NBTY 10-Q 2007
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2007
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: 001-31788
(Exact name of registrant as specified in its charter)
90 Orville Drive
(Address of principal executive offices) (Zip Code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
The number of shares of Common Stock (par value $.008 per share) outstanding as of May 3, 2007 was 67,363,470.
NBTY, INC. AND
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NBTY, INC. AND SUBSIDIARIES
NBTY, Inc. and subsidiaries are referred to herein collectively as we, our, us, NBTY, or the Company. We have prepared these unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles applicable to interim financial information and on a basis that is consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (2006 Form 10-K). In our opinion, these financial statements reflect all adjustments (including normal recurring accruals) necessary for a fair statement of our results for the interim periods presented. These unaudited condensed consolidated financial statements do not include all information or notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the financial and notes thereto contained in our 2006 Form 10-K. Results for interim periods are not necessarily indicative of results which may be achieved for a full year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. Our most significant estimates include: sales returns and other allowances; inventory valuation and obsolescence; allowance for doubtful accounts; valuation and recoverability of long-lived assets; income taxes; and accruals for the outcome of current litigation.
The carrying value of our financial instruments approximates fair value due to their short maturities and variable interest rates, with the exception of the 71¤8% Senior Subordinated Notes. The face value and the fair value of the 71¤8% Senior Subordinated Notes at March 31, 2007, based on then quoted market prices, was $190,000 and $192,375, respectively.
Financial instruments which potentially subject us to credit risk consist primarily of cash and cash equivalents (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts), investments and trade accounts receivable. We mitigate our risk by investing in or through major financial institutions. At March 31, 2007, our investments consisted of auction rate securities, which were classified as available-for-sale investments and reported at fair value (which approximates cost). We believe that no significant concentration of credit risk existed at March 31, 2007 with respect to these securities.
We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customers current credit worthiness, as determined by a review of their current credit information. Collections and payments from customers are continuously monitored. We maintain an allowance for doubtful accounts, which is based upon historical experience as well as specific customer
NBTY, INC. AND SUBSIDIARIES
collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
For the three and six months ended March 31, 2007 and 2006 the following individual customers accounted for the following percentages of the Wholesale / US Nutrition divisions net sales, respectively:
Customer A is primarily a supplier to Customer B. Therefore, the loss of Customer B would likely result in the loss of most of the net sales to Customer A. While no one customer represented, individually, more than 10 percent of our consolidated net sales for the three and six months ended March 31, 2007 and 2006, the loss of any one of these customers would have a material adverse effect on the Wholesale/US Nutrition division if we were unable to replace such customer(s).
The following individual customers accounted for 10% or more of the Wholesale/US Nutrition divisions total gross accounts receivable as of March 31, 2007 and September 30, 2006, respectively:
Accounts receivable are presented net of the following reserves at March 31, 2007 and September 30, 2006:
NBTY, INC. AND SUBSIDIARIES
During March 2007 we made a decision to sell the land and building we own located in Augusta, Georgia. We anticipate that a sale of the land and building will be completed by March 2008. As a result, the carrying value of the land and building of approximately $12,900 (which approximates its fair value less costs to sell) was transferred from property, plant and equipment and is classified as held for sale and is included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheet at March 31, 2007.
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure certain financial instruments and other eligible items at fair value when the items are not otherwise currently required to be measured at fair value. Under SFAS 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Companies electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. Companies electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS 159 will be effective as of the beginning of the first fiscal year that begins after November 15, 2007. We will adopt SFAS 159 on October 1, 2008. The impact of the adoption of SFAS 159 will be dependent on the extent to which we choose to elect to measure eligible items at fair value.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and enhances disclosures about fair value measurements. This statement applies
NBTY, INC. AND SUBSIDIARIES
when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. We will adopt SFAS 157 on October 1, 2008. We are currently evaluating the impact of adopting this standard on our consolidated financial statements and related disclosures.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109. (FIN 48). This Interpretation clarifies the accounting for uncertainty in tax positions and requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We will adopt the provisions of FIN 48 on October 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 in our financial statements.
We account for acquisitions under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. Any excess of the purchase price over their estimated fair values is recorded as goodwill. The fair value assigned to the tangible and intangible assets acquired and liabilities assumed is based upon estimates and assumptions that we developed and other information that we compiled, including a valuation.
