10-K 1 bth-12312014x10k.htm 10-K BTH-12.31.2014-10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 
           (Mark One)
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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)
Registrant’s telephone number, including area code: (203) 661-1926
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.02 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No  x
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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. (Check one):
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 
The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $70.4 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on June 30, 2014 and based on the assumption, for purposes of this computation only, that all of the registrant’s directors and executive officers are affiliates.
As of February 28, 2015, there were 16,082,230 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2015 Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2015 (Incorporated into Part III).





TABLE OF CONTENTS

PART I
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
PART II
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
PART III
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
PART IV
Item 15.
 


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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K 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 annual 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 or Silver Star Brands' plans, strategies or objectives for future operations; 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 our ability to recruit, retain and motivate them;
• the loss by PartyLite of a significant number of its consultants;
• the attractiveness of PartyLite's compensation plans to current and prospective independent consultants;
• our ability to influence or control our consultants;
• 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 or business models, or those of similar companies;
• product liability 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;
• our reliance on third-party manufacturers for the supply of some of our 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 dependence on key employees;
certain taxes or assessments relating to the activities of our independent consultants for which we may be held responsible;
• our ability to identify, consummate and integrate suitable acquisition candidates on favorable terms and conditions;
• the covenants in our revolving loan agreement and term loan 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;
• credit card and debit card fraud;
• changes in our effective tax rate;
• fluctuations in our periodic results of operations;

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• 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 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 of our forward-looking statements. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this annual 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 our actual results to differ materially from our forward-looking statements are set forth in this annual 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 annual 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.



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PART I

Item 1.   Business.
 
(a) General Development of Business

Blyth, Inc. (together with its subsidiaries, the “Company,” which may be referred to as “we,” “us” or “our”) is 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 health, wellness and beauty related products. Our products can be found primarily throughout the United States, Canada, Mexico, Europe and Australia.

During the past five years we have disposed of some of our businesses. In February 2011 we assigned all the assets and liabilities of the Boca Java business through a court approved assignment for the benefit of its creditors. In May 2011, we sold substantially all of the net assets of our Midwest-CBK seasonal, home décor and home fragrance business. In October 2012, we sold our Sterno business, which completed our strategic transformation from a multi-channel marketing company to a direct-to-consumer marketing company focused on the direct selling and direct marketing channels of distribution. In September 2014, we entered into a recapitalization agreement with ViSalus that reduced our ownership interest in ViSalus from approximately 80.9% to 10.0%. As a result of our strategic transformation, we report our financial results in two business segments: Candles & Home Décor (which currently is our PartyLite business) and Catalog & Internet (which currently is our Silver Star Brands business).

Additional Information

Additional information is available on our website, www.blyth.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto filed or furnished pursuant to the Securities Exchange Act of 1934 are available on our website free of charge as soon as reasonably practicable following submission to the SEC. Also available on our website are our corporate governance guidelines, code of conduct, and the charters for the audit committee, compensation committee, and nominating and corporate governance committee, each of which is available in print to any shareholder who makes a request to Blyth, Inc., One East Weaver Street, Greenwich, CT 06831, Attention: Secretary. The information posted to www.blyth.com is not incorporated herein by reference and is not a part of this report.

(b) Financial Information about Segments

We report our financial results in two business segments: Candles & Home Décor and Catalog & Internet. These segments accounted for approximately 71% and 29% of consolidated net sales, respectively, for the year ended December 31, 2014. Financial information relating to these business segments for the years ended December 31, 2014, 2013 and 2012 appears in Note 19 to the Consolidated Financial Statements and is incorporated herein by reference.

(c) Narrative Description of Business

Candles & Home Décor Segment

We operate in the Candles & Home Décor segment through PartyLite. PartyLite sells premium candles, flameless and other home fragrance products and related decorative accessories under the PartyLite® name primarily in the United States, Canada, Mexico, Europe and Australia. Since late 2014, PartyLite’s products have also been available through third parties in South Korea and Turkey.

Independent Consultants

Within the United States and Canada, which PartyLite defines as its North American market, PartyLite® brand products are sold through independent consultants who are compensated on the basis of PartyLite product sales at in-person and on-line parties organized by them and parties organized by consultants recruited by them. Approximately 14,800 active independent North American sales consultants were selling PartyLite products at December 31, 2014 compared to approximately 16,800 at December 31, 2013. PartyLite products are designed, packaged and priced in accordance with their premium quality, exclusivity and the distribution channel through which they are sold. Products may also be purchased on individual consultants’ websites and, in certain markets, on the corporate shopping website.


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Approximately 27,600 active independent European sales consultants were selling PartyLite products at December 31, 2014 compared to approximately 30,200 at December 31, 2013. PartyLite's international markets include: Australia, Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Mexico, Netherlands, Norway, Poland, Slovakia, South Korea, Sweden, Switzerland, Turkey and the United Kingdom.

Sourcing, Manufacturing and Logistics

PartyLite supports its independent sales consultants with inventory management and control, and satisfies delivery requirements through on-line order entry systems, which are available to most of its independent sales consultants.

PartyLite manufactures most of its candles using highly automated processes and technologies, as well as certain hand crafting and finishing, and sources nearly all of its home décor products, primarily from independent manufacturers in the Pacific Rim and Europe. PartyLite sources its food products from third party manufacturers in the United States based on its formulas. PartyLite has highly automated distribution facilities in the United States and Europe supporting its business.

Raw Materials

All of the raw materials used for our candles and home fragrance products have historically been available in adequate supply from multiple sources. Some of our ingredients are proprietary to the supplier and may not be easily re-sourced or replaced.
 
Catalog & Internet Segment

Silver Star Brands is a direct-to-consumer business that develops and markets an extensive array of decorative and functional household products, personalized products, gifts, unique food products and health, wellness and beauty products. Silver Star Brands reaches consumers through its websites, catalogs and direct mail campaigns through its brands:

As We Change® - focuses exclusively on the needs and preferences of women age 40+, providing a private and convenient place to turn for beauty, anti-aging, personal care, health and wellness, and slimming active wear items.

Easy Comforts® - offers health and personal care merchandise to the 50+ aging consumer, to support an independent lifestyle, including a wide array of mobility, daily living aids, personal safety and incontinence products.

Exposures® - sells photo albums, storage products, holiday décor and personalized gifts.

Miles Kimball® - offers unique and hard-to-find gadgets, personalized gifts, outdoor, gardening and household items, stationery, apparel and candy.

Native Remedies® - a direct-to-consumer eCommerce marketer of natural herbal dietary supplements and homeopathic products (acquired in February 2015).

Walter Drake® - a leading direct marketer of value-priced kitchenware, household products, organizers, health care items, gardening and outdoor décor, personalized gifts, calendars and stationery.

Sourcing, Manufacturing and Logistics

Silver Star Brands sources all of its As We Change, Easy Comforts, Exposures, Miles Kimball and Walter Drake products, primarily from independent manufacturers in the Pacific Rim, and sources its Native Remedies products from third party manufacturers in the United States. Silver Star Brands has a highly automated distribution facility in the United States supporting its business.
Product Brand Names

The major brand names under which our Candles & Home Décor segment products are sold are PartyLite® and GloLite by PartyLite®. For the primary brand names under which our Catalog & Internet segment products are sold, see above under “Catalog & Internet Segment.”

Trade names, trademarks and service marks of other companies appearing in this annual report are the property of their respective holders.


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Manufacturing, Sourcing and Distribution

In all of our business segments, management continuously works to increase value and lower costs through increased efficiency in worldwide production, sourcing, distribution and customer service practices, the application of new technologies and process control systems, and consolidation and rationalization of equipment and facilities. Net capital expenditures over the past five years have totaled $28.7 million and are targeted at technological advancements, significant maintenance and replacement projects at our manufacturing and distribution facilities and customer service capacity increases. We have also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions. In January 2015, PartyLite began to shut down its manufacturing facility in Cumbria, U.K. and will manufacture all of its candles in its Batavia, IL manufacturing facility.

Customers

Our customers are individuals served by our independent sales consultants or who purchase products from our catalogs or websites. No single customer accounted for 10% or more of our net sales for the year ended December 31, 2014 or our accounts receivable balance as of December 31, 2014.

Competition

Both of our business segments 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. Some of our 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 we do. Because there are relatively low barriers to entry in both of our business segments, it is relatively easy for new competitors to emerge to compete with both of our businesses. Some of our competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

Competition in the Candles & Home Decor segment includes companies selling candles manufactured at lower costs through direct selling and retail channels. The Catalog & Internet segment is also highly competitive, with longer and better established brands as well as new start-ups in the catalog, internet and brick-and-mortar retail markets.

In the Candles & Home Décor segment we compete for consultants with other direct selling companies, both those that sell similar products and those that sell other types of products, and we compete with other direct selling companies for hosts who allow consultants to conduct parties in their homes.

Employees

As of December 31, 2014, we had approximately 1,600 full-time employees, of whom approximately 34% were based outside of the United States. Approximately 60% of our employees are non-salaried. We do not have any unionized employees in North America. We believe that relations with our employees are good. Since our formation in 1977, we have never experienced a work stoppage.

Seasonality

Our businesses are seasonal in nature and, as a result, the net sales and working capital requirements of our businesses fluctuate from quarter to quarter. Our Candles & Home Décor and Catalog & Internet businesses tend to achieve their strongest sales in the third and fourth quarters due to increased shipments to meet year-end holiday season demand for our products. We expect the seasonality of our businesses to continue in the future, which may cause period-to-period fluctuations in certain of our operating results and limit our ability to predict our future results accurately.

Government Regulation

eCommerce and Data Collection

Our involvement in eCommerce and collection of information regarding employees, independent consultants and consumers subject our businesses to a number of laws, regulations, administrative determinations, court decisions and similar constraints at the U.S. federal, state and local level and at all levels of government in foreign jurisdictions, governing companies that maintain information regarding their employees, consultants and consumers or their conduct of business on the Internet. These may involve user privacy, data protection, electronic contracts, consumer protection, taxation and online payment services. For

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example, the FTC regulates the appropriate collection and protection of personal identifiable information and has issued a number of enforcement actions against companies for using mobile applications or collecting information regarding consumers in a manner that the FTC considers to violate the Federal Trade Commission Act, as amended (the "FTC Act"). United States federal, state and foreign jurisdiction laws and regulations regarding data privacy and protection and eCommerce are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly given the new and rapidly-evolving use of technology in the marketplace. The adoption of new laws and regulations or changes in the interpretations of existing laws and regulations may result in significant compliance costs or otherwise negatively impact our business.

Direct Selling and Network Marketing Programs

Our direct selling programs are subject to federal and state regulations administered by the FTC and various state agencies as well as regulations in foreign markets administered by foreign agencies. These regulations generally seek to ensure that product sales are made to consumers and that advancement within an organization is based on sales of products rather than investments in the organization or other non-retail sales related criteria. For instance, in some markets, there are limits on the extent to which consultants may earn royalty overrides on sales generated by consultants that were not directly sponsored by them. While we believe we are in compliance with these regulations, we remain subject to the risk that in one or more markets our marketing systems could be found not to be in compliance with applicable regulations. Failure to comply with these regulations could have a material adverse effect on our business in a particular market or in general.

Environmental Regulations

Most of our manufacturing and distribution operations are affected by federal, state, local and international environmental laws relating to the discharge of materials or otherwise to the protection of the environment. We have made and intend to continue to make expenditures necessary to comply with applicable environmental laws, and do not believe that such expenditures will have a material effect on our capital expenditures, earnings or competitive position.

Regulation of Foods, Dietary Supplements, Vitamins, Minerals, Herbal and Homeopathic Products and Cosmetics.

The sale, advertisement and promotion of foods, dietary supplements, vitamins, minerals, herbal and homeopathic products and cosmetics that we sell are subject to regulation by the Food and Drug Administration (“FDA”), the Federal Trade Commission ("FTC"), the U.S. Postal Service ("USPS"), the U.S. Department of Agriculture and state regulatory authorities. In particular, the FDA regulates the formulation, manufacturing, packaging, labeling, distribution and sale of foods, dietary supplements, vitamins, minerals, herbal and homeopathic products and cosmetics. The FTC regulates the advertising of these products, and the USPS regulates advertising claims with respect to such products sold by mail order. The National Advertising Division (“NAD”) of the Council of Better Business Bureaus oversees an industry-sponsored self-regulatory system that permits competitors to resolve disputes over advertising claims. The NAD may refer matters to the FTC and/or other agencies for further action, if the advertiser does not participate in the NAD system or implement the NAD's recommendations.

(d) Financial Information about Geographic Areas

For information on net sales from external customers attributed to the United States and international geographies and on long-lived assets located in and outside the United States, see Note 19 to the Consolidated Financial Statements.








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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 7 - 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.

Our success depends on our ability to improve our financial and operational performance.

Our ability to improve our financial and operational performance depends upon a number of factors, including our ability to recruit, retain and motivate 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 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 changing preferences, our sales may decline. PartyLite's candles represented a substantial portion of our sales in 2012, 2013 and 2014. If consumer demand for these products decreases significantly, 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.

PartyLite depends upon sales by its independent sales force to drive its business, and its failure to continue to recruit, retain and motivate consultants would harm its business and our financial condition and results of operations.

PartyLite markets its products through its independent consultants primarily using a party plan direct selling model. This marketing system depends upon the successful recruitment, retention and motivation of a large number of consultants to offset frequent turnover, which is a common characteristic found in the direct selling industry. Our 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 PartyLite is unable to grow its consultant sales forces and reverse declines in their total number of consultants, our business would be materially harmed. The rate of turnover of PartyLite's consultants can be very high and volatile from time to time, which may materially hinder its ability to increase its total consultant count.

Our ability to recruit, retain and motivate 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. PartyLite relies primarily upon the efforts of its consultants to attract, train and motivate new consultants, so our sales directly depend upon their efforts. The failure by PartyLite to recruit, retain and motivate consultants and to reverse declines in its total number of consultants could negatively impact sales of its products, which could harm our business, financial condition and results of operations.

The loss by PartyLite of a significant number of its consultants could harm our business, financial condition and results of operations.

