliers in each of our businesssegments.  Additional information aboutways in which the Company’s business may be affected by increased competitionappears below under the heading “Risk of Increased Competition.”

 

# **Employees**

 

As of January 31,2005, the Company had approximately 4,900 full-time employees, of whomapproximately 35% are based outside of the United States.  Approximately 2,950 of the 4,900 employeesare non-salaried.  Blyth does not haveany unionized employees in the United States. Approximately 50 employees are represented by the IG Chemie labor unionin the Company’s German facility and have a General Agreement in place with notermination period.  A Wages Agreement isin place for a period of one year from July 2004 until June 2005 andcurrently may be terminated by either party at the end of that period.  Approximately 40 employees are represented bythe Chemical Union in the Company’s manufacturing and distribution facilitylocated in Promol, Portugal.  The unioncontract is negotiated annually at the

 

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beginning of each yearand upon one year’s prior notice may be terminated by either side.  Liljeholmens has approximately 70 employeesrepresented by the Industrifacket union, a manufacturing union, and the SIKunion, a management union.  Both unionagreements each have a three-year term (April 2004–March 2007).  Management believes that relations with theCompany’s employees are good.  Since itsformation in 1977, Blyth has never experienced a work stoppage.

 

# **RawMaterials**

 

All of the raw materialsused by Blyth for its candles, home fragrance products and chafing fuel,principally petroleum-based wax, fragrance, glass containers and corrugate,have historically been available in adequate supply from multiple sources.  In fiscal year 2005, substantial costincreases for certain chemicals such as dyethelene glycol (DEG) and ethanol, aswell as aluminum, negatively impacted profitability of certain products in theWholesale business segment.  Additionalinformation about ways in which Blyth’s business may be affected by shortagesof raw materials appears below under the heading “Risk of Shortages of RawMaterials.”

 

# **Trademarksand Patents**

 

The Company owns and haspending numerous trademark and patent registrations and applications in theUnited States Patent and Trademark Office related to its products.  Blyth also registers certain trademarks andpatents in other countries.  Whilemanagement regards these trademarks and patents as valuable assets to itsbusiness, the Company is not dependent on any single trademark or patent orgroup thereof.

 

# **EnvironmentalLaw Compliance**

 

Most of the Company’s manufacturing,distribution and research operations are affected by federal, state, local andinternational environmental laws relating to the discharge of materials orotherwise to the protection of the environment. Management has made and intends to continue to make expendituresnecessary to comply with applicable environmental laws and does not believethat such expenditures will have a material effect on the Company’s capitalexpenditures, earnings or competitive position.

 

# **CautionaryFactors That May Affect Future Results**

# ** **

*Thedisclosure and analysis in this report and in Blyth’s 2005 Annual Report toShareholders contain forward-looking statements that describe the Company’scurrent expectations or forecasts of future events.  One can usually identify these statements bythe fact that they do 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*

 

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*writtenforward-looking statements in other public materials.*

 

*Any orall of the forward-looking statements in this report, in our 2005 Annual Reportto Shareholders and in any other public statements made by management may turnout to 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 beguaranteed, and actual results may vary materially from the Company’sprojections.*

 

*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 reportson Form 10-K to the SEC.  TheCompany also provides below the following cautionary discussion of risks,uncertainties and potentially inaccurate assumptions relevant to itsbusiness.  These and other factors couldcause actual results to differ materially from expected and historical resultsand are provided as permitted by the Private Securities Litigation Reform Actof 1995.*

 

**•     Risk ofInability to Maintain Growth Rate**

 

The Company hasexperienced significant sales growth in past years.  While management expects continued growth,Blyth’s future growth rate will likely be less than its historical growth rate.  The Company expects faster sales growth in itsinternational market versus its United States market.  The Company’s ability to increase salesdepends on numerous factors, including market acceptance of existing products,the successful introduction of new products, growth of consumer discretionary spending,the ability to recruit new independent sales consultants, sourcing of rawmaterials and demand-driven increases in production and distributioncapacity.  Business in all of Blyth’ssegments is driven by consumer preferences. Accordingly, there can be no assurances that the Company’s current orfuture products will maintain or achieve market acceptance.  Blyth’s sales and earnings results can benegatively impacted by the worldwide economic environment, particularly theUnited States, Canadian and European economies. There can be no assurances that the Company’s financial results will notbe materially adversely affected by these factors in the future.

 

The Company’s historicalgrowth has been due in part to acquisitions, and management continues toconsider additional strategic acquisitions. There can be no assurances that management will continue to identifysuitable acquisition candidates, consummate acquisitions on terms favorable tothe Company, finance acquisitions or successfully integrate acquiredoperations.

 

# **•    **Risks Associated With InternationalSales and Foreign-Sourced Products

 

Blyth’s internationalsales growth rate has outpaced that of its United States growth rate in recentyears.  Moreover,

 

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

 

# **•    **Ability to Respond to IncreasedProduct Demand

# ** **

The Company’s ability tomeet future product demand in all of its business segments will depend upon itssuccess in (1) sourcing adequate supplies of its products,(2) bringing new production and distribution capacity on line in a timelymanner, (3) improving its ability to forecast product demand and fulfillcustomer orders promptly, (4) improving customer service-orientedmanagement information systems and (5) training, motivating and managingnew employees.  The failure of any of theabove could result in a material adverse effect on Blyth’s financial results.

 

# **•    **Risk of Shortages of Raw Materials

 

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

 

# **•    **Dependence on Key CorporateManagement Personnel

# ** **

Blyth’s success dependsin part on the contributions of key corporate management, including itsChairman and Chief Executive Officer, Robert B. Goergen, as well as the membersof the Office of the Chairman: Robert H. Barghaus, Vice President and ChiefFinancial Officer; Bruce G. Crain, Senior Vice President and President,Wholesale Group; Robert B. Goergen, Jr., Vice President and President,Catalog & Internet Group; and Frank P. Mineo, Senior Vice Presidentand President, Direct Selling Group.  TheCompany does not have employment contracts with any of its key corporatemanagement personnel except the Chairman and Chief Executive Officer, nor doesit maintain any key person life insurance policies.  The loss of any of the key corporatemanagement personnel could have a material adverse effect on the Company.

 

**•     Risk ofIncreased Competition**

 

As noted above under theheading “Competition,” Blyth’s business is highly competitive both in terms ofpricing and new product introductions. The worldwide market for Home Expressions products is highly

 

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fragmented with numeroussuppliers serving one or more of the distribution channels served by theCompany.  In addition, the Companycompetes for direct selling consultants with other direct sellingcompanies.  Because there are relativelylow barriers to entry in all of Blyth’s business segments, the Company may faceincreased competition from other companies, some of which may havesubstantially 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 Related toInformation Technology Systems

# ** **

Blyth’s informationtechnology systems are dependent on global communications providers, telephonesystems, hardware, software and other aspects of Internet infrastructure thathave experienced significant system failures and outages in the past.  Blyth’s systems are susceptible to outagesdue to fire, floods, power loss, telecommunications failures, break-ins andsimilar events.  Despite theimplementation of network security measures, the Company’s systems arevulnerable to computer viruses, break-ins and similar disruptions fromunauthorized tampering with Company systems. The occurrence of these or other events could disrupt or damage Blyth’sinformation technology systems and inhibit internal operations, the ability toprovide customer service or the ability of customers or sales personnel toaccess the Company’s information systems.

 

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

(2) Sold outside the United States only.

 

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**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                     |   | 227,552                     |       | 324,522 |   |
| Almere-De Vaart,  Netherlands  |       | Distribution                                       |       | Wholesale                     |   | 122,760                     |       |   |   |
| Arndell Park,  Australia       |       | Distribution                                       |       | Direct Selling                |   |                        |       | 18,535 |   |
| Batavia,  Illinois             |       | Manufacturing  and Research & Development |       | Direct Selling  and Wholesale |   | 486,000                     |       |   |   |
| Caldas da  Rainha, Portugal    |       | Manufacturing  and related distribution            |       | Wholesale                     |   | 230,000                     |       |   |   |
| Cannon Falls,  Minnesota       |       | Distribution                                       |       | Wholesale                     |   |                        |       | 192,000 |   |
| Carol Stream,  Illinois        |       | Distribution                                       |       | Direct Selling                |   |                        |       | 651,000 |   |
| Clara City,  Minnesota         |       | Distribution                                       |       | Wholesale                     |   |                        |       | 213,000 |   |
| Colorado  Springs, Colorado(1) |       | Manufacturing  and related distribution            |       | Catalog &  Internet  |   | 211,200                     |       |   |   |
| Cumbria,  England(2)           |       | Manufacturing  and related distribution            |       | Direct Selling  and Wholesale |   | 223,000                     |       | 70,000 |   |
| Elkin, North  Carolina         |       | Manufacturing  and related distribution            |       | Wholesale                     |   | 690,000                     |       |   |   |
| Glinde, Germany                |       | Manufacturing  and related distribution            |       | Wholesale                     |   | 172,000                     |       |   |   |
| Heidelberg,  Germany           |       | Distribution                                       |       | Direct Selling                |   |                        |       | 17,000 |   |
| Memphis,  Tennessee            |       | Distribution                                       |       | Wholesale                     |   |                        |       | 414,960 |   |
| Monterrey,  Mexico             |       | Distribution                                       |       | Direct Selling                |   |                        |       | 45,000 |   |
| Ontario, Canada                |       | Distribution                                       |       | Direct Selling                |   |                        |       | 25,000 |   |
| Oshkosh,  Wisconsin            |       | Distribution                                       |       | Catalog &  Internet  |   |                        |       | 375,000 |   |
| Oskarshamm,  Sweden            |       | Manufacturing  and related distribution            |       | Wholesale                     |   |                        |       | 122,000 |   |
| Plymouth,  Massachusetts       |       | Distribution                                       |       | Direct Selling                |   | 59,000                      |       |   |   |
| Reeuwijk,  Netherlands(3)      |       | Distribution                                       |       | Wholesale                     |   | 6,750                       |       |   |   |
| Roseville,  Michigan           |       | Warehouse and  distribution                        |       | Direct Selling                |   |                        |       | 9,000 |   |
| Tampa, Florida                 |       | Warehouse and  distribution                        |       | Direct Selling                |   |                        |       | 12,000 |   |
| Texarkana, Texas               |       | Manufacturing  and related distribution            |       | Wholesale                     |   | 154,000                     |       | 65,000 |   |
| Tilburg,  Netherlands          |       | Distribution                                       |       | Direct Selling                |   | 327,000                     |       |   |   |
| Tijuana, Mexico                |       | Manufacturing                                      |       | Wholesale                     |   |                        |       | 150,355 |   |
| Union City,  Tennessee         |       | Distribution                                       |       | Wholesale                     |   | 360,000                     |       | 89,300 |   |
| Woerden, Netherlands(3)        |       | Distribution                                       |       | Wholesale                     |   |                        |       | 15,500 |   |

 

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 are currentlybeing utilized for their intended purpose except as discussed in the footnotesbelow.

 

----

(1) This facility was closed on August 7, 2004.

(2) Represents fourseparate facilities as follows: 60,000 square feet, 73,000 square feet and70,000 square feet used by Colony Gifts Corporation Limited; 90,000 square feetused by CCW Manufacturing Limited.

(3) Measured in square meters.

 

13

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**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.

 

**Item 4****.  Submission of Matters to a Vote of SecurityHolders**

 

None

 

**PART II**

 

**Item 5****.  Market for the Company’s Common Equity,Related Stockholder Matters 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 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 |   |

 
| ** **     | ** ** | **Fiscal 2005**                   | ** ** |
|----------------|------------|-----------------------------------|------------|
| ** **     | ** ** | **(Ended January 31, 2005)** | ** ** |
| ** **     | ** ** | **HIGH**                          | ** ** | **LOW** | ** ** |
| First Quarter  |       | $                                 | 34.51      |   | $ | 31.28 |   |
| Second Quarter |       | $                                 | 36.00      |   | $ | 30.46 |   |
| Third Quarter  |       | $                                 | 35.51      |   | $ | 28.43 |   |
| Fourth Quarter |       | $                                 | 32.72      |   | $ | 27.80 |   |

 

As of April 8, 2005,there were 1,919 registered holders of record of the Company’s Common Stock.

 

OnMarch 17, 2005, the Company’s Board of Directors declared a regularsemi-annual cash dividend in the amount of $0.21 per share of Common Stockpayable in the second quarter of fiscal year 2006.  During fiscal years 2005 and 2004, theCompany’s Board of Directors declared dividends as follows: $0.17 per share ofCommon Stock payable in the second quarter of the fiscal year 2005; $0.19 pershare of Common Stock payable in the fourth quarter of fiscal year 2005; $0.13per share of Common Stock payable in the second quarter of fiscal year 2004;and $0.15 per share of Common Stock payable in the fourth quarter of fiscalyear 2004.  Currently, the Companyexpects to pay comparable cash dividends in the future.

 

The following table sets forth, for theequity compensation plan categories listed below, information as ofJanuary 31, 2005:

 

14

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**Equity Compensation Plan Information**

 
| **Plan Category**                                           | ** ** | **(a)  Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights(****1)** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights(****1)** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                           |       |                                                                                           |       |                                                                                                                                                      |       |
| Equity  compensation plans approved by security holders     |       | 1,525,433                                                                                                      |       | $                                                                                              | 25.80      |                                                                                                                                                      | 3,183,691  |   |
|                                                        |       |                                                                                                           |       |                                                                                           |       |                                                                                                                                                      |       |
| Equity  compensation plans not approved by security holders |       | N/A                                                                                                            |       | N/A                                                                                            |       | N/A                                                                                                                                                       |       |
|                                                        |       |                                                                                                           |       |                                                                                           |       |                                                                                                                                                      |       |
| Total                                                       |       | 1,525,433                                                                                                      |       | $                                                                                              | 25.80      |                                                                                                                                                      | 3,183,691  |   |

 

----

(1) The information inthis column excludes 13,000 shares of restricted stock and 79,835 restrictedstock units outstanding as of January 31, 2005.

 

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

 

**ISSUER PURCHASES OF EQUITYSECURITIES(1)**

 
| **Period**                                                | ** ** | **(a) Total  Number  of Shares  Purchased** | ** ** | **(b)  Average  Price Paid  per Share** | ** ** | **(c) Total  Number of  Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d) Maximum  Number (or  Approximate Dollar  Value) of Shares  that May Yet Be  Purchased Under  the Plans or  Programs** | ** **       |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------------|
| Month #1  November 1, 2004 -  November 30, 2004 |       | 0                                                |       | —                                  |       | 0                                                                                                         |       | 1,453,200 shares                                                                                                                      |             |
| Month #2  December 1, 2004 -  December 31, 2004 |       | 0                                                |       | —                                  |       | 0                                                                                                         |       | 1,453,200 shares                                                                                                                      |             |
| Month #3  January 1, 2005 -January 31, 2005     |       | 15,000                                           |       | $                                       | 30.63      |                                                                                                      | 15,000     |                                                                                                                                  | 1,438,200 shares |   |
| Total                                                     |       | 15,000                                           |       | $                                       | 30.63      |                                                                                                      | 15,000     |                                                                                                                                  | 1,438,200 shares |   |

 

----

(1) On September 10,1998, the Company’s Board of Directors approved the Company’s share repurchaseprogram (the “Repurchase Program”) pursuant to which the Company was authorizedto repurchase up to

 

15

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1,000,000 shares of itsissued and outstanding Common Stock in open market transactions.  On June 8, 1999, the Company’s Board ofDirectors amended the Repurchase Program and increased the number of shares ofCommon Stock to be repurchased by 1,000,000 shares, from 1,000,000 to 2,000,000shares.  On March 30, 2000, theCompany’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 2,000,000 to 3,000,000 shares. On December 14, 2000, the Company’s Board of Directors furtheramended the Repurchase Program and increased the number of shares of CommonStock to be repurchased by 1,000,000 shares, from 3,000,000 to 4,000,000shares.  On April 4, 2002, theCompany’s Board of Directors further amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 2,000,000shares, from 4,000,000 to 6,000,000 shares. As of January 31, 2005, the Company has purchased a total of4,561,800 shares of Common Stock under the Repurchase Program.  The Repurchase Program does not have anexpiration date.  The Company intends tomake further purchases under the Repurchase Program from time to time.

 

16

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**Item 6**.

 

**Selected ConsolidatedFinancial Data**

** **

Set forth beloware selected summary consolidated financial and operating data of the Companyfor fiscal years 2001 through 2005, which have been derived from our auditedfinancial statements for those years. The information presented below should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our consolidated financial statements, including the notesthereto, appearing elsewhere in this Annual Report to Shareholders onForm 10-K.

 
| ** **                                                                                      | ** ** | **Year ended January 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **(In thousands, except per share  and percent data)**                                          | ** ** | **2001**                        | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** |   | **2005** | ** ** |
| **Statement  of Earnings Data: (1)**                                                            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Net sales                                                                                       |       | $                               | 1,178,813  |   | $ | 1,178,771 |   | $ | 1,288,583 |   | $ | 1,505,573 |   | **$** | **1,586,297** | ** ** |
| Gross profit                                                                                    |       | 596,101                         |       | 577,005 |   | 640,302 |   | 723,675 |   | **771,680** | ** ** |
| Operating profit                                                                                |       | 145,244                         |       | 120,490 |   | 155,517 |   | 153,077 |   | **169,330** | ** ** |
| Interest expense                                                                                |       | 15,876                          |       | 17,237 |   | 14,664 |   | 17,443 |   | **22,138** | ** ** |
| Earnings before  income taxes, minority interest and cumulative effect of accounting change (2) |       | 130,690                         |       | 108,289 |   | 142,557 |   | 136,893 |   | **149,076** | ** ** |
| Earnings before  minority interest and cumulative effect of accounting change                   |       | 80,715                          |       | 68,006 |   | 89,525 |   | 86,516 |   | **96,154** | ** ** |
| Net earnings (3)                                                                                |       | 79,562                          |       | 68,006 |   | 57,772 |   | 86,351 |   | **96,514** | ** ** |
| Basic net  earnings per common share before cumulative effect of accounting change              |       | $                               | 1.69       |   | $ | 1.45 |   | $ | 1.94 |   | $ | 1.89 |   | **$** | **2.24** | ** ** |
| Cumulative effect  of accounting change (3)                                                     |       | (0.02                           | )          | — |   | (0.69 | ) | — |   | **—** | ** ** |
|                                                                                            |       | $                               | 1.67       |   | $ | 1.45 |   | $ | 1.25 |   | $ | 1.89 |   | **$** | **2.24** | ** ** |
| Diluted net  earnings per common share before cumulative effect of accounting change            |       | $                               | 1.69       |   | $ | 1.44 |   | $ | 1.92 |   | $ | 1.88 |   | **$** | **2.22** | ** ** |
| Cumulative  effect of accounting change (3)                                                     |       | (0.02                           | )          | — |   | (0.68 | ) | — |   | **—** | ** ** |
|                                                                                            |       | $                               | 1.66       |   | $ | 1.44 |   | $ | 1.24 |   | $ | 1.88 |   | **$** | **2.22** | ** ** |
| Cash dividends  paid, per share                                                                 |       | $                               | 0.20       |   | $ | 0.20 |   | $ | 0.22 |   | $ | 0.28 |   | **$** | **0.36** | ** ** |
| Basic weighted  average number of common shares outstanding                                     |       | 47,629                          |       | 47,056 |   | 46,256 |   | 45,771 |   | **43,136** | ** ** |
| Diluted weighted  average number of common shares outstanding                                   |       | 47,902                          |       | 47,205 |   | 46,515 |   | 46,027 |   | **43,556** | ** ** |
| **Operating  Data:**                                                                            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Gross profit  margin                                                                            |       | 50.6                            | %          | 48.9 | % | 49.7 | % | 48.1 | % | **48.6** | **%** |
| Operating profit  margin                                                                        |       | 12.3                            | %          | 10.2 | % | 12.1 | % | 10.2 | % | **10.7** | **%** |
| Capital  expenditures                                                                           |       | $                               | 25,322     |   | $ | 11,901 |   | $ | 14,322 |   | $ | 21,963 |   | **$** | **20,976** | ** ** |
| Depreciation and  amortization                                                                  |       | 33,383                          |       | 36,246 |   | 30,212 |   | 35,954 |   | **35,600** | ** ** |
| **Balance  Sheet Data:**                                                                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Working capital                                                                                 |       | $                               | 224,413    |   | $ | 285,771 |   | $ | 324,060 |   | $ | 400,540 |   | **$** | **312,172** | ** ** |
| Total assets                                                                                    |       | 770,974                         |       | 804,781 |   | 860,084 |   | 1,127,963 |   | **1,075,820** | ** ** |
| Total debt                                                                                      |       | 199,968                         |       | 191,701 |   | 176,493 |   | 293,886 |   | **287,875** | ** ** |
| Total  stockholders’ equity                                                                |       | 421,794                         |       | 468,063 |   | 507,852 |   | 588,970 |   | **521,349** | ** ** |

 

----

*(1)*       Statement of Earnings Dataincludes the results of operations for periods subsequent to the respectivepurchase acquisitions of Midwest of Cannon Falls, Inc. acquired inApril 2001, CBK, Ltd., LLC (now CBK Styles, Inc.) acquired in May 2002,Miles Kimball Company acquired in April 2003, Kaemingk B.V. acquired inJune 2003, Walter Drake acquired in December 2003 and Edelman B.V.and Euro-Decor B.V. acquired in September 2004, none of which had amaterial effect on the Company’s results of operations in the period duringwhich they occurred, or thereafter.

*(2)*       Fiscal 2001 pre-tax earningsinclude restructuring and impairment charges of approximately $7.7 millionrelated to realignment of the Company’s European operations and U.S. consumerwholesale organization, decisions to exit certain product lines, and changesimpacting its specialty retail business. Fiscal 2001 pre-tax earnings also include approximately $9.0 million ofcharges to cost of sales for adjustments to carrying values of inventoryconnected with these initiatives, as well as $2.3 million of unexpected baddebt expenses associated with certain customer bankruptcy filings.  Fiscal 2002 pre-tax earnings includerestructuring and impairment charges of approximately $14.1 million related toclosure of the Company’s 62nd Street Chicago facility, otherrationalization of the North American consumer wholesale business and certainchanges in the European sector.  Fiscal2002 pre-tax earnings also include approximately $6.3 million and $5.0 millionin charges to cost of sales for inventory revaluations related to the US massmarket and other marketplace conditions impacting realizable value of obsoleteinventory. Fiscal 2003 pre-tax earnings include an impairment charge of $2.6million as a result of putting Wax Lyrical into receivership. Fiscal 2004pre-tax earnings include restructuring and impairment charges of $23.8 millionrelated to manufacturing equipment impairment, closure of the Company’s Hyannismanufacturing facility, the discontinuance of the Canterbury® brand, and theclosure of five of the Company’s candle outlet stores.

