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") designs, manufactures, markets and distributes an extensive line of candles and home fragrance products and non-fragranced products. The Company has operations within and outside the United States and sells its products worldwide.
Since becoming a public company, our net sales have grown substantially in the last seven years. Internal growth and acquisitions have contributed to such growth. Internal growth has been generated by increased sales of candles and home fragrance products and non-fragranced products to consumers worldwide, the introduction of new products and product line extensions, and geographic expansion. We have successfully integrated numerous acquisitions and investments into our operations since the Company's formation in 1977.
Our home page on the Internet is at www.blythinc.com. You can learn more about us by visiting that site. That information, however, is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.
(B) DESCRIPTION OF AND FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
During the fourth quarter of fiscal 2001, the Company announced a realignment of its business strategy and the formation of a new business segment, the non-fragranced products segment. The Company operates in two business segments: candles and home fragrance products, and non-fragranced products, which accounted for approximately 88.8% and 11.2%, respectively, of consolidated net sales for the fiscal year ended January 31, 2001. The financial information relating to these business segments for each of the years in the periods ended January 31, 2001, 2000 and 1999 appearing in Note 13 to the Company's consolidated financial statements in this Annual Report on Form 10-K is incorporated herein by reference. Further description of each business segment is provided below:
CANDLES AND HOME FRAGRANCE PRODUCTS
The candles and home fragrance products designed, manufactured, marketed and distributed by the Company primarily include scented and unscented candles, aromatherapy candles, potpourri and environmental fragrance products, including air fresheners, filters and sprays, and a broad range of candle accessories. These products are sold under various brand names through a wide variety of distribution channels.
In managing our day to day business, as well as evaluating strategic
opportunities, the Company is focused on the worldwide consumer market for candles and home fragrance products and related accessories.
Within the worldwide consumer market for candles and home fragrance products, we focus on two primary areas: the consumer market in the United States and markets outside the United States.
UNITED STATES CONSUMER MARKET
With respect to the consumer market in the United States, our candles and home fragrance brands continued to grow in fiscal year 2001. Through the activities of PartyLite Gifts, Inc., Candle Corporation of America, Endar Corp., and Fragrance Solutions, Inc., we market our candles and home fragrance products through a variety of distribution channels and tailor our products, designs, packaging and prices to satisfy the varying demands of customers within each distribution channel.
Specifically, we sell our candles and home fragrance products direct to the consumer through a network of independent sales consultants, as well as to department and gift stores, specialty chains, food and drug stores, and mass merchandisers, and through independent sales representatives and Company sales managers. We support all of the above by providing them with comprehensive product catalogues and samples to market our everyday, promotional and seasonal product lines.
Our direct selling activities reach consumers by utilizing a network of independent sales consultants to sell candles and home fragrance products through the home party plan method of selling. Our independent sales consultants receive their earnings based on sales of our products at home parties organized by them, as well as through home parties organized by other consultants recruited by them. Over 35,000 independent sales consultants were selling in the United States in fiscal year 2001; and, we were represented by independent sales consultants in all 50 states. Our direct selling activity continued to demonstrate growth in fiscal year 2001.
We believe that certain advantages arise from having a broad mix of distribution channels. For example, successful new ideas and research can be shared across channels among our marketing groups. We believe that our competitive position in all markets is enhanced by our ability to respond quickly to new orders and our ability to assist customers through inventory management and control and to satisfy delivery requirements through on-line ordering.
MARKETS OUTSIDE THE UNITED STATES
We continue to focus on becoming a worldwide home fragrance company built mainly around candles, but also including related products. We market our candles and home fragrance products outside (as well as inside) the United States direct to the consumer through a network of independent sales consultants, as well as to department and gift stores, specialty chains, and mass merchandisers and through independent sales representatives, and Company sales managers. During fiscal year 2001, the Company had independent direct selling sales consultants in the following geographical areas: Austria, England, Finland, France, Germany, Italy, Luxembourg, Northern Ireland, Switzerland, and Canada. The Company has a total of approximately 49,000 active selling consultants
worldwide (including the United States). In fiscal year 2002, we have begun our direct selling operations in Mexico. The Company is the leading manufacturer and marketer of fragranced candles and related products to mass merchants, department and gift stores in Europe through the activities of the Colony Group, the Gies Group and Wax Lyrical, Ltd., our specialty retailer in the United Kingdom. Our Ambria(TM), Asp-Holmblad(TM), Carolina Designs(R), Colony(R)(1)(2), Gies(TM)(1), Liljeholmens(R), and Wax Lyrical(TM) brand products are sold through retailers and have their highest market shares in the United Kingdom, Germany, Sweden and Denmark. In fiscal year 2001, the Colony Group expanded its business operations into Italy and Spain through joint ventures, and the Company successfully completed the restructuring of its Gies/Liljeholmens Group.
We believe that international markets, including Canada, offer the Company significant potential for growth. In fiscal year 2001, approximately 27.5% of our total sales were outside of the United States and our international sales growth rate was approximately 2%.
Our international operations also include exports of products sold through Company sales managers and independent sales representatives, which compete in the markets of Canada, Europe, Latin America and the Pacific Rim, to independent distributors, department and gift stores, mass merchandisers and Foodservice distributors. We currently plan to continue to expand internationally through the establishment of foreign-based marketing and distribution operations.
More detailed information regarding geographic area data is set forth in Note 13 to the Company's consolidated financial statements.
In fiscal year 2002, we plan to grow the candles and home fragrance products segment of our business for the most part organically, both domestically and internationally, with the possibility of some smaller acquisition-related growth.
NON-FRAGRANCED PRODUCTS
The Company designs, manufactures, markets and distributes a broad range of non-fragranced products, including decorative gift bags and tags and seasonal decorations under the brand names Jeanmarie(R) and Impact(TM). We are also a producer of portable heating fuel and other institutional products sold under various brand names, including Sterno(R) and HandyFuel(R). We sell these products, both domestically and internationally, through independent sales representatives and distributors.
Through the activities of JMC Impact, Inc.(3), we market our decorative gift bags, tags and seasonal decorations primarily to the mass market and tailor our non-fragranced products, designs and packaging to meet the varying demands of customers within these channels.
The Company also services, through its institutional products group, the Foodservice market where it is a supplier of institutional non-fragranced products to restaurants, hotels and other institutional customers. We sell these products through independent sales representatives, independent Foodservice distributors, and Company sales managers. Sales of the Sterno(R) and HandyFuel(R) brands grew in fiscal year 2001 at 2.5 times industry
growth rates. Institutional sales in fiscal year 2001 were less than ten percent of the Company's total sales. In fiscal year 2002, we plan to continue our growth in the non-fragranced products segment through internal sales growth, as well as acquisitions.
On April 11, 2001, the Company acquired Midwest of Cannon Falls, Inc., a leading creative expressions company in the wholesale decorative products and giftware industry. The Midwest of Cannon Falls(R) brand of holiday giftware, home accents and garden products is sold by over 17,000 retailers nationwide.
In fiscal year 2001, we exited two product lines, citronella candles and religious candles, since we believe these products no longer offer the sales and profit growth opportunities we foresee for the Company overall.
The Company continues actively to pursue strategic acquisitions in the following areas: paper-related and seasonal decorative products and Foodservice products, mirroring businesses in which the Company is already engaged, as well as giftware and premium personal care products, both of which are closely related to current established product lines.
PRODUCT BRAND NAMES
Our key brand names under which our candles and home fragrance products are sold, in alphabetical order, are: Ambria(TM) Ambria Natural Elements(R) Aromatics(TM) Asp-Holmblad(TM)(1) Being(TM) Candle Corporation of America(TM) Canterbury(R) Carolina Designs(R) Colonial Candle of Cape Cod(R) Colonial at HOME(R) Colony(R)(1) (2) Eclipse Candles(TM)(1) (2) Endar(TM) FilterMate(R) Florasense(R) Fragrance Originals(R) Fragrance Solutions(TM) Gies(TM)(1) Indulgences(TM) Kate's Original Recipe(TM) Kate's Simple Pleasures(TM) Liljeholmens(R) Old Harbor Candles(R) Original Recipe(R) PartyLite(R) Wax Lyrical(TM)
Our key brand names for our non-fragranced products, in alphabetical order, are:
Canned Heat(TM) HandyFuel(R) Impact(TM) Jeanmarie(R) Midwest of Cannon Falls(R)(5) Sterno(R)
NEW PRODUCT DEVELOPMENT
Each year we develop and introduce new products for the candles and home fragrance products segment and non-fragranced products segment to satisfy changing consumer tastes. The new product development process is coordinated by the Company on a worldwide basis by teams comprised of brand managers, product managers, designers, global sourcing personnel, research and development laboratory technicians, manufacturing engineers and sales managers.
New product concepts are directed to the marketing departments from all areas within the Company, as well as from the Company's independent sales representatives. The new product development process, including technical research, fragrance studies, market research, comparative analysis, engineering specifications, feasibility studies, safety assessments, testing and evaluation can require from 3 to 18 months to complete. In total, new products have typically accounted for at least 15% of our net sales in the first full year following introduction.
The Company's focus on new product development and product line extensions specific to each channel of distribution and segment has been an important element of its efforts to become a leading candles and home fragrance products and non-fragranced products company. With continual introduction of new designs, new forms, new shapes, new fragrances, and innovative packaging, the Company continues to enjoy its sales growth and profitability. In fiscal year 2001 the Company introduced new products such as the Frosted Line and Simmer Snaps(TM) in the Colonial at HOME(R) product line and Kate's Simple Pleasures(TM), an extension of the Kate's Original Recipe(TM) brand, as well as Being(TM) and Ambria Natural Elements(R), to name a few.
