UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 2012. |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to . |
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Commission file number 333-172973
NBTY, Inc.
(Exact name of registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of incorporation or organization) |
11-2228617 (I.R.S. Employer Identification No.) |
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2100 Smithtown Avenue Ronkonkoma, New York (Address of principal executive offices) |
11779 (Zip Code) |
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(631) 567-9500 (Registrant's telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: None
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 ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ý No o
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 o No ý
Note: The registrant was subject to the reporting requirements of Section 15(d) of the Exchange Act from June 16, 2011 through September 30, 2011. As of October 1, 2011, the registrant is a voluntary filer not subject to these filing requirements. However, the registrant has filed all reports required pursuant to Section 13 or 15(d) as if the registrant was subject to such filing requirements since June 16, 2011.
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer o | Accelerated filer o | Non-Accelerated Filer ý (Do not check if a smaller reporting company) |
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 ý
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of March 30, 2012 was $0. The number of shares of common stock of the registrant outstanding at November 26, 2012 was 1,000.
DOCUMENTS INCORPORATED BY REFERENCE.
None
NBTY, INC.
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2012
TABLE OF CONTENTS
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This annual report on Form 10-K for the fiscal year ended September 30, 2012 (this "Report") contains "forward-looking statements" within the meaning of the securities laws. You should not place undue reliance on these statements. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. As you read and consider this Report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Many factors could affect our actual financial results and could cause actual results to differ materially from those expressed in the forward-looking statements. Some important factors include:
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- consumer perception of our products due to adverse scientific research or findings, regulatory investigations, litigation,
national media attention and other publicity regarding nutritional supplements;
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- potential slow or negative growth in the vitamin, mineral and supplement market;
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- increases in the cost of borrowings or unavailability of additional debt or equity capital, or both;
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- volatile conditions in the capital, credit and commodities markets and in the overall economy;
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- dependency on retail stores for sales;
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- the loss of significant customers;
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- compliance with new and existing federal, state, local or foreign legislation or regulation, or adverse determinations by
regulators anywhere in the world (including the banning of products) and, in particular, Good Manufacturing Practices ("GMPs") in the United States, the Food Supplements Directive and Traditional
Herbal Medicinal Products Directive (the "Herbal Products Directive") in Europe and greater enforcement by any such federal, state, local or foreign governmental entities;
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- material product liability claims and product recalls;
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- our inability to obtain or renew insurance, or to manage insurance costs;
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- international market exposure and compliance with anti-corruption laws in the U.S. and foreign jurisdictions;
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- difficulty entering new international markets;
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- legal proceedings initiated by regulators in the United States or abroad;
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- unavailability of, or our inability to consummate, advantageous acquisitions in the future, or our inability to integrate
acquisitions into the mainstream of our business;
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- difficulty entering new international markets;
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- loss of executive officers or other key personnel;
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- loss of certain third-party suppliers;
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- the availability and pricing of raw materials;
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- disruptions in manufacturing operations that produce nutritional supplements and loss of manufacturing certifications;
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- increased competition and failure to compete effectively;
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- our inability to respond to changing consumer preferences;
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- interruption of business or negative impact on sales and earnings due to acts of God, acts of war, sabotage, terrorism,
bio-terrorism, civil unrest or disruption of delivery service;
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- work stoppages at our facilities;
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- increased raw material, utility and fuel costs;
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- fluctuations in foreign currencies, including the British pound, the euro, the Canadian dollar and the Chinese yuan;
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- interruptions in information processing systems and management information technology, including system interruptions and
security breaches;
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- failure to maintain and/or upgrade our information technology systems;
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- our inability to protect our intellectual property rights;
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- our exposure to, and the expense of defending and resolving, product liability claims, intellectual property claims and
other litigation;
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- failure to maintain effective controls over financial reporting;
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- other factors disclosed in this Report; and
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- other factors beyond our control.
In light of these risks, uncertainties and assumptions, the forward-looking statements contained in this Report might not prove accurate. You should not place undue reliance upon them. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date of this Report, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In this Report, we rely on and refer to information and statistics regarding our industry, products or market share. We obtained some of this information and statistics from third-party sources, such as independent trade associations, industry publications, government publications or reports by market research firms. Additionally, we have supplemented third-party information where necessary with management estimates, based on our review of internal surveys, information from our customers and suppliers, trade and business organizations and other contacts in the markets in which we operate, and our management's knowledge and experience. However, these estimates are subject to change and are uncertain due to limits on the availability and reliability of primary sources of information and the voluntary nature of the data gathering process. Although we believe that these independent sources and our management's estimates are reliable as of the date of this Report, we have not independently verified this information, and we cannot assure you of its accuracy or completeness. As a result, you should be aware that market share and industry data included in this Report, and estimates and beliefs based on that data, may not be reliable. We make no representation as to the accuracy or completeness of the information.
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Numerical figures included in this Report have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
References in this Report to our fiscal year refer to the fiscal year ended September 30 in the specified year. For example, references to "fiscal 2012" refer to our fiscal year ended September 30, 2012.
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The following description of our business should be read in conjunction with the information included elsewhere in this Report. This description contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in "Forward-Looking Statements," "Risk Factors" and elsewhere in this Report. Unless the context otherwise requires, references in this Report to "we," "our," "us," or the "Company," refer to NBTY, Inc. together with its subsidiaries.
Our Company
We are the leading vertically integrated manufacturer, marketer, distributor and retailer of high-quality vitamins, nutritional supplements and related products in the United States, with operations worldwide. Our products are marketed through four operating segments: Wholesale, European Retail, Direct Response/E-Commerce and North American Retail. We currently market over 25,000 individual stock keeping units ("SKUs") under a portfolio of well-known brands, with leading category positions across their respective categories, channels and geographies. With our broad range of products, we are able to offer our wholesale customers a "one-stop" source for a wide assortment of both branded and private label products across the value spectrum. Additionally, we have a significant presence in virtually every major vitamins, minerals, herbs and supplements ("VMHS") product category and in multiple key distribution channels. We utilize our direct-to-consumer channels to identify new consumer trends and leverage our flexible manufacturing capabilities and strong supplier relationships to bring new products to market quickly. Through our industry-leading manufacturing operations and significant economies of scale, we believe we are a low-cost manufacturer that offers attractively priced products to retailers and consumers. In addition, we enjoy long-standing relationships with several domestic retailers, including Wal-Mart, Costco, CVS, Walgreens, Kroger and Target. We believe our diversified product, channel and geographic revenue mix, strong key customer relationships and steady demand for VMHS products provide for a diversified, stable and profitable business with strong cash flows.
NBTY, Inc. was incorporated in New York in 1971 under the name Nature's Bounty, Inc. We changed our state of incorporation to Delaware in 1979 by merger. In 1995, we changed our name to NBTY, Inc. NBTY's principal executive offices are located at 2100 Smithtown Avenue, Ronkonkoma, New York 11779, our telephone number is (631) 567-9500, and our website is www.nbty.com.
Carlyle Transaction
On October 1, 2010, NBTY consummated a merger (the "Merger") with an affiliate of The Carlyle Group ("Carlyle"), under which the Carlyle affiliate acquired 100% of NBTY's equity. Carlyle financed the Merger with equity financing provided by an investment fund affiliated with Carlyle, the sale of our 9% senior notes due 2018 (our "notes"), cash on hand at NBTY and senior secured credit facilities initially consisting of (1) senior secured term loan facilities of $1.75 billion and (2) a senior secured revolving credit facility with commitments of $250 million (our "senior secured credit facilities") under a credit agreement with Barclays Bank PLC as administrative agent. We refinanced our senior secured credit facilities, term loans and revolving credit facility in March 2011 (the "Refinancing").
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.
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Recent Developments
On October 17, 2012, our parent company, Alphabet Holding Company, Inc. ("Holdings"), sold 7.75%/8.50% contingent cash pay senior notes due 2017 (the "Holdco Notes"), in an aggregate principal amount of $550 million through a private placement. These contingent cash pay senior notes are not guaranteed by NBTY or its subsidiaries. The proceeds from the offering of the Holdco Notes and $200 million of cash on hand at NBTY were used to pay fees and expenses related to the transaction and a cash dividend to Holdings' shareholders in the amount of $722 million. While NBTY has no direct obligation under the Holdco Notes, NBTY is the sole source of cash generation for Holdings. The Holdco Notes do not appear on our balance sheet and the related interest expense on the Holdco Notes and other general and administrative expenses of Holdings are not included in our income statement. The Holdco Notes do not require any cash interest payments until May 1, 2013.
In connection with the offering of the Holdco Notes, we amended our credit agreement to allow Holdings to issue and sell the contingent cash pay senior notes in the private placement. In addition, the amendment, among other things, (i) increased the general restricted payments basket, (ii) increased the maximum total leverage ratio test which governs the making of restricted payments using Cumulative Credit (as defined in our credit agreement) and (iii) modified the definition of Cumulative Credit to be calculated retroactively using 50% of the consolidated net income as defined in the indenture governing our notes.
On November 26, 2012, we acquired all of the outstanding shares of Balance Bar Company, a company that manufactures and markets nutritional bars, for a purchase price of approximately $78 million of cash, subject to certain post-closing adjustments. We used funds drawn from the revolving portion of our senior secured credit facilities to finance this acquisition.
Operating Segments
We market our products through a global multi-channel distribution platform, supported by our industry-leading manufacturing operations and supply chain.
Wholesale. We are the leading wholesale manufacturer of branded and private label VMHS products in the United States. We sell our products in virtually all major mass merchandisers, club stores, drug store chains and supermarkets. We also sell our products to independent pharmacies, health food stores, the military and other retailers. Our key brands include Nature's Bounty®, Osteo Bi-Flex®, Pure Protein®, Body Fortress®, Sundown®, MET-Rx® and Ester-C®. We sell directly to health and natural food stores under the Solgar®, SISU® and Good 'N Natural® brands, to health food wholesalers under our American Health® brand and to healthcare practitioners through our Physiologics® brand. We also have licensing relationships with Disney Consumer Products, Inc. and Marvel Characters, B.V. to manufacture VMHS products for children using their character images and licensed art work. In addition to our strong brand positions, we are a leading private label manufacturer in the industry and supply the majority of private label VMHS products to several of the largest U.S. retailers. Fiscal 2012 branded sales accounted for approximately 64% and private label sales accounted for approximately 36% of our Wholesale sales.
European Retail. We have significant retail operations throughout Europe. We are the leading VMHS specialty retailer in the United Kingdom. As of September 30, 2012, this segment generated revenue through the retail operations of 687 Holland & Barrett stores (including ten franchised stores in Singapore, six franchised stores in Cyprus, three franchised stores in Malta and one franchised store in each of Gibraltar and Hungary, three franchised stores in United Arab Emirates and six franchised stores in China), 55 GNC (UK) stores, 42 Nature's Way stores in Ireland and 112 De Tuinen stores in the Netherlands, including 10 franchised locations. Holland & Barrett, the leading player in the United Kingdom VMHS specialty retail business, sells VMHS products and food products, such as fruits and nuts, through a broad range of approximately 4,400 SKUs. Our GNC (UK) stores specialize in
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vitamins, minerals and sports nutrition products, marketing approximately 1,900 SKUs targeted at the more health-conscious sports enthusiasts and price-sensitive customers, and are a strong complement to the Holland & Barrett stores. We believe the breadth of our product offering, the superior customer service provided in our stores and the deep category and product knowledge of our well trained sales associates are key differentiators relative to our competitors. On July 2, 2012, Julian Graves Limited ("Julian Graves"), a subsidiary organized under the laws of the United Kingdom and Wales, was placed into administration and its management, affairs, business, and property were under the direct control of Deloitte LLP as administrator. During the course of the administration, attempts to sell the business were unsuccessful and the operations were wound down by the end of August 2012.
Direct Response/E-Commerce. Through our internet and mail-order catalogs, we are a leader in the U.S. direct response VMHS industry, offering a full line of VMHS products and selected personal care and sports nutrition items under our Puritan's Pride® brand and other brand names, at prices that are generally at a discount to similar products sold in retail stores. We also offer products focusing on other brands through websites associated with our retail operations, such as www.vitaminworld.com, www.hollandandbarrett.com, www.detuinen.nl and www.gnc.co.uk. During fiscal 2012, our Puritan's Pride website, www.puritan.com, generated an average of 1.2 million unique visitors per month. As of September 30, 2012, Puritan's Pride operated across four active websites in three languages. Puritan's Pride is strategically advantaged relative to its competitors, offering high-quality products at low direct-from-manufacturer prices, as well as multi-buy promotions, creating a seamless shopping experience for customers. Our highly automated, industry-leading equipment enables us to process orders quickly, economically and efficiently, with orders typically filled within 24 hours of receipt. Internet sales accounted for approximately 66% of our total fiscal 2012 Direct Response/E-Commerce sales.
North American Retail. As of September 30, 2012, we operated 426 Vitamin World retail stores throughout the United States, including Puerto Rico, Guam and the U.S. Virgin Islands, primarily in regional and outlet malls. Each store carries a full line of store brand products, as well as products manufactured by third parties. Vitamin World stores serve as an effective channel to identify early consumer and market trends, as well as to test new product introductions and ascertain product acceptance. We are able to provide insight into the marketplace to our domestic wholesale customers and can leverage our vertically integrated model to bring new products to the market quickly. We believe the direct-to-consumer channels also serve a key role in educating consumers on the VMHS category, including new products and the latest clinical studies and research. On August 31, 2012, we consummated the sale of substantially all of the assets and liabilities, including 80 retail stores throughout Canada, of Le Naturiste Inc. ("Le Naturiste"), a subsidiary organized under the laws of Canada, to an unrelated third party.
Operating Segment and Geographic Financial Information
For a presentation of financial information for each of our operating segments, including financial information relating to the geographic areas in which we conduct our business, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations," and Note 21 to the fiscal 2012 Consolidated Financial Statements included elsewhere in this Report.
Our Industry
The VMHS industry is comprised of several distinct product sub-categories:
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- Vitamins. This sub-category includes single and multi-vitamin supplements. Products in the vitamin category include: vitamin C, vitamin E, B vitamins, vitamin A/beta carotene, niacin, folic acid, and multi-vitamin formulae.
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- Minerals. This sub-category includes single and multi-mineral
supplements. Products in the mineral category include: calcium, magnesium, chromium, zinc, selenium, potassium, iron, manganese, other single minerals and multi-mineral formulae.
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- Herbs &
Botanicals. Single herb or multi-herb supplements made primarily from plants or plant components. Products in this category
include: echinacea, garlic, ginseng, and ginkgo biloba.
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- Specialty
Supplements. This sub-category includes supplements falling outside other sub-categories, such as glucosamine,
melatonin, probiotics, docasahexanenoic acid (DHA), fish oils and shark cartilage, Co-enzyme Q10 (Co-Q10), amino acids and homeopathic remedies.
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- Sports
Nutrition. Sports Nutrition products include tablets, powders, nutrition bars and drinks formulated to enhance physical activity, and
include creatine, amino acids and protein formulae, among others.
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- Meal Replacements. This sub-category includes powders, nutrition bars and liquid nutritional formulae.
Our Strategy
We continuously evaluate strategies to drive revenues and cash flows at each of our operating segments by building on our leading market positions and strong customer relationships.
Increase Sales from Existing and New Customers
We expect to continue to drive organic growth through incremental shelf space with existing customers, new customer additions and the continued strong momentum of our branded products. Our ability to supply both branded and private label products across all price points allows retailers to source a majority of their VMHS products from one supplier.