The loss by PartyLite of a significant number of its consultants for any reason could negatively impact the sales of its products, impair its ability to recruit new consultants and harm our business, financial condition and results of operations. During 2014, the total number of PartyLite’s consultants declined to approximately 48,000 from approximately 52,100 at December 31, 2013.

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In general, PartyLite does not have non-competition arrangements with its consultants that would prohibit them from promoting competing products if they terminate their relationship. Pursuant to agreements that all of PartyLite's top consultants are requested to sign, the consultant is not permitted to solicit or recruit 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 PartyLite's consultants will abide by any non-solicitation obligations or that we will be able to enforce them. Some of 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 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 operations.

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

Direct selling is highly competitive and sensitive to the introduction of new competitors, new products and/or new compensation plans. Companies commonly attempt to attract new consultants by offering generous compensation plans. From time to time, PartyLite modifies components of its compensation plan in an effort to:

keep it competitive and attractive to existing and potential consultants,
cause or address a change in the behavior of its consultants,
motivate 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 consultant sales force and the complexity of our compensation plan, it is difficult to predict how any changes to the plan would be viewed by PartyLite's consultants and whether such changes will achieve their desired results. There can be no assurance that PartyLite's compensation plan will allow us to successfully attract or retain consultants, nor can we assure that any changes we make to our compensation plan will achieve our desired results.

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

PartyLite's consultants are independent contractors and, accordingly, PartyLite is not 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 PartyLite's consultants will participate in its 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 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 consultants and their independent status. Violations by our 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.

The failure of our product advertising, promotional programs and recruitment techniques to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general.

There are 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 consultants. These materials, as well as our other recruiting efforts and those of consultants, are subject to scrutiny by the FTC, other enforcement agencies, our competitors, and current or former consultants with respect to misleading statements, including misleading earnings claims made to convince potential new recruits to become consultants. If claims or recruiting techniques used by PartyLite or by its 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 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 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

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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.

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 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 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.

Our products are subject to government regulation, both in the United States and abroad, which could increase our costs significantly and limit or prevent the sale of our products.
The sale, advertisement and promotion of foods, dietary supplements, vitamins, minerals, herbal and homeopathic products and cosmetics that we sell are subject to regulation by the FDA, FTC, USPS, the U.S. Department of Agriculture and state regulatory authorities. Any of these government agencies, as well as legislative bodies, can change existing regulations, or impose new ones, or could take aggressive measures, causing or contributing to a variety of negative consequences, including:
requirements for the reformulation of products to meet new standards,
the recall or discontinuance of products,
additional record keeping,
expanded documentation of the properties of products,
expanded or different labeling,
adverse event tracking and reporting and
additional scientific substantiation.

Any or all of these requirements could have a material adverse effect on us. There can be no assurance that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action taken against us, will not result in a material adverse effect on us.

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. 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.

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

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.


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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.

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 eCommerce. 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. 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 consultants and customers.

PartyLite is subject to significant competition for the recruitment of consultants from other direct selling organizations, including those that market candles and home accessories, as well as other types of products. Furthermore, the fact that our 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 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 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 on 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
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 has a history of expanding into new international markets. 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. Once we have entered a market, we must adhere to the regulatory and legal requirements of that market. 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.

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In many markets, other network marketing companies already have significant market penetration which may have the
effect of desensitizing the local population to a new opportunity from PartyLite, or to make it more difficult for us to attract qualified consultants. Even if PartyLite is able to commence operations in new markets, there may not be a sufficient population of individuals who are interested in direct selling in general or our business model in particular. We believe our future success will depend in part on our ability to seamlessly integrate PartyLite's compensation plans across all markets where legally permissible. There can be no assurance, however, that we will be able to utilize our compensation plans seamlessly in all existing or future markets.

We face diverse risks in our international business.

We depend on international sales for a substantial amount of our total revenue. For the years ended December 31, 2014 and 2013, revenue from outside the United States represented 58% of our total revenue. We expect international sales to continue to represent a substantial portion of our revenue for the foreseeable future and we plan to expand further into international markets. During 2014 and into 2015, our results of operations were negatively impacted by the significant increase in the value of the U.S. dollar against the euro. Due to our reliance on sales to customers outside the United States, we are subject to the risks of conducting business internationally, including:

• the acceptability of our products and sales models to international consumers;
• the interest in PartyLite's business, products and compensation programs to prospective overseas consultants;
• United States and foreign government trade restrictions, including those which may impose restrictions on imports to
or from the United States;
• foreign government taxes and regulations, including foreign taxes that we may not be able to offset against taxes
imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate funds to the
United States;
• laws and policies affecting the importation of goods (including duties, quotas and taxes);
• foreign employment and labor laws, regulations and restrictions;
• difficulty in staffing and managing international operations and difficulty in maintaining quality control;
• adverse fluctuations in world currency exchange rates and interest rates, including risks related to any interest rate
swap or other hedging activities we undertake;
• political instability, natural disasters, health crises, war or events of terrorism;
• transportation costs and delays; and
• the strength of international economies.

Legal actions by PartyLite's former consultants or third parties against us could harm our business.

PartyLite monitors and reviews the compliance of its consultants with their respective policies and procedures as well the laws and regulations applicable to their businesses. From time to time, some consultants fail to adhere to these policies and procedures. In such cases, PartyLite may take disciplinary action against that consultant based on the facts and circumstances of the particular case, which may include, for example, warnings for minor violations to termination of the relationship for more serious violations. From time to time, we become involved in litigation with a former consultant who voluntarily terminated their relationship or whose relationship has been terminated. Sometimes those former consultants have become associated with one of our competitors and that competitor may join in the action. We consider this type of litigation to be routine and incidental to our business. While neither the existence nor the outcome of this type of litigation is typically material to our business, we may become involved in litigation of this nature that results in a large cash award against us. Our competitors have also been involved in this type of litigation and, in some cases, class actions, where the result has been a large cash award against the competitor. These types of challenges, awards or settlements could provide incentives for similar actions by former consultants against us in the future. Any such challenge involving us or others in our industry could harm our business by resulting in fines or damages against us, creating adverse publicity about us or our industry, or hurting our ability to attract and retain consultants. We believe that compliance by consultants with our policies and procedures is critical to the integrity of our business, and, therefore, we will continue to be aggressive in enforcing them. As such, there can be no assurance that this type of litigation will not occur again in the future or result in an award or settlement that has an adverse effect on our business.

Since our businesses rely on independent third parties to manufacture and supply many of their products, if these third
parties fail to reliably supply products at required levels of quantity and quality, then our business, financial condition and
results of operations would be harmed.


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PartyLite manufactures substantially all of its candles, but all of its accessories are manufactured by third parties, primarily based overseas. All of Silver Star Brands' products are manufactured and supplied by third party manufacturers, primarily based overseas. If any of the third party manufacturers were to become unable or unwilling to continue to provide products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. An extended interruption in the supply of products would result in loss of sales, which could negatively impact our business, financial condition and results of operations. In addition, any actual or perceived degradation of product quality as a result of reliance on third party manufacturers may have an adverse effect on sales or result in increased product returns.

If PartyLite is unable to manufacture its candles at required levels of quantity and quality, then our business, financial
condition and results of operations could be harmed.

PartyLite will manufacture substantially all of its candles at its manufacturing facility in Batavia, IL. As a result, PartyLite will depend upon the uninterrupted and efficient operation of one manufacturing facility. Those operations are subject to power failures, the breakdown, failure or substandard performance of equipment, the improper installation, maintenance and operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies. If PartyLite's manufacturing facility was to experience a catastrophic loss, it would disrupt our operations and could result in personal injury or property damage, damage relationships with PartyLite's consultants and customers or result in large expenses to repair or replace the facility, as well as result in other liabilities and adverse impacts. If PartyLite were to become unable to provide candles in required volumes and at suitable quality levels we would be required to identify and obtain acceptable replacement third party manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. An extended interruption in the supply of candles would result in loss of sales by PartyLite, which could negatively impact our business, financial condition and results of operations. In addition, any actual or perceived degradation of product quality as a result of reliance on third party manufacturers instead of PartyLite for the manufacture of its candles could have an adverse effect on sales or result in increased product returns.

PartyLite's manufacturing facility is subject to a variety of environmental laws relating to the storage, discharge, handling,
emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste, and other toxic and hazardous
materials. PartyLite's manufacturing operations presently do not result in the generation of material amounts of hazardous or
toxic substances. Nevertheless, complying with new or more stringent laws or regulations, or more vigorous enforcement of
current or future policies of regulatory agencies, could require substantial expenditures by us that could have a material adverse
effect on our business, financial condition or results of operations. Environmental laws and regulations require us to maintain
and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety
data regarding materials used in our processes. Violations of those requirements could result in financial penalties and other
enforcement actions and could require us to halt one or more portions of our operations until a violation is cured. The
combined costs of curing incidents of non-compliance, resolving enforcement actions that might be initiated by government
authorities or of satisfying new legal requirements could have a material adverse effect on our business, financial condition or
results of operations.

Disruptions to transportation channels that we use to distribute our products may adversely affect us.

We may experience disruptions to the transportation channels used to distribute our products, including increased airport and
shipping port congestion, lack of transportation capacity, increased fuel expenses and a shortage of manpower. Disruptions in
our container shipments may result in increased costs, including the additional use of air freight to meet demand. Although we
have not recently experienced significant shipping disruptions, we continue to watch for signs of upcoming congestion.
Congestion in ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in
shipping costs.

Our profitability may be affected by shortages or increases in the cost of raw materials.

Certain raw materials could be in short supply due to price changes, capacity, availability, a change in production requirements,
weather or other factors, including supply disruptions due to production or transportation delays. PartyLite sources petroleum-based paraffin wax (which is used to manufacture candles) from several suppliers. While the price of crude oil is only one of several factors impacting the price of paraffin, it is possible that fluctuations in oil prices may have a material adverse effect on the cost and availability of petroleum-based products used in the manufacture or transportation of PartyLite's products. In recent years, substantial cost increases for certain raw materials, such as paraffin and paper, negatively impacted our profitability, and the global supply of paraffin has declined. There can be no assurance that PartyLite will have continued access to an adequate supply of paraffin or that it will able to identify and procure an adequate supply of a suitable replacement if required to do so. In addition, a number of governmental authorities in the United States and abroad have introduced or are

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contemplating enacting legal requirements, including emissions limitations, cap and trade systems and other measures to reduce production of greenhouse gases, in response to the potential impacts of climate change. These measures may have an indirect effect on us by affecting the prices of products made from fossil fuels, including paraffin. Given the wide range of potential future climate change regulations and their effects on these raw materials, the potential indirect impact to our operations is uncertain. In addition, climate change might contribute to severe weather in the locations where fossil fuel-based raw materials are produced, such as increased hurricane activity in the Gulf of Mexico, which could disrupt the production, availability or pricing of these raw materials. Volatility in the prices of raw materials could increase our cost of sales and reduce our profitability. Moreover, we may not be able to implement price increases for products to cover any increased costs, and any price increases we implement may result in lower sales volumes. If our businesses are not successful in managing ingredient costs, if they are unable to increase their prices to cover increased costs or if such price increases reduce their sales volume, then such increases could harm our business, financial condition and results of operations.

If we lose the services of key employees, then our business, financial condition and results of operations would be harmed.

We depend on the continued services of Robert B. Goergen, our executive Chairman of the Board; Robert B. Goergen, Jr., our President and Chief Executive Officer and President PartyLite Worldwide; and Jane F. Casey, our Vice President and Chief Financial Officer. In addition, PartyLite depends upon the continued services of the other members of its current senior management teams, including the relationships that they have developed with PartyLite's senior independent consultants. The loss or departure of these key employees could negatively impact PartyLite's relationship with its senior independent consultants and harm our business, financial condition and results of operations. If any of these key employees does not remain with us, our business could suffer. The loss of any key employees could negatively impact our ability to implement our business strategy. Our continued success will also depend upon our ability to retain existing, and attract additional, qualified personnel to meet our needs. Replacing key employees may be difficult and may require an extended period of time because of the limited number of individuals in our industry with the necessary breadth of skills and experience.

We may be held responsible for certain taxes or assessments relating to the activities of our consultants.

The earnings of consultants are subject to taxation, and, in some instances, legislation or governmental regulations impose obligations on PartyLite to collect or pay taxes, such as value-added taxes, and to maintain appropriate records. In addition, we may be subject to the risk in some jurisdictions of new liabilities being imposed for social security and similar taxes with respect to consultants. If local laws and regulations or the interpretation of local laws and regulations change to require PartyLite to treat consultants as employees, or if consultants are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors or agents under existing laws and interpretations, we may be held responsible for social charges and related taxes in those jurisdictions, plus related assessments and penalties.

There can be no assurances that we will identify suitable acquisition candidates, complete acquisitions on terms favorable to
us, successfully integrate acquired operations or that companies we acquire will perform as anticipated.

We seek to grow through strategic acquisitions in addition to internal growth. There can be no assurances that we will identify suitable acquisition candidates, complete acquisitions on terms favorable to us or be able to finance acquisitions. We also may
encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these
acquisitions or in managing strategic investments. Additionally, we may not realize the degree or timing of benefits we
anticipate when we first enter into a transaction. We will not be required to submit acquisitions for stockholder approval,
except in certain situations that have not applied to any of our acquisitions and that we do not expect to apply to any future
acquisitions. In addition, accounting requirements relating to business combinations, including the requirement to expense
certain acquisition costs as incurred, may cause us to incur greater earnings volatility and generally lower earnings during
periods in which we acquire new businesses. Furthermore, covenants in our revolving loan agreement and term loan limit or restrict our and our subsidiaries' ability to engage in acquisitions.

The covenants in our revolving loan agreement and term loan limit our operating and financial flexibility.