MANUFACTURING, SOURCING AND DISTRIBUTION
In both our business segments, we are continuously attempting to reduce our costs through more efficient worldwide production, sourcing and distribution methods, technological advancements and consolidating and rationalizing acquired equipment and facilities. Since our 1994 initial public offering, we have invested over $250 million in new facilities and more advanced equipment in order to lower manufacturing costs, improve product quality and significantly increase manufacturing capacity so that we may meet expected future sales growth and improve time to market. However, in fiscal year 2001, in order to rationalize and restructure our European consumer activities encompassing the Colony Group, the Gies Group and Wax Lyrical, Ltd., our specialty retailer in the United Kingdom, we took steps to close four manufacturing facilities. We believe that these closings will permit us to reposition these businesses more effectively for growth and profitability in fiscal year 2002.
The manufacture of the Company's candles and home fragrance products and non-fragranced products involves the use of various highly automated processes and technologies, as well as certain hand crafting and finishing. During recent years, we have invested in new automated machinery and process control systems that we believe have resulted and will continue to result in significant cost savings and capacity expansion.
Since many of our products, especially our candle-related accessories and non-fragranced products, are manufactured by others based on our design specifications, our global sourcing approach is very important to our new product development process, as well as to managing product quality and cost. To maximize distribution efficiencies, we operate a network of stand-alone highly automated distribution facilities in addition to distribution facilities in our manufacturing plants.
In fiscal year 2001, we expanded our corporate research and development space located in Batavia, Illinois. This state-of-the-art research and development center became the Company's worldwide center of technical and product innovation.
TECHNOLOGICAL ADVANCEMENTS
We have invested substantial sums in technological initiatives, including Internet-based technology, and we are seeing the benefits. PLANET - or PartyLite Application for the NET - is a Web-based Extranet being rolled out to all PartyLite independent sales consultants in North America. We believe that PLANET's automated order entry system will help to eliminate most common errors and speed orders through faster processing and delivery, resulting in superior customer service. Further, by easing the administrative workload and providing tools with which to track sales and programs, we believe PLANET will help consultants build their businesses more effectively. And, as an added benefit, the improved accuracy of an automated order entry system should result in administrative cost savings for the Company.
CUSTOMERS
Throughout the world, customers for our candles and home fragrance products and non-fragranced products include department and gift stores, mass merchandisers including specialty chains, food and drug stores, and individual consumers (served by independent sales consultants through the home party plan method). Our institutional customers are primarily major hotel and restaurant chains and distributors servicing the institutional Foodservice market. No single customer accounts for 10% or more of our sales of candles and home fragrance products and non-fragranced products.
COMPETITION
Both of our business segments are highly competitive. The principal competitive factors are new product introductions, product quality, delivery time and reliability, customer service and price. The domestic and international markets for candles and home fragrance products, as well as for non-fragranced products, are highly fragmented. Numerous suppliers service these markets. Because there are relatively low barriers to entry, the Company may face future competition from other consumer product companies, which may have substantially greater financial and marketing resources than those available to the Company.
EMPLOYEES
As of January 31, 2001, the Company had approximately 4,600 full-time employees. Of those, approximately 3,600 are non-salaried, of which approximately 35% are outside the United States. Approximately 150 hourly workers in the Company's Chicago, Illinois and Brooklyn, New
York(4) facilities are represented by Local 777 of the Teamsters and Local 422-S of the AFL-CIO. Contracts with these unions will expire in June 2003 and June 2002, respectively. Also, approximately 50 workers for the Gies Group are represented by the IG Chemie union in our facility in Germany. The contracts with this union will expire in April 2002. The remaining employees, approximately 97% of total employees, are salaried and non-salaried, non-unionized employees. We believe that our relations with our employees are good. Since its formation in 1977, the Company has never experienced a work stoppage.
RAW MATERIALS
All of the raw materials used by the Company for its candles and home fragrance products and non-fragranced products, principally petroleum based wax, fragrance and glass containers, have historically been available in adequate supply from multiple sources.
TRADEMARKS AND PATENTS
The Company owns numerous United States trademark registrations and has trademark applications pending in the United States Patent and Trademark Office with respect to certain candles and home fragrance products and non-fragranced products. In addition, we register certain trademarks in certain foreign countries. All of our United States trademark registrations can be maintained and renewed provided that the trademarks are still in use for the goods and services covered by such registrations. We regard these trademarks as valuable assets for our candles and home fragrance products and non-fragranced products business segments. Although we own certain patents used primarily in the non-fragranced products segment that we consider valuable, our total business is not dependent upon any single patent or group of patents.
ENVIRONMENTAL LAW COMPLIANCE
Most of our manufacturing and distribution and certain research operations are affected by federal, state and local environmental laws and international environmental laws. These laws relate to the discharge of materials or otherwise with respect to the protection of the environment. We have made and intend to continue to make necessary expenditures for compliance with applicable laws. We do not believe these expenditures will have any material effect on our capital expenditures, earnings or competitive position.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR DISCLOSURE AND ANALYSIS IN THIS REPORT AND IN OUR 2001 ANNUAL REPORT TO SHAREHOLDERS CONTAIN SOME FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS GIVE OUR CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. YOU CAN USUALLY IDENTIFY THESE STATEMENTS BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. THEY OFTEN USE WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "EXPECT", "PROJECT", "INTEND", "PLAN", "BELIEVE," AND OTHER WORDS AND TERMS OF SIMILAR MEANING IN CONNECTION WITH ANY DISCUSSION OF FUTURE OPERATING OR FINANCIAL PERFORMANCE. IN PARTICULAR, THESE INCLUDE STATEMENTS RELATING TO FUTURE ACTIONS, PROSPECTIVE PRODUCTS OR PRODUCT APPROVALS, FUTURE PERFORMANCE OR RESULTS OF CURRENT AND ANTICIPATED PRODUCTS, SALES EFFORTS, EXPENSES, THE OUTCOME OF CONTINGENCIES SUCH AS LEGAL PROCEEDINGS, AND FINANCIAL RESULTS. FROM TIME TO TIME,
WE ALSO MAY PROVIDE ORAL OR WRITTEN FORWARD-LOOKING STATEMENTS IN OTHER MATERIALS WE RELEASE TO THE PUBLIC.
ANY OR ALL OF OUR FORWARD-LOOKING STATEMENTS IN THIS REPORT, IN OUR 2001 ANNUAL REPORT TO SHAREHOLDERS AND IN ANY OTHER PUBLIC STATEMENTS WE MAKE MAY TURN OUT TO BE WRONG. THEY CAN BE AFFECTED BY INACCURATE ASSUMPTIONS WE MIGHT MAKE OR BY KNOWN OR UNKNOWN RISKS AND UNCERTAINTIES. MANY FACTORS MENTIONED IN THIS DISCUSSION, FOR EXAMPLE, PRODUCT COMPETITION AND THE COMPETITIVE ENVIRONMENT, WILL BE IMPORTANT IN DETERMINING FUTURE RESULTS. CONSEQUENTLY, NO FORWARD-LOOKING STATEMENT CAN BE GUARANTEED. ACTUAL FUTURE RESULTS MAY VARY MATERIALLY.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE ADVISED, HOWEVER, TO CONSULT ANY FURTHER DISCLOSURES WE MAKE ON RELATED SUBJECTS IN OUR 10-Q, 8-K AND 10-K REPORTS TO THE SEC. ALSO NOTE THAT WE PROVIDE THE FOLLOWING CAUTIONARY DISCUSSION OF RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT TO OUR BUSINESS. THESE ARE SOME OF THE FACTORS THAT WE THINK COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTED AND HISTORICAL RESULTS. OTHER FACTORS BESIDES THOSE LISTED HERE COULD ALSO ADVERSELY AFFECT THE COMPANY. THIS DISCUSSION IS PROVIDED AS PERMITTED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
|X| RISK OF INABILITY TO MAINTAIN GROWTH RATE
The Company has grown substantially in past years. We expect that our future growth will be generated by sales to the faster-growing worldwide consumer market for candles and home fragrance products and non-fragranced products. The market for our Foodservice products has grown, but more slowly, and we expect it will continue to do so. Our ability to continue to grow depends on several factors, including the following: market acceptance of existing products, the successful introduction of new products, our ability to recruit new independent sales consultants, sourcing of raw materials, and increases in production and distribution capacity to meet demand. The candles and home fragrance products and the non-fragranced products industries are driven by consumer tastes. Accordingly, there can be no assurance that our existing or future products will maintain or achieve market acceptance. In addition, our sales and earnings results have recently been impacted negatively by a slowing of the United States economy as a whole and by a drop in consumer confidence at both the individual and retailer levels. There can be no assurance that our sales and earnings results will not be materially adversely affected by these factors in the future. If the United States economy continues to slow and/or consumer confidence continues to drop, our operating results may be materially adversely affected. Also recently, we have incurred certain one-time expenses in connection with the restructuring of our U.S. and European consumer wholesale operations and our exit from certain lower margin product lines. While we expect these actions to position us more effectively for continued growth and profitability, there can be no assurance that we will achieve these results. We expect that, as we grow, our rate of growth will be less than our historical growth rate. Our growth in both the candles and home fragrance products segment and the non-fragranced
products segment has been due, in part, to acquisitions. We expect our future growth in the candles and home fragrance segment to be primarily organic, with the possibility of selective acquisitions. We continue to pursue strategic acquisitions in certain areas of the non-fragranced segment. There can be no assurance that we will be able to continue to identify suitable acquisition candidates, to consummate acquisitions on terms favorable to the Company, to finance acquisitions or to integrate successfully acquired operations. In the future, acquisitions may contribute more to the overall Company's sales growth rate than historically.
