10-Q 1 bth-6302014x10q.htm 10-Q BTH-6.30.2014-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
           (Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File number 1-13026
BLYTH, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
36-2984916
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
One East Weaver Street
Greenwich, Connecticut
 
06831
(Address of Principal Executive Offices)
(Zip Code)

 (203) 661-1926
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes  x         No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o 
Non-accelerated filer o
Accelerated filer x 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o     No  x 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
16,054,157 Common Shares as of July 30, 2014






TABLE OF CONTENTS

 
 
 
 
PART I. Financial Information
Item 1.
Financial Statements (Unaudited):
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All of our statements in this quarterly report other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, by way of example, any projections of future earnings, revenue, capital expenditures, cash flow from operations or other financial items; any statements regarding our, PartyLite's, ViSalus's or Silver Star Brands' plans, strategies or objectives for future operations, including those related to international expansion by PartyLite or ViSalus; any statements as to our belief; and any assumptions underlying any forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and often include words such as “may,” “will,” “estimate,” “intend,” “believe,” “expect” or “anticipate” and any other similar words.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, our actual results could differ materially from those projected, estimated or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the Securities and Exchange Commission. Important factors that could cause our actual results, performance and achievements to differ materially from those indicated in
our forward-looking statements include, among others, the following:

our ability to improve our financial and operational performance;
our ability to respond appropriately to changing consumer preferences and demand for our current and new products
or product enhancements;
• our dependence on sales by independent consultants and promoters and our ability to recruit, retain and motivate them;
• the loss of one or more leading consultants or promoters, for any reason, together with their respective sales
organizations;
• the attractiveness of PartyLite's and ViSalus's compensation plans to current and prospective independent consultants and promoters;
• our ability to retain our existing customers or attract new customers;
• our ability to influence or control our consultants and promoters;
• federal, state and foreign regulations applicable to our products (including advertising and labeling), promotional
programs and compensation plans;
• susceptibility to excess and obsolete inventory due to changing consumer preferences;
• adverse publicity directed at our products, ingredients, consultants, promoters, programs or business models, or those
of similar companies;
• product liability and health-related claims;
• competition;
• an economic downturn;
• our ability to grow our business in existing and new markets, including risks associated with international operations;
• legal actions by or against current or former independent consultants and promoters;
• our reliance on third-party manufacturers for the supply of products;
• our ability to manufacture candles at required quantity and quality levels;
• disruptions to transportation channels;
• shortages or increases in the cost of raw materials;
• our guarantee of ViSalus's obligation to redeem its preferred stock in December 2017;
• awards made pursuant to ViSalus's Omnibus Incentive Plan;
• our dependence on key employees;
certain taxes or assessments relating to the activities of our independent consultants and promoters for which we may
be held responsible;
• our reliance on third parties to plan many of our events;
• our ability to identify, consummate and integrate suitable acquisition candidates on favorable terms and conditions;

3


• the covenants in the indenture that governs our 6.00% Senior Notes due 2017 limit our operating and financial
flexibility, including, among other things, our ability to pay dividends and repurchase our common stock;
• increased borrowing costs and reduced access to capital;
• our ability to protect our intellectual property;
• interruptions in our information-technology systems;
• our storage of user and employee data;
• information security or data breaches;
• our ability to successfully adapt to and integrate mobile devices;
• credit card and debit card fraud;
• changes in our effective tax rate;
• fluctuations in our periodic results of operations;
• increased paper, mailing and shipping costs;
• increased risk and write-offs associated with Silver Star Brands' credit program;
• speculative trading and volatility in our stock price;
• the failure of securities or industry analysts to publish research or reports about our business, or the publication of
negative reports about our business; and
• our compliance with the Sarbanes-Oxley Act of 2002.

We operate in a very competitive and rapidly changing environment, where new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this quarterly report may not occur, and our actual results could differ materially and adversely from those anticipated, estimated or implied in any forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this quarterly report, especially under the heading “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in our Consolidated Financial Statements and the related Notes.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements in this quarterly report speak only as of the date of this report, and forward-looking statements in documents attached or to be filed with the Securities and Exchange Commission that are incorporated by reference speak only as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statement, whether as a result of new information, future developments or otherwise.


4


Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
BLYTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
June 30, 2014
 
December 31, 2013
(In thousands, except share and per share data)
(Unaudited)
 
 
ASSETS
 
 

Current assets:
 
 
 
Cash and cash equivalents
$
76,631

 
$
114,847

Short-term investments
24,034

 
7,985

Accounts receivable, less allowance for doubtful receivables of $5,199 and $3,932, respectively
13,218

 
12,704

Inventories
75,211

 
75,795

Prepaid assets
16,390

 
18,630

Deferred income taxes
3,959

 
2,198

Other current assets
8,726

 
7,649

Total current assets
218,169

 
239,808

Property, plant and equipment, at cost:
 

 
 

Less accumulated depreciation of $161,336 and $155,911, respectively
87,049

 
95,428

Other assets:
 

 
 

Investments
2,025

 
2,246

Goodwill
2,924

 
2,298

Other intangible assets, net of accumulated amortization of $15,317 and $15,186, respectively
8,677

 
8,808

Deferred income taxes
9,397

 
10,425

Other assets
7,358

 
7,764

Total other assets
30,381

 
31,541

Total assets
$
335,599

 
$
366,777

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
891

 
$
952

Accounts payable
23,292

 
33,197

Accrued expenses
53,656

 
58,917

Deferred income taxes
509

 
585

Income taxes payable
778

 
779

Other current liabilities
3,629

 
9,603

Total current liabilities
82,755

 
104,033

Long-term debt, less current maturities
54,885

 
55,326

Other liabilities
13,071

 
14,787

Commitments and contingencies

 

ViSalus redeemable preferred stock
146,667

 
146,603

Stockholders' equity:
 

 
 

Preferred stock - authorized 10,000,000 shares of $0.01 par value; no shares issued

 

Common stock - authorized 50,000,000 shares of $0.02 par value; issued 26,625,576 shares and 26,574,031 shares, respectively
533

 
532

Additional contributed capital
169,457

 
168,732

Retained earnings
303,072

 
312,036

Accumulated other comprehensive income
16,834

 
16,362

Treasury stock, at cost, 10,571,419 shares and 10,557,342 shares, respectively
(452,166
)
 
(452,040
)
Total stockholders' equity
37,730

 
45,622

Noncontrolling interest
491

 
406

Total equity
38,221

 
46,028

Total liabilities and equity
$
335,599

 
$
366,777

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

5


BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Loss)
  (Unaudited)
 
Three months ended
Six months ended
(In thousands, except per share data)
June 30, 2014
June 30, 2013
June 30, 2014
June 30, 2013
 
 
 
 
 
Net sales
$
157,793

$
211,731

$
333,462

$
444,825

Cost of goods sold
56,464

76,524

118,653

156,541

Gross profit
101,329

135,207

214,809

288,284

Selling
69,754

92,492

148,062

195,605

Administrative and other expense
34,380

41,565

72,192

85,551

Total operating expense
104,134

134,057

220,254

281,156

Operating profit (loss)
(2,805
)
1,150

(5,445
)
7,128

Other expense (income):
 
 
 
 
Interest expense
1,014

1,648

1,991

2,782

Interest income
(91
)
(142
)
(135
)
(417
)
Foreign exchange and other, net
72

278

100

(274
)
Total other expense
995

1,784

1,956

2,091

Earnings (loss) from operations before income taxes and noncontrolling interest
(3,800
)
(634
)
(7,401
)
5,037

Income tax expense
969

21

520

2,239

Net earnings (loss)
(4,769
)
(655
)
(7,921
)
2,798

Less: Net earnings (loss) attributable to noncontrolling interests
(329
)
703

(719
)
1,560

Net earnings (loss) attributable to Blyth, Inc.
(4,440
)
(1,358
)
(7,202
)
1,238

Less: Accretion to redemption value for ViSalus redeemable preferred stock
(447
)
(1,834
)
(957
)
(1,834
)
Net loss attributable to Blyth, Inc. common stockholders
$
(4,887
)
$
(3,192
)
$
(8,159
)
$
(596
)
Basic earnings (loss) per share:
 
 
 

 

Net loss attributable per share of Blyth, Inc. common stock
$
(0.30
)
$
(0.20
)
$
(0.51
)
$
(0.04
)
Weighted average number of shares outstanding
16,111

16,056

16,096

16,321

Diluted earnings (loss) per share:
 
 
 

 

Net loss attributable per share of Blyth, Inc. common stock
$
(0.30
)
$
(0.20
)
$
(0.51
)
$
(0.04
)
Weighted average number of shares outstanding
16,111

16,056

16,096

16,321

Cash dividend declared per share
$

$

$
0.05

$
0.10


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

6



BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Six months ended
(In thousands)
June 30, 2014
 
June 30, 2013
 Net earnings (loss)
$
(7,921
)
 
$
2,798

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
365

 
(1,212
)
Net unrealized loss on certain investments
(24
)
 
(205
)
Net unrealized gain on cash flow hedging instruments
10

 
274

Less: Reclassification adjustments for loss included in net income
121

 
90

Other comprehensive income (loss)
472

 
(1,053
)
Total comprehensive income (loss), net of tax
(7,449
)
 
1,745

   Less: comprehensive (income) loss attributable to noncontrolling interests
719

 
(1,560
)
Comprehensive income (loss) attributable to Blyth, Inc.
$
(6,730
)
 
$
185

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


7


BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
 
(Unaudited)
 
 
Blyth, Inc.'s Stockholders
 
 
 
 
 
 
(In thousands)
Common
Stock
 
Additional
Contributed
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Noncontrolling
Interest
 
Total
Equity
 
Redeemable Preferred Stock
For the six months ended June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
$
530

 
$
167,080

 
$
318,299

 
$
14,401

 
$
(441,774
)
 
$
268

 
$
58,804

 
$
146,547

Net earnings for the period
 

 
 

 
1,238

 
 

 
 

 
162

 
1,400

 
1,398

Distributions to noncontrolling interest
 

 
 

 
 

 
 

 
 

 
(90
)
 
(90
)
 
(3,239
)
Adjustment for dividends paid
to noncontrolling interest
holders in excess of income
earned by noncontrolling
interest holders
 
 
 
 
(1,834
)
 
 
 
 
 
 
 
(1,834
)
 
1,834

Other comprehensive loss
 

 
 

 
 

 
(1,053
)
 
 

 
 

 
(1,053
)
 
 
Stock-based compensation
2

 
1,132

 
 

 
 

 
 

 
 

 
1,134

 
 
Dividends declared ($0.10 per share)
 

 
 

 
(1,617
)
 
 

 
 

 
 

 
(1,617
)
 
 
Treasury stock purchases (1)
 

 
 

 
 

 
 

 
(10,266
)
 
 

 
(10,266
)
 
 
Balance at June 30, 2013
$
532

 
$
168,212

 
$
316,086

 
$
13,348

 
$
(452,040
)
 
$
340

 
$
46,478

 
$
146,540

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
532

 
$
168,732

 
$
312,036

 
$
16,362

 
$
(452,040
)
 
$
406

 
$
46,028

 
$
146,603

Net earnings (loss) for the period
 

 
 

 
(7,202
)
 
 

 
 

 
175

 
(7,027
)
 
(893
)
Distributions to noncontrolling interest
 

 
 

 
 

 
 

 
 

 
(90
)
 
(90
)
 
 
Accretion to redemption value for ViSalus redeemable preferred stock
 
 
 
 
(957
)
 
 
 
 
 
 
 
(957
)
 
957

Other comprehensive income
 

 
 

 
 

 
472

 
 

 
 

 
472

 
 
Stock-based compensation
1

 
725

 
 

 
 

 
 

 
 

 
726

 
 
Dividends declared ($0.05 per share)
 

 
 

 
(805
)
 
 

 
 

 
 

 
(805
)
 
 
Treasury stock purchases (1)
 

 
 

 
 

 
 

 
(126
)
 
 

 
(126
)
 
 
Balance at June 30, 2014
$
533

 
$
169,457

 
$
303,072

 
$
16,834

 
$
(452,166
)
 
$
491

 
$
38,221

 
$
146,667


(1) This includes shares withheld in order to satisfy employee withholding taxes upon the distribution of vested restricted stock units.

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

8


BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended
(In thousands)
June 30, 2014
 
June 30, 2013
Cash flows from operating activities:
 
 

Net earnings (loss) attributable to Blyth, Inc.
$
(7,921
)
 
$
2,798

Adjustments to reconcile earnings to net cash used in operating activities:
 

 
 

Depreciation and amortization
6,668

 
6,537

Loss on sale of assets
333

 
65

Stock-based compensation expense of Blyth, Inc.
726

 
1,134

Deferred income taxes
(1,151
)
 
(1,617
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(524
)
 
(892
)
Inventories
911

 
7,035

Prepaid and other
1,447

 
5,975

Other long-term assets
176

 
(1,127
)
Accounts payable
(10,085
)
 
(6,140
)
Accrued expenses
(5,795
)
 
(6,522
)
Income taxes payable
(12
)
 
896

Other liabilities and other
(7,973
)
 
(3,744
)
Net cash used in operating activities
(23,200
)
 
4,398

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment, net of disposals
(1,785
)
 
(9,758
)
Proceeds from collection of note receivable

 
10,000

Proceeds from sale of assets
4,091

 

Payment for purchase of business
(236
)
 

Purchases of short-term investments
(20,032
)
 
(12,793
)
Proceeds from sale of investments
4,000

 
28,277

Net cash provided by (used in) investing activities
(13,962
)
 
15,726

Cash flows from financing activities:
 

 
 

Purchases of treasury stock

 
(9,961
)
Borrowings on long-term debt

 
50,000

Repayments on long-term debt
(332
)
 
(307
)
Purchases of additional ViSalus interest

 
(25,341
)
Payments on capital lease obligations
(179
)
 
(83
)
Dividends paid
(805
)
 
(1,617
)
Distributions to noncontrolling interest
(90
)
 
(3,329
)
Net cash provided by (used in) financing activities
(1,406
)
 
9,362

Effect of exchange rate changes on cash
352

 
(1,899
)
Net decrease in cash and cash equivalents
(38,216
)
 
27,587

Cash and cash equivalents at beginning of period
114,847

 
129,056

Cash and cash equivalents at end of period
$
76,631

 
$
156,643

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


9


BLYTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Blyth, Inc. ("Blyth" or the “Company”) is a multi-channel company focused on the direct to consumer market. The Company’s products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items and personalized gifts, as well as meal replacement shakes, nutritional supplements, functional foods, energy drink mixes and health, wellness and beauty related products. The Company’s products can be found throughout the United States, Canada, Mexico, Europe and Australia. Our financial results are reported in three segments: the Candles & Home Décor segment (PartyLite), the Health & Wellness segment (ViSalus), and the Catalog & Internet segment (Silver Star Brands).