The asset-based revolving loan agreement and term loan contain covenants that restrict, subject to certain exceptions, our and our domestic subsidiaries’ ability to, among other things: (i) incur indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) engage in certain dispositions or acquisitions of assets; (v) make investments, loans, guarantees or advances; (vi) pay dividends and distributions or repurchase our common stock; (vii) repay certain indebtedness; (viii) enter into sale and leaseback transactions; (ix) engage in certain transactions with affiliates; and (x) change the nature of our or our domestic subsidiaries’ business. In addition, the revolving loan agreement and term loan (a) require us to maintain a fixed charge coverage ratio (“FCCR”) of 1.0 to 1.0 upon the occurrence of certain events or conditions, (b) with certain exceptions,

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prohibit us from making acquisitions if the FCCR is less than 1.0 to 1.0, and (c) among other conditions, prohibit us from paying dividends or repurchasing our common stock under certain circumstances. We estimate that our FCCR was less than 1.0 to 1.0 at February 28, 2015. The term loan also requires us to make certain prepayments out of "excess cash flow" starting in 2017. The revolving loan agreement and term loan also contains certain additional affirmative, negative and financial covenants and events of default.

If our businesses fail to protect their intellectual property, then our ability to compete could be negatively affected.

All of our businesses attempt to protect their intellectual property rights, both in the United States and elsewhere, through a
combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. The failure by our businesses to obtain or maintain adequate protection of their intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.

We also possess trade secret rights in our consultant lists and related contact information. To protect our trade secrets and other proprietary information, we currently require most of our employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot ensure that these agreements will provide meaningful protection for any of our trade secrets, knowhow or other proprietary information in the event of any unauthorized use, misappropriation or disclosure. If we are unable to maintain the proprietary and/or secret nature of our products and consultant lists, we could be materially adversely affected. Further, loss of protection for our consultant lists could harm our ability to recruit and retain consultants, which could harm our financial condition and results of operations.

The market for our products depends to a significant extent upon the goodwill associated with our trademarks and trade names.
We own most of the material trademarks and trade-name rights used in connection with the packaging, marketing and
distribution of our products in the markets where those products are sold. We rely on these trademarks, trade names, trade
dress and brand names to distinguish our products from the products of our competitors, and have registered or applied to
register many of these trademarks. We may not be successful in asserting trademark or trade-name protection against third
parties or otherwise successfully defending against a challenge to our trademarks or trade names. In addition, the laws of
other countries may not protect our intellectual property rights to the same extent as the laws of the United States. In the event that our trademarks or trade names are successfully challenged, we could be forced to rebrand our products, remove products from the market or pay a settlement, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands and building goodwill in these new brands, trademarks and trade names. Further, we cannot ensure that competitors will not infringe our trademarks, pass off themselves or their goods and services as being ours or associated with ours or otherwise deprecate the value of the goodwill associated with our trademarks and trade names or that we will have adequate resources to enforce our trademarks. Infringement of our trademarks or trade names, passing off by a competitor or deprecating the goodwill associated with our trademarks could impair the goodwill associated with our brands and harm our reputation, which could materially harm our financial condition and results of operations.

We face the risk of claims that we have infringed third parties' intellectual property rights. Any claims of intellectual property
infringement, even those without merit, could be expensive and time consuming to defend; cause us to cease making, licensing,
selling or using products that incorporate the challenged intellectual property; require us to redesign, reengineer, or rebrand our
products or packaging, if feasible; divert management's attention and resources; or require us to enter into royalty or licensing
agreements in order to obtain the right to use a third party's intellectual property. Any royalty or licensing agreements, if
required, may not be available to us on acceptable terms or at all.

We depend upon our information-technology systems, and if we experience interruptions in these systems, our business,
financial condition and results of operations could be negatively impacted.

Our businesses are increasingly dependent on information-technology systems to operate their websites, communicate with
their independent consultants, calculate compensation due to their consultants, process transactions, manage inventory, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations, including information technology that they license from third parties. There is no guarantee that our businesses will continue to have access to these third-party information-technology systems after the current license agreements expire, and if they do not obtain licenses to use effective replacement information-technology systems, our business, financial condition and results of operations could be adversely affected.

Previously, our businesses have experienced interruptions resulting from upgrades to some of their information-technology
systems that temporarily reduced the effectiveness of their operations. Our information-technology systems depend on global
communication providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have

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experienced system failures in the past. Our systems are susceptible to outages due to fire, floods, power loss,
telecommunication failures and similar events. Despite the implementation of network security measures, our systems are
vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our systems. The
occurrence of these or other events could disrupt or damage our information-technology systems and inhibit internal operations,
the ability to provide service to our consultants and customers or their ability to access our information systems. If we are unable to effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems, it could cause system interruptions or delays and adversely affect our operating results.

The Internet plays a major role in our interaction with customers and consultants. The disruptions described above may make our websites and online services unavailable or slow to respond and prevent us from efficiently fulfilling orders, which may reduce our sales and the attractiveness of our products and services. Risks such as changes in required technology interfaces, website downtime and other technical failures, security breaches and consumer privacy regulations are key concerns related to the Internet. Our failure to respond successfully to these risks and uncertainties could reduce sales, increase costs and damage our relationships.

Management uses information systems to support decision-making and to monitor business performance. We may fail to
generate accurate financial and operational reports essential for making decisions at various levels of management. Failure to
adopt systematic procedures to maintain quality information-technology general controls could impact management's decision making and performance monitoring, which could disrupt our business. In addition, if we do not maintain adequate controls
such as reconciliations, segregation of duties and verification to prevent errors or incomplete information, our ability to operate
our business could be limited.

As a result of our online sales, we process, store and transmit large amounts of data, including personal information. If we fail to prevent or mitigate data loss, security breaches or the circumvention of our security measures, our systems could allow data loss or misappropriation of confidential, proprietary and/or personal information - including that of third parties such as consultants and customers collected in our online businesses - or could interrupt our operations, damage our computers or otherwise harm our reputation and business. Although we have developed systems and processes that are designed to protect this information and prevent data loss and security breaches, such measures cannot provide absolute security. In addition, we rely on third party technology, systems and services in certain aspects of our business, including storage encryption and authentication technology to securely transmit confidential information. These third party systems also cannot provide absolute security.

Our storage of user and employee data subjects us to a number of federal, state and foreign laws and regulations governing the collection, storage, handling or sharing of personal data.

We collect, handle, store and disclose personal data collected from users of our websites and mobile applications, as well as our
employees, consultants, and potential and actual purchasers of our products. In this regard, we are subject to a number of U.S. federal, state and foreign laws and regulations. The FTC, state attorneys general and foreign data protection and consumer protection authorities actively investigate and enforce compliance with laws and regulations governing fair information practices, as they are evolving in practice and being tested in courts. These laws, including the FTC Act, could be interpreted in ways that could harm our business, particularly if we are deemed to engage in unfair or deceptive trade practices with regard to our collection, storage, handling or sharing of personal data. Risks attendant upon our conduct of business on the Internet and data collection practices may involve user or employee privacy, data protection, electronic contracts, consumer protection, taxation and online payment services. The adoption of new laws and regulations or changes in the interpretations of existing laws and regulations regarding the storage, handling, collection and sharing of personal data may result in significant compliance costs or otherwise negatively impact our business. Our consultants also collect, store, handle and process personal data. A violation of law or fair information practices by a consultant could cause us financial or reputational harm.

A breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, hardware, processes, associated sites or service providers could have a material adverse impact on our business or reputation.

Numerous and evolving cybersecurity threats pose a potential risk to the security of our information technology systems, networks and services, as well as the confidentiality, availability and integrity of our data. Since the techniques used in these cyber-attacks change frequently and may be difficult to detect for periods of time, we may face difficulties in anticipating and implementing adequate preventative measures. Our information technology systems have been, and will likely continue to be, subject to computer viruses or other malicious codes, unauthorized access attempts, phishing and other cyber-attacks. To date, we have seen no material impact on our business or operations from these attacks; however, we cannot guarantee that our security efforts will prevent breaches or breakdowns to our or our third party providers’ databases or systems. If the information

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technology systems, networks or service providers we rely upon fail to function properly, or if we or one of our third-party providers suffer a loss, significant unavailability or disclosure of our business, customer, consultant or other information, due to any number of causes, ranging from catastrophic events or power outages to improper data handling or security breaches, and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to reputational, competitive and business harm as well as litigation and regulatory action. The costs and operational consequences of responding to breaches and implementing remediation measures could be significant.

Our business is susceptible to fraud, including credit card and debit card fraud.

Our customers and consultants typically pay for their orders with debit cards or credit cards. Our reputation, business and results of operations could be negatively impacted if we experience credit card and debit card fraud. Failure to adequately detect and avoid fraudulent credit card and debit card transactions could cause our businesses to lose their ability to accept credit cards or debit cards as forms of payment and/or result in charge-backs of the fraudulently charged amounts and/or significantly decrease revenues. Furthermore, credit card and debit card fraud may lessen customers' and consultants' willingness to purchase our products.

Changes in our effective tax rate may have an adverse effect on our financial results.

Our effective tax rate and the amount of our provision for income taxes may be adversely affected by a number of factors,
including:

• the jurisdictions in which profits are determined to be earned and taxed;
• adjustments to estimated taxes upon finalization of various tax returns;
• changes in available tax credits;
• changes in the valuation of our deferred tax assets and liabilities;
• the resolution of issues arising from uncertain positions and tax audits with various tax authorities;
• the non-deductibility of certain expenditures for tax purposes;
• changes in accounting standards or tax laws and regulations, or interpretations thereof; and
• penalties and/or interest expense that we may be required to recognize on liabilities associated with uncertain tax
positions.

A substantial amount of our deferred tax assets include foreign tax credits. We reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, some portion or all of the deferred tax assets are unlikely to be realized. Recording of valuation allowances includes estimates and therefore involves inherent uncertainty. In the fourth quarter of 2014, we recorded a $19.6 million valuation allowance on foreign tax credits. We may also be required to record valuation allowances in the future, and our future results and financial condition may be adversely affected if we are required to do so. We may also be affected by future tax regulatory changes since the recordation of deferred tax assets and valuation allowances have been made based on the currently effective tax regulations.

We do not collect sales or consumption taxes in some states.

Some jurisdictions have implemented, or may implement, laws that require out-of-state sellers of tangible personal property to collect and remit taxes. In particular, the Streamlined Sales Tax Project (an ongoing, multi-year effort by U.S. state and local governments to pursue federal legislation that would require collection and remittance of remote sales tax by out-of-state sellers) could allow states that meet certain simplification and other standards to require out-of-state sellers to collect and remit sales taxes on goods purchased by in-state residents. The adoption of remote sales tax collection legislation would result in the imposition of sales taxes and additional costs associated with complex sales tax collection, remittance and audit compliance requirements on us. A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.

Since our periodic results of operations may fluctuate, we may fail to meet or exceed the expectations of investors or
securities analysts, which could cause our stock price to decline.

Our periodic results of operations have fluctuated in the past and are likely to fluctuate significantly in the future. Our periodic
results of operations may fluctuate as a result of many factors, including those listed below, many of which are outside of our
control:

• demand for and market acceptance of our products;
• our ability to recruit, retain and motivate consultants;

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• the timing and success of introductions of new products by us or our competitors;
• the strength of the economy;
• changes in our pricing policies or those of our competitors;
• competition, including entry into the industry by new competitors and new offerings by existing competitors;
• the impact of seasonality on our business; and
• the international expansion of our operations.

These factors, among others, make business forecasting difficult, may cause quarter to quarter fluctuations in our results of
operations and may impair our ability to predict financial results accurately, which could reduce the market price of our
common stock. Therefore, you should not rely on the results of any one quarter or year as an indication of future performance.
Furthermore, period to period comparisons of our results of operations may not be as meaningful for our company as they may
be for other public companies.

Our profitability could be adversely affected by increased mailing, printing and shipping costs.

Postal rate increases and paper and printing costs affect the cost of our catalog and promotional mailings. Future additional
increases in postal rates or in paper or printing costs would reduce Silver Star Brands' profitability to the extent that it is unable
to pass those increases directly to customers or offset those increases by raising selling prices or by reducing the number and
size of certain catalog circulations. The sales volume and profitability of both of our businesses could be affected by increased costs to ship our products.

The turmoil in the financial markets in recent years could increase our cost of borrowing and impede access to or increase
the cost of financing our operations and investments and could result in additional impairments to our businesses.

United States and global credit and equity markets have undergone significant disruption in recent years, making it difficult for
many businesses to obtain financing on acceptable terms, if at all. In addition, in recent years equity markets have experienced
rapid and wide fluctuations in value. If these conditions continue or worsen, our cost of borrowing may increase and it may be
more difficult to obtain financing for our businesses. In addition, while our debt is not currently being rated, our future borrowing costs could be affected by short and long-term debt ratings assigned by independent rating agencies if we choose to raise capital with public debt. A decrease in these ratings by the agencies would likely increase our cost of future borrowings and/or make it more difficult for us to obtain financing. In the event current market conditions continue we will more than likely be subject to higher interest costs than we are currently incurring. In addition, we may be subject to future impairments of our assets, including accounts receivable, inventories, property, plant and equipment, goodwill and other intangibles, if the valuation of these assets or businesses declines.

We have agreed to lend ViSalus up to $6.0 million and to reimburse them for up to $4.0 million in legal fees.

In October 2014, we and ViSalus entered into a revolving loan agreement pursuant to which we agreed to lend ViSalus up to $6.0 million. The revolving loan agreement will terminate on the later of (i) October 17, 2019 or (ii) resolution of the putative class action that is pending against ViSalus and others in the United States District Court in the Eastern District of Michigan, Southern Division (the “ViSalus Lawsuit”). Loans made under the revolving loan agreement will be unsecured and there are no financial performance covenants under the loan agreement and limited negative covenants. ViSalus will be permitted to obtain financing from other parties, whether that financing is secured or unsecured. In addition, in connection with the ViSalus recapitalization in September 2014, we agreed to reimburse and pay on behalf of ViSalus 80% of the legal fees and disbursements reasonably charged by ViSalus’s legal counsel and reasonable out-of-pocket expenses incurred by ViSalus in defending ViSalus and certain others against the claims asserted by the plaintiffs in the ViSalus Lawsuit, up to a maximum amount of $4.0 million.