New Product Introductions
We have been among the first in the industry to introduce innovative products in response to new research and clinical studies, media attention and consumer preferences. Given our presence in multiple distribution channels, we are well-positioned to identify trends and demand for new products, and we have the manufacturing scale, expertise and supplier relationships to respond rapidly and bring new products to market. During fiscal 2012, we introduced over 160 new products.
Further Penetrate International Markets
Our products are currently marketed and sold in approximately 90 countries . However, only $1.1 billion (or 36%) of our sales in fiscal 2012 were sold to customers outside the United States, of which $653 million was to customers located in the United Kingdom. We plan to capitalize on our industry-leading manufacturing and distribution capabilities to drive incremental international sales, particularly in emerging markets such as those in Asia and Central and South America, which are characterized by a rising middle-class, high rates of nutritional deficiencies and a strong demand for high-quality VMHS products from U.S. based manufacturers. In addition, we plan to concentrate on Western European markets, where there is a demand for VMHS products, by leveraging our current distribution structure.
Drive Growth and Profitability in Retail Operations
We will continue to focus on positioning our retail operations for growth and profitability through various strategies, including a pricing strategy that focuses on value, optimization of our store base, expansion of our customer loyalty programs, a new store format and focusing on development of our associates. We continue to strengthen our position as a customer-centric specialty retailer through our
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associate development initiatives which provide associates at all levels with resources to enhance customer service and sales skills, to improve product knowledge and to provide a clear path for career growth. Vitamin World store performance has demonstrated the favorable impact of these initiatives.
We also have implemented several successful initiatives in our European Retail operations. We are focused on maximizing multi-channel business and driving increased customer traffic by modifying our promotional pricing strategy, increasing our focus on associate training, and developing loyalty and customer relationship management programs.
Free Cash Flow Generation
We expect our strong and stable cash flows to be driven by continued strong top-line growth and targeted initiatives for ongoing improvement in our manufacturing and supply chain operations, as well as low maintenance capital expenditures and improvements in working capital efficiency.
Enhance Manufacturing Efficiencies
We expect to continue to focus on reducing costs and improving efficiency in our manufacturing operations and driving supply chain strategies to maintain our leadership in low-cost manufacturing. In May 2010, we purchased a softgel plant in the People's Republic of China ("China" or "PRC"), which added 1.2 billion softgels to our annual production capacity, to address international growth opportunities and strengthen our low-cost manufacturing position.
Disciplined Acquisition Strategy
Since 1986, we have acquired and successfully integrated more than 30 companies, expanding our brands, geographic presence, distribution channels and product offerings. In the fragmented, global VMHS industry, there remains a robust pool of acquisition opportunities across channels and geographies. We expect to continue to take a disciplined approach to acquisitions and will capitalize on our strong track record of integrating acquisitions and realizing synergies to address complementary business opportunities.
Employees
As of September 30, 2012, we employed approximately 13,500 persons. In addition, we sell products through commissioned sales representative organizations. As of September 30, 2012, CAW Local 468, Retail Wholesale Canada Division, represented approximately 270 of our associates in Canada under an agreement that expired in October 2012. The CAW reached a new three-year collective agreement on September 30, 2012. We believe we have strong employee and labor relations domestically and internationally and historically have not experienced work stoppages that materially adversely affected our operations.
Advertising
For fiscal 2012, 2011 and 2010, we spent approximately $164 million, $152 million and $137 million, respectively, on advertising, promotions and catalogs, including print, media and cooperative advertising. Our in-house advertising staff creates our advertising materials, which include print, radio, television and internet advertising. In the United Kingdom and Ireland, Holland & Barrett advertises on television. Holland & Barrett, GNC (UK) and Nature's Way advertise in national newspapers and conduct sales promotions. DeTuinen advertises on television and in newspapers and conducts sales promotions in the Netherlands. In addition, Holland & Barrett, GNC (UK) and De Tuinen each publishes its own magazine with articles and promotional materials. Solgar and GNC (UK) advertise in trade journals and magazines, operate web sites and conduct sales promotions. In Canada,
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SISU advertises in trade journals and magazines. Vita Health advertises in newspapers, trade publications and magazines and operates web sites.
Manufacturing, Distribution and Quality Control
At September 30, 2012, we employed approximately 4,800 manufacturing, shipping and packaging associates. We manufacture domestically in Arizona, California, Florida, New Jersey, New York and North Carolina. In addition, at September 30, 2012, we manufactured internationally in Winnipeg, Manitoba, Canada, Burton, United Kingdom, and Zhongshan, China. We have technologically advanced, industry-leading manufacturing and production facilities, with total production capacity of approximately 70 billion tablets, capsules and softgels per year.
All our domestic manufacturing operations are subject to GMPs, promulgated by the U.S. Food and Drug Administration ("FDA"), and other applicable regulatory standards. We believe our U.S. manufacturing processes comply with the GMPs for dietary supplements or foods, and our manufacturing and distribution facilities generally have sufficient capacity to meet our current business requirements and our currently anticipated sales. We place special emphasis on quality control. We assign lot numbers to all raw materials and, except in rare cases, initially hold them in quarantine while our Quality Department evaluates them for compliance with established specifications. Once released, we retain samples and process the material according to approved formulae by blending, mixing and technically processing as necessary. We manufacture products in final delivery form as a capsule, tablet, powder, softgel, nutrition bar or liquid. After a product is manufactured, our laboratory analysts test its weight, purity, potency, disintegration and dissolution, if applicable. Except in rare instances, we hold the product in quarantine until we complete the quality evaluation and determine that the product meets all applicable specifications before packaging. In those instances when we release a product concurrently with testing, we implement a conditional release process to ensure the product is not distributed before we complete testing. When the manufactured product meets all specifications, our automated packaging equipment packages the product with at least one tamper-evident safety seal and affixes a label, an indelible lot number and, in most cases, the expiration or "best by" date. We use sophisticated computer-generated documentation for picking and packing for order fulfillment.
We are subject to regulations and standards of a similar nature in Canada, China and the United Kingdom with respect to our manufacturing activities in those countries. We maintain mandatory Health Canada GMP Natural Health Product Licenses and establishment and site licenses.
In the United States and Canada, we have received recognition from many prestigious private organizations, including U.S. Pharmacopeia GMP Certification (as part of their Dietary Supplement Verification Program). Additionally, we have been recognized in the United Kingdom with MHRA Importation License and Wholesale Dealers License, as well as the BRC Global Standard for Food Safety.
Our manufacturing operations are designed to allow low-cost production of a wide variety of products of different quantities, physical sizes and packaging formats, while maintaining a high level of customer service and quality. Flexible production line changeover capabilities and reduced cycle times allow us to respond quickly to changes in manufacturing schedules and customer demands.
We have inventory control systems at our facilities that track each manufacturing and packaging component as we receive it from our supply sources through manufacturing and shipment of each product to customers. To facilitate this tracking, most products we sell are bar coded. Our inventory control systems report shipping, sales and, in most cases, individual SKU level inventory information. We manage the retail sales process by monitoring customer sales and inventory levels by product category. We believe our distribution capabilities increase our flexibility in responding to our customers' delivery requirements. Our purchasing and merchandising staff regularly reviews and analyzes information from our U.S. point-of-sale computer system and makes merchandise allocation and markdown decisions based on this information. We use an automated reorder system in the United States to maintain in-stock positions on key items. These systems give us the information we need to determine the proper timing and quantity of reorders.
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Our financial reporting systems provide us with detailed financial reporting to support our operating decisions and cost control efforts. These systems provide functions such as payment scheduling, application of payment receipts, general ledger interface, vendor tracking and flexible reporting options.
Research and Development
We did not expend material amounts for research and development of new products during the last three fiscal years.
Competition; Customers
The market for nutritional supplement products is highly competitive. Our direct competition consists of publicly and privately owned companies, which tend to be highly fragmented in terms of both geographic market coverage and product categories. Competition is based primarily on quality and assortment of products, customer service (including timely deliveries), marketing support, availability of new products and price. Given our significant scale and broad scope relative to our competition, strong innovation capabilities, high-quality manufacturing and vertical integration, we believe that we are well positioned to capitalize on the industry's favorable long term secular trends and gain share.
There are numerous companies in the vitamin and nutritional supplement industry with which we compete that sell products to retailers, including mass merchandisers, convenience stores, drug store chains, club stores, independent drug stores, supermarkets and health food stores.
During fiscal 2012 and 2011, Wal-Mart, individually, accounted for 23% and 25% of our Wholesale segment's net sales, respectively, and 14% and 15% of our consolidated net sales, respectively. As of September 30, 2012, Wal-Mart, individually, accounted for 18% of our Wholesale segment's gross accounts receivable. We sell products to Wal-Mart under individual purchase orders placed by Wal-Mart under Wal-Mart's standard terms and conditions of sale. These terms and conditions include insurance requirements; representations by us with respect to the quality of our products and our manufacturing process; our obligations to comply with law; and indemnifications by us if we breach our representations or obligations. There is no commitment from Wal-Mart to purchase from us, or from us to sell to Wal-Mart, any minimum amount of product. The loss of Wal-Mart, or any other major customer, would have a material adverse effect on us if we were unable to replace that customer. See "Item 1A. Risk Factors—Risks Relating to Our Business—One of our customers accounted for 14% of our consolidated net sales during fiscal 2012, and the loss of this customer, or any of our other major customers, could have a material adverse effect on our results of operations."
United States
The processing, formulation, manufacturing, packaging, labeling, advertising, distribution and sale of our products are subject to regulation by federal agencies, including the FDA, the United States Federal Trade Commission ("FTC"), the U.S. Customs and Border Protection ("CBP"), the U.S. Postal Service ("USPS"), the Consumer Product Safety Commission ("CPSC"), the Department of Agriculture, U.S. Department of Labor's Occupational Safety & Health Administration ("OSHA") and the U.S. Environmental Protection Agency ("EPA"). These activities also are subject to regulation by various agencies of the states, localities and foreign countries in which we sell our products. In particular, the FDA, under the Federal Food, Drug, and Cosmetic Act (the "FDCA"), regulates the biennial registration, formulation, manufacturing, packaging, labeling, distribution and sale of foods, including dietary supplements, vitamins, minerals and herbs 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
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Bureaus oversees an industry-sponsored self-regulatory system that permits competitors to resolve disputes over advertising claims. The NAD may refer matters that the NAD views as violating FTC guides or rules to the FTC for further action.
The FDCA has been amended several times with respect to dietary supplements, in particular by the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). DSHEA establishes a framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA defines "dietary supplements" as vitamins, minerals, herbs, other botanicals, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, constituents, extracts or combinations of such dietary ingredients. Generally, under DSHEA, dietary ingredients that were marketed in the United States before October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a "new" dietary ingredient (a dietary ingredient that was not marketed in the United States before October 15, 1994) must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been "present in the food supply as an article used for food" without being "chemically altered." A new dietary ingredient notification must provide the FDA with evidence of a "history of use or other evidence of safety" establishing that use of the dietary ingredient "will reasonably be expected to be safe." A new dietary ingredient notification must be submitted to the FDA at least 75 days before the initial marketing of the new dietary ingredient. There can be no assurance that the FDA will accept the evidence of safety for any new dietary ingredients that we may want to market, and the FDA's refusal to accept such evidence could prevent the marketing of such dietary ingredients. The FDA has recently published guidance for the industry to attempt to clarify the FDA's interpretation of the new dietary ingredient notification requirements, and this guidance raises new challenges to the development of new dietary ingredients. In addition, increased FDA enforcement could lead the FDA to challenge dietary ingredients already on the market as "illegal" under the FDCA because of the failure to submit a new dietary ingredient notification.
The FDA generally prohibits the use in labeling for a dietary supplement of any "disease claim," correlating use of the product with a decreased risk of disease, unless the claim is specifically pre-approved or authorized by the FDA. DSHEA permits "statements of nutritional support" to be included in labeling for dietary supplements without FDA pre-approval. Such statements may describe how a particular dietary ingredient affects the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well-being (but may not state that a dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease). FDA deems internet materials as labeling in most cases, so our internet materials must comply with FDA requirements and could be the subject of regulatory action if the FDA, or the FTC reviewing the materials as advertising, considers the materials false or misleading. A company that uses a statement of nutritional support in labeling must possess evidence substantiating that the statement is truthful and not misleading. FTC has recently imposed an extremely stringent product specific, clinical trial substantiation standard on certain dietary supplement manufacturers making statements of nutritional support. When such a claim is made on labels, we must disclose on the label that the FDA has not "evaluated" the statement, disclose that the product is not intended for use for a disease, and notify the FDA about our use of the statement within 30 days of marketing the product. However, there can be no assurance that the FDA will not determine that a particular statement of nutritional support that we want to use is an "unauthorized health or disease claim" or an unauthorized version of a "health claim." Such a determination might prevent us from using the claim.
In addition, DSHEA provides that certain so-called "third-party literature," such as a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient with health benefits, may be used "in connection with the sale of a dietary supplement to consumers" without the literature being subject to regulation as labeling. Such literature must not be, among other things, false or misleading; the literature may not promote a particular manufacturer or brand of dietary supplement; and the
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literature must present a balanced view of the available scientific information on the subject matter. There can be no assurance, however, that all third-party literature that we would like to disseminate in connection with our products will satisfy these requirements, and failure to satisfy all requirements could prevent use of the literature or subject the product involved to regulation as an unapproved drug.
As authorized by DSHEA, the FDA adopted GMPs specifically for dietary supplements, which became effective in June 2008. These GMP regulations are more detailed than the GMPs that previously applied to dietary supplements and require, among other things, dietary supplements to be prepared, packaged and held in compliance with specific rules, and require quality control provisions similar to those in the GMP regulations for drugs. We believe our manufacturing and distribution practices comply with these new rules.
We also must comply with the Dietary Supplement and Nonprescription Drug Consumer Protection Act (the "AER Act"), which became effective in December 2007. The AER Act amended the FDCA to require that manufacturers, packers, and distributors of dietary supplements report serious adverse events (as defined in the AER Act) to the FDA within specific time periods. We believe we are in compliance with the AER Act.
The FDA has broad authority to enforce the provisions of the FDCA applicable to foods, dietary supplements and cosmetics, including powers to issue a public "warning letter" to a company, to publicize information about illegal products, to request a voluntary recall of illegal products from the market, and to request the Department of Justice to initiate a seizure action, an injunction action, or a criminal prosecution in the U.S. courts. The FTC exercises jurisdiction over the advertising of foods, dietary supplements and cosmetics. In recent years, the FTC has instituted numerous enforcement actions against dietary supplement companies for failure to adequately substantiate claims made in advertising, or for the use of false or misleading advertising claims. These enforcement actions have often resulted in consent decrees and the payment of civil penalties, restitution, or both, by the companies involved. We currently are subject to FTC consent decrees resulting from past advertising claims for certain of our products. As a result, we are required to maintain compliance with these decrees and are subject to an injunction and substantial civil monetary penalties if we should fail to comply. We also are subject to consent judgments under the Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"). Further, the USPS has issued cease and desist orders against certain mail order advertising claims made by dietary supplement manufacturers, including us, and we are required to maintain compliance with the orders applicable to us, subject to civil monetary penalties for any noncompliance. Violations of these orders could result in substantial monetary penalties. These civil penalty actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
In October 2009, the FTC issued new Guides Concerning the Use of Endorsements and Testimonials in Advertising ("Endorsement Guides"). These Endorsement Guides significantly extend the scope of potential liability associated with the use of testimonials, endorsements, and new media methods, such as blogging, in advertising. As of December 1, 2009, the effective date of the Endorsement Guides, advertisers were required either to substantiate that the experiences conveyed by testimonials or endorsements represent typical consumer experiences with the advertised product or clearly and conspicuously disclose the typical consumer experience with the advertised product. In many instances, this will require advertisers to possess "competent and reliable scientific evidence" to substantiate the consumer or endorser representations. Under the Endorsement Guides, advertisers also may be liable for statements made by consumers in the context of "new media," including blogs, depending on the relationship between the consumer and the advertiser. Although an advertiser's control over the consumer's comments will be relevant to a determination regarding liability for false or misleading statements, it will not necessarily be dispositive.