Note 1. Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The Company's subsidiaries within the Catalog & Internet segment operate on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of items that are normal and recurring in nature) necessary for fair presentation of the Company's consolidated financial position as of June 30, 2014 and the consolidated results of its operations and cash flows for the three and six months ended June 30, 2014 and 2013. These interim statements should be read in conjunction with the Company's Consolidated Financial Statements for the year ended December 31, 2013, as set forth in the Company's Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Recently Adopted Accounting Guidance

In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative
Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an
Investment in a Foreign Entity (“ASU 2013-05”). This amendment clarifies the applicable guidance for the release of
cumulative translation adjustment into net earnings. When an entity ceases to have a controlling financial interest in a
subsidiary or group of assets within a foreign entity, the entity is required to apply the guidance in FASB Accounting Standards
Codification (ASC) Topic 830-30 to release any related cumulative translation adjustment into net earnings. The Company adopted ASU 2013-01 as of January 1, 2014. This standard did not have an impact on the Company's consolidated financial condition or results of operations.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"), which provides guidance for the
financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. The Company adopted ASU 2013-11 as of January 1, 2014. This standard did not have a material impact on the Company's consolidated financial condition or results of operations.

Recently Issued Accounting Guidance

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", ("ASU 2014-08"). ASU 2014-08 changes the definition of reporting discontinued operations by limiting discontinued operations reporting to disposals that represent strategic shifts what will have a major effect on an entity's operations and financial results. The amendments of this update also require additional disclosures for discontinued operations. The Company is required to adopt ASU 2014-08 prospectively for all disposals classified as held for sale during fiscal periods beginning after December 15, 2014. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.


10



Other Comprehensive Income

The following table discloses the tax effects allocated to each component of other comprehensive income in the financial statements:
 
Six months ended
 (In thousands)
June 30, 2014
 
June 30, 2013
 
Before-Tax Amount
Tax (Expense) or Benefit
Net-of-tax Amount
 
Before-Tax Amount
Tax (Expense) or Benefit
Net-of-tax Amount
Foreign currency translation adjustments
$
551

$
(186
)
$
365

 
$
(288
)
$
(924
)
$
(1,212
)
Net unrealized gain (loss) on certain investments
(37
)
13

(24
)
 
(315
)
110

(205
)
Net unrealized gain (loss) on cash flow hedging instruments
16

(6
)
10

 
422

(148
)
274

Less: Reclassification adjustments for (gain) loss included in net income
186

(65
)
121

 
139

(49
)
90

Other comprehensive income (loss)
$
716

$
(244
)
$
472

 
$
(42
)
$
(1,011
)
$
(1,053
)
The components of accumulated other comprehensive income (loss), net of tax, for the six months ended June 30, 2014 is as follows:
(In thousands)
Foreign Currency Translation Adjustment
Net unrealized gain (loss) on certain investments
Net unrealized gain (loss) on cash flow hedging instruments
Net Investment Hedge gain (loss)
Total
Beginning balance at January 1, 2014
$
13,905

$
263

$
(110
)
$
2,304

$
16,362

Other comprehensive income (loss) before reclassifications
521

(24
)
10

(156
)
351

Amounts reclassified from accumulated other comprehensive income (loss) (1) (2)

(44
)
(77
)

(121
)
Net current period other comprehensive income (loss)
521

20

87

(156
)
472

Balance at June 30, 2014
$
14,426

$
283

$
(23
)
$
2,148

$
16,834

(1) All amounts net of a 35% tax rate.
(2) Reclassified from Accumulated other comprehensive income into Foreign exchange and other and Cost of goods sold.
  
Note 2. Business Acquisitions
 
In August 2008, the Company signed a definitive agreement to purchase ViSalus, a direct seller of weight management products, functional foods, nutritional supplements and energy drink mixes, through a series of investments. In October 2008, the Company completed its initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash and incurred acquisition costs of $1.0 million for a total cash acquisition cost of $14.0 million. In April 2011, the Company completed the second phase of its acquisition of ViSalus for approximately $2.5 million, increasing its ownership to 57.5%. In January and April 2012, the Company completed the third phase of its acquisition of ViSalus and increased its ownership to 72.7% for approximately $28.7 million in cash and the issuance of 681,324 unregistered shares of the Company's common stock valued at $14.6 million.

In December 2012, the Company purchased an additional 8.2% of ViSalus increasing its ownership to 80.9% for a payment of $60.5 million to the ViSalus founders and its other noncontrolling members. In addition, the ViSalus founders and the other members exchanged their remaining membership interests for a total of 8,955,730 shares of Series A and Series B Redeemable Preferred Stock of ViSalus Inc. (“Preferred Stock”), which will become redeemable on December 31, 2017 for a total redemption price of $143.2 million. The Preferred Stock is redeemable for cash on December 31, 2017 at a price per share equal to $15.99 unless prior thereto ViSalus shall have effected a “Qualified IPO” or the holders, at their option, elect to convert their Preferred Stock into common shares of ViSalus. In January 2013, the Company made a final payment of $25.3 million to certain equity rights holders associated with the Company's acquisition of ViSalus.


11


The Company has accounted for the redeemable preferred stock in accordance with the guidance of ASC 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and the non-codified portions of Emerging Issues Task Force Topic D-98, “Classification and Measurement of Redeemable Securities”. ASC 480 requires preferred securities that are redeemable for cash to be classified outside permanent equity if they are redeemable (1) at a fixed or determinable date, (2) at the option of the holder or (3) upon occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company has classified the Preferred Stock outside of permanent equity as its redemption has been determined to be not solely within the control of the issuer.

As of June 30, 2014, $146.7 million of Preferred Stock was recorded outside of permanent equity as required by ASC 480. The Company determined the fair value of the Preferred Stock in December 2012 based on an allocation of ViSalus's total enterprise value to its Preferred and common stock components utilizing an option pricing model. The option pricing model considered the characteristics of the ViSalus Preferred and common stock, interest rates, expected term and estimated volatility. The enterprise value was determined using a combination of a discounted cash flow methodology and a publicly traded company market multiple methodology. The discounted cash flow methodology used an estimated weighted average cost of capital to discount the estimated future cash flows of ViSalus to its present value. The publicly traded company methodology used various market multiples with consideration for comparable operating revenues and earnings. The initial recording to fair value in December 2012 was recorded as a charge to retained earnings since no proceeds were received at the time of issuance. The difference in recorded value at June 30, 2014 and its previously recorded fair value at December 31, 2012 represents an accretion adjustment to be recorded on a prorated basis through December 2017 to arrive at the fully accreted value upon maturity.

The acquisition of ViSalus involves related parties, as discussed in Note 12 to the Consolidated Financial Statements. In addition to Blyth, the other owners of ViSalus include its three founders (each of whom currently owns approximately 4.6% for a total of 13.7%) (“the founders”), Robert B. Goergen (the Company's Chairman of the Board, who owns 1.8%), Robert B. Goergen, Jr. (President and Chief Executive Officer of the Company, who owns 0.1%), Todd A. Goergen (ViSalus's Chief Operating Officer, who owns 0.6%), and a small group of employees and others who collectively own approximately 2.9% of ViSalus. The Company's initial investment in ViSalus of $13.0 million was paid to ViSalus ($2.5 million), Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC (collectively, “RAM”) ($3.0 million), and each of the three founders ($2.5 million each). The Company's second investment of $2.5 million was paid to RAM ($1.0 million), each of the three founders ($0.3 million each) and others ($0.6 million in the aggregate).  The Company's third investment in ViSalus of $28.7 million in cash and the issuance of 681,324 unregistered shares of common stock was paid to RAM ($11.0 million in cash), the three founders (a total of $10.1 million in cash and the issuance of a total of 681,324 unregistered shares) and others ($7.6 million in cash, in the aggregate). The Company's fourth investment of $60.5 million was paid to Robert B. Goergen ($5.1 million), Robert B. Goergen, Jr. ($0.2 million), Todd A. Goergen ($1.7 million), each of the three founders ($13.3 million each) and others ($13.6 million in the aggregate). Mr. Goergen, the Company's Chairman of the Board, beneficially owns approximately 36.0% of Blyth's outstanding common stock, and together with members of his family, owns substantially all of RAM.

On April 1, 2014, ViSalus entered into an agreement to acquire the remaining 50% interest of a healthy snack manufacturer it did not already own for $250,000, bringing the total acquisition cost to $0.5 million. The purchase agreement also provides for a payment of contingent consideration to the former owner based on gross profit from product sales over the next 26 months. The total purchase price inclusive of the expected payments to be made for product sales will be approximately $0.7 million. The difference between the estimated purchase price and the net assets acquired was recorded as goodwill within the Health & Wellness segment. Financial results of the healthy snack manufacturer prior to the acquisition and for interim periods subsequent to the acquisition are not significant.


Note 3. Financing Receivables

During 2012, Silver Star Brands entered into an agreement with a financial services company to offer financing services, including originating, collecting, and servicing customer receivables related to the purchase of Silver Star Brands products through a private credit financing program. Net financing sales, which represent the amounts of financing provided by the service provider to customers, were approximately $12.3 million and $7.9 million for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014 and December 31, 2013, our net financing receivables balances were $6.4 million and $5.6 million, respectively. This balance is recorded in accounts receivable in the Consolidated Balance Sheets and includes income from financing fees which represents income from interest earned on outstanding balances and late fees.

Silver Star Brands maintains an allowance to cover expected financing receivable credit losses and evaluates credit loss expectations based on its total portfolio. The allowance for credit losses is determined based on various factors, including

12


historical and anticipated experience, past due receivables, receivable type, and customer risk profile. Accounts become past due and accrue interest 30 days after the first initial billing cycle when a payment due date is missed or only a partial payment is received. As of June 30, 2014 and December 31, 2013, the allowance for credit losses was $4.3 million and $3.0 million, respectively. Provisions for the allowance of credit losses for products sales are recorded to Selling expenses and provisions for credit losses for interest and late fees are recorded to Net sales within the Consolidated Statements of Earnings (Loss). Silver Star Brands continues to monitor broader economic indicators and their potential impact on future loss performance. Silver Star Brands has an extensive process to manage its exposure to customer credit risk, including active management of credit lines and its collection activities. Based on its assessment of the customer financing receivables, Silver Star Brands believes it is adequately reserved. Write-offs recorded to date related to 2014 and 2013 credit sales were 4.0% and 19.2% of 2014 and 2013 sales, respectively. Silver Star Brands' policy is to write-off financing receivables greater than 180 days past due with no collection activity and no receivable is placed on non-accrual status until it is written off. All write-offs are submitted to a third party collection agency.

The majority of Silver Star Brands' financing receivables are considered sub-prime credit risk, which represent lower credit quality accounts that are comparable to FICO scores below 600. Credit decisions are based on propriety scorecards, which include the customer's credit history, payment history, credit usage and other credit agency-related elements. Credit scores are obtained prior to a customer's initial mailing and then rescored each season and adjusted accordingly. At a minimum each customer is rescored at least every six months.

The following table summarizes the changes in the allowance for financing receivables credit losses for the respective periods:
(In Thousands)
June 30, 2014
December 31, 2013

Balance at the beginning of period
$
2,988

$
712

Provision for credit losses
3,582

4,540

Write-offs
(2,360
)
(2,277
)
Recoveries
81

13

Balance at the end of period
$
4,291

$
2,988


The following table summarizes the age of Silver Star Brands' customer financing receivables, gross, including interest and other finance charges, as of June 30, 2014:
 
June 30, 2014
(In Thousands)
Current
Past Due 1 - 90 Days
91 - 180 Days
Total
Financing Receivables
$6,777
$2,733
$1,209
$10,719
 
Note 4. Investments

The Company’s investments as of June 30, 2014 consisted of a number of financial securities including certificates of deposit, shares in mutual funds invested in short term bonds, and a cost investment. The Company accounts for its investments in debt and equity instruments in accordance with ASC 320, “Investments – Debt & Equity Securities.” The Company accounts for its cost investment in accordance with ASC 325, “Investments – Other.” 

The following table summarizes, by major security type, the amortized costs and fair value of the Company’s investments: 
 
June 30, 2014
 
December 31, 2013
(In thousands)
Cost Basis(1)
 
Fair Value
 
Net unrealized loss in AOCI (2)
 
Cost Basis(1)
 
Fair Value
 
Net unrealized loss in AOCI (2)
Short-term bond mutual funds
$
24,000

 
$
24,034

 
$
34

 
$
8,000

 
$
7,985

 
$
(15
)
Certificates of deposit
1,663

 
1,663

 

 
1,634

 
1,634

 

Other investment
362

 
362

 

 
612

 
612

 

Total investments
$
26,025

 
$
26,059

 
$
34

 
$
10,246

 
$
10,231

 
$
(15
)
(1) The cost basis represents the actual amount paid less any permanent impairment recorded on that asset.
(2) The Company believes these short-term losses are temporary in nature therefore no permanent impairment is required.


13


As of June 30, 2014 and December 31, 2013, the Company held $24.0 million and $8.0 million, respectively, of short-term bond mutual funds, which are classified as short-term available for sale investments. Unrealized gains and losses on these investments that are considered temporary are recorded in AOCI.  These securities are valued based on quoted prices in active markets. As of June 30, 2014 and December 31, 2013, the Company recorded insignificant unrealized losses, net of tax.
 
Also included in long-term investments are certificates of deposit that are held as collateral for the Company’s outstanding standby letters of credit and for foreign operations of $1.7 million and $1.6 million as of June 30, 2014 and December 31, 2013, respectively. These investments are recorded at fair value which approximates cost. Interest earned on these investments is recorded in Interest income in the Consolidated Statements of Earnings (Loss).

Included in Other investments is a $0.4 million investment obtained through its ViSalus acquisition. As of June 30, 2014 and December 31, 2013, the Company accounts for this investment on a cost basis under ASC 325. This investment involves related parties as discussed in Note 12.

In addition to the investments noted above, the Company holds mutual funds as part of a deferred compensation plan which are classified as available for sale. As of June 30, 2014 and December 31, 2013, the fair value of these securities was $0.9 million and $1.0 million, respectively. These securities are valued based on quoted prices in an active market. Unrealized gains and losses on these securities are recorded in AOCI.  These mutual funds are included in Other assets in the Consolidated Balance Sheets.

The following table summarizes the proceeds and realized gains on the sale of available for sale investments recorded in Foreign exchange and other within the Consolidated Statements of Earnings (Loss) for the three and six months ended June 30, 2014 and 2013. Gains and losses reclassified from AOCI, net to foreign exchange, in the Consolidated Statement of Earnings (Loss) are calculated using the specific identification method.
 
Three months ended
Six months ended
 (In thousands)
June 30, 2014
June 30, 2013
June 30, 2014
June 30, 2013
Net proceeds
$
4,000

$
20,707

$
4,000

$
28,277

Realized gains
$

$
(95
)
$

$
(57
)
 
Note 5. Inventories

The major components of Inventories are as follows:
(In thousands)
June 30, 2014
 
December 31, 2013
Raw materials
$
6,794

 
$
4,628

Finished goods
68,417

 
71,167

Total
$
75,211

 
$
75,795


As of June 30, 2014 and December 31, 2013, the inventory valuation adjustments totaled $10.3 million and $8.6 million, respectively and have been netted against the above amounts.