|X| RISKS ASSOCIATED WITH INTERNATIONAL SALES AND FOREIGN-SOURCED PRODUCTS
Our international business has grown at a faster rate than sales in the United States in recent years. In addition, we source a portion of our candles, accessories and decorative gift bags and seasonal decor from independent manufacturers in the Pacific Rim, Europe and Mexico. For these reasons we are subject to the following risks inherent in foreign manufacturing and sales: fluctuations in currency exchange rates, economic and political instability, transportation delays, difficulty in maintaining quality control, restrictive actions by foreign governments, nationalizations, the laws and policies of the United States affecting importation of goods (including duties, quotas and taxes) and trade and foreign tax laws. In particular, during fiscal year 2001, declining European currencies had a significant negative impact on our international sales results. If European currencies remain weak or decline further, our operating results may be materially adversely affected.
|X| ABILITY TO RESPOND TO INCREASED PRODUCT DEMAND
Our internal growth has required increases in personnel, expansion of production and distribution facilities, and enhancement of management information systems. Our ability to meet future demand for candles and home fragrance products and non-fragranced products will be dependent upon success in (1) training, motivating and managing new employees, (2) bringing new production and distribution facilities on line in a timely manner, (3) improving management information systems in order to respond promptly to customer orders and (4) improving our ability to forecast anticipated product demand in order to continue to fill customer orders promptly. If we are unable to meet future demand for products in a timely and efficient manner, our operating results could be materially adversely affected.
|X| RAW MATERIALS
For certain raw materials, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays. Such raw material shortages have not previously had, and are not expected to have, a material adverse effect on the Company's operations.
|X| DEPENDENCE ON KEY MANAGEMENT PERSONNEL
Our success depends upon the contributions of key management personnel, particularly our Chairman, Chief Executive Officer and President,
Robert B. Goergen. We do not have employment contracts with any of our key management personnel except for Mr. Goergen, nor do we maintain any key person life insurance policies. Also, certain of our senior executives have assumed new positions recently. The loss of any of the key management personnel or the inability of executives to perform their new positions could have a material adverse effect on the Company.
|X| COMPETITION
Our business is highly competitive, both in terms of price and new product introductions. The worldwide market for candles and home fragrance products, as well as for non-fragranced products, is highly fragmented, with numerous suppliers serving one or more of the distribution channels served by the Company. Because there are relatively low barriers to entry to the candles and home fragrance products and non-fragranced products industries, we may face increased future competition from other companies, some of which may have substantially greater financial and marketing resources than those available to us. From time to time during the year-end holiday season, we compete with companies offering candles manufactured in foreign countries, particularly China. In addition, certain competitors focus on a particular geographic or single-product market and attempt to gain or maintain market share solely on the basis of price.
- -------- (1) Sold only outside the United States. (2) The Colony(R) trademark is registered in the United Kingdom and other countries outside of the United States. In the United States they are sold by another company. (3) Formerly Jeanmarie Creations, Inc. (4) The Company entered into an agreement on January 18, 2001 pursuant to which the assets and employees located at the Brooklyn facility are expected to be assigned to another company. (5) The Company acquired the Midwest of Cannon Falls(R) trademark on April 11, 2001.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth the location and approximate square footage of the Company's major manufacturing and distribution facilities:
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The Company's executive offices, administrative offices and outlet stores are generally located in leased space (except for certain offices located in owned space).
- ------------ 1 The number shown does not include 32,000 square feet of Research & Development space used for office and laboratories. 2 The Company is currently engaged in negotiations with a third party to sell this facility and possibly lease it back from such third party. 3 The Company entered into an agreement on January 18, 2001 pursuant to which the Company sold this facility on February 27, 2001. 4 Facility is leased by third party service provider; the Company pays provider an all-inclusive service fee.
Most of the Company's properties are currently being utilized for their intended purpose except as footnoted above.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of its business. In the opinion of the Company's management, existing litigation will not have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2001 annual meeting of stockholders will be held on June 12, 2001. No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year ended January 31, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price range for the Company's Common Stock on the New York Stock Exchange as reported by the New York Stock Exchange was as follows:
As of April 16, 2001, there were 2,727 registered holders of record of the Company's Common Stock. On March 28, 2001, the Company's Board of Directors declared a regular semi-annual cash dividend in the amount of $0.10 per share of Common Stock payable in the second quarter of fiscal year 2002.
ITEM 6.
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected summary consolidated financial and operating data of the Company for fiscal years 1997 through 2001, which have been derived from the Company's audited financial statements for those years. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report to Shareholders on Form 10-K.
- ---------- (1) ALL PERIODS HAVE BEEN RESTATED TO REFLECT THE ADOPTION OF "EMERGING ISSUES TASK FORCE" ("EITF") 00-10, "ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS" (SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS, "ACCOUNTING CHANGES"). (2) RESTATED FOR A JUNE 1997 THREE-FOR-TWO STOCK SPLIT, WHICH WAS EFFECTED AS A STOCK DIVIDEND. EARNINGS PER COMMON SHARE FOR FISCAL 1997 REFLECTS THE ISSUANCE OF 993,745 SHARES OF COMMON STOCK IN CONNECTION WITH THE ACQUISITION OF NEW IDEAS INTERNATIONAL, INC. IN DECEMBER 1996. EARNINGS PER COMMON SHARE FOR ALL PERIODS GIVE EFFECT TO THE ISSUANCE OF 1,900,786 SHARES OF COMMON STOCK IN CONNECTION WITH THE ACQUISITION OF ENDAR CORP. IN MAY 1997. EARNINGS PER COMMON SHARE FOR THE APPLICABLE PERIODS ALSO INCLUDES THE RESULTS OF OPERATIONS OF JEANMARIE CREATIONS, INC., 100% OWNED, OF WHICH 80% WAS ACQUIRED IN APRIL 1995, WITH AN ADDITIONAL 4% BEING ACQUIRED EACH SUBSEQUENT YEAR BEGINNING IN MAY 1996, THE RESULTS OF OPERATIONS OF NEW IDEAS INTERNATIONAL, INC., WHICH WAS ACQUIRED IN DECEMBER 1996, THE DECEMBER 1997 ACQUISITION OF THE STERNO(TM) AND HANDYFUEL(TM) ASSETS, AND THE RESULTS OF OPERATIONS FROM THE COMPANY'S ACQUISITION OF THE REMAINING 50% OF COLONY GIFT CORPORATION, LTD., IN MAY 1999 WHICH WAS PREVIOUSLY INCLUDED AS AN EQUITY INVESTMENT, NONE OF WHICH HAD A MATERIAL EFFECT ON THE COMPANY'S RESULTS OF OPERATIONS IN THE PERIOD DURING WHICH THEY OCCURRED, OR THEREAFTER, AND ALSO INCLUDES THE RESULTS OF OPERATIONS OF ENDAR CORP., WHICH WAS ACQUIRED THROUGH A POOLING OF INTERESTS IN MAY 1997 (THE COMPANY'S RESULTS HAVE BEEN RESTATED TO INCLUDE THE HISTORICAL RESULTS OF OPERATIONS OF ENDAR CORP.). AS A RESULT OF THE ACQUISITIONS OF LILJEHOLMENS STEARINFABRIKS AB ("LILJEHOLMENS") CLASS A AND CLASS B COMMON STOCK IN DECEMBER 1998 AND JUNE 1999, BALANCE SHEET AMOUNTS BEGINNING IN JANUARY 1999 INCLUDE THE BALANCES OF LILJEHOLMENS AND RESULTS OF OPERATIONS INCLUDE LILJEHOLMENS BEGINNING IN FEBRUARY 1999. (3) THE COMPANY RECORDED A ONE-TIME CUMULATIVE EFFECT OF ACCOUNTING CHANGE IN JANUARY 2001 TO REFLECT THE ADOPTION OF STAFF ACCOUNTING BULLETIN ("SAB") 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" (SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS, "ACCOUNTING CHANGES").
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage relationship to net sales and the percentage increase of certain items included in the Company's consolidated statements of earnings:
FISCAL 2001 COMPARED TO FISCAL 2000
CONSOLIDATED OPERATIONS Net sales increased $47.2 million, or 4.1%, from $1,150.0 million in fiscal 2000 to $1,197.2 million in fiscal 2001. This increase was attributable to sales growth both in the Candles and Home Fragrance Products and the Non-Fragranced Products segments as well as the inclusion of sales from businesses acquired. The continued weakness of European currencies versus the dollar had a negative impact on the overall sales growth rate of the Company. Excluding the negative effect of the deterioration of European currencies, net sales increased approximately 6.8% in fiscal 2001 when compared to last year. International sales represented approximately 26% of total net sales in fiscal 2001, which is approximately the same percentage as in the prior year despite the deterioration of foreign currencies. Net sales in the US market increased approximately 5% when compared to last year.
Gross profit increased $28.1 million, or 4.7%, from $597.6 million in fiscal 2000 to $625.7 million in fiscal 2001. Gross profit margin increased from 52.0% for fiscal 2000 to 52.3% for fiscal 2001. A key factor that favorably impacted the gross margin was the relatively higher sales growth of premium priced products. The Company recorded one-time charges in cost of goods sold of approximately $9.0 million in fiscal 2001, (which are included in the $16.7 million in total restructuring and other one-time charges as described in Note 4 to the Consolidated Financial Statements, "Unusual Charges") which reduced the gross profit margin by 0.8%. Excluding these one-time charges gross profit margin increased 1.1% compared to fiscal 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED)
CONSOLIDATED OPERATIONS (CONTINUED) Selling and shipping expense increased $29.3 million, or 8.5%, from $341.9 million in fiscal 2000 to $371.2 million in fiscal 2001. Selling and shipping expense as a percentage of net sales increased in fiscal 2001 when compared to fiscal 2000 primarily due to the higher percentage of sales of premium priced products for which selling expenses are relatively higher. Unexpected bad debt expenses (discussed in Note 4 to the Consolidated Financial Statements) of approximately $2.3 million also contributed to the increase in selling expenses.