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In October 2012, the FTC announced proposed revisions to its Guides For The Use Of Environmental Marketing Claims ("Green Guides"). These Green Guides are intended to assist advertisers in avoiding the dissemination of false or deceptive environmental claims for their products. The latest proposed revisions to the Green Guides include new guidance regarding advertisers' use of product certifications and seals of approval, "renewable energy" claims, "renewable materials" claims, and "carbon offset" claims. Many of these provisions instruct advertisers to specify and qualify environmental claims even more extensively than previously required. The FTC simultaneously has reminded advertisers that environmental claims inconsistent with the Green Guides may trigger FTC challenge. In addition, although these Green Guides do not themselves have the force of law and are not independently enforceable, violations of them might give rise not only to FTC scrutiny but also to actions under state consumer fraud statutes.
We also are subject to regulation under various state and local laws that include provisions governing, among other things, the registration, formulation, manufacturing, packaging, labeling, advertising and distribution of foods, dietary supplements and cosmetics.
In addition, from time to time in the future, we may become subject to additional laws or regulations administered by the FDA or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that we consider favorable, such as DSHEA, or to more stringent interpretations of current laws or regulations. We believe that the dietary supplement industry is likely to face a more aggressive enforcement environment in the future even in the absence of new regulation. We cannot predict the nature of future laws, regulations, repeals or interpretations, and we cannot predict what effect additional governmental regulation, when and if it occurs, would have on our business in the future. Such developments, however, could require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, additional personnel, or other new requirements. Any such development could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
European Union
In the European Union ("EU"), the EU Commission is responsible for developing legislation to regulate foodstuffs and medicines. Although the government of each member state may implement legislation governing these products, national legislation must be compatible with, and cannot be more restrictive than, European requirements. Each member state is responsible for its enforcement of the provisions of European and national legislation.
In July 2002, the EU published in its Official Journal the final text of a Supplements Directive, which became effective in the EU at that time and which sets out a process and timetable by which the member states must bring their domestic legislation in line with its provisions. The Supplements Directive seeks to harmonize the regulation of the composition, labeling and marketing of food supplements (at this stage only vitamins and minerals) throughout the EU. It does this by specifying what nutrients and nutrient sources may be used (and by interpretation the rest which may not), and the labeling and other information which must be provided on packaging. In addition, the Supplements Directive is intended to regulate the levels at which these nutrients may be present in a supplement. These maximum permitted levels are still to be announced.
By harmonizing member state legislation, the Supplements Directive should provide opportunities for businesses to market one product or a range of products to a larger number of potential customers without having to reformulate or repackage it. This development may lead to some liberalizing of the more restrictive regimes in Europe, providing new business opportunities. Conversely, however, it may limit the range of nutrients and nutrient sources substantially, and eventually the potencies at which
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some nutrients may be marketed by us in the more liberal countries in Europe, such as the United Kingdom, which may lead to some reformulation costs and loss of some specialty products.
In April 2004, the EU published the Herbal Products Directive which requires traditional herbal medicines to be registered in each member state in which they are intended to be marketed. A registration requires a product be manufactured to pharmaceutical GMP standards; however, generally, there is no need to demonstrate efficacy, provided that the product is safe, is manufactured to high standards, and has a history of supply on the market for 30 years, 15 years of which must be in the EU. The Herbal Products Directive is intended to provide a safe harbor in EU law for a number of categories of herbal remedies, which may otherwise be found to fall outside EU law. However, it does not provide a mechanism for new product development, and would entail some compliance costs in registering the many herbal products already on the market. Full compliance was required by April 2011.
In December 2006, the EU published the Nutrition and Health Claim Regulation to apply from July 1, 2007. This regulation controls nutrition and health claims by means of lists of authorized claims that can be made in advertising, labeling and presentation of all foods, including food supplements, together with the criteria a product must meet to use them. Claims already in use before January 1, 2006, and complying with existing national legislation, can continue to be made under transitional arrangements, which expire on December 14, 2012. Thereafter, except in respect of botanical products which will be considered separately, only permitted lists of health claims produced by the European Food Safety Authority and approved by the European Commission can be used.
Additional European legislation is being developed to regulate sports nutrition products, including the composition of such products. In particular, such legislation could restrict the type of nutrients we may use in our products. Legislation introducing maximum permitted levels for nutrients in fortified foods is also under discussion together with legislation introducing a positive list for enzymes. These proposals, if implemented, could require us to reformulate our existing products. Also, proposals to amend medicine legislation will impact traditional herbal medicines and introduce new requirements, such as Braille labeling, which may lead to higher associated costs.
United Kingdom
In the United Kingdom, the two main pieces of legislation that affect the operations of Holland & Barrett and GNC (UK) are the Medicines Act 1968, which regulates the licensing and sale of medicines, and the Food Safety Act 1990, which provides for the safety of food products. A large volume of secondary legislation in the form of Statutory Instruments adds detail to the main provisions of these Acts, governing composition, packaging, labeling and advertising of products.
In the United Kingdom regulatory system, a product intended to be taken orally will fall within either the category of food or the category of medicine. There is currently no special category of dietary supplement as provided for in the United States by DSHEA. Some products which are intended to be applied externally, for example creams and ointments, may be classified as medicines and others as cosmetics.
The Medicines and Healthcare Products Regulatory Agency ("MHRA"), an executive agency of the Department of Health, has responsibility for the implementation and enforcement of the Medicines Act 1968 and the Herbal Products Directive, and is the licensing authority for medicinal products. The MHRA directly employs enforcement officers from a wide range of backgrounds, including the police, and with a wide range of skills, including information technology. However, the MHRA still relies heavily on competitor complaints to identify non-compliant products. The MHRA decides whether a product is a medicine or not and, if so, considers whether it can be licensed. It determines the status of a product by considering whether it is medicinal by "presentation" or by "function."
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The FSA deals with legislation, policy and oversight of food products, with enforcement action in most situations being handled by local authority Trading Standards Officers. The large number of local authorities in the United Kingdom can lead to an inconsistent approach to enforcement. Unlike the MHRA, local authorities regularly purchase products and analyze them to identify issues of non-compliance. Most vitamin and mineral supplements, and some products with herbal ingredients, are considered to be food supplements and fall under general food law which requires them to be safe. Despite the differences in approaches in identifying non-compliant products, both the MHRA and local authorities can, and do, prosecute where issues of non-compliance are identified.
Ireland
The legislative and regulatory situation in the Republic of Ireland is similar, but not identical, to that in the United Kingdom. The Irish Medicines Board has a similar role to that of the U.K.'s MHRA and the Food Safety Authority of Ireland is analogous to the U.K.'s FSA. Ireland has brought its domestic legislation into line with the provisions of the Supplements Directive and the Herbal Products Directive. Thus, the market prospects for Ireland, in general, are similar to those outlined in the United Kingdom.
Netherlands
The regulatory environment in the Netherlands is similar to the United Kingdom in terms of availability of products. The Netherlands currently has the same liberal market, with no restrictions on potency of nutrients. Licensed herbal medicines are available. However, some herbal medicines are sold freely as in the United Kingdom without the need to be licensed, based on the claims made for them. The Netherlands also is more liberal regarding certain substances, for which unlicensed sales are allowed. The government department dealing with this sector is the Ministry for Health, Welfare and Sport.
Responsibility for food safety falls to the Voedsel en Warenautoriteit (Inspectorate for Health Protection and Veterinary Public Health), which deals with all nutritional products. The Medicines Evaluation Board, which is the equivalent of the U.K.'s MHRA, is charged with responsibility for the safety of medicines which are regulated under the Supply of Medicines Act.
The overall market prospects for the Netherlands, in general, are similar to those outlined for the United Kingdom above. Traditional herbal medicinal products that are currently on sale in the Netherlands fall within the scope of the Herbal Products Directive.
Canada
The product safety, quality, manufacturing, packaging, labeling, storage, importation, advertising, distribution, sale and clinical trials of natural health products ("NHPs"), prescription and non-prescription drugs, food and cosmetics are subject to regulation primarily under the federal Food and Drugs Act (Canada) (the "Canadian FDA") and associated regulations, including the Food and Drug Regulations and the Natural Health Products Regulations, and related Health Canada guidance documents and policies (collectively, the "Canadian Regulations"). In addition, NHPs and drugs are regulated under the federal Controlled Drugs and Substances Act if the product is considered a "controlled substance" or a "precursor," as defined in that statute or in related regulatory provisions.
Health Canada is primarily responsible for administering the Canadian FDA and the Canadian Regulations.
The Canadian FDA and Canadian Regulations also set out requirements for establishment and site licenses, market authorization for drugs and NHP licenses. Effective January 2004, each NHP must have a product license issued by Health Canada before it can be sold in Canada, subject to certain
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transition rules. NHPs that had a drug identification number ("DIN") under the prior regulations could continue to be sold without a license until December 31, 2009. Health Canada assigns a natural health product number ("NPN") to each NHP once Health Canada issues the license for that NHP. The Canadian Regulations require that all drugs and NHPs be manufactured, packaged, labeled, imported, distributed and stored under Canadian GMPs or the equivalent thereto, and that all premises used for manufacturing, packaging, labeling and importing drugs and NHPs have a site license (NHPs) or establishment license (drugs), which requires GMP compliance. The Canadian Regulations also set out requirements for labeling, packaging, clinical trials and adverse reaction reporting.
Health Canada approval for drug marketing authorizations and NHP licenses can take time. The approval time for NHPs and drugs can vary depending on the product and the application or submission. For NHPs, the Canadian Regulations indicate that certain product licenses should be processed within 60 days. However, the regulations also include provisions to extend this time frame if, for example, more information is required. There can be significant delays. Health Canada has publicly acknowledged that there has been a delay in processing NHP licenses, and until August 3, 2010 the Health Canada "Compliance Policy for Natural Health Products" provided that Health Canada would focus compliance actions against those NHPs that do not have a product license submission number and that Health Canada believes pose a health risk. The policy was not to be construed as authorization to sell any NHP that does not have a product license, and Health Canada could exercise its authority to stop the sale of unlicensed NHPs, or NHP sales that otherwise fail to comply with Canadian Regulations at any time. Effective August 3, 2010, regulations to the Canadian FDA came into force which provide that each application for an NPN that is in process, that has not been disallowed and is for a product that is neither a specified restricted product nor a product that contains an ingredient that is likely to result in injury to the health of a consumer, is to be issued an exemption number. Upon the completion of certain formalities, a product license is deemed to have been issued for a product with an exemption number and such license remains in effect until the associated application is processed. These regulations will automatically be repealed 30 months after they came into force. If Health Canada refuses to issue a product license, the NHP can no longer be sold in Canada unless and until Health Canada issues such a license. We have adopted a compliance strategy to adhere to these new regulations and to Health Canada's policies.
The Canadian FDA and Canadian Regulations, among other things, govern the manufacture, formulation, packaging, labeling, advertising and sale of NHPs and drugs, and regulate what may be represented on labels and in promotional materials regarding the claimed properties of products. The Canadian Regulations also require NHPs and drugs sold in Canada to affix a label showing specified information, such as the proper and common name of the medicinal and non-medicinal ingredients and their source, the name and address of the manufacturer/product license holder, its lot number, adequate directions for use, a quantitative list of its medical ingredients and its expiration date. In addition, the Canadian Regulations require labeling to bear evidence of the marketing authorization as evidenced by the designation DIN, drug identification number-homeopathic medicine ("DIN-HM") or NPN, followed by an eight-digit number assigned to the product and issued by Health Canada.
Health Canada can perform routine and unannounced inspections of companies in the industry to ensure compliance with the Canadian Regulations. The overall risk factors and market prospects for Canada, in general, are similar to those in the United States, as outlined above. Health Canada can suspend or revoke licenses for lack of compliance. In addition, if Health Canada perceives a product to present an unacceptable level of risk, it can also impose fines and jail terms.
The advertising of drugs and NHPs in Canada also is regulated under the misleading advertising and deceptive marketing practices of the Competition Act (Canada), a federal statute. The labeling of products also may be regulated under the federal Consumer Packaging and Labelling Act (Canada) and also under certain provincial statutes. Both the Competition Act and the Consumer Packaging and Labelling Act (except in respect of food products) are administered by the federal Competition Bureau.
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See "Item 1A. Risk Factors—Risks Relating to Our Business—Complying with new and existing government regulation, both in the United States and abroad, could increase our costs significantly, reduce our growth prospects and adversely affect our financial results," for additional information.
China
In China, the packaging, labeling, importation, advertising, distribution and sale of our products are primarily subject to the Food Safety Law, the Imported and Exported Goods Inspection Law, the Product Quality Law, the Law on the Protection of Consumer Rights and Interests and the Advertising Law, as well as various administrative regulations, rules, orders and policies issued by the national and local government agencies regarding food regulation including the Regulations on Implementation of Food Safety Law, Regulatory Measures on Labeling of Imported & Exported Foods, General Standards for the Labeling of Prepackaged Foods For Special Dietary Uses, Guidelines for Labeling Inspection of Imported & Exported Foods, Regulations on Food Advertising, Health Food Regulations, Health Food Registration Regulations, Regulatory Measures on Health Food Advertising (collectively "PRC Food Regulations").
Currently, the Ministry of Health ("MOH"), the General Administration of Quality Supervision, Inspection and Quarantine ("AQSIQ"), the Safe Food and Drug Administration ("SFDA"), the State Administration for Industry and Commerce ("SAIC") and their local counterparts have the power and responsibility for the implementation and enforcement of the PRC Food Regulations. In particular, the MOH is responsible for enacting food safety standards, publishing food safety information and coordinating with other agencies to handle major food safety accidents. The AQSIQ (mostly through its local counterparts) is responsible for inspection and regulation of the imported food as well as quality inspection and control. The SAIC (mostly through its local counterparts) is responsible for regulating the advertising of food. The SFDA (together with its local counterparts) is responsible for examination and approval of the registration, labeling, advertising and supervision of health food (including imported health food).
The PRC Food Regulations require that imported food conform to the national food safety standards and be subject to inspection by the AQSIQ and its local counterparts. After passing the inspection and obtaining a sanitation registration certificate issued by the AQSIQ or its local counterparts, food products can be imported into China and then distributed in the China market.
The PRC Food Regulations also require packaging for food imported into China to have labels and instructions in Chinese showing specific information, such as the name, list of ingredients and quantitative labeling of ingredients, energy and nutrients, place of origin, name and address of the domestic importer or distributor, production date, date of minimum durability, storage instructions, instructions for use and target population group, but any claims as to prevention, alleviation, treatment or cure of a disease or use of a drug's name implying the treatment and functional effects must not appear in the labeling.
China currently is implementing a stricter inspection system for health food. To the extent that some of our products may be deemed as health food, we may have to comply with the special regulations and rules applicable to health food. For example, in addition to AQSIQ's inspection and labeling requirement, the PRC Food Regulations could require us to apply for registration of health foods with the SFDA and obtain a Health Food Import Approval Certificate. Furthermore, advertisement about any health food will be reviewed and approved by the SFDA before placement or publication.