*(3)*       The Company recorded aone-time cumulative effect of accounting change in January 2001 to reflectthe adoption of Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition inFinancial Statements.”  The Companyrecorded a one-time cumulative effect of accounting change inFebruary 2002 to reflect the adoption of SFAS No. 142, “Goodwill andOther Intangible Assets.”  (See Note 1 tothe Consolidated Financial Statements, “Summary of Significant AccountingPolicies”).

 

 

17

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**Item 7.**

 

**Management’s Discussionand Analysis of**

**Financial Condition and Results ofOperations**

 

The financial andbusiness analysis below provides information that we believe is relevant to anassessment and understanding of our consolidated financial condition, changesin financial condition and results of operations.  This financial and business analysis shouldbe read in conjunction with our consolidated financial statements andaccompanying notes to the consolidated financial statements set forth in Item8. below.

 

**OVERVIEW**

 

Blyth is adesigner and marketer of home fragrance products and accessories, home décor,seasonal decorations, household convenience items, personalized gifts andproducts for the foodservice trade.  Wecompete in the global Home Expressions industry, and our products can be foundthroughout North America, Europe and Australia. Our financial results are reported in three segments - the DirectSelling segment, the Wholesale segment and the Catalog & Internetsegment.  These reportable segments arebased on similarities in distribution channels, customers and managementoversight.

 

Today, on anannualized net sales basis considering the full year impact of recentacquisitions, Blyth is comprised of an approximately $740 million direct sellingbusiness, an approximately $720 million wholesale business and an approximately$200 million catalog and Internet business. Sales and earnings growth differ in each segment depending on geographiclocation, market penetration, our relative market share and product andmarketing execution, among other business factors.  Over the long term, all three segments shouldexperience single-digit growth, most likely within the low to mid-single digitrange, again depending on the business factors previously noted.

 

Our current focus isdriving sales growth of our brands so we may more fully leverage ourinfrastructure.  New product developmentcontinues to be critical to all three segments of our business.  In the Direct Selling segment, monthly salesand productivity incentives are designed to attract, retain and increase theearnings opportunity of independent sales consultants.  In the Wholesale segment, we have numerouscollaborative initiatives underway, which we believe will help drive sales andleverage the sales and marketing talents across this segment.  These initiatives include customerinformation sharing and leveraging our in-house sales forces, as well asongoing global sourcing objectives and other organic strategic initiatives intowhich we are investing resources.

 

With the acquisitions of Miles Kimball in April 2003 and WalterDrake in December 2003, we entered the Catalog and Internet channel ofdistribution, giving us a presence in all of our desired channels.  The operations of Walter Drake have beenintegrated into those of Miles Kimball, and form the core of ourCatalog & Internet segment. This segment’s personalization capabilities and knowledge of thedirect-to-consumer market are being leveraged across all three segments.

** **

**SEGMENTS**

 

Within the Direct Sellingsegment, the Company designs, manufactures or sources, markets and distributesan extensive line of products including scented candles, candle-relatedaccessories, fragranced bath gels and body lotions and other fragrancedproducts. These products are sold directly to the consumer under the PartyLite®brand in North America, Europe and Australia through a network of independentsales consultants using the party plan method of direct selling.

 

Within the Wholesalesegment, the Company designs, manufactures or sources, markets and distributesan extensive line of home fragrance products, candle-related accessories,seasonal decorations such as ornaments, artificial trees and trim, and homedécor products such as picture frames, lamps and textiles.  Products in this segment are sold in NorthAmerica and Europe to retailers in the premium, specialty and mass channelsunder the CBK®, Carolina®, Colonial®(1), Colonial Candle of Cape Cod®, Colonialat HOMEâ, Edelman®, Euro-Decor®(1), Florasense®,

 

----

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

 

18

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Gies®(1), Holiday 365TM, KaemingkTM(2),Liljeholmens®, Seasons of Cannon Falls® and Triumph Tree®(1) brands.  In addition, chafing fuel and tabletoplighting products and accessories for the Away From Home or foodservice tradeare sold through this segment under the Ambria®, FilterMate®, HandyFuel® andSterno® brands.

 

Within the Catalog &Internet segment, the Company designs, sources and markets a broad range ofhousehold convenience items, premium photo albums, frames, holiday cards,personalized gifts and kitchen accessories under the Exposuresâ,Miles Kimballâ, Walter Drakeâ, TheHome Marketplace® and Directions...the path to better healthâbrands.  These products are soldprimarily in North America.

 

The followingtable sets forth, for the periods indicated, the percentage relationship to netsales and the percentage increase of certain items included in the Company’sConsolidated Statements of Earnings:

 
| ** **          | ** ** | ** **                      | ** ** | ** **    | ** ** | ** **    | ** ** | **Percentage Increase (Decrease)  from Prior Period** | ** ** |
|---------------------|------------|---------------------------------|------------|---------------|------------|---------------|------------|-------------------------------------------------------|------------|
| ** **          | ** ** | ** **                      | ** ** | ** **    | ** ** | ** **    | ** ** | **Fiscal 2004**                                       | ** ** | **Fiscal 2005** | ** ** |
| ** **          | ** ** | **Percentage of Net Sales**     | ** ** | **Compared**  | ** ** | **Compared**  | ** ** |
| ** **          | ** ** | **Years Ended January 31** | ** ** | **to Fiscal** | ** ** | **to Fiscal** | ** ** |
| ** **          | ** ** | **2003**                        | ** ** | **2004**      | ** ** | **2005**      | ** ** | **2003**                                              | ** ** | **2004** | ** ** |
| Net sales           |       | 100.0                           |       | 100.0         |       | 100.0         |       | 16.8                                                  |       | 5.4 |   |
| Cost of goods  sold |       | 50.3                            |       | 51.9          |       | 51.4          |       | 20.6                                                  |       | 4.2 |   |
| Gross profit        |       | 49.7                            |       | 48.1          |       | 48.6          |       | 13.0                                                  |       | 6.6 |   |
| Selling             |       | 28.2                            |       | 27.7          |       | 28.9          |       | 14.8                                                  |       | 9.8 |   |
| Administrative      |       | 9.2                             |       | 8.6           |       | 9.1           |       | 9.0                                                   |       | 11.3 |   |
| Operating profit    |       | 12.1                            |       | 10.2          |       | 10.7          |       | (1.6                                                  | )          | 10.6 |   |
| Net earnings        |       | 4.5                             |       | 5.7           |       | 6.1           |       | 49.5                                                  |       | 11.8 |   |

 

**Fiscal2005 Compared to Fiscal 2004**

 

Net salesincreased $80.7 million, or 5%, from $1,505.6 million in fiscal 2004 to $1,586.3million in fiscal 2005.  Approximately 10percentage points of the increase in net sales is attributable to the positivesales impact of Edelman and Euro-Decor, which Blyth acquired inSeptember 2004, the positive impact of approximately 46 weeks ofacquisition-related sales growth of Walter Drake, which was acquired inDecember 2003, the positive sales impact of approximately 24 weeks ofacquisition-related sales growth of Kaemingk, which was acquired inJune 2003, and the positive sales impact of approximately 8 weeks ofacquisition-related sales growth of Miles Kimball, which was acquired inApril 2003.  The loss of sales fromJeanmarie Creations, which was divested in April 2004, had a negative impacton sales equal to approximately 2 percentage points.  So, excluding the impact of acquisitions anddivestitures, sales were down 3% for the year. The relative strength of foreign currencies versus the U.S. dollar had apositive impact on fiscal 2005 sales growth equal to approximately 3 percentagepoints.  Management believes that asignificant increase in party plan competition in the United States and a weakNorth American wholesale environment, exacerbated by higher energy prices andeconomic uncertainty related to the U.S. presidential election, negativelyimpacted Blyth’s sales throughout fiscal 2005.

 

----

**(1)Colonial, Euro-Decor, Gies and Triumph Tree trademarks are registered and soldonly outside the United States.**

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

** **

**19**

----

** **

Net Sales – DirectSelling Segment

 

Net sales in theDirect Selling segment decreased $28.6 million, or 4%, from $764.5 million infiscal 2004 to $735.9 million in fiscal 2005. PartyLite’s U.S. sales decreased approximately 12% compared to the prioryear.  PartyLite Canada reported anapproximately 7% decrease versus the prior year in U.S. dollars.  Management believes that sales in the U.S.and Canadian markets were negatively impacted by increased competition forhostesses and party guests due to a substantial increase in channelcompetition.  In addition, we believePartyLite’s U.S. operations were negatively impacted by reduced discretionaryincome, resulting from higher gasoline prices. The U.S. market also experienced a significant decrease in third quartersales in Florida, PartyLite’s fourth largest market, due to the August andSeptember hurricanes.  Managementbelieves that this situation continued to have a negative impact into thefourth quarter given the loss of booking momentum due to cancelledparties.  In PartyLite’s Europeanmarkets, sales increased approximately 20% in U.S. dollars (+9% in localcurrencies), driven by strong sales in the newest markets*.* PartyLite Europe now represents approximately 30% of PartyLiteWorldwide’s net sales.

 

Net sales in theDirect Selling segment represented approximately 46% of total Blyth sales infiscal 2005 compared to 51% in fiscal 2004. This decrease was primarily due to the growth of the Catalog &Internet segment.

 

Net Sales –Wholesale Segment

 

Net sales in theWholesale segment increased $26.6 million, or 4%, from $630.3 million in fiscal2004 to $656.9 million in fiscal 2005. The primary reason for this increase was the acquisitions of Edelman andEuro-Decor in September 2004, which had a positive effect on sales of 6percentage points, and the approximately 24 weeks of acquisition-related salesgrowth of Kaemingk, acquired in June 2003, which had a positive effect of3 percentage points.  The loss of salesof Jeanmarie Creations, which was divested in April 2004, had a negativeimpact on sales of approximately 4 percentage points.  So, excluding acquisitions and divestitures,Wholesale segment sales were down approximately 2%.

* *

In North America,the Wholesale segment experienced a sales decline of 10% versus the prioryear.  Management believes softness wasseen in the sales of premium home fragrance products and seasonal decorationsas a result of independent retailers’ cautiousness in purchasing throughout theyear.  Management also believes sales ofhome décor products in fiscal 2005 were slightly below the prior year due toretailers’ cautiousness.  In addition,the divestiture of Jeanmarie Creations had a negative impact on sales ofapproximately 6 percentage points.  Infiscal 2005, sales of chafing fuel and tabletop lighting to the foodservicetrade improved significantly compared to the prior year, as the hospitalityindustry continued to rebound.

 

In Europe, theWholesale segment experienced a sales increase of approximately 30% in fiscal2005 versus fiscal 2004, due in part to the effect of the Edelman andEuro-Decor acquisitions and the full year of sales from Kaemingk, which had apositive effect on sales of 27 percentage points.  Increased sales of mass channel candles infiscal 2005 offset sales declines in premium candles in Europe.

 

Net sales in theWholesale segment represented approximately 41% of total Blyth sales in fiscal2005 compared to 42% in fiscal 2004. This decrease was primarily due to the growth of the Catalog &Internet segment.

 

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Net Sales –Catalog & Internet Segment

 

**Netsales in the Catalog & Internet segment increased $82.8 million, or75%, from $110.7 million in fiscal 2004 to $193.5 million in fiscal 2005 due tothe December 2003 acquisition of Walter Drake.*** *Net sales in this segment weremodestly below our expectations due to decreased consumer discretionaryspending and increased returns resulting from integration-related orderprocessing delays.  Net sales in theCatalog & Internet segment accounted for approximately 12% of Blyth’stotal net sales in fiscal 2005 compared to 7% in fiscal 2004.

** **

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

 

Blyth’sconsolidated selling expense increased $40.9 million, or 10%, from $417.8million in fiscal 2004 to $458.7 million in fiscal 2005.  Most of the increase in selling expense relatesto the addition of selling expenses from the previously discussed fiscal 2005acquisitions.  Selling expense as apercentage of net sales increased from 28% in fiscal 2004 to 29% in fiscal2005.  This increase in selling expense,as a percentage of net sales, is principally due to increased promotionalspending in the Direct Selling segment relative to sales, as well as the impactof Walter Drake’s business, which has a higher selling expense ratio than theoverall Company average.

 

Blyth’sconsolidated administrative expenses increased $14.7 million, or 11%, from$129.0 million in fiscal 2004 to $143.7 million in fiscal 2005.  Most of the increase relates toadministrative expenses associated with acquisitions made in fiscal 2005*.* As a percentage of net sales, administrative expenses remainedrelatively flat at 9% despite the Company’s spending for organic strategicinitiatives and compliance costs associated with the Sarbanes-Oxley Act of2002.

* *

In fiscal 2004,the Company recorded pre-tax restructuring and impairment charges ofapproximately $23.8 million. Of the $23.8 million charge, $6.7 million relatedto the Direct Selling segment and the closure of the Company’s Hyannis,Massachusetts candle manufacturing facility and $17.1 million related to theWholesale segment.  The Wholesale segmentcharges principally related to the write down of certain candle manufacturingassets, severance and personnel charges related to the restructuring in NorthAmerica, and the discontinuation of one brand. The total charge of $23.8 million was reported as a component ofoperating expenses.

 

Blyth’sconsolidated operating profit increased $16.2 million from $153.1 in fiscal2004 to $169.3 million in fiscal 2005 principally due to the impact of thefiscal 2004 restructuring and impairment charges on the year to yearcomparison.

* *

OperatingProfit/Loss - Direct Selling Segment

 

Operating profitin the Direct Selling segment decreased $4.5 million, or 3%, from $136.4million in fiscal 2004 to $131.9 million in fiscal 2005.  The decrease resulted from the salesshortfalls in North America.  Additionalpromotional and sales incentive expenses also negatively impacted thissegment’s operating profit.  Operatingprofit in the Direct Selling segment represented approximately 78% of totalCompany operating profit in fiscal 2005 compared to 89% in fiscal 2004.

 

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OperatingProfit/Loss – Wholesale Segment

 

Operating profitin the Wholesale segment increased from $10.0 million in fiscal 2004 to $30.7million in fiscal 2005.  Fiscal 2004includes restructuring and impairment charges of $17.1 million.  Additional increases in operating profit wereattributable to profit improvements in the North American home fragrancebusiness, the fiscal 2005 acquisitions of Edelman and Euro-Decor, and aspreviously mentioned, a $2.2 million insurance recovery benefit related to thefiscal 2004 Monterrey fire claim received in fiscal 2005 versus the negativeimpact of $1.9 million of expense recorded in fiscal 2004 for the fire.  Operating profit in the Wholesale segmentrepresented approximately 18% of total Company operating profit in fiscal 2005compared to 7% in fiscal 2004.

 

OperatingProfit/Loss – Catalog & Internet Segment

 

Operating profitin the Catalog & Internet segment increased from $6.6 million infiscal 2004 to $6.7 million in fiscal 2005. Operating profit in the Catalog & Internet segment representedapproximately 4% of total Company operating profit in both fiscal 2004 andfiscal 2005.

 

Interest expenseincreased $4.7 million, or 27%, from $17.4 million in fiscal 2004 to $22.1million in fiscal 2005, primarily due to higher interest costs related to the$100 million of 5.5% Senior Notes issued in October 2003 and borrowingsassociated with the July 2004 Dutch tender offer.

* *

Interest income and other increased $0.3million, from $1.3 million in fiscal 2004 to $1.6 million in fiscal 2005.  This increase was primarily due to favorableforeign currency exchange gains.

* *

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

* *

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

 

Basic earnings pershare were $2.24 for fiscal 2005 compared to $1.89 for fiscal 2004.  The previously discussed restructuring andimpairment charges**reducedearnings per share by approximately $0.31 in fiscal 2004*.* Diluted earnings per share were $2.22 for fiscal 2005 compared to $1.88for fiscal 2004.

 

**Fiscal2004 Compared to Fiscal 2003**

** **

Net salesincreased $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 the increase in net sales isattributable to the positive sales impact of Miles Kimball, which Blythacquired in April 2003, Kaemingk, which was acquired in June 2003,Walter Drake, which was acquired in December 2003, and the positive impactof approximately twelve weeks of acquisition-related sales growth of CBKStyles, Inc. (“CBK”), which was acquired in May 2002.  The loss of sales from Wax Lyrical, which wasclosed in December 2002, had a negative impact on sales equal toapproximately one percentage point.  The relativestrength of foreign currencies versus the U.S. dollar had a positive impact onfiscal 2004 sales growth equal to approximately 4 percentage points.  Management believes that a relatively weakholiday sales season in calendar 2002, geopolitical events including SARS andthe outbreak of war in Iraq resulted in very cautious buying patterns byretailers, which negatively impacted Blyth’s sales throughout fiscal 2004.

 

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Net Sales – DirectSelling Segment

 

Net sales in theDirect Selling segment increased $47.1 million, or 7%, from $717.4 million infiscal 2003 to $764.5 million in fiscal 2004. The relative strength of foreign currencies versus the U.S. dollar had apositive impact on sales in the Direct Selling segment equal to approximately 5percentage points.  In PartyLite’sEuropean markets, fiscal 2004 sales increased approximately 33%.  In local currencies, PartyLite’s Europeansales were 11% above the prior year, driven by sales growth in the developingmarkets of Austria, Switzerland, France and Finland.  In North America, PartyLite’s U.S. sales wereapproximately equal to the prior year, while PartyLite Canada reported a 3%increase versus the prior year.  In localcurrency, PartyLite Canada’s sales declined 10% from the prior year.  We believe that PartyLite’s sales in the U.S.and Canada were negatively impacted by cautious consumer spending resultingfrom economic and geopolitical concerns.

 

Net sales in theDirect Selling segment represented approximately 51% of total Blyth sales infiscal 2004 compared to 56% in fiscal 2003.

 

Net Sales –Wholesale Segment

 

Net sales in theWholesale segment increased $59.2 million, or 10%, from $571.1 million infiscal 2003 to $630.3 million in fiscal 2004. The primary reason for this increase was the acquisition of Kaemingk inJune 2003, which had a positive effect of 12 percentage points, and theacquisition of CBK in May 2002, which had a positive effect of 2percentage points.  The loss of sales ofWax Lyrical, which was closed in December 2002, had a negative impact onsales of approximately 4 percentage points. The strengthening of foreign currency exchange rates versus the U.S.dollar had a positive effect of 3 percentage points.  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.

 

In North America,the Wholesale segment experienced a sales decline of 4% versus the prioryear.  This was principally due todecreased sales in the mass channel as management declined to participate incertain fiscal 2004 holiday programs that had unacceptable profit margins.  The growth of competitive direct importproducts also had a negative impact on this segment’s North American masschannel sales.  Sales in the premiumchannel in fiscal 2004 were slightly below the prior year, partly due tomanagement’s decision to discontinue certain product lines in favor of astreamlined brand and SKU portfolio more appropriate to current channel andcustomer sales trends, as well as from retailer economic cautiousness.  In fiscal 2004, management focused itsefforts on marketing the premium Colonial Candle of Cape Cod® brand, and salesof that brand showed positive results versus the prior year.

 

In Europe, theWholesale segment experienced a sales increase of approximately 55% in fiscal2004 versus fiscal 2003.  The acquisitionof Kaemingk had a positive effect on sales of approximately 51 percentagepoints, and the closure of Wax Lyrical had a negative impact of approximately20 percentage points on sales.  Thestrengthening of foreign currency exchange rates versus the U.S. dollar had apositive effect of approximately 16 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.

 

Net sales in theWholesale segment represented approximately 42% of total Blyth sales in fiscal2004 compared to 44% in fiscal 2003.

 

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Net Sales –Catalog & Internet Segment

 

Net sales in theCatalog & Internet segment were $110.7 million in fiscal 2004 dueentirely to the acquisitions of Miles Kimball and Walter Drake.  Blyth sought to enter this distributionchannel for several years, as it was the primary strategic channel in which wedid not yet have a sales presence.  Withthe initial acquisition of Miles Kimball and the addition of Walter Drake, theoperations of which have been integrated into those of Miles Kimball, Blyth isnow operating in all of its desired channels and we believe we can now reachconsumers however they choose to shop.

 

**Netsales in the Catalog & Internet segment were modestly below ourpre-acquisition assumptions due in part to a delayed pre-holiday catalog dropdate, the revamping of Miles Kimball’s Exposures® brand and product line and alower than expected response rate to new targeted customer lists.  Net sales in the Catalog & Internetsegment accounted for approximately 7% of Blyth’s total net sales in fiscal2004 compared to 0% in fiscal 2003.**

** **

Blyth’sconsolidated gross profit increased $83.4 million, or 13%, from $640.3 millionin fiscal 2003 to $723.7 million in fiscal 2004.  The gross profit margin, however, declinedfrom 49.7% in fiscal 2003 to 48.1% in fiscal 2004 principally due to theaddition of Kaemingk, which has a lower gross margin than Blyth’s overallcompany average, as well as the sales mix among and within Blyth’s variousbusinesses.

 

Blyth’sconsolidated selling expense increased $54.0 million, or 15%, from $363.8million in fiscal 2003 to $417.8 million in fiscal 2004.  Most of the increase in selling expense is aresult of the expenses relating to the previously discussed acquisitions.  Selling expense as a percentage of net salesdecreased from 28.2% in fiscal 2003 to 27.7% in fiscal 2004.  This decrease in selling expense, as apercentage of net sales, was primarily a result of the impact of the businessmodels of recently acquired companies, which have lower selling expenses thanthe overall Company average.

 

Blyth’sconsolidated administrative expenses increased $10.7 million, or 9%, from$118.3 million in fiscal 2003 to $129.0 million in fiscal 2004.  Most of the increase in administrativeexpenses related to administrative expenses incurred in connection withacquisitions made in fiscal 2004.  As apercentage of net sales, administrative expenses decreased from 9.2% in fiscal2003 to 8.6% in fiscal 2004, which is due to the fact that the Company’scorporate resources have grown at a significantly lower rate than have theCompany’s sales, which have grown with acquisitions.

 

In fiscal 2004,the Company recorded pre-tax restructuring and impairment charges ofapproximately $23.8 million. Of the $23.8 million charge, $6.7 million relatedto the Direct Selling segment and the closure of the Company’s Hyannis,Massachusetts candle manufacturing facility and $17.1 million related to theWholesale segment.  The total charge of$23.8 million was reported as a component of operating expenses, which reducedoperating profit margin by 1.6 percentage points, compared to a pre-tax chargeof $2.6 million recorded in fiscal 2003 related to placing Wax Lyrical intoadministrative receivership, which reduced operating profit margin by 0.2 percentagepoints (See Note 4 to the Consolidated Financial Statements).