On October 2, 2006, we acquired 100% of the stock of Zila Nutraceuticals, Inc., a division of Zila, Inc. Once acquired, we changed the name of Zila Nutraceuticals, Inc. to The Ester-C Company (Ester-C). Ester-C manufactures and markets Ester-C, which is known throughout multiple markets including health food stores and mass market retailers. This acquisition represents an opportunity for us to enhance our presence in key markets. The purchase price for Ester-C was $37,500 in cash and up to a $3,000 contingent cash payment which is based upon EBITDA (as defined in the purchase agreement) of Ester-C during the one-year period following the closing. In addition, the purchase price was subject to a post-closing adjustment based on the final working capital. During March 2007, we received a payment of $1,214 in settlement of the final working capital adjustment. We also incurred approximately $766 of direct transaction costs for a total purchase price of approximately $37,052, subject to any contingent cash payment noted above. The goodwill associated with this acquisition is deductible for tax purposes. Ester-C had approximately $21,000 in net revenue for the twelve months ended July 31, 2006. The $37,500 purchase price was paid out of cash on hand. This acquisition contributed $2,423 in net sales and an operating loss of $1,579 to NBTYs wholesale segment for the three months ended March 31, 2007 and $6,504 in net sales and $1,424 of operating income to NBTYs wholesale segment for the six months ended
March 31, 2007. We are in the process of finalizing the allocation of the purchase price to the assets acquired and liabilities assumed.
At March 31, 2007, investments consisted of auction rate securities, which are long-term variable rate bonds tied to short-term interest rates that are reset through a dutch auction process which occurs every 7 to 35 days. These investments are recorded at fair value; any unrealized gains/losses are included in other comprehensive income, unless a loss is determined to be other than temporary. Despite the long-term nature of their stated contractual maturities, there is a ready liquid market for these securities based on the interest rate reset mechanism. We classify such securities as current assets in the accompanying balance sheets because we have the ability and intent to sell these securities as necessary to meet our current liquidity requirements. As of March 31, 2007, there were no unrealized holding gains or losses.
Investment income included in Miscellaneous, net in the Condensed Consolidated Statements of Income was $1,037 and $383 for the three months ended March 31, 2007 and 2006, respectively, and $1,917 and $1,115 for the six months ended March 31, 2007 and 2006, respectively.
The components of inventories were as follows:
Goodwill represents the excess purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and indefinite lived assets acquired in a business combination are not amortized, but instead tested for impairment at least annually. We test goodwill and indefinite lived intangibles for impairment annually as of September 30, the last day of our fourth fiscal quarter, unless an event occurs that would indicate the value may be impaired at an interim date.
The changes in the carrying amount of goodwill by segment for the six month period ended March 31, 2007, were as follows:
We are in the process of finalizing the allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of Ester-C. Accordingly, the goodwill amount associated with this acquisition is preliminary.
We are in a dispute with the seller of SISU, Inc., which we acquired in June 2005, with respect to the calculation of the final working capital adjustment. Upon the resolution of this dispute, final allocations to the acquired assets and liabilities could result in future adjustments to goodwill and actual results may differ from those presented herein.
Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives (not exceeding 20 years). The carrying amounts of intangible assets as of March 31, 2007 and September 30, 2006 were as follows:
In connection with the acquisition of Ester-C, definite-lived intangible assets relating to brands increased $15,000 and customer relationships increased $5,300 at March 31, 2007.
Amortization expense of definite lived intangible assets is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Income. Amortization for the three months ended March 31, 2007 and 2006 was approximately $3,194 and $3,097, respectively. Amortization for the six months ended March 31, 2007 and 2006 was approximately $6,502 and $6,220, respectively.
Assuming no changes in our definite lived intangible assets, estimated amortization expense for each of the five succeeding fiscal years is as follows:
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), carrying values are reviewed for impairment whenever events or changes in circumstances indicate that the assets carrying values may not be recoverable. In order to determine if a write down is necessary, the estimated future undiscounted cash flows associated with the asset would be compared to the assets carrying amount. If required, an impairment charge is recorded based on an estimate of future discounted cash flows. We consider a history of cash flow losses on a store by store basis to be a primary indicator of potential impairment.
During the six months ended March 31, 2007 and 2006, we evaluated, for an impairment review, certain retail stores that had reached a certain level of maturity and were sustaining operating losses. During the three months ended March 31, 2007 and 2006, we recognized impairment charges of $231 and $146, respectively. During the six months ended March 31, 2007 and 2006, we recognized impairment charges of $584 and $2,271, respectively. These impairment charges related primarily to leasehold improvements and furniture and fixtures for North American Retail operations and were included in Selling, general and administrative expense in the Condensed Consolidated Statements of Income.