Administrative expense increased $8.7 million, or 9.8%, from $88.7 million in fiscal 2000 to $97.4 million in fiscal 2001. The increase in administrative expense in fiscal 2001 versus a year ago is due to investments in product development, e-business initiatives and to the overall growth of the Company.
The Company recorded other one-time charges of approximately $7.7 million reported as a component of operating expenses in fiscal 2001, (which are included in the $16.7 million in total restructuring and other one-time charges as described in Note 4 to the Consolidated Financial Statements, "Unusual Charges") which reduced the operating profit margin by 0.6%.
The Company, for strategic reasons, decided during fiscal 2001 to exit certain lower margin product lines, including the religious and citronella product lines. Expenses related to this activity include asset write-offs, inventory write-downs and severance payments made to employees, which were recorded as restructuring and one-time charges and are included in the amounts discussed above as part of "Gross Profit" and the immediately preceding paragraph discussing other one-time charges. The following table sets forth net sales and operating profit data for these discontinued product lines for fiscal 2001 and fiscal 2000. These amounts were reported as part of the Candles and Home Fragrance Products segment in Note 13 to the Consolidated Financial Statements, "Segment Information".
Interest expense increased $3.8 million, or 31.4%, from $12.1 million in fiscal 2000 to $15.9 million in fiscal 2001. The increase in interest expense is primarily attributable to borrowing under the Company's public debt offering which was in effect for the full 2001 fiscal year and to increases in short term interest rates (as further described in "Liquidity and Capital Resources").
Income tax expense decreased $7.5 million, or 13.0%, from $57.5 million in fiscal 2000 to $50.0 million in fiscal 2001. The reduction in income tax expense is primarily attributable to the decrease in earnings subject to income tax. The Company's effective tax rate remained at approximately 38.2% during fiscal 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED)
CONSOLIDATED OPERATIONS (CONTINUED) The Company recorded a one-time charge of $1.2 million, which is reflected as a cumulative effect of accounting change, in fiscal 2001 as a result of adopting Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements" (See Note 2 to the Consolidated Financial Statements, "Accounting Changes").
As a result of the foregoing, net earnings decreased $12.8 million, or 13.9%, from $92.4 million in fiscal 2000 to $79.6 million in fiscal 2001.
Basic earnings per share before cumulative effect of accounting change based upon the weighted average number of shares outstanding were $1.69 compared to $1.91 for the same period last year. The cumulative effect of accounting change previously discussed had an effect on basic earnings per share equal to $.02. Basic earnings per share after cumulative effect of accounting change based on the weighted average number of shares outstanding were $1.67 compared to $1.91 for the same period last year. Diluted earnings per share before cumulative effect of accounting change based upon the potential dilution that could occur if options to issue common stock were exercised were $1.69 compared to $1.89 for the same period last year. The cumulative effect of accounting change had an effect on diluted earnings per share equal to $.02. Diluted earnings per share after cumulative effect of accounting change based upon the potential dilution that could occur if options to issue common stock were exercised were $1.66 compared to $1.89 for the same period last year.
During the fourth quarter of fiscal 2001, the Company announced a realignment of its business strategy and the formation of a new business segment, the Non-Fragranced Products segment. The Company operates in two business segments - Candles and Home Fragrance Products and Non-Fragranced Products. A discussion about these segments follows.
SEGMENT REVIEW - CANDLES AND HOME FRAGRANCE PRODUCTS Net sales of the Candles and Home Fragrance Products segment increased $10.0 million, or 0.9%, from $1,053.4 million in fiscal 2000 to $1,063.4 million in fiscal 2001 inclusive of the sales of Wax Lyrical a U.K. retailer that became a consolidated subsidiary in April 2000. The continued weakness of European currencies against the dollar had a negative impact on the net sales growth rate as discussed under the heading "Consolidated Operations" above. International sales accounted for approximately 27.5% of total net sales in the Candles and Home Fragrance Products segment for fiscal 2001. In the US market, the Candles and Home Fragrance Products segment experienced a modest overall sales increase versus a year ago. This modest sales increase for the year, driven by strong first half net sales, occurred despite the impact of the overall weakening of the economy in the second half of fiscal 2001, particularly the fourth quarter. In fiscal 2002, the Company plans to grow the Candles and Home Fragrance Products segment for the most part organically, with the possibility of some smaller acquisition-related growth.
Earnings of the Candles and Home Fragrance Products segment decreased $24.8 million, or 16.1%, from $153.8 million in fiscal 2000 to $129.0 million in fiscal 2001. The decrease in earnings is largely attributable to the unusual charges, which included restructuring and one-time costs and unexpected bad debt expenses totaling approximately $19.0 million (as further described in Note 4 to the Consolidated Financial Statements, "Unusual Charges") and the further deterioration in foreign currency exchange rates versus the dollar.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED)
SEGMENT REVIEW - NON-FRAGRANCED PRODUCTS Net sales of the Non-Fragranced Products segment increased $37.2 million, or 38.5%, from $96.6 million in fiscal 2000 to $133.8 million in fiscal 2001. This sales growth is primarily due to the acquisition of Impact Plastics, which occurred at the end of fiscal 2000. The deterioration in the US economy in the latter part of the 2001 fiscal year adversely affected the overall sales growth of the Non-Fragranced Products segment. In fiscal 2002, the Company plans to continue to grow the Non-Fragranced Products segment through internal growth, as well as acquisitions.
Earnings of the Non-Fragranced Products segment increased $6.0 million, or 58.8%, from $10.2 million in fiscal 2000 to $16.2 million in fiscal 2001. This increase is primarily due to the acquisition of Impact Plastics.
FISCAL 2000 COMPARED TO FISCAL 1999
CONSOLIDATED OPERATIONS Net sales increased $234.7 million, or 25.6%, from $915.3 million in fiscal 1999 to $1,150.0 million in fiscal 2000. Most of this increase was attributable to unit sales growth in sales of the Company's consumer everyday and seasonal holiday products, which was achieved through a combination of four key factors: market growth, new products, new customers and acquisitions which will be discussed further in the segments review below. Despite the deterioration of European currencies during the year, international net sales continued to grow. International sales accounted for approximately 26% of total net sales in fiscal 2000, compared to approximately 18% in fiscal 1999, and continued to grow at a faster rate than the Company as a whole, accounting for approximately 58% of the net sales increase in fiscal 2000.
Gross profit increased $108.5 million, or 22.2%, from $489.1 million in fiscal 1999 to $597.6 million in fiscal 2000. Gross profit margin decreased from 53.4% for fiscal 1999 to 52.0% for fiscal 2000. The gross profit margin as a percentage of net sales was lower in fiscal 2000 due to the inclusion of Liljeholmens, which contributes relatively lower gross margin than the rest of the Company and was not included in the fiscal 1999 operating results. Before including Liljeholmens, gross profit as a percentage of net sales increased more than one full percentage point to 54.6% compared to 53.4% a year earlier. Several key operational factors continued to favorably impact the gross margin: relatively higher sales growth of premium priced products; global product sourcing benefits across our businesses both in raw materials and accessories; and, cost efficiencies as a result of capital investments made over several previous years, particularly in manufacturing process technology, and distribution technology, including two new distribution facilities.
Selling and shipping expense increased $60.6 million, or 21.5%, from $281.3 million in fiscal 1999 (30.7% of net sales), to $341.9 million in fiscal 2000 (29.7% of net sales). Selling and shipping expense, as a percentage of net sales, decreased in fiscal 2000 when compared to fiscal 1999 due to, among other factors, the continued improvement in shipping efficiencies. The inclusion of Liljeholmens' operating results in fiscal 2000 also contributed to the lower selling and shipping expense as a percentage of net sales due to their relatively lower selling expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED)
CONSOLIDATED OPERATIONS (CONTINUED) Administrative expense increased $11.2 million, or 14.5%, from $77.5 million in fiscal 1999 (8.5% of net sales) to $88.7 million in fiscal 2000 (7.7% of net sales). Administrative expense as a percentage of net sales declined during fiscal 2000 versus fiscal 1999 for two main reasons: the economies of scale (the ability to leverage administrative expense over a larger sales base); and, the inclusion of Liljeholmens (which experiences relatively lower administrative expense as a percentage of sales).
Interest expense increased $5.4 million, or 80.6%, from $6.7 million in fiscal 1999 to $12.1 million in fiscal 2000. The increase in interest expense was primarily attributable to borrowings to fund the acquisitions and long-term investments made during fiscal 2000 including debt assumed in such acquisitions and to a lesser extent the Company's public debt offering (as further described in "Liquidity and Capital Resources").
Income tax expense increased $9.1 million, or 18.8%, from $48.4 million in fiscal 1999 to $57.5 million in fiscal 2000. The Company's effective tax rate decreased from approximately 39.4% during fiscal 1999 to approximately 38.3% for fiscal 2000, reflecting the on-going globalization of the Company's business portfolio and effective use of foreign tax planning strategies.
As a result of the foregoing, net earnings increased $17.9 million, or 24.0%, from $74.5 million in fiscal 1999 to $92.4 million in fiscal 2000.
Basic earnings per share based upon the weighted average number of shares outstanding were $1.91 for fiscal 2000 compared to $1.52 for fiscal 1999. Diluted earnings per share based upon the potential dilution that could occur if options to issue common stock were exercised were $1.89 for fiscal 2000 compared to $1.50 for fiscal 1999.