 

Blyth’sconsolidated operating profit declined $2.4 million from $155.5 million infiscal 2003 to $153.1 million in fiscal 2004 principally due to fiscal 2004restructuring and impairment charges of $23.8 million.  Restructuring and impairment charges of $2.6million were recorded in fiscal 2003.

 

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Operating Profit -Direct Selling Segment

 

Operating profitin the Direct Selling segment decreased $8.8 million, or 6%, from $145.2million in fiscal 2003 to $136.4 million in fiscal 2004.  The pre-tax restructuring and impairmentcharges of $6.7 million in fiscal 2004 negatively impacted operating profit inthis segment.  Additional promotional andsales incentive expenses, as well as higher shipping costs, also negativelyimpacted this segment’s operating profit. Operating profit in the Direct Selling segment represented approximately89% of total Company operating profit in fiscal 2004 compared to 93% in fiscal2003.

 

Operating Profit –Wholesale Segment

 

Operating profitin the Wholesale segment decreased slightly from $10.3 million in fiscal 2003to $10.0 million in fiscal 2004.  Pre-taxrestructuring and impairment charges of $17.1 million in fiscal year 2004versus $2.6 million in fiscal 2003 negatively impacted this segment’s operatingresults.  Of the total segment charges infiscal 2004, $8.3 million (pre-tax) related to the write down of certain candlemanufacturing equipment due to significant productivity increases in recentyears, as well as a product shift in candle forms from pillars and taperstowards 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) related primarily to severance and personnel costs associated withthe North American restructuring in this segment, including the consolidationof our Temecula, California potpourri operations and the closure of five candleoutlet stores.  Of the total segmentcharges, $4.2 million related to the discontinuation of the Canterbury® brand,one of several 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 has recouped theseexpenses through insurance in fiscal 2005.

 

Sales volumeshortfalls in our creative expressions businesses resulting from significantretailer caution throughout 2004 translated into operating profit shortfalls.  These factors were partially offset by thefull year effect of CBK, which was acquired in May 2002, and had apositive impact on operating profit. Sales volume shortfalls in our food service business resulting fromoverall industry sluggishness and a resulting decrease in factory overheadabsorption were responsible for most of the profit decline.  Increased direct import competition also hada negative impact on operating profit.

 

Operating profitin the Wholesale segment represented approximately 7% of total Companyoperating profit in both fiscal 2004 and fiscal 2003.

 

Operating Profit –Catalog & Internet Segment

 

Operating profitin the Catalog & Internet segment was $6.6 million in 2004 dueentirely to the fiscal 2004 acquisitions of Miles Kimball and WalterDrake.  Operating profit in theCatalog & Internet segment represented approximately 4% of totalCompany operating profit in fiscal 2004.

 

Interest expenseincreased $2.7 million, or 18%, from $14.7 million in fiscal 2003 to $17.4million in fiscal 2004, mostly due to higher interest costs related to the $100million of 5.5% Senior Notes issued in October 2003.  In addition, interest expense was impacted bythe 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.

 

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Income tax expensedecreased $2.6 million, or 5%, from $53.0 million in fiscal 2003 to $50.4million in fiscal 2004.  The decrease inincome tax expense was attributable to the decrease in pre-tax earnings as aresult of the restructuring 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 was a result of a larger amount of income beinggenerated in jurisdictions with lower tax rates.

 

As a result of the foregoing, netearnings increased $28.6 million, or 49.5%, from $57.8 million in fiscal 2003to $86.4 million in fiscal 2004.  Netearnings before the cumulative effect of change in accounting principledecreased $3.1 million, or 3%, from $89.5 million in fiscal 2003 to $86.4million in fiscal 2004.  As of theFebruary 1, 2002 adoption date of SFAS No. 142, the Company recordeda $31.8 million impairment of goodwill as a cumulative effect of change inaccounting principle.  This impairmentreduced the carrying value of the goodwill related to the 1999 acquisition ofthe Gies Group by $20.9 million, the carrying value of the goodwill related tothe 1999 acquisition of the Colony Group by $6.3 million and the carrying valueof the goodwill related to the 1997 acquisition of the Sterno® brand by $4.6million (after-tax).

 

Basic earnings pershare were $1.89 for fiscal 2004 compared to $1.25 for fiscal 2003.  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 were $1.88 for fiscal 2004 compared to $1.24 for fiscal 2003.  

 

**Seasonality**

 

Approximately 41%of the Company’s net sales occurred in the first and second fiscal quarters of2005 up from 39% in fiscal 2004, with the larger balance experienced in thethird and fourth fiscal quarters, generally due to consumer buying patterns.The decrease in the percentage of shipments in the second half of the fiscalyear is primarily due to the seasonality of the recently acquiredbusinesses.  The Company’s net sales arestrongest in the third and fourth fiscal quarters due to increased shipments tomeet year-end holiday season demand for the Company’s products.

 

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**Liquidityand Capital Resources**

 

Cash and cashequivalents decreased $138.0 million, or 60%, from $229.7 million atJanuary 31, 2004 to $91.7 million at January 31, 2005, following theuse of $172.6 million of cash to repurchase shares of the Company’s commonstock in the July 2004 Dutch tender offer and the September 2004acquisitions of Edelman and Euro-Decor.

 

The Companytypically generates positive cash flow from operations due to favorable grossmargins and the variable nature of selling expenses, which constitute asignificant percentage of operating expenses. The Company generated $138.5 million in cash from operations in fiscal2005 compared to $173.1 million in fiscal 2004. This decrease was primarily due to decreased earnings before non-cashrestructuring and impairment charges and timing matters that resulted in ausage of cash to fund working capital needs in fiscal 2005 versus cashgenerated from working capital in fiscal 2004.

 

Capitalexpenditures for property, plant and equipment were approximately $21.0 millionin fiscal 2005 down from $22.0 million in fiscal 2004.  The decrease from historical levels is due tothe Company continuing to reduce spending for manufacturing while moving tomore of an outsourced product supply model. The Company anticipates total capital spending of approximately $20.0million to $25.0 million for fiscal 2006, primarily for upgrades to machineryand equipment in existing manufacturing and distribution facilities,information technology and research and development-related equipment.

 

The Company hasgrown in part through acquisitions and, as part of its growth strategy, theCompany expects to continue from time to time in the ordinary course of itsbusiness to evaluate and pursue acquisition opportunities as appropriate.  Our recent growth has been primarilyacquisition related and in the future acquisitions may continue to contributemore to the Company’s overall sales growth rate than historically.  We expect our future growth in the DirectSelling and Wholesale segments to be primarily organic, with the possibility ofselective acquisitions.  We continue topursue strategic Wholesale acquisitions primarily in the following areas: homedécor products and seasonal decorative accessories.  In the Catalog & Internet segment, asignificant portion of future growth may come through acquisitions.  The Company acquired Edelman B.V. andEuro-Decor B.V. during fiscal 2005, and the Miles Kimball Company, KaemingkB.V. and Walter Drake during fiscal 2004, as further described in Note 3 to theConsolidated Financial Statements, “Business Acquisitions”.

 

The Company has a$200 million unsecured revolving credit facility, which matures onAugust 5, 2005 (the “Credit Facility”). The Company has the ability to increase the Credit Facility, undercertain circumstances, by an additional $50 million.  The Credit Facility may be used for generalcorporate purposes, which includes funding for strategic acquisitions andseasonal working capital needs.  TheCredit Facility contains, among other provisions, requirements for maintainingcertain financial ratios including, among others, a minimum level of net worthand a maximum level of leverage.  TheCredit Facility also imposes limitations on, among other things, certainpayments, the imposition of liens on our assets, indebtedness that may beincurred by our subsidiaries, investments we may make and sales of ourassets.  At January 31, 2005, theCompany was in compliance with such covenants. Amounts outstanding under the Credit Facility bear interest, at theCompany’s option, at JPMorgan Chase Bank’s prime rate (5.25% at January 31,2005) or at the Eurocurrency rate plus a credit spread ranging from 0.525% to1.5%, calculated on the basis of a combination of the Company’s seniorunsecured long-term debt rating and the Company’s usage of the CreditFacility.  On January 31, 2005, $3.3million letters of credit were outstanding under the Credit Facility.  The Company intends to renew the creditarrangement before the August maturity date.

 

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

 

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AtJanuary 31, 2005, the Company had a total of $10.0 million available underan uncommitted line of credit with Bank of America to be used for letters ofcredit.  At January 31, 2005,approximately $0.1 million of letters of credit were outstanding under thiscredit line.

 

As of December 31, 2004, The Gies Group (“Gies”) had availablelines of credit of approximately $44.5 million. No amounts were outstanding at December 31, 2004.  The lines of credit are renewed annually.

 

As ofDecember 31, 2004, Kaemingk had available lines of credit of approximately$37.3 million with ING Bank N.V.  No amounts wereoutstanding at December 31, 2004.  The lines ofcredit are collateralized by certain real estate and equipment owned byKaemingk.

 

Colony GiftCorporation Limited (“Colony”) has a $23.0 million short-term revolving creditfacility with Barclays Bank, which matures in June 2005.  As of December 31, 2004, Colony hadborrowings under the credit facility of approximately $4.9 million, at aweighted average interest rate of 5.8%.

 

**As ofDecember 31, 2004, Edelman B.V. and Euro-Decor B.V. had available lines ofcredit of approximately $33.9 million with ABN Amro Bank N.V.  The lines of credit are collateralized byinventory and receivables owned by Edelman B.V. and Euro-Decor B.V. **As ofDecember 31, 2004, approximately $6.9 million was outstanding under thecredit line.

** **

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

 

AtDecember 31, 2004, Kaemingk had approximately $8.8 million of long-termdebt outstanding under six loans with ING Bank N.V. ata weighted average interest rate of 5.1%. The bank loans have maturity dates ranging from 2006 through 2021.  The loans are collateralized by certain realestate and equipment owned by Kaemingk.

 

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

 

In May 1999,the Company filed a shelf registration statement for issuance of up to $250.0million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Companyissued $150.0 million of 7.90% Senior Notes due October 1, 2009 at adiscount of approximately $1.4 million, which is being amortized over the lifeof the notes.  Such notes contain, amongother provisions, restrictions on liens on principal property or stock issuedto collateralize debt.  AtJanuary 31, 2005, the Company was in compliance with such provisions.  Interest is payable semi-annually onApril 1 and October 1.  OnOctober 20, 2003, the Company issued $100.0 million, 5.50% Senior Notesdue on November 1, 2013 at a discount of approximately $0.2 million, whichis being amortized over the life of the notes. Such notes contain provisions and restrictions similar to those in the7.90% Senior Notes.  At January 31,2005, the Company was in compliance with such covenants.  Interest is payable semiannually in arrearson May 1 and November 1.  Thenotes may be redeemed in whole or in part at any time at a specified redemptionprice.  The proceeds of the debt issuancewere used for general corporate purposes.

 

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AtJanuary 31, 2005, CBK had $4.5 million of long-term debt outstanding underan Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letterof credit issued by La Salle Bank National Association.  The 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 2.6% at January 31, 2005.  Payments of principal are required annuallyand interest payments are required monthly under the terms of the bond.

 

The estimated fair value of the Company’s $280.3 million and $276.1million total long-term debt (including current portion) at January 31,2004 and 2005 was approximately $312.8 million and $303.0 million,respectively.  The fair value isdetermined 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 followingtable summarizes the maturity dates of the contractual obligations of theCompany as of January 31, 2005:

 

**PaymentsDue by Period**

 

 

 
| **Contractual Obligations (In  thousands)** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 - 3 Years** | ** ** | **3 -5 Years** | ** ** | **More than  5 Years** | ** ** |
|---------------------------------------------|------------|-----------|------------|-----------------------|------------|-----------------|------------|----------------|------------|------------------------|------------|
| Interest                                    |       | $         | 111,972    |                  | $          | 18,330          |       | $              | 36,341     |                   | $          | 32,247 |   | $ | 25,054 |   |
| Capital Leases                              |       | 217       |       | 172                   |       | 27              |       | 17             |       | 1                      |       |
| Purchase  Obligations (1)                   |       | 40,944    |       | 39,289                |       | 1,655           |       | —         |       | —                 |       |
| Long-Term Debt                              |       | 276,062   |       | 4,489                 |       | 1,630           |       | 153,877        |       | 116,066                |       |
| Operating Leases                            |       | 65,793    |       | 19,871                |       | 26,900          |       | 11,515         |       | 7,507                  |       |
| Lines of Credit                             |       | 11,813    |       | 11,813                |       | —          |       | —         |       | —                 |       |
| Other(2)                                    |       | 8,508     |       | 7,030                 |       | 1,362           |       | 116            |       | —                 |       |
| Total  Contractual Obligations              |       | $         | 515,309    |                  | $          | 100,994         |       | $              | 67,915     |                   | $          | 197,772 |   | $ | 148,628 |   |

 

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(1)  Purchaseobligations primarily consist of open purchase orders for inventory.

(2)  Otherprimarily consists of 401(k), profit sharing and pension obligations.

 

The Company doesnot utilize derivatives for trading purposes.

 

The Company leasescertain office and warehouse space used in the Wholesale segment from a relatedparty.  Under the terms of the lease, theCompany is responsible for all real estate taxes, maintenance and insurancecosts.  The lease rate was determinedbased on market rates for comparable property at the time of entering into thecontract.

 

The Company’sBoard of Directors has authorized the Company to repurchase up to 6,000,000shares of common stock under the share repurchase program.  The Company repurchases shares to offsetgrants of restricted stock and shares issued upon exercise of stock options andto decrease shares outstanding.  During fiscal2005, the Companypurchased an additional 216,700 shares on the open market for a cost of $7.1million, bringing the cumulative total purchased shares to 4,561,800 as ofJanuary 31, 2005 for a total cost of approximately $112.5 million.  The acquired shares are held as common stockin treasury at cost.

 

On June 7,2004 the Company announced that its Board of Directors approved a repurchase ofup to 4,000,000 outstanding shares of the Company’s common stock, with theright to repurchase up to an additional 2% of the Company’s outstanding shares,at a price per share not greater than $35.00 nor less than $30.00 through aDutch auction cash tender offer.  Thefinal number of shares repurchased under the tender offer, which expired onJuly 9, 2004, was 4,906,616 shares for an aggregate purchase price of$172.6 million including fees and expenses. The tender offer was funded with $86.1 million of available cash and$86.5 million of borrowings against our $200 million Credit Facility.  The Company does not expect the tender offerto affect its share repurchase program, capital expenditures, dividend policyor acquisitions.

 

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On March 17,2005, the Company announced that it has declared a cash dividend of $0.21 pershare of the Company’s common stock for the six months ended January 31,2005.  The dividend, authorized at theCompany’s March 17, 2005 Board of Directors meeting, will be payable toshareholders of record as of April 29, 2005, and will be paid onMay 13, 2005.

 

The Company’sprimary capital requirements are for working capital to fund the levels ofinventory and accounts receivable necessary to sustain the Company’s salesgrowth, and for capital expenditures and acquisitions.  The Company believes that cash on hand, cashfrom operations and available borrowings under the current Credit Facility andlines of credit will be sufficient to fund its operating requirements, capitalexpenditures, stock repurchase program, dividends, long-term debt repaymentsand all other obligations for the foreseeable future.

 

We do not maintainany off 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.

 

**CriticalAccounting Policies**

** **

Our discussion andanalysis of our financial condition and results of operations are based uponour Consolidated Financial Statements, which have been prepared in accordancewith accounting principles generally accepted in the United States.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.  On anon-going basis, we evaluate our estimates, including those related to baddebts, 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 theseestimates under different assumptions or conditions.

 

FinancialReporting Release No. 60 requires all companies to include a discussion ofcritical accounting policies or methods used in the preparation of financialstatements.  Note 1 to the 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.

 

Revenuerecognition – Revenues consist of sales to customers, net of returns andallowances.  The Company recognizesrevenue upon delivery, when both title and risk of loss are transferred to thecustomer.

 

Generally, salesorders are received via signed customer purchase orders with stated fixedprices based on published price lists. The Company records estimated reductions to revenue for customerprograms, which may include special pricing agreements for specific customers,volume incentives and other promotions. Should market conditions decline, the Company may increase customerincentives with respect to future sales. The Company also records estimated reductions to revenue, basedprimarily on historical experience, for customer returns and chargebacks thatmay arise as a result of shipping errors, product damage in transit or forother reasons that can only become known subsequent to recognizing therevenue.  If the amount of actualcustomer returns and chargebacks were to increase significantly from theestimated amount, revisions to the estimated allowance would be required.

 

In some instances,the Company receives payment in advance of product shipments.  Such 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.

 

30

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Most of theCompany’s sales 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 theCompany’s evaluation of specific customers’ ability to pay, aging ofreceivables, historical experience and the current economic environment.  While the Company believes it hasappropriately considered known or expected outcomes, its customers’ ability topay their obligations, including those to the Company, could be adverselyaffected by declining sales at retail resulting from such factors ascontraction in the economy or a general decline in consumer spending.

 

Some of theCompany’s business units offer seasonal dating programs pursuant to whichcustomers that qualify for such programs are offered extended payment terms forseasonal product shipments.  As withother customers, 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.”  The salesprice for the Company’s products sold pursuant to such seasonal dating programsis fixed prior to the time of shipment to the customer.  Customers do not have the right to return product except for rights to return that the Company believes aretypical of our industry for such reasons as damaged goods, shipping errors orsimilar occurrences. The Company is not required to repurchase products fromits customers, nor does the Company have any regular practice of doing so.  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.

 

Inventoryvaluation – Inventories are valued at the lower of cost or market.  Cost is determined by the first-in, first-outmethod.  The Company writes down itsinventory for estimated obsolescence or unmarketable inventory by an amountequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand, market conditions, customerplanograms and sales forecasts.  Ifmarket acceptance of our existing products or the successful introduction ofnew products should significantly decrease, additional inventory write-downscould be required.  Potential additionalinventory write-downs could result from unanticipated additional quantities ofobsolete finished goods and raw materials, and/or from lower disposition valuesoffered by the parties who normally purchase surplus inventories.  At January 31, 2005 the Company hadobsolete inventory reserves totaling approximately $22.4 million.

 

Restructuring andimpairment charges – In response to changing market conditions and competition,the Company’s management regularly updates its business model and marketstrategies, including the evaluation of facilities, personnel andproducts.  Future adverse changes in economicand market conditions could result in additional organizational changes andpossibly additional restructuring and impairment charges.  The Company did not record any restructuringand impairment charges in fiscal 2005. In fiscal 2004 and 2003, the Company recorded charges related to assetimpairments, product line discontinuances, severance payments to employees,lease write-offs, bad debt write-offs and inventory write-downs.  (See Note 4 to theConsolidated Financial Statements). The Company recorded restructuring and impairment charges in fiscal 2004totaling $23.8 million.  In the fourthquarter of fiscal 2003, the Company recorded a pre-tax impairment charge of$2.6 million as a result of putting Wax Lyrical, its UK retail business, inadministrative receivership. Historically, the Company has reviewed long-livedassets, including property, plant and equipment and goodwill and otherintangibles for impairment periodically and whenever events or changes incircumstances indicated that the carrying amount of such an asset might not berecoverable.  Management determineswhether there has been a permanent impairment on fixed assets held for use inthe business

 

31

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by comparing anticipated undiscountedfuture cash flow from the use and eventual disposition of the asset or assetgroup, to the carrying value of the asset. The amount of any resulting impairment is calculated by comparing thecarrying value to the fair value, which may be estimated using the presentvalue of the same cash flows.  Long-livedassets that meet the definition of held for sale are valued at the lower ofcarrying amount or net realizable value.

 

Goodwill and otherindefinite lived intangibles - In June 2001, the FASB issued SFASNo. 142, “Goodwill and Other Intangible Assets” (“SFASNo. 142”).  Prior toFebruary 1, 2002, excess of costs of acquisitions over fair value ofidentifiable net assets acquired less liabilities assumed (“goodwill”) wasbeing amortized on a straight-line basis over estimated lives ranging from15-40 years. Amortization of goodwill ceased on February 1, 2002, uponadoption of the new goodwill rules under SFAS No. 142.  Under SFAS No. 142, goodwill and anyother intangibles deemed to have indefinite lives are no longer subject toamortization; however, goodwill is subject to an assessment for impairmentusing a two-step fair value-based test and such other intangibles are alsosubject to impairment reviews, which must be performed at least annually, ormore frequently if events or circumstances indicate that goodwill or otherindefinite lived intangibles might be impaired. The Company performs its annualassessment of impairment in the fourth fiscal quarter.  For goodwill the first step compares the fairvalue of a reporting unit to its carrying amount, including goodwill.  For each of the reporting units, theestimated fair value is determined utilizing the expected present value of thefuture cash flows of the unit.  If thefair value of the reporting unit exceeds the carrying value, no further analysisis necessary.  If the carrying amount ofthe reporting unit exceeds its fair value, the second step is performed. Thesecond step compares the carrying amount of the goodwill to the fair value ofthe goodwill.  If fair value is less 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.

 

Accounting for income taxes - As part of the process of preparing ourconsolidated financial statements, we are required to estimate our actualcurrent tax exposure (state, federal and foreign), together with assessingpermanent and temporary differences resulting from differing bases andtreatment of items for tax and accounting purposes, such as the carrying valueof intangibles, deductibility of expenses, depreciation of property andequipment, and valuation of inventories. Temporary differences result in deferred tax assets and liabilities,which are included within our consolidated balance sheets.  We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income.  Actual results could differ from thisassessment if sufficient taxable income is not generated in futureperiods.  To the extent we determine theneed to establish a valuation allowance or increase such allowance in a period, we must include an expense within the tax provisionin the accompanying consolidated statement of operations.  The management of the corporationperiodically 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 take place,there is a risk that the tax rate may increase or decrease in any period.

 

**Impactof Adoption of Recently Issued Accounting Standards**

** **

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs – anamendment of ARB No. 43”. This Standard requires abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage) to berecognized as current period charges. Additionally, it requires that allocationof fixed production overhead costs be allocated to inventory based on thenormal capacity of the production facility. The provisions of this Standardapply prospectively and are effective for us for inventory costs incurred afterFebruary 1, 2006. While we believe this Standard will not have a materialeffect on our financial statements, the impact of adopting these newrules is dependent on events that could occur in future periods, and assuch, an estimate of the impact cannot be determined until the event occurs infuture periods.