Due to continued difficult market conditions experienced in our low carb product line, we decided during the second fiscal quarter ended March 31, 2006 to discontinue our Carb Solutions trademarked brand (which was acquired as part of the acquisition of Rexall Sundown in 2003). Since the brand related to this trademark had virtually no future undiscounted cash flow to support its carrying value, we wrote off the net carrying value of the Carb Solutions trademarked brand of $10,450 during the second fiscal quarter ended March 31, 2006, which also impacted the six months ended March 31, 2006.
7. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows:
8. Long-Term Debt
Long-term debt consisted of the following:
(a) In September 2005, we issued 10-year 71¤8% Senior Subordinated Notes due 2015 in the aggregate principal amount of $200,000 (the 71¤8% Notes). The 71¤8% Notes are guaranteed by all of our domestic subsidiaries and are full, unconditional and joint and several and uncollaterized and subordinated in right of payment for all existing and future indebtedness. The 71¤8% Notes are subject to redemption, at our option, in whole or in part, at any time on or after October 1, 2010, and prior to maturity at certain fixed redemption prices plus accrued interest. In addition, on or prior to October 1, 2008, we may redeem in the aggregate up to 35% of the 71¤8% Notes with the net cash proceeds received by us from certain types of equity offerings (as defined), at a redemption value equal to 107.125% of the principal amount plus accrued interest, provided that at least 65% of the aggregate principal amount of notes remains outstanding immediately after any such redemption. The 71¤8% Notes do not have any sinking fund requirements. Interest is paid semi-annually on April 1st and October 1st. During fiscal 2006, we purchased, on the open market, $10,000 face value of the 71¤8% Notes for $9,575. We recorded a gain on extinguishment of debt of $425 and wrote-off $264 of the related unamortized deferred financing fees during the fiscal year ended September 30, 2006 as a result of this transaction.
(b) We entered into various capital leases for computer equipment which provide us with bargain purchase options at the end of such lease terms.
(c) In September 2006, we entered into a multicurrency term facility agreement with JP Morgan Chase Bank. During fiscal 2007, we amended the terms of the facility to extend the maturity to December 2008. As part of the amendment, we are required to maintain cash collateral in the amount of the outstanding loan balance. At March 31, 2007, the amount outstanding under this facility was a loan denominated in the British Pounds Sterling in the amount of £9,575, which approximated $18,850
in US Dollars based upon the exchange rate as of March 31, 2007. As a result, the cash collateral, which is considered, restricted, of $18,850, is included in Other assets within the Condensed Consolidated Balance Sheet at March 31, 2007. Interest is payable in quarterly installments at LIBOR plus applicable margin. At March 31, 2007, the interest rate was approximately 5.9%.
On November 3, 2006, we entered into a Revolving Credit Agreement (RCA) with JP Morgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Bank of America, N.A., BNP Paribas, Citibank, N.A., and HSBC Bank USA, National Association, as Co-Syndication Agents. The RCA provides for revolving credit loans in the aggregate principal amount of up to $325,000 to be used for (a) the repayment of all obligations outstanding under our prior credit agreement (which consisted solely of commitment fees since we had previously repaid all amounts borrowed under the prior credit agreement), (b) working capital and other general corporate purposes, and (c) acquisitions. In connection with the RCA, our prior credit agreement was terminated. There have been no borrowings under the RCA to date. The terms and requirements of the RCA are substantially the same as the prior credit agreement. Our obligations under the RCA are secured by substantially all of our assets and are guaranteed by certain of our subsidiaries, in each case to the extent set forth in the Guarantee and Collateral Agreement (the Guarantee) that was entered into on November 3, 2006.
Interest rates charged on borrowings can vary depending on the interest rate option utilized. Options for the rate can either be the Alternate Base Rate or LIBOR plus applicable margin. We are required to pay a commitment fee, which varies between .20% and .375% per annum, depending on our ratio of consolidated indebtedness to consolidated Adjusted EBITDA, on any unused portion of the revolving credit facility. The RCA defines Adjusted EBITDA as net income, excluding the aggregate amount of all non-cash losses reducing net income (excluding any non-cash losses that results in an accrual of a reserve for cash charges in any future period and the reversal thereof), plus interest, taxes, depreciation and amortization. Virtually all of our assets are collateralized under the RCA. Under the RCA, we are obligated to maintain various financial ratios and covenants that are typical for such facilities. We were in compliance with all financial covenants under the RCA as of March 31, 2007.