The operation of Silver Star Brands' credit program, including higher than expected rates of customer defaults, could
adversely affect Silver Star Brands' sales and earnings and impact its cash flow from operations.

Silver Star Brands allows some of its customers to purchase products and pay for them with monthly payments over time,
which impacts Silver Star Brands' working capital requirements and cash flow from operations. Although customers are
selected and dollar limits on their purchases under the program are set using parameters that seek to ensure that most customers
will be able to make the monthly payments under the program, some customers default on their obligations under the program
and there is a risk that defaults may occur in larger than anticipated amounts. In addition the program may become subject to
regulatory regimes including, but not limited to, regulations that might be issued by the Consumer Financial Protection Bureau.
The operation of the credit program and the application of such regulatory regimes or changes to them, if either occurs, may
affect Silver Star Brands' sales and/or financial performance.

19



Our stock price has been volatile, has a small public float and is subject to market conditions.

The trading price of our common stock has been subject to wide fluctuations. Due to the large ownership of our common stock
by Robert B. Goergen and his affiliates, we have a relatively small public float compared to the number of our shares
outstanding. Accordingly, we cannot predict the extent to which investors' interest in our common stock will provide an active
and liquid trading market.

If securities or industry analysts do not publish research reports about our business, or publish negative reports about
our business, our share price and trading volume could decline.

The trading market for our common stock depends, to some extent, on the research reports that securities or industry
analysts may publish about us. We are not currently followed by securities or industry analysts, and there can be no assurance
that any analysts will begin to follow us. In the event that securities or industry analysts begin to cover us, we will not have
any control over them or the reports that they may issue. If our financial performance fails to meet analyst estimates in the
future or one or more of the analysts who cover us at such time downgrade our shares or change their opinion of our shares, our
share price would likely decline. Since we are not currently followed by analysts, we do not have significant visibility in the
financial markets, which could cause our share price or trading volume to decline. Moreover, since we do not currently have any analyst coverage, the price of our stock may be influenced by articles and opinions expressed in newsletters or on Internet message boards, any of which may contain inaccuracies or misstatements. If analysts begin to cover us and one or
more of such analysts cease coverage of our company or fail to regularly publish reports on us, our share price or trading
volume may decline. Our operating results in future quarters may be below the expectations of securities analysts and
investors. If that were to occur, the price of our common stock would likely decline, perhaps substantially.

If we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002, the market may have reduced confidence in our
reported financial information.

We must continue to document, test, monitor and enhance our internal control over financial reporting in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We will continue to perform the documentation and
evaluations needed to comply with Section 404. If during this process our management identifies one or more material
weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective,
which may cause market participants to have reduced confidence in our reported financial condition.

20


Item 1B.  Unresolved Staff Comments.
 
None.

Item 2.  Properties.

The following table sets forth the location and approximate square footage of our major manufacturing, distribution, research and development, and office facilities for each of our business segments:

Location
Use
Business Segment
Approximate Square Feet
 
 
 
Owned
Leased
Arndell Park, Australia
Distribution
Candles & Home Décor
38,000
Batavia, IL
Manufacturing, Distribution and Research & Development
Candles & Home Décor
420,000
Cumbria, England (1)
Manufacturing and related distribution
Candles & Home Décor
90,000
 
Oshkosh, WI
Distribution
Catalog & Internet
386,000
Oshkosh, WI
Office
Catalog & Internet
99,625
Plymouth, MA
Office
Candles & Home Décor
100,000
Tilburg, Netherlands
Distribution
Candles & Home Décor
442,500
(1) In January 2015, we announced our intention to shut down the Cumbria, England manufacturing facility, which we expect to complete in the first half of 2015.

Our executive and administrative offices are generally located in leased space (except for certain offices located in owned space).

Item 3.  Legal Proceedings.

We are involved in 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 4.  Mine Safety Disclosures.

Not applicable.
 

21


PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our Common Stock is traded on the New York Stock Exchange under the symbol BTH. The following table provides the closing price range for the Common Stock on the New York Stock Exchange:
 
High
 
Low
Year Ended December 31, 2014
 
 
 
First Quarter
$
10.94

 
$
8.90

Second Quarter
10.72

 
7.42

Third Quarter
9.88

 
5.85

Fourth Quarter
10.27

 
7.68

 
 
 
 
Year Ended December 31, 2013
 
 
 
First Quarter
$
17.36

 
$
13.45

Second Quarter
19.68

 
13.34

Third Quarter
15.23

 
8.70

       Fourth Quarter
15.50

 
10.50

Many of our shares are held in “street name” by brokers and other institutions on behalf of stockholders, and we had approximately 2,625 beneficial holders of Common Stock as of February 28, 2015.

During the year ended December 31, 2014 and December 31, 2013, the Board of Directors declared cash dividends as follows:

Regular Dividend
December 31, 2014
 
December 31, 2013
Second Quarter
$
0.05

 
$
0.10

Fourth Quarter
$

 
$
0.10


Our revolving loan agreement and term loan prohibit us from paying dividends or repurchasing common stock:

• for amounts in excess of $2.5 million in any twelve-month period;
• at times when there are no loans outstanding under the revolving loan agreement, if availability (on a pro forma basis) is less than $3.0 million; and
• at times when there are loans outstanding under the revolving loan agreement, if (a) availability (on a pro forma basis) is less than the greater of 30.0% of the revolving loan commitment or $2.25 million, (b) immediately after such dividend or repurchase, availability (on a pro forma basis) would be less than the greater of 30.0% of the revolving loan commitment or $2.25 million or (c) the FCCR is less than 1.1 to 1.0.

We estimate that our FCCR was less than 1.0 to 1.0 at February 28, 2015.

The following table sets forth, for the equity compensation plan categories listed below, information as of December 31, 2014:

Equity Compensation Plan Information
Plan Category
(a)
Number of securities to be issued upon exercise of outstanding options, warrants and rights1
 
(b)
Weighted-average
exercise price of outstanding options, warrants and rights1
 
(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders

 
$

 
1,570,776

Equity compensation plans not approved by security holders

 

 

Total

 
$

 
1,570,776

1 The information in this column excludes 227,257 restricted stock units outstanding as of December 31, 2014.

22



The following table sets forth certain information concerning repurchases of our common stock during the quarter ended December 31, 2014.

Issuer Purchases of Equity Securities (1)
Period
Total Number of
Shares Purchased
 
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2014 - October 31, 2014

 
$

 

 
1,005,578

November 1, 2014 -November 30, 2014

 

 

 
1,005,578

December 1, 2014 -December 31, 2014

 

 

 
1,005,578

Total

 
$

 

 
1,005,578

(1) On September 10, 1998, our Board of Directors approved a share repurchase program pursuant to which we were originally authorized to repurchase up to 500,000 shares of common stock in open market transactions. From June 1999 to June 2006 the Board of Directors increased the authorization under this repurchase program five times (on June 8, 1999 to increase the authorization by 500,000 shares to 1.0 million shares; on March 30, 2000 to increase the authorization by 500,000 shares to 1.5 million shares; on December 14, 2000 to increase the authorization by 500,000 shares to 2.0 million shares; on April 4, 2002 to increase the authorization by 1.0 million shares to 3.0 million shares; and on June 7, 2006 to increase the authorization by 3.0 million shares to 6.0 million shares). On December 13, 2007, the Board of Directors authorized a new repurchase program, for 3.0 million shares, which became effective after we exhausted the authorized amount under the old repurchase program. As of December 31, 2014, we have purchased a total of 7,994,422 shares of common stock under the old and new repurchase programs. The new repurchase program does not have an expiration date. We intend to make further purchases under our repurchase program from time to time. Our revolving loan agreement and term loan limit and restrict our ability to repurchase our common stock. The amounts set forth in this paragraph have been adjusted to give effect to the 1-for-4 reverse stock split implemented in January 2009 and the 2-for-1 stock split implemented in June 2012.

23


Performance Graph

The performance graph set forth below reflects the yearly change in the cumulative total stockholder return (price appreciation and reinvestment of dividends) on our common stock compared to the Standard and Poor’s (“S&P”) 500 Index and the S&P SmallCap 600 Index. The graph assumes the investment of $100 in common stock and the reinvestment of all dividends paid on such common stock into additional shares of common stock and such indexes. We believe that it is appropriate to compare us to companies comprising the S&P SmallCap 600 Index, the index we are currently tracked in by S&P.

24


Item 6. Selected Financial Data

Set forth below are selected summary consolidated financial and operating data which have been derived from our audited financial statements.  The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Report. The per share amounts and number of shares outstanding have been retroactively adjusted to give effect to the 2-for-1 stock split implemented June 15, 2012.

In December 2011, we changed our fiscal year-end from January 31 to December 31. In addition, we have eliminated the lag differences in the reporting year-ends of certain of our subsidiaries to align them with our other subsidiaries fiscal year-end.
 
Years ended December 31,
 
Eleven Months ended December 31,
 
Year ended January 31,
(In thousands, except per share and percent data)
2014
 
2013
 
2012
 
2011
 
2011
 
2011
Statement of Earnings Data:
 
 
(2)
 
(2)
 
(Unaudited)
 
(2)
 
(2)
Net sales
$
490,020

 
$
534,262

 
$
555,980

 
$
648,498

 
$
601,781

 
$
701,450

Gross profit
307,240

 
334,676

 
343,303

 
402,269

 
375,091

 
438,102

  Operating profit (1)
7,097

 
11,890

 
4,015

 
24,660

 
29,744

 
50,060

  Earnings (loss) from continuing operations before income taxes and noncontrolling interest (3)
(3,512
)
 
6,536

 
351

 
18,398

 
20,449

 
43,438

Earnings (loss) from continuing operations
(24,583
)
 
(200
)
 
3,001

 
21,455

 
22,695

 
28,780

Less: Net earnings attributable to noncontrolling interests
343

 
313

 
281

 
280

 
257

 
225

  Earnings (loss) from discontinued operations
111,687

 
2,946

 
41,282

 
(7,425
)
 
(6,212
)
 
(1,964
)
Net earnings attributable to Blyth, Inc.
86,761

 
2,433

 
44,002

 
13,750

 
16,226

 
26,591

Per share data:
 
 
 
 
 
 
 
 
 
 
 
Diluted net earnings (loss) from continuing operations
$
(1.54
)
 
$
(0.03
)
 
$
0.16

 
$
1.27

 
$
1.34

 
$
1.68

Diluted net earnings (loss) from discontinued operations
6.91

 
0.18

 
2.39

 
(0.45
)
 
(0.37
)
 
(0.12
)
Diluted net earnings attributable per share of Blyth, Inc.
$
5.37

 
$
0.15

 
$
2.55

 
$
0.83

 
$
0.97

 
$
1.56

Cash dividends declared, per share
0.05

 
0.20

 
0.18

 
0.85

 
0.85

 
0.60

Diluted weighted average number of common shares outstanding
16,165

 
16,228

 
17,247

 
16,656

 
16,656

 
17,017

Operating Data:
 

 
 
 
 

 
 

 
 

 
 

Gross profit margin
62.7
%
 
62.6
%
 
61.7
%
 
62.0
%
 
62.3
%
 
62.5
%
Operating profit margin
1.4
%
 
2.2
%
 
0.7
%
 
3.8
%
 
4.9
%
 
7.1
%
Net capital expenditures
$
2,867

 
$
3,061

 
$
9,098

 
$
6,294

 
$
5,786

 
$
7,913

Depreciation and amortization
8,322

 
9,889

 
10,132

 
10,785

 
9,774

 
10,976

Balance Sheet Data:
 

 
 
 
 

 
 

 
 

 
 

Total assets
$
287,353

 
$
366,841

 
$
436,114

 
$
515,294

 
$
515,294

 
$
508,835

Total debt
55,463

 
56,278

 
78,190

 
99,883

 
99,883

 
107,618

Total stockholders' equity
$
133,571

 
$
45,622

 
$
58,536

 
$
153,798

 
$
153,798

 
$
252,868


(1) Calendar year 2012 and 2011 and fiscal 2011 earnings include restructuring charges recorded in the Candles & Home Décor segment of $3.2 million, $3.0 million and $0.8 million, respectively.
(2) In September 2014, we entered into a recapitalization agreement with ViSalus that reduced our ownership in ViSalus from approximately 80.9% to 10.0%. In 2012, we sold our Sterno business and in 2011 we sold substantially all of the net assets of Midwest-CBK and disposed of the assets and liabilities of the Boca Java business as more fully detailed in Note 3 to the Consolidated
Financial Statements.  The results of operations for these businesses have been reclassified to discontinued operations for all periods presented.
(3) In 2013, we paid make-whole interest expense of $1.2 million for the early retirement of our 5.50% Senior Notes recorded in Interest Expense. In addition, in 2012, we recorded a $1.9 million impairment on a promissory note in addition to other adjustments of $0.3 million, for a net write-down of $1.6 million recorded in Foreign exchange and other.

25


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

The financial and business analysis below provides information that we believe is relevant to an assessment and understanding of our consolidated financial condition, changes in financial condition and results of operations. This financial and business analysis should be read in conjunction with our Consolidated Financial Statements and accompanying notes set forth in Item 8 “Financial Statements and Supplementary Data.”

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 health, wellness and beauty related products. Our products can be found primarily throughout the United States, Canada, Mexico, Europe and Australia. Our financial results are reported in two segments: the Candles & Home Décor segment (PartyLite) and the Catalog & Internet segment (Silver Star Brands).

On September 4, 2014, we entered into a recapitalization agreement with the ViSalus founders and certain other preferred stockholders to exchange the ViSalus redeemable preferred stock for ViSalus common stock, which reduced our ownership in ViSalus from approximately 80.9% to 10.0%. In 2012, we divested our Sterno business. These transactions are more fully detailed in Note 3 to the Consolidated Financial Statements. The results of operations for these businesses have been presented as discontinued operations for all periods presented.

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 both segments of our business. In the Candles & Home Décor segment, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants. 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.

Segments

Within the Candles & Home Décor segment, we design, manufacture or source, market and distribute 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 predominately through networks of independent sales consultants. PartyLite brand products are primarily sold in the United States, Canada, Mexico, Europe and Australia.