SEGMENT REVIEW - CANDLES AND HOME FRAGRANCE PRODUCTS Net sales in the Candles and Home Fragrance Products segment increased $223.8 million, or 27.0%, from $829.6 million in fiscal 1999 to $1,053.4 million in fiscal 2000. Most of this increase was attributable to unit sales growth in sales of the Company's consumer everyday and seasonal holiday products, which was achieved through a combination of four key factors: market growth, new products, new customers and acquisitions. First, in terms of market growth in fiscal 2000, the Company was the largest competitor in the large market for home fragrance products, which was still growing in fiscal 2000: namely fragrance candles, potpourri, and related accessories. The Company also had the most diverse home fragrance product assortment in Europe. Despite the deterioration of European currencies during fiscal 2000, international net sales continued to grow at a faster rate than the Candles and Home Fragrance Products segment as a whole and represented approximately 27% of total sales in this segment in fiscal 2000. Second, new products continued to be a key contributor to the Candles and Home Fragrance Products segment's sales growth. During fiscal 2000 the Company introduced three major new fragrance initiatives in the Candles and Home Fragrance Products segment in three distinct market channels: Colonial at Home(TM) for our US premium channel - independent giFT stores; Indulgences(TM) for our direct selling channel worldwide; and Ambria by Gies for oUR European mass market merchandisers. Third, the Company increased its customer base in this segment in three major channels of distribution: direct selling consultants, premium retail outlets and mass retail outlets. Lastly, the acquisition of Liljeholmens contributed to growing sales and share of market.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED)
SEGMENT REVIEW - CANDLES AND HOME FRAGRANCE PRODUCTS (CONTINUED) Earnings of the Candles and Home Fragrance Products segment increased $32.2 million, or 26.5%, from $121.6 million in fiscal 1999 to $153.8 million in fiscal 2000. The previously discussed factors leading to the growth in sales all contributed to the increase in earnings in the Candles and Home Fragrance Products segment as well as the favorable impact of: global product sourcing benefits across our businesses both in raw materials and accessories; and, cost efficiencies as a result of capital investments made over several previous years, particularly in manufacturing process technology and distribution technology including two new distribution facilities.
SEGMENT REVIEW - NON-FRAGRANCED PRODUCTS Net sales in the Non-Fragranced Products segment increased $10.8 million, or 12.6%, from $85.8 million in fiscal 1999 to $96.6 million in fiscal 2000. Most of this increase was attributable to unit sales growth in sales of the segment's consumer everyday and seasonal holiday products, which was achieved primarily through a combination of new products and new customers.
Earnings of the Non-Fragranced Products segment increased $3.5 million, or 52.2%, from $6.7 million in fiscal 1999 to $10.2 million in fiscal 2000. The previously discussed increases in total sales along with a relatively higher sales growth of higher operating margin products contributed to the increased earnings as well as the cost efficiencies as a result of capital investments made over several previous years.
SEASONALITY
Approximately 44% of the Company's annual net sales typically occur in the first and second fiscal quarters of the fiscal year, with the larger balance experienced in the third and fourth fiscal quarters, generally due to consumer buying patterns. The Company's net sales are strongest in the third and fourth fiscal quarters due to increased shipments to meet year-end holiday season demand for the Company's products. Operating profit largely follows these patterns, although a somewhat larger portion of the Company's annual operating profit is earned in the second half of the fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Operating assets and liabilities increased from January 31, 2000 to January 31, 2001 due to both the Company's internally generated growth and acquisitions. Inventory increased from $186.7 million at January 31, 2000 to $201.1 million at January 31, 2001. Inventory at January 31, 2001 includes an adjustment to inventory as a result of the adoption of SAB 101. Excluding this adjustment inventory increased approximately 4.3% when compared to last year. Accounts receivable decreased $17.9 million from $84.9 million at the end of fiscal 2000 to $67.0 million at the end of fiscal 2001. Excluding the adjustment to accounts receivable as a result of the adoption of SAB 101, accounts receivable at January 31, 2001, decreased $5.4 million, which is due to reduced sales in the fourth quarter. Accounts payable and accrued expenses decreased $2.9 million from $105.2 million at the end of fiscal 2000 to $102.3 million at the end of fiscal 2001.
Capital expenditures for property, plant and equipment were approximately $25.3 million in fiscal 2001. The Company anticipates total capital spending of approximately $25.0 million for fiscal 2002, which will be used primarily for upgrades to machinery and equipment in existing facilities, and technology.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has grown in part through acquisitions and, as part of its growth strategy, the Company expects to continue from time to time in the ordinary course of its business to evaluate and pursue acquisition opportunities as appropriate. In the future, acquisitions may contribute more to the overall Company's sales growth rate than historically. We expect our future growth in the Candles and Home Fragrance Products segment to be primarily organic, with the possibility of selective acquisitions. We continue to pursue strategic acquisitions in certain areas of the Non-Fragranced Products segment.
Pursuant to the Company's revolving credit facility ("Credit Facility"), as amended on September 14, 1999, which matures on October 17, 2002, lending institutions have agreed, subject to certain conditions, to provide an unsecured revolving credit facility to the Company in an aggregate amount of up to $135.0 million and to provide, under certain circumstances, an additional $33.8 million. Amounts outstanding under the Credit Facility bear interest, at the Company's option, at Bank of America's prime rate (9.00% at January 31, 2001) or at the Eurocurrency rate plus a credit spread ranging from 0.25% to 0.50%, based on a pre-defined financial ratio. At January 31, 2001, approximately $2.3 million in letters of credit was outstanding under the Credit Facility. The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments. At January 31, 2001, the Company was in compliance with such covenants.
At December 31, 2000, Liljeholmens had various long-term debt agreements in multiple European currencies maturing at different dates over the next two to six years. The total amount outstanding as of December 31, 2000 under the loan agreements was approximately $5.0 million with variable interest rates ranging from 3.80% to 5.55%, of which $1.5 million relates to current maturities. The loans are collateralized by certain of Liljeholmens' real estate.
As of January 31, 2001, the Company had a total of $10.0 million available under an uncommitted bank line of credit. Amounts outstanding under the line of credit bear interest at short term fixed rates. No amount was outstanding under the uncommitted line of credit at January 31, 2001.
As of December 31, 2000, Liljeholmens had available lines of credit of approximately $36.3 million of which approximately $2.1 million was outstanding. The amounts outstanding under the lines of credit bear interest at a weighted average rate of 5.22% at December 31, 2000. The lines of credit are renewed annually.
Colony Gift has a short term revolving credit facility with Barclays Bank ("Barclays"), which matures on June 30, 2001, pursuant to which Barclays has agreed to provide a revolving credit facility in an amount of up to $29.9 million, collateralized by certain of Colony Gifts' assets. As of December 31, 2000, Colony Gift had borrowings under the credit facility of approximately $25.2 million, at a weighted average interest rate of 6.62%.
In May 1999, the Company filed a shelf registration statement for up to $250.0 million in debt securities with the Securities and Exchange Commission. On September 24, 1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.0 million, which is being amortized over the life of the notes. Such notes contain, among other provisions, restrictions on liens of principal property or stock issued to collateralize debt. At January 31, 2001, the Company was in compliance with such covenants. Interest is payable semiannually on April 1 and October 1. The proceeds of the offering were used to repay substantially all of the Company's outstanding debt under its revolving and uncommitted lines of credit in the United States.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash provided by operating activities amounted to $112.7 million in fiscal 2001 compared to $119.4 million in fiscal 2000, a modest decrease of $6.7 million or 5.6%. The key factors contributing to the continued strong cash flow from operations were net earnings of $79.6 million and depreciation and amortization of $33.4 million.
On December 14, 2000, the Company's Board of Directors authorized the Company to repurchase up to 1,000,000 additional shares of its common stock bringing the total authorization to 4,000,000 shares. During the course of fiscal 2001, a total of 1,148,100 shares were repurchased for a total cost of approximately $26.8 million. As of March 31, 2001, the Company had cumulatively purchased on the open market 2,356,800 common shares for a total cost of approximately $57.0 million. The acquired shares are held as common stock in treasury at cost.
On March 28, 2001, the Company announced that it has declared a cash dividend of $0.10 per share of the Company's common stock for the six months ended January 31, 2001. The dividend, authorized at the Company's March 28, 2001 Board of Directors meeting, will be payable to shareholders of record as of May 1, 2001, and will be paid on May 15, 2001.
The Company's primary capital requirements are for working capital to fund the necessary levels of inventory and accounts receivable to sustain the Company's sales growth, and for capital expenditures and acquisitions. The Company believes that cash on hand, cash from operations and available borrowings under the Credit Facility and lines of credit previously described will be sufficient to fund its operating requirements, capital expenditures, stock repurchase program, dividends and all other obligations for fiscal 2002 and fiscal 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company has operations outside of the United States and sells its products worldwide. The Company's activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are actively monitored and, where considered appropriate, managed by the Company.
INTEREST RATE RISK
As of January 31, 2001 the Company is subject to interest rate risk on approximately $30.2 million of variable rate debt, including the debt attributable to Liljeholmens and Colony Gift. Each 1.00% increase in the interest rate would impact pre-tax earnings by approximately $302,000 if applied to the total.
FOREIGN CURRENCY RISK
The Company uses forward foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain committed capital expenditures, certain inventory purchases, Canadian intercompany payables and on certain intercompany loans. The Company does not hold or issue derivative financial instruments for trading purposes.