 

32

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InDecember 2004, the FASB issued SFAS No. 123 (revised 2004) (SFASNo. 123R), “Share-Based Payment”. This Standard requires companies tomeasure share-based payments at grant-date fair value and recognize thecompensation expense in their financial statements.  While we previously adopted, for disclosurepurposes only, the fair value based method of accounting pursuant to SFASNo. 123, “Accounting for Stock Based Compensation”, SFAS No. 123Rrequires a forfeiture assumption for our unvested awards. Additionally, SFASNo. 123R amends the presentation of the statement of cash flows andrequires additional annual disclosures. We will apply the provisions of this Standard using the modified prospectivemethod for the unvested portion of previously issued awards that remainoutstanding at February 1, 2006. The implementation of this standard is not expected to have a materialimpact on our financial statements.

 

In December 2004, the Financial Accounting Standards Board(“FASB”) issued Staff Position No. FAS 109-2 (“FAS109-2”), “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creations Act of 2004”(“AJCA”).  The AJCA introduces alimited time 85% dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer (repatriation provision), provided certaincriteria are met. FAS109-2 provides accounting and disclosure guidance for therepatriation provision. Although FAS 109-2 is effective immediately, we do notexpect to be able to complete our evaluation of the repatriation provisionuntil after Congress or the Treasury Department provides additional clarifyinglanguage on key elements of the provision. In January 2005, the TreasuryDepartment began to issue the first of a series of clarifying guidancedocuments related to this provision. We expect to complete our evaluation ofthe effects of the repatriation provision sometime during fiscal 2006.

 

The range of possible amounts that we are considering for repatriationunder this provision is between zero and $100 million. While we estimate thatthe related potential range of additional income tax is between zero and $11million, this estimation is subject to change following technical correctionlegislation that we believe is forthcoming from Congress. The amount ofadditional income tax would be reduced by the part of the eligible dividendthat is attributable to foreign earnings on which a deferred tax liability hadbeen previously accrued.

 

**Forward-lookingand Cautionary Statements**

** **

Certain statementscontained in this Annual Report on Form 10-K may constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Thesestatements involve a number of risks, uncertainties and other factors thatcould cause actual results to differ materially, as discussed more fullyelsewhere in this Annual Report on Form 10-K and in the Company’s previousfilings with the Securities and Exchange Commission.

 

33

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**Item 7A**.

 

**Quantitativeand Qualitative Disclosures About Market Risk**

** **

***Market Risk***

*** ***

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

 

***Interest Rate Risk***

*** ***

As ofJanuary 31, 2005, the Company is subject to interest rate risk onapproximately $19.4 million of variable rate debt.  Each 1-percentage point increase in theinterest rate would impact pre-tax earnings by approximately $0.2 million ifapplied to the total.

 

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

 

***Foreign Currency Risk***

*** ***

The Company usesforeign exchange forward and options contracts to hedge the impact of foreigncurrency fluctuations on foreign denominated inventory purchases, intercompanypayables and certain intercompany loans. The Company does not hold or issuederivative financial instruments for trading purposes.

 

The Company hasdesignated its forward exchange and options contracts on forecastedintercompany purchases and future purchase commitments as cash flow hedges and,as such, as long as the hedge remains effective and the underlying transactionremains probable, the effective portion of the changes in the fair value ofthese contracts will be recorded in accumulated other comprehensive income(loss) (“OCI”) until earnings are affected by the variability of the cash flowsbeing hedged.  With regard to commitmentsfor inventory purchases, upon payment of each commitment, the underlying forwardcontract is closed and the corresponding gain or loss is transferred fromaccumulated OCI and is included in the measurement cost of the acquiredasset.  If a hedging instrument is soldor terminated prior to maturity, gains and losses are deferred in accumulatedOCI until the hedged item is settled. However, if the hedged item is no longer likely to occur, the resultantgain or loss on the terminated hedge is recognized into earningsimmediately.  Approximately $1.6 millionof hedge losses are included in accumulated OCI at January 31, 2005 andare expected to be transferred into earnings within the next twelve months uponpayment of the underlying commitment.

 

The Company hasdesignated its foreign currency forward contracts related to intercompany loansas fair value hedges.  The gains orlosses on the fair value hedges are recognized into earnings and generallyoffset the transaction gains or losses in the foreign denominated loans thatthey are intended to hedge.

 

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

 

34

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The followingtable provides information about the Company’s foreign exchange forward andoptions contracts at January 31, 2005:

 
| **(In thousands, except average  contract rate)** | ** ** | **US Dollar  Notional Amount** | ** ** | **Average  Contract Rate** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|---------------------------|------------|
| Canadian Dollar                                   |       | $                              | 9,929      |                       | 0.78       |                      | $          | (310 | ) |
| Euro                                              |       | 36,585                         |       | 1.28                       |       | (1,877                    | )          |
| Mexican Peso                                      |       | 4,000                          |       | 0.09                       |       | (97                       | )          |
| Australian  Dollar                                |       | 1,465                          |       | 0.73                       |       | (91                       | )          |
| Pound Sterling                                    |       | 500                            |       | 1.81                       |       | (32                       | )          |
|                                              |       | $                              | 52,479     |                       |       |                      | $          | (2,407 | ) |

 

The foreignexchange contracts outstanding have maturity dates through December 2005.

 

35

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**Item 8.****    Fi****nancial Statements and Supplementary Data.**

 

**REPORTOF****INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of Blyth, Inc.:

 

Wehave audited the accompanying consolidated balance sheet of Blyth, Inc.and subsidiaries (the “Company”) as of January 31, 2005, and the relatedconsolidated statements of earnings, stockholders’ equity, and cash flows forthe fiscal year then ended. Our audit also included the financial statementschedule listed in the index in Item 15 in the Company’s Annual Report onForm 10-K for the year ended January 31, 2005. These financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thefinancial statements and financial statement schedule based on ouraudit.  The financial statements ofBlyth, Inc. for the years ended January 31, 2004 and 2003 wereaudited by other auditors whose report, dated April 26, 2004, except for Note18, as to which the date is April 8, 2005, on those statements expressed anunqualified opinion and included an explanatory paragraph regarding the changein the Company’s method for accounting for goodwill and intangible assets infiscal 2003 as discussed in Note 1 to the financial statements.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as of January 31,2005, and the results of its operations and its cash flows for the period endedJanuary 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of theCompany’s internal control over financial reporting as of January 31,2005, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated April 15,2005 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anadverse opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 

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

 

 

April 15,2005

Chicago, Illinois

 

36

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**Reportof Independent Registered Public Accounting Firm**

 

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

 

In our opinion, the accompanying consolidated balance sheet as ofJanuary 31, 2004 and the related consolidated statements of earnings,stockholders’ equity and cash flows for each of the two years in the periodended January 31, 2004 present fairly, in all material respects, thefinancial position, results of operations and cash flows of Blyth, Inc.and Subsidiaries (the “Company”) at January 31, 2004 and for each of thetwo years in the period ended January 31, 2004, in conformity withaccounting principles generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

As discussed in Note 1 to the consolidated financial statements, theCompany changed its method of accounting for goodwill and intangible assets infiscal 2003.

 

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

 

Stamford, Connecticut

April 26, 2004, except for Note 18, as to which the date isApril 8, 2005

 

37

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**BLYTH, INC. AND SUBSIDIARIES****Consolidated Balance****Sheets**

 
| **January 31,****(In thousands, except share and per share data)**                                                           | ** ** | **2004**   |      | **2005**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------|--------------|------------|
| **ASSETS**                                                                                                                        |       |       |      |         |       |
| **Current assets:**                                                                                                               | ** ** | ** ** |      | ** **   | ** ** |
| Cash and cash equivalents                                                                                                         |       | $          | 229,726   |         | **$**      | **91,695** | ** ** |
| Accounts receivable, less allowance for  doubtful receivables $4,470 in 2004 and $4,028 in 2005                                   |       | 104,502    |      | **124,603**  | ** ** |
| Inventories                                                                                                                       |       | 208,581    |      | **234,984**  | ** ** |
| Prepaid and other                                                                                                                 |       | 40,302     |      | **43,832**   | ** ** |
| Assets held for sale                                                                                                              |       | 9,437      |      | **3,949**    | ** ** |
| Deferred income taxes                                                                                                             |       | 14,191     |      | **15,068**   | ** ** |
| Total current assets                                                                                                              |       | 606,739    |      | **514,131**  | ** ** |
| **Property, plant and equipment, at cost:**                                                                                       | ** ** | ** ** |      | ** **   | ** ** |
| Land and buildings                                                                                                                |       | 160,920    |      | **190,198**  | ** ** |
| Leasehold improvements                                                                                                            |       | 20,601     |      | **19,797**   | ** ** |
| Machinery and equipment                                                                                                           |       | 182,472    |      | **210,674**  | ** ** |
| Office furniture, data processing equipment  and software                                                                         |       | 106,426    |      | **97,750**   | ** ** |
| Construction in progress                                                                                                          |       | 1,039      |      | **3,162**    | ** ** |
|                                                                                                                              | ** ** | 471,458    |      | **521,581**  | ** ** |
| Less accumulated depreciation                                                                                                     |       | 210,961    |      | **262,685**  | ** ** |
|                                                                                                                              | ** ** | 260,497    |      | **258,896**  | ** ** |
| **Other assets:**                                                                                                                 | ** ** | ** ** |      | ** **   | ** ** |
| Investments                                                                                                                       |       | 3,510      |      | **3,446**    | ** ** |
| Excess of cost over fair value of assets acquired                                                                                 |       | 204,093    |      | **246,182**  | ** ** |
| Other intangible assets, net of accumulated  amortization of $1,500 in 2004 and $3,867 in 2005                                    |       | 41,600     |      | **39,233**   | ** ** |
| Deposits and other assets                                                                                                         |       | 11,524     |      | **13,932**   | ** ** |
|                                                                                                                              | ** ** | 260,727    |      | **302,793**  | ** ** |
| Total assets                                                                                                                      |       | $          | 1,127,963 |         | **$**      | **1,075,820** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                     | ** ** | ** ** |      | ** **   | ** ** |
| **Current liabilities:**                                                                                                          | ** ** | ** ** |      | ** **   | ** ** |
| Bank lines of credit                                                                                                              |       | $          | 13,621    |         | **$**      | **11,813** | ** ** |
| Current maturities of long-term debt                                                                                              |       | 4,522      |      | **4,489**    | ** ** |
| Accounts payable                                                                                                                  |       | 78,407     |      | **81,333**   | ** ** |
| Accrued expenses                                                                                                                  |       | 97,395     |      | **94,847**   | ** ** |
| Liability associated with assets held for  sale                                                                                   |       | 508        |      | **—**   | ** ** |
| Income taxes                                                                                                                      |       | 11,746     |      | **9,477**    | ** ** |
| Total current liabilities                                                                                                         |       | 206,199    |      | **201,959**  | ** ** |
| **Deferred income taxes**                                                                                                         |       | 33,773     |      | **47,740**   | ** ** |
| **Long-term debt,**less  current maturities                                                                                       |       | 275,743    |      | **271,573**  | ** ** |
| **Other liabilities**                                                                                                             |       | 23,278     |      | **33,199**   | ** ** |
| **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 49,975,502 shares in 2004 and 50,367,827  shares in 2005 |       | 999        |      | **1,007**    | ** ** |
| Additional contributed capital                                                                                                    |       | 107,965    |      | **118,148**  | ** ** |
| Retained earnings                                                                                                                 |       | 570,171    |      | **651,156**  | ** ** |
| Accumulated other comprehensive income                                                                                            |       | 15,224     |      | **36,102**   | ** ** |
| Treasury stock, at cost, 4,345,100 shares  in 2004 and 9,468,416 shares in 2005                                                   |       | (105,389   | )         | **(285,064** | **)**      |
| Total stockholders’ equity                                                                                                   |       | 588,970    |      | **521,349**  | ** ** |
| Total liabilities and stockholders’ equity                                                                                   |       | $          | 1,127,963 |         | **$**      | **1,075,820** | ** ** |
|                                                                                                                                   |            |            |           |              |            |  |  |  |  |  |  |

 

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

 

 

38

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**BLYTH, INC. AND SUBSIDIARIES****Consolidated Statements ofEarni****ngs**

 
| **Year ended  January 31,**** ****(In thousands, except per share  data)**                     | ** ** | **2003**   | ** ** | **2004**   |   | **2005**    | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|--------|-------------|------------|
| Net sales                                                                                                |       | $          | 1,288,583  |       | $      | 1,505,573   |       | **$** | **1,586,297** | ** ** |
| Cost of goods sold                                                                                       |       | 648,281    |       | 781,898    |   | **814,617** | ** ** |
| Gross profit                                                                                             |       | 640,302    |       | 723,675    |   | **771,680** | ** ** |
| Selling                                                                                                  |       | 363,835    |       | 417,768    |   | **458,690** | ** ** |
| Administrative                                                                                           |       | 118,329    |       | 129,021    |   | **143,660** | ** ** |
| Restructuring and impairment charges                                                                     |       | 2,621      |       | 23,809     |   | **—**  | ** ** |
|                                                                                                     |       | 484,785    |       | 570,598    |   | **602,350** | ** ** |
| Operating profit                                                                                         |       | 155,517    |       | 153,077    |   | **169,330** | ** ** |
| Other expense (income):                                                                                  | ** ** | ** ** | ** ** | ** ** |   | ** **  | ** ** |
| Interest expense                                                                                         |       | 14,664     |       | 17,443     |   | **22,138**  | ** ** |
| Interest income and other                                                                                |       | (1,737     | )          | (1,330     | )      | **(1,565**  | **)**      |
| Equity in (earnings)/losses of investees                                                                 |       | 33         |       | 71         |   | **(319**    | **)**      |
|                                                                                                     |       | 12,960     |       | 16,184     |   | **20,254**  | ** ** |
| Earnings before income taxes, minority  interest and cumulative effect of change in accounting principle |       | 142,557    |       | 136,893    |   | **149,076** | ** ** |
| Income tax expense                                                                                       |       | 53,032     |       | 50,377     |   | **52,922**  | ** ** |
| Earnings before minority interest and  cumulative effect of change in accounting principle               |       | 89,525     |       | 86,516     |   | **96,154**  | ** ** |
| Minority Interest                                                                                        |       | —     |       | 165        |   | **(360**    | **)**      |
| Earnings before cumulative effect of change  in accounting principle                                     |       | 89,525     |       | 86,351     |   | **96,514**  | ** ** |
| Cumulative effect of change in accounting  principle, net of taxes of $2,887 in 2003                     |       | (31,753    | )          | —     |   | **—**  | ** ** |
| Net earnings                                                                                             |       | $          | 57,772     |       | $      | 86,351      |       | **$** | **96,514** | ** ** |
| Basic:                                                                                                   | ** ** | ** ** | ** ** | ** ** |   | ** **  | ** ** |
| Net earnings per common share before  cumulative effect of change in accounting principle                |       | $          | 1.94       |       | $      | 1.89        |       | **$** | **2.24** | ** ** |
| Cumulative effect of change in accounting  principle                                                     |       | (0.69      | )          | —     |   | **—**  | ** ** |
|                                                                                                     |       | $          | 1.25       |       | $      | 1.89        |       | **$** | **2.24** | ** ** |
| Weighted average number of shares  outstanding                                                           |       | 46,256     |       | 45,771     |   | **43,136**  | ** ** |
| ** **                                                                                               | ** ** | ** ** | ** ** | ** ** |   | ** **  | ** ** |
| Diluted:                                                                                                 | ** ** | ** ** | ** ** | ** ** |   | ** **  | ** ** |
| Net earnings per common share before cumulative  effect of change in accounting principle                |       | $          | 1.92       |       | $      | 1.88        |       | **$** | **2.22** | ** ** |
| Cumulative effect of change in accounting  principle                                                     |       | (0.68      | )          | —     |   | **—**  | ** ** |
|                                                                                                     |       | $          | 1.24       |       | $      | 1.88        |       | **$** | **2.22** | ** ** |
| Weighted average number of shares  outstanding                                                           |       | 46,515     |       | 46,027     |   | **43,556**  | ** ** |

 

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

 

39

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**BLYTH,INC. AND SUBSIDIARIES****Consolidated Statements ofStockholders****’ Equity**

 

(In thousands, except shareand per share data)

 
| ** **                                                       | ** ** | **Common  stock** | ** ** | **Additional  contributed  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury stock** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------|------------|------------------------------------------------------|------------|-----------|------------|
| **Shares**                                                       | ** ** | **Amount**        | **Shares** | ** **                           | **Amount** |
| Balance at  February 1, 2002                                |       | 49,509,776        |       | $                                    | 990        |                   | $          | 97,879             |       | $                                                    | 449,038    |      | (2,630,900 | ) | $ | (62,950 | ) | $ | (16,894 | ) | $ | 468,063 |   |
| Net earnings for  the year                                       |       |              |       |                                 |       |                   |       | 57,772             |       |                                                 |       |      |       |   |   | 57,772 |   |
| Foreign currency  translation adjustments                        |       |              |       |                                 |       |                   |       |               |       |                                                 |       |      |       | 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                                            |       |              |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   | 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                                |       | 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 |   |
| Net earnings for  the year                                       |       |              |       |                                 |       |                   |       | 96,514             |       |                                                 |       |      |       |   |   | 96,514 |   |
| Foreign currency  translation adjustments                        |       |              |       |                                 |       |                   |       |               |       |                                                 |       |      |       | 21,311 |   | 21,311 |   |
| Unrealized gain  on certain investments (net of tax of $75)      |       |              |       |                                 |       |                   |       |               |       |                                                 |       |      |       | 135 |   | 135 |   |
| Net loss on cash  flow hedging instruments (net of tax of $280)  |       |              |       |                                 |       |                   |       |               |       |                                                 |       |      |       | (568 | ) | (568 | ) |
| Comprehensive  income                                            |       |              |       |                                 |       |                   |       |               |       |                                                 |       |      |       |   |   | 117,392 |   |
| Common stock issued  in connection with long-term incentive plan |       | 392,325           |       | 8                                    |       | 9,463                  |       |               |       |                                                 |       |      |       |   |   | 9,471 |   |
| Tax benefit from  stock options                                  |       |              |       |                                 |       | 720                    |       |               |       |                                                 |       |      |       |   |   | 720 |   |
| Dividends paid  ($0.36 per share)                                |       |              |       |                                 |       |                   |       | (15,529            | )          |                                                 |       |      |       |   |   | (15,529 | ) |
| Treasury stock  purchases                                        |       |              |       |                                 |       |                   |       |               |       | (5,123,316                                           | )          | (179,675  | )          |   |   | (179,675 | ) |
| Balance at  January 31, 2005                                |       | 50,367,827        |       | $                                    | 1,007      |                   | $          | 118,148            |       | $                                                    | 651,156    |      | (9,468,416 | ) | $ | (285,064 | ) | $ | 36,102 |   | $ | 521,349 |   |

 

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

 

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**BLYTH, INC. AND SUBSIDIARIES****Consolidated Statements ofCash****Flows**

 
| **Year ended January 31, (In  thousands)**                                       | ** ** | **2003**   | ** ** | **2004**   |   | **2005**     | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|--------|--------------|------------|
| Cash flows from operating activities:                                                 | ** ** | ** ** | ** ** | ** ** |   | ** **   | ** ** |
| Net earnings                                                                          |       | $          | 57,772     |       | $      | 86,351       |       | **$** | **96,514** | ** ** |
| 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                                                         |       | 30,212     |       | 35,954     |   | **35,600**   | ** ** |
| Loss on disposition of fixed assets                                                   |       | —     |       | 2,739      |   | **1,070**    | ** ** |
| Tax benefit from stock options                                                        |       | 321        |       | 558        |   | **720**      | ** ** |
| Deferred income taxes                                                                 |       | 4,711      |       | (584       | )      | **12,407**   | ** ** |
| Equity in (earnings)/losses of investees                                              |       | 33         |       | 71         |   | **(319**     | **)**      |
| Minority interest                                                                     |       | —     |       | 165        |   | **(528**     | **)**      |
| Restructuring and impairment charges                                                  |       | 2,621      |       | 20,229     |   | **—**   | ** ** |
| Gain on sale of long-term investments                                                 |       | —     |       | (497       | )      | **—**   | ** ** |
| Gain on sale of assets held for sale                                                  |       | —     |       | —     |   | **(492**     | **)**      |
| Changes in operating assets and  liabilities, net of effect of business acquisitions: | ** ** | ** ** | ** ** | ** ** |   | ** **   | ** ** |
| Accounts receivable                                                                   |       | 14,896     |       | (12,935    | )      | **10,106**   | ** ** |
| Inventories                                                                           |       | (1,109     | )          | 24,718     |   | **(3,391**   | **)**      |
| Prepaid and other                                                                     |       | 1,452      |       | (2,422     | )      | **(10,429**  | **)**      |
| Deposits and other assets                                                             |       | 913        |       | 5,611      |   | **(1,235**   | **)**      |
| Goodwill disposed of due to sale of assets  held for sale                             |       | —     |       | —     |   | **(3,621**   | **)**      |
| Accounts payable                                                                      |       | 8,407      |       | 3,236      |   | **(3,199**   | **)**      |
| Accrued expenses                                                                      |       | 11,970     |       | 6,937      |   | **(12,496**  | **)**      |
| Other liabilities                                                                     |       | 9,356      |       | 2,093      |   | **6,565**    | ** ** |
| Income taxes                                                                          |       | (1,121     | )          | 833        |   | **11,250**   | ** ** |
| Total adjustments                                                                     |       | 114,415    |       | 86,706     |   | **42,008**   | ** ** |
| Net cash provided by operating activities                                             |       | 172,187    |       | 173,057    |   | **138,522**  | ** ** |
| Cash flows from investing activities:                                                 | ** ** | ** ** | ** ** | ** ** |   | ** **   | ** ** |
| Purchases of property, plant and equipment                                            |       | (14,322    | )          | (21,963    | )      | **(20,976**  | **)**      |
| Purchases of long-term investments                                                    |       | —     |       | (1,377     | )      | **(21,000**  | **)**      |
| Proceeds from sale of long-term investments                                           |       | 26         |       | 1,874      |   | **21,000**   | ** ** |
| Proceeds from sale of assets held for sale                                            |       | —     |       | —     |   | **13,470**   | ** ** |
| Cash impact of Wax Lyrical receivership                                               |       | (3,253     | )          | 1,902      |   | **—**   | ** ** |
| Purchase of businesses, net of cash  acquired                                         |       | (51,658    | )          | (148,584   | )      | **(54,221**  | **)**      |
| Net cash used in investing activities                                                 |       | (69,207    | )          | (168,148   | )      | **(61,727**  | **)**      |
| Cash flows from financing activities:                                                 | ** ** | ** ** | ** ** | ** ** |   | ** **   | ** ** |
| Proceeds from issuance of common stock                                                |       | 3,371      |       | 5,845      |   | **9,471**    | ** ** |
| Purchases of treasury stock                                                           |       | (23,635    | )          | (18,804    | )      | **(179,675** | **)**      |
| Borrowings from bank line of credit                                                   |       | 71,961     |       | 67,833     |   | **158,761**  | ** ** |
| Repayments on bank line of credit                                                     |       | (90,655    | )          | (70,931    | )      | **(187,649** | **)**      |
| Borrowings on long-term debt                                                          |       | 517        |       | 130,506    |   | **—**   | ** ** |
| Repayments on long-term debt                                                          |       | (19,872    | )          | (40,663    | )      | **(5,044**   | **)**      |
| Dividends paid                                                                        |       | (10,183    | )          | (12,807    | )      | **(15,529**  | **)**      |
| Net cash provided by (used in) financing  activities                                  |       | (68,496    | )          | 60,979     |   | **(219,665** | **)**      |
| Effect of exchange rate changes on cash                                               |       | (1,245     | )          | (4,758     | )      | **4,839**    | ** ** |
| Net increase in cash and cash equivalents                                             |       | 33,239     |       | 61,130     |   | **(138,031** | **)**      |
| Cash and cash equivalents at beginning of  year                                       |       | 135,357    |       | 168,596    |   | **229,726**  | ** ** |
| Cash and cash equivalents at end of year                                              |       | $          | 168,596    |       | $      | 229,726      |       | **$** | **91,695** | ** ** |
| Supplemental disclosure of cash flow  information:                                    | ** ** | ** ** | ** ** | ** ** |   | ** **   | ** ** |
| Cash paid during the year for:                                                        | ** ** | ** ** | ** ** | ** ** |   | ** **   | ** ** |
| Interest                                                                              |       | $          | 15,355     |       | $      | 10,800       |       | **$** | **22,380** | ** ** |
| Income taxes, net of refunds                                                          |       | 47,741     |       | 47,460     |   | **37,270**   | ** ** |
|                                                                                       |            |            |            |            |        |              |            |  |  |  |  |  |  |

 

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

 

41

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**BLYTH, INC. AND SUBSIDIARIESNotes to Consolidated FinancialStatements**

 

**Note  1.**       Summary ofSignificant Accounting Policies

 

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

 

**Principlesof Consolidation**

 

The consolidated financial statements include the accounts ofBlyth, Inc. and its direct and indirect subsidiaries,  (the “Company”).  The Company consolidates entities in which it owns or controls more than50% of the voting shares and investments where the Company has been determinedto be the primary beneficiary.  Theunowned portion is reflected as minority interest.  Investments in companies that are notconsolidated are reported using the equity method and are recorded in otherassets in the Consolidated Balance Sheet.  Allsignificant inter-company balances and transactions have been eliminated inconsolidation.