Within the Catalog & Internet segment, under the Silver Star Brands name, we design, source and market 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®, Exposures® and Native Remedies® brands. These products are sold in the United States and Canada.

The following table sets forth, for the periods indicated, the percentage relationship to net sales and the percentage increase or decrease of certain items included in our Consolidated Statements of Earnings:

 
Percentage of Net Sales (1)
Percentage Increase (Decrease) from Prior Period
 
Years ended
 
 
12/31/2014
 
12/31/2013
 
12/31/2012
 
12/31/14 compared to 12/31/13
 
12/31/13 compared to 12/31/12
Net sales
100.0

 
100.0

 
100.0

 
(8.3
)
 
(3.9
)
Cost of goods sold
37.3

 
37.4

 
38.3

 
(8.4
)
 
(6.2
)
Gross profit
62.7

 
62.6

 
61.7

 
(8.2
)
 
(2.5
)
Selling
45.7

 
45.1

 
44.8

 
(7.1
)
 
(3.3
)
Administrative
15.6

 
15.3

 
16.2

 
(6.6
)
 
(9.1
)
Operating profit
1.4

 
2.2

 
0.7

 
(40.3
)
 
196.1

Earnings (loss) from continuing operations
(5.1
)
 
(0.1
)
 
0.5

 
4,758.9

 
(118.9
)

26


(1)  In 2014 we entered into a recapitalization agreement with ViSalus and in 2012, we sold our Sterno business as more fully detailed in Note 3 to the Consolidated Financial Statements.  The results of operations for these businesses have been reclassified to discontinued operations for all periods presented.

For the year ended December 31, 2014 compared to the year ended December 31, 2013

Net Sales
 
Net sales decreased 8%, or approximately $44.3 million, to $490.0 million for the year ended December 31, 2014 from $534.3 million for the year ended December 31, 2013 primarily due to a decrease in the Candles & Home Décor segment and to a much lesser extent a decrease in the Catalog & Internet segment.

Net Sales – Candles & Home Décor Segment

Net sales for PartyLite decreased $43.2 million, or 11%, to $347.6 million for the year ended December 31, 2014 from $390.8 million in the prior year. This decline was principally due to a decrease at PartyLite North America of 20% and a decrease at PartyLite Europe of 8%, or down 6% in local currency. These declines were principally due to a reduction in consultant counts which resulted in a lower number of shows. Net sales at PartyLite Australia were down 2% compared to last year in U.S. dollars, however sales increased 4% in local currency.

PartyLite's European active independent sales consultants decreased to approximately 27,600 at December 31, 2014 from approximately 30,200 at December 31, 2013. North American active independent sales consultants decreased to approximately 14,800 at December 31, 2014 from approximately 16,800 at December 31, 2013.

Net sales in the Candles & Home Décor segment accounted for approximately 71% of total Blyth net sales for the year ended December 31, 2014 compared to 73% in the prior year.

Net Sales – Catalog & Internet Segment

Net sales for Silver Star Brands decreased $1.1 million, or 1%, to $142.4 million for the year ended December 31, 2014 from $143.5 million in the prior year reflecting a higher number of sales orders deferred this year versus the prior year partly offset by increases associated with health, wellness and beauty products and increased sales on preferred credit. Net sales in the Catalog & Internet segment accounted for approximately 29% of total Blyth net sales for the year ended December 31, 2014 compared to 27% in the prior year.

Gross Profit and Operating Expenses

Blyth’s consolidated gross profit decreased $27.5 million, or 8%, to $307.2 million for the year ended December 31, 2014 from $334.7 million for the year ended December 31, 2013. This decrease was principally due to the impact of lower sales, as well as a one-time fixed asset impairment charge of $0.6 million on certain machinery and equipment located at the Cumbria, United Kingdom facility. Gross margin increased to 62.7% for the year ended December 31, 2014 from 62.6% for the prior year primarily due to the implementation of various cost saving programs.
 
Blyth’s consolidated selling expenses decreased $17.2 million, or approximately 7%, to $223.7 million for the year ended December 31, 2014 from $240.9 million for the year ended December 31, 2013. This decrease was primarily due to lower commission expenses at PartyLite associated with their sales decline.  Selling expenses as a percentage of net sales increased to 45.7% from 45.1% when compared to the prior year. This increase was mainly due to the impact of a lower sales base.

Blyth’s consolidated administrative and other expenses decreased $5.4 million, or 7%, to $76.4 million for the year ended December 31, 2014 from $81.8 million for the year ended December 31, 2013. This decline was principally due to lower administrative overhead and other cost saving initiatives throughout the company. Administrative expenses as a percentage of net sales increased to 15.6% for the year ended December 31, 2014 from 15.3% for the prior year. This increase was mainly due to the impact of a lower sales base.

Blyth’s consolidated operating profit decreased $4.8 million to $7.1 million for the year ended December 31, 2014 from $11.9 million for the year ended December 31, 2013. This decrease was principally due to lower sales and operating profit at PartyLite partly offset by a decrease in operating losses at Silver Star Brands.

Operating Profit – Candles & Home Décor Segment

27


 
Operating profit for PartyLite was $7.5 million for the year ended December 31, 2014 versus $14.8 million for the prior year, a decline of $7.3 million. This decrease was principally due to the impact of sales declines at PartyLite Europe and PartyLite North America.  In addition to the impact of lower sales, PartyLite Europe was affected by the stronger U.S. dollar, which negatively impacted full year 2014 profits by approximately $1.8 million. These decreases were partly offset by cost reduction programs. Included in this year's operating profit is a one-time fixed asset impairment of $0.6 million on certain machinery and equipment located at the Cumbria, United Kingdom facility. Corporate expenses charged to PartyLite were $10.1 million this year and $12.2 million last year.
 
Operating Loss – Catalog & Internet Segment

Operating loss for Silver Star Brands was $0.4 million for the year ended December 31, 2014 versus a $2.9 million loss for the prior year. This improvement was due to reduced promotional expenses, lower catalog costs due to shifts to eCommerce, an increase in proprietary sales of health, wellness and beauty products that carry higher gross margins than general merchandise products, and higher credit sales. Corporate expense charged to Silver Star Brands were $3.9 million this year and $4.5 million last year.
 
Other Expense (Income)

Interest expense increased $1.0 million to $7.0 million for the year ended December 31, 2014 from $6.0 million in the prior year. This increase was principally due to charges associated with the debt modification of our 6.00% Senior Notes, which were originally due in 2017. Additional charges this year relate to accelerated amortization of previously deferred costs of $1.2 million, as well as an accrual of a prepayment of $2.0 million premium paid to the Senior Notes holder in March 2015. Partly offsetting these fee increases was the charge of last year's make-whole interest payment on the early retirement of the 5.50% Senior Notes of $1.2 million, as well as the impact of lower outstanding debt this year as compared to last year.
 
Interest income decreased $0.1 million to $0.5 million for the year ended December 31, 2014 from $0.6 million in the prior year, mainly due to lower invested average cash balances.

Foreign exchange and other expense was $4.0 million for the year ended December 31, 2014 compared to income of $0.1 million in the prior year. This increased expense was due to a $2.9 million impairment charge this year on our ViSalus investment as well as this year's foreign exchange losses mainly resulting from the U.S. dollar strengthening. Last year's income included losses on the sale of investments of $0.3 million.

Income tax expense increased $14.4 million to $21.1 million for the year ended December 31, 2014 from $6.7 million in the prior year. The effective tax rate was 600.0% in 2014 compared to 103.1% for 2013. The increase in the effective tax rate was due primarily to a valuation allowance which was recorded in the fourth quarter of 2014 on foreign tax credits of $19.6 million.

The net earnings from discontinued operations for the year ended December 31, 2014 were $111.7 million compared to $2.9 million in the prior year. The net earnings for the year ended December 31, 2014 from discontinued operations includes $118.9 million related to the gain on the ViSalus recapitalization during the period through its recapitalization date partly offset by operating losses from ViSalus of $7.2 million. The ViSalus recapitalization was non-cash and was treated as a tax free exchange as the preferred stockholders received ViSalus common stock in exchange for their preferred stock.

The net earnings attributable to noncontrolling interests remained constant at $0.3 million for the year ended December 31, 2014 and 2013.

Net earnings attributable to Blyth, Inc. increased $84.4 million to $86.8 million for the year ended December 31, 2014 from $2.4 million in the prior year.  This increase is primarily attributable to the gain from the ViSalus recapitalization of $118.9 million partly offset by discontinued operations net loss of $7.2 million, higher tax expense of $14.4 million, higher other expenses of $5.3 million and lower operating profit of $4.8 million.

For the year ended December 31, 2013 compared to the year ended December 31, 2012

Net Sales
 
Net sales decreased 4%, or approximately $21.7 million, to $534.3 million for the year ended December 31, 2013 from $556.0 million for the year ended December 31, 2012 due to a 6% decrease in the Candles & Home Décor segment. Net sales in our Catalog & Internet segment increased 3% over the prior year.

28



Net Sales – Candles & Home Décor Segment

Net sales for PartyLite decreased $26.5 million, or 6%, to $390.8 million for the year ended December 31, 2013 from $417.3 million for the year ended December 31, 2012. This decline was mainly due to a 17% decline in North American sales due to a decline in active independent sales consultants to approximately 17,000 at December 31, 2013 from approximately 19,000 at December 31, 2012, as well as fewer shows, which results in fewer opportunities to promote our products and recruit new consultants.

In PartyLite’s European markets sales declined 6% in local currency or 2% in U.S. dollars mainly due to lower sales within the larger, more mature markets partly offset by higher sales in Austria and Finland. In addition, PartyLite Australia sales increased 27% in local currency or 17% in U.S. dollars mainly due to growing consultant counts. PartyLite's European independent consultant count was over 30,000 at December 31, 2013 and at December 31, 2012.

Net sales in the Candles & Home Décor segment accounted for approximately 73% of total Blyth net sales for the year ended December 31, 2013 compared to 75% for the year ended December 31, 2012.

Net Sales – Catalog & Internet Segment

Net sales for Silver Star Brands increased $4.8 million, or 3%, to $143.5 million for the year ended December 31, 2013 from $138.7 million for the year ended December 31, 2012. This increase was primarily due to the improved performance of our health, wellness and beauty products as well as higher sales associated with the credit program. These increases were partly offset by lower general merchandise sales. Net sales in the Catalog & Internet segment accounted for approximately 27% of total Blyth net sales for the year ended December 31, 2013 compared to 25% for the year ended December 31, 2012.

Gross Profit and Operating Expenses

Blyth’s consolidated gross profit decreased $8.6 million, or 3%, to $334.7 million for the year ended December 31, 2013 from $343.3 million for the year ended December 31, 2012. This decrease was principally due to the impact of lower sales. In addition, gross margin increased to 62.6% for the year ended December 31, 2013 from 61.7% for the year ended December 31, 2012 due to improvements at PartyLite and Silver Star Brands.
 
Blyth’s consolidated selling expenses decreased $8.3 million, or approximately 3%, to $240.9 million for the year ended December 31, 2013 from $249.2 million for the year ended December 31, 2012. This decrease was primarily due to lower commission expenses at PartyLite associated with its sales declines. Selling expenses as a percentage of net sales increased to 45.1% from 44.8% for the year ended December 31, 2012 principally due to lower sales.

Blyth’s consolidated administrative and other expenses decreased $8.3 million, or 9%, to $81.8 million for the year ended December 31, 2013 from $90.1 million for the year ended December 31, 2012. This decline was due to prior year charges at PartyLite associated with the realignment of the North American distribution center. In addition, corporate expenses declined from the prior year due to cost saving initiatives as well as the elimination of executive and employee bonuses. Administrative expenses as a percentage of net sales decreased to 15.3% for the year ended December 31, 2013 from 16.2% for the year ended December 31, 2012 principally due to cost saving initiatives.

Blyth’s consolidated operating profit increased $7.9 million to $11.9 million for the year ended December 31, 2013 from $4.0 million for the year ended December 31, 2012.  This increase was principally due to an increase in operating profit at PartyLite and a decrease in operating loss at Silver Star Brands. In addition, prior year's operating profit includes PartyLite's restructuring charges of $3.2 million associated with the realignment of the North American distribution center and Silver Star Brands' intangible impairment charge of $0.8 million.

Operating Profit – Candles & Home Décor Segment
 
Operating profit for PartyLite increased to $14.8 million for the year ended December 31, 2013 from $12.3 million for the year ended December 31, 2012. Prior year profit includes restructuring charges of $3.2 million associated with the realignment of the North American distribution center. Corporate expenses charged to PartyLite were $12.2 million for the year ended December 31, 2013 and $15.7 million for the year ended December 31, 2012.
 
Operating Loss – Catalog & Internet Segment


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Operating loss for Silver Star Brands decreased to $2.9 million for the year ended December 31, 2013 from $8.3 million for year ended December 31, 2012. This improvement was principally due to the impact of increased sales. In addition, last year's loss includes an intangible impairment charge of $0.8 million. Corporate expense charged to Silver Star Brands were $4.5 million for the year ended December 31, 2013 and $5.8 million for the year ended December 31, 2012.
 
Other Expense (Income)

Interest expense decreased $0.1 million to $6.0 million for the year ended December 31, 2013 from $6.1 million for year ended December 31, 2012. This decline was due to lower average outstanding debt this year versus last year offset by a make-whole interest charge of $1.2 million incurred in 2013 associated with the early retirement of the 5.50% senior notes settled in July 2013.
 
Interest income decreased $1.1 million to $0.6 million for the year ended December 31, 2013 from $1.7 million for year ended December 31, 2012, mainly due to lower invested average cash balances as well as prior year's interest income of $0.7 million received on a promissory note.

Foreign exchange and other income was $0.1 million for the year ended December 31, 2013 compared to $0.7 million for year ended December 31, 2012. This decline was due to this year's losses on the sale of investments of $0.3 million compared to last year's gain on the sale of investments of $1.0 million.