Note 6. Goodwill and Other Intangibles
 
Goodwill is subject to an assessment for impairment using a two-step fair value-based test and, as such, other intangibles are also subject to impairment reviews, which must be performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite-lived intangibles might be impaired. As of June 30, 2014, there were no indications that a review was necessary.

As of June 30, 2014 and December 31, 2013, the carrying amount of the Company’s goodwill within the Candles & Home Décor segment was $2.3 million, respectively. As of June 30, 2014, the carrying amount of goodwill within the Health & Wellness segment was $0.6 million.

On April 1, 2014, ViSalus entered into an agreement to acquire the remaining 50% interest of a healthy snack manufacturer it did not already own for $250,000, bringing the total acquisition cost to $0.5 million. The purchase agreement also provides for a payment of contingent consideration to the former owner based on gross profit from product sales over the next 26 months.

14


The estimated purchase price, inclusive of the expected payments to be made for product sales, will be approximately $0.7 million. The difference between the estimated purchase price and the net assets acquired of $0.6 million was recorded as goodwill within the Health & Wellness segment.
Other intangible assets include indefinite-lived trade names, trademarks, domain names and customer relationships related to the Company's acquisition of Miles Kimball, Walter Drake and As We Change, which are reported in the Catalog & Internet segment and ViSalus, which is reported in the Health & Wellness segment. The Company does not amortize the indefinite-lived trade names, trademarks and domain names, but rather tests for impairment annually upon the occurrence of a triggering event. As of June 30, 2014, there were no indications that a review was necessary.


Other intangible assets include the following:
 
Health & Wellness Segment
 
Catalog & Internet Segment
 
Total
(In thousands)
Indefinite-lived trade names and trademarks
 
Indefinite-lived trade names and trademarks
 
Customer
relationships
 
Indefinite-lived trade names and trademarks
 
Customer relationships
Other intangibles at Gross value
$
4,200

 
$
28,100

 
$
15,400

 
$
32,300

 
$
15,400

Accumulated amortization

 

 
(15,186
)
 

 
(15,186
)
Additions
928

 

 

 
928

 

Impairments
(3,100
)
 
(21,534
)
 

 
(24,634
)
 

Other intangibles at December 31, 2013
$
2,028

 
$
6,566

 
$
214

 
$
8,594

 
$
214

Additions

 

 

 

 

Amortization

 

 
(131
)
 

 
(131
)
Other intangibles at June 30, 2014
$
2,028

 
$
6,566

 
$
83

 
$
8,594

 
$
83


Amortization expense is recorded on an accelerated basis over the estimated lives of the customer lists ranging from 5 to 12 years. Amortization expense for other intangible assets was $0.1 million and $0.3 million for the six months ended June 30, 2014 and 2013, respectively. The estimated annual amortization expense for 2014 is $0.2 million and an insignificant amount to be amortized in 2015.

Note 7. Fair Value Measurements
 
The fair-value hierarchy established in ASC 820 prioritizes the inputs used in valuation techniques into three levels as follows:
 
Level-1 – Observable inputs – quoted prices in active markets for identical assets and liabilities
 
Level-2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data;
 
Level-3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
 

15


Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis as of  June 30, 2014 and December 31, 2013, and the basis for that measurement, by level within the fair value hierarchy:
(In thousands)
Balance as of June 30, 2014
 
Quoted prices in active markets for identical assets (Level 1)
 
Significant
other observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
Certificates of deposit
$
1,663

 
$

 
$
1,663

 
$

Short-term bond mutual funds
24,034

 
24,034

 

 

Foreign exchange forward contracts
10

 
 
 
10

 
 
Deferred compensation plan assets (1)
910

 
910

 

 

Total
$
26,617

 
$
24,944

 
$
1,673

 
$

Financial liabilities
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
(282
)
 
$

 
$
(282
)
 
$

(1) Recorded as an Other asset with an offsetting liability for the obligation to its employees in Other liabilities.
(In thousands)
Balance as of December 31, 2013
 
Quoted prices in active markets for identical assets (Level 1)
 
Significant
other observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
Certificates of deposit
$
1,634

 
$

 
$
1,634

 
$

Short-term bond mutual funds
7,985

 
7,985

 

 

Foreign exchange forward contracts
44

 

 
44

 

Deferred compensation plan assets (1)
1,007

 
1,007

 

 

Total
$
10,670

 
$
8,992

 
$
1,678

 
$

Financial liabilities
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
(225
)
 
$

 
$
(225
)
 
$

(1) Recorded as an Other asset with an offsetting liability for the obligation to its employees in Other liabilities.
 
The Company values its investments in equity securities within the deferred compensation plan and its investments in short term bond mutual funds using level 1 inputs, by obtaining quoted prices in active markets.  The deferred compensation plan assets consist of shares of mutual funds. The Company also enters into both cash flow and fair value hedges by purchasing foreign currency exchange forward contracts. These contracts are valued using level 2 inputs, primarily observable forward foreign exchange rates. The certificates of deposit that are used to collateralize some of the Company’s letters of credit have been valued using information classified as level 2, as these are not traded on the open market and are held unsecured by one counterparty.
 
The carrying values of cash and cash equivalents, trade and other receivables and trade payables are considered to be representative of their respective fair values. 
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with ASC 820. The Company’s assets and liabilities measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill, intangibles and other assets. These assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that impairment may exist. As of June 30, 2014, there were no indications or circumstances indicating that an impairment might exist.

Note 8. Derivatives and Other Financial Instruments
 

16


The Company uses foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, net assets of our foreign operations, intercompany payables and loans. It does not hold or issue derivative financial instruments for trading purposes. The Company has hedged the net assets of certain of its foreign operations through foreign currency forward contracts. The realized and unrealized gains/losses on these hedges are recorded within AOCI until the investment is sold or disposed of. As of June 30, 2014, there were two outstanding net investment hedges. The cumulative net after-tax gain related to net investment hedges in AOCI as of June 30, 2014 and December 31, 2013 was $2.1 million and $2.3 million.
 
The Company has designated its foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as fair value hedges.  The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.

The Company has designated forward exchange contracts on forecasted intercompany inventory purchases and future purchase commitments as cash flow hedges and as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in AOCI until earnings are affected by the variability of the cash flows being hedged. Upon settlement of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from AOCI and is included in the measurement of the cost of the acquired asset upon sale.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in AOCI until the hedged item is settled.  However, if the hedged item is probable of not occurring, the resulting gain or loss on the terminated hedge is recognized into earnings immediately.  The net after-tax unrealized loss included in AOCI at June 30, 2014 for cash flow hedges was immaterial and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment. The net after-tax unrealized loss included in AOCI at December 31, 2013 for cash flow hedges was $0.1 million.

For financial statement presentation, net cash flows from such hedges are classified in the categories of the Consolidated Statement of Cash Flows with the items being hedged. Forward contracts held with each bank are presented within the Consolidated Balance Sheets as a net asset or liability, based on netting agreements with each bank and whether the forward contracts are in a net gain or loss position. The foreign exchange contracts outstanding have maturity dates through March 2015.

The table below details the fair value and location of the Company’s hedges in the Consolidated Balance Sheets: 
(In thousands)
June 30, 2014
December 31, 2013
 Derivatives designated as hedging instruments
Accrued Expenses
Accrued Expenses
Foreign exchange forward contracts in an asset position
$
10

$
44

Foreign exchange forward contracts in a liability position
(282
)
(225
)
Net derivatives at fair value
$
(272
)
$
(181
)

For the three and six months ended June 30, 2014, the Company recorded a loss of $0.1 million and $0.2 million, respectively, compared to a gain of $0.4 million and an insignificant loss in both comparable prior year periods related to foreign exchange forward contracts accounted for as Fair Value hedges to Foreign exchange and other.

Gain and loss activity recorded to cost of goods sold and reclassified from AOCI related to the Company's Cash Flow hedges for the three and six months ended June 30, are as follows:
 
Cash Flow Hedging Relationships
Amount of Gain Recognized in AOCI on Derivative
(Effective Portion)
 
Amount of Loss
Reclassified from AOCI into Income
(Effective Portion)
(In thousands)
 
 
 
Three months ended
Six months ended
 
2014
2013
 
2014
2013
2014
2013
Foreign exchange forward contracts
$
16

$
74

 
$
(39
)
$
(11
)
$
(118
)
$
(94
)
 

17


Note 9. Accrued Expenses
 
Accrued expenses consist of the following:
(In thousands)
June 30, 2014
 
December 31, 2013
Compensation and benefits
$
19,982

 
$
20,162

Deferred revenue
11,993

 
10,382

Promotional
6,388

 
7,649

Inventory
794

 
3,864

Professional fees
1,697

 
2,651

Taxes, other than income
2,177

 
2,344

Other
10,625

 
11,865

Total
$
53,656

 
$
58,917


Note 10. Long-Term Debt

On May 10, 2013, the Company issued $50.0 million principal amount of 6.00% Senior Notes due June 2017. The notes bear interest payable semi-annually in arrears on May 15 and November 15. The indenture governing the 6.00% Senior Notes due 2017 contains affirmative and negative covenants that, among other things, limit or restrict the Company's and its subsidiaries' ability to incur additional debt, grant negative pledges to other creditors, prepay subordinated indebtedness and certain other
indebtedness, pay dividends or make other distributions on capital stock, redeem or repurchase preferred and capital stock,
make loans, investments and other restricted payments, engage in acquisitions, enter into transactions with affiliates, sell assets,
create liens on assets to secure debt, or effect a consolidation or merger or to sell all, or substantially all, of the Company's
assets, in each case, subject to certain qualifications and exceptions set forth in the indenture.

As of June 30, 2014 and December 31, 2013, Silver Star Brands had approximately $5.2 million and $5.5 million, respectively, of long-term debt outstanding under a real estate mortgage note payable which matures June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.
 
The Company’s debt is recorded at its amortized cost basis which approximates its fair value.

As of June 30, 2014, the Company had a total of $2.4 million available under an uncommitted bank facility to be used for letters of credit. The issuance of letters of credit under this facility will be available until January 31, 2015.  As of June 30, 2014, no amount was outstanding under this facility.

As of June 30, 2014, the Company had $1.1 million in standby letters of credit outstanding that are collateralized with a certificate of deposit and have an expiration date of March 1, 2015.

Note 11. Income Taxes

The Company's effective tax rate for the three months ended June 30, 2014 was a negative 26% which resulted in an income tax expense of $1.0 million on a net loss before taxes of $3.8 million. This compares to a negative 3% for the three months ended June 30, 2013, which resulted in a tax expense of $21.0 thousand on a net loss before taxes of $0.6 million. The tax expense on the pre-tax loss this year, as compared to the U.S. statutory tax rate, is primarily a result of no tax benefit being realized on certain foreign net operating losses and no tax benefit recorded on state net operating losses.

The Company's effective tax rate for the six months ended June 30, 2014 was a negative 7% which resulted in an income tax expense of $0.5 million on a net loss before taxes of $7.4 million. This compares to 44% for the six months ended June 30, 2013, which resulted in a tax expense of $2.2 million on a net profit before taxes of $5.0 million. The tax expense on the pre-tax loss this year, as compared to the U.S. statutory tax rate, is primarily a result of no tax benefit being realized on certain foreign net operating losses and no tax benefit recorded on state net operating losses.
Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be significant changes in the amount of unrecognized tax benefits in 2014 but the amount cannot be estimated. There has been no material change in the Company's contingency reserve for the six months ended June 30, 2014.


18


Note 12. Related Party Transactions

In August 2008, the Company signed a membership interest purchase agreement to acquire ViSalus, a network marketing
company that sells weight management products, nutritional supplements, functional foods and energy drink mixes, through a series of investments as discussed in further detail in Note 2. Through December 2012, the Company made investments that
increased its ownership in ViSalus to approximately 80.9%. In connection with the December 2012 closing, ViSalus issued
shares of its redeemable convertible preferred stock to the holders of the 19.1% of ViSalus that was not owned by the
Company. The Company and ViSalus have agreed to redeem all of the shares of preferred stock on December 31, 2017 for $143.2 million, which date can be extended with the consent of holders of a majority of the voting power of the preferred stock, unless prior to such date ViSalus has made an initial public offering of its common stock at a price that indicates a valuation of
ViSalus of $800 million or more, in which event the preferred stock will automatically convert into common stock of ViSalus
on a one-to-one basis. The threshold valuation in the preceding sentence is an aspirational goal and should not be considered
the valuation of ViSalus at the date hereof or to predict ViSalus’s valuation at any time in the future. The Company has
guaranteed the performance by ViSalus of its redemption obligation. In the event that ViSalus does not redeem the preferred
shares, each of the preferred shares will become convertible, in the holder's sole discretion, into 100 shares of common stock of ViSalus.

At the time of the first closing in October 2008, ViSalus was owned in part by Ropart Asset Management Fund, LLC and
related entities (collectively, “RAM”), which owned a significant non-controlling interest in ViSalus. In September 2012,
RAM distributed its interest in ViSalus to its members, including Robert B. Goergen, Robert B. Goergen, Jr. and Todd A.
Goergen. Robert B. Goergen beneficially owns approximately 36.0% of the Company’s outstanding common stock, and together with members of his family, owns substantially all of RAM.

As of June 30, 2014, Robert B. Goergen, Robert B. Goergen, Jr. and Todd A. Goergen (the son of Robert B. Goergen and the brother of Robert B. Goergen, Jr.) own 1.8%, 0.1% and 0.6%, respectively, of the outstanding capital stock of ViSalus. In addition, Ryan J. Blair owns 4.6% of the outstanding capital stock of ViSalus. Of the $143.2 million aggregate redemption amount that will be paid upon redemption of the preferred stock in December 2017, $13.2 million will paid to Robert B. Goergen, $0.5 million will be paid to Robert B. Goergen, Jr., $4.5 million will be paid to Todd A. Goergen (and trusts affiliated with him) and $34.3 million will be paid to Ryan J. Blair.

ViSalus Salary Deferral Program.  In February 2014, ViSalus offered its senior executives, founders and independent board member the right to participate in a long-term incentive program, which we refer to as the 2014 ViSalus LTIP, in exchange for their agreement to defer the receipt of a portion of their salary or commissions until no later than March 15, 2015. The award under the 2014 ViSalus LTIP is a performance award payable in cash and the amount of the award will be determined by the amount deferred.  For those participants who elected to defer less than 50% of their base salary or commissions, the award will equal the amount deferred, and for those participants who elected to defer 50% or more of their base salary or commissions, the award will equal two times the amount deferred.  The award will only be paid if ViSalus achieves trailing twelve month earnings before interest and taxes of $20.0 million or more, inclusive of the entire compensation award associated with the 2014 ViSalus LTIP (the “performance goal”), and the participant is associated with ViSalus through the payment date.  Ryan J. Blair elected to defer 50% of his 2014 salary (after giving effect to insurance premiums for health and welfare programs), representing $368,159, which amount will be paid to him by March 15, 2015.  Todd A. Goergen elected to defer 50% of his 2014 salary (after giving effect to insurance premiums for health and welfare programs), representing $243,521, which amount will be paid to him by March 15, 2015.  In addition, because Mr. Blair and Mr. Goergen elected to defer 50% of their respective salaries (after giving effect to insurance premiums for health and welfare programs), they are eligible for LTIP awards of $736,317 and $487,042, respectively, if ViSalus achieves the performance goal and if they are employed by ViSalus on the LTIP payment date. As of June 30, 2014, no amounts for the LTIP award have been accrued for under this program as the probability of whether these targets will be achieved remains uncertain.