 

Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscalyear ending on the Saturday nearest to January 31.  Most foreign operations maintain a calendaryear accounting period, which is consolidated with 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.

 

**CreditConcentration**

** **

The Company’scredit sales are principally to department and gift stores, mass merchandisersand distributors, which purchase the Company’s products for resale.  The Company performs ongoing creditevaluations of its customers and generally does not require collateral.  The Company makes provisions for estimatedcredit losses.

 

**ForeignCurrency Translation**

** **

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

 

**Reclassifications**

** **

Certainreclassifications have been made in prior years’ financial statements toconform to classifications 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.

 

42

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**Derivativesand Other Financial Instruments**

** **

The Companyapplies the provisions of Statement of Financial Accounting StandardsNo. 133 (SFAS No. 133), “Accounting for Derivative and HedgingActivities” and its corresponding amendment under SFAS No. 138. Thesestatements establish the accounting and reporting standards for derivativeinstruments and hedging activities and require that all derivative instrumentsbe recorded on the balance sheet at fair value. The Company uses foreign exchange forward and options contracts to hedgethe impact of foreign currency fluctuations on foreign denominated inventorypurchases, intercompany payables and certain intercompany loans. The Companydoes not hold or issue derivative financial instruments for trading purposes.

 

The Company hasdesignated its forward exchange and options contracts on forecastedintercompany purchases and future purchase commitments as cash flow hedges and,as such, as long as the hedge remains effective and the underlying transactionremains probable, the effective portion of the changes in the fair value ofthese contracts will be recorded in accumulated other comprehensive income(loss) (“OCI”) until earnings are affected by the variability of the cash flowsbeing hedged.  With regard to commitmentsfor inventory purchases, upon payment of each commitment, the underlyingforward contract is closed and the corresponding gain or loss is transferredfrom accumulated OCI and is included in the measurement cost of the acquiredasset.  If a hedging instrument is soldor terminated prior to maturity, gains and losses are deferred in accumulatedOCI until the hedged item is settled. However, if the hedged item is no longer likely to occur, the resultantgain or loss on the terminated hedge is recognized into earningsimmediately.  Approximately $1.6 millionof hedge losses are included in accumulated OCI at January 31, 2005 andare expected to be transferred into earnings within the next twelve months uponpayment of the underlying commitment.

 

The Company hasdesignated its foreign currency forward contracts related to intercompany loansas fair value hedges.  The gains orlosses on the fair value hedges are recognized into earnings and generallyoffset the transaction gains or losses in the foreign denominated loans thatthey are intended to hedge.

 

For consolidatedfinancial statement presentation, net cash flows from such hedges areclassified in the categories of the Consolidated Statements of Cash Flows withthe items being hedged.

 

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

 

**FairValue of Financial Instruments**

** **

The Company’sfinancial instruments include accounts receivable, accounts payable, short-termand long-term debt.  Management believesthe carrying values of these items approximate their estimated fair values,except for long-term debt, as discussed in Note 11 to the ConsolidatedFinancial Statements.

 

**CashEquivalents**

** **

The Companyconsiders all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents.

 

**Inventories**

** **

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

 

43

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**Shippingand Handling**

** **

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

 

**Property,Plant and Equipment**

** **

Property, plantand equipment are stated at cost, less accumulated depreciation andamortization.  Depreciation andamortization are provided principally by use of the straight-line method forfinancial reporting purposes.  Leaseholdimprovements are amortized over the lives of the respective leases or theservice lives of the improvements, whichever is shorter.  The Company records gains and losses from thesale of property, plant and equipment in operating profit.

 

The principalestimated lives used in determining depreciation and amortization are asfollows:

 
| 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 to 7 years   |   |

** **

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

 

Prior toFebruary 1, 2002, excess of costs of acquisitions over fair value ofidentifiable net assets acquired less liabilities assumed (“goodwill”) wasbeing amortized on a straight-line basis over estimated lives ranging from 15to 40 years. Amortization of goodwill ceased on February 1, 2002, uponadoption of the new goodwill rules under SFAS No. 142 “Goodwill andOther Intangible Assets.”

 

In June 2001,the Financial Accounting Standards Board (“FASB”) issued SFASNo. 142.  Under SFAS No. 142,goodwill and any other intangibles deemed to have indefinite lives are nolonger subject to amortization; however, goodwill is subject to an assessmentfor impairment using a two-step fair value-based test and such other intangiblesare also subject to impairment reviews, which must be performed at leastannually, or more frequently if events or circumstances indicate that goodwillor other indefinite lived intangibles might be impaired. The Company performsits annual assessment of impairment in the fourth fiscal quarter.  For goodwill the first step compares the fairvalue of a reporting unit to its carrying amount, including goodwill.  For each of the reporting units, theestimated fair value is determined utilizing the expected present value of thefuture cash flows of the unit.  If thefair value of the reporting unit exceeds the carrying value, no furtheranalysis is necessary.  If the carrying amountof the reporting unit exceeds its fair value, the second step is performed. Thesecond step compares the carrying amount of the goodwill to the fair value ofthe goodwill.  If fair value is less 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.

 

The Companyadopted SFAS No. 142, effective February 1, 2002.  In accordance with the new standard, Blythceased amortization of goodwill and performed an assessment for impairment ofits goodwill.  As a result of the initialimpairment review, Blyth reduced the carrying value of its goodwill by $34.6million to write-off $20.9 million in goodwill associated with the 1999acquisition of the Gies Group, $6.3 million in goodwill associated with the1999 acquisition of the Colony Group and $7.4 million in goodwill associatedwith the Sterno® brand, all of which are included in the Wholesale segment.

 

44

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The fair values ofthe Sterno 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 charge, which was partiallydeductible for tax purposes, was recorded in the cumulative effect of change inaccounting principle and had the effect of reducing net income by $31.8 millionor $0.69 per share.

 

**Thefollowing table shows changes in the carrying amount of goodwill for the yearsended January 31, 2004 and 2005, by operating segment:**

** **
| **(In thousands)**                                                                            | ** ** | **Direct Selling** | ** ** | **Wholesale** | ** ** | **Catalog &  Internet** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------|------------|----------------------------------|------------|-----------|------------|
| Goodwill at February 1, 2003                                                             |       | $                  | —     |          | $          | 113,534                          |       | $         | —     |   | $ | 113,534 |   |
| Kaemingk acquisition                                                                          |       |               |       | 17,550        |       |                             |       | 17,550    |       |
| Miles Kimball acquisition                                                                     |       |               |       |          |       | 45,617                           |       | 45,617    |       |
| Walter Drake acquistion                                                                       |       |               |       |          |       | 25,443                           |       | 25,443    |       |
| Foreign currency translation adjustment related  to Kaemingk                                  |       |               |       | 1,949         |       |                             |       | 1,949     |       |
| Total adjustments                                                                             |       | —             |       | 19,499        |       | 71,060                           |       | 90,559    |       |
| Goodwill at January 31, 2004                                                             |       | $                  | —     |          | $          | 133,033                          |       | $         | 71,060     |   | $ | 204,093 |   |
| Edelman and Euro-Decor acquisitions                                                           |       |               |       | 32,928        |       |                             |       | 32,928    |       |
| Kaemingk earn out payment                                                                     |       |               |       | 3,448         |       |                             |       | 3,448     |       |
| Goodwill disposed of related to the sale of  Jeanmarie Creations                              |       |               |       | (3,621        | )          |                             |       | (3,621    | )          |
| Walter Drake integration and acquisition costs                                                |       |               |       |          |       | 3,054                            |       | 3,054     |       |
| Miles Kimball pension liability adjustment                                                    |       |               |       |          |       | 408                              |       | 408       |       |
| Investment in gourmet food business                                                           |       | 307                |       |          |       |                             |       | 307       |       |
| Foreign currency translation adjustment related  to Kaemingk, Edelman and Euro-Decor goodwill |       |               |       | 5,565         |       |                             |       | 5,565     |       |
| Total adjustments                                                                             |       | 307                |       | 38,320        |       | 3,462                            |       | 42,089    |       |
| Goodwill at January 31, 2005                                                             |       | $                  | 307        |          | $          | 171,353                          |       | $         | 74,522     |   | $ | 246,182 |   |

 

45

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**Impairmentof Long-Lived Assets**

 

We reviewlong-lived assets, including property, plant and equipment for impairmentwhenever events or changes in circumstances indicate that the carrying amountof such an asset may not be recoverable. Management will determine whether there has been a permanent impairmenton such assets held for use in the business by comparing anticipatedundiscounted future cash flows from the use and eventual disposition of theasset or asset group to the carrying value of the asset.  The amount of any resulting impairment willbe calculated by comparing the carrying value to the fair value, which may beestimated using the present value of the same cash flows.  Long-lived assets that meet the definition ofheld for sale are valued at the lower of carrying amount or net realizablevalue.

 

**ComprehensiveIncome**

** **

Comprehensiveincome (loss) includes net income (loss) and other comprehensive income(loss).  Other comprehensive income(loss) is classified separately into foreign currency items, unrealized gainsand losses on certain investments in debt and equity securities and the netgains and losses on cash flow hedging instruments.  The Company reports, by major components andas a single total, the change in comprehensive income (loss) during the periodas part of the Consolidated Statements of Stockholders’ Equity.

 

**The following table presents thecomponents of the Company’s accumulated other comprehensive income (loss), netof tax, for the years ended January 31, 2003, 2004 and 2005:**

** **
| **(In thousands)**                                              | ** ** | **Foreign  currency  translation  adjustments** | ** ** | **Unrealized  gain (loss)  on certain  investments** | ** ** | **Net  gain (loss)  on cash flow  hedges** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------|------------|-----------|------------|
|                                                            |       |                                            |       |                                                 |       |                                       |       |      |       |
| Balance at February 1, 2002                                |       | $                                               | (16,842    | )                                                    | $          | (159                                       | )          | $         | 107        |   | $ | (16,894 | ) |
| Foreign currency translation adjustments                        |       | 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      | )          |
| Balance at January 31, 2003                                |       | (4,372                                          | )          | (215                                                 | )          | (164                                       | )          | (4,751    | )          |
| 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      | )          |
| Balance at January 31, 2004                                |       | 16,748                                          |       | (540                                                 | )          | (984                                       | )          | 15,224    |       |
| Reclassification adjustment (net of tax of  $574)               |       |                                            |       |                                                 |       | 984                                        |       | 984       |       |
| Foreign currency translation adjustments                        |       | 21,311                                          |       |                                                 |       |                                       |       | 21,311    |       |
| Unrealized gain on certain investments (net  of tax of $75)     |       |                                            |       | 135                                                  |       |                                       |       | 135       |       |
| Net loss on cash flow hedging instruments  (net of tax of $854) |       |                                            |       |                                                 |       | (1,552                                     | )          | (1,552    | )          |
| Balance at January 31, 2005                                |       | $                                               | 38,059     |                                                 | $          | (405                                       | )          | $         | (1,552     | ) | $ | 36,102 |   |

 

46

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**IncomeTaxes**

 

Income tax expenseis based on pre-tax financial accounting income.  Deferred tax assets and liabilities arerecognized for the expected tax consequences of temporary differences betweenthe tax basis of assets and liabilities and their reported amounts.  The management of the corporation, along withthird-party advisers, periodically estimates the probable tax obligations ofthe corporation using historical experience in tax jurisdictions and informedjudgments.  There are inherentuncertainties related to the interpretation of tax regulations in thejurisdictions in which the corporation transacts business.  The judgments and estimates made at a pointin time may change based on the outcome of tax audits, as well as changes to orfurther interpretations of regulations. If such changes take place, there is a risk that the tax rate mayincrease or decrease in any period.

 

**RevenueRecognition**

** **

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

 

Generally, salesorders are received via signed customer purchase orders with stated fixedprices based on published price lists. The Company records estimated reductions to revenue for customerprograms, which may include special pricing agreements for specific customers,volume incentives and other promotions. Should market conditions decline, the Company may increase customerincentives with respect to future sales. The Company also records estimated reductions to revenue, basedprimarily on historical experience, for customer returns and chargebacks thatmay arise as a result of shipping errors, product damage in transit or forother reasons that can only become known subsequent to recognizing therevenue.  If the amount of actualcustomer returns and chargebacks were to increase significantly from theestimated amount, revisions to the estimated allowance would be required.

 

In some instances,the Company receives payment in advance of product shipments.  Such 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 theCompany’s sales made on credit are made to an established list ofcustomers.  Although the collectibilityof sales made on credit is reasonably assured, the Company has established anallowance for doubtful accounts for its trade and note receivables.  The allowance is determined based on theCompany’s evaluation of specific customers’ ability to pay, aging ofreceivables, historical experience and the current economic environment.  While the Company believes it hasappropriately considered known or expected outcomes, its customers’ ability topay their obligations, including those to the Company, could be adverselyaffected by declining sales at retail resulting from such factors ascontraction in the economy or a general decline in consumer spending.

 

Some of theCompany’s business units offer seasonal dating programs pursuant to whichcustomers that qualify for such programs are offered extended payment terms forseasonal product shipments.  As withother customers, 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.”  The salesprice for the

 

47

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Company’s productssold pursuant 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 theestablished list of customers eligible for such programs.  In addition, the Company minimizes itsexposure to bad debts by utilizing established credit limits for eachcustomer.  If, however, product sales byour customers during the seasonal selling period should fall significantlybelow expectations, such customers’ financial condition could be adverselyaffected, 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.

 

**Earningsper Common and Common Equivalent Share**

** **

Earnings percommon and common equivalent share-basic are computed based upon the weightedaverage number of shares outstanding during the period.  Earnings per common and common equivalentshare-diluted reflects the potential dilution that could occur if options andfixed awards to be issued under stock-based compensation arrangements wereconverted into common stock.

 

**EmployeeStock Option Plans**

** **

The Company haselected to adopt the disclosure only provisions of SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure,” andcontinues to follow Accounting Principles Board (APB) opinion No. 25,“Accounting for Stock Issued to Employees” and related interpretations inaccounting for stock options granted to its employees and directors under theintrinsic value method.  Accordingly, nocompensation expense is recorded for the stock options issued to employeesunless the option price is below market at the measurement date.  The Company does not at this time issue stockoptions below market value at the date of grant; therefore no compensationexpense has been recorded in the financial statements.  Had compensation expense for the Company’sstock options been determined in accordance with the fair value method in SFASNo. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148,the Company’s reported net income and earnings per share would have beenadjusted to the pro forma amounts indicated below:

 
| **Year ended January 31,****(In  thousands, except per share data)**                                        | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net earnings:                                                                                                    |       |     |       |     |       |     |       |
| As reported                                                                                                      |       | $        | 57,772     |     | $          | 86,351   |       | $ | 96,514 |   |
| Stock-based employee compensation expense determined  under SFAS No. 123 for all awards, net of related tax |       | 2,202    |       | 2,428    |       | 2,409    |       |
| Pro forma                                                                                                        |       | $        | 55,570     |     | $          | 83,923   |       | $ | 94,105 |   |
| Net earnings per common share:                                                                                   |       |     |       |     |       |     |       |
| As reported:                                                                                                     |       |     |       |     |       |     |       |
| Basic                                                                                                            |       | $        | 1.25       |     | $          | 1.89     |       | $ | 2.24 |   |
| Diluted                                                                                                          |       | 1.24     |       | 1.88     |       | 2.22     |       |
| Pro forma:                                                                                                       |       |     |       |     |       |     |       |
| Basic                                                                                                            |       | $        | 1.20       |     | $          | 1.83     |       | $ | 2.18 |   |
| Diluted                                                                                                          |       | 1.19     |       | 1.82     |       | 2.16     |       |

 

48

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

 
| ** **               | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Expected volatility      |       | 43.26    | %          | 41.48    | %          | 32.0     | %          |
| Risk free interest rates |       | 4.48     | %          | 2.73     | %          | 3.80     | %          |
| Expected lives           |       | 5        |       | 5        |       | 5        |       |
| Expected dividend yield  |       | 0.74     | %          | 0.87     | %          | 1.40     | %          |

 

**Advertising and Catalog Costs**

 

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

 

Direct-response advertising relates to the Company’s Miles Kimball andWalter Drake businesses and consists primarily of the costs to producedirect-mail order catalogs that include order forms for the Company’sproducts.  The capitalized productioncosts are amortized for each specific catalog mailing over the period followingcatalog distribution in proportion to revenues (orders) received, compared tototal estimated revenues for that particular catalog mailing.  The amortization period is generally fromthree to six months and does not exceed twelve months.  Deferred direct-response advertising costs of$7.4 million and $5.6 million were reported as assets at January 31, 2004and January 31, 2005, respectively.

 

In certain of the Company’s wholesale businesses, catalog productioncosts are capitalized and expensed as the catalogs are distributed, generallyover less than a twelve month period. The Consolidated Balance Sheets reflect $0.5 million and $0.1 million ofthese costs at January 31, 2004 and 2005, respectively.

 

49

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**Note2.       New Accounting Pronouncements**

 

In November 2004, the FASB issued SFASNo. 151, “Inventory Costs – an amendment of ARB No. 43”. ThisStandard requires abnormal amounts of idle facility expense, freight, handlingcosts and wasted material (spoilage) to be recognized as current periodcharges. Additionally, it requires that allocation of fixed production overheadcosts be allocated to inventory based on the normal capacity of the productionfacility. The provisions of this Standard apply prospectively and are effectivefor the Company for inventory costs incurred after February 1, 2006. Whilethe Company believes this Standard will not have a material effect on itsfinancial statements, the impact of adopting these new rules is dependenton events that could occur in future periods, and as such, an estimate of theimpact cannot be determined until the event occurs in future periods.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004) (SFASNo. 123R), “Share-Based Payment”. This Standard requires companies tomeasure share-based payments at grant-date fair value and recognize thecompensation expense in their financial statements.  While the Company previously adopted, fordisclosure purposes only, the fair value based method of accounting pursuant toSFAS No. 123, “Accounting for Stock Based Compensation”, SFASNo. 123R requires a forfeiture assumption for its unvested awards.Additionally, SFAS No. 123R amends the presentation of the statement ofcash flows and requires additional annual disclosures.  The Company will apply the provisions of thisStandard using the modified prospective method for the unvested portion ofpreviously issued awards that remain outstanding at February 1, 2006.  The implementation of this standard is notexpected to have a material impact on the financial statements.

 

**Note3.       Business Acquisitions**

** **

On May 10, 2002, the Company purchased all of the interests inCBK, Ltd., LLC (“CBK”), now known as CBK Styles, Inc., a designer andmarketer of premium everyday home décor, for approximately $51.5 million incash*.*  The excess of the purchase price over theestimated fair value of the net assets acquired approximated $40.0 million,which will be deductible for income tax purposes over 15 years.  The results of operations of CBK are includedin the Consolidated Statements of Earnings of the Company since May 11,2002.  For segment reporting purposes,CBK is included in the Wholesale segment.

 

On April 1,2003, the Company acquired 100% of the Miles Kimball Company (“Miles Kimball”),a direct marketer of giftware, home décor and household convenience items,premium photo albums, frames and holiday cards under the Miles Kimball® andExposures® catalog titles for approximately $66.2 million in cash.  The acquisition of Miles Kimball aligns withone component of the Company’s overall growth strategy, which is to growthrough selected acquisitions in the Home Expressions industry.  The excess of the purchase price over theestimated fair value of the net assets acquired approximated $46.0 million,which will not be deductible for income tax purposes.  The other intangibles acquired consist of$16.1 million of trade names and trademarks, which are deemed to have anindefinite life and will not be amortized, plus $9.0 million of customer lists,which will be amortized on an accelerated basis over 12 years.  The results of operations of Miles Kimballare included in the Consolidated Statements of Earnings of the Company sinceApril 2, 2003.  For segmentreporting purposes, Miles Kimball is included in the Catalog &Internet segment.