Income tax expense increased $9.4 million to $6.7 million for the year ended December 31, 2013 from a benefit of $2.7 million for the year ended December 31, 2012.  The effective tax rate was 103.1% in 2013 compared to negative 755.0% for 2012. This increase was due primarily to increased nondeductible foreign losses as well as the tax impact of a dividend received from ViSalus, a non-consolidated subsidiary for income tax purposes.

The net earnings from discontinued operations was $2.9 million for the year ended December 31, 2013 compared to $41.3 million for the year ended December 31, 2012. The net earnings for the year ended December 31, 2012 include $5.5 million related to the gain on sale of Sterno.

The net earnings attributable to noncontrolling interests remained constant at $0.3 million for the years ended December 31, 2013 and 2012.

Net earnings attributable to Blyth, Inc. decreased $41.6 million to $2.4 million for the year ended December 31, 2013 from $44.0 million for the year ended December 31, 2012.  This decrease was primarily attributable to ViSalus's decreased operating performance within discontinued operations partly offset by improved operating results at PartyLite and Silver Star Brands.

Seasonality

Our businesses are seasonal in nature and, as a result, the net sales and working capital requirements of our businesses fluctuate from quarter to quarter. Our Candles & Home Décor and Catalog & Internet businesses tend to achieve their strongest sales in the third and fourth quarters due to increased shipments to meet year-end holiday season demand for our products.We expect the seasonality of our businesses to continue in the future, which may cause period-to-period fluctuations in certain of our operating results and limit our ability to predict our future results accurately.

Liquidity and Capital Resources

Cash and cash equivalents decreased $12.6 million to $94.3 million at December 31, 2014 from $106.9 million at December 31, 2013. This decrease in cash was primarily attributed to net purchases of short-term investments, foreign exchange losses and capital expenditures. These payments were partly offset by positive cash flow from operations. Cash held in foreign locations was approximately $47 million and $53 million as of December 31, 2014 and 2013, respectively.

We typically generate positive cash flow from operations due to favorable gross margins and the variable nature of selling expenses, which constitute a significant percentage of operating expenses. We generated $14.7 million in cash from continuing operations for the year ended December 31, 2014 compared to $12.2 million for the year ended December 31, 2013. Cash from continuing operations reflects an increase mainly due to lower working capital requirements primarily in inventories.  Included in earnings for the year ended December 31, 2014 were non-cash charges for depreciation and amortization of $8.3 million and stock-based compensation of $1.2 million.
 

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Net cash used by investing activities from continuing operations was $14.0 million for the year ended December 31, 2014, compared to cash provided by investing activities of $29.5 million for the year ended December 31, 2013. Cash used in investing activities mainly reflects net purchases of investments of $11.1 million and capital expenditures of $2.9 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 $23.8 million offset by capital expenditures of $3.1 million.

Net cash used in financing activities from continuing operations for the year ended December 31, 2014 was $1.8 million compared to $36.0 million for the year ended December 31, 2013. This year's activity includes dividend payments of $0.8 million as well as repayments on long-term debt and lease obligations of $0.8 million. Prior year's cash primarily reflected repayments on long-term debt and lease obligations of $72.7 million mainly due to the early retirement of our 5.50% senior notes, treasury stock repurchases of $10.0 million and dividend payments of $3.2 million partly offset by borrowing on long term debt of $50.0 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 our revolving loan agreement and term loan. Our revolving loan agreement and term loan prohibit us from paying dividends and repurchasing our common stock under certain circumstances.

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 consultants. Management's key areas of focus have included stabilizing and increasing the consultant base within PartyLite through training and promotional incentives. PartyLite has had several continuous years of decline in the United States and Canada. While we are making efforts to stabilize and increase the number of active independent sales consultants within PartyLite, it may be difficult to do so. If PartyLite's consultant count continues to decline it will have a negative impact on our liquidity and financial results.

In connection with the ViSalus recapitalization, we agreed to make available to ViSalus a revolving credit facility. On October 17, 2014, we and ViSalus entered into a revolving loan agreement (the “Blyth Revolving Loan Agreement”) pursuant to which we agreed to lend ViSalus up to $6.0 million. Loans under the Blyth Revolving Loan Agreement bear interest at a rate of 10% per annum. Interest will be paid monthly, in arrears, and there is no higher default rate of interest. The Blyth Revolving Loan Agreement will terminate on the later of (i) October 17, 2019 or (ii) resolution of the putative class action that is pending against ViSalus and others in the United States District Court in the Eastern District of Michigan, Southern Division (the “ViSalus Lawsuit”). Loans made under the Blyth Revolving Loan Agreement may be voluntarily repaid and the Blyth Revolving Loan Agreement may be terminated by ViSalus, subject to certain conditions. Loans made under the Blyth Revolving Loan Agreement will be unsecured. On October 17, 2014, the founders of ViSalus and Robert B. Goergen (the “Founder Lenders”) entered into a substantially similar loan agreement with ViSalus (the “Founder Revolving Loan Agreement”) pursuant to which they made a revolving credit facility available to ViSalus in an amount up to $6.0 million on terms that are substantially identical to the terms of the Blyth Revolving Loan Agreement. Loans made under the Blyth Revolving Loan Agreement and loans made under the Founder Revolving Loan Agreement will be made at the same time in equal amounts and will rank equally with each other. There are no financial performance covenants under the Blyth Revolving Loan Agreement and limited negative covenants. ViSalus is permitted to obtain financing from other parties, whether that financing is secured or unsecured. In addition, we agreed to reimburse and pay on behalf of ViSalus 80% of the legal fees and disbursements reasonably charged by ViSalus’s legal counsel and reasonable out-of-pocket expenses incurred by ViSalus in defending ViSalus and certain others against the claims asserted by the plaintiffs in the ViSalus Lawsuit, up to a maximum amount of $4.0 million.

On May 10, 2013, we issued $50.0 million principal amount of 6.00% Senior Notes. The Senior Notes bore interest payable semi-annually in arrears on May 15 and November 15. In connection with the ViSalus recapitalization, we amended the indenture governing the Senior Notes to provide for notice of the mandatory redemption of the Senior Notes on the earlier of March 4, 2015 or the date, if any, that we consummated a new financing in the amount of at least $50.0 million. In early March 2015, we provided the notice of the mandatory redemption of the Senior Notes, which became due and were repaid on March 10, 2015. As a result, we were also required to pay a $3.0 million redemption premium in addition to accrued interest. In addition, to secure the obligations under the indenture, we granted a security interest to the lender in substantially all of our personal property and certain of our real property. 

On March 9, 2015, we, together with all of our domestic subsidiaries, except the subsidiary through which we hold our interest in ViSalus, entered into a term loan and security agreement, which we refer to as the term loan, with GFIE, LLC, as term lender. The agreement provides for a five-year term loan in an original principal amount equal to $35.0 million. The obligations under

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the term loan are secured by, among other assets, (i) a first priority lien on and security interest in PartyLite’s manufacturing facility in Batavia, IL, intellectual property and various stock and other equity interests and (ii) a second priority lien on and security interest in all accounts receivable, inventory, chattel paper, and deposit and securities accounts and PartyLite’s office building in Plymouth, MA. The term loan bears interest at a rate of the greater of 1.00% or LIBOR, in each case plus 5%. The principal amount of the term loan will be paid in installments as follows: beginning on March 31, 2016, and continuing on the last day of each calendar quarter thereafter, up to and including December 31, 2019, we will pay equal quarterly installments of $437,500. The entire remaining balance of principal and accrued interest on the term loan, and all other charges and/or amounts then due in connection with the term loan, will be due and payable in full on March 9, 2020. The term loan may be prepaid, in whole or in part, from time to time, without penalty or premium. In addition, commencing in 2017 (based on our 2016 results), we are required to prepay the term loan annually in an amount up to 25% of “excess cash flow,” if any. For these purposes, excess cash flow is our consolidated EBITDA for the most recently completed fiscal year, determined as set forth in the term loan, less certain capital expenditures, certain repayments of debt, certain interest expenses, and certain cash and other expenditures.

The term loan contains covenants that restrict, subject to certain exceptions, our and the domestic subsidiaries’ ability to, among other things: (i) incur indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) engage in certain dispositions or acquisitions of assets; (v) make investments, loans, guarantees or advances; (vi) pay dividends and distributions or repurchase our common stock; (vii) repay certain indebtedness; (viii) enter into sale and leaseback transactions; (ix) engage in certain transactions with affiliates; and (x) change the nature of our or the domestic subsidiaries’ business. In addition, the term loan (a) requires us to maintain a fixed charge coverage ratio (“FCCR”) upon the occurrence of certain events or conditions, (b) with certain exceptions, prohibits us from making acquisitions if the FCCR is less than 1.0 to 1.0, and (c) among other conditions, generally prohibits us from paying dividends or repurchasing our common stock:

• for amounts in excess of $2.5 million in any twelve-month period;
• at times when there are no loans outstanding under the revolving loan agreement, if availability (on a pro forma basis) is less than $3.0 million; and
• at times when there are loans outstanding under the revolving loan agreement, if (a) availability (on a pro forma basis) is less than the greater of 30.0% of the revolving loan commitment or $2.25 million, (b) immediately after such dividend or repurchase, availability (on a pro forma basis) would be less than the greater of 30.0% of the revolving loan commitment or $2.25 million or (c) the FCCR is less than 1.1 to 1.0.

We estimate that our FCCR was less than 1.0 to 1.0 at February 28, 2015. The term loan also contains certain additional affirmative, negative and financial covenants and events of default.    

On March 9, 2015, we and the domestic subsidiaries also entered into a loan and security agreement, which we refer to as the revolving loan agreement, with Bank of America, N.A., as revolver lender. The revolving loan agreement provides for an asset-based five-year revolving line of credit facility in an aggregate principal amount up to the lesser of $15.0 million or an amount determined by reference to a “borrowing base,” which deducts such reserves as the revolver lender may require in its reasonable discretion. Our borrowing base under the revolving loan agreement will be comprised principally of specified percentages of eligible inventory, accounts receivables and (once a required appraisal is received) PartyLite’s office building in Plymouth, MA. The obligations under the revolving loan agreement are secured by, among other assets, (i) a first priority lien on and security interest in accounts receivable, inventory, chattel paper and deposit and securities accounts, as well as PartyLite’s office building in Plymouth, MA, and (ii) a second priority lien on and security interest in various other assets, including PartyLite’s manufacturing facility in Batavia, IL, and our intellectual property and various stock and other equity interests.

We estimate that, based on the value of eligible inventory, accounts receivable and PartyLite’s office building in Plymouth, MA, as of January 31, 2015, subject to the receipt of the appraisal of that facility, our borrowing base would have been approximately $13.0 million.  As of the date hereof, we have not made any borrowings under the revolving loan agreement and have outstanding thereunder only an existing letter of credit for approximately $1.1 million.

Advances under the revolving loan agreement will bear interest at a rate equal to either (i) LIBOR plus an applicable margin ranging from 1.75% to 2.25% or (ii) a base rate equal, at the time of determination, to the greater of (a) the revolver lender’s prime rate; (b) the Federal Funds Rate (as defined) plus 0.50%; or (c) LIBOR for a 30 day interest period plus 1.00%, in each case plus an applicable margin ranging from 0.75% to 1.25%. All loans under the revolving loan agreement will be due and payable in full on March 9, 2020, and may be prepaid, in whole or in part, from time to time, without penalty or premium (except as may be necessary to cover certain funding losses in connection with LIBOR loans). If an overadvance, as determined pursuant to the revolving loan agreement, exists at any time, or accounts receivable are disposed of, we will be

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required to repay a portion of the loans under the revolving loan agreement determined as set forth in the revolving loan agreement.
    
The revolving loan agreement contains affirmative and negative covenants that are substantially similar to those contained in the term loan and that restrict our and the domestic subsidiaries, and impose obligations on us and them, in the same manner. The revolving loan agreement also contains certain customary events of default that are substantially similar to those contained in the term loan. Loans under the revolving loan agreement will be used primarily for working capital and other general corporate purposes.

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 and domestic 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, goodwill and other intangibles, if the valuations of these assets or businesses decline.

As of December 31, 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 December 31, 2014, no amount was outstanding under this facility.

As of December 31, 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 December 31, 2014 and 2013, Silver Star Brands had approximately $4.9 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 following table summarizes the maturity dates of our contractual obligations as of December 31, 2014:
 
Payments Due by Period
Contractual Obligations (In thousands)
Total
 
Less than 1 year
 
1 - 3 Years
 
4 - 5 Years
 
More than 5 Years
  Long-Term Debt(1)
$
54,852

 
$
50,734

 
$
1,652

 
$
1,933

 
$
533

  Capital Leases(2)
611

 
173

 
294

 
144

 

  Interest(3)
4,716

 
3,887

 
564

 
253

 
12

  Purchase Obligations(4)
18,313

 
18,142

 
171

 

 

Operating Leases
18,423

 
5,068

 
6,592

 
4,575

 
2,188

  Unrecognized Tax Benefits(5)
2,791

 

 

 

 

Total Contractual Obligations
$
99,706

 
$
78,004

 
$
9,273

 
$
6,905

 
$
2,733

(1) Long-term debt includes 6.00% Senior Notes due 2015 and a mortgage note payable maturing June 1, 2020 (See Note 11 to the Consolidated Financial Statements).
(2) Amounts represent future lease payments, excluding interest, due on nine capital leases, which end between 2015 and 2019 (See Note 13 to the Consolidated Financial Statements).
(3) Interest expense on long-term debt is comprised of $3.5 million relating to Senior Notes, $1.1 million in mortgage interest, and approximately $71,000 of interest relating to future capital lease obligations.
(4) Purchase obligations consist primarily of open purchase orders for inventory.
(5) There are no unrecognized tax benefits expected to be realized within the next 12 months and $2.8 million for which we are not able to reasonably estimate the timing of the potential future payments (See Note 14 to the Consolidated Financial Statements).
 
On December 13, 2007, our Board of Directors authorized a new stock repurchase program for 3,000,000 shares in addition to 6,000,000 shares authorized under the previous plan. The new stock repurchase program became effective after we exhausted the authorized amount under the old repurchase program.  As of December 31, 2014, the cumulative total shares purchased under the new and old program was 7,994,422, at a total cost of approximately $275.0 million. The acquired shares are held as common stock in treasury at cost.