The AQSIQ, the SAIC, the SFDA, the Ministry of Commerce ("MOC") and their local counterparts can perform routine and unannounced inspections of importers and distributors in the food industry to ensure compliance with the PRC Food Regulations. In recent years, these government agencies have jointly taken numerous inspection and enforcement actions to deal with illegal practices
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in the food market and promote sound development of food industry in China. The enforcement actions have often resulted in correction orders, monetary penalties, revocation of business licenses or approval certificates, or suspension of import decision imposed by such agencies for non-compliance.
The regulatory environment in China is becoming more stringent. We believe that the food industry is likely to face a more aggressive enforcement environment in the future, which could result in additional product testing and approval requirements, additional record-keeping requirements, additional or different labeling standards, recalls or discontinuance of certain products, and other new standards and requirements, which could negatively affect our consolidated financial position, results of operation and cash flows.
Our facilities and operations, in common with those of similar industries making similar products, are subject to many federal, state, provincial and local requirements, rules and regulations relating to the protection of the environment and of human health and safety, including regulating the discharge of materials into the environment. We continually examine ways to reduce our emissions and minimize waste and limit our exposure to any liabilities, as well as decrease costs related to environmental compliance. Costs to comply with current and anticipated environmental requirements, rules and regulations and any estimated capital expenditures for environmental control facilities are not anticipated to be material when compared with overall costs and capital expenditures. Accordingly, we do not anticipate that such costs will have a material effect on our financial position, results of operations, cash flows or competitive position.
We market nutritional supplement products through subsidiaries, distributors, retailers and direct mail in approximately 90 countries throughout Europe, the Middle East, Africa, Central America, North America, South America, Asia, the Caribbean islands and the Pacific Rim countries.
We conduct our international operations to conform to local variations, economic realities, market customs, consumer habits and regulatory environments. We modify our products (including labeling of such products) and our distribution and marketing programs in response to local and foreign legal requirements and customer preferences.
Our international operations are subject to many of the same risks our domestic operations face. These include competition and the strength of the relevant economy. In addition, international operations are subject to certain risks inherent in conducting business abroad, including foreign regulatory restrictions, fluctuations in monetary exchange rates, import-export controls and the economic and political policies of foreign governments. Government regulations in foreign countries may prevent or delay the introduction, or require the reformulation, of certain of our products. Compliance with such foreign governmental regulations is generally the responsibility of our distributors in those countries. These distributors are independent contractors whom we do not control. The importance of these risks increases as our international operations grow and expand. Foreign currency fluctuations, and, more particularly, changes in the value of the British pound, the euro, the Canadian dollar and the Chinese yuan as compared to the U.S. dollar, affect virtually all our international operations.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for additional information regarding the geographic areas in which we conduct our business and the effect of foreign currency exchange rates on our operations.
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General
We own trademarks registered with the U.S. Patent and Trademark Office (the "PTO") and many foreign jurisdictions for our Nature's Bounty®, Body Fortress®, Pure Protein®, Ester-C®, Solgar®, MET-Rx®, American Health®, Osteo Bi-Flex®, Sundown®, Worldwide Sport Nutrition®, Puritan's Pride®, Holland & Barrett®, Vitamin World® and Leiner® trademarks, among others, and with the appropriate United Kingdom, EU, Benelux, Canadian and Irish authorities for our Holland & Barrett®, De Tuinen®, SISU® and Nature's Way® trademarks, respectively, among others. We have an exclusive license to use the GNC mark in the United Kingdom. Our policy is to pursue registrations for all trademarks associated with our key products. U.S. registered trademarks have a perpetual life, as do trademarks in most other jurisdictions, as long as they are renewed on a timely basis and used properly as trademarks, subject to the rights of third parties to seek cancellation of the trademarks. We regard our trademarks and other proprietary rights as valuable assets and believe they have significant value in marketing our products. We hold U.S. and foreign patents on inventions embodied in certain products, including Ester-C® products.
We have developed many brand names, trademarks and other intellectual property for products in all areas. We consider the overall protection of our patent, trademark, license and other intellectual property rights to be paramount. As such, we vigorously protect these rights against infringement. We have approximately 2,400 trademark registrations and applications with the PTO or foreign trademark offices.
We hold approximately 50 patents and patent applications, in the United States and in certain other countries, most of which relate to Ester-C®. We also are prosecuting a patent application on Ester-C® compositions in the E.U. U.S. patents for Ester-C® expire June 2019. Most foreign patents for Ester-C® products expire between February 2019 and June 2021, with a large number of foreign patents expiring in 2019.
Canada
Each of our Solgar, Vita Health, Nature's Bounty, MET-Rx and SISU subsidiaries owns the trademarks registered in Canada for its respective brand.
United Kingdom/Ireland
Our Holland & Barrett subsidiary owns trademarks registered in the United Kingdom and in the EU for its Holland & Barrett® trademark, and has rights to use other names essential to its business. NBTY Europe Limited uses GNC trademarks under an exclusive license in the United Kingdom and these trademarks are considered essential to the business. Our Nature's Way subsidiary owns the Nature's Way® trademarks in Ireland. One of our Solgar subsidiaries owns trademarks in the United Kingdom and in the EU.
Netherlands
Our De Tuinen subsidiary owns trademarks registered in the Benelux Office for Intellectual Property, and Community Trademarks, which are in force throughout the EU, for its De Tuinen® trademarks.
China
We own trademark applications and registrations for most of our material trademarks, which are filed with the Chinese Trademark Office. We also own patents for Ester-C® compositions, issued by the Chinese Patent Office.
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In fiscal 2012, we spent approximately $757 million on raw materials (approximately $680 million domestically), excluding packaging and similar product materials. The principal raw materials required in our operations are vitamins, minerals, herbs and gelatin. We purchased the majority of our vitamins, minerals and herbs from raw material manufacturers and distributors in Asia, Europe, North America and South America. We believe that there are adequate sources of supply for all our principal raw materials, and in general we maintain two to three suppliers for many of our raw materials. From time to time, weather or unpredictable fluctuations in the supply and demand may affect price, quantity, availability or selection of raw materials. We believe that our strong relationships with our suppliers yield high quality, competitive pricing and overall good service to our customers. Although we cannot be sure that our sources of supply for our principal raw materials will be adequate in all circumstances, we believe that we can develop alternate sources in a timely and cost effective manner if our current sources become inadequate. During fiscal 2012, no one supplier accounted for more than 10% of our raw material purchases. Due to the availability of numerous alternative suppliers, we do not believe that the loss of any single supplier would have a material adverse effect on our consolidated financial condition or results of operations.
For a description of the impact of seasonality on our financial performance, please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Seasonality."
Please carefully consider the following risk factors, which could materially adversely affect our business, financial condition, operating results and cash flows. The risk factors described below are not the only ones we face. Risks and uncertainties not known to us currently, or that may appear immaterial, also may have a material adverse effect on our business, financial condition, operating results and cash flows.
Risks Relating to Our Business
Unfavorable publicity or consumer perception of our products and any similar products distributed by other companies could have a material adverse effect on our business.
We believe the nutritional supplement market is highly dependent upon consumer perception regarding the safety, efficacy and quality of nutritional supplements generally, as well as of products distributed specifically by us. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, national media attention and other publicity regarding the consumption of nutritional supplements. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the nutritional supplement market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and our business, results of operations, financial condition and cash flows. Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on us, the demand for our products, and our business, results of operations, financial condition and cash flows. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of nutritional supplements in general, or our products specifically, or associating the consumption of nutritional supplements with illness, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even
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if the adverse effects associated with such products resulted from consumers' failure to consume such products appropriately or as directed.
Our success is linked to the size and growth rate of the vitamin, mineral and supplement market and an adverse change in the size or growth rate of that market could have a material adverse effect on us.
An adverse change in size or growth rate of the vitamin, mineral and supplement market could have a material adverse effect on us. Underlying market conditions are subject to change based on economic conditions, consumer preferences and other factors that are beyond our control, including media attention and scientific research, which may be positive or negative.
Our ability to obtain additional capital on commercially reasonable terms may be limited or non-existent.
Although we believe our cash, cash equivalents and short-term investments, as well as future cash from operations and availability under our revolving credit facility, provide adequate resources to fund ongoing operating requirements for the foreseeable future, we may need to seek additional financing to compete effectively.
If we are unable to obtain capital or obtain capital on commercially reasonable terms, it could:
- •
- reduce funds available to us for purposes such as working capital, capital expenditures, research and development,
strategic acquisitions and other general corporate purposes;
- •
- restrict our ability to introduce new services or products or exploit business opportunities;
- •
- increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate;
and
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- place us at a competitive disadvantage.
Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could materially adversely affect our financial position, results of operations and cash flows, and we do not know if these conditions will improve in the near future.
Our financial position, results of operations and cash flows could be materially adversely affected by continuation of the difficult conditions and significant volatility in the capital, credit and commodities markets and in the overall economy. These factors, combined with low levels of business and consumer confidence and increased unemployment, have precipitated a slow recovery from the global recession and concern about a return to recessionary conditions. The difficult conditions in these markets and the overall economy affect our business in a number of ways. For example:
- •
- under difficult market conditions there can be no assurance that borrowings under our revolving credit facility would be
available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all;
- •
- in order to respond to market conditions, we may need to seek waivers of various provisions in our senior secured credit
facilities, and we might not be able to obtain such waivers on reasonable terms, if at all; and
- •
- market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending because many consumers consider the purchase of our products discretionary, which in turn could result in decreased sales and earnings for us.
We do not know if market conditions or the state of the overall economy will improve in the near future.
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Because a substantial majority of our sales are to or through retail stores, we are dependent to a large degree upon the success of this channel as well as the success of specific retailers in the channel.
Approximately 64% of our sales for fiscal 2012 were in the United States. In this market, we sell our products primarily to or through our and third-party retail stores. Because of this, we are dependent to a large degree upon the growth and success of that channel as well as the growth and success of specific retailers in the channel, which are outside our control. There can be no assurance that the retail channel will be able to grow as it faces price and service pressure from other channels.
One of our customers accounted for 14% of our consolidated net sales during fiscal 2012 and the loss of this customer, or any of our other major customers, could have a material adverse effect on our results of operations.
During fiscal 2012 and 2011, Wal-Mart, individually, accounted for 23% and 25% of our Wholesale segment's net sales, respectively, and 14% and 15% of our consolidated net sales, respectively. As of the end of our fiscal 2012, Wal-Mart, individually, accounted for 18% of our Wholesale segment's total gross accounts receivable. Additionally, for fiscal 2012, our other top three wholesale customers collectively accounted for approximately 24%, of our Wholesale segment's net sales and 15% of our consolidated net sales. We do not have a long-term contract with Wal-Mart or any other major customer, and the loss of this customer or any other major customer could have a material adverse effect on our results of operations. In addition, our results of operations and ability to service our debt obligations would be impacted negatively to the extent Wal-Mart is unable to make payments to us, or does not make timely payments on outstanding accounts receivables.
Complying with new and existing government regulation, both in the United States and abroad, could increase our costs significantly, reduce our growth prospects and adversely affect our financial results.
The processing, formulation, manufacturing, packaging, labeling, advertising, distribution and sale of our products are subject to regulation by several U.S. federal agencies, including the FDA, the FTC, the CBP, the USPS, the CPSC, the Department of Agriculture, OSHA and the EPA, as well as various state, local and international laws and agencies of the localities in which our products are sold, including Health Canada and the Competition Bureau in Canada, the Food Standards Agency ("FSA") and the Department of Health in the United Kingdom and similar regulators in Ireland, the Netherlands, the EU and China. Government regulations may prevent or delay the introduction, or require the reformulation or relabeling, of our products. Some agencies, such as the FDA, could require us to remove a particular product from the market, delay or prevent the import of raw materials for the manufacture of our products, or otherwise disrupt the marketing of our products. Any such government actions would result in additional costs to us, including lost revenues from any additional products that we are required to remove from the market, which could be material. Any such government actions also could lead to liability, substantial costs and reduced growth prospects. In addition, complying with the AER Act, GMPs and other legislation may impose additional costs on us, which could become significant. Moreover, there can be no assurance that new laws or regulations imposing more stringent regulatory requirements on the dietary supplement industry will not be enacted or issued or that certain agencies will not enforce the existing laws or regulations more strictly. We currently are subject to FTC consent decrees and a USPS consent order, prohibiting certain advertising claims for certain of our products. We also are subject to consent judgments under Proposition 65. A determination that we have violated these obligations could result in substantial monetary penalties, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, we could incur costs as a result of violations of or liabilities hereunder, environmental laws and regulations, or to maintain compliance with such environmental laws, regulations or permit requirements.
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Additional or more stringent regulations and enforcement of dietary supplements and other products have been considered from time to time in the United States and globally. These developments could require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, adverse event reporting or other new requirements. These developments also could increase our costs significantly.
In Europe, we anticipate the enactment of legislation that could significantly impact the formulation and marketing of our products. For example, in accordance with the Supplements Directive, maximum permitted content levels for vitamin and mineral supplements are expected to be enacted but have not yet been announced. European legislation regulating food supplements other than vitamins and minerals also is expected to be introduced. The introduction of this anticipated legislation could require us to reformulate our existing products to meet the new standards and, in some cases, may lead to some products being discontinued.
The Nutrition and Health Claims Regulation implemented in July 2007 controls the types of claims that can be made for foodstuffs (including supplements) in Europe, and the criteria a product must meet for the claims to be made. Except in relation to botanical products, after December 14, 2012, only certain permitted health claims can be made for foodstuffs, and this may impact our sales of those products in Europe. In addition, we anticipate that it will entail some products being relabeled at an additional cost to meet the implementation date.
In addition, the General Product Safety Directive governing product safety came into force in Europe at the beginning of 2004. This legislation requires manufacturers to notify regulators as soon as they know that a product is unsafe and gives regulators in each EU member state the power to order a product recall and, if necessary, instigate the product recall themselves. A recall of any of our products in Europe could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In Canada the federal government has undertaken an initiative to develop a new framework for drug licensing. The current system of drug regulation in Canada focuses on pre-market activities and licensing is point-in-time, not continuous, subject to the licensee performing its obligations with respect to advertising restrictions, quality of product and adverse reaction reporting. A progressive licensing regime would entail a life-cycle approach to the regulation of drugs and could involve earlier consultation with industry before drug submissions, the requirement for licensees to provide and for Health Canada to review pharmacovigilance (adverse reaction reporting) and risk management plans, and re-evaluation by Health Canada of drug information after a period of initial marketing. Health Canada has completed the consultation process with external stakeholders and is moving towards the development of a progressive licensing framework document. The implementation of a new regulatory framework could have a significant impact on our Canadian operations. There is no indication of when, or if, such new regulatory regime will be implemented.
In China, the Food Safety Law, which replaced prior regulations, came into force on June 1, 2009. This legislation requires all imported food to comply with applicable national food safety standards and subjects it to inspection by AQSIQ. Where there are no national food safety standards for some imported food, the MOH approval must be obtained before applying for the inspection; otherwise the food in question cannot be imported into China. The revision of the national food safety standards by the MOH and other government agencies is in progress and various new and updated standards are expected to be promulgated and implemented by the end of 2015. The introduction of these new food safety standards may require us to reformulate our existing products to meet the new standards and in some cases, may lead to some products being discontinued.
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The Food Safety Law also requires overseas food manufacturers to register with AQSIQ or its local counterparts, which must establish records of the credit standing of importers, exporters and manufacturers of imported goods. The imported foods, importers, exporters or manufacturers with unsatisfactory records are subject to stricter inspection or even suspension of their import business. Any restriction or suspension of import of any of our products into China could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The Food Safety Law provides for strict regulation and supervision over food claimed to have particular effects on human health, namely "health food," which is mainly subject to the regulation by the SFDA. To the extent AQSIQ or SFDA determines some of our products fall into this category, the manufacture, exportation, importation and sale of such products could be subject to the more complicated registration and licensing requirements, and stricter inspection by SFDA and AQSIQ.