 

On June 20,2003, the Company acquired a 100% interest in Kaemingk B.V. (“Kaemingk”), adesigner and marketer of a wide range of premium seasonal decorations.  Kaemingk’s product lines feature Christmasdécor, including ornaments, lighting, trim, glassware, candles and plushanimals, as well as spring and summer decorative accents.  The acquisition of Kaemingk aligns with onecomponent of the Company’s overall growth strategy, which is to grow through selectedacquisitions in the Home Expressions industry. The cash purchase price was approximately $36.2 million less cashacquired of $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 of approximately $17.6 millionwill not be deductible for income tax purposes. In addition to the fixed purchase price, there is contingentconsideration payable in the

 

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form of athree-year earn out provision based on a pre-defined formula related to amultiple of earnings before interest and income taxes.  The first annual earn out of $3.4 million wasrecorded in the first quarter and paid in the second quarter of fiscal 2005,and increased the goodwill to approximately $21.0 million.  The results of operations of Kaemingk areincluded in the Consolidated Statements of Earnings of the Company sinceJune 21, 2003.  For segment reportingpurposes, Kaemingk is included in the Wholesale segment.

 

On December 22, 2003, the Company acquired 100% of Walter Drake, adirect marketer of value-priced household products including household gifts,gadgets and convenience products, personalized merchandise, home décor andholiday cards under the Walter Drake and Home Marketplace catalog titles, forapproximately $54.2 million in cash.  The acquisition of Walter Drake alignswith one component of the Company’s overall growth strategy, which is to growthrough selected acquisitions in the Home Expressions industry.  The excess of the purchaseprice over the estimated fair value of the net assets acquired approximated$25.4 million, which will be deductible for income tax purposes over 15years.  During the quarter endedApril 30, 2004, the Company made an adjustment to the preliminary purchaseprice for additional liabilities primarily related to severance of employees ofthe Colorado Springs facility as of the acquisition date.  These additional costs related to theintegration of the Walter Drake business into Miles Kimball, which isessentially complete as of January 31, 2005.  These adjustments increased the goodwill byapproximately $3.1 million to $28.5 million. As a result of payments made during the year, an approximate $0.2million liability remains on the balance sheet at January 31, 2005.  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.  The results of operations ofWalter Drake are included in the Consolidated Statements of Earnings of theCompany since December 23, 2003. For segment reporting purposes, Walter Drake is included in theCatalog & Internet segment.

 

OnSeptember 10, 2004, the Company acquired 100% interests in Edelman B.V.(“Edelman”), a designer and marketer of everyday home, garden and seasonaldécor, and Euro-Decor B.V. (“Euro-Decor”), a designer and marketer of traditionaland contemporary gift and florist products. The acquisitions align with one component of the Company’s overallgrowth strategy, which is to grow through selected acquisitions in the HomeExpressions industry.  The cash purchaseprice was approximately $48.6 million less cash acquired of $1.1 millionresulting in net cash paid of $47.5 million. Included in the purchase price is a $9.2 million earn out based on amultiple of 2004 earnings before interest and income taxes that the combinedcompanies have achieved.  The Companyalso assumed Edelman and Euro-Decor’s long-term debt of approximately $7.2million.  During the fourth quarter, anadjustment was recorded to reflect the final appraised value of the acquiredproperty, plant and equipment for $3.8 million, as well as the net pensionasset of $0.6 million.  The excess of thepurchase price over the estimated fair value of the net assets acquiredapproximated $32.9 million, which will not be deductible for income taxpurposes.  The results of operations ofEdelman and Euro-Decor are included in the Consolidated Statements of Earningsof the Company since September 11, 2004. For segment reporting purposes, Edelman and Euro-Decor are included inthe Wholesale segment.

 

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The followingprovides a preliminary allocation of the purchase price of Edelman andEuro-Decor:

 
| **(In thousands)**                    | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Cash Purchase Price                   |       | $          | 48,587     |   |
| Less: Assets acquired                 |       |       |       |
| Cash                                  |       | 1,112      |       |
| Accounts receivable                   |       | 23,684     |       |
| Inventories                           |       | 16,964     |       |
| Prepaid and other                     |       | 4,044      |       |
| Property, plant and equipment         |       | 10,109     |       |
| Other assets                          |       | 624        |       |
| Total assets acquired                 |       | 56,537     |       |
| Plus: Liabilities assumed             |       |       |       |
| Bank line of credit                   |       | 18,523     |       |
| Accounts payable                      |       | 3,227      |       |
| Accrued expenses                      |       | 11,911     |       |
| Other liabilities                     |       | 22         |       |
| Debt                                  |       | 7,195      |       |
| Total liabilities assumed             |       | 40,878     |       |
| Unallocated purchase price (goodwill) |       | $          | 32,928     |   |

 

The followingunaudited pro forma summary financial information summarizes the estimatedcombined results of operations of the Company, Miles Kimball, Kaemingk, WalterDrake, Edelman and Euro-Decor assuming that the acquisitions of Miles Kimball,Kaemingk, Walter Drake, Edelman and Euro-Decor had taken place onFebruary 1, 2003.  The unaudited proforma combined results of operations were prepared on the basis of informationprovided to the Company by the former management of Miles Kimball, Kaemingk,Walter Drake, Edelman and Euro-Decor and no representation is made by theCompany with respect to the accuracy of such information.  The pro forma combined results of operationsreflect adjustments for interest income, additional depreciation based on thefair market value of Miles Kimball’s, Walter Drake’s, Edelman’s andEuro-Decor’s property, plant, and equipment, amortization of identifiableintangibles of Miles Kimball and Walter Drake and income tax expense.

 
| **Year ended January 31,****(In  thousands except per share data) (Unaudited)** | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                            |       | $        | 1,691,425  |     | $          | 1,648,622 |   |
| Net earnings                                                                         |       | 88,376   |       | 97,574   |       |
| Basic:                                                                               |       |     |       |     |       |
| Net earnings per common share                                                        |       | $        | 1.93       |     | $          | 2.26 |   |
| Diluted:                                                                             |       |     |       |     |       |
| Net earnings per common share                                                        |       | $        | 1.92       |     | $          | 2.24 |   |

 

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

 

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**Note4.       Restructuring and ImpairmentCharges**

 

During fiscal2004, the Company recorded restructuring and impairment charges of $23.8million pre-tax of which $23.0 was recorded in the fourth quarter and $0.8million was recorded in the third quarter. These charges were primarily aresult of ongoing efforts by the Company to rationalize and align its Wholesalesegment operations with the changing marketplace and global supply chainrequirements.  The following summarizesthe components of these charges:

 

The Companyrecognized pre-tax impairment losses of $8.4 million for long-lived assetsdisposed of and $2.3 million for long-lived assets to be held and used, duringthe fourth quarter of fiscal 2004 on certain equipment in the Company’s primaryNorth American manufacturing facilities. The Company anticipates cost savingsin the form of reduced depreciation expense related to the assets disposed ofsomewhat offset by increased depreciation due to reductions in remaining usefullives of assets held and used.  The assetdisposals resulted from significant productivity increases in recent years, aswell as product shift from candle forms such as pillars and tapers towardsfilled containers, votives and tealights.

 

The Company alsorecorded an impairment charge of $4.2 million pre-tax related to theCanterbury® brand acquired in fiscal 1997. Within its home fragrance business, the Company acquired severalconsumer wholesale brands over the past decade and is focusing its sales andmarketing resources to fewer brands.  Inthe fourth quarter of fiscal 2004 the Company decided to discontinue theCanterbury® brand.

 

During the thirdand fourth 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,Massachusetts manufacturing facility. In conjunction with the closing, theCompany eliminated 43 jobs, comprised of manufacturing and managementpositions. This manufacturing facility, which was the Company’s smallest, islocated in a busy downtown area of Cape Cod, making transportation of rawmaterials and finished products to and from the location challenging.Operations have been consolidated into Blyth’s manufacturing facility inBatavia, Illinois.

 

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

 

In total,approximately 15% or $3.6 million of the $23.8 million in charges were cashcharges.

 

During the fourthquarter of fiscal 2003, the Company recorded an impairment charge of $2.6million pre-tax as a result of putting Wax Lyrical, its UK specialty retailer,into administrative 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.

 

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

 
| **(In thousands)**                                  | ** ** | **Lease  Obligations** | ** ** | **Severance  Costs** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
| Balance at February 1, 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     |       |
| Payments made against 2004 charges                  |       | (766                   | )          | (2,155               | )          | (2,921    | )          |
| Reversal of over accrual to income of 2004  charges |       | (139                   | )          | (228                 | )          | (367      | )          |
| Balance at January 31, 2005                    |       | $                      | —     |                 | $          | 12        |       | $ | 12 |   |

 

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

 

**Note5.       Assets Held for Sale**

 

During the fourthquarter of fiscal 2004, the Company decided to divest its decorative gift bagbusiness, Jeanmarie Creations, in the Wholesale segment through a sale toJeanmarie’s senior management. Therefore, the assets of Jeanmarie were classified as assets held forsale in the Company’s Consolidated Balance Sheet as of January 31,2004.  The assets held for sale relatedto Jeanmarie were comprised principally of accounts receivable of $3.1 million,inventory of $3.4 million and property, plant and equipment of $1.7million.  The operating results relatedto Jeanmarie were immaterial to the consolidated operating results of theCompany.  On April 6, 2004, theCompany sold the business to Jeanmarie’s management and associated investorsfor $10.0 million in cash.  The saleresulted in a taxable gain of approximately $4.0 million.  In addition, $3.6 million of goodwillattributable to Jeanmarie, which was not tax deductible, was disposed of.

 

There is anadditional $1.1 million classified as assets held for sale in the ConsolidatedBalance Sheet as of January 31, 2004 related to the Hyannis, Massachusettsmanufacturing facility, the closure of which is discussed in Note 4.  On December 15, 2004, the Company soldthe factory and outlet store for $2.4 million.

 

Certain assets in the Wholesale segment associated with the Maynard,Minnesota manufacturing facility were classified as assets held for sale in thethird quarter of fiscal 2005 and sold in the fourth quarter of fiscal 2005 to asenior manager of the Company.  The saleprice of $1.6 million, which was paid in full, was the Company’s best offer,and so considered to be on terms equivalent to those that prevail in anarm’s-length transaction.  The saleresulted in a loss of $0.3 million.

 

During the third quarter of fiscal 2005, the Colorado Springs facility,purchased as part of the Walter Drake acquisition (refer also to Note 3 ),became available for sale and management maintains an active program to locatea buyer.  The fair value of the buildingof $3.9 million, which approximates the carrying value less selling costs, isclassified as assets held for sale in the Consolidated Balance Sheet as ofJanuary 31, 2005.

 

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**Note6.       Inventories**

 

The majorcomponents of inventories are as follows:

 
| **January 31,****(In  thousands)** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Raw materials                           |       | $        | 25,104     |     | $          | 27,286 |   |
| Work in process                         |       | 915      |       | 2,641    |       |
| Finished goods                          |       | 182,562  |       | 205,057  |       |
|                                    |       | $        | 208,581    |     | $          | 234,984 |   |

 

**Note7.       Prepaid and Other**

 

Prepaid and otherconsists of the following:

 
| **January 31,****(In  thousands)** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Taxes                                   |       | $        | 15,194     |     | $          | 15,457 |   |
| Catalogs                                |       | 7,928    |       | 7,186    |       |
| Other                                   |       | 17,180   |       | 21,189   |       |
|                                    |       | $        | 40,302     |     | $          | 43,832 |   |

 

**Note 8.      Other Intangibles**

 

Other intangible assets consistedof the following (in thousands):

 
| ** **                                  | ** ** | **January 31, 2004** | ** ** | **January 31, 2005**     | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Gross**                 | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived trade names and trademarks |       | $                         | 28,100     |                          | $          | — |   | $ | 28,100 |   | $ | 28,100 |   | $ | — |   | $ | 28,100 |   |
| Customer lists                              |       | 15,000                    |       | 1,500                         |       | 13,500 |   | 15,000 |   | 3,867 |   | 11,133 |   |
| Total                                       |       | $                         | 43,100     |                          | $          | 1,500 |   | $ | 41,600 |   | $ | 43,100 |   | $ | 3,867 |   | $ | 39,233 |   |
|                                             |            |                           |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization isbeing recorded on an accelerated basis over the estimated lives of the customerlists ranging from 10 to 12 years. Amortization expense was $1.5 million in fiscal 2004 and $2.4 million infiscal 2005.  Estimated amortizationexpense for the next five fiscal years is as follows:  $2.1 million, $1.8 million, $1.5 million,$1.5 million, and $1.2 million.  Theweighted average remaining life of the Company’s customer lists was 9.5 yearsat January 31, 2005.

 

**Note9.       Accrued Expenses**

** **

Accrued expensesconsist of the following:

 
| **January 31,****(In  thousands)** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Compensation and certain benefits       |       | $        | 21,484     |     | $          | 26,298 |   |
| Deferred revenue                        |       | 13,095   |       | 13,724   |       |
| Promotional expenses                    |       | 23,307   |       | 26,849   |       |
| Taxes, other than income                |       | 10,019   |       | 7,960    |       |
| Interest payable                        |       | 8,642    |       | 8,630    |       |
| Restructuring charges                   |       | 3,300    |       | 12       |       |
| Self-insurance reserves                 |       | 2,921    |       | 2,452    |       |
| Other                                   |       | 14,627   |       | 8,922    |       |
|                                    |       | $        | 97,395     |     | $          | 94,847 |   |

 

55

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**Note10.       Bank Lines of Credit**

 

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

 

At January 31, 2005, the Company had a total of $10.0 millionavailable under an uncommitted line of credit with Bank of America to be usedfor letters of credit.  AtJanuary 31, 2005, approximately $0.1 million of letters of credit wereoutstanding under this credit line.

 

As of December 31, 2004, The Gies Group (“Gies”) had availablelines of credit of approximately $44.5 million. No amounts were outstanding at December 31, 2004.  The lines of credit are renewed annually.

 

Colony Gift Corporation Limited (“Colony”) has a $23.0 millionshort-term revolving credit facility with Barclays Bank, which matures inJune 2005.  As of December 31,2004, Colony had borrowings under the credit facility of approximately $4.9million, at a weighted average interest rate of 5.8%.

 

As of December 31, 2004, Kaemingk had available lines of credit ofapproximately $37.3 million with ING Bank N.V. No amounts were outstanding at December 31, 2004.  The lines of credit are collateralized bycertain real estate and equipment owned by Kaemingk.

 

As of December 31, 2004, Edelman B.V. and Euro-Decor B.V. hadavailable lines of credit of approximately $33.9 million with ABN Amro BankN.V.  The lines of credit arecollateralized by inventory and receivables owned by Edelman B.V. andEuro-Decor B.V.  As of December 31,2004, approximately $6.9 million was outstanding under the credit line.

 

**Note11.       Long-Term Debt**

** **

Long-term debtconsists of the following:

 
| **January 31,****(In  thousands)** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| 7.54% Senior Notes                      |       | $        | 7,143      |     | $          | 3,571 |   |
| 7.90% Senior Notes                      |       | 149,358  |       | 149,496  |       |
| 5.50% Senior Notes                      |       | 99,792   |       | 99,814   |       |
| Other                                   |       | 23,972   |       | 23,181   |       |
|                                    |       | 280,265  |       | 276,062  |       |
| Less current maturities                 |       | (4,522   | )          | (4,489   | )          |
|                                    |       | $        | 275,743    |     | $          | 271,573 |   |
|                                         |            |          |            |          |            |  |  |  |  |

 

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

 

In May 1999,the Company filed a shelf registration statement for issuance of up to $250.0million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Companyissued $150.0 million of 7.90% Senior Notes due October 1, 2009 at adiscount of approximately $1.4 million, which is being amortized over the lifeof the notes.  Such notes contain, amongother provisions, restrictions on liens on principal property or stock issuedto collateralize debt.  AtJanuary 31, 2005, the Company was in compliance with such provisions.  Interest is payable semi-annually onApril 1 and October 1.  OnOctober 20, 2003, the Company issued $100.0 million, 5.50%

 

56

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Senior Notes dueon November 1, 2013 at a discount of approximately $0.2 million, which isbeing amortized over the life of the notes. Such notes contain provisions and restrictions similar to those in the7.90% Senior Notes.  At January 31,2005, the Company was in compliance with such covenants.  Interest is payable semiannually in arrearson May 1 and November 1.  Thenotes may be redeemed in whole or in part at any time at a specified redemptionprice.  The proceeds of the debt issuancewere used for general corporate purposes.

 

The Company has a$200 million unsecured revolving credit facility, which matures onAugust 5, 2005 (the “Credit Facility”). The Company has the ability to increase the Credit Facility, undercertain circumstances, by an additional $50 million.  The Credit Facility may be used for generalcorporate purposes, which includes funding for strategic acquisitions andseasonal working capital needs.  TheCredit Facility contains, among other provisions, requirements for maintainingcertain financial ratios including, among others, a minimum level of net worthand a maximum level of leverage.  TheCredit Facility also imposes limitations on, among other things, certainpayments, the imposition of liens on our assets, indebtedness that may beincurred by our subsidiaries, investments we may make and sales of ourassets.  At January 31, 2005, theCompany was in compliance with such covenants. Amounts outstanding under the Credit Facility bear interest, at theCompany’s option, at JPMorgan Chase Bank’s prime rate (5.25% atJanuary 31, 2005) or at the Eurocurrency rate plus a credit spread rangingfrom 0.525% to 1.5%, calculated on the basis of a combination of the Company’ssenior unsecured long-term debt rating and the Company’s usage of the CreditFacility.  On January 31, 2005, $3.3million letters of credit were outstanding under the Credit Facility.  The Company intends to renew the creditarrangement before the August maturity date.

 

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

 

AtDecember 31, 2004, Kaemingk had approximately $8.8 million of long-termdebt outstanding under six loans with ING Bank N.V. at a weighted averageinterest rate of 5.1%.  The bank loanshave maturity dates ranging from 2005 through 2021.  The loans are collateralized by certain realestate and equipment owned by Kaemingk.

 

AtJanuary 31, 2005, CBK had $4.5 million of long-term debt outstanding underan Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letterof credit issued by La Salle Bank National Association.  The 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 2.6% at January 31, 2005.  Payments of principal are required annuallyand interest payments are required monthly under the terms of the bond.

 

Maturities under debtobligations for the fiscal years ending January 31 are as follows (In thousands):

 
| 2006       |   | 4,489   |    |
|------------|--------|---------|---------|
| 2007       |   | 803     |    |
| 2008       |   | 827     |    |
| 2009       |   | 3,348   |    |
| 2010       |   | 150,529 |    |
| Thereafter |   | 116,066 |    |
|       |   | $       | 276,062 |   |
|            |        |         |         |  |

 

The estimated fair value of the Company’s $280.3 million and $276.1million total long-term debt (including current portion) at January 31,2004 and 2005 was approximately $312.8 million and $303.0 million,respectively.  The fair value isdetermined by quoted market prices, where available, and from analysesperformed by investment bankers using current interest rates considering creditratings and the remaining terms to maturity.

 

57

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** **

**Note12.       Employee Benefit Plans**

 

Certain employees of MilesKimball are covered by the Miles Kimball Company Retirement Plan (thePlan).  This non-contributory, definedbenefit retirement plan provides benefits based on years of service andemployee compensation for specified periods. When the Company acquired Miles Kimball on April 1, 2003, adecision was made to cease the accrual of benefits for all Plan participants,except to the extent that a benefit accrual is required to comply withSection 416 of the Internal Revenue Code. The Plan was frozen effective May 31, 2003.  All vested benefits that have been accrued asof May 31, 2003 will continue to be held for participants under the termsof the Plan.

 

The Company has additional defined benefit retirement plans outside theU.S. following the acquisitions of Edelman and Euro-Decor inSeptember 2004.  The benefitsprovided under these plans are based primarily on years of service andcompensation levels.

 

The Company’s defined benefit pension plan in the United States uses aJanuary 31 measurement date.  TheCompany’s defined benefit pension plans in the Netherlands use aSeptember 30 measurement date.

 

As of the measurement dates (September 30 and January 31),the status of the Company’s defined benefit pension plans was as follows (inthousands):

 
| ** **                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| **Change  in benefit obligations:**           |       |     |       |     |       |
| Benefit  obligation, beginning of year        |       | $        | —     |     | $          | 15,255 |   |
| Benefit  obligation acquired                  |       | 15,167   |       | 10,879   |       |
| Interest  cost                                |       | 604      |       | 742      |       |
| Actuarial  loss                               |       | 147      |       | (1,321   | )          |
| Benefits  paid                                |       | (663     | )          | (917     | )          |
| Foreign  currency rate changes                |       | —   |       | 154      |       |
| Benefit  obligation, end of year              |       | $        | 15,255     |     | $          | 24,792 |   |
|                                          |       |     |       |     |       |
| **Change  in plan assets:**                   |       |     |       |     |       |
| Fair value  of plan assets, beginning of year |       | $        | —     |     | $          | 10,508 |   |
| Plan assets  acquired                         |       | 8,698    |       | 11,481   |       |
| Actual  return on plan assets                 |       | 1,673    |       | 412      |       |
| Employer  contributions                       |       | 800      |       | 145      |       |
| Benefits  paid                                |       | (663     | )          | (917     | )          |
| Foreign  currency rate changes                |       | —   |       | 163      |       |
| Fair value  of plan assets, end of year       |       | $        | 10,508     |     | $          | 21,792 |   |
| Funded status                                 |       | $        | (4,747     | )        | $          | (3,000 | ) |
| Unrecognized  actuarial gain                  |       | (973     | )          | (1,895   | )          |
| Net amount  recognized                        |       | $        | (5,720     | )        | $          | (4,895 | ) |

 

Amounts recognizedin the statement of financial position consist of (in thousands):

 
| ** **             | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Prepaid  pension asset |       | $        | —     |     | $          | 633 |   |
| Pension  liability     |       | (5,720   | )          | (5,528   | )          |
| Net amount  recognized |       | $        | (5,720     | )        | $          | (4,895 | ) |

 

 

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

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

 

For fiscal 2004and fiscal 2005, the Company’s defined benefit plans had accumulated benefitobligations of approximately $15.3 million and $23.8 million,respectively.  The projected benefitobligation, accumulated benefit obligation and fair value of plan assets forpension plans with accumulated benefit obligations in excess of plan assetswere:

 
| ** **                      | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Projected  benefit obligation   |       | 15,255   |       | 13,759   |       |
| Accumulated  benefit obligation |       | 15,255   |       | 13,759   |       |
| Fair value  of plan assets      |       | 10,508   |       | 10,148   |       |

 

Components of the net periodicbenefit cost of the Company’s noncontributory defined benefit pension plan forthe years ended January 31, were as follows (in thousands):

 
| ** **                      | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Service cost                    |       | $        | —     |     | $          | 210 |   |
| Interest  cost                  |       | 604      |       | 890      |       |
| Expected  return on plan assets |       | (553     | )          | (1,076   | )          |
| Net periodic  benefit cost      |       | $        | 51         |     | $          | 24 |   |

 

Weighted averageassumptions used to determine net periodic benefit cost for the years endedJanuary 31, were as follows:

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

 

The definedbenefit pension plan asset allocation as of the measurement dates(September 30 and January 31), presented as a percentage of totalplan assets, were as follows:

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

 

For fiscal 2005, the Company’s weighted average expected long-term rateof return on assets was 5.86%.  Indeveloping this assumption, the Company evaluated input from its third partypension plan asset managers, including their review of asset class returnexpectations and long-term inflation assumptions.  The shift in plan assets from equity to debtsecurities is a result of the plan assets acquired in fiscal 2005.