During the year ended December 31, 2014 we paid $0.8 million in dividends compared to $3.2 million in 2013.

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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

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to bad debts, sales adjustments, inventories, income taxes, restructuring and impairments, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.










































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Note 1 to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following are our critical accounting policies and methods.

Revenue Recognition

Revenues consist of sales to customers, net of returns and allowances.  We recognize revenue upon delivery, when both title and risk of loss are transferred to the customer. We present revenues net of any taxes collected from customers and remitted to government authorities. We also record revenue on financing fees from past due balances from financing receivables within our Catalog & Internet segment.

Generally, our sales are based on fixed prices from published price lists.  We record estimated reductions to revenue for customer promotions, volume incentives and other promotions.  Should market conditions decline, we may increase customer incentives with respect to future sales.  We also record reductions to revenue based primarily on historical experience, for estimated customer returns and chargebacks that may arise as a result of shipping errors, product damage in transit or for other reasons that can only become known subsequent to recognizing the revenue.  If the amount of actual customer returns and chargebacks were to increase significantly from the estimated amount, revisions to the estimated allowance would be required.  In some instances, we receive payment in advance of product delivery.  Such advance payments occur in both our direct selling and direct marketing channels and are recorded as deferred revenue in Accrued expenses in the Consolidated Balance Sheets.  Upon delivery of product for which advance payment has been made, the related deferred revenue is reversed and recorded as revenue.

We establish an allowance for doubtful accounts for customer receivables.  The allowance is determined based on our evaluation of specific customers’ ability to pay, aging of receivables, historical experience and the current economic environment. We believe we are adequately reserved for expected credit losses and will continue to take actions to reduce our exposure to credit losses. While we believe we have appropriately considered known or expected outcomes, our customers’ ability to pay their obligations, including those to us, could be adversely affected by contraction in the economy or a general decline in consumer spending.

The sales price for our products sold is fixed prior to the time of shipment to the customer.  Customers do not have the right to return product, except for rights to return that we believe are typical of our industry for such reasons as damaged goods, shipping errors or similar occurrences.

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. New financing originations, which represent the amounts of financing provided by the service provider to customers, were approximately $20.9 million and $14.8 million for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, our net financing receivables balances were $7.2 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.

We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. The allowance for credit losses is determined based on various factors, including 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 December 31, 2014 and 2013, the allowance for credit losses was $4.8 million and $3.0 million, respectively. Provisions for the allowance of credit losses are recorded to selling expenses for product sales. Interest income from financing or late fees is charged directly against net sales within the Consolidated Statements of Earnings. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage exposure to customer credit risk, including active management of credit lines and collection activities. Based on our assessment of the customer financing receivables, we believe we are adequately reserved. Write-offs were 11.5% and 23.7% of 2014 and 2013 sales, respectively. Our 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.

See Note 4 of the Notes to the Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional information about our financing receivables and the associated allowance.


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Inventory valuation

Inventories are valued at the lower of cost or market.  Cost is determined by the first-in, first-out method.  We write down our inventory for estimated obsolete, excess and unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions, customer programs and sales forecasts.  If market acceptance of our existing products or the successful introduction of new products should significantly decrease, additional inventory write-downs could be required.  Potential additional inventory write-downs could result from unanticipated additional quantities of obsolete finished goods and raw materials, and/or from lower disposition values offered by the parties who normally purchase surplus inventories.

Restructuring and impairment charges on long-lived assets

In response to changing market conditions and competition, our management regularly updates our business model and market strategies, including the evaluation of facilities, personnel and products. Future adverse changes in economic and market conditions could result in additional organizational changes and possibly additional restructuring and impairment charges. Historically, we have reviewed long-lived assets, including property, plant and equipment and other intangibles with definite lives for impairment whenever events or changes in circumstances indicated that the carrying amount of such an asset might not be recoverable.  Management determines whether there has been an impairment on long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or asset group to the carrying value of the asset.  For assets whose aggregate undiscounted cash flows are less than its carrying value, the assets are considered potentially impaired and actual impairments, if any, would be determined to the extent the assets carrying value exceeds its aggregate fair value. Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value. Assets or asset groups are determined at the lowest level possible for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Goodwill

We had approximately $2.3 million of goodwill as of December 31, 2014 and 2013.  Goodwill is subject to an assessment for impairment using a two-step fair value-based test, which is performed at least annually or more frequently if events or circumstances indicate that goodwill might be impaired.

The following circumstances could impact our cash flow and cause further impairments to reported goodwill:

unexpected increase in competition resulting in lower prices or lower volumes,
entry of new products into the marketplace from competitors,
lack of acceptance of our new products into the marketplace,
loss of a key employee or customer,
significantly higher raw material costs,
economic downturn, and
other micro/macroeconomic factors.

The December 31, 2014 impairment assessment of our $2.3 million of the goodwill within the Candles & Home Décor segment unit indicates that it is fully recoverable.

If actual revenue growth, profit margins, costs and capital spending should differ significantly from the assumptions included in our business outlook used in the cash flow models, the reporting unit’s fair value could fall significantly below expectations and additional impairment charges could be required to write down goodwill to its fair value and, if necessary, other long lived-assets could be subject to a similar fair value test and possible impairment. Long-lived assets represent primarily fixed assets and other long-term assets excluding goodwill and other intangibles.

Trade Names and Trademarks
 
Our trade name and trademark intangible assets relate to our acquisitions of Miles Kimball and Walter Drake (reported in the Catalog & Internet segment). We had approximately $6.6 million in trade names and trademarks as of December 31, 2014 and 2013.
 

36


On an annual basis we perform our assessment of impairment for indefinite-lived intangible assets, or upon the occurrence of a triggering event.  We use the relief from royalty method to estimate the fair value for indefinite-lived intangible assets. The underlying concept of the relief from royalty method is that the inherent economic value of intangibles is directly related to the timing of future cash flows associated with the intangible asset. Similar to the discounted cash flow methodology used to determine the fair value of goodwill, the fair value of indefinite-lived intangible assets is equal to the present value of after-tax cash flows associated with the intangible asset based on an applicable royalty rate. The royalty rate is determined by using existing market comparables for royalty agreements using an intellectual property data base. The arms-length agreements generally support a rate that is a percentage of direct sales. This approach is based on the premise that the free cash flow is a more valid criterion for measuring value than “book” or accounting profits.

As of December 31, 2014, we performed our annual impairment analysis on the trade names and trademarks of the Catalog & Internet assets. The three primary assumptions used in the relief from royalty method are the discount rate, the perpetuity growth rate and the royalty rate. This discount rate is used to value the expected net cash flows to be derived from the royalty to its net present value. The discount rate uses a rate of return to account for the time value of money and an investment risk factor. The perpetuity growth rate estimates the businesses' sustainable long-term growth rate. The royalty rate is based upon past royalty performance as well as the expected royalty growth rate using both macro and microeconomic factors surrounding the business. A change in the discount rate is often used by management to risk adjust the discounted cash flow analysis if there is a higher degree of risk that the estimated cash flows from the indefinite-lived intangible asset may not be fully achieved. These risks are often based upon the business units’ past performance, competition, position in the marketplace, acceptance of new products in the marketplace and other macro and microeconomic factors surrounding the business. If, however, actual cash flows should fall significantly below expectations, this could result in an impairment of our indefinite-lived intangible assets.

If the discount rate had increased by 0.5% and royalty rate had decreased by 0.25%, the estimated fair value of the trade names and trademarks within the Catalog & Internet segment would have decreased by $2.8 million to $7.2 million. This decrease would have required us to take an impairment charge of $0.5 million to write-down our indefinite lived intangibles to its estimated fair value. Conversely, if the discount rate had decreased by 0.5% and the royalty rate had increased by 0.25%, the estimated fair value of the trade names and trademarks within the Catalog & Internet segment would have increased by $3.1 million to $13.0 million, requiring us to take an impairment charge of $0.1 million to write-down our indefinite lived intangibles to its estimated fair value.

Accounting for income taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our actual current tax exposure (state, federal and foreign), together with assessing permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, investments, deductibility of expenses, depreciation of property and equipment, and valuation of inventories. Temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or change the allowance in a period, we would include this as an expense within the tax provision in the accompanying Consolidated Statements of Earnings. Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Amounts accrued for tax uncertainties, primarily recorded in long-term liabilities, total $2.8 million and $4.0 million at December 31, 2014 and 2013, respectively. Accruals relate to tax issues for U.S. federal, domestic state, and taxation of foreign earnings.

Our policy is to record deferred taxes on our unremitted foreign earnings in excess of amounts deemed required for working capital and expansion needs as these earnings are not considered indefinitely reinvested. We periodically reassess the working capital needs of our foreign subsidiaries and update our indefinite reinvestment assertion accordingly.

As of December 31, 2014, we determined that $176.5 million of cumulative undistributed foreign earnings were not reinvested indefinitely by our non-U.S. subsidiaries. An accumulated deferred tax liability has been recorded against these undistributed earnings of $1.1 million, which includes the impact of utilization of foreign tax credits.

Due to the various jurisdictions in which we file tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in the year ended December 31, 2014 but the amount cannot be estimated.

37


Item 7A. 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. International sales represented 58% of total sales for the year ended December 31, 2014.

Investment Risk

We are subject to investment risks on our investments due to market volatility.  As of December 31, 2014, we held $19.0 million of short-term bond mutual funds, which have been adjusted to fair value based on current market data. We also have a long-term cost basis investment in ViSalus of approximately $6.9 million which may be subject to future impairments based upon ViSalus' performance.
 
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 December 31, 2014 and 2013 was $4.1 million and $2.3 million, respectively.

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 no longer probable of occurring, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  The net after-tax unrealized gain included in AOCI at December 31, 2014 for cash flow hedges is $0.2 million and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment. The net after-tax 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 December 31, 2014:
(In thousands, except average contract rate)
U.S. Dollar Notional Amount
 
Average Contract Rate
 
Unrealized Gain
Euro
$
4,650

 
$
1.32

 
$
376

 
The foreign exchange contracts outstanding have maturity dates through October 2015.
 

38


Item 8. Financial Statements and Supplementary Data
 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Blyth, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of Blyth, Inc. and subsidiaries (“the Company”) as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
    
Stamford, Connecticut
March 16, 2015




39


                                                 BLYTH, INC. AND SUBSIDIARIES
                                             Consolidated Balance Sheets
 
 
 
(In thousands, except share and per share data)
December 31, 2014
 
December 31, 2013
ASSETS
 
 

Current assets:
 
 
 
Cash and cash equivalents
$
94,329

 
$
106,933

Short-term investments
18,961

 
7,985

Accounts receivable, less allowance for doubtful receivables of $5,481 and $3,932, respectively
11,133

 
12,556

Inventories
45,784

 
54,682

Prepaid assets
15,168

 
17,281

Other current assets
7,515

 
6,483

Discontinued operations

 
34,208

Total current assets
192,890

 
240,128

Property, plant and equipment, at cost:
 

 
 

Land and buildings
85,788

 
89,575

Leasehold improvements
6,371

 
6,460

Machinery and equipment
76,147

 
79,479

Office furniture, data processing equipment and software
51,063

 
51,988

Construction in progress
1,184

 
838

 
220,553

 
228,340

Less accumulated depreciation
152,287

 
151,514

 
68,266

 
76,826

Other assets:
 

 
 

Investments
7,951

 
1,070

Goodwill
2,298

 
2,298

Other intangible assets, net of accumulated amortization of $15,372 and $15,186, respectively
6,593

 
6,780

Deferred income taxes
624

 
4,369

Other assets
8,731

 
7,763

Discontinued operations

 
27,607

Total other assets
26,197

 
49,887

Total assets
$
287,353

 
$
366,841

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
50,907

 
$
952

Accounts payable
23,358

 
27,327

Accrued expenses
41,327

 
40,931

Income taxes payable
1,193

 
669

Deferred income taxes
4,086

 
648

Other current liabilities
8,387

 
9,604

Discontinued operations

 
23,966

Total current liabilities
129,258

 
104,097

Long-term debt, less current maturities
4,556

 
55,326

Deferred income taxes
7,309

 

Other liabilities
12,087

 
13,922

Discontinued operations

 
147,468

 
 
 
 
Stockholders' equity:
 

 
 

Common stock - authorized 50,000,000 shares of $0.02 par value; issued 26,642,250 shares and 26,574,031 shares, respectively
533

 
532

Additional contributed capital
169,897

 
168,732

Retained earnings
403,463

 
312,036

Accumulated other comprehensive income
11,849

 
16,362

Treasury stock, at cost, 10,572,020 shares and 10,557,342 shares, respectively
(452,171
)
 
(452,040
)
Total stockholders' equity
133,571

 
45,622

Noncontrolling interest
572

 
406

Total equity
134,143

 
46,028

Total liabilities and equity
$
287,353

 
$
366,841


The accompanying notes are an integral part of these Consolidated Financial Statements.
 