With regard to commitments for machinery and equipment and inventory in foreign currencies, upon payment of each commitment the underlying forward contract is closed and the corresponding gain or loss is included in the measurement of the cost of the acquired asset. With regard to forward exchange contracts used to hedge Canadian intercompany payables, gain or loss on such hedges is recognized in earnings in the period in which the underlying hedged transaction occurs. Gains or losses on foreign currency forward contracts related to intercompany loans are recognized currently through income and generally offset the transaction gains or losses in the foreign currency cash flows which they are intended to hedge. If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred until the hedged item is settled. However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings. For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the cash flow with the items being hedged.
The following table provides information about the Company's foreign exchange forward contracts at January 31, 2001.
The foreign exchange contracts outstanding as of January 31, 2001 had maturity dates ranging from February 2001 through January 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
For the fiscal year ended January 31, 2001, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs" which requires that amounts billed to customers for shipping and handling fees be classified as revenues and shipping and handling costs be classified as cost of goods sold. All prior periods have been restated to reflect the reclassification of shipping and handling fees and costs previously reported in selling and shipping expense in the Consolidated Statements of Earnings. The adoption has no impact on net earnings.
For the fiscal year ended January 31, 2001, the Company adopted the newly-effective Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements". As a result of adopting SAB 101, the Company changed its revenue recognition policy to recognize revenue upon delivery, when both title and risk of loss are transferred to the customer. In accordance with the provisions of SAB 101, the Company recorded a one-time charge of $1.2 million, net of tax, which is reflected as a cumulative effect of an accounting change in the Consolidated Statements of Earnings. This one-time charge had an effect equal to $.02 Diluted Earnings Per Share. This adoption by the Company affected certain amounts reported in the fiscal 2001 fourth quarter and full year Consolidated Statements of Earnings and certain year-end Consolidated Balance Sheet amounts such as a decrease in accounts receivable of approximately $12.5 million. The change in accounting method would not have had a material effect on the Consolidated Statements of Earnings in fiscal 2000 or 1999 if adopted in these periods.
On June 15, 1998, the Financial Accounting Standards Board issued Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 (as deferred by SFAS 137) is effective for all fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of transaction. The Company anticipates that, due to its limited use of derivative instruments, the adoption of SFAS 133 will not have a significant effect on the Company's results of operations or its financial position.
Also, in May 2000, the EITF issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF No. 00-14 addresses the recognition, measurement and statement of earnings classification of various sales incentives such as discounts, coupons, rebates and free products. The effective date has been delayed until June 30, 2001. EITF 00-14 becomes effective in the Company's second quarter of fiscal 2002 at which time the Company will report the cost of sales incentives covered by EITF 00-14 as a reduction of revenue. The adoption will have no impact on net earnings.
EUROPEAN MONETARY UNION - EURO
On January 1, 1999, several member countries of the European Union established fixed conversion rates between their existing sovereign currencies, and adopted the Euro as their new common legal currency. Since that date, the Euro has been traded on currency exchanges while at the same time the legacy currencies will remain legal tender in the participating countries during a transition period from January 1, 1999 through January 1, 2002.
During the transition period, cashless payments can be made in the Euro, and parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EUROPEAN MONETARY UNION - EURO (CONTINUED)
Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies so that they will no longer be available.
The Company began assessing the effect of the Euro's introduction in late 1997. The Company believes that its business and financial systems are capable of handling the conversion to Euro. The Company will continue to evaluate issues involving introduction of the Euro. Based on current information and the Company's current assessment, the Company does not expect that the Euro conversion will have a material adverse effect on its business, results of operations, cash flows or financial condition.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully elsewhere in this Annual Report on Form 10-K and in the Company's subsequent filings with the Securities and Exchange Commission.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Blyth, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Blyth, Inc. and its subsidiaries at January 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether 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 by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 of the Notes to Consolidated Financial Statements, the Company changed its method of accounting for revenue recognition.
/s/ PricewaterhouseCoopers LLP ------------------------------ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois March 14, 2001, except for Note 14, as to which the date is March 31, 2001, and except for Note 17, as to which the date is April 11, 2001
ITEM 8.
ITEM 8.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During the fourth quarter of fiscal 2001, the Company announced a realignment of its business strategy and the formation of a new business segment, the Non-Fragranced Products segment. The Company operates in two business segments - Candles and Home Fragrance Products and Non-Fragranced Products. The Company has operations outside of the United States and sells its products in both segments worldwide. The Candles and Home Fragrance Products segment designs, manufactures and markets an extensive line of products including scented candles, potpourri and other fragrance products and markets a broad range of complimentary candle accessories. These products are sold direct to the consumer under the PartyLite(R) brand, to retailers in the mid-tier and premium retail channels, under the Colonial Candle of Cape Cod(R), Kate's Original Recipe(TM) and Carolina Designs(R) brands, and in the mass retail channel under the Ambria(TM), Florasense(R) and FilterMate(R) brands. In Europe, these products are also sold under the Gies(TM), Liljeholmens(R), Colony(R), Carolina Designs(R) and Wax Lyrical(TM) brands. The Non-Fragranced Products segment designs, manufactures and markets a broad range of products including decorative seasonal products for the consumer market, under the Jeanmarie(R) and Impact(R) brand names, tabletop illumination products, and portable heating fuel products for the hotel, restaurant and catering trade, under the Sterno(R) and HandyFuel(R) brand names.
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Blyth, Inc. and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in companies which are not majority owned or controlled are reported using the equity method and are recorded in other assets. Certain of the Company's subsidiaries operate on a 52 or 53 week fiscal year ending on the last Saturday in January. European operations maintain a calendar year accounting period which is consolidated with the Company's fiscal period.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CREDIT CONCENTRATION
The Company's credit sales are principally to department and gift stores, mass merchandisers and distributors who purchase the Company's products for resale. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company makes provisions for estimated credit losses.
FOREIGN CURRENCY TRANSLATION
The Company's international subsidiaries use their local currency as their functional currency. Therefore all balance sheet accounts of international subsidiaries are translated into U.S. dollars at the year-end rate of exchange, and statement of earnings items are translated at the weighted average exchange rates for the period. Resulting translation adjustments are included in "Accumulated other comprehensive income". Gains and losses on foreign currency transactions, which are included in income, were not material.
RECLASSIFICATIONS
Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company makes investments from time to time in the ordinary course of its business which may include selected assets and product lines, long term investments and/or joint ventures that either complement or expand its existing business.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Company uses forward foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain committed capital expenditures, certain purchases of inventory, Canadian intercompany payables and on certain intercompany loans. The Company does not hold or issue derivative financial instruments for trading purposes.
With regard to commitments for machinery and equipment and inventory in foreign currencies, upon payment of each commitment the underlying forward contract is closed and the corresponding gain or loss is included in the measurement of the cost of the acquired asset. With regard to forward exchange contracts used to hedge Canadian intercompany payables, gain or loss on such hedges is recognized in earnings in the period in which the underlying hedged transaction occurs. Gains or losses on foreign currency forward contracts related to intercompany loans are recognized currently through income and generally offset the transaction gains or losses in the foreign currency cash flows which they are intended to hedge. If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred until the hedged item is settled. However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings.
For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the cash flow with the items being hedged (See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations").
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts payable, short-term and long-term debt. Management believes the carrying value of these items approximates their estimated fair values.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The elements of cost are material, labor and overhead.
SHIPPING AND HANDLING
The Company classifies shipping and handling fees billed to customers in revenue and shipping and handling costs are classified as cost of goods sold (See Note 2 to the Consolidated Financial Statements, "Accounting Changes").
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided principally by use of the straight-line method for financial reporting purposes. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
The principal estimated lives used in determining depreciation and amortization are as follows:
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED
The excess of costs of the acquisitions over the fair value of identifiable assets acquired less liabilities assumed is being amortized on a straight-line basis ranging from 15-40 years. On an ongoing basis, management reviews the valuation of the intangible assets to determine possible impairment by comparing the carrying value to the undiscounted future cash flows of the related assets.
COMPREHENSIVE INCOME
Comprehensive income is defined as all changes in equity during a period from non-owner sources. The Company reports, by major components and as a single total, the change in comprehensive income during the period as part of the Consolidated Statements of Stockholders' Equity.
INCOME TAXES
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts.
REVENUE RECOGNITION
Revenue is recognized upon delivery, when both title and risk of loss transfer to the customer. Prior to fiscal 2001, the Company recognized revenue upon shipment (See Note 2 to the Consolidated Financial Statements, "Accounting Changes").
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are computed based upon the weighted average number of shares outstanding during the period, which includes outstanding options for common stock, when dilutive.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: ACCOUNTING CHANGES
For the fiscal year ended January 31, 2001, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs" which requires that amounts billed to customers for shipping and handling fees be classified as revenues and shipping and handling costs be classified as cost of goods sold. All prior periods have been restated to reflect the reclassification of shipping and handling fees and costs previously reported in selling and shipping expense in the Consolidated Statements of Earnings. The adoption has no impact on net earnings.
For the fiscal year ended January 31, 2001, the Company adopted the newly-effective Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements". As a result of adopting SAB 101, the Company changed its revenue recognition policy to recognize revenue upon delivery, when both title and risk of loss are transferred to the customer. In accordance with the provisions of SAB 101, the Company recorded a one-time charge of $1.2 million, net of tax, which is reflected as a cumulative effect of an accounting change in the Consolidated Statements of Earnings. This one-time charge had an effect equal to $.02 Diluted Earnings Per Share. This adoption by the Company affected certain amounts reported in the fiscal 2001 fourth quarter and full year Consolidated Statements of Earnings and certain year-end Consolidated Balance Sheet amounts such as a decrease in accounts receivable of approximately $12.5 million. The change in accounting method would not have had a material effect on the Consolidated Statements of Earnings in fiscal 2000 or 1999 if adopted in these periods.