 

59

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Substantially all pension benefit payments are made from assets of thepension plans.  Using foreign exchangerates as of December 31, 2004 and expected future service, it isanticipated that the future benefit payments will be as follows:  $0.9 million in fiscal 2006, $1.0 million infiscal 2007, $1.0 million in fiscal 2008, $1.0 million in fiscal 2009 and $6.2million from fiscal 2010 to 2015.

 

The Company makes periodic cash contributions to its defined benefitplans.  The level of these contributionsis within minimum required and maximum allowable government prescribed levelsfor the jurisdictions in which the Company operates.  In fiscal 2006, the Company expects tocontribute $0.6 million of cash to these plans.

 

The Company hasdefined contribution employee benefit plans in both the United States andcertain of its foreign locations, covering substantially all eligible non-unionemployees.  Contributions to all suchplans are principally at the Company’s discretion except for theSection 401(k) Company matching contributions, which became guaranteedeffective April 1, 2002.  The GiesGroup contributes to a Swedish government-sponsored retirement system, whichprovides retirement benefits to certain of its employees.  Total expense related to all definedcontribution plans for the years ended January 31, 2003, 2004 and 2005 was$5.0 million, $6.0 million and $9.3 million, respectively.

 

The Company has asupplemental pension benefit agreement with one of its key corporateexecutives.  Benefits pursuant to theagreement will be provided by a purchased annuity insurance policy.

 

**Note13.       Commitments and Contingencies**

** **

The Companyutilizes operating 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, |   |   |   |
|---------------------------------------|--------|--------|--------|
| 2006                                  |   | $      | 19,871 |   |
| 2007                                  |   | 16,020 |   |
| 2008                                  |   | 10,880 |   |
| 2009                                  |   | 6,646  |   |
| 2010                                  |   | 4,869  |   |
| Thereafter                            |   | 7,507  |   |
| Total  minimum payments required      |   | $      | 65,793 |   |

 

Rent expense forthe years ended January 31, 2003, 2004 and 2005 was $26.0 million, $21.2million and $29.3 million, respectively.

 

The Company leasescertain office and warehouse space used in its Wholesale segment from a relatedparty.  Under the terms of the lease, theCompany is responsible for all real estate taxes, maintenance and insurancecosts.  The lease rates were determinedbased on market rates for comparable property at the time of entering into thecontract.  At January 31, 2005, thetotal future lease commitments under the related party lease, which expires infiscal 2007, were approximately $0.8 million. Rent expense associated with the related party leases was $0.9 millionand $0.4 million in fiscal 2004 and fiscal 2005, respectively.

 

60

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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, the parties agreed in open court to settle and resolve all mattersinvolving or in any way relating to the previously reported legal proceedingsby and between the Company and its wholly-owned subsidiary, Endar Corp., on theone hand, and Ennio Racinelli, Darlene Racinelli and others, on the other hand,by means of a written settlement and release agreement, without any payment byany party.  On August 25, 2003, thecase was dismissed by the Riverside Superior Court.

 

The Company hasentered into an employment agreement with its Chairman and CEO, Mr. RobertB. Goergen, dated as of August 1, 2000, as amended by Amendment No. 1dated as of June 15, 2002 and Amendment No. 2 dated as ofMarch 31, 2004 (sometimes herein referred to as “agreement” or “employmentagreement”).  Pursuant to the employmentagreement, upon the death of both Mr. Goergen and his spouse, the Companywill, upon the demand of the estate of either Mr. Goergen or his spouse,buy back from such estate up to 7,500,000 shares of Company Common Stock within90 days of such demand at the fair market value thereof (as defined in theemployment agreement) or register the public offer and sale by such estate ofup to 7,500,000 shares of Company Common Stock.

 

In connection withthe employment agreement, the Company and Mr. Goergen entered into aregistration rights agreement relating to the registration of up to 7,500,000shares of Company Common Stock as described above in the event that the Companychooses not to purchase such shares upon the death of both Mr. Goergen andhis spouse.  There is no specifiedeffective date or stock price requirement in the agreements.  The Company will not be obligated to purchaseor register such shares, notwithstanding the death of both Mr. Goergen andhis spouse, if the survivor’s estate, or his or her beneficiaries, as the casemay be, can then sell all of the shares of the Company Common Stock owned bythem without registration.  The Companyhas recorded a liability of approximately $50,000 at January 31, 2005related to the future costs to register the securities.

 

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

 

During the thirdquarter of fiscal 2004, the Company became aware of an issue involving its401(k) and profit sharing plan.  Thisissue arose effective April 1, 2002 when the Company amended the plan toallow participants to direct voluntary contributions to be invested in theCompany’s common stock, and to permit other investments in the plan to betransferred into the Company’s common stock. These amendments may have caused the continued operation of the plansince April 1, 2002 to be deemed to be an offering of securities thatshould have been registered under the Securities Act of 1933  (the “1933 Act”).  If interests should have been registered, thefailure of the Company to register interests in the plan may entitleparticipants to remedies under the 1933 Act, including rescission ordamages.  The Company ceased allowingparticipants to make new investments in Company common stock effectiveOctober 17, 2003.  The Company haselected to adopt the so-called “restorative” approach with respect to personswho invested in the Plan on or after April 1, 2002 and on or before October 17,2003, the last day on which participants in the Plan could make investments inthe Company Stock Fund.  Under therestorative approach, the Company made additional contributions to the Planaccounts of participants in the total amount of approximately $2,700.  In the case of a limited number of formerparticipants, payments in the amount of contributions that were due to be madeto such participants’ Plan accounts were mailed directly to such formerparticipants.  Due to the statue oflimitations, based on each individual participant’s state of residence, futurerestorative payments may be required if additional losses were incurred afterDecember 1, 2003.

 

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**Note 15.       Guarantees**

 

**Fromtime to time, the Company is party to agreements under which it may beobligated to indemnify a third party with respect to certain matters.  Typically, these obligations arise as aresult of leases entered into by the subsidiaries, under which Blyth agrees toindemnify a third party against losses arising from a breach of representationsrelated to lease obligations assumed.  Inthese circumstances, payment by Blyth is conditioned on the other party makinga claim pursuant to the procedures specified in the lease.  These procedures generally allow Blyth tochallenge the other party’s claims.  Inaddition, Blyth’s obligations under these agreements may be limited in terms oftime and amount. Historically, payments made by Blyth under these arrangementshave not had a material effect on the business, financial condition or resultsof operations.  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 potential amountof future payments due under these lease arrangements, approximate $19.1million.  These amounts are included aspart of the Company’s consolidated lease commitments as reported in Note 13,Commitments and Contingencies.  The leaseguarantees have expiration dates through fiscal 2014.**

 

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**Note16.       Income Taxes**

 

Earnings beforeprovision for income taxes:

 
| **Year ended January 31,****(In thousands)** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| United  States                                    |       | $        | 118,912    |     | $          | 79,809   |       | $ | 72,632 |   |
| Foreign                                           |       | 23,645   |       | 57,084   |       | 76,444   |       |
|                                              |       | $        | 142,557    |     | $          | 136,893  |       | $ | 149,076 |   |

 

Income tax expense consists of the following:

 
| **Year ended January 31,****(In thousands)** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current  income tax expense:                      |       |     |       |     |       |     |       |
| Federal                                           |       | $        | 36,319     |     | $          | 28,943   |       | $ | 21,592 |   |
| State                                             |       | 5,739    |       | 4,710    |       | 3,393    |       |
| Foreign                                           |       | 6,263    |       | 17,308   |       | 15,530   |       |
|                                              |       | 48,321   |       | 50,961   |       | 40,515   |       |
| Deferred  income tax expense (benefit):           |       |     |       |     |       |     |       |
| Federal                                           |       | 4,390    |       | (565     | )          | 11,456   |       |
| State                                             |       | 775      |       | (160     | )          | 981      |       |
| Foreign                                           |       | (454     | )          | 141      |       | (30      | )          |
|                                              |       | 4,711    |       | (584     | )          | 12,407   |       |
|                                              |       | $        | 53,032     |     | $          | 50,377   |       | $ | 52,922 |   |

 

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

 
| **January 31,****(In thousands)**                 | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                  |       |     |       |     |       |
| Accrued  expenses and other                            |       | $        | 410        |     | $          | 294 |   |
| Allowance  for doubtful receivables                    |       | 1,473    |       | 1,150    |       |
| Employee  benefit plans                                |       | 1,052    |       | 2,588    |       |
| Inventory  reserves                                    |       | 6,364    |       | 6,135    |       |
| Net  operating loss and other tax credit carryforwards |       | 5,756    |       | 5,926    |       |
| Other  reserves                                        |       | 3,871    |       | 3,013    |       |
| Valuation  allowance                                   |       | (2,673   | )          | (4,038   | )          |
|                                                   |       | 16,253   |       | 15,068   |       |
| Deferred tax  liabilities:                             |       |     |       |     |       |
| Prepaids                                               |       | —   |       | (3,892   | )          |
| Depreciation  and amortization                         |       | (35,835  | )          | (43,848  | )          |
|                                                   |       | $        | (35,835    | )        | $          | (47,740 | ) |
| Net deferred  tax liability                            |       | $        | (19,582    | )        | $          | (32,672 | ) |

 

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The valuationallowance relates to certain non-U.S. tax loss carryforwards, for which theCompany believes, due to various limitations in these foreign jurisdictions, itis more likely than not that such benefits will not be realized, and to a U.S.loss carryforward where the benefit is limited by the U.S. taxregulations.  The increase in thevaluation allowance from the prior year is principally due to a change in theCompany’s belief that a certain non-U.S. tax loss carryforward would not giverise to a benefit.  At January 31,2005, the Company has a $17.0 million net operating loss carryforward, whichconsists of approximately $6.5 million of federal net operating loss that expireson January 31, 2023 and foreign net operating losses of $10.5 million,which have an indefinite expiration.

 

As ofJanuary 31, 2005, undistributed earnings of foreign subsidiariesconsidered permanently invested for which deferred income taxes have not beenprovided were approximately $115.0 million.

 

A reconciliation of the provision for income taxes to the amountcomputed at the federal statutory rate is as follows:

 
| **Year ended January 31,****(In thousands)** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax  provision at statutory rate                  |       | $        | 49,895     |     | $          | 47,913   |       | $ | 52,176 |   |
| Tax effect  of:                                   |       |     |       |     |       |     |       |
| State income  taxes, net of federal benefit       |       | 4,234    |       | 2,958    |       | 6,618    |       |
| Foreign rate  differential                        |       | (2,667   | )          | (2,530   | )          | (5,663   | )          |
| Other, net                                        |       | 1,570    |       | 2,036    |       | (209     | )          |
|                                              |       | $        | 53,032     |     | $          | 50,377   |       | $ | 52,922 |   |

 

The management ofthe Company periodically estimates the probable tax obligations of the Companyusing historical experience in tax jurisdictions and informed judgments.  There are inherent uncertainties related tothe interpretation of tax regulations in the jurisdictions in which the Companytransacts business.  The judgments andestimates made at a point in time may change based on the outcome of taxaudits, as well as changes to or further interpretations of regulations.  If such changes take place, there is a riskthat the tax rate may increase or decrease in any period.  Amounts accrued for the potential taxassessments primarily recorded in long-term liabilities total $13.6 million and$17.0 million at January 31, 2004 and 2005, respectively. Accruals relateto tax issues for U.S. federal, domestic state and taxation of foreignearnings.  The amounts provided areincluded in the appropriate categories in the table above.

 

In December 2004, the FASB issued FASB Staff Position No. FAS109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creations Act of 2004”(“AJCA”).  The AJCA introduces a limitedtime 85% dividends received deduction on the repatriation of certain foreignearnings to a U.S. taxpayer (repatriation provision), provided certain criteriaare met. FAS109-2 provides accounting and disclosure guidance for therepatriation provision. Although FAS 109-2 is effective immediately, we do notexpect to be able to complete our evaluation of the repatriation provisionuntil after Congress or the Treasury Department provides additional clarifyinglanguage on key elements of the provision. In January 2005, the TreasuryDepartment began to issue the first of a series of clarifying guidancedocuments related to this provision. We expect to complete our evaluation ofthe effects of the repatriation provision sometime during fiscal 2006.

 

The range of possible amounts that we are considering for repatriationunder this provision is between zero and $100 million. While we estimate thatthe related potential range of additional income tax is between zero and $11million, this estimation is subject to change following technical correctionlegislation that we believe is forthcoming from Congress. The amount ofadditional income tax would be reduced by the part of the eligible dividendthat is attributable to foreign earnings on which a deferred tax liability hadbeen previously accrued.

 

64

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**Note17.       Stock Based Compensation**

 

At****January 31, 2005, the Company hadthree stock-based compensation plans, which are described below.

 

The Company’sAmended and Restated 1994 Employee Stock Option Plan (the “Employee OptionPlan”) provides for the grant to officers and employees of both “incentivestock options” and stock options that are non-qualified for Federal income taxpurposes.  The total number of shares ofcommon stock for which options may be granted pursuant to the Employee OptionPlan shall not exceed the sum of 2,880,000 shares plus an additional number ofshares, which were to be added on February 1, 2001, and each anniversarythereof during the term of Employee Option Plan, equal to the lesser of (x)0.75% of the total outstanding shares of common stock of the Company on theapplicable anniversary date and (y) 600,000 shares up to a maximum of 5,280,000shares.

 

The exercise priceof incentive stock options granted under the Employee Option Plan may not beless than 100% of the fair market value of the common stock at the time ofgrant, and the term of any option may not exceed 10 years.  Options generally become exercisable over afive-year period.  With respect to anyemployee who 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 Boardof Directors of the Company unanimously approved an amendment to the EmployeeOption Plan providing that no awards will be made under such plan afterMay 31, 2003.

 

The Company has also adopted the Amended and Restated 1994 Stock OptionPlan for Non-Employee Directors (the “Non-Employee Director Plan”).  A total of 270,000 shares of common stock maybe issued through the exercise of options granted pursuant to the Non-EmployeeDirector Plan.

 

Options grantedpursuant to the Non-Employee Director Plan become exercisable as follows: eachInitial Grant vests over a two year period at the rate of 50% on eachanniversary of the date of grant and each Annual Grant vests in full on thesooner of (x) the first anniversary of the date of the grant or (y) the date ofthe next Annual Meeting of shareholders of Blyth.  On April 1, 2003, the Board of Directorsof the Company unanimously approved an amendment to the Non-Employee DirectorPlan providing that no awards will be made under such plan after May 31,2003.

 

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

 

On March 31, 2004, the Board of Directors of the Companyunanimously approved Amendment No. 1 to the 2003 Plan, and thestockholders approved Amendment No. 1 to the 2003 Plan at the AnnualMeeting of Stockholders on June 24, 2004 (the “2004 Annual Meeting”),effective as of such approval, non-employee directors will no longer receiveoption grants.  Instead, annual awardswill be determined by the Company’s full Board of Directors, subject to anannual limit of awards of 5,000 shares of Common Stock or share equivalents fornew non-employee directors and 2,500 shares of Common Stock or shareequivalents for continuing non-employee directors.  At the 2004 Annual Meeting, each non-employeedirector with at least six months service was granted 1,500 restricted stockunits vesting in two equal installments beginning on the first anniversary ofthe date of grant instead of the Annual Grant.

 

65

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Transactions involving restrictedstock are summarized as follows (in shares):

 
| ** **                               | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Outstanding  grants at beginning of year |       | —   |       | 13,000   |       |
| New shares  granted                      |       | 18,000   |       | 83,795   |       |
| Shares  forfeited                        |       | (5,000   | )          | (3,960   | )          |
| Shares  vested                           |       | —   |       | —   |       |
| Outstanding  grants at year-end          |       | 13,000   |       | 92,835   |       |

 

Transactionsinvolving stock options are summarized as follows:

 
| ** **                            | ** ** | **Option  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------------------------|------------|
| Outstanding  at February 1, 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                      |       | 396,000            |       | 26.14                                |       |
| Options  exercised                    |       | (253,820           | )          | 22.81                                |       |
| Options  cancelled                    |       | (133,700           | )          | 25.54                                |       |
| Outstanding  at January 31, 2004 |       | 2,084,325          |       | 25.26                                |       |
| Options  granted                      |       | 8,500              |       | 31.69                                |       |
| Options  exercised                    |       | (397,325           | )          | 23.62                                |       |
| Options  cancelled                    |       | (170,067           | )          | 24.59                                |       |
| Outstanding  at January 31, 2005 |       | 1,525,433          |       | $                                    | 25.80      |   |

 

AtJanuary 31, 2003, 2004 and 2005, options to purchase 806,677, 920,724 and874,066 shares, respectively, were exercisable.

 

Optionsoutstanding and exercisable as of January 31, 2005, by price range:

 
| ** **                   | ** **   | **Outstanding** | ** ** | **Exercisable**                                   | ** ** |
|------------------------------|--------------|-----------------|------------|---------------------------------------------------|------------|
| **Range of  Exercise Price** | ** **   | **Shares**      | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $                            | 9.96 - 24.97 |            |       | 472,333                                           |       | 5.14 |   | $ | 22.69 |   | 321,533 |   | $ | 22.42 |   |
| 25.03 -  29.97               |         |            | 922,600    |                                              | 6.77       |   | 26.66 |   | 446,533 |   | 26.95 |   |
| 30.44 -  36.00               |         |            | 130,500    |                                              | 5.59       |   | 31.90 |   | 106,000 |   | 31.94 |   |
|                         |         | 1,525,433       |       |                                              |       |   |   | 874,066 |   |   |   |
|                              |              |                 |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

The weightedaverage fair value of options granted during the years ended January 31,2003, 2004 and 2005 was  $11.29, $9.68 and$9.52, respectively.

 

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Certain members ofthe Company’s management have been granted phantom stock appreciation rights(“SARs”). These SARs vest in equal installments as of the end of each fiscalyear and are subject to a term as specified in each individual agreement.  Upon exercise of the SARs, the participant isentitled to receive a payout amount as defined in the agreement.  At the expiration of the term, anyoutstanding portion of vested SARs is deemed to be exercised, and theparticipant is entitled to a payout.  TheCompany’s Consolidated Balance Sheets reflect a liability for these SARs in theamount of $0.5 million and $0.0 million at January 31, 2004 and 2005,respectively.

 

**Note18.       Segment Information**

 

As a result ofcertain organizational changes implemented in the beginning of fiscal 2005, theCompany reevaluated its reporting segments pursuant to SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information”, anddetermined to report financial information with respect to three segmentsbeginning with the quarter ended April 30, 2004.  These new reporting segments are as follows -the Direct Selling segment, the Wholesale segment and the Catalog &Internet segment.  Prior year segmentinformation has been restated to conform with the current yearpresentation.  This revision of segmentshad no effect on the Company’s reporting units for purposes of goodwillimpairment reviews under SFAS No. 142**.**

 

Within the DirectSelling segment, the Company designs, manufactures or sources, markets anddistributes an extensive line of products including scented candles,candle-related accessories, fragranced bath gels and body lotions and otherfragranced products.  These products aresold direct to the consumer under the PartyLite® brand in North America, Europeand Australia through a network of independent sales consultants using theparty plan method of direct selling.

 

Within theWholesale segment, the Company designs, manufactures or sources, markets anddistributes an extensive line of home fragrance products, candle-relatedaccessories, seasonal decorations such as ornaments, artificial trees and trim,and home décor products such as picture frames, lamps and textiles.  Products in this segment are sold in NorthAmerica and Europe  to retailers in thepremium, specialty and mass channels under the CBK®, Carolina®, Colonial®(1),Colonial Candle of Cape Cod®, Colonial at HOMEâ,Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), Holiday 365TM, KaemingkTM(2),Liljeholmens®, Seasons of Cannon Falls® and Triumph Tree®(1)brands.  In addition, chafing fuel andtabletop lighting products and accessories for the Away From Home orfoodservice trade are sold through this segment under the Ambria®, FilterMate®,HandyFuel® and Sterno® brands.

 

**Withinthe Catalog & Internet segment, the Company designs, sources andmarkets a broad range of household convenience items, premium photo albums,frames, holiday cards, personalized gifts and kitchen accessories under theExposures**â, Miles Kimballâ, Walter Drakeâ, The Home Marketplace® and Directions...the path to betterhealthâ brands.  Theseproducts are sold primarily in North America.

 

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

 

The geographicarea data includes net trade sales based on product shipment destination andlong-lived assets (which consists of fixed assets, goodwill and long-terminvestments) based on physical location.