40


BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
 
For the year ended
(In thousands, except per share data)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
 
 

 

Net sales
$
490,020

 
$
534,262

 
$
555,980

Cost of goods sold
182,780

 
199,586

 
212,677

Gross profit
307,240

 
334,676

 
343,303

Selling
223,742

 
240,943

 
249,231

Administrative and other expense
76,401

 
81,843

 
90,057

Total operating expense
300,143

 
322,786

 
339,288

Operating profit
7,097

 
11,890

 
4,015

Other expense (income):
 

 
 

 
 

Interest expense
7,042

 
6,042

 
6,062

Interest income
(453
)
 
(616
)
 
(1,707
)
Foreign exchange and other, net
4,020

 
(72
)
 
(691
)
Total other expense
10,609

 
5,354

 
3,664

Earnings (loss) from continuing operations before income taxes and noncontrolling interest
(3,512
)
 
6,536

 
351

Income tax expense (benefit)
21,071

 
6,736

 
(2,650
)
Earnings (loss) from continuing operations
(24,583
)
 
(200
)
 
3,001

Earnings (loss) from discontinued operations, net of income tax expense
(7,231
)
 
2,946

 
35,742

Gain on sale of discontinued operations
118,918

 

 
5,540

Net earnings from discontinued operations
111,687

 
2,946

 
41,282

Net earnings
87,104

 
2,746

 
44,283

Less: Net earnings attributable to noncontrolling interests
343

 
313

 
281

Net earnings attributable to Blyth, Inc.
$
86,761

 
$
2,433

 
$
44,002

Basic earnings per share:
 

 
 

 
 

Net earnings (loss) from continuing operations
$
(1.55
)
 
$
(0.03
)
 
$
0.16

Net earnings from discontinued operations
6.93

 
0.18

 
2.40

Net earnings attributable per share of Blyth, Inc.
$
5.38

 
$
0.15

 
$
2.56

Weighted average number of shares outstanding
16,112

 
16,196

 
17,180

Diluted earnings per share:
 

 
 

 
 

Net earnings (loss) from continuing operations
$
(1.54
)
 
$
(0.03
)
 
$
0.16

Net earnings from discontinued operations
6.91

 
0.18

 
2.39

Net earnings attributable per share of Blyth, Inc.
$
5.37

 
$
0.15

 
$
2.55

Weighted average number of shares outstanding
16,165

 
16,228

 
17,247

Cash dividend declared per share
$
0.05

 
$
0.20

 
$
0.18


The accompanying notes are an integral part of these Consolidated Financial Statements.

41



BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
 
For the year ended
(In thousands)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 Net earnings
$
87,104

 
$
2,746

 
$
44,283

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments
(4,798
)
 
1,914

 
3,451

Net unrealized gain (loss) on certain investments
(109
)
 
(169
)
 
202

Net unrealized gain (loss) on cash flow hedging instruments
439

 
(154
)
 
(490
)
Less: Reclassification adjustments for (gain) loss included in net income
(45
)
 
370

 
(624
)
Other comprehensive income (loss)
(4,513
)
 
1,961

 
2,539

Total comprehensive income, net of tax
82,591

 
4,707

 
46,822

Less: net earnings attributable to noncontrolling interests
343

 
313

 
281

Comprehensive income attributable to Blyth, Inc.
$
82,248

 
$
4,394

 
$
46,541


The accompanying notes are an integral part of these Consolidated Financial Statements.


42


BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
 
Blyth, Inc.'s Stockholders
 
 
 
 
(In thousands)
Common
Stock
 
Additional
Contributed
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Noncontrolling
Interest
 
Total
Equity
Balance, December 31, 2011
$
514

 
$
147,790

 
$
420,349

 
$
11,862

 
$
(426,717
)
 
$
168

 
$
153,966

Net earnings for the year
 

 
 

 
44,002

 
 

 
 

 
281

 
44,283

Distribution to noncontrolling interest
 

 
 

 
 

 
 

 
 

 
(181
)
 
(181
)
Other comprehensive income
 

 
 

 
 

 
2,539

 
 

 
 

 
2,539

Stock-based compensation
2

 
4,676

 
 

 
 

 
 

 
 

 
4,678

Purchase of additional ViSalus interest
14

 
14,614

 
 

 
 

 
 

 
 

 
14,628

Reversal of accretion of redeemable noncontrolling interest, net
 
 
 
 
(2,396
)
 
 
 
 
 
 
 
(2,396
)
Issuance of redeemable preferred stock, net (2)
 
 
 
 
(140,644
)
 
 
 
 
 
 
 
(140,644
)
Dividends declared ($0.18 per share)
 

 
 

 
(3,012
)
 
 

 
 

 
 

 
(3,012
)
Treasury stock purchases (1)
 

 
 

 
 

 
 

 
(15,057
)
 
 

 
(15,057
)
Balance, December 31, 2012
$
530

 
$
167,080

 
$
318,299

 
$
14,401

 
$
(441,774
)
 
$
268

 
$
58,804

Net earnings for the year
 

 
 

 
2,433

 
 

 
 

 
313

 
313

Distribution to noncontrolling interest
 

 
 

 
 

 
 

 
 

 
(175
)
 
(175
)
Accretion to redemption value for ViSalus redeemable preferred stock
 
 
 
 
(5,471
)
 
 
 
 
 
 
 
(5,471
)
Other comprehensive income
 

 
 

 
 

 
1,961

 
 

 
 

 
1,961

Stock-based compensation
2

 
1,652

 
 

 
 

 
 

 
 

 
1,654

Dividends paid ($0.20 per share)
 

 
 

 
(3,225
)
 
 

 
 

 
 

 
(3,225
)
Treasury stock purchases (1)
 

 
 

 
 

 
 

 
(10,266
)
 
 

 
(10,266
)
Balance, December 31, 2013
$
532

 
$
168,732

 
$
312,036

 
$
16,362

 
$
(452,040
)
 
$
406

 
$
46,028

Net earnings for the year
 

 
 

 
86,761

 
 

 
 

 
343

 
87,104

Distribution to noncontrolling interest
 

 
 

 
 

 
 

 
 

 
(177
)
 
(177
)
Reversal of accretion to redemption value for ViSalus redeemable preferred stock and dividends paid in excess of income earned
 
 
 
 
5,471

 
 
 
 
 
 
 
5,471

Other comprehensive loss
 

 
 

 
 

 
(4,513
)
 
 

 
 

 
(4,513
)
Stock-based compensation
1

 
1,165

 
 

 
 

 
 

 
 

 
1,166

Dividends paid ($0.05 per share)
 

 
 

 
(805
)
 
 

 
 

 
 

 
(805
)
Treasury stock purchases (1)
 

 
 

 
 

 
 

 
(131
)
 
 

 
(131
)
Balance, December 31, 2014
$
533

 
$
169,897

 
$
403,463

 
$
11,849

 
$
(452,171
)
 
$
572

 
$
134,143

(1) This includes shares withheld in order to satisfy employee withholding taxes upon the distribution of vested restricted stock units.
(2) Net amount includes $5.8 million reclassed from accrued expenses to equity as a result of a stock award settlement previously accounted for as a liability and satisfied with the redeemable preferred stock.
The accompanying notes are an integral part of these Consolidated Financial Statements. 

43


BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 
For the year ended
(In thousands)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Cash flows from operating activities:
 
 

 

Earnings (loss) from continuing operations
$
(24,583
)
 
$
(200
)
 
$
3,001

Adjustments to reconcile earnings to net cash provided by (used in) operating activities:
 

 
 

 
 

Depreciation and amortization
8,322

 
9,889

 
10,132

Loss (gain) on sale of assets
75

 
429

 
(582
)
Stock-based compensation expense of Blyth, Inc.
1,166

 
1,654

 
2,704

Deferred income taxes
14,472

 
1,793

 
(1,797
)
Loss on impairment of assets
3,475

 

 
834

Changes in operating assets and liabilities:
 

 
 

 
 

Accounts receivable
896

 
(3,525
)
 
(4,838
)
Inventories
6,627

 
(717
)
 
16,442

Prepaid and other
1,450

 
(443
)
 
2,423

Other long-term assets
1,986

 
(1,225
)
 
(648
)
Accounts payable
(2,731
)
 
(2,309
)
 
(1,412
)
Accrued expenses
642

 
(4,622
)
 
(5,861
)
Income taxes payable
186

 
169

 
(572
)
Other liabilities and other
2,764

 
11,351

 
(4,706
)
Net cash provided by operating activities of continuing operations
14,747

 
12,244

 
15,120

Net cash provided by (used in) operating activities of discontinued operations
(8,992
)
 
35,259

 
28,570

Net cash provided by operating activities
5,755

 
47,503

 
43,690

Cash flows from investing activities:
 

 
 

 
 

Purchases of property, plant and equipment, net of disposals
(2,867
)
 
(3,061
)
 
(9,098
)
Proceeds from collection of note receivable

 
10,000

 

Purchases of short-term investments
(20,032
)
 
(20,810
)
 
(63,233
)
Proceeds from sale of short-term investments
8,900

 
44,550

 
66,090

Proceeds from sale of discontinued operations

 

 
23,500

Cash settlement of net investment hedges

 
(1,356
)
 
(1,874
)
Proceeds from sales of assets
10

 
29

 
539

Proceeds from sale of long-term investments

 
105

 
3,611

Net cash provided by (used in) investing activities of continuing operations
(13,989
)
 
29,457

 
19,535

Net cash provided by (used in) investing activities of discontinued operations
3,135

 
(9,569
)
 
(10,569
)
Net cash provided by (used in) investing activities
(10,854
)
 
19,888

 
8,966

Cash flows from financing activities:
 

 
 

 
 

Purchases of treasury stock

 
(9,961
)
 
(13,434
)
Borrowings on long-term debt

 
50,000

 

Repayments on long-term debt
(678
)
 
(72,402
)
 
(21,722
)
Payments on capital lease obligations
(107
)
 
(248
)
 
(127
)
Dividends paid
(805
)
 
(3,225
)
 
(3,012
)
Distributions to noncontrolling interest
(177
)
 
(175
)
 
(181
)
Net cash used in financing activities of continuing operations
(1,767
)
 
(36,011
)
 
(38,476
)
Net cash used in financing activities of discontinued operations

 
(31,447
)
 
(95,195
)
Net cash used in financing activities
(1,767
)
 
(67,458
)
 
(133,671
)
Effect of exchange rate changes on cash
(5,738
)
 
1,063

 
1,333

Net increase (decrease) in cash and cash equivalents
(12,604
)
 
996

 
(79,682
)
Cash and cash equivalents at beginning of period
106,933

 
105,937

 
185,619

Cash and cash equivalents at end of period
$
94,329

 
$
106,933

 
$
105,937

Supplemental disclosure of cash flow information:
 

 
 

 
 

Cash paid during the year for:
 

 
 

 
 

Interest
$
7,206

 
$
6,042

 
$
6,140

Income taxes
7,173

 
7,107

 
46,511

Non-cash transactions:
 

 
 

 
 

Capital leases for equipment
$
463

 
$
655

 
$
137

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


44


BLYTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
Note 1. Summary of Significant Accounting Policies

Blyth, Inc. (the “Company”) is a multi-channel company primarily 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 health, wellness and beauty related products. The Company’s products can primarily be found throughout the United States, Canada, Mexico, Europe and Australia. Our financial results are reported in two segments: the Candles & Home Décor segment (PartyLite) and the Catalog & Internet segment (Silver Star Brands).

A summary of the significant accounting policies applied in the preparation of the accompanying Consolidated Financial Statements follows:

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Blyth, Inc. and its subsidiaries. The Company’s Catalog & Internet subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. The Company consolidates entities in which it owns or controls more than 50% of the voting shares and/or investments where the Company has been determined to have control. The portion of the entity not owned by the Company is reflected as the noncontrolling interest within the Equity section of the Consolidated Balance Sheets. All inter-company balances and transactions have been eliminated in consolidation.

Discontinued Operations
 
In September 2014, the Company entered into a recapitalization agreement with ViSalus that reduced its ownership in ViSalus from approximately 80.9% to 10.0%. In October 2012, the Company sold its Sterno business. See Note 3 to the Consolidated Financial Statements for further information. The results of operations for these businesses have been reclassified to discontinued operations for all periods presented.

Two-for-one stock split

On May 16, 2012, the Company's Board of Directors announced a two-for-one stock split of its common stock effective in the form of a stock dividend of one share for each outstanding share. The record date for the stock split was June 1, 2012, and the additional shares were distributed on June 15, 2012. Accordingly, all per share amounts, weighted average shares outstanding, shares outstanding and shares repurchased presented in the Consolidated Financial Statements and notes have been adjusted retroactively to reflect the stock split. Shareholders' equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the stock split from Retained Earnings to Common Stock.

 Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Credit Concentration
 
The Company performs ongoing credit evaluations of its customers and generally does not require collateral.  The Company makes provisions for estimated credit losses. No single customer accounts for 10% or more of Net Sales or Accounts Receivable.

Foreign Currency Translation

The Company’s international subsidiaries use their local currency as their functional currency.  Therefore, all Balance Sheet accounts of international subsidiaries are translated into U.S. dollars at the year-end rates of exchange and Statement of Earnings items are translated using the weighted average exchange rates for the period.  Resulting translation adjustments are

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included in Accumulated other comprehensive income (loss) (“AOCI”) within the Consolidated Balance Sheets. Transactional gains and losses arising from the impact of currency exchange rate fluctuations on transactions in a currency other than the local functional currency are included in Foreign exchange and other, net within the Consolidated Statements of Earnings.

Investments
 
The Company makes investments from time to time in the ordinary course of its business that may include equity securities, debt instruments (all maturing within one year), mutual funds, cost investments and long-term investments and/or joint ventures. The Company’s investments are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topics 320 Investments – debt and equity securities and 325 Investments - other. The Company reviews investments for impairment using both quantitative and qualitative factors. Unrealized gains and losses on available-for-sale investment securities that are considered temporary and are not the result of a credit loss are included in AOCI, net of applicable taxes, while realized gains and losses are reported in earnings.

Derivatives and Other Financial Instruments

The Company uses foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, intercompany payables and certain loans. It does not hold or issue derivative financial instruments for trading purposes.  The Company has also hedged the net assets of certain of its foreign operations through foreign currency forward contracts.

The Company has designated forward exchange contracts on forecasted intercompany purchases and 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 are recorded in AOCI until earnings are affected by the variability of the cash flows being hedged.  With regard to commitments for inventory purchases, upon payment of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from AOCI upon sale of the asset assigned and is realized in the Consolidated Statements of Earnings.  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 no longer probable of occurring, the resultant gain or loss on the hedge is recognized into earnings immediately.

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.

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. 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. Refer to Note 7 to the Consolidated Financial Statements for further details on our accounting for derivative instruments.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Amounts due from credit card companies of $1.7 million for the settlement of credit card transactions are included in cash equivalents because they are both short-term and highly liquid instruments and typically take one to three business days to be received by the Company. The major credit card companies making these payments are highly accredited businesses and the Company does not deem them to have material counterparty credit risk.
 
The Company holds its cash investments with high credit quality financial institutions. Cash balances in the Company’s U.S. concentration accounts are fully insured by