NOTE 3: BUSINESS ACQUISITIONS
In December 1998, the Company acquired 9,431,000 shares of Class A voting common stock of Liljeholmens, a leading European candle manufacturer, in a private sale. In June 1999, the Company acquired the remaining outstanding Class A and Class B common stock of Liljeholmens through a tender offer. After the total purchase price of approximately $51.2 million was applied to the fair value of assets acquired and liabilities assumed, goodwill of approximately $28.2 million was generated and is being amortized over 40 years.
In May 1999, the Company acquired the remaining 50% interest in Colony Gift Corporation, Ltd. ("Colony") for approximately $10.0 million in cash. The excess of the purchase price over the estimated fair value of the net assets acquired approximated $7.2 million and is being amortized over 15 years.
In January 2000, the Company acquired the net assets of Impact Plastics, a seasonal decorative products company, as a product line extension of Jeanmarie Creations, Inc., for approximately $19.8 million in cash. The excess of the purchase price over the estimated fair value of the net assets acquired approximated $13.3 million and is being amortized over 20 years.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: UNUSUAL CHARGES
During the fourth quarter of fiscal 2001, the Company recorded restructuring and other one-time charges of approximately $16.7 million pre-tax and unexpected bad debt expenses of approximately $2.3 million pre-tax. The total of these charges impacted fourth quarter Diluted Earnings Per Share by $.28. The following summarizes the components of these charges:
Pre-tax expenses associated with the restructuring of the Company's European activities, including asset write-offs, redundancy payments made to employees and inventory write-downs were incurred in (a) its Fragrant Memories and Eclipse Candles units (part of the Colony Group), (b) its Nordic and Becker units (part of the Gies Group), and (c) Wax Lyrical, its U.K.-based specialty retailer. The Company had evaluated its European consumer activities and closed or vacated four production and warehousing facilities in order to reposition these units more effectively for growth and profitability in fiscal 2002. Total charges recorded in the fourth quarter related to these activities impacted fourth quarter Diluted Earnings Per Share by $.13.
The Company, for strategic reasons, has chosen to exit certain lower margin product lines, including the religious and citronella product lines. Expenses associated with this activity includes asset write-offs, inventory write-downs and severance payments made to employees, which impacted fourth quarter Diluted Earnings Per Share by $.03.
The restructuring of the Company's U.S. consumer wholesale organizations, which has been underway since early in fiscal 2001, will be concluded in late Spring, 2001. This initiative, which includes the consolidation of several facilities, is expected to improve customer service, increase margins and enhance future profitability. The associated actions resulted in one-time charges, including the write-off of lease obligations of $1.2 million, severance payments made of $0.2 million, equipment write-offs of $0.2 million and adjustments to the carrying value of inventory of $5.2 million. Total pre-tax charges related to these activities impacted fourth quarter Diluted Earnings Per Share by $.09.
The fourth quarter and full year results also include unexpected bad debt expenses associated with customer bankruptcy filings by Home Place (formerly Waccamaw Pottery), Bradlees, Montgomery Ward, Frank's Nursery and Spoils, a U.K. retailer. Potential losses, net of likely recovery assumptions, impacted fourth quarter Diluted Earnings Per Share by approximately $.03.
During the fourth quarter of fiscal 2001, the Company recorded a non-cash impairment charge of approximately $4.0 million related to its specialty retailer in the Candles and Home Fragrance Products segment, for a write-off of goodwill of approximately $3.0 million and a write-down of fixed assets of approximately $1.0 million. The impairment charge was calculated as the present value of the expected cash flows of the assets compared to the carrying value of the assets.
Of the amounts recorded as restructuring and one-time charges during fiscal 2001, approximately $1.4 million of accrued liabilities is included in the Consolidated Balance Sheet at January 31, 2001, relating entirely to lease obligations.
NOTE 5: INVENTORIES
The major components of inventories are as follows (in thousands):
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
NOTE 7: BANK LINES OF CREDIT
As of January 31, 2001, the Company had a total of $10.0 million available under an uncommitted bank line of credit. Amounts outstanding under the line of credit bear interest at short term fixed rates. No amount was outstanding under the uncommitted line of credit at January 31, 2001.
As of December 31, 2000, Liljeholmens had available lines of credit of approximately $36.3 million of which approximately $2.1 million was outstanding. The amounts outstanding under the lines of credit bear interest at a weighted average rate of 5.22% at December 31, 2000. The lines of credit are renewed annually.
Colony Gift has a short term revolving credit facility with Barclays Bank ("Barclays"), which matures on June 30, 2001, pursuant to which Barclays has agreed to provide a revolving credit facility in an amount of up to $29.9 million, collateralized by certain of Colony Gifts' assets. As of December 31, 2000, Colony Gift had borrowings under the credit facility of approximately $25.2 million, at a weighted average interest rate of 6.62%.
NOTE 8: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
In July 1995, the Company privately placed $25.0 million aggregate principal amount of 7.54% Senior Notes due 2005. Such senior notes contain, among other provisions, requirements for maintaining certain financial ratios and net worth. At January 31, 2001, the Company was in compliance with such covenants. Payment on the notes commenced in June 1999 and require annual installments through June 2005.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: LONG-TERM DEBT (CONTINUED)
In May 1999, the Company filed a shelf registration statement for issuance of up to $250.0 million in debt securities with the Securities and Exchange Commission. On September 24, 1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.0 million, which is being amortized over the life of the notes. Such notes contain, among other provisions, restrictions on liens of principal property or stock issued to collateralize debt. At January 31, 2001, the Company was in compliance with such covenants. Interest is payable semiannually on April 1 and October 1. The proceeds of the offering were used to repay substantially all of the Company's outstanding debt under its revolving and uncommitted lines of credit in the United States.
Pursuant to the Company's revolving credit facility ("Credit Facility"), as amended on September 14, 1999, which matures on October 17, 2002, lending institutions have agreed, subject to certain conditions, to provide an unsecured revolving credit facility to the Company in an aggregate amount of up to $135.0 million and to provide, under certain circumstances, an additional $33.8 million. Amounts outstanding under the Credit Facility bear interest, at the Company's option, at Bank of America's prime rate (9.00% at January 31, 2001) or at the Eurocurrency rate plus a credit spread ranging from 0.25% to 0.50%, based on a pre-defined financial ratio. At January 31, 2001, approximately $2.3 million in letters of credit was outstanding under the Credit Facility. The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments. At January 31, 2001, the Company was in compliance with such covenants.
At December 31, 2000, Liljeholmens had various long-term debt agreements in multiple European currencies maturing at different dates over the next two to six years. The total amount outstanding as of December 31, 2000 under the loan agreements was approximately $5.0 million with variable interest rates ranging from 3.80% to 5.55%, of which $1.5 million relates to current maturities. The loans are collateralized by certain of Liljeholmens' real estate.
Maturities under debt obligations are as follows (in thousands):
NOTE 9: EMPLOYEE BENEFIT PLANS
The Company has defined contribution employee benefit plans in both the United States and certain of its foreign locations, covering substantially all eligible non-union employees. Contributions to all such plans are principally at the Company's discretion. Liljeholmens contributes to a Swedish government sponsored retirement system which provides retirement benefits to certain of its employees. The Company has a supplemental pension benefit agreement with one of its key executives. Benefits pursuant to the agreement will be provided by a purchased annuity insurance policy. Total expense related to all plans for the years ended January 31, 1999, 2000 and 2001 was $1.7 million, $3.0 million and $3.5 million, respectively.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: COMMITMENTS
The Company utilizes operating leases for a portion of its facilities and equipment. Generally, the leases provide that the Company pay real estate taxes, maintenance, insurance and other occupancy expenses applicable to leased premises. Certain leases provide for renewal for various periods at stipulated rates.
The minimum future rental commitments under operating leases are as follows (in thousands):
Rent expense for the years ended January 31, 1999, 2000 and 2001 was $12.7 million, $14.6 million and $19.6 million, respectively.
NOTE 11: INCOME TAXES
Earnings before provision for income taxes (in thousands):
Income tax expense consists of the following (in thousands):
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
The valuation allowance relates principally to certain non-US tax loss carryforwards, as the Company believes that due to various limitations in these foreign jurisdictions, it is more likely than not that such benefits will not be realized.
As of January 31, 2001, undistributed earnings of foreign subsidiaries considered permanently invested for which deferred income taxes have not been provided were approximately $20.1 million.
A reconciliation of the provision for income taxes to the amount computed at the federal statutory rate is as follows (in thousands):
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: EMPLOYEE STOCK OPTION PLANS
At January 31, 2001, the Company had two stock-based compensation plans, which are described below.
In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company has elected to continue to account for stock-based compensation under the intrinsic value based method of accounting described by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Under APB No. 25, generally, no cost is recorded for stock options issued to employees unless the option price is below market at the time options are granted. The following pro forma net earnings and net earnings per common share are presented for informational purposes and have been computed using the fair value method of accounting for stock-based compensation as set forth in SFAS No. 123:
The fair value of each option is estimated on the date of grant, using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 2000 and 2001, respectively: expected volatility was 43.7% for 1999 and 43.3% for 2000 and 44.2% for 2001; risk-free interest rates at 4.27% to 5.67% for 1999, 4.89% to 6.63% for 2000 and 5.11% to 6.70% for 2001; expected life of 7 years for all years and an expected dividend yield of .73%.