AQSIQ promulgated the Imported and Exported Food Safety Regulatory Measures on July 22, 2011, which provides for detailed safety and inspection requirements applicable to imported and exported food. These regulations became effective on March 1, 2012 and require us to go through complicated procedures for importing and exporting our products into and from China. In compliance with these regulations, we are in the process of applying for registration of certain of our products as "health food" to meet applicable requirements for manufacture and export of such products. If we fail to obtain required registration on time when our current export license expires, our ability to continue exporting these products from China could be adversely affected, which in turn could have a material adverse effect on our business, financial condition, results of operations and cash flows.
See "Item 1. Business—Government Regulation" for more information about the regulatory environment in which we conduct our business.
We may incur material product liability claims, which could increase our costs and adversely affect our reputation, revenues and operating income.
As a retailer, marketer and manufacturer of products designed for human and animal consumption, we are subject to product liability claims if the use of our products is alleged to have resulted in injury. Our products consist of vitamins, minerals, herbs and other ingredients that are classified as foods, dietary supplements, or NHPs, and, in most cases, are not necessarily subject to pre-market regulatory approval in the United States. One of our Canadian subsidiaries also manufactures and sells non-prescription medications such as headache and cold remedies and contract manufactures some prescription medications. Some of our products contain innovative ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. In addition, some of the products we sell are produced by third-party manufacturers. As a marketer of products manufactured by third parties, we also may be liable for various product liability claims for products we do not manufacture. We have been in the past, and may be in the future, subject to various product liability claims, including, among others, that our products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. A product liability claim against us could result in increased costs and could adversely affect our reputation with our customers, which, in turn, could have a material adverse effect on our business, results of operations, financial condition and cash flows. See Item 3, "Legal Proceedings," for additional information.
If we experience product recalls, we may incur significant and unexpected costs, and our business reputation could be adversely affected.
We may be exposed to product recalls and adverse public relations if our products are alleged to cause injury or illness, or if we are alleged to have violated governmental regulations. A product recall could result in substantial and unexpected expenditures, which would reduce operating profit and cash
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flow. In addition, a product recall may require significant management attention. Product recalls may hurt the value of our brands and lead to decreased demand for our products. Product recalls also may lead to increased scrutiny by federal, state or international regulatory agencies of our operations and increased litigation and could have a material adverse effect on our business, results of operations, financial condition and cash flows. See "—Complying with new and existing government regulation, both in the United States and abroad, could increase our costs significantly, reduce our growth prospects and adversely affect our financial results" and other risks summarized in this Report.
Insurance coverage, even where available, may not be sufficient to cover losses we may incur.
Our business exposes us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure you that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The insurance industry has become more selective in offering some types of coverage and we may not be able to obtain insurance coverage in the future.
The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors' and officers' liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure you that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
International markets expose us to certain risks.
As of September 30, 2012, we operated 896 retail stores outside of the United States, including 40 franchised stores. In addition, we had significant wholesale sales outside of the United States. For fiscal 2012, international sales represented approximately 36% of our net sales. These international operations expose us to certain risks, including:
- •
- local economic conditions;
- •
- inflation;
- •
- changes in or interpretations of foreign regulations that may limit our ability to sell certain products or repatriate
profits or capital to the United States;
- •
- exposure to currency fluctuations;
- •
- potential imposition of trade or foreign exchange restrictions or increased tariffs;
- •
- changes and limits in export and import controls;
- •
- difficulty in collecting international accounts receivable;
- •
- difficulty in staffing, developing and managing foreign operations;
- •
- potentially longer payment cycles;
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- •
- difficulties in enforcement of contractual obligations and intellectual property rights;
- •
- renegotiation or modification of various agreements;
- •
- national and regional labor strikes;
- •
- increased costs in maintaining international manufacturing and marketing efforts;
- •
- quarantines for products or ingredients, or restricted mobility of key personnel due to disease outbreaks;
- •
- government regulations and laws;
- •
- geographic time zone, language and cultural differences between personnel in different areas of the world;
- •
- political instability;
- •
- trademarks availability and registration issues;
- •
- changes in exchange rates;
- •
- changes in taxation; and
- •
- wars and other hostilities.
As we continue to expand our international operations, these and other risks associated with international operations are likely to increase. These risks, if they occur, could have a material adverse effect on our business and results of operations.
Our international operations require us to comply with anti-corruption laws and regulations of the U.S. government and various international jurisdictions in which we do business.
Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of the U.S. government and various international jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act ("FCPA") and the U.K. Bribery Act ("UKBA"). The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires us to maintain adequate record-keeping and internal accounting practices to accurately reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA and UKBA. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti-corruption laws. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.
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We may not be successful in expanding globally.
We may experience difficulty entering new international markets due to regulatory barriers, the necessity of adapting to new regulatory systems, and problems related to entering new markets with different cultural bases and political systems. These difficulties may prevent, or significantly increase the cost of, our international expansion.
We may be exposed to legal proceedings initiated by regulators in the United States or abroad that could increase our costs and adversely affect our reputation, revenues and operating income.
In all jurisdictions in which we operate, non-compliance with relevant legislation can result in regulators bringing administrative, or, in some cases, criminal proceedings. In the United States, the FTC has considered bringing actions against the Company in the past. In the United Kingdom, it is common for regulators to prosecute retailers and manufacturers for non-compliance with legislation governing foodstuffs and medicines. Our failure to comply with applicable legislation could occur from time to time, and prosecution for any such violations could have a material adverse effect on our business, results of operations, financial condition and cash flows. See "Item 1. Business—Government Regulation" for additional information.
We may not be successful in our future acquisition endeavors, if any, which may have an adverse effect on our business and results of operations.
Historically, we have engaged in substantial acquisition activity. We may be unable to identify suitable targets, opportunistic or otherwise, for acquisition in the future. If we identify a suitable acquisition candidate, our ability to successfully implement the acquisition will depend on a variety of factors, including our ability to obtain financing on acceptable terms and to comply with the restrictions contained in our debt agreements. Historical instability in the financial markets indicates that obtaining future financing to fund acquisitions may present significant challenges. If we need to obtain our lenders' consent to an acquisition, they may condition their consent on our compliance with additional restrictive covenants that may limit our operating flexibility. Acquisitions involve risks, including:
- •
- significant expenditures of cash;
- •
- the risk that acquired businesses may not perform in accordance with expectations;
- •
- risks associated with integrating the operations, financial reporting, disparate technologies and personnel of acquired
companies;
- •
- managing geographically dispersed operations;
- •
- diversion of management's attention from other business concerns;
- •
- the inherent risks in entering markets or lines of business in which we have either limited or no direct experience;
- •
- the potential loss of key employees, customers and strategic partners of acquired companies;
- •
- incurrence of liabilities and claims arising out of acquired businesses;
- •
- inability to obtain financing; and
- •
- incurrence of indebtedness or issuance of additional stock.
We may not integrate any businesses or technologies we acquire in the future successfully and may not achieve anticipated operating efficiencies and effective coordination of sales and marketing as well as revenue and cost benefits. Acquisitions may be expensive, time consuming and may strain our resources. Acquisitions may impact our results of operations negatively as a result of, among other things, the incurrence of debt.
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We are dependent on our executive officers and other key personnel, and we may not be able to pursue our current business strategy effectively if we lose them.
Our continued success will depend largely on the efforts and abilities of our executive officers and certain other key employees. For additional information about these individuals, see Item 10, "Directors, Executive Officers and Corporate Governance" elsewhere in this Report. Our ability to manage our operations and meet our business objectives could be affected adversely if, for any reason, we are unable to recruit and retain executive talent.
We are dependent on certain third-party suppliers.
We purchase from third-party suppliers certain important ingredients and raw materials. The principal raw materials required in our operations are vitamins, minerals, herbs, gelatin and packaging components. We purchase the majority of our vitamins, minerals and herbal raw materials from manufacturers and distributors in Asia, Europe, North America and South America. Real or perceived quality control problems with raw materials outsourced from certain regions could negatively impact consumer confidence in our products, or expose us to liability. In addition, although raw materials are available from numerous sources, an unexpected interruption of supply or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Also, currency fluctuations, including the decline in the value of the U.S. dollar, could result in higher costs for raw materials purchased abroad. In addition, we rely on outside printing services and availability of paper stock in our printed catalog operations.
We rely on our manufacturing operations to produce the vast majority of the nutritional supplements that we sell, and disruptions in our manufacturing system or losses of manufacturing certifications could affect our results of operations adversely.
During fiscal 2012, we manufactured approximately 90% of the nutritional supplements that we sold. We currently operate manufacturing facilities in Arizona, California, Florida, New Jersey, New York and North Carolina in the United States, and in Canada, the United Kingdom and China. All our domestic and foreign operations manufacturing products for sale to the U.S. are subject to GMPs promulgated by the FDA and other applicable regulatory standards, including in the areas of environmental protection and worker health and safety. We are subject to similar regulations and standards in Canada, the United Kingdom and China. Any significant disruption in our operations at any of these facilities, including any disruption due to any regulatory requirement, could affect our ability to respond quickly to changes in consumer demand and could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, we may be exposed to risks relating to the transfer of work between facilities or risks associated with opening new facilities that may cause a disruption in our operations. There have been a number of well publicized incidents of tainted food and drugs manufactured in China in the past few years. Although we have implemented GMPs in our China plant, there can be no assurance that products manufactured in China, or in our other plants around the world, will not be contaminated or otherwise fail to meet our quality standards. Any such contamination or other quality failures could result in costly recalls, litigation, regulatory actions or damage to our reputation, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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We operate in a highly competitive industry, and our failure to compete effectively could affect our market share, financial condition and growth prospects adversely.
The VMHS industry is a large and growing industry and is highly fragmented in terms of both geographical market coverage and product categories. The market for vitamins and other nutritional supplements is highly competitive in all our channels of distribution. We compete with companies that may have broader product lines or larger sales volumes, or both, than we do, and our products compete with nationally advertised brand name products. Several of the national brand companies have resources greater than ours. Numerous companies compete with us in the development, manufacture and marketing of vitamins and nutritional supplements worldwide. In addition, our North American and European retail stores compete with specialty vitamin stores, health food stores and other retail stores worldwide. With respect to mail order sales, we compete with a large number of smaller mail order and internet companies, some of which manufacture their own products and some of which sell products manufactured by others. The market is highly sensitive to the introduction of new products, which may rapidly capture a significant share of the market. We also may face competition from low-cost entrants to the industry, including from international markets. Increased competition from companies that distribute through the wholesale channel, especially the private label market, could have a material adverse effect on our business, results of operations, financial condition and cash flows as these competitors may have greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities far greater than ours.
We may not be able to compete effectively in some or all our markets, and our attempt to do so may require us to reduce our prices, which may result in lower margins. Failure to compete effectively could have a material adverse effect on our market share, business, results of operations, financial condition, cash flows and growth prospects. See "Item 1. Business—Competition; Customers."
Our failure to appropriately respond to changing consumer preferences and demand for new products and services could harm our customer relationships and product sales significantly.
The nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions. Our failure to accurately predict these trends could negatively impact consumer opinion of us as a source for the latest products, which, in turn, could harm our customer relationships and cause decreases in our net sales. The success of our new product offerings depends upon a number of factors, including our ability to:
- •
- accurately anticipate customer needs;
- •
- innovate and develop new products;
- •
- successfully commercialize new products in a timely manner;
- •
- price our products competitively;
- •
- manufacture and deliver our products in sufficient volumes and in a timely manner;
and
- •
- differentiate our product offerings from those of our competitors.
In addition, we are subject to the risk of a potential shift in customer demand towards more private label products, which could have an adverse effect on our profitability. If any new products fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, this would harm our results of operations. If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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We are subject to acts of God, war, sabotage and terrorism risk.
Acts of God, war, sabotage and terrorist attacks or any similar risk may affect our operations in unpredictable ways, including disruptions of the shopping and commercial behavior of our customers, changes in the insurance markets and disruptions of fuel supplies and markets.
We may be subject to work stoppages at our facilities, which could negatively impact the profitability of our business.
As of September 30, 2012, we had approximately 13,500 employees. As of September 30, 2012, CAW Local 468, Retail Wholesale Canada Division represented approximately 270 of our associates in Canada under an agreement that expired in October 2012. The CAW reached a new three-year collective agreement on September 30, 2012. If our employees were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations, which could interfere with our ability to deliver products on a timely basis and could have other negative effects, such as decreased productivity and increased labor costs. Any interruption in the delivery of our products could reduce demand for our products and could have a material adverse effect on us.
We may be affected adversely by increased raw material, utility and fuel costs.
Inflation and other factors affect the cost of raw materials, goods and services we use. Increased raw material and other costs may adversely affect our results of operations to the extent we are unable to pass these costs through to our customers or to benefit from offsetting cost reductions in the manufacture and distribution of our products. Furthermore, increasing fuel costs may affect our results of operations adversely in that consumer traffic to our retail locations may be reduced and the costs of our sales may increase as we incur fuel costs in connection with our manufacturing operations and the transportation of goods from our warehouse and distribution facilities to stores or Direct Response/E-Commerce customers. Also, high oil costs can affect the cost of our raw materials and components and the competitive environment in which we operate may limit our ability to recover higher costs resulting from rising fuel prices.
Our profits may be affected negatively by currency exchange rate fluctuations.
Our assets, earnings and cash flows are influenced by currency fluctuations due to the geographic diversity of our sales and the countries in which we operate. These fluctuations may have a significant impact on our financial results. For fiscal 2012, 31% of our sales were denominated in a currency other than the U.S. dollar, and as of fiscal 2012, 25% of our assets and 5% of our total liabilities were denominated in a currency other than the U.S. dollar. In December 2010, we entered into various cross currency swap transactions. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk."
Our success is dependent on the accuracy, reliability, and proper use of sophisticated and dependable information processing systems and management information technology and any interruption in these systems could have a material adverse effect on our business, financial condition, and results of operations.
Our success is dependent on the accuracy, reliability, and proper use of sophisticated and dependable information processing systems and management information technology. Our information technology systems are designed and selected to facilitate order entry and customer billing, maintain customer records, accurately track purchases and incentive payments, manage accounting, finance and manufacturing operations, generate reports, and provide customer service and technical support. Any interruption in these systems or any interruption associated with the transition of these systems to a new information technology platform could have a material adverse effect on our business, financial condition, and results of operations.
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System interruptions or security breaches may affect sales.
Customer access to, and ability to use, our websites affect our Direct Response/E-Commerce sales. If we are unable to maintain and continually enhance the efficiency of our systems, we could experience system interruptions or delays that could affect our operating results negatively. In addition, we could be liable for breaches of security on our websites, loss or misuse of our customers' personal information or payment data. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to prevent or mitigate such fraud or breaches may affect our operating results negatively.
We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We rely on various information technology systems to manage our operations. Recently we have implemented and we continue to implement modifications and upgrades to such systems and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have a material adverse effect on our business, financial condition or results of operations.
Our inability to protect our intellectual property rights could adversely affect our business.