9. Litigation Summary and Indemnification of Officers and Directors
New York Action
On July 25, 2002, a putative class-action lawsuit was filed against Vitamin World, Inc., alleging that Vitamin World engaged in deceptive trade practices and false advertising with respect to the sale of certain prohormone supplements and that the plaintiffs were therefore entitled to equitable and monetary relief under the New York General Business Law. Similar complaints were filed against other companies in the vitamin and nutritional supplement industry. By Decision and Order filed July 18, 2006, the Court granted Vitamin Worlds motion for summary judgment and dismissed all claims. The plaintiffs have appealed.
On July 25, 2002, a putative consumer class-action lawsuit was filed in California state court against MET-Rx USA, Inc. (MET-Rx), an indirect subsidiary of Rexall Sundown, Inc. (Rexall), claiming that the advertising and marketing of certain prohormone supplements were false and misleading, or alternatively, that the prohormone products contained ingredients that were controlled substances under
California law. Plaintiffs seek equitable and monetary relief. On June 18, 2004, this case was coordinated with several other class-action cases brought against other companies relating to the sale of products containing androstenediol, one of the prohormones contained in MET-Rx products. The coordinated proceedings have been assigned to a coordination judge for further pretrial proceedings. No trial date has been set, the court has not yet certified a class, and the matter is currently in discovery. We have defended vigorously against the claims asserted. Because this action is still in the early stages, no determination can be made at this time as to its final outcome, nor can its materiality be accurately ascertained.
New Jersey Action
In March 2004, a putative class-action lawsuit was filed in New Jersey against MET-Rx, claiming that the advertising and marketing of certain prohormone supplements were false and misleading and that plaintiff and the putative class of New Jersey purchasers of these products were entitled to damages and injunctive relief. Because these allegations are virtually identical to allegations made in a putative nationwide class-action previously filed in California, we moved to dismiss or stay the New Jersey action pending the outcome of the California action. The motion was granted, and the New Jersey action is stayed at this time.
In July 2002, a putative class-action lawsuit was filed in Florida against MET-Rx, claiming that the advertising and marketing of certain prohormone supplements were false and misleading, that the
products were ineffective, and alternatively, that the products were anabolic steroids whose sale violated Florida law. Plaintiff seeks equitable and monetary relief. This case has been largely inactive since its
filing. No determination can be made at this time as to its final outcome, nor can its materiality be accurately ascertained.
Rexall and certain of its subsidiaries are defendants in a class-action lawsuit brought in 2002 on behalf of all California consumers who bought various nutrition bars. Plaintiffs allege misbranding of nutrition bars and violations of California unfair competition statutes, misleading advertising and other similar causes of action. Plaintiffs seek restitution, legal fees and injunctive relief. We have defended this action vigorously. In December 2006, while Rexalls and the other defendants renewed motion for judgment on the pleadings was pending, the Court again stayed the case for all purposes, pending rulings on relevant cases before the California Supreme Court. Because it is unclear when the Supreme Court will issue rulings in these cases, Rexall cannot estimate how long the case will be stayed. Based upon the information available at this time, no determination can be made at this time as to the final outcome of this case, nor can its materiality be accurately ascertained.
From June 24, 2004 through September 3, 2004, six separate shareholder class-actions were filed against us and certain of our officers and directors in the U.S. District Court for the Eastern District of New York (the Court), on behalf of shareholders who purchased shares of our common stock between February 9, 2004 and July 22, 2004 (the potential Class Period). The actions alleged that we failed to disclose material facts during the Class Period that resulted in a decline in the price of our stock after June 16, 2004 and July 22, 2004, respectively. The Court consolidated the six class-actions in March 2005 and appointed lead plaintiff and counsel. The lead plaintiff filed a consolidated amended complaint alleging an amended class period from November 10, 2003 to July 22, 2004. Along with the officers and directors, we filed a motion to dismiss the action. The motion was denied on May 1, 2006. The parties entered into extensive document discovery, during which the Court certified the class to consist of shareholders who purchased shares of our common stock during the period from November 10, 2003 to July 22, 2004 (the Class).