The Company has adopted the Amended and Restated 1994 Employee Stock Option Plan (the "Employee Option Plan"), which provides for the grant to officers and employees of both "incentive stock options" and stock options that are non-qualified for Federal income tax purposes. The total number of shares of common stock for which options may be granted pursuant to the Employee Option Plan, subject to shareholder approval for 1,000,000 additional shares, is 2,880,000.
The exercise price of incentive stock options granted under the Employee Option Plan may not be less than 100% of the fair market value of the common stock at the time of grant, and the term of any option may not exceed 10 years. Options generally become exercisable over a five-year period. With respect to any employee who owns stock representing more than 10% of the voting power of the outstanding capital stock of the Company, the exercise price of any incentive stock option may not be less than 110% of the fair market value of such shares at the time of grant, and the term of such option may not exceed five years.
The Company has also adopted the 1994 Stock Option Plan for Non-Employee Directors (the "Non-Employee Director Plan"). A total of 120,000 shares of common stock may be issued through the exercise of options granted pursuant to the Non-Employee Director Plan. No option may be granted under the Non-Employee Director Plan after May 18, 2004.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: EMPLOYEE STOCK OPTION PLANS (CONTINUED)
Each non-employee director who is elected to office for the first time after March 1, 1994 will, upon such date, automatically be granted an option to acquire 3,000 shares of common stock. Each non-employee director who is in office on November 15 of any year thereafter will, on the immediately succeeding January 1, automatically be granted an option to acquire 1,500 shares of common stock. The price of shares that may be purchased upon exercise of an option is the fair market value of the common stock on the date of grant.
Options granted pursuant to the Non-Employee Director Plan become exercisable in full on the first anniversary of the date of the grant.
Transactions involving stock options are summarized as follows:
At January 31, 1999, 2000 and 2001, options to purchase 461,407, 668,417 and 694,749 shares, respectively, were exercisable.
Options outstanding and exercisable as of January 31, 2001, by price range:
The weighted average fair value of options granted during the years ended January 31, 1999, 2000 and 2001 was $16.99, $14.46 and $12.91, respectively.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SEGMENT INFORMATION
During the fourth quarter of fiscal 2001, the Company announced a realignment of its business strategy and the formation of a new business segment, the Non-Fragranced Products segment. The Company, which previously reported in a single segment, has changed to reporting two business segments. Prior-year business segment information has been restated to conform to the current-year presentation. The Company's reportable segments are based on similarities in products and represent the aggregation of operating units for which financial information is regularly evaluated in determining resource allocation and assessing performance. The Company operates in two business segments - Candles and Home Fragrance Products and Non-Fragranced Products. The company has operations outside of the United States and sells its products in both segments worldwide.
The CANDLES AND HOME FRAGRANCE PRODUCTS segment designs, manufactures and markets an extensive line of products including scented candles, potpourri and other fragrance products and markets a broad range of complimentary candle accessories. These products are sold direct to the consumer under the PartyLite(R) brand, to retailers in the mid-tier and premium retail channels, under the Colonial Candle of Cape Cod(R), Kate's Original Recipe(TM) and Carolina Designs(R) brands, and in the mass retail channel under the Ambria(TM), Florasense(R) and FilterMate(R) brands. In Europe, these products are also sold under the Gies(TM), Liljeholmens(R), Colony(R), Carolina Designs(R) and Wax Lyrical(TM) brands.
The NON-FRAGRANCED PRODUCTS segment designs, manufactures and markets a broad range of products including decorative seasonal products for the consumer market, under the Jeanmarie(R) and Impact(R) brand names, tabletop illumination products, and portable heating fuel productS for the hotel, restaurant and catering trade, under the Sterno(R) and HandyFuel(R) brand names.
Earnings represents net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments. Earnings of the Candles and Home Fragrance Products segment for 2001 includes restructuring and one-time charges of approximately $16.7 million and unexpected bad debt expenses of approximately $2.3 million (See Note 4 to the Consolidated Financial Statements, "Unusual Charges"). 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 consists of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations. Other identifiable assets includes corporate long-term investments, deferred income taxes and deferred bond costs which are not allocated to the business segments.
The geographic area data includes net trade sales based on product shipment destination and long-lived assets (which consists of fixed assets, goodwill and long-term investments) based on physical location.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SEGMENT INFORMATION (CONTINUED)
OPERATING SEGMENT INFORMATION
(1) 2001 Candles and Home Fragrance Products includes restructuring and one-time charges of approximately $16.7 million and unexpected bad debt expenses of approximately $2.3 million (See Note 4 to the Consolidated Financial Statements, "Unusual Charges").
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: STOCK REPURCHASE PLAN
On December 14, 2000, the Company's Board of Directors authorized the Company to repurchase up to 1,000,000 additional shares of its common stock bringing the total authorization to 4,000,000 shares. During the course of fiscal 2001, a total of 1,148,100 shares were repurchased for a total cost of approximately $26.8 million. As of March 31, 2001, the Company had cumulatively purchased on the open market 2,356,800 common shares for a total cost of approximately $57.0 million. The acquired shares are held as common stock in treasury at cost.
NOTE 15: EARNINGS PER SHARE
The following table presents the components of basic and diluted net earnings per common share as required under SFAS No. 128 (in thousands):
As of January 31, 1999, 2000 and 2001, options to purchase 12,232, 78,321 and 90,886 shares of common stock, respectively, are not included in the computation of diluted earnings per share because the effect would be antidilutive.
BLYTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for the years ended January 31 is as follows:
(1) Restatements have been made to the previously reported fiscal 2001 quarterly information to reflect the adoption of SAB 101. Data presented for both fiscal 2001 and 2000 have been adjusted to reflect the adoption of EITF 00-10. (See Note 2 to the Consolidated Financial Statements, "Accounting Changes"). (2) The sum of per share amounts for the quarters does not necessarily equal that reported for the year because the computations are made independently.
NOTE 17: SUBSEQUENT EVENT
On April 11, 2001 the Company acquired Midwest of Cannon Falls, Inc., a leading creative expressions company in the decorative products and giftware industry, for approximately $25.0 million in cash plus the assumption of long-term debt of approximately $30.0 million.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10 through 13 is included in the Company's proxy statement dated May 1, 2001, on pages 3 through 13.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS
The following consolidated financial statements are contained on the indicated pages of this report:
PAGE NO.
Report of Independent Accountants........................ 27
Statements:
Consolidated Balance Sheets.......................... 28 Consolidated Statements of Earnings.................. 29 Consolidated Statements of Stockholders' Equity...... 30 Consolidated Statements of Cash Flows................ 31 Notes to Consolidated Financial Statements........... 32-46
(a)(2). FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is contained on the indicated pages of this report:
PAGE NO.
Report of Independent Accountants S-1 Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are inapplicable or the requested information is shown in the consolidated 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+ 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) 4.2+ Form of Nontransferable 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) 4.3+ Form of Nontransferable 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) 4.4+ 1994 Stock Option Plan for Non-Employee Directors of the Registrant (incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1996) 4.5*+ Form of Stock Option Agreement under the 1994 Stock Option Plan for Non-Employee Directors of the Registrant 4.6(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) 4.6(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) 10.1 Credit Agreement, dated as of October 17, 1997, among the Registrant, the Banks listed therein, Morgan Guaranty Trust Company of New York, as documentation agent, and Bank of America National Trust and Savings Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.1(a) Amendment No. 1 dated as of May 13, 1999 to the Credit Agreement (incorporated by reference to Exhibit 10.1(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2001) 10.1(b) Amendment No. 2 dated as of September 14, 1999 to the Credit Agreement (incorporated by reference to Exhibit 10.1(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2001) 10.2 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) 10.2(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) 10.2(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) 10.2(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) 10.2(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) 10.2(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) 10.3 Master Equipment Lease Agreement between MetLife Capital, Limited Partnership, as lessor, and Candle Corporation of America, as lessee (incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995) 10.4* Standard Form Industrial Lease dated April 22, 1993, between Carol Point Builders I General Partnership and PartyLite Gifts, Inc. 10.4(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) 10.5 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) 10.6*+ Form of Indemnity Agreement between the Registrant and each of its directors
10.7+ Promissory Note, dated March 17, 1995, payable by Elwood L. La Forge, Jr. and Mary G. La Forge to the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998) 10.8+ Mortgage, dated March 17, 1995, between Elwood L. La Forge, Jr. and Mary G. La Forge, as mortgagor, to the Registrant, as mortgagee (incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998) 10.9+ 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) 10.10+ 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) 10.11+ Registration Rights Agreement dated as of August 1, 2000 by and between the Registrant and Robert B. Goergen (incorporated by reference to Exhibit A to the Employment Agreement filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2001) 21.** List of Subsidiaries 23.** Consent of PricewaterhouseCoopers LLP, independent accountants 24.1** Power of Attorney 24.2** Certified Resolutions of the Board of Directors of the Registrant - ---------- * Included as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-77458) and incorporated herein by reference. ** Filed herewith. + Management contract or compensatory plan required to be filed by Item 14(c) of this report.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the fourth quarter of the fiscal year ended January 31, 2001:
Current Report on Form 8-K, filed December 15, 2000, attaching share repurchase authorization press release.
Current Report on Form 8-K, filed December 6, 2000, attaching earnings press release.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 1, 2001 BLYTH, INC.
By: /s/ Robert B. Goergen ---------------------- Name: Robert B. Goergen Title: Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Blyth, Inc.:
Our audits of the consolidated financial statements referred to in our report dated March 14, 2001, except for Note 14, as to which the date is March 31, 2001, and except for Note 17, as to which the date is April 11, 2001, appearing in the 2001 Annual Report to Stockholders of Blyth, Inc. and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP ------------------------------ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois March 14, 2001
S-1
BLYTH, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended January 31 1999, 2000 and 2001 (In thousands)
S-2