FragMob. ViSalus entered into an agreement with FragMob LLC in October 2011 under which FragMob agreed to provide
ViSalus with software development and hosting services for a mobile phone application that allows ViSalus's promoters to
access their Vi-Net promoter account information on their smart phones. In March 2012, ViSalus added a second application, a
credit card swiper for mobile phones, to the services provided by FragMob pursuant to the agreement. In September 2012,
ViSalus and FragMob entered into a new revised agreement that extended the terms to December 31, 2014 and revised certain
terms of the agreement. Ryan Blair directly and indirectly owns a total of 11.8% of FragMob, RAM directly and indirectly
owns a total of 7.1% of FragMob and Todd A. Goergen indirectly owns 5.3% of FragMob. Fees paid to FragMob for the three and six months ended June 30, 2014 and 2013 for both services were $0.5 million and $0.9 million, respectively.

Software Services. ViSalus’s promoters may use a direct-selling software, which provides the promoters with an array of
promoter and corporate web modules. ViSalus licenses this software pursuant to a software and hosting services agreement that

19


expires in June 2016 and has annual renewal terms. ViSalus currently owns approximately 2.7% of this software provider. In
addition, Ryan J. Blair owns directly and indirectly a total of 2.2%, RAM directly and indirectly owns a total of 4.8% and Todd
A. Goergen indirectly owns 0.8% of the software provider. Fees paid to the company for software licensing and other services
for the three and six months ended June 30, 2014 were $0.2 million and $0.5 million, respectively. Fees paid to the company for software licensing and other services for the three and six months ended June 30, 2013 were $0.3 million and $0.7 million, respectively.

Employment Agreement with Todd A. Goergen. In February 2014, Todd A. Goergen became the Chief Operating Officer of
ViSalus. Mr. Goergen's base salary is $500,000 and he has an annual target bonus opportunity equal to 100% of his base salary
(with a maximum annual bonus opportunity equal to 200% of his base salary). In May 2013, Todd A. Goergen was issued
507,375 restricted stock units and 620,125 nonqualified stock options under the ViSalus Plan. Todd A. Goergen is also a member of the Board of Directors of ViSalus.

Management Services with ViSalus. On July 25, 2012, ViSalus and the Company entered into a management services
agreement whereby the Company will provide certain administrative support services to ViSalus for what is believed to be an
arm's length price for such services. The basis for determining the price for the services is on a cost recovery basis and requires
ViSalus to pay for such services within 30 days of receipt of the invoice. The agreement terminates on December 31, 2015 but
can be amended by either party. The estimated cost of services to be provided in 2014 is $1.1 million.

RAM Sublease. For the six months ended June 30, 2014 and 2013, RAM paid the Company $0.1 million, respectively, to sublet office space, which the Company believes approximates the fair market rental for the rental period.

Note 13. Stock-Based Compensation

Blyth, Inc. Amended and Restated 2003 Omnibus Incentive Plan

As of June 30, 2014, the Company had one active stock-based compensation plan, the Second Amended and Restated Omnibus Incentive Plan (“2003 Plan”), available to grant future awards. There were 2,040,897 shares authorized for grant as of June 30, 2014, and approximately 1,574,085 shares available for grant under the 2003 Plan. The Company’s policy is to issue new shares of common stock for all stock options exercised and restricted stock grants.
 
The Board of Directors and the stockholders of the Company have approved the adoption and subsequent amendments of the 2003 Plan. The 2003 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock unit awards to officers and employees. The 2003 Plan also provides for grants of nonqualified stock options to directors of the Company who are not, and who have not been during the immediately preceding 12-month period, officers or employees of the Company or any of its subsidiaries. Restricted stock and restricted stock units (“RSUs”) are granted to certain employees to incent performance and retention. RSUs issued under these plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed. The release of RSUs on each of the vesting dates is contingent upon continued active employment by the employee until the vesting dates.
 
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Consolidated Statements of Earnings (Loss) for the three and six months ended June 30, 2014 and 2013 included compensation expense for restricted stock, RSUs and stock-based awards granted subsequent to January 31, 2006 based on the grant date fair value estimated in accordance with the provisions of ASC 718, “Compensation—Stock Compensation” (“ASC 718”). The Company recognizes these compensation costs net of a forfeiture rate for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is over periods of 3 years for stock options; 2 to 5 years for employee restricted stock and RSUs; and 1 to 2 years for non-employee restricted stock and RSUs. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.


20


Transactions related to restricted stock and RSUs are summarized as follows:
 
Shares
 
Weighted Average
Grant Date Fair Value
 
Aggregate Intrinsic Value
(In thousands)
Nonvested restricted stock and RSUs at December 31, 2013
100,740

 
$
24.25

 
$
1,096

Granted
133,949

 
9.56

 
 

Vested
(61,777
)
 
27.20

 
 

Forfeited
(721
)
 
33.11

 
 

Nonvested restricted stock and RSUs at June 30, 2014
172,191

 
$
11.73

 
$
1,405

Total restricted stock and RSUs at June 30, 2014
240,313

 
$
18.23

 
$
1,961

 
Compensation expense related to restricted stock and RSUs for the three months ended June 30, 2014 and 2013 was approximately $0.3 million and $0.4 million, respectively. The total recognized tax benefit for the three months ended June 30, 2014 and 2013 was approximately $0.1 million and $0.2 million, respectively. Compensation expense related to restricted stock and RSUs for the six months ended June 30, 2014 and 2013 was approximately $0.7 million and $1.1 million, respectively. The total recognized tax benefit for the six months ended June 30, 2014 and 2013 was approximately 0.3 million and 0.4 million, respectively.

As of June 30, 2014, there was $1.0 million of unearned compensation expense related to non-vested restricted stock and RSU awards.  This cost is expected to be recognized over a weighted average period of 2.1 years. The total unrecognized stock-based compensation cost to be recognized in future periods as of June 30, 2014 does not consider the effect of stock-based awards that may be issued in subsequent periods.

Transactions involving stock options are summarized as follows:

For the six months ended June 30, 2014, 2,500 stock options were outstanding with a weighted average exercise price of $63.37. The weighted average remaining contractual life is 0.19 years.

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

ViSalus, Inc. 2012 Omnibus Incentive Plan

On May 14, 2013, the Board of Directors of ViSalus, Inc. adopted the ViSalus, Inc. 2012 Omnibus Incentive Plan (the “ViSalus Plan”), which allows the Board of Directors of ViSalus to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock units, dividend equivalents and performance compensation awards to employees and others of ViSalus and its affiliates. The objectives of the ViSalus Plan are to attract, retain and provide incentives to employees and others to promote the long-term success of the business. In May 2013, 7,050,000 shares of common stock of ViSalus were authorized for grant under this plan by the Board of Directors of ViSalus and 36,249 shares of common stock of ViSalus were available for grant as of June 30, 2014.

Transactions related to restricted stock and RSUs are summarized as follows:
 
Shares
Outstanding and exercisable at December 31, 2013
3,185,863

Forfeited
(32,000
)
Outstanding and exercisable at June 30, 2014
3,153,863


Compensation expense related to RSUs for the three months ended June 30, 2014 and 2013 was a benefit of $0.2 million and and expense of $0.6 million, respectively. The total recognized tax expense for the three months ended June 30, 2014 and 2013 was $0.1 million and a benefit of $0.2 million, respectively. Compensation expense related to RSUs for the six months ended June 30, 2014 and 2013 was $29 thousand and $0.6 million, respectively. The total recognized tax benefit for the six months ended June 30, 2014 and 2013 was $10 thousand and $0.2 million, respectively. As of June 30, 2014, there was $1.3 million of unearned compensation expense related to non-vested RSUs.  This cost is expected to be recognized over a weighted average period of 4.8 years. RSUs vest beginning October 1, 2014 through October 1, 2020.


21


Transactions involving stock options are summarized as follows:
 
Shares
Options outstanding at December 31, 2013
3,515,988

Granted
358,000

Forfeited
(14,100
)
Options outstanding at June 30, 2014
3,859,888


Compensation expense related to nonqualified stock options for the three months ended June 30, 2014 and 2013 was a benefit of $25 thousand and and expense of $0.5 million, respectively. The total recognized tax expense for the three months ended June 30, 2014 and 2013 was $9 thousand and a benefit of $0.2 million, respectively. Compensation expense related to nonqualified stock options for the six months ended June 30, 2014 and 2013 was $6 thousand and $0.5 million, respectively. The total recognized tax benefit for the six months ended June 30, 2014 and 2013 was $2 thousand and $0.2 million, respectively. As of June 30, 2014, there was $0.1 million of unearned compensation expense related to non-vested nonqualified stock options awards.  This cost is expected to be recognized over a weighted average period of 4.8 years. Nonqualified stock options vest beginning October 1, 2013 through October 1, 2020.

The fair value of the RSUs and nonqualified stock options was determined using a combination of a discounted cash flow methodology and a valuation approach using similar publicly traded companies. The discounted cash flow methodology used an estimated weighted average cost of capital to discount the estimated future cash flows of ViSalus to its present value. The publicly traded company methodology used various market multiples with consideration for comparable operating revenues and earnings.

ViSalus is required to estimate the expected forfeiture rate and only recognizes expense for those shares and options expected to vest. If the actual forfeiture rate is materially different from the estimate, the share-based compensation expense could be materially different.

The ViSalus Plan permits its participants to elect to have ViSalus purchase some or all of the shares acquired under the ViSalus Plan upon the vesting of RSUs or exercise of stock options unless such purchase would materially adversely affect ViSalus or would violate, or be prohibited by, the terms of any lending arrangements of the Company or ViSalus. These put rights automatically terminate upon an initial public offering of the common stock of ViSalus. Awards subject to these “put rights” may be classified as a liability and are subject to fair value measurement in accordance with ASC section 718 on “Stock Compensation”. Additional expense (or expense reduction) may be recorded in future periods for increases (or decreases) in the fair value of these awards. The fair value of these awards is based on ViSalus's future operating performance and may change significantly if ViSalus's sales forecasts and operating profits exceed or fall short of projections.

ViSalus Salary Deferral Program

In February 2014, ViSalus offered its senior executives, founders and independent board member the right to participate in a long-term incentive program, which we refer to as the 2014 ViSalus LTIP, in exchange for their agreement to defer the receipt of a portion of their 2014 salary or commissions until no later than March 15, 2015. The award under the 2014 ViSalus LTIP is a performance award payable in cash and the amount of the LTIP award depends on the amount deferred. For those participants who elected to defer under 50% of their base salary or commissions, the LTIP award will equal the amount deferred, and for those participants who elected to defer 50% or more of their base salary or commissions, the LTIP award will equal two times the amount deferred. The LTIP award will only be paid if ViSalus achieves trailing twelve month earnings before interest and taxes of $20.0 million or more, inclusive of the entire compensation award associated with the program, and the participant is associated with ViSalus through the LTIP payment date. As of June 30, 2014 there were 18 participants in the 2014 ViSalus LTIP who have deferred salaries and commissions totaling approximately $2.2 million until no later than March 15, 2015. The maximum amount payable by ViSalus under the 2014 ViSalus LTIP is $4.2 million if ViSalus achieves the performance goal and all participants are associated with ViSalus at the LTIP payment date. As of June 30, 2014, no amounts for the LTIP award have been accrued for under this program as the probability of whether these targets will be achieved remains uncertain.
Note 14. Redeemable Preferred Stock

In December 2012, the Company and the ViSalus founders and the other noncontrolling members reached an agreement and
exchanged their remaining ViSalus membership interests for a total of 8,955,730 shares of Series A and Series B Redeemable
Preferred Stock of ViSalus Inc. (“Preferred Stock”), which will become redeemable on December 31, 2017 for a total

22


redemption price of $143.2 million (See Note 2). The shares are redeemable for cash on December 31, 2017 at a price per
share equal to $15.99 unless prior thereto ViSalus shall have effected a “Qualified IPO” or the holders, at their option, elect to
convert their Preferred Stock into common shares of ViSalus. The Preferred Stock is convertible into Class A and Class B
common stock of ViSalus on a one for one basis. Preferred Stockholders have the same rights to earnings, dividends and voting
as their common stock equivalents. ViSalus intends to pay quarterly dividends to its preferred and common stockholders (on an
as-converted common stock basis) in an amount equal to its excess cash reserves, if any. In the event of a voluntary or
involuntary liquidation or dissolution, the holders of the Preferred Stock are entitled to be paid out of the assets of ViSalus prior
to making any payment to common stock holders. The balance as of June 30, 2014 represents the fair value plus an accretion
adjustment to arrive at its redemption value at December 31, 2017. For the six months ended June 30, 2014, the Company recorded an earnings per share charge of $1.0 million or $0.06 per share representing the accretion adjustment to its redemption value after allocating attributable losses to preferred stockholders in excess of earnings.

Note 15. Earnings Per Share
 
Vested restricted stock units issued under the Company’s stock-based compensation plans participate in a cash equivalent of the dividends paid to common stockholders and are not considered contingently issuable shares. Accordingly, these RSUs are included in the calculation of basic and diluted earnings per share as common stock equivalents. RSUs that have not vested and are subject to a risk of forfeiture are included solely in the calculation of diluted earnings per share.

The components of basic and diluted earnings per share are as follows:
 
Three months ended
Six months ended
(In thousands)
June 30, 2014
June 30, 2013
June 30, 2014
June 30, 2013
Net loss attributable to Blyth, Inc. common stockholders
$
(4,887
)
$
(3,192
)
$
(8,159
)
$
(596
)
Weighted average number outstanding:
 
 
 
 
Common shares
16,047

16,002

16,034

16,269

Vested restricted stock units
64

54

62

52

Weighted average number of common shares outstanding:
 
 
 
 
Basic common shares outstanding
16,111

16,056

16,096

16,321

Dilutive effect of non-vested restricted shares units




Diluted common shares outstanding
16,111

16,056

16,096

16,321

Basic earnings per share attributable to common stockholders
 
 
 
 
Net loss attributable per share of Blyth, Inc. common stock
$
(0.30
)
$
(0.20
)
$
(0.51
)
$
(0.04
)
Diluted earnings per share attributable to common stockholders
 
 
 

 

Net loss attributable per share of Blyth, Inc. common stock
$
(0.30
)
$
(0.20
)
$
(0.51
)
$
(0.04
)
 
As of June 30, 2014 and 2013, options to purchase 2,500 and 8,750 shares of common stock, respectively, are not included in the computation of diluted earnings per share because the effect would be antidilutive.