Following a mediation on February 15, 2007, the parties agreed to a proposed settlement of the class action claims. Under the terms of the proposed settlement, all the class action claims will be dismissed with prejudice and a full release will be given to the Company and its officers and directors, including all defendants named in the consolidated actions. The total amount to be paid to the Class in settlement of the claims will be paid entirely by our directors and officers liability insurers. In the settlement, we and the individual defendants deny any violation of law, and have agreed to the settlement to eliminate the uncertainties, distractions and expense of further litigation. The settlement is subject to review and approval by the Court. On April 17, 2007, the lead plaintiff filed with the Court the proposed settlement, as well as an application for its preliminary approval, for notice to the Class, and for a settlement hearing. That application is pending. The timetable for hearings and other aspects of the review and approval process will be set by the Court.
A purported shareholder of the Company delivered a demand in July 2004 that our board of directors commence a civil action against certain of our officers and directors based on certain of the allegations described above. Our board of directors, based on the investigation and recommendation of a special committee of the Board, determined not to commence any such lawsuit. On or about April 28, 2005, a state court derivative action was filed in the Supreme Court of the State of New York, Suffolk County, by this purported shareholder alleging wrongful rejection of his demand and breaches of fiduciary duties by
some of our individual directors and officers. We are named solely as a nominal defendant, against which no recovery is sought. This derivative complaint is predicated upon the same allegations as a previously-dismissed Eastern District consolidated derivative action. Along with the named officers and directors, we filed a motion to dismiss. On January 3, 2007, the Court directed plaintiff to serve and file within 90 days an amended complaint with allegations sufficient to cure deficiencies in plaintiffs prior complaint, observing that plaintiff could not have satisfied the requirements to state a claim under Delaware law at the time plaintiff originally filed the derivative complaint. Plaintiff filed a motion to compel discovery from the defendants and the Company prior to filing an amended pleading, and we, together with the defendants, filed a cross-motion for a protective order that plaintiff is not entitled to such discovery. Those motions will be heard on May 23, 2007. In the event that plaintiff files an amended complaint, defendants will renew their motion to dismiss for failure to state a claim.
We and our named officers and directors believe these suits are without merit and have vigorously defended these actions. The proposed settlement of the class action claims will not have a material impact on the Companys results of operations or financial condition. We maintain policies of directors and officers personal liability insurance.
In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability and intellectual property claims) arise in the ordinary course of our business. We believe that such other inquiries, claims, suits and complaints would not have a material adverse effect on our consolidated financial condition or results of operations, if adversely determined against us.
We are incorporated under the laws of Delaware. Section 145(a) of the Delaware General Corporation Law (the DGCL) provides that a corporation may indemnify officers and directors of the corporation against expenses incurred by them if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceedings, if they had no reasonable cause to believe that their conduct was unlawful.
As permitted by the DGCL, we have provided in its certificate of incorporation for the indemnification to the full extent permitted by Section 145 of the DGCL of the persons who may be indemnified pursuant thereto. Further, we have provided in our certificate of incorporation that a director of our corporation shall not be personally liable to the corporation or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit.
Finally, our directors and officers are covered by directors and officers insurance policies maintained by the Company.
10. Income Taxes
Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2013 and 2016. Therefore, our overall effective income tax rate
could vary as a result of these factors. The effective income tax rate for the three months ended March 31, 2007 was 28.9%, compared to 28.8% for the prior comparable period. The effective income tax rate for the six months ended March 31, 2007 was 31.3%, compared to 27.0% for the prior comparable period. The fiscal year 2007 tax rate is impacted by our decision to partially reinvest foreign earnings in a lower tax jurisdiction, as well as our ability to partially utilize our prior year state and local investment tax credits. The fiscal year 2006 tax rate is primarily impacted by the Foreign Earnings Repatriation (FER) provision in the American Jobs Creation Act of 2004, which only impacted quarters in fiscal year 2006. In the prior year, we repatriated foreign earnings at a more beneficial tax rate under the FER provision in the American Jobs Creations Act of 2004.
11. Employee Benefits Plans
We maintain defined contribution benefit plans which collectively cover substantially all full-time U.S. based employees. The defined contribution benefit plans are funded through employer contributions to the Employee Stock Ownership Plan and through employees contributions and employers matching contributions to the 401(k) plan. The accompanying financial statements reflect contributions to these plans of approximately $1,144 and $1,742 for the three months ended March 31, 2007 and 2006, respectively, and $1,619 and $2,410 for the six months ended March 31, 2007 and 2006, respectively.