Despite our efforts, we may not be able to determine the extent of unauthorized use of our trademarks and patents. In any case, such efforts are difficult, expensive, and time-consuming, and there can be no assurance that infringing goods could not be manufactured without our knowledge and consent. Many of our products are not subject to patent protection, and thus they can be legally reverse-engineered by competitors. Moreover, even with respect to some of our products that are covered by patents, such as Ester-C® products, there are numerous similar yet non-infringing supplement products in the marketplace, and this negatively affects sales we might otherwise make. Our patents, or certain claims made in such patents, could be found to be invalid or unenforceable. From time to time we face opposition to our applications to register trademarks, and we may not ultimately be successful in our attempts to register certain trademarks. Further, there can be no assurance that in those foreign jurisdictions in which we conduct business the trademark and patent protection available to us will be as extensive as the protection available to us in the United States.
Intellectual property litigation and infringement claims against us could cause us to incur significant expenses or prevent us from manufacturing, selling or marketing our products, which could adversely affect our revenues and market share.
We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from manufacturing, selling or marketing our products in various jurisdictions. Claims of intellectual property infringement also may require us to enter into costly royalty or license agreements. However, we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Claims that our technology or products infringe on intellectual property rights of others could be costly to defend or settle, could cause reputational injury
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and would divert the attention of management and key personnel, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are party to a number of lawsuits that arise in the ordinary course of business and may become party to others in the future.
We are party to a number of lawsuits (including product liability, false advertising, intellectual property and Proposition 65 claims) that arise in the ordinary course of business and may become party to others in the future. The possibility of such litigation, and its timing, is in large part outside our control. While none of the current lawsuits arising in the ordinary course of business in which we are involved are reasonably estimable to be material as of the date hereof, it is possible that future litigation could arise, or developments could occur in existing litigation, that could have material adverse effects on us.
Failure to maintain effective internal control over financial reporting could have a material adverse effect on our business and operating results.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. The Sarbanes-Oxley Act of 2002, as well as related rules and regulations implemented by the SEC, have required changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have increased our legal and financial compliance costs and made many activities more time-consuming and more burdensome. The costs of compliance with these laws, rules and regulations may adversely affect our financial results. Moreover, we run the risk of non-compliance, which could adversely affect our financial condition or results of operations.
In the past we have discovered, and in the future we may discover, areas of our internal control over financial reporting that need improvement. We have devoted significant resources to remediate any deficiencies we discovered and to improve our internal control over financial reporting. Based upon management's assessment of the effectiveness of our internal control over financial reporting as of September 30, 2012, management concluded that our internal control over financial reporting was effective as of that date. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information.
Risks Relating to Our Indebtedness
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the notes.
As a result of the Merger, we have a significant amount of indebtedness. At September 30, 2012, we had $2.2 billion of indebtedness on a consolidated basis, of which $1.5 billion was secured indebtedness. As of September 30, 2012, we also had an additional $200 million available under the revolving portion of our senior secured credit facilities, as amended. In connection with the acquisition of Balance Bar, $80 million was drawn on the revolving portion of our senior secured credit facilities in November 2012. In addition, as of September 30, 2012, as adjusted for the issuance of the Holdco Notes, our parent, Holdings, had indebtedness of $550 million, which indebtedness does not require any cash interest payments until May 1, 2013. While NBTY has no direct obligation under the Holdco
29
Notes, NBTY is the sole source of cash generation for Holdings. The Holdco Notes do not appear on our balance sheet and the related interest expense is not included in our income statement.
Our substantial indebtedness could have important consequences. For example, it could:
- •
- make it more difficult for us to satisfy our obligations with respect to the notes or the Holdco Notes;
- •
- require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;
- •
- increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business and the
industries in which we operate;
- •
- restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
- •
- expose us to the risk of increased interest rates as borrowings under our senior secured credit facilities will be subject
to variable rates of interest;
- •
- expose us to additional risks related to currency exchange rates and repatriation of funds;
- •
- place us at a competitive disadvantage compared to our competitors that have less debt;
and
- •
- limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes.
In addition, the agreements governing our senior secured credit facilities and the indentures governing the notes and the Holdco Notes contain affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.
Restrictive covenants in the indentures governing the notes and the Holdco Notes and the agreements governing our senior secured credit facilities may restrict our ability to pursue our business strategies.
The indentures governing the notes and the Holdco Notes and the agreements governing our senior secured credit facilities limit our ability, and the terms of any future indebtedness may limit our ability, among other things, to:
- •
- incur or guarantee additional indebtedness;
- •
- make certain investments;
- •
- pay dividends or make distributions on our capital stock;
- •
- sell assets, including capital stock of restricted subsidiaries;
- •
- agree to payment restrictions affecting our restricted subsidiaries;
- •
- consolidate, merge, sell or otherwise dispose of all or substantially all our assets;
- •
- enter into transactions with our affiliates;
- •
- incur liens; and
- •
- designate any of our subsidiaries as unrestricted subsidiaries.
The restrictions contained in the indentures governing the notes and the Holdco Notes and the agreements governing our senior secured credit facilities also could limit our ability to plan for, or react
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to, market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans.
A breach of any of these restrictive covenants (to the extent applicable at such time), or our inability to comply with the required financial ratios, could result in a default under the agreements governing our senior secured credit facilities. If a default occurs, the lenders under our senior secured credit facilities may elect to:
- •
- declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable;
or
- •
- prevent us from making unscheduled prepayments or payments on the notes,
either of which would result in an event of default under the indentures governing the notes and the Holdco Notes. An event of default under either or both of these indentures or the senior secured credit facilities would permit some of our lenders to declare all amounts borrowed from them to be due and payable. The lenders also have the right in these circumstances to terminate any commitments they have to provide further borrowings. An event of default under either of these indentures or the senior secured credit facilities would likely result in a cross default under either or both of the other instruments. If we are unable to repay outstanding borrowings when due, the lenders under our senior secured credit facilities also have the right to proceed against the collateral, including our available cash, granted to them to secure the indebtedness. If the indebtedness under our senior secured credit facilities, the Holdco Notes and/or the notes were to be accelerated, we can give no assurance that our assets would be sufficient to repay in full that indebtedness and our other indebtedness, including the notes and the Holdco Notes.
Despite current indebtedness levels and restrictive covenants, NBTY and its subsidiaries may incur additional indebtedness in the future. This could further exacerbate the risks associated with our substantial financial leverage.
The terms of the indenture governing the notes, the agreements governing our senior secured credit facilities and the indenture governing the Holdco Notes permit us to incur a substantial amount of additional debt, including secured debt. Any additional borrowings under the senior secured credit facilities, and any other secured debt, would be effectively senior to the notes and any guarantees thereof to the extent of the value of the assets securing such indebtedness. If we incur any additional indebtedness that ranks equally with the notes the holders of that debt will be entitled to share ratably with noteholders in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company. This could reduce the amount of proceeds available to be paid to noteholders. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of September 30, 2012, we had an additional $200 million of unused commitments under the revolving portion of our senior secured credit facilities. In connection with the acquisition of Balance Bar, $80 million was drawn on the revolving portion of our senior secured credit facilities in November 2012. Additionally, our senior secured credit facilities may be increased by up to $500 million (of which no more than $100 million will be under our revolving credit facility), subject to certain conditions. All of those borrowings would be secured indebtedness. If new debt is added to our and our subsidiaries' current debt levels, the risks that we now face as a result of our leverage would intensify.
To service our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
Our ability to make cash payments on and to refinance our indebtedness, including the notes, and to fund planned capital expenditures, will depend on our ability to generate significant operating cash flow in the future. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
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Our business may not generate sufficient cash flow from operations and future borrowings may not be available under our senior secured credit facilities in an amount sufficient to enable us to pay our indebtedness, including the notes, or to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service our indebtedness, we may need to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The indentures governing the notes and the Holdco Notes and the agreements governing our senior secured credit facilities restrict our ability to sell assets and use the proceeds from such sales.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness (including covenants in our senior secured credit facilities, the indenture governing the notes and the indenture governing the Holdco Notes), Holdco could be required to pay interest-in-kind and/or we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may need to obtain waivers in the future from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow, it could negatively impact our business.
In the current volatile credit market, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by our senior secured credit facilities and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable to fund borrowings under their credit commitments, or we are unable to borrow, it could be difficult in this environment to replace our senior secured credit facilities on similar terms.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our senior secured credit facilities are at variable rates of interest and expose us to interest rate risk. Interest rates are currently at historically low levels. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming all revolving loans are fully drawn and the interest rates are above the interest rate floor set forth in our credit agreement, each quarter point change in interest rates would result in a $0.9 million change in annual interest expense on our indebtedness under our senior secured credit facilities. However, we may maintain interest rate swaps with respect to any of our variable rate indebtedness, and any swaps we enter into may not fully
32
mitigate our interest rate risk. We have entered into interest rate swaps to mitigate a portion of this risk, although we can make no assurances that it would do so.
Risks Relating to Our Debt Securities
The right of holders of the notes and the Holdco Notes to receive payments on the notes and the Holdco Notes is effectively subordinated to the rights of our existing and future secured creditors. Further, the guarantees of the notes are effectively subordinated to all our guarantors' existing and future secured indebtedness.
Holders of our secured indebtedness and the secured indebtedness of the guarantors of the notes have claims that are prior to the claims of holders of the notes and the Holdco Notes to the extent of the value of the assets securing that other indebtedness. Notably, Holdings, NBTY and certain of its subsidiaries, including the guarantors of the notes, are parties to the senior secured credit facilities, which are secured by liens on substantially all our assets and the guarantors' assets. The notes and Holdco Notes are effectively subordinated to all our secured indebtedness to the extent of the value of the assets securing that indebtedness. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have a prior claim to those of our assets that constitute their collateral. Holders of the notes and the Holdco Notes participate ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as the notes and the Holdco Notes, and potentially with all our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, we cannot assure holders of the notes and the Holdco Notes that there will be sufficient assets to pay amounts due on the notes or the Holdco Notes. As a result, holders of the notes or the Holdco Notes may receive less, ratably, than holders of secured indebtedness.
As of September 30, 2012, the aggregate amount of our secured indebtedness was approximately $1,508 million. As of September 30, 2012, we had $200 million of unused commitments available for additional borrowing under the revolving portion of our senior secured credit facilities, as amended. In connection with the acquisition of Balance Bar, $80 million was drawn on the revolving portion of our senior secured credit facilities in November 2012. We are permitted to incur substantial additional indebtedness, including secured debt, in the future under the terms of the indentures governing the notes and the Holdco Notes.
The trading prices of the notes and the Holdco Notes may be volatile and can be affected by many factors, including our credit rating.
The trading price of the notes and the Holdco Notes could be subject to significant fluctuation in response to, among other factors, changes in our operating results, interest rates, the market for non-investment grade securities, general economic conditions and securities analysts' recommendations, if any, regarding our securities.
Credit rating agencies continually revise their ratings for companies they follow, including us. Any ratings downgrade could adversely affect the trading price of the notes and the Holdco Notes, or the trading market for the notes and the Holdco Notes, to the extent a trading market for such securities develops. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future and any fluctuation may impact the trading price of the notes and the Holdco Notes.
We may not be able to satisfy our obligations to holders of the notes or the Holdco Notes upon a change of control.
Upon the occurrence of a "change of control," as defined in the indenture governing the notes, each noteholder will have the right to require us to purchase the notes at a price equal to 101% of the principal amount, together with any accrued and unpaid interest. A similar obligation can be found in
33
the indenture governing the Holdco Notes. Our failure to purchase, or give notice of purchase of, the notes or the Holdco Notes would be a default under the indentures governing the notes and the Holdco Notes, which would in turn be a default under our senior secured credit facilities and the indentures governing the notes and the Holdco Notes. In addition, a change of control may constitute an event of default under our senior secured credit facilities and the indentures governing the notes and the Holdco Notes. A default under our senior secured credit facilities and the indentures governing the notes and Holdco Notes would result in an event of default under the indentures if the lenders accelerate the debt under our senior secured credit facilities or the holders accelerate the debt under the indentures governing the notes and the Holdco Notes.
If a change of control occurs, we may not have enough assets to satisfy all obligations under our senior secured credit facilities, the indenture related to the notes and the indenture related to the Holdco Notes. Upon the occurrence of a change of control we could seek to refinance the indebtedness under our senior secured credit facilities, the indenture governing the notes and the indenture governing the Holdco Notes or obtain a waiver from the lenders and holders of the notes or the Holdco Notes. We can give no assurance, however, that we would be able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, if at all. No assurances can be given that any court would enforce the change of control provisions in the indenture governing the notes as written for the benefit of the holders, or as to how these change of control provisions would be impacted were we to become a debtor in a bankruptcy case.
Holders of the notes or the Holdco Notes may not be able to determine when a change of control giving rise to their right to have the notes or the Holdco Notes repurchased has occurred following a sale of "substantially all" of our assets.
The definition of change of control in the indentures governing the notes and the Holdco Notes includes a phrase relating to the sale of "all or substantially all" of our assets. There is no precise established definition of the phrase "substantially all" under applicable law. Accordingly, the ability of a holder of the notes or the Holdco Notes to require us to repurchase the notes or Holdco Notes, respectively, as a result of a sale of less than all our assets to another person may be uncertain.
Risks Relating to Ownership of Our 9% Senior Notes due 2018
Claims of noteholders will be effectively subordinated to claims of creditors of all our non-guarantor subsidiaries.
The notes are guaranteed on a senior basis by our current and future domestic subsidiaries that are guarantors of our senior secured credit facilities. However, the historical consolidated financial statements included in this Report include all our domestic and foreign subsidiaries. Our foreign subsidiaries, which do not guarantee the notes, held approximately $1,259 million, or 25%, of our total assets and $156 million, or 5%, of our total liabilities as of September 30, 2012 and accounted for approximately $917 million, or 31%, of our net sales, for fiscal 2012 (all amounts presented exclude intercompany balances). In addition, we have the ability to designate certain of our subsidiaries as unrestricted subsidiaries under the terms of the indenture, and any subsidiary so designated will not be a guarantor of the notes.
Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due under the notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of noteholders to realize proceeds from the sale of any of those subsidiaries' assets, will be effectively subordinated to the claims of those subsidiaries' creditors, including trade creditors and holders of debt of that subsidiary.
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NBTY is a holding company with no operations and may not have access to sufficient cash to make payments on its credit obligations.
NBTY is a holding company and has limited direct operations. NBTY's most significant assets are the equity interests it holds in its subsidiaries. As a result, it is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its outstanding debt service and other obligations and such dividends may be restricted by law or the instruments governing its indebtedness, including the indenture governing the notes, the agreement governing its senior secured credit facilities or other agreements of its subsidiaries. NBTY's subsidiaries may not generate sufficient cash from operations to enable it to make principal and interest payments on its indebtedness, including the notes. In addition, its subsidiaries are separate and distinct legal entities and, except for its existing and future subsidiaries that will be the guarantors of the notes, any payments on dividends, distributions, loans or advances to us by its subsidiaries could be subject to legal and contractual restrictions on dividends. In addition, payments to NBTY by its subsidiaries will be contingent upon its subsidiaries' earnings. Additionally, NBTY may be limited in its ability to cause its existing and any future joint ventures to distribute their earnings to it. Subject to certain qualifications, its subsidiaries are permitted under the terms of its indebtedness, including the indenture governing the notes, to incur additional indebtedness that may restrict payments from those subsidiaries to it. NBTY can give no assurance that agreements governing the current and future indebtedness of its subsidiaries will permit those subsidiaries to provide it with sufficient cash to fund payments of principal premiums, if any, and interest on the notes when due. In addition, any guarantee of the notes will be subordinated to any senior secured indebtedness of a subsidiary guarantor to the extent of the assets securing such indebtedness.
Federal and state statutes may allow courts, under specific circumstances, to void the guarantees and require noteholders to return payments received from guarantors.
Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be deemed a fraudulent transfer if the guarantor received less than a reasonably equivalent value in exchange for giving the guarantee and:
- •
- was insolvent on the date that it gave the guarantee or became insolvent as a result of giving the guarantee; or
- •
- was engaged in business or a transaction, or was about to engage in business or a transaction, for which property
remaining with the guarantor was an unreasonably small capital; or
- •
- intended to incur, or believed that it would incur, debts that would be beyond the guarantor's ability to pay as those debts matured.
A guarantee could also be deemed a fraudulent transfer if it was given with actual intent to hinder, delay or defraud any entity to which the guarantor was or became, on or after the date the guarantee was given, indebted.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, a guarantor would be considered insolvent if:
- •
- the sum of its debts, including contingent liabilities, is greater than all its assets, at a fair valuation; or
35
- •
- the present fair saleable value of its assets is less than the amount that would be required to pay its probable liability
on its existing debts, including contingent liabilities, as they become absolute and mature; or
- •
- it could not pay its debts as they become due.
We cannot predict:
- •
- what standard a court would apply to determine whether a guarantor was insolvent as of the date it issued the guarantee or
whether, regardless of the method of valuation, a court would determine that the guarantor was insolvent on that date; or
- •
- whether a court would determine that the payments under the guarantee constituted fraudulent transfers or conveyances on other grounds.
The indenture contains a "savings clause" intended to limit each subsidiary guarantor's liability under its guarantee to the maximum amount that it could incur without causing the guarantee to be a fraudulent transfer under applicable law. There can be no assurance that this provision will be upheld as intended. In a recent case, the U.S. Bankruptcy Court in the Southern District of Florida found this kind of provision in that case to be ineffective, and held the subsidiary guarantees to be fraudulent transfers and voided them in their entirety. Although this ruling was reversed, there can be no assurance that other courts will not reach the same conclusion as the U.S. Bankruptcy Court in the Southern District of Florida.
If a guarantee is deemed to be a fraudulent transfer, it could be voided altogether, or it could be subordinated to all other debts of the guarantor. In that case, any payment by the guarantor under its guarantee could be required to be returned to the guarantor or to a fund for the benefit of the creditors of the guarantor. If a guarantee is voided or held unenforceable for any other reason, noteholders would cease to have a claim against the subsidiary based on the guarantee and would be creditors only of NBTY, Inc. and any guarantor whose guarantee was not similarly voided or otherwise held unenforceable.
The lenders under our senior secured credit facilities have the discretion to release the guarantors under our senior secured credit facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes.
While any obligations under our senior secured credit facilities remain outstanding, any guarantee of the notes may be released without action by, or consent of, any holder of the notes or the trustee under the indenture governing the notes, at the discretion of lenders under our senior secured credit facilities, if such guarantor is no longer a guarantor of obligations under our senior secured credit facilities or any other indebtedness. The lenders under our senior secured credit facilities will have the discretion to release the guarantees under our senior secured credit facilities in a variety of circumstances. A noteholder will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders.
Certain private equity investment funds affiliated with Carlyle own substantially all the equity of Holdings, our sole shareholder, and their interests may not be aligned with those of our noteholders.
Carlyle owns substantially all the fully diluted equity of Holdings, our sole shareholder, and, therefore, has the power to control our affairs and policies. Carlyle also controls, to a large degree, the election of directors, the appointment of management, the entry into mergers, sales of substantially all our assets and other extraordinary transactions. The directors so elected have authority, subject to the terms of our debt, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. Carlyle's interests could conflict with the interests of our noteholders. For
36
example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Carlyle and certain of its affiliates and co-investors, as equity holders, might conflict with the interests of our noteholders. Carlyle also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our noteholders. Additionally, Carlyle is in the business of making investments in companies, and from time to time in the future may acquire interests in businesses that directly or indirectly compete with certain portions of our business, or are suppliers or customers of ours.
Investment funds advised by entities affiliated with Carlyle and affiliates of Carlyle may buy or sell notes and Holdco Notes in open market transactions at any time. Such funds and affiliates will not, however, be able to participate in any exchange offer with respect to the Holdco Notes, and their inability to participate may impair the liquidity of the market for the Holdco Notes following the consummation of any exchange offer for the Holdco Notes.
Risks Relating to Ownership of the Holdco Notes
Holdings is a holding company and relies on dividends, loans and other payments and distributions from its subsidiaries to meet its debt service and other obligations.
Holdings is a holding company with no business operations, revenues, expenses, liabilities other than the $550 million aggregate principal amount of Holdco Notes or assets other than the capital stock of NBTY. Because Holdings' assets consist of the equity interests it holds in its subsidiaries, Holdings is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its outstanding debt service and other obligations and such dividends may be restricted by law or the instruments governing certain indebtedness, including the indenture governing the notes, the agreements governing our senior secured credit facilities, the indenture governing the Holdco notes or other agreements of our subsidiaries. The earnings of Holdings' subsidiaries will depend substantially on their respective financial and operating results, which will be affected by prevailing economic and competitive conditions and by financial, business and other factors beyond Holdings' and its subsidiaries' control. Holdings' subsidiaries may not generate sufficient cash from operations to enable Holdings to make principal and interest payments on its indebtedness, including the Holdco Notes, or to fund Holdings' and its subsidiaries' other cash obligations.
Our ability to pay dividends or make other distributions to Holdings ("restricted payment capacity") is limited under certain covenants in the credit agreement governing our senior secured credit facilities and the indenture governing the notes. For example, under the indenture governing the notes, we are permitted to pay dividends or make other distributions to Holdings if the total amount thereof does not exceed a formula based on the sum of (a) 50% of our consolidated net income for periods beginning with our fiscal quarter commencing October 1, 2010 and (b) the amount of certain cash proceeds and the fair market value of certain property received by or contributed to us. Under our senior secured credit facilities, we are permitted to pay dividends and make other distributions (or to make loans or advances in lieu thereof) to Holdings but the total amount is limited and such payments are subject to certain terms and conditions. Pursuant to the agreements governing our senior secured credit facilities, we will be permitted to pay dividends or make other distributions (or to make loans or advances in lieu thereof) to Holdings pursuant to the notes formula payment of dividends, subject to certain terms and conditions.
As of September 30, 2012, on an as adjusted basis after giving effect to the amendment to the credit agreement dated October 11, 2012 and the dividend of approximately $194 million from NBTY to Holdings, NBTY would have had approximately $102 million of restricted payments capacity under its senior secured credit facilities and approximately $141 million of restricted payments capacity under the indenture governing the notes.
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Holdings' subsidiaries are permitted, under the terms of their existing indebtedness, to incur additional indebtedness that may restrict payments from those subsidiaries to Holdings. The indenture governing the Holdco Notes may also permit these subsidiaries to incur additional indebtedness even if Holdings would not be able to incur additional indebtedness. Agreements governing current and future indebtedness of Holdings' subsidiaries may not permit those subsidiaries to provide Holdings with sufficient cash to fund payments on the Holdco Notes when due.
Holdings' subsidiaries are separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay amounts due under the Holdco Notes or to make any funds available to pay those amounts whether by dividend, distribution, loan or other payment.
Claims of holders of Holdco Notes will be effectively subordinated to claims of creditors of all of Holdings' subsidiaries.
The Holdco Notes will not be guaranteed by any of Holdings' subsidiaries. However, the historical consolidated financial statements included in this Report include all of Holdings' subsidiaries. After taking into account the pro forma effect of the issuance of the Holdco Notes, Holdings had $550 million of liabilities as of September 30, 2012 and Holdings' subsidiaries held all of its assets and accounted for all of its net sales as of and for the twelve-month period ended September 30, 2012.
Holdings' subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Holdco Notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that Holdings has to receive any assets of any of its subsidiaries upon the liquidation or reorganization of such subsidiaries, and the consequent rights of holders of Holdco Notes to realize proceeds from the sale of any of such subsidiaries' assets, will be structurally subordinated to the claims of Holdings' subsidiaries' creditors, including trade creditors and holders of debt of that subsidiary.
If certain conditions for the payment of cash interest are not met, interest on the Holdco Notes may be payment in kind ("PIK") interest.
Holdings is required to pay interest on the Holdco Notes entirely in cash unless certain conditions are satisfied, in which case Holdings will be entitled to pay PIK interest. The terms of the Holdco Notes do not restrict Holdings' ability to use its dividend payment capacity for such alternative uses. In addition, the credit agreement governing our senior secured credit facilities, the indenture governing the notes and the indenture governing the Holdco Notes allow us and our subsidiaries to utilize amounts that would otherwise be available to pay cash dividends to Holdings for purposes such as making restricted investments, capital expenditures and prepaying subordinated indebtedness and, subject to certain limitations, making cash dividends to and other payments in respect of equityholders, and such uses would reduce the amounts available to pay dividends to Holdings in order to pay cash interest on the Holdco Notes. The indenture governing the Holdco Notes does not restrict Holdings' ability to use its dividends payment capacity for such alternative uses. As a result, there can be no assurance that Holdings will be required (or able) to make cash interest payments on the Holdco Notes. The payment of interest through PIK interest will increase the amount of Holdings' indebtedness and would exacerbate the risks associated with such a high level of indebtedness.
Federal and state statutes may allow courts, under specific circumstances, to void the Holdco Notes and require holders to return payments received from Holdings.
Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, issuance of notes could be deemed a fraudulent transfer if Holdings received less than a reasonably equivalent value in exchange for issuing the Holdco Notes and
38
- •
- Holdings was insolvent on the date that it issued the Holdco Notes or became insolvent as a result of issuing the Holdco
Notes, or
- •
- Holdings was engaged in business or a transaction, or was about to engage in business or a transaction, for which property
remaining with Holdings was an unreasonably small capital, or
- •
- Holdings intended to incur, or believed that it would incur, debts that would be beyond its ability to pay as those debts matured.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, an entity would be considered insolvent if:
- •
- the sum of its debts, including contingent liabilities, is greater than all its assets, at a fair valuation, or
- •
- the present fair saleable value of its assets is less than the amount that would be required to pay its probable liability
on its existing debts, including contingent liabilities, as they become absolute and mature, or
- •
- it could not pay its debts as they become due.
- •
- what standard a court would apply in order to determine whether Holdings was insolvent as of the date Holdings issued the
Holdco Notes or whether, regardless of the method of valuation, a court would determine that Holdings was insolvent on that date; or
- •
- whether a court would determine that the payments under the Holdco Notes constituted fraudulent transfers or conveyances on other grounds.
We cannot predict:
If issuance of the Holdco Notes is deemed to be a fraudulent transfer, it could be voided altogether, or it could be subordinated to all other debts of Holdings. In the event of a finding that a fraudulent transfer or conveyance occurred, holders of the Holdco Notes may not receive any repayment on the Holdco Notes. Further, the voidance of the Holdco Notes could result in an event of default with respect to Holdings and its subsidiaries' other debt that could result in acceleration of that debt.
Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the Holdco Notes to other claims against Holdings under the principle of equitable subordination if the court determines that (1) the holder of Holdco Notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to Holdings' other creditors or conferred an unfair advantage upon the holders of Holdco Notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.
No public market exists for the Holdco Notes, and resale of the Holdco Notes is subject to significant legal restrictions as well as uncertainties regarding the liquidity of the trading market for the Holdco Notes.
The Holdco Notes have not been registered under the Securities Act or any state or foreign securities laws. As a result, the Holdco Notes may only be resold if:
- •
- there are applicable exemptions from the registration requirements of the Securities Act and any state or foreign laws
that apply to the circumstances of the sale; or
- •
- Holdings files a registration statement and it becomes effective.
Under the registration rights agreement applicable to the Holdco Notes, Holdings is required to use commercially reasonable efforts to commence an exchange offer to exchange the Holdco Notes
39
within a specified period of time for equivalent securities registered under the Securities Act or to register the resale of the Holdco Notes under the Securities Act. However, no assurance can be made that Holdings will be successful in having any such registration statement declared effective.
Until the registration statement it files becomes effective, Holdings will not be required to file reports with the SEC. The indenture governing the Holdco Notes contains periodic reporting requirements that are different and less burdensome than the requirements that would be applicable to Holdings upon the effectiveness of a registration statement related to the Holdco Notes.
Until the registration statement it files becomes effective, Holdings will not be required to file reports with the SEC. The indenture governing the Holdco Notes does not require Holdings to file periodic reports or other information with the SEC until such a registration statement becomes effective. The indenture requires Holdings to provide annual, quarterly and current reports to the holders of the Holdco notes and the trustee until such time. Prior to such time, the content of the reports required by the indenture will be more limited than if Holdings were subject to the reporting requirements of the Exchange Act.
Holdings is not subject to the Sarbanes-Oxley Act of 2002.
Holdings is not subject to the requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations of the SEC or the Sarbanes-Oxley Act of 2002, which requires, among other things, public companies to have and maintain effective disclosure controls and procedures to ensure timely disclosure of material information, and have management review the effectiveness of those controls on a quarterly basis. The Sarbanes-Oxley Act of 2002 also requires public companies to have and maintain effective internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements, and have management review the effectiveness of those controls on an annual basis (and have the independent auditor attest to the effectiveness of such internal controls). Holdings is not required to comply with these requirements prior to effectiveness of a registration statement required by the registration rights agreement, and therefore Holdings may not have comparable procedures in place as compared to public companies.
United States. As of September 30, 2012, we owned a total of approximately 2.9 million square feet, and lease approximately 1.9 million square feet, of administrative, manufacturing, warehouse and distribution space in various locations in the United States and its territories. In addition, as of September 30, 2012, we operated 426 Vitamin World retail locations in 43 states in the United States, Guam, Puerto Rico and the Virgin Islands. Generally, we lease retail properties for five to ten years at varying annual base rents and percentage rents. The Vitamin World retail stores have an average of approximately 1,230 square feet.
UK/Ireland. As of September 30, 2012, Holland & Barrett owned a 270,000 square foot administrative and distribution facility and a 133,220 square foot manufacturing facility in Burton, United Kingdom. Holland & Barrett owns a 30,000 square foot administrative facility in Nuneaton, United Kingdom. Solgar leased 50,000 square feet of administrative and distribution space in Tring, United Kingdom. As of September 30, 2012, we leased all but one of our 754 Holland & Barrett, GNC (UK) and Nature's Way retail stores for varying terms, at varying annual base rents. Forty-six Holland & Barrett, four GNC (UK) and 13 Nature's Way stores are subject to percentage rents. As of September 30, 2012, Holland & Barrett stores have an average of approximately 976 square feet, Nature's Way stores have an average of approximately 863 square feet and the GNC (UK) stores have an average of approximately 861 square feet.
40
Netherlands. As of September 30, 2012, De Tuinen leased a 64,600 square foot administrative and distribution facility in Beverwijk. At September 30, 2012, De Tuinen leased locations for 112 retail stores on varying terms at varying annual base rents. Of these, 102 are operated as company stores and ten are sub-leased to, and operated by, franchisees and an additional franchisee operated on a lease directly from a third party landlord. No De Tuinen store is subject to percentage rents. De Tuinen stores are an average of approximately 1,442 square feet.
Canada. As of September 30, 2012, Vita Health owned a 185,000 square foot manufacturing, packaging, distribution and administration building in Winnipeg, Manitoba. Vita Health also leased a 52,000 square foot distribution facility in Winnipeg, Manitoba. SISU leases a 19,200 square foot administrative, distribution and warehouse facility in Burnaby, British Columbia.
China. As of September 30, 2012, our subsidiary, Ultimate Biopharma (Zhongshan) Corporation ("Ultimate") owned a 50,000 square foot facility in Zhongshan, China for manufacturing softgel capsules and for administrative offices and 20.5 acres of vacant land adjacent to the manufacturing facility. In addition, Ultimate leased 11,300 square feet of dormitory space in Zhongshan City. Also, one of our subsidiaries leased 67,800 square feet of warehouse space in Beijing.