Note 16. Treasury and Common Stock
Treasury Stock (In thousands, except shares)
Shares
 
Amount
Balance at January 1, 2013
9,944,239

 
$
(441,774
)
Treasury stock purchases
594,582

 
(9,961
)
Treasury stock withheld in connection with long-term incentive plan
18,521

 
(305
)
Balance at December 31, 2013
10,557,342

 
$
(452,040
)
Treasury stock withheld in connection with long-term incentive plan
14,077

 
(126
)
Balance at June 30, 2014
10,571,419

 
$
(452,166
)


23


Common Stock (In thousands, except shares)
Shares
 
Amount
Balance at January 1, 2013
26,505,210

 
$
530

Common stock issued in connection with long-term incentive plan
68,821

 
2

Balance at December 31, 2013
26,574,031

 
$
532

Common stock issued in connection with long-term incentive plan
51,545

 
1

Balance at June 30, 2014
26,625,576

 
$
533


Note 17. Segment Information
 
The Company’s products include an extensive array of decorative and functional household products such as candles,
accessories, seasonal decorations, household convenience items, personalized gifts, as well as meal replacement shakes,
nutritional supplements, functional foods, energy drink mixes and health, wellness and beauty related products. The Company's products can be found throughout the United States, Canada, Mexico, Europe and Australia. The Company's financial results are
reported in three segments: the Candles & Home Décor segment, the Health & Wellness segment and the Catalog & Internet
segment.

Within the Candles & Home Décor segment, the Company designs, manufactures or sources, markets and distributes an
extensive line of products including scented candles, candle-related accessories and other fragranced products under the
PartyLite® brand. Products in this segment are sold through networks of independent sales consultants. PartyLite brand
products are sold in the United States, Canada, Mexico, Europe and Australia.

Within the Health & Wellness segment, the Company operates ViSalus, which is focused on selling meal replacement shakes,
nutritional supplements, functional foods and energy drink mixes. Products in this segment are sold through networks of
independent sales promoters. ViSalus® brand products are sold in the United States and Canada and Vi™ products are sold in the United Kingdom, Ireland, Germany and Austria.

Within the Catalog & Internet segment, under the Silver Star Brands name, the Company designs, sources and markets a broad
range of household convenience items, health, wellness and beauty products, holiday cards, personalized gifts, kitchen accessories, premium photo albums and frames. These products are sold directly to the consumer under the Miles Kimball®, Walter Drake®, Easy Comforts®, As We Change® and Exposures® brands. These products are sold in the United States and Canada.

Operating profit in all segments represents net sales less operating expenses directly related to the business segments and
corporate expenses allocated to the business segments. Other expense includes Interest expense, Interest income, and Foreign
exchange and other which are not allocated to the business segments. Identifiable assets for each segment consist of assets
used directly in its operations and intangible assets, if any, resulting from purchase of business combinations. Unallocated
Corporate within the identifiable assets include cash and cash equivalents, short-term investments, prepaid income tax, corporate fixed assets, deferred debt costs and other long-term investments, which are not allocated to the business segments.

The geographic area data includes net sales, based on product shipment destination, and long-lived assets, which consist of fixed assets, based on physical location.

Operating Segment Information

24


 
Three months ended
Six months ended
(In thousands)
June 30, 2014
 
June 30, 2013
June 30, 2014
 
June 30, 2013
Net Sales
 
 
 
 
 
 
Candles & Home Décor
$
72,745

 
$
77,800

$
153,603

 
$
168,756

Health & Wellness
53,560

 
101,522

110,991

 
205,831

Catalog & Internet
31,488

 
32,409

68,868

 
70,238

Total
$
157,793

 
$
211,731

$
333,462

 
$
444,825

 
 
 
 
 
 
 
Earnings (loss) from operations before income taxes
 
 
 
 
 
 
Candles & Home Décor
$
(653
)
 
$
(310
)
$
1,455

 
$
3,086

Health & Wellness
(1,328
)
 
2,769

(5,058
)
 
6,955

Catalog & Internet
(824
)
 
(1,309
)
(1,842
)
 
(2,913
)
Operating profit (loss)
(2,805
)
 
1,150

(5,445
)
 
7,128

Unallocated Corporate
(995
)
 
(1,784
)
(1,956
)
 
(2,091
)
Total
$
(3,800
)
 
$
(634
)
$
(7,401
)
 
$
5,037


Identifiable Assets
June 30, 2014

 
December 31, 2013

Candles & Home Décor
$
167,927

 
$
176,062

Health & Wellness
51,767

 
57,995

Catalog & Internet
49,229

 
50,880

Unallocated  Corporate
66,676

 
81,840

Total
$
335,599

 
$
366,777


Note 18. Contingencies

The Company, certain of its officers, ViSalus, one of its founders and others were named as defendants in a putative class action filed in federal district court in Connecticut on behalf of purchasers of our common stock during the period March to November 2012. On March 31, 2014, the Court granted the defendants' motion to dismiss the plaintiffs’ complaint and entered judgment for the defendants. Plaintiffs did not appeal the judgment.
 
In July 2014, three former ViSalus promoters filed a putative class action in the U.S. District Court for the Eastern District of Michigan against ViSalus, Robert B. Goergen (our Chairman of the Board), the three founders of ViSalus (Nick Sarnicola, Ryan Blair and Blake Mallen), Todd A. Goergen (ViSalus’s Chief Operating Officer), several of ViSalus’s promoters (along with certain of their affiliates), and FragMob and iCentris (two service vendors to ViSalus). For additional information, see Part II, Item 1 - Legal Proceedings.
The Company is involved in other litigation arising in the ordinary course of business, which, in its opinion, will not have a
material adverse effect on its financial position, results of operations or cash flows.






25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a multi-channel company primarily focused on the direct to consumer market. Our products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items and personalized gifts, as well as meal replacement shakes, nutritional supplements, functional foods, energy drink mixes and health, wellness and beauty related products. Our products can be found throughout the United States, Canada, Mexico, Europe and Australia. Our financial results are reported in three segments: the Candles & Home Décor segment (PartyLite), the Health & Wellness segment (ViSalus) and the Catalog & Internet segment (Silver Star Brands, formerly known as the Miles Kimball Company).

Our current focus is driving sales growth and profitability of our brands so we may leverage more fully our infrastructure, as
well as supporting new infrastructure requirements of some of our businesses. New product development continues to be
critical to all three segments of our business. In the Candles & Home Décor and Health & Wellness segments, monthly sales
and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants
and promoters. In the Catalog & Internet segment, product, merchandising and circulation strategy are designed to drive strong
sales growth in smaller brands and expand the sales and customer base of our flagship brands.
 
Results of operations - Three and six months ended June 30, 2014 versus 2013

Net Sales
 
Net sales for the three months ended June 30, 2014 decreased $53.9 million, or 25%, to $157.8 million, from $211.7 million in the comparable prior year period. Net sales for the six months ended June 30, 2014 decreased $111.3 million, or 25%, to $333.5 million, from $444.8 million in the comparable prior year period. These declines were due to a decrease in the Health & Wellness segment and to a lesser extent a decrease in the Candles & Home Décor segment and Catalog & Internet segment.

Net Sales – Candles & Home Décor Segment

Net sales for PartyLite for the three months ended June 30, 2014 decreased $5.1 million, or 6%, to $72.7 million from $77.8 million in the comparable prior year period. This decline was principally due to a decrease at PartyLite North America of 22% due to fewer consultants which resulted in a lower number of shows. Partially offsetting this decline was an increase at PartyLite Europe of 4%, or a decrease of 1% in local currency, mostly due to lower sales in France and Nordic partly offset by higher sales in Germany, the United Kingdom and Austria.

Net sales for PartyLite for the six months ended June 30, 2014 decreased $15.2 million, or 9%, to $153.6 million from $168.8 million in the comparable prior year period. This decline was principally due to a decrease at PartyLite North America of 20% and to a lesser extent, a decrease at PartyLite Europe of 3%, or down 7% in local currency. These declines were principally due to fewer consultants which resulted in a lower number of shows.

PartyLite's European active independent sales consultants totaled approximately 23,300 at the end of the second quarter versus approximately 24,700 for the comparable prior year period. Active North American independent sales consultants totaled approximately 13,000 at the end of the second quarter this year versus approximately 15,600 last year.

Net Sales – Health & Wellness Segment

Net sales for ViSalus for the three months ended June 30, 2014 decreased $47.9 million, or 47%, to $53.6 million from $101.5 million in the comparable prior year period. Net sales for ViSalus for the six months ended June 30, 2014 decreased $94.8 million, or 46%, to $111.0 million from $205.8 million in the comparable prior year period. These decreases were principally attributed to a decline in North American promoters to approximately 28,700 at June 30, 2014 from approximately 57,200 at June 30, 2013. International promoters totaled approximately 3,100 at June 30, 2014 reflecting ViSalus's entry into the United Kingdom in April 2013 and Germany, Austria and Ireland in 2014.

Net Sales – Catalog & Internet Segment

Net sales for Silver Star Brands for the three months ended June 30, 2014 decreased $0.9 million, to $31.5 million from $32.4 million in the comparable prior year period mainly due lower general merchandise sales within the Miles Kimball catalog partially offset by increases associated with health and wellness products and increased sales on preferred credit.

26



Net sales for Silver Star Brands for the six months ended June 30, 2014 decreased $1.3 million, to $68.9 million from $70.2 million in the comparable prior year period. This decline was mostly due to lower general merchandise sales within the Miles Kimball catalog partially offset by increases associated with health and wellness products and increased sales on preferred credit.

Gross Profit and Operating Expenses

Blyth’s consolidated gross profit for the three months ended June 30, 2014 decreased $33.9 million, or 25%, to $101.3 million from $135.2 million in the comparable prior year period. This decrease was principally due to the impact of lower sales. The gross profit margin increased slightly to 64.2% for the three months ended June 30, 2014 from 63.9% for the comparable prior year period primarily due to implementation of various cost saving programs, offset in part with higher excess and obsolete inventory expenses.

Blyth’s consolidated gross profit for the six months ended June 30, 2014 decreased $73.5 million, or 25%, to $214.8 million from $288.3 million in the comparable prior year period. This decrease was principally due to the impact of lower sales and higher excess and obsolete inventory expenses. The gross profit margin decreased to 64.4% for the six months ended June 30, 2014 from 64.8% for the comparable prior year period primarily due to the impact of lower sales volume at ViSalus, which carries a higher gross margin than our other businesses, partially offset by the implementation of various cost saving programs.

Blyth’s consolidated selling expense for the three months ended June 30, 2014 decreased $22.7 million, or 25%, to $69.8 million from $92.5 million in the comparable prior year period.  This decrease was primarily due to lower commission expenses at ViSalus associated with their sales decline. Selling expense as a percentage of net sales increased slightly to 44.2% for the three months ended June 30, 2014 from 43.7% for the comparable prior year period.

Blyth’s consolidated selling expense for the six months ended June 30, 2014 decreased $47.5 million, or 24%, to $148.1 million from $195.6 million in the comparable prior year period.  This decrease was primarily due to lower commission expenses at ViSalus associated with their sales decline. Selling expense as a percentage of net sales increased slightly to 44.4% for the six months ended June 30, 2014 from 44.0% for the comparable prior year period.

Blyth’s consolidated administrative and other expenses for the three months ended June 30, 2014 decreased $7.2 million, or 17%, to $34.4 million from $41.6 million in the comparable prior year period. This decline was principally due to cost saving initiatives throughout the Company and most significantly at ViSalus North America, partially offset by additional expenses at ViSalus Europe to support their international expansion. As a percent of net sales, administrative expenses were 21.8% for the three months ended June 30, 2014 and 19.6% for the comparable prior year period. This increase was mostly due to lower sales.

Blyth’s consolidated administrative and other expenses for the six months ended June 30, 2014 decreased $13.4 million, or 16%, to $72.2 million from $85.6 million in the comparable prior year period. This decline was principally due to cost saving initiatives throughout the Company and most significantly at ViSalus North America, partially offset by additional expenses at ViSalus Europe to support their international expansion. As a percent of net sales, administrative expenses were 21.6% for the six months ended June 30, 2014 and 19.2% for the comparable prior year period. This increase was mostly due to lower sales.

Operating Profit (Loss)

Blyth’s consolidated operating profit (loss) for the three months ended June 30, 2014 decreased $4.0 million to a loss of $2.8 million from a profit of $1.2 million for the comparable prior year period. Blyth’s consolidated operating profit (loss) for the six months ended June 30, 2014 decreased $12.5 million to a loss of $5.4 million from a profit of $7.1 million for the comparable prior year period. These decreases were due to sales declines at ViSalus and PartyLite partially offset by improved operating performance at Silver Star Brands.

Operating Profit (Loss) – Candles & Home Décor Segment
 
Operating loss for PartyLite was $0.7 million for the three months ended June 30, 2014 compared to a loss of $0.3 million for the comparable prior year period. This decline is principally due to reduced profit at PartyLite North America associated with their sales decline, offset by a profit increase at PartyLite Europe. Corporate expenses allocated to PartyLite were $1.8 million for the three months ended June 30, 2014 and $1.6 million for the comparable prior year period.

Operating profit for PartyLite was $1.5 million for the six months ended June 30, 2014 compared to $3.1 million for the comparable prior year period. This decline is principally due to reduced profit at PartyLite North America associated with their

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sales decline. Corporate expenses allocated to PartyLite were $3.6 million for the six months ended June 30, 2014 and $3.1 million for the comparable prior year period.

Operating Profit (Loss) - Health & Wellness Segment

Operating profit (loss) for ViSalus decreased to a loss of $1.3 million for the three months ended June 30, 2014 from a profit of $2.8 million for the comparable prior year period. This decrease was primarily due to lower sales and additional expenses for the international expansion in Europe partially offset by execution of various cost saving programs. Corporate expenses allocated to ViSalus were $0.7 million for the three months ended June 30, 2014 and $2.4 million for the comparable prior year period.

Operating profit (loss) for ViSalus decreased to a loss of $5.1 million for the six months ended June 30, 2014 from a profit of $7.0 million for the comparable prior year period. This decrease was primarily due to lower sales in North America and additional expenses for the international expansion in Europe partially offset by execution of various cost saving programs. Corporate expenses allocated to ViSalus were $1.9 million for the six months ended June 30, 2014 and $4.6 million for the comparable prior year period.

Operating Loss – Catalog & Internet Segment

Operating loss for Silver Star Brands was $0.8 million for the three months ended June 30, 2014 compared to a loss of $1.3 million in the comparable prior year. This improvement was due to reduced promotional expenses, higher sales in health and wellness products and higher credit sales partly offset by lower general merchandise product sales and higher credit related expenses. Corporate expenses allocated to Silver Star Brands were $0.7 million for the three months ended June 30, 2014 and $0.6 million for the comparable prior year period.

Operating loss for Silver Star Brands was $1.8 million for the six months ended June 30, 2014 compared to a loss of $2.9 million in the comparable prior year. This improvement was due to reduced promotional expenses, higher sales in health and wellness products and higher credit sales partly offset by lower general merchandise product sales and higher credit related expenses. Corporate expenses allocated to Silver Star Brands were $1.5 million for the six months ended June 30, 2014 and $1.1 million for the comparable prior year period.