Certain of our international subsidiaries (mainly in the U.K.) have company sponsored defined contribution plans to comply with local statutes and practices. The accompanying financial statements reflect contributions to these plans by such subsidiaries in the approximate amount of $389 and $1,059 and for the three months ended March 31, 2007 and 2006, respectively, and $773 and $1,318 for the six months ended March 31, 2007 and 2006, respectively.
12. Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding during the three and six month periods ended March 31, 2007 and 2006. Diluted net income per share includes the dilutive effect of outstanding stock options, which resulted in a dilutive effect of 2,217 and 1,848 shares for the three months ended March 31, 2007 and 2006, respectively, and 2,181 and 1,844 shares for the six months ended March 31, 2007 and 2006, respectively. There were no outstanding stock options at March 31, 2007 and 2006, respectively, that would have been anti-dilutive in the calculation of dilutive net income per share.
13. Comprehensive Income
Comprehensive income includes net income and other gains and losses, net of tax, affecting shareholders equity that, under generally accepted accounting principles, are excluded from net income. Comprehensive income for the three and six months ended March 31, 2007 and 2006 was as follows:
The change in foreign currency translation adjustment relates primarily to our investment in European subsidiaries and fluctuations in exchange rates between their local currencies and the U.S. Dollar.
During the three and six months ended March 31, 2007, we recorded an increase in our deferred tax liability of $688 and $5,701, respectively, relating to other comprehensive income earned during the period.
During the three months ended March 31, 2006, we recorded an increase in our deferred tax liability of $1,306 relating to other comprehensive income earned during the period. During the six months ended March 31, 2006, we recorded a decrease in our deferred tax liability of $1,882 relating to other comprehensive losses incurred during the period.
14. Segment Information
We are organized by sales segments on a worldwide basis. Our management reporting system evaluates performance based on a number of factors; however, the primary measures of performance are the net sales, gross profit and income or loss from operations (prior to corporate allocations) of each segment, as these are the key performance indicators that we review. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to: human resources, legal, finance, IT, and various other corporate level activity related expenses. Such unallocated expenses remain within corporate. Corporate also includes our manufacturing assets and, accordingly, certain items associated with these activities remain unallocated in the corporate segment. The European Retail operations are evaluated excluding the impact of any intercompany transfer pricing.
All of our products fall into one or more of these four segments:
· Wholesale / US NutritionThis segment is comprised of several divisions, each targeting specific market groups which include wholesalers, distributors, supermarket and drug store chains, pharmacies, health food stores, bulk and international customers.
· North American RetailThis segment generates revenue through its 462 owned and operated Vitamin World stores selling proprietary brand and third-party products and through its Canadian operation of 88 owned and operated Le Naturiste stores.
· European RetailThis segment generates revenue through its 598 Company-owned stores and 22 franchised stores. Such revenue consists of sales of proprietary brand and third-party products as well as franchise fees.
· Direct Response/Puritans PrideThis segment generates revenue through the sale of proprietary brand and third-party products primarily through mail order catalog and the Internet. Catalogs are strategically mailed to customers who order by mail, internet, or by phoning customer service representatives in New York, Illinois or the United Kingdom.
The following table represents key financial information of our business segments:
Net sales by location of customer were as follows:
Total assets by segment were as follows:
Approximately 36% and 35% of our net sales during the six months ended March 31, 2007 and 2006 were denominated in currencies other than U.S. dollars, principally British Pounds, Euros and Canadian dollars. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on our results of operations.
Foreign subsidiaries accounted for the following percentages of total assets and total liabilities:
The 71¤8% Notes are guaranteed by all of our domestic subsidiaries, which are wholly-owned by the Company. These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents:
(1) Condensed consolidating financial statements as of March 31, 2007 and September 30, 2006 and for the three and six months ended March 31, 2007 and 2006 of (a) NBTY Inc., the parent and issuer, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries and (d) the Company on a consolidated basis, and
(2) Elimination entries necessary to consolidate NBTY Inc., the parent, with guarantor and non-guarantor subsidiaries.
The condensed consolidating financial statements are presented using the equity method of accounting for investments in wholly-owned subsidiaries. Under this method, the investments in subsidiaries are recorded at cost and adjusted for our share of the subsidiaries cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. This financial information should be read in conjunction with the consolidated financial statements and other notes related thereto.
INC. AND SUBSIDIARIES