 

----

**(1)Colonial, Euro-Decor, Gies and Triumph Tree trademarks are registered and soldonly outside the United States.**

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

 

67

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**OperatingSegment Information**

 
| **Year ended January 31, (In thousands)**                                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| **Net  Sales**                                                               |       |     |       |     |       |      |       |
| Direct  Selling                                                              |       | $        | 717,442    |     | $          | 764,527   |       | $ | 735,863 |   |
| Wholesale                                                                    |       | 571,141  |       | 630,318  |       | 656,921   |       |
| Catalog &  Internet                                                 |       | —   |       | 110,728  |       | 193,513   |       |
| **Total**                                                                    |       | $        | 1,288,583  |     | $          | 1,505,573 |       | $ | 1,586,297 |   |
|                                                                         |       |     |       |     |       |      |       |
| **Earnings**                                                                 |       |     |       |     |       |      |       |
| Direct  Selling (2)                                                          |       | $        | 145,169    |     | $          | 136,423   |       | $ | 131,930 |   |
| Wholesale  (1),(2)                                                           |       | 10,348   |       | 10,026   |       | 30,699    |       |
| Catalog &  Internet                                                 |       | —   |       | 6,628    |       | 6,701     |       |
| Operating  profit                                                            |       | 155,517  |       | 153,077  |       | 169,330   |       |
| Other income  (expense)                                                      |       | (12,960  | )          | (16,184  | )          | (20,254   | )          |
| **Earnings  before income taxes and cumulative effect of accounting change** |       | $        | 142,557    |     | $          | 136,893   |       | $ | 149,076 |   |
|                                                                         |       |     |       |     |       |      |       |
| **Identifiable  Assets**                                                     |       |     |       |     |       |      |       |
| Direct  Selling                                                              |       | $        | 246,607    |     | $          | 273,900   |       | $ | 249,126 |   |
| Wholesale                                                                    |       | 468,986  |       | 519,647  |       | 613,819   |       |
| Catalog &  Internet                                                 |       | —   |       | 160,380  |       | 164,237   |       |
| Unallocated  Corporate                                                       |       | 144,491  |       | 174,036  |       | 48,638    |       |
| **Total**                                                                    |       | $        | 860,084    |     | $          | 1,127,963 |       | $ | 1,075,820 |   |
|                                                                         |       |     |       |     |       |      |       |
| **Capital  Expenditures**                                                    |       |     |       |     |       |      |       |
| Direct  Selling                                                              |       | $        | 5,321      |     | $          | 5,333     |       | $ | 8,196 |   |
| Wholesale                                                                    |       | 7,409    |       | 14,097   |       | 9,611     |       |
| Catalog &  Internet                                                 |       | —   |       | 1,399    |       | 2,235     |       |
| Unallocated  Corporate                                                       |       | 1,592    |       | 1,134    |       | 934       |       |
| **Total**                                                                    |       | $        | 14,322     |     | $          | 21,963    |       | $ | 20,976 |   |
|                                                                         |       |     |       |     |       |      |       |
| **Depreciation  and Amortization**                                           |       |     |       |     |       |      |       |
| Direct  Selling                                                              |       | $        | 12,386     |     | $          | 12,174    |       | $ | 11,964 |   |
| Wholesale                                                                    |       | 16,873   |       | 19,890   |       | 17,937    |       |
| Catalog &  Internet                                                 |       | —   |       | 2,858    |       | 4,482     |       |
| Unallocated  Corporate                                                       |       | 953      |       | 1,032    |       | 1,217     |       |
| **Total**                                                                    |       | $        | 30,212     |     | $          | 35,954    |       | $ | 35,600 |   |
|                                                                         |       |     |       |     |       |      |       |
| **GEOGRAPHIC  INFORMATION**                                                  |       |     |       |     |       |      |       |
| **Net  Sales**                                                               |       |     |       |     |       |      |       |
| United  States                                                               |       | $        | 943,009    |     | $          | 1,026,275 |       | $ | 1,015,992 |   |
| Germany                                                                      |       | 134,983  |       | 177,443  |       | 203,796   |       |
| Other  International                                                         |       | 210,591  |       | 301,855  |       | 366,509   |       |
| **Total**                                                                    |       | $        | 1,288,583  |     | $          | 1,505,573 |       | $ | 1,586,297 |   |
|                                                                         |       |     |       |     |       |      |       |
| **Long  Lived Assets**                                                       |       |     |       |     |       |      |       |
| United  States                                                               |       | $        | 288,617    |     | $          | 391,517   |       | $ | 376,209 |   |
| International                                                                |       | 77,498   |       | 118,183  |       | 171,548   |       |
| **Total**                                                                    |       | $        | 366,115    |     | $          | 509,700   |       | $ | 547,757 |   |

 

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*(1)*       2003 Wholesale segmentearnings include an impairment charge of approximately $2.6 million as a resultof placing Wax Lyrical into administrative receivership (See Note 4 to theConsolidated Financial Statements).

*(2)*       2004 earnings include $23.8million of restructuring and impairment charges of which $17.1 million relatesto the Wholesale segment and $6.7 million relates to the Direct Sellingsegment  (See Note 4 to the ConsolidatedFinancial Statements).

 

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**Note19.       Stock Repurchase Plan**

 

The Company’sBoard of Directors has authorized the Company to repurchase up to 6,000,000shares of common stock under the share repurchase program.  The Company repurchases shares to offsetgrants of restricted stock and shares issued upon exercise of stock options andto decrease shares outstanding.  During fiscal2005, the Companypurchased an additional 216,700 shares on the open market for a cost of $7.1million, bringing the cumulative total purchased shares to 4,561,800 as of January 31,2005 for a total cost of approximately $112.5 million.  The acquired shares are held as common stockin treasury at cost.

 

On June 7,2004 the Company announced that its Board of Directors approved a repurchase ofup to 4,000,000 outstanding shares of the Company’s common stock, with theright to repurchase up to an additional 2% of the Company’s outstanding shares,at a price per share not greater than $35.00 nor less than $30.00 through aDutch auction cash tender offer.  Thefinal number of shares repurchased under the tender offer, which expired onJuly 9, 2004, was 4,906,616 shares for an aggregate purchase price of$172.6 million including fees and expenses. The tender offer was funded with $86.1 million of available cash and$86.5 million of borrowings against the Company’s $200 million CreditFacility.  The Company does not expectthe tender offer to affect its share repurchase program, capital expenditures,dividend policy or acquisitions.

 

**Note20.       Earnings Per Share**

 

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

 
| **Year ended January 31,****(In thousands)**          | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net earnings                                               |       | $        | 57,772     |     | $          | 86,351   |       | $ | 96,514 |   |
| Weighted  average number of common shares outstanding:     |       |     |       |     |       |     |       |
| Basic                                                      |       | 46,256   |       | 45,771   |       | 43,136   |       |
| Dilutive  effective of stock options and restricted shares |       | 259      |       | 256      |       | 420      |       |
| Weighted  average number of common shares outstanding:     |       |     |       |     |       |     |       |
| Diluted                                                    |       | 46,515   |       | 46,027   |       | 43,556   |       |
|                                                            |            |          |            |          |            |          |            |  |  |  |

 

As ofJanuary 31, 2003, 2004 and 2005, options to purchase 417,800, 456,800 and50,200 shares of common stock, respectively, are not included in thecomputation of diluted earnings per share because the effect would beantidilutive.

 

**Note21.       Fire Loss**

** **

In July 2003,the Company’s manufacturing facility located in Monterrey, Mexico was destroyedby fire.  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.  The Company has decidednot to rebuild the Monterrey facility. The loss of fixed assets and inventory totaled approximately $8.0million.  The Company incurred additionalcosts of $1.9 million through January 31, 2004, primarily for theadditional production costs of manufacturing product at differentfacilities.   Some of these costsremained in ending inventory at January 31, 2004.  The Company is insured for losses related tothis fire and has received $11.3 million in insurance proceeds as ofJanuary 31, 2005.

 

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**Note22.       Selected Quarterly FinancialData**(Unaudited)

** **

A summary ofselected quarterly information for the years ended January 31 is asfollows:

 
| ** **                                                | ** ** | **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 |   |

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

 

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

 

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**Item 9****.  Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

(a) Previous independentaccountants

 

On March 16,2004, the Board of Directors of the Company, acting upon the recommendation ofthe Audit Committee, dismissed PricewaterhouseCoopers LLP (“PwC”) as theindependent accountants of the Company, effective as of April 26, 2004,the date of its report on the financial statements of the Company as ofJanuary 31, 2004 and for the year then ended, which financial statementswere included in the Annual Report on Form 10-K for the year endedJanuary 31, 2004.

 

PwC’s reports on thefinancial statements of the Company for the fiscal years ended January 31,2003 and 2004 did not contain any adverse opinion or disclaimer of opinion andwere not qualified or modified as to uncertainty, audit scope or accountingprinciple.

 

In connection with itsaudits of the financial statements of the Company for the two most recentfiscal years ended January 31, 2004, and through April 30, 2004,there were no disagreements with PwC on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure,which disagreements, if not resolved to PwC’s satisfaction, would have causedPwC to make reference thereto in their reports on the Company’s financialstatements 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 thatthe Company’s then current designation of two reporting segments did not complywith the requirements of Statement of Financial Accounting StandardsNo. 131 (“Disclosures about Segments of an Enterprise and RelatedInformation”), a position with which the Company did not agree.  The Audit Committee discussed the subject ofthe designation of operating segments with PwC. The Company authorized PwC to respond fully to the inquiries ofDeloitte & Touche LLP, the Company’s independent accountants for thefiscal year ending January 31, 2005, concerning this disagreement.

 

In response to PwC’sadvice that it believed that the Company’s designation of two reportingsegments did not comply with the requirements of SFAS 131, the Companyreevaluated its reporting segments as at the end of each of its fiscal yearsended January 31, 2004, 2003 and 2002. As a result of such reevaluation, the Company determined to report itsfinancial results in five reporting segments in fiscal 2004, and four reportingsegments in fiscal 2003 and fiscal 2002. This revision of segments had the related effect of requiring changes inthe Company’s reporting units for purposes of goodwill impairment reviews underStatement of Financial Accounting Standards No. 142 (“Goodwill and OtherIntangible Assets”), retroactive to the February 1, 2002 adoption date ofSFAS 142.  This resulted in the need toperform impairment reviews of several additional reporting units as ofFebruary 1, 2002, and each subsequent year-end balance sheet datethereafter.  These impairment reviewsindicated the need to record additional impairment charges as of theFebruary 1, 2002 adoption of SFAS 142, specifically to write off $20.9million in goodwill associated with the 1999 acquisition of the Gies

 

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Groupand $6.3 million in goodwill associated with the 1999 acquisition of the ColonyGroup.  Both of these businesses arecomponents of the current Wholesale reporting segment (previously WholesaleHome Fragrance).  The Company’s fiscal2003 financial statements were 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.

 

During each of the twoyears in the period ended January 31, 2004, and through April 30,2004, there were no reportable events (as defined in Regulation S-K Item304(a)(1)(v)), except for the following event: On April 21, 2004, PwC advised the Company that it had identifiedan internal control issue which PwC considered to be a material weakness inthat changes in circumstances, internal reporting and management structuresappeared not to have been properly evaluated by management or considered inconnection with ongoing compliance with SFAS 131 and SFAS 142 guidance.  PwC recommended that the Company should(A) have a process in place to evaluate changes in management structureand reporting to the chief operating decision maker that would effect segmentdetermination, (B) strengthen procedures to monitor all changes inoperations that impact accounting and reporting matters and (C) ensurethat it has sufficient staffing in its financial reporting function, withappropriate technical qualifications and tasked with ensuring ongoingcompliance with relevant accounting and financial reporting requirements.

 

(b) New independent accountants

 

OnMarch 16, 2004, the Board of Directors of the Company, acting upon therecommendation of the Audit Committee, appointed Deloitte & Touche LLPas the independent accountants of the Company for the fiscal year endingJanuary 31, 2005.

 

**Item 9A****.  Controls and Procedures**

 

(a) Evaluation of Disclosure Controls andProcedures.

 

Our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Securities Exchange Act of 1934 (“Exchange Act”)Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered bythis report as required by paragraph (b) of Exchange Act Rules 13a-15or 15d-15.  Based upon this evaluation,our principal executive officer and our principal financial officer have concludedthat the Company’s disclosure controls and procedures were not effective as ofJanuary 31, 2005 because of the material weakness described below.

 

(b) Management’s Report on Internal Controlover Financial Reporting.

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange ActRules 13a-15(f) and 15d-15(f). The Company’s internal control overfinancial reporting is a process designed under the supervision of theprincipal executive and financial officers, and effected by the board ofdirectors and management, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of consolidated

 

72

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financial statements forexternal purposes in accordance with generally accepted accounting principlesin the United States of America. Because of its inherent limitations, such ashuman judgment, errors or mistakes, internal control over financial reportingmay not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

We performed an assessment of the effectiveness of the Company’sinternal control over financial reporting as of January 31, 2005 based onthe framework in*Internal Control*—*Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The objectiveof this assessment is to determine whether the company’s internal control overfinancial reporting was effective as of January 31, 2005.

 

A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected. Management is unable to conclude that the Company’sinternal control over financial reporting is effective if there are one or morematerial weaknesses in internal control over financial reporting. As ofJanuary 31, 2005, the Company did not maintain effective controls over theaccounting for income taxes. Specifically, the Company did not adequately identify, quantify andaccount for income tax contingencies; the Company did not adequately reconcileits effective tax rate to its statutory rate; and the Company did notadequately review the difference between the income tax basis and financialreporting basis of assets and liabilities and reconcile the difference torecorded deferred income tax assets and liabilities. These control deficienciesresult in more than a remote likelihood that a material misstatement of annualor interim financial statements would not be prevented or detected.Accordingly, management determined that these control deficiencies constitute amaterial weakness. Because of this material weakness, management has concludedthat the Company did not maintain effective internal control over financialreporting as of January 31, 2005, based on criteria in*Internal Control—Integrated Framework*.

 

Our management’s assessmentof the effectiveness of the Company’s internal control over financial reportingas of January 31, 2005 has been audited by Deloitte & Touche LLP,an independent registered public accounting firm, as stated in their report,which appears below in Item 9A(d) in the Annual Report and which expresses anunqualified opinion on management’s assessment and an adverse opinion on theeffectiveness of the Company’s internal control over financial reporting as ofJanuary 31, 2005.

 

(c) Changes in Internal Control over FinancialReporting.

 

There was no change in ourinternal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Exchange Act Rules 13a-15 or15d-15 that occurred during the fourth quarter of fiscal year 2005 that hasmaterially 

 

73

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affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

However, to address the material weakness described above, subsequent toJanuary 31, 2005, the Company’s management has performed an extensivestudy and reconciliation of the income tax accounts and income taxcontingencies. As a result, management believes that the financialstatements included in this report fairly present in all material respects theCompany’s financial condition, results of operations and cash flows for theperiods presented in conformity with generally accepted accounting principles.In addition, the enhanced reconciliation procedures performed to address thisissue subsequent to year-end will continue to be performed in the future toensure this matter is remediated.  Additionally,the Company has added a resource to the tax department to complete thenecessary levels of review and has increased its focus on processes andprocedures associated with accounting for income taxes.

 

(d) Report of Independent Registered PublicAccounting Firm

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

We have audited management’s assessment, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting (“Management’sReport”), that Blyth, Inc. and subsidiaries (the “Company”) did notmaintain effective internal control over financial reporting as ofJanuary 31, 2005, because of the effect of the material weaknessidentified in management’s assessment based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinions.

 

A company’s internal control over financial reporting is a processdesigned by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, andeffected by the company’s board of directors, management, and other personnelto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis. Also, projections of any evaluation ofthe effectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

A material weakness is a significant deficiency, or combination ofsignificant deficiencies, that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected. The following material weakness has been identified andincluded in management’s assessment.  At January 31, 2005, the Company had not designed andimplemented effective controls over: (1) the process to identify, quantifyand account for income tax contingencies; and (2) the reconciliation ofthe recorded amounts in the prior year of its tax accounts and balances to itstax return.  In addition, the Company’scontrols over the reconciliation of its effective tax rate to its statutoryrate did not operate effectively. Although there were no misstatements identified, the combination of thetwo design deficiencies and the operating deficiency results in more than aremote likelihood that a material misstatement to the current anddeferred tax asset and liability accounts, the income tax provision andthe related disclosures will not be prevented or detected in the annual orinterim consolidated financial statements.

 

Thismaterial weakness was considered in determining the nature, timing, and extentof audit tests applied in our audit of the consolidated financial statementsand financial statement schedule as of and for the year endedJanuary 31, 2005 of the Company and this report does not affect our reporton such consolidated financial statements and financial statement schedule.

 

Inour opinion, management’s assessment that the Company did not maintaineffective internal control over financial reporting as of January 31,2005, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Also in our opinion, because of the effect of the materialweakness described above on the achievement of the objectives of the controlcriteria, the Company has not maintained effective internal control overfinancial reporting as of January 31, 2005, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. 

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule.

 

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

 

April 15,2005

Chicago,Illinois

 

**Item 9B****.  Other Information**

 

None

 

**PART III**

 

**Item 10****.   Directors and Executive Officers of theRegistrant**

**Item 11****.   Executive Compensation**

**Item 12****.   Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

##### **Item13****.   Certain Relationships and RelatedTransactions**

**Item 14****.   Principal Accountant Fees and Services**

 

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, 2005.

 

74

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

 

**Item 15****.  Exhibits and Financial Statement Schedules**

 

(a)(1).*      Financial Statements*

 

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

 
| Reports  of Independent Registered Public Accounting Firms | 36-37  |
|------------------------------------------------------------|--------|
|                                                       |   |
| Statements:                                                |   |
|                                                       |   |
| Consolidated Balance Sheets                                | 38     |
| Consolidated  Statements of Earnings                       | 39     |
| Consolidated  Statements of Stockholders’ Equity      | 40     |
| Consolidated Statements of Cash Flows                      | 41     |
| Notes to Consolidated Financial Statements                 | 42     |

 

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

 

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

 
| 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                                                                                                                                    |

 

75

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|    |   | (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)                                                                                                                                                                                                                                                                                                                                                     |
| 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 |

 

76

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|     |   | 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)                                                                                                                                                                                                                                                                                            |
| 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 (incorporated by  reference to Exhibit 10.6(b) to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended January 31, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7+    |   | Registration Rights Agreement dated as of  August 1, 2000 by and between the Registrant and Robert B. Goergen  (incorporated by reference to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

77

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|      |   | 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 (incorporated  by reference to Exhibit 10.7(a) to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended January 31, 2004)                                                                                                                                                 |
| 10.8+     |   | 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 (incorporated by  reference to Exhibit 10.9(a) to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended January 31, 2004)                                                                                                                                                                                                                             |
| 10.10+    |   | 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)                                                                                                                                                                                 |
| 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  (incorporated by reference to Exhibit 10.12(a) to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended January 31,  2004)                                                                                                                                                                                                         |
| 10.13*+   |   | 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)                                                                                                                                                                                                                                                                                          |
| 10.15**+  |   | Director Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 16.       |   | Letter re: Change in Certifying Accountant  (incorporated by reference to Exhibit 16 to the Registrant’s Annual Report on  Form 10-K filed April 30, 2004)                                                                                                                                                                                                                                                                                                                                     |

 

78

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| 21.**  |   | List of Subsidiaries                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|
| 23.1** |   | Consent of Deloitte & Touche LLP                                                                                    |
| 23.2** |   | Consent of PricewaterhouseCoopers LLP                                                                                        |
| 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 President                                            |
| 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 |

 

----

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

**          Filedherewith.

+                 Managementcontract or compensatory plan required to be filed by Item 15(a) of thisreport.

 

79

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Date: April 15, 2005 | BLYTH, INC.                                 |
|---------------------------|---------------------------------------------|
|                      |                                        |
|                      |                                        |
|                      | By:                                         | /s/ Robert B. Goergen |   |
|                      | Name: Robert B. Goergen                     |
|                      | Title: Chairman and Chief Executive Officer |

 

----

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                    | ** ** | **Date**            |
|------------------------|------------|----------------------------------------------|------------|---------------------|
|                   |       |                                         |       |                |
| /s/ Robert B. Goergen  |       | Chairman and Chief Executive Officer;        |       | April 15, 2005 |
| Robert B. Goergen      |       | Director (Principal Executive Officer)       |       |                |
|                   |       |                                         |       |                |
| /s/ Robert H. Barghaus |       | Vice President and Chief Financial Officer   |       | April 15, 2005 |
| Robert H. Barghaus     |       | (Principal Financial and Accounting Officer) |       |                |
|                   |       |                                         |       |                |
| /s/ Roger A. Anderson  |       | Director                                     |       | April 15, 2005 |
| Roger A. Anderson      |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ John W. Burkhart   |       | Director                                     |       | April 15, 2005 |
| John W. Burkhart       |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ Pamela M. Goergen  |       | Director                                     |       | April 15, 2005 |
| Pamela M. Goergen      |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ Neal I. Goldman    |       | Director                                     |       | April 15, 2005 |
| Neal I. Goldman        |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ Carol J. Hochman   |       | Director                                     |       | April 15, 2005 |
| Carol J. Hochman       |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ Wilma H. Jordan    |       | Director                                     |       | April 15, 2005 |
| Wilma H. Jordan        |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ James M. McTaggart |       | Director                                     |       | April 15, 2005 |
| James M. McTaggart     |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ John E. Preschlack |       | Director                                     |       | April 15, 2005 |
| John E. Preschlack     |       |                                         |       |                |
|                   |       |                                         |       |                |
| /s/ Howard E. Rose     |       | Director                                     |       | April 15, 2005 |
| Howard E. Rose         |       |                                         |       |                |

 

----

 

### **Report of Independent**Registered Public Accounting Firm

 

**on**

**Financial Statement Schedule**

 

To the Board of Directors and

Stockholders of Blyth, Inc.:

 

Our audits of the consolidated financialstatements referred to in our report dated April 26, 2004, appearing inthe 2005 Annual Report to Stockholders of Blyth, Inc. and Subsidiaries onForm 10-K, also included an audit of the financial statementschedule listed in Item 15(a)(2) of this Form 10-K.  In our opinion, this financial statementschedule presents fairly, in all material respects, the information setforth therein when read in conjunction with the related consolidated financialstatements.

 

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

 

 

Stamford, Connecticut

April 26, 2004

 

S-1

----

 

**SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS**

**For the years ended January 31, 2003,2004 and 2005**

**(In thousands)**

 
| **Description**                  | ** ** | **Balance at  Beginning  of Period** | ** ** | **Acquired  Balances** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|------------------------|------------|-------------------------------------|------------|----------------|------------|--------------------------------|------------|
| **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                                |       | 1656                   |       | —                              |       | —         |       | 2,673                          |       |
| Inventory  reserve               |       | 27,145                               |       | 1343                   |       | 15,462                              |       | (20,970        | )          | 22,980                         |       |
|                             |       |                                 |       |                   |       |                                |       |           |       |                           |       |
| **2005**                         |       |                                 |       |                   |       |                                |       |           |       |                           |       |
|                             |       |                                 |       |                   |       |                                |       |           |       |                           |       |
| Allowance  for doubtful accounts |       | $                                    | 4,470      |                   | $          | 538                                 |       | $              | 1,371      |                           | $          | (2,351 | ) | $ | 4,028 |   |
| Income tax  valuation allowance  |       | 2,673                                |       | —                 |       | 1,565                               |       | (200           | )          | 4,038                          |       |
| Inventory  reserve               |       | 22,980                               |       | 1,730                  |       | 14,130                              |       | (16,407        | )          | 22,433                         |       |

 

S-2

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