Other Expense (Income)

Interest expense was $1.0 million for the three months ended June 30, 2014 compared to $1.6 million in the comparable prior year period. Interest expense was $2.0 million for the six months ended June 30, 2014 compared to $2.8 million in the comparable prior year period. These decreases were principally due to lower outstanding debt this year as compared to last year.
 
Interest income was $0.1 million for the three months ended June 30, 2014 and 2013. Interest income was $0.1 million for the six months ended June 30, 2014 compared to $0.4 million in the comparable prior year period. This decline was mainly due to lower invested cash balances.

Foreign exchange and other was an expense of $0.1 million for the three months ended June 30, 2014 compared to an expense of $0.3 million in the comparable prior year period. Included in prior year's expense were losses on the sale of investments of $0.1 million. Foreign exchange and other was an expense of $0.1 million for the six months ended June 30, 2014 compared to income of $0.3 million in the comparable prior year period.

Our effective tax rate for the three months ended June 30, 2014 was a negative 26% which resulted in an income tax expense of $1.0 million on a net loss before taxes of $3.8 million. This compares to a negative 3% for the three months ended June 30, 2013, which resulted in a tax expense of $21.0 thousand on a net loss before taxes of $0.6 million. The tax expense on the pre-tax loss this year, as compared to the U.S. statutory tax rate, is primarily a result of no tax benefit being realized on certain foreign net operating losses and no tax benefit recorded on state net operating losses.

Our effective tax rate for the six months ended June 30, 2014 was a negative 7% which resulted in an income tax expense of $0.5 million on a net loss before taxes of $7.4 million. This compares to 44% for the six months ended June 30, 2013, which resulted in a tax expense of $2.2 million on a net profit before taxes of $5.0 million. The tax expense on the pre-tax loss this year, as compared to the U.S. statutory tax rate, is primarily a result of no tax benefit being realized on certain foreign net operating losses and no tax benefit recorded on state net operating losses.


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The net earnings attributable to noncontrolling interests was a loss of $0.3 million for the three months ended June 30, 2014 compared to earnings of $0.7 million in the comparable prior year period. The net earnings attributable to noncontrolling interests was a loss of $0.7 million for the six months ended June 30, 2014 compared to earnings of $1.6 million in the comparable prior year period. These decreases are attributed to lower earnings associated with ViSalus.

Net loss attributable to Blyth increased $3.0 million to $4.4 million for the three months ended June 30, 2014 from $1.4 million in the comparable prior year period. Net earnings attributable to Blyth decreased $8.4 million to a net loss of $7.2 million for the six months ended June 30, 2014 from earnings of $1.2 million in the comparable prior year period. These decreases in income were primarily attributable to ViSalus's and PartyLite's decreased operating performance partly offset by improved operating results from Silver Star Brands.

Net loss attributable to Blyth, Inc. common stockholders increased $1.7 million to a net loss of $4.9 million for the three months ended June 30, 2014 from $3.2 million in the comparable prior year period. Net loss attributable to Blyth, Inc. common stockholders increased $7.6 million to a net loss of $8.2 million for the six months ended June 30, 2014 from $0.6 million in the comparable prior year period. These increased losses were primarily due to ViSalus's and PartyLite's decreased operating performance partially offset by improved operating results from Silver Star Brands and a lower earnings per share adjustment for the accretion to redemption value for ViSalus redeemable preferred stock.

Liquidity and Capital Resources

Cash and cash equivalents decreased $38.2 million to $76.6 million at June 30, 2014 from $114.8 million at December 31, 2013. This decrease was primarily attributed to a decrease in cash from operations. Cash held in foreign locations was approximately $48 million as of June 30, 2014.

Net cash used in operating activities was $23.2 million for the six months ended June 30, 2014 compared to cash provided by operating activities of $4.4 million for the comparable prior year period. The decrease in cash from operations reflects a decline in ViSalus's operating profits and changes in working capital accounts mainly in prepaid expenses and inventories. Included in net losses for the six months ended June 30, 2014 were non-cash charges for depreciation and amortization, and stock-based compensation of $6.7 million and $0.7 million, respectively.
 
Net cash used in investing activities was $14.0 million for the six months ended June 30, 2014, compared to cash provided by investing activities of $15.7 million for the comparable prior year period. Cash used in investing activities mainly reflects net purchases of investments of $16.0 million and capital expenditures of $1.8 million. These expenditures were partially offset by net proceeds from the sale of assets of $4.1 million. Prior year's cash provided by investing activities included the collection of a note receivable of $10.0 million and net proceeds from the sales and purchases of investments of $15.5 million offset by capital expenditures of $9.8 million.

Net cash used in financing activities for the six months ended June 30, 2014 was $1.4 million compared to cash provided by financing activities of $9.4 million for the comparable prior year period. This year's activity includes dividend payments of $0.8 million as well as repayments on long-term debt and lease obligations of $0.5 million. Prior year's cash provided by financing activities primarily reflected borrowing on long term debt of $50.0 million offset by the additional purchase of ViSalus interest of $25.3 million and treasury stock repurchases of $10.0 million.

We will continue to monitor carefully our cash position, and will only make additional repurchases of treasury shares and pay dividends when we have sufficient cash surpluses available and are permitted to do so under the terms of the indenture governing our 6.00% Senior Notes due June 2017. The indenture limits the dividends that we pay on our common stock, repurchases of our outstanding common stock, repurchases of ViSalus plan shares and other restricted payments to an amount not exceeding the sum of 50% of our net income on a cumulative basis from July 1, 2013 (the first day of the fiscal quarter beginning after we issued the 6.00% Senior Notes) until the last day of the fiscal quarter preceding any such restricted payments (provided that if we shall have a cumulative net loss, then 100% of such loss), the net cash proceeds from issuances of common stock and other items, subject to conditions, qualifications and exceptions set forth in the indenture. Since we incurred a cumulative net loss during the period from July 1, 2013 through June 30, 2014, we are currently prohibited under the indenture from paying dividends on or repurchasing our common stock, repurchasing the ViSalus Plan Shares or making other restricted payments. The indenture also restricts us from incurring additional debt if we do not meet a liquidity ratio.

A significant portion of our business is outside of the United States. A significant downturn in our business in our international markets would adversely impact our ability to generate operating cash flows. Operating cash flows would also be negatively impacted if we experienced difficulties in the recruitment, retention and our ability to maintain the productivity of our independent promoters and consultants. ViSalus had approximately 31,800 promoters at June 30, 2014, which represented a

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decline from approximately 61,000 promoters at June 30, 2013 and a decline from approximately 38,400 at December 31, 2013. Management's key areas of focus have included stabilizing and increasing the promoter and consultant base within ViSalus and PartyLite through training and promotional incentives. PartyLite has had several continuous years of decline in the United States and Canada. ViSalus has generally experienced a decline in its number of promoters since summer 2012, other than a slight increase from December 31, 2013 to March 31, 2014. While we are making efforts to stabilize and increase the number of active independent sales promoters and consultants within ViSalus and PartyLite and expand our ViSalus business internationally, it may be difficult to do so. If PartyLite's consultant count and ViSalus's promoters continue to decline it will have a negative impact on our liquidity and financial results.

In December 2012, we purchased an additional 8.2% of ViSalus which increased our ownership to 80.9% for a payment of $60.5 million to the ViSalus founders and its other noncontrolling members. In addition, the ViSalus founders and other members of ViSalus exchanged their remaining membership interests for a total of 8,955,730 shares of Series A and Series B Redeemable Preferred Stock of ViSalus Inc. (“Preferred Stock”), which will become redeemable on December 31, 2017 for a total redemption price of $143.2 million. The Preferred Stock is redeemable for cash on December 31, 2017 at a price per share equal to $15.99 (or a total redemption price of $143.2 million) unless prior thereto ViSalus shall have effected a “Qualified IPO” or the holders, at their option, elect to convert their Preferred Stock into common shares of ViSalus.

On May 10, 2013, we issued $50.0 million principal amount of 6.00% Senior Notes due June 2017. The notes bear interest payable semi-annually in arrears on May 15 and November 15. The indenture governing the 6.00% Senior Notes due 2017 contains affirmative and negative covenants that, among other things, limit or restrict our and our subsidiaries' ability to incur additional debt, grant negative pledges to other creditors, prepay subordinated indebtedness and certain other indebtedness, pay dividends or make other distributions on capital stock, redeem or repurchase preferred and capital stock, make loans, investments and other restricted payments, engage in acquisitions, enter into transactions with affiliates, sell assets, create liens on assets to secure debt, or effect a consolidation or merger or to sell all, or substantially all, of our assets, in each case, subject to certain qualifications and exceptions set forth in the indenture.

A portion of our cash and cash equivalents is held by our international subsidiaries in foreign banks and, as such, may be subject to foreign taxes, unfavorable exchange rate fluctuations and other factors, including foreign working capital requirements, limiting our ability to repatriate funds to the United States.

In addition, if economic conditions decline, we may be subject to future impairments of our assets, including accounts receivable, inventories, property, plant and equipment, investments, deferred tax assets, goodwill and other intangibles, if the valuations of these assets or businesses decline.

As of June 30, 2014, we had $2.4 million available under an uncommitted facility issued by a bank, to be used for letters of credit through January 31, 2015.  As of June 30, 2014, no amount was outstanding under this facility.

As of June 30, 2014, we had $1.1 million in standby letters of credit outstanding that are fully collateralized through a certificate of deposit funded by us.

As of June 30, 2014 and December 31, 2013, Silver Star Brands had approximately $5.2 million and $5.5 million, respectively, of long-term debt outstanding under a real estate mortgage note payable which matures June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

On March 12, 2014, the Board of Directors authorized and declared a cash dividend of $0.05 per share for a total payment of $0.8 million. The dividend was payable to stockholders of record as of April 1, 2014 and was paid on April 15, 2014.

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to a have a material current or future effect upon our financial statements. We utilize foreign exchange forward contracts for operational purposes.

Critical Accounting Policies

There were no changes to our critical accounting policies in the first six months of 2014. For a discussion of the Company's critical accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2013.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We have operations outside of the United States and sell our products worldwide.  Our activities expose us to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates and commodity prices. These financial exposures are actively monitored and, where considered appropriate, managed by us. We enter into contracts, with the intention of limiting these risks, with only those counterparties that we deem to be creditworthy, and also in order to mitigate our non-performance risk.

Investment Risk

We are subject to investment risks on our investments due to market volatility.  As of June 30, 2014, we held $24.0 million of short-term bond mutual funds, which have been adjusted to fair value based on current market data.
 
Foreign Currency Risk
 
We use foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, net assets of our foreign operations, intercompany payables and certain foreign denominated loans. We do not hold or issue derivative financial instruments for trading purposes.

We have hedged the net assets of certain of our foreign operations through foreign currency forward contracts. The realized and unrealized gains/losses on these hedges are recorded within AOCI until the investment is sold or disposed of. The cumulative net after-tax gain related to net investment hedges in AOCI as of June 30, 2014 and December 31, 2013 was $2.1 million and $2.3 million.

We have designated our foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as fair value hedges.  The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.

We have designated forward exchange contracts on forecasted intercompany inventory purchases and future purchase commitments as cash flow hedges and as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in AOCI until earnings are affected by the variability of the cash flows being hedged. Upon settlement of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from AOCI and is included in the measurement of the cost of the acquired asset upon sale.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in AOCI until the hedged item is settled.  However, if the hedged item is probable of not occurring, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  The net after-tax unrealized loss included in AOCI at June 30, 2014 for cash flow hedges was immaterial and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment. The net after-tax unrealized loss included in AOCI at December 31, 2013 for cash flow hedges was $0.1 million.
  
For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the Consolidated Statement of Cash Flows with the items being hedged.

The following table provides information about our foreign exchange forward contracts accounted for as cash flow hedges as of June 30, 2014:
(In thousands, except average contract rate)
US Dollar Notional Amount
 
Average Contract Rate
 
Unrealized Loss
Euro
$
7,650

 
$
1.36

 
$
(36
)
 
The foreign exchange contracts outstanding have maturity dates through March 2015.
 

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Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.
We conducted an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2014.

(b) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the first six months of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
 
Item 1.  Legal Proceedings.

We, certain of our officers, ViSalus, one of its founders and others were named as defendants in a putative class action filed in federal district court in Connecticut on behalf of purchasers of our common stock during the period March to November 2012. On March 31, 2014, the Court granted the defendants' motion to dismiss the plaintiffs’ complaint and entered judgment for the defendants. Plaintiffs did not appeal the judgment.

On July 9, 2014, three former ViSalus promoters filed a putative class action in the U.S. District Court for the Eastern District of Michigan against ViSalus, Robert B. Goergen (our Chairman of the Board), the three founders of ViSalus (Nick Sarnicola, Ryan Blair and Blake Mallen), Todd A. Goergen (ViSalus’s Chief Operating Officer), several of ViSalus’s promoters (along with certain of their affiliates), and FragMob and iCentris (two service vendors to ViSalus). The plaintiffs allege that the defendants violated the Racketeer Influenced and Corrupt Organizations (RICO) statutes, the Michigan Consumer Protection Act and Franchise Investment Law, have been unjustly enriched, and have engaged in statutory and/or common law conversion and civil conspiracy. They allege that the amount lost by the putative class has not yet been determined but is alleged to be over $100 million. The plaintiffs are seeking certification of the class, a judgment against the defendants, monetary damages (and that such amount be trebled in accordance with the RICO statutes), injunctive relief enjoining the defendants from operating an alleged pyramid scheme, imposition of a constructive trust for plaintiffs’ benefit, disgorgement of all proceeds of the alleged pyramid scheme by each defendant, an accounting to make plaintiffs whole or to the extent they are otherwise entitled to such relief, relief (including damages and rescission of any contract made with ViSalus) under the Michigan Franchise Disclosure Act, the costs of investigation and litigation (including attorneys’ fees) and such other damages, relief and pre- and post-judgment interest as the court may deem just and proper. The defendants intend to vigorously defend themselves against this action.

We are involved in other litigation arising in the ordinary course of business, which, in our opinion, will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

We encounter substantial risks in our business, any one of which may adversely affect our business, results of operations or financial condition. The fact that some of these risk factors may be the same or similar to those that we have filed with the Securities and Exchange Commission in prior reports means only that the risks are present in multiple periods. We believe that many of the risks that are described here are part of doing business in the industries in which we operate and will likely be present in all periods. The fact that certain risks are endemic to these industries does not lessen their significance. These risk factors should be read together with the other items in this report, including “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.” We use the terms “we”, “us” or “our” to refer to Blyth, Inc. and its subsidiaries, unless suggested otherwise by the context.

We have incurred an operating loss and net loss for the three and six months ended June 30, 2014.

We had an operating loss of $2.8 million and $5.4 million for the three and six month periods ended June 30, 2014, respectively, compared to operating profit of $1.2 million and $7.1 million for the comparable prior year periods. We had a net loss attributable to Blyth, Inc. common stockholders of $4.9 million and $8.2 million for the three and six month periods ended June 30, 2014, respectively, compared to $3.2 million and $0.6 million for the comparable prior year periods. Our ability to improve our financial and operational performance depends upon a number of factors, including our ability to recruit, retain and motivate promoters and consultants; reverse declines in our net sales; implement our cost savings programs and other initiatives and achieve anticipated savings and benefits; reinvest certain of those savings effectively in our business, while effectively managing our cost base; improve working capital, effectively manage inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence; and appropriately address the other factors described below in “Risk Factors.”

The failure by our businesses to respond appropriately to changing consumer preferences and demand for new products or product enhancements could harm our business, financial condition and results of operations.

Our ability to increase our sales and earnings depends on numerous factors, including market acceptance of our existing
products and the successful introduction of new products. Sales of ViSalus's weight-management products, nutritional
supplements, functional foods and energy drink mixes, PartyLite's candles and accessories and Silver Star Brands' consumer
products fluctuate according to changes in consumer preferences. If our businesses are unable to anticipate, identify or react to

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changing preferences, our sales may decline. ViSalus's weight-management products and PartyLite's candles represented a
substantial portion of our sales in 2012, 2013 and the first half of 2014. If consumer demand for these products decreases significantly, or ViSalus ceases offering weight-management products without offering a suitable replacement, then our business, financial condition and results of operations would be harmed. In addition, if our businesses miscalculate consumer tastes and are no longer able to offer products that appeal to their customers, their brand images may suffer and sales and earnings would decline.

ViSalus and PartyLite depend upon sales by their independent sales forces to drive their businesses, and their failure to continue to recruit, retain and motivate promoters and consultants would harm their business and our financial condition and results of operations.

ViSalus markets its products and The Challenge through its independent promoters using a network marketing model and
PartyLite markets its products through its independent consultants primarily using a party plan direct selling model. Both of
these marketing systems depend upon the successful recruitment, retention and motivation of a large number of promoters and
consultants to offset frequent turnover, which is a common characteristic found in the direct selling industry. Our promoters
and consultants may terminate their services at any time. Many of them market and sell our products on a part-time basis, join us for a short-period of time and likely engage in other business activities, some of which may compete with us. If ViSalus and PartyLite are unable to grow their promoter and consultant sales forces and reverse declines in their total number of promoters and consultants, our business would be materially harmed. The rates of turnover of ViSalus's and PartyLite's promoters and consultants can be very high and volatile from time to time, which may materially hinder their abilities to increase their total promoter and consultant counts.

Our ability to recruit, retain and motivate promoters and consultants depends on a number of factors, including, but not limited
to, our prominence among direct selling companies and the general labor market, the attractiveness of our products and
compensation and promotional programs, the number of people interested in direct selling, unemployment levels, economic
conditions, and demographic and cultural changes in the workforce. ViSalus and PartyLite both rely primarily upon the efforts
of their promoters and consultants to attract, train and motivate new promoters and consultants, so our sales directly depend
upon their efforts. The failure by ViSalus or PartyLite to recruit, retain and motivate promoters and consultants and to reverse
declines in their total number of promoters and consultants could negatively impact sales of their products, which could harm
our business, financial condition and results of operations.

The loss by ViSalus or PartyLite of a leading promoter or consultant, together with his or her associated sales organization, or the loss of a significant number of promoters or consultants for any reason, could harm our business, financial condition and results of operations.

Sales generated by a small number of promoters, together with their associated sales organizations, represent a majority of
ViSalus's net sales. In addition, there are a number of promoters whose generated sales, together with those of their sales
organizations, represent in excess of 10% of ViSalus's net sales. In particular, sales generated by one of ViSalus's founders and
promoters, Nick Sarnicola, together with his wife and their sales organizations and customers to whom they market represented
a substantial percentage of ViSalus's net sales in 2012, 2013 and the first half of 2014. The loss by ViSalus of one or more of its leading promoters, together with their respective associated sales organizations, or the loss of a significant number of promoters or consultants by ViSalus or PartyLite for any reason, could negatively impact sales of their products, impair their ability to recruit new promoters or consultants and harm our business, financial condition and results of operations. During 2013, the total number of ViSalus’s promoters declined from approximately 75,900 at December 31, 2012 to approximately 38,400 at December 31, 2013, and over the same period, the number of PartyLite’s total consultants declined from approximately 54,400 to approximately 52,100. In addition, the total number of ViSalus’s promoters declined from approximately 61,000 at June 30, 2013 to approximately 31,800 at June 30, 2014, and over the same period, the number of PartyLite’s total consultants declined from approximately 44,600 to approximately 40,700.

In general, ViSalus and PartyLite do not have non-competition arrangements with their promoters and consultants that would
prohibit them from promoting competing products if they terminate their relationship. Pursuant to agreements that all of
ViSalus's and PartyLite's top promoters and consultants are requested to sign, the promoter or consultant is not permitted to solicit or recruit ViSalus's promoters or PartyLite's consultants to participate in any other direct selling company for a period of time following the termination of their agreement. We cannot ensure that ViSalus's promoters or PartyLite's consultants will
abide by any non-solicitation obligations or that we will be able to enforce them. Some of ViSalus’s promoters and PartyLite’s
consultants have not abided by these non-solicitation agreements following their departure and while we have, in some cases,
taken legal action and other steps to seek to enforce these non-solicitation agreements, we have not always been able to do so.
If ViSalus's promoters and PartyLite's consultants do not abide by these non-solicitation obligations or if we are unable to
enforce them, our competitive position may be compromised, which could harm our business, financial condition and results of

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operations.

ViSalus's and PartyLite's compensation plans, or changes that are made to those plans, may be viewed negatively by some of their promoters and consultants, could fail to achieve our desired objectives and could have a negative impact on our business.

Direct selling and network marketing are highly competitive and sensitive to the introduction of new competitors, new products and/or new compensation plans. Companies commonly attempt to attract new distributors by offering generous compensation plans. From time to time, ViSalus and/or PartyLite modify components of their compensation plans in an effort to:

keep them competitive and attractive to existing and potential promoters and consultants,
cause or address a change in the behavior of their promoters and consultants,
motivate promoters and consultants to grow our business,
conform to legal and regulatory requirements, and
address other business needs.

In light of the size and diversity of our promoter and consultant sales force and the complexity of our compensation plans, it is difficult to predict how any changes to the plans will be viewed by ViSalus's promoters or PartyLite's consultants and whether such changes will achieve their desired results. There can be no assurance that ViSalus's or PartyLite's compensation plans will allow us to successfully attract or retain promoters or consultants, nor can we assure that any changes we make to our compensation plans will achieve our desired results.

If we fail to retain our existing customers or attract new customers, our business, financial condition and results of operations may be harmed.

ViSalus and PartyLite are customer-driven businesses, and the size of their customer bases and the amount that their customers
spend on their products are critical to their success. Increases in sales to customers are driven primarily by obtaining new
customers and retention of existing customers, rather than through increases in the average monthly expenditures of customers.
Many of ViSalus's customers sign up for an automatic monthly shipment of products. ViSalus must continually add new
customers to replace those who cancel their auto-shipments to grow its business over time. Customers choose to
cancel their auto-shipments for a wide variety of reasons, many of which are not within ViSalus's control, including the
conclusion of their 90-day Challenge, their desire to reduce discretionary spending, product dissatisfaction, their perception that
competitive products provide a better value or benefit to them, or customer service issues are not addressed to their satisfaction.

Since we cannot exert the same level of influence or control over our promoters and consultants as we could if they were our own employees, we may be unable to enforce compliance with our policies and procedures, which could result in claims against us.

ViSalus's promoters and PartyLite's consultants are independent contractors and, accordingly, neither ViSalus nor PartyLite is
in a position to provide the same direction, motivation and oversight as it could if they were its employees. As a result, there
can be no assurance that ViSalus's promoters and PartyLite's consultants will participate in their marketing strategies or
plans, accept the introduction of new products or comply with policies and procedures. Extensive federal, state, local and
foreign jurisdiction laws regulate our businesses, products and programs. While we have implemented policies and procedures
that are designed to govern promoter and consultant conduct so that they comply with this regulatory regime, it can be difficult
to enforce these policies and procedures because of the large number of promoters and consultants and their independent status.
Violations by our promoters or consultants of applicable laws or of our policies and procedures could reflect negatively on our
products and operations, harm our business reputation or lead to the imposition of penalties or claims.

Our product advertising and promotional programs are subject to a number of federal, state and foreign jurisdiction regulations. The failure of our product advertising and promotional programs to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general.

The FTC exercises jurisdiction in the United States over product advertising in general and advertising of conventional foods and dietary supplements in particular and has instituted numerous enforcement actions against companies for false and misleading claims and for failure to have adequate substantiation for claims made in advertising. The FTC also regulates promotional offers, including purported “savings” from the regular or suggested retail price of products. In the event that the FTC pursues an enforcement action against any of our businesses, our businesses could be subject to consent decrees that could limit their ability to make certain claims with respect to their products and require them to pay civil penalties. The National Advertising Division, which we refer to as the “NAD,” of the Council of Better Business Bureaus serves as an industry-

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sponsored self-regulatory system that permits competitors to resolve disputes over advertising claims. The system also empowers the NAD to challenge claims that the NAD believes to be misleading, including product benefit claims and purported sales or other discounts off of “regular” prices. The NAD has no independent enforcement authority. However, it can refer cases to the FTC for further action. Our competitors may also challenge our product labels and claims. Failures by any of our businesses to comply with rules, consent decrees and applicable regulations could occur from time to time, which could result in substantial monetary penalties.

There are also federal, state, provincial and foreign laws of general application, such as the FTC Act and state, provincial or foreign unfair and deceptive trade practices laws that could potentially be invoked to challenge our advertising, compensation practices or recruitment techniques. In particular, our recruiting efforts include promotional materials for recruits that describe the potential opportunity available to them if they become promoters or consultants. These materials, as well as our other recruiting efforts and those of promoters and consultants, are subject to scrutiny by the FTC, other enforcement agencies, our competitors, and current or former promoters and consultants with respect to misleading statements, including misleading earnings claims made to convince potential new recruits to become promoters or consultants. If claims or recruiting techniques used by ViSalus or PartyLite or by their promoters or consultants are deemed to be misleading, it could result in violations of the FTC Act or comparable state, provincial or foreign statutes prohibiting unfair or deceptive trade practices, result in reputational harm, or be subject to court challenge under the Lanham Act and state law by our competitors and current and former promoters and consultants, any of which could materially harm our business, financial condition and results of operations.

We are subject to the risk that, in one or more markets, our network marketing and party plan programs could be found not to be in compliance with applicable law or regulations since regulatory requirements concerning direct selling programs do not include “bright line” rules. The failure of our compensation programs to comply with current or newly adopted regulations over “pyramid” or “chain sales” schemes would negatively impact our business in a particular market or in general.

ViSalus's and PartyLite's promotional and compensation programs are subject to a number of federal and state regulations administered by the FTC and various state agencies in the United States and the equivalent provincial and federal government agencies in Canada and in the other countries in which our businesses operate. We are subject to the risk that, in one or more markets, our network marketing and party plan programs could be found not to be in compliance with applicable law or regulations. Regulations applicable to direct selling organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization's products rather than investments in the organization or other non-retail, non-product sales related criteria. The regulatory requirements concerning network marketing and party plan programs do not include “bright line” rules, and therefore, even in jurisdictions where we believe that our compensation programs are in compliance with applicable laws or regulations, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. The failure of our compensation programs to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general.

In general, a “pyramid scheme” is defined as an arrangement in which new participants are required to pay a fee to participate
in the organization and then receive compensation primarily for recruiting other persons to participate, either directly or
through sales of goods or services that are merely disguised payments for recruiting others. Such schemes are illegal because,
without legitimate sales of goods or services to support the organization's continued existence, new participants are exposed to
the loss of the fee paid to participate in the scheme. The application of these laws and regulations to a given set of business
practices is inherently fact-based and, therefore, is subject to interpretation by applicable enforcement authorities or courts. Our
promoters and consultants are paid by commissions based on sales of our products to bona fide purchasers by those promoters
or consultants and by their downline promoters or consultants. For this and other reasons we do not believe that we are in
violation of any laws regulating pyramid schemes. However, even though we believe that our distribution practices are
currently in compliance with, or exempt from, these laws and regulations, there is a risk that a governmental agency or court
could disagree with our assessment or that these laws and regulations could change, which may require ViSalus or PartyLite to
alter their distribution model or cease operations in certain jurisdictions or result in other costs or fines, any of which could
harm our business, financial condition and results of operations.

Our products are subject to challenge under California Proposition 65.

California's Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65, prohibits the discharge or
release of chemicals known to California to cause cancer or reproductive toxicity, without first giving clear and reasonable
warning. Among other things, the statute covers all consumer goods (including foods and consumer products) sold in

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California. Proposition 65 allows private enforcement actions. Reports indicate that hundreds of such actions have been
commenced annually over the past few years against many companies in the consumer products and nutritional supplement
businesses alleging that their products are contaminated with chemicals that would trigger the warning requirements of the
act. While we take appropriate steps to ensure that our products are in compliance with the act, given the nature of this statute
and the extremely low tolerance limits it establishes, there is a risk that we or our manufacturers could be found liable for the
presence of minuscule amounts of a prohibited chemical in our products. We have, from time to time, been the subject of
Proposition 65 enforcement actions and may become the target of similar actions in the future. While the amounts we have paid
to settle such actions have not had a material impact on our operations, there can be no assurance that any future
settlements would not be significant.

ViSalus's products are subject to regulation by the FDA and other federal and state authorities as foods, and in many
instances, the subset of foods referred to as “dietary supplements.” Any failure to comply with such regulations, or any
determinations by the FDA that any of ViSalus's products do not meet adequate safety standards or that its labeling or
marketing claims violate applicable requirements, could prevent ViSalus from marketing some of its products or subject it to
administrative, civil or criminal penalties.

ViSalus's products are subject to regulation by the FDA and other federal and state authorities as foods, and in many instances,
the subset of foods referred to as “dietary supplements.” The FDA regulates, among other things, the composition, safety,
labeling and marketing of conventional foods and dietary supplements (including vitamins, minerals, herbs and other dietary
ingredients for human use). While ViSalus's products as they are currently marketed are not required to obtain pre-market
approval from the FDA, ViSalus must submit a new dietary ingredient notification to the FDA at least 75 days before the initial
marketing of any dietary supplement that contains a new dietary ingredient. The FDA may find unacceptable the evidence of
safety for any new dietary supplement ViSalus wishes to market, may determine that a particular dietary supplement or
ingredient that ViSalus currently markets presents an unacceptable health risk, or may determine that a particular claim or
statement of nutritional support that ViSalus uses to support the marketing of a food or dietary supplement conflicts with FDA
regulations regarding labeling claims. Any of these actions could prevent ViSalus from marketing particular products or
subject it to administrative, civil or criminal penalties. The FDA could also require ViSalus to remove or recall a particular product from the market based on safety issues or a failure to comply with applicable legal and regulatory requirements. Any future recall or removal would result in additional costs to ViSalus, including lost revenues from any products that it removes or recalls from the market, any of which could be material. Any product recalls or removals could also lead to liability, including consumer class action lawsuits, substantial costs and reduced growth prospects.

Additional or more stringent regulations of dietary supplements and other products have been considered from time to time.
These developments could require unanticipated company expenditures to address the reformulation of some products to meet
new standards, recalls or discontinuance of some products not able to be reformulated, additional record keeping requirements,
increased documentation of the properties of some products, additional or different labeling standards, additional scientific
substantiation, adverse event reporting or other new requirements. For example, in 2006, Congress enacted legislation to
impose adverse event reporting and record keeping requirements for dietary supplements, and in 2007, the FDA issued a final
rule on current Good Manufacturing Practices, creating new requirements for manufacturing, packaging and storing dietary
ingredients and dietary supplements. In the same year, the “Reportable Food Registry,” which we refer to as the “RFR,” was
established by the Food and Drug Administration Amendments Act of 2007, which requires food companies and other
“responsible parties” to file a report through the RFR electronic portal when there is a reasonable probability that the use of, or
exposure to, an article of food will cause serious adverse health consequences or death to humans or animals. In 2011, the FDA issued a draft guidance document expanding the FDA's previous interpretation of the regulatory requirements surrounding new dietary ingredient notifications and related issues, and Congress enacted new food safety legislation that has increased the FDA's authority over food facilities. ViSalus may not be able to comply with the new requirements or other future legislation, rules or guidance documents without incurring additional expenses, which could be significant.

Although we intend that ViSalus's products be promoted in compliance with all applicable regulatory requirements, we
cannot ensure that aspects of ViSalus's operations will not be reviewed and challenged by regulatory authorities and if
challenged, that ViSalus would prevail. Furthermore, we cannot ensure that new laws or regulations, or industry standards
and guidelines, governing weight management, nutritional supplements, functional foods or energy drink mixes will not be enacted in the future, which could result in lost sales.

The FTC, state attorneys general, Canadian provincial and federal authorities, state consumer protection agencies in the United
States and similar authorities in foreign jurisdictions regulate fitness, weight loss and nutritional product-advertising claims and require that claims be supported by competent and reliable scientific evidence, where appropriate. The FTC and state attorneys general actively investigate and enforce claims made in weight management and nutritional supplement product advertisements, including for making claims that are too good to be true. ViSalus's marketing materials occasionally include

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consumer testimonials reporting or depicting specific results achieved by using the product or service generally. Published FTC guidelines state that such claims will be interpreted to mean that the endorser's experience is what others typically can expect to achieve. The FTC requires that advertisers possess adequate proof to back up that claim before making it, or clearly and conspicuously disclose the generally expected performance in the depicted circumstances. The FTC also requires that any material connections between an endorser must be clearly and conspicuously disclosed to consumers at the time of the endorsement.

Although we intend that ViSalus's products be promoted in compliance with these and all applicable regulatory requirements in
the markets in which it operates, and specifically intend to avoid making any express weight loss claims in marketing and other
promotional material provided to ViSalus's independent promoters, we cannot ensure that aspects of ViSalus's operations will
not be reviewed and challenged by regulatory authorities, or our competitors, and if challenged, that ViSalus would prevail. Furthermore, we cannot ensure that new laws or regulations, or industry standards and guidelines, governing weight management, nutritional supplements, functional foods or energy drink mixes will not be enacted in the future in any of the markets in which ViSalus does business, resulting in lost sales.

These same laws, regulations, and government guidelines for enforcement and compliance apply to ViSalus's independent
promoters. While ViSalus trains its promoters and attempts to monitor their marketing practices and materials, we cannot ensure that their promotional activities comply with the foregoing prohibitions on unfair and deceptive trade practices. If ViSalus's promoters are found responsible for violating such restrictions, there can be no assurance that ViSalus could not be held responsible for their conduct.

ViSalus and its promoters must comply with advertising and labeling laws. If ViSalus or its promoters fail to comply with these laws, then ViSalus and its promoters could be subjected to claims, financial penalties and relabeling requirements.

Although the physical labeling of ViSalus's products is not within the control of its promoters, ViSalus's promoters must
nevertheless advertise the products in compliance with the extensive regulations governing the promotion and labeling of
products intended for human consumption. ViSalus's products are sold principally as conventional foods and dietary
supplements and are subject to rigorous FDA and related legal regimens limiting the types of health-benefit claims that can be
made for their products. Claims that a product can diagnose, cure, mitigate, treat or prevent a disease, which we refer to as “therapeutic claims,” for example, are not permitted for these products. While ViSalus trains its promoters and attempts to monitor their marketing materials, we cannot ensure that all such materials comply with bans on therapeutic claims. If ViSalus or its promoters fail to comply with these restrictions, then ViSalus and its promoters could be subjected to claims, financial penalties and relabeling requirements. Similarly, the FTC prohibits promoters and endorsers from making any claims for products that are not substantiated with competent and reliable evidence. Although we expect that ViSalus's responsibility for the actions of its promoters in such an instance would be dependent on a determination that ViSalus either controlled or condoned a noncompliant advertising practice, there can be no assurance that ViSalus could not be held responsible for the actions of its promoters.

If we do not respond appropriately to changing consumer preferences, we could be vulnerable to increased exposure to
excess and obsolete inventory.

The ability of our businesses to respond to changing consumer preferences and demand for new products or product
enhancements and to manage their inventories properly is an important factor in their operations. The nature of their products
and the rapid changes in consumer preferences leave them vulnerable to an increased risk of inventory obsolescence. Excess or
obsolete inventories can result in lower gross margins due to the excessive discounts and markdowns that might be necessary to
reduce inventory levels. ViSalus’s products are meant for human consumption and have limited shelf lives. Our success depends in part on the ability of our businesses to anticipate and respond to these changes, and they may not respond in a timely or commercially appropriate manner to such changes. We have in the past written down and written off excess or obsolete inventories. The ability of our businesses to meet future product demand will depend, among other things, upon their success in improving their ability to forecast product demand and fulfill customer orders promptly.

Adverse publicity directed at our products, ingredients, promoters, programs or network marketing business model, or those
of similar companies, could harm us.

Companies that market their products to consumers through a network of independent promoters can be the subject of negative
commentary. For example, starting in late 2012 and continuing in 2014, a hedge fund manager publicly raised allegations
regarding the legality of Herbalife's network marketing program and announced that his fund had taken a significant short
position regarding Herbalife's common shares, leading to intense public scrutiny of Herbalife's business and network marketing, including by federal agencies and state attorneys general, and significant volatility in its stock price. We expect that

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negative publicity will, from time to time, continue to negatively impact our business in particular markets and may adversely affect our stock price. This negative commentary can spread inaccurate or incomplete information about the direct selling industry in general or our products, ingredients, promoters, consultants or programs in particular. The number of our customers and promoters/consultants and our business, financial condition and results of operations may be significantly affected by the public's perception of us and similar companies. This perception is dependent upon opinions concerning:

• the safety, quality, effectiveness and taste of our products and ingredients;
• the safety, quality, effectiveness and taste of similar products and ingredients distributed by other companies;
• our independent sales forces;
• our promotional and compensation programs; and
• the direct selling business in general, including the operations of other direct selling companies.

Adverse publicity concerning any actual or purported failure by our direct selling businesses or their promoters or consultants
to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the
regulation of our direct selling businesses, the licensing of our products for sale in our target markets or other aspects of our
business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse effect on our
business and could negatively affect our direct selling businesses' ability to recruit, motivate and retain promoters and
consultants, which would negatively impact our ability to generate sales and earnings.

In addition, adverse publicity concerning any actual or purported concerns about the quality of our products could have an
adverse effect on our business. We monitor our product quality and, from time to time, make changes to the ingredients,
packaging, fragrance, color and other matters to take into account changes in consumer preferences, opportunities to improve
the quality of our products and other matters. Our failure to maintain the quality of our products would reduce consumer
demand and negatively affect our ability to recruit, motivate and retain promoters and consultants, any of which would
negatively impact our sales and earnings.

ViSalus may be subject to health-related claims from its customers. Adverse publicity, whether or not accurate, could lead to
lawsuits or other legal challenges and could negatively impact ViSalus's and our reputation and the market demand for
products.

Customers that suffer health problems may allege that ViSalus's products caused or contributed to the injury or ailment. From
time to time, customers may make such allegations on social media, which can be difficult to confront, challenge or refute. In
addition, the perception of the safety, quality, effectiveness and taste of our products and ingredients, as well as similar products
and ingredients distributed by other companies, could be significantly influenced by media attention (including on social
media), publicized scientific research or findings, widespread recalls or product liability claims or other publicity concerning
our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or
not accurate or resulting from the use or misuse of products, that associates consumption of our products or ingredients or any
similar products or ingredients with illness or other adverse effects, questions the benefits of ViSalus's products or similar
products, or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use
could lead to lawsuits or other legal challenges and could negatively impact ViSalus's and our reputation and the market
demand for our products.

We may incur material product liability claims, which could increase our costs and harm our business.

ViSalus markets products designed for human consumption. PartyLite and Silver Star Brands primarily market products for
consumer use, although some of their products are also intended for human consumption. As such, we may be subject to
product liability claims if the use of our products is alleged to have resulted in injury to consumers, whether from consumption
or otherwise. We also may be subjected to product liability claims that relate to the use of candles and claims that our candles and accessories include inadequate instructions as to their uses or inadequate warnings concerning side effects. We cannot ensure that any of our products will never be associated with consumer injury. In addition, many of our products are manufactured by third-party manufacturers that also provide raw materials, which prevent us from having full control over the ingredients contained in many of our products.

As a marketer of weight-management products, nutritional supplements, functional foods and energy drink mixes, ViSalus may be subjected to product-liability claims, including claims related to the use of these products in an inappropriate manner or by inappropriate consumer groups. Although we maintain third-party product liability insurance coverage, it is possible that claims against us may exceed the coverage limits of our insurance policies and cause us to record a self-insured loss. Even if any product liability loss is covered by an insurance policy, these policies typically have substantial retentions or deductibles for

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which we are responsible. Product liability claims in excess of applicable insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

In addition to the above, any product liability claim brought against any of our businesses, with or without merit, could result in
an increase of our product liability insurance rates. Insurance coverage varies in cost and can be difficult to obtain, and we
cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable to us or at all. In addition,
such liability claims could cause our consumers to lose confidence in our products and stop purchasing our products, which
would harm our business, financial condition and results of operations.

All of our businesses are subject to risks from increased competition, and our failure to maintain our competitive position
would harm us.

ViSalus's business of marketing and selling weight-management products, nutritional supplements, functional foods and energy drink mixes, PartyLite's business of selling candles and accessories and Silver Star Brands' business of selling a wide variety of consumer products through catalogs and the Internet are highly competitive both in terms of pricing and new product introductions. The worldwide markets for these products are highly fragmented, with numerous suppliers serving one or more of the distribution channels served by us. In addition, we anticipate that we will be subject to increasing competition in the future from sellers that utilize electronic commerce. Some of these competitors have longer operating histories, significantly greater financial, technical, product development, marketing and sales resources, greater name recognition, larger established customer bases, and better-developed distribution channels than our businesses. Our current or future competitors may be able to develop products that are comparable or superior to those that we offer, offer competitive products at more attractive prices, adapt more quickly than we do to new technologies, evolving industry trends and standards or consumer requirements, or devote greater resources to the development, promotion and sale of their products than our businesses. For example, ViSalus's Vi-Shape meal replacement product constitutes a significant portion of its sales, and if its competitors develop other weight-management products, nutritional supplements, functional foods or energy drink mixes that become more popular than the ViSalus products, demand for ViSalus's products could decline. Competitors in ViSalus's target product market include Herbalife and retail establishments such as Weight Watchers, Jenny Craig, General Nutrition Centers and retail pharmacies. Competitors in PartyLite's target market include Yankee Candle and numerous retail establishments, including big-box retailers, that sell a wide variety of candles and accessories. Silver Star Brands competes with numerous general merchandise catalogs, online retailers and retail establishments. In addition, because the industries in which our businesses operate are not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new competitors to emerge to compete with us for promoters, consultants and customers.

ViSalus and PartyLite are subject to significant competition for the recruitment of promoters and consultants from other direct
selling organizations, including those that market weight-management products, nutritional supplements, functional foods and energy drink mixes, candles and home accessories, as well as other types of products. Our competitors for the recruitment of promoters and consultants include a large number of direct selling companies, examples of which include Amway, Avon, Herbalife, Natura, Nature's Sunshine, Nu Skin, Reliv, Shaklee, Tupperware and USANA. Furthermore, the fact that our promoters and consultants may easily enter and exit our programs contributes to the level of competition that we face. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining promoters and consultants through attractive compensation plans, the maintenance of attractive product portfolios and other incentives.

If our businesses are unable to compete effectively in their markets, if competition in their markets intensifies or if we are unable to recruit and retain promoters and consultants, our business, financial condition and results of operations would be harmed.

A downturn in the economy may affect consumer purchases of discretionary items such as our products.

Recently, concerns over the global economy, including the recent financial crisis in Europe (including concerns that certain
European countries may default in payments due on their national debt) and the resulting economic uncertainty, as well as
concerns over unemployment in the United States and Europe, inflation, energy costs, geopolitical issues, and the availability
and cost of credit have contributed to increased volatility and diminished expectations for the United States and global
economies. A continued or protracted downturn in the economy could adversely impact consumer purchases of discretionary
items, including all of our products. Factors that could affect consumers' willingness to make such discretionary purchases
include general business conditions, levels of unemployment, political uncertainty, energy costs, interest rates and tax rates, the
availability of consumer credit and consumer confidence. A reduction in consumer spending could significantly reduce our
sales and leave us with unsold inventory.

Our results of operations are significantly affected by our success in increasing sales in our existing markets, as well as

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opening new markets. As we continue to expand into international markets, our business becomes increasingly subject to
political, economic, legal and other risks. Changes in these markets could adversely affect our business.

PartyLite and ViSalus have a history of expanding into new international markets, although ViSalus has a very short history of
doing so commensurate with the short history of its business. We believe that our ability to achieve future growth is dependent
in part on our ability to continue our international expansion efforts. There can be no assurance, however, that we will be able
to grow in our existing international markets, enter new international markets on a timely basis or that new markets will be
profitable. We must overcome significant regulatory and legal barriers before we can begin marketing in any international
market. Also, before marketing commences in a new country or market, it is difficult to assess the extent to which our products
and sales techniques will be accepted or successful in any given country. In addition to significant regulatory barriers, we may
also encounter problems conducting operations in new markets with different cultures, languages, legal systems and payment methods from those encountered elsewhere. We may be required to reformulate certain of our products before commencing sales in a given country. Once we have entered a market, we must adhere to the regulatory and legal requirements of that market. No assurance can be given that we will be able to successfully reformulate our products in any of our current or potential international markets to meet local regulatory requirements or to attract local customers. There can be no assurance that we will be able to obtain and retain necessary permits and approvals in new markets, or that we will have sufficient capital to finance our expansion efforts in a timely manner.

In markets outside the United States, prior to commencing operations or marketing products, ViSalus may be required to obtain
approvals, licenses, or certifications from a country's regulatory agencies. Approvals, licensing or certifications may be
conditioned on reformulation of ViSalus's products for the market or may be unavailable with respec