41
The following is a listing, as of September 30, 2012, of all material properties that we own or lease (excluding retail locations, de minimis locations with less than 4,000 square feet and temporary storage facilities leased for less than six months). We are required to pay real estate taxes and maintenance costs relating to most of our leased properties. All our segments benefit from the use of our material properties.
Location
|
Type of Facility | Approximate Square Feet | ||||
|---|---|---|---|---|---|---|
United States: |
||||||
Prescott, AZ |
Manufacturing | 65,000 | ||||
Boca Raton, FL(1) |
Administration | 58,000 | ||||
Boca Raton, FL |
Manufacturing | 84,000 | ||||
Boca Raton, FL |
Distribution | 100,000 | ||||
Deerfield Beach, FL |
Packaging | 157,000 | ||||
Pompano Beach, FL |
Warehousing | 62,000 | ||||
Augusta, GA |
Warehousing | 400,000 | ||||
Carbondale, IL(2) |
Retail Store | 77,000 | ||||
Carbondale, IL |
Administration | 15,000 | ||||
Murphysboro, IL |
Storage | 62,000 | ||||
South Plainfield, NJ |
Administration & Manufacturing | 68,000 | ||||
Bayport, NY |
Storage | 12,000 | ||||
Bayport, NY |
Manufacturing | 161,500 | ||||
Bohemia, NY |
Administration, Manufacturing & Packaging | 169,000 | ||||
Bohemia, NY |
Manufacturing | 80,000 | ||||
Bohemia, NY |
Manufacturing & Packaging | 75,000 | ||||
Bohemia, NY |
IT | 42,000 | ||||
Holbrook, NY |
Administration & Distribution | 230,000 | ||||
Holbrook, NY |
Packaging & Engineering | 108,000 | ||||
N. Amityville, NY |
Manufacturing | 48,300 | ||||
N. Amityville, NY(3) |
Manufacturing | 66,000 | ||||
Ronkonkoma, NY |
Administration | 110,000 | ||||
Wilson, NC |
Manufacturing | 125,000 | ||||
Hazleton, PA |
Distribution | 413,600 | ||||
San Antonio, TX |
Manufacturing | 110,000 | ||||
Canada: |
||||||
Winnipeg, Manitoba |
Manufacturing, Packaging, Distribution & Administration | 185,000 | ||||
China: |
||||||
Zhongshan |
Manufacturing & Packaging | 50,000 | ||||
Zhongshan |
Vacant Land—approx. 20.5 acres | |||||
United Kingdom: |
||||||
Burton |
Administration & Distribution | 270,000 | ||||
Burton |
Manufacturing | 133,200 | ||||
Nuneaton |
Administration | 30,000 | ||||
|
Total approximate square feet owned | 3,566,600 | ||||
- (1)
- We
currently lease several small offices in this building on a short-term basis to unaffiliated tenants.
- (2)
- The
distribution portion of this facility has been closed since the end of calendar year 2011.
- (3)
- The installation of mezzanines in this facility has increased the square footage by 9,000 square feet.
42
Location
|
Type of Facility | Approximate Square Feet |
||||
|---|---|---|---|---|---|---|
United States: |
||||||
Prescott, AZ |
Warehousing (term–2015) | 29,000 | ||||
Bentonville, AR(1) |
Sales Office (term–2017) | 4,900 | ||||
Anaheim, CA |
Administration, Manufacturing, Packaging & Distribution (term–July 2013) | 286,100 | ||||
Carson, CA |
Administration & Packaging (term–2014) | 267,500 | ||||
Carson, CA |
Distribution (term–2014) | 204,000 | ||||
Carson, CA |
Warehousing (term–April 2013) | 150,400 | ||||
Garden Grove, CA |
Manufacturing & Packaging (term–December 2016) | 140,000 | ||||
Garden Grove, CA |
Warehousing (term–June 2013) | 54,000 | ||||
Valencia, CA(2) |
Manufacturing (term–May 2013) | 20,500 | ||||
Valencia, CA(2) |
Manufacturing (term–May 2013) | 32,000 | ||||
Naples, FL |
Manufacturing (term–February 2013) | 14,700 | ||||
Naples, FL |
Manufacturing (term–February 2016) | 7,000 | ||||
Naples, FL |
Warehousing (term–month to month) | 4,800 | ||||
Naples, FL |
Manufacturing (term–February 2016) | 18,000 | ||||
Naples, FL |
Manufacturing (term–February 2016) | 5,000 | ||||
Sparks, NV |
Distribution (term–2014) | 201,300 | ||||
Leonia, NJ |
Administration & Manufacturing (term–July 2016) | 49,500 | ||||
Leonia, NJ |
Manufacturing & Warehousing (term–2016) | 18,500 | ||||
Lyndhurst, NJ |
Administration, Packaging & Distribution (term–2014) | 130,000 | ||||
South Plainfield, NJ |
Packaging (term–May 2013) | 40,000 | ||||
Bohemia, NY |
Administration & Warehousing (term–2020) | 110,000 | ||||
Ronkonkoma, NY |
Warehousing (term–November 2013) | 83,600 | ||||
Ronkonkoma, NY |
Warehousing (term–2014) | 75,000 | ||||
Canada: |
||||||
Burnaby, British Columbia |
Admin., Warehousing & Distribution (term–2017) | 19,000 | ||||
Winnipeg, Manitoba |
Warehousing & Administration (term–2017) | 52,000 | ||||
China: |
||||||
Beijing |
Offices (term–2014) | 7,080 | ||||
Beijing |
Warehousing (term–2014) | 67,800 | ||||
Zhongshan City |
Dormitory (term–January 2013) | 11,300 | ||||
United Kingdom: |
||||||
Burton |
Offices & Warehouse (term–2024) | 43,300 | ||||
Tring |
Administration & Warehousing (term–2016) | 25,000 | ||||
Tring |
Warehousing, Distribution & Offices (term–2016) | 25,000 | ||||
Netherlands: |
||||||
Beverwijk |
Administration & Distribution (term–2020) | 64,600 | ||||
New Zealand: |
||||||
Auckland |
Offices & Warehousing (term–2016) | 4,800 | ||||
South Africa: |
||||||
Randburg |
Offices & Warehousing (term–2015) | 13,800 | ||||
- (1)
- This
sales office was relocated to a larger location in Bentonville.
- (2)
- We have ceased operations in this facility in the first quarter of fiscal 2013.
(Table continued on next page)
43
(Table continued from prior page)
Location
|
Type of Facility | Approximate Square Feet |
||||
|---|---|---|---|---|---|---|
Spain: |
||||||
Madrid |
Administration & Distribution (term–2014) | 6,500 | ||||
|
Total approximate square feet leased | 2,285,980 | ||||
|
Total approximate square feet owned and leased | 5,852,580 | ||||
As of September 30, 2012, we had approximately 3.4 million square feet dedicated primarily to warehousing and distribution. This figure includes our facilities in Long Island, New York; Anaheim, Carson and Garden Grove, California; Augusta, Georgia; Lyndhurst, Leonia and South Plainfield, New Jersey; Boca Raton, Naples and Pompano Beach, Florida; Sparks, Nevada; Hazleton, Pennsylvania; Prescott, Arizona; Burton and Tring, United Kingdom; Winnipeg, Manitoba and Burnaby, British Columbia, Canada; Madrid, Spain; Randburg, South Africa; Auckland, New Zealand; Beverwijk, Netherlands and Beijing, China.
Our Direct Response/Puritan's Pride orders are handled by our domestic distribution center that is integrated with our order entry systems so we typically ship out orders within 24 hours of their receipt. Once a customer's telephone, mail or internet order is completed, our computer system forwards the order to our distribution center, where all necessary distribution and shipping documents are printed to facilitate processing. Then, the orders are prepared, picked, packed and shipped continually throughout the business day. We operate a proprietary, industry-leading, automated picking and packing system for frequently shipped items. We are capable of fulfilling 16,000 Direct Response/Puritan's Pride orders daily. A system of conveyors automatically routes boxes carrying merchandise throughout our primary Long Island distribution center for fulfillment of orders. Completed orders are bar-coded and scanned and the merchandise and ship date are verified and entered automatically into the customer order file for access by sales associates before shipment. We currently ship our U.S. orders primarily through the United Parcel Service, Inc., serving domestic markets. In Canada, we currently use various common carriers for shipments, and we primarily use Global Mail for international markets. Holland & Barrett uses DPD for international deliveries. Holland & Barrett and GNC (UK) use Royal Mail, the U.K. national postal service, and Yodel for deliveries in the United Kingdom, and Nature's Way uses An Post, the Irish national postal service, for deliveries in Ireland. De Tuinen uses ABC Mail for deliveries in the Netherlands.
We currently distribute our products to our customers from distribution centers through contract and common carriers globally. In addition, we ship products overseas in pallet amounts and by container loads. We also operate additional distribution centers in Burton and Tring, United Kingdom; Madrid, Spain; Auckland, New Zealand; Randburg, South Africa, Beverwijk, Netherlands; and Beijing, China. Deliveries are made directly to Vitamin World stores once per week or once every other week, depending on the needs at various store locations. Deliveries are made directly to Company-owned and operated Holland & Barrett and GNC (UK), through Company owned trucks, and Nature's Way and De Tuinen stores, through third parties, once or twice per week, depending on each store's inventory requirements.
All our properties are covered by all-risk and liability insurance, in amounts and on terms that we believe are customary for our industry.
We believe that these properties, taken as a whole, are generally well-maintained, and are adequate for current and reasonably foreseeable business needs. We also believe that substantially all our properties are being utilized to a significant degree.
44
Stock Purchases
On May 11, 2010, a putative class-action, captioned John F. Hutchins v. NBTY, Inc., et al, was filed in the United States District Court, Eastern District of New York, against NBTY and certain current and former officers, claiming that the defendants made false material statements, or concealed adverse material facts, for the purpose of causing members of the class to purchase NBTY stock at allegedly artificially inflated prices. An amended complaint, seeking unspecified compensatory damages, attorneys' fees and costs, was served on February 1, 2011. The Company moved to dismiss the amended complaint on March 18, 2011 and that motion was denied on March 6, 2012. On September 28, 2012, the court set a January 22, 2013 trial date. On November 12, 2012, at a mediation, the parties reached an agreement in principle, subject to agreement on settlement documentation and court approval, to settle the claims for $6 million, to be paid from insurance proceeds.
Employment Class Actions
On or about July 7, 2010, a putative class action captioned Hamilton and Taylor v. Vitamin World, Inc. was filed against one of our subsidiaries in the Alameda Superior Court, California. Plaintiffs seek to represent a class of employees in connection with several causes of action alleging, among other things, wage and hour violations. Plaintiffs describe the class as all non-exempt current and former employees of Vitamin World Stores in California. The complaint seeks compensatory damages, statutory penalties, restitution, disgorgement of profits, and attorneys' fees and costs in unidentified amounts. Vitamin World, Inc. has agreed upon a settlement with the plaintiffs, which provides for payments to the class, and the settlement documentation has been approved by the court. This settlement is not material.
On or about April 8, 2010, a putative class action captioned Dirickson v. NBTY Acquisition, LLC, NBTY Manufacturing, LLC, NBTY, Inc., and Volt Management Corporation ("Volt") was filed against the Company and certain subsidiaries in the Superior Court of California, County of Los Angeles. Volt is not related to the Company. Plaintiff seeks to represent a class of employees in connection with several causes of action alleging, among other things, wage and hour violations. The complaint seeks damages on behalf of all non-exempt employees within the State of California who worked for Volt or any of the NBTY entities between April 8, 2006 and April 8, 2010, including compensatory damages, unpaid wages, statutory penalties, restitution, unspecified injunctive relief, unjust enrichment and attorneys' fees and costs in unidentified amounts. The parties submitted to the court a settlement agreement and the court granted final approval of the settlement on or about September 6, 2012. The settlement provides for payments to the class which was funded by the Company on or before November 20, 2012. The settlement value is not material.
Glucosamine-Based Dietary Supplements
Beginning in June 2011, certain putative class actions have been filed in various jurisdictions against the Company, its subsidiary Rexall Sundown, Inc. ("Rexall"), and/or other companies as to which there may be a duty to defend and indemnify, challenging the marketing of glucosamine-based dietary supplements, under various states' consumer protection statutes. The lawsuits against the Company and its subsidiaries are: Cardenas v. NBTY, Inc. and Rexall Sundown, Inc. (filed June 14, 2011) in the United States District Court for the Eastern District of California, on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief); and Jennings v. Rexall Sundown, Inc. (filed August 22, 2011 in the United States District Court for the District of Massachusetts, on behalf of a putative class of Massachusetts consumers seeking unspecified trebled compensatory damages), as well as other cases in California and Illinois against certain wholesale customers as to which the Company
45
may have certain indemnification obligations. Motions to dismiss have been filed in all of these cases. While most of the cases are in discovery, the Jennings case is trial ready for a trial of limited issues. Settlement discussions to resolve the cases on a national level are ongoing. The Company disputes the allegations and intends to vigorously defend these actions. At this time, however, no determination can be made as to the ultimate outcome of the litigation or the amount of liability, if any, on the part of any of the defendants.
Claims in the Ordinary Course
In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, false advertising, intellectual property and Proposition 65 claims) arise from time to time 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.
Item 4. Mine Safety Disclosures
Not applicable.
46
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of the date of this Report, we are a wholly-owned subsidiary of an affiliate of Carlyle, and there is no public market for our common stock.
On October 17, 2012, NBTY paid a cash dividend of approximately $194 million to Holdings, and Holdings paid a dividend of $722 million, which included the proceeds from the offering of the Holdco Notes, to its shareholders. Future determination as to the payment of cash or stock dividends will depend upon our results of operations, financial condition, capital requirements, restrictions contained in our senior secured credit facilities, limitations contained in the indentures governing the notes and the Holdco Notes, and such other factors as our Board considers appropriate.
The senior secured credit facilities prohibit our paying dividends or making any other distributions to our stockholder, subject to some exceptions. The indenture under which the notes and the Holdco Notes were issued similarly prohibit paying dividends or making any other distributions to stockholders, subject to some exceptions. Our senior secured credit facility and the indenture governing the notes permit the payment of interest on the Holdco Notes via dividends from NBTY to Holdings, provided that certain conditions are satisfied.
For additional information regarding these lending arrangements and securities (including payment of interest under the Holdco Notes), see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources," and Note 10 to the consolidated financial statements in this Report.
For information regarding securities authorized for issuance under our equity compensation plans as of September 30, 2012, see Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in this Report.
47
Item 6. Selected Financial Data
| |
Fiscal Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor(1) |
|
Predecessor | |||||||||||||||
| |
2012 | 2011 |
|
2010 | 2009 | 2008 | ||||||||||||
| |
(In thousands) |
|||||||||||||||||
Selected Income Statement Data: |
||||||||||||||||||
Net sales |
$ | 2,999,733 | $ | 2,864,427 | $ | 2,705,837 | $ | 2,452,161 | $ | 2,154,864 | ||||||||
Costs and expenses: |
||||||||||||||||||
Cost of sales |
1,608,436 | 1,641,887 | 1,473,095 | 1,408,189 | 1,092,311 | |||||||||||||
Advertising, promotion and catalog |
164,298 | 152,021 | 136,763 | 108,976 | 139,574 | |||||||||||||
Selling, general and administrative |
832,629 | 788,719 | 694,803 | 660,525 | 683,494 | |||||||||||||
Merger expenses |
— | 44,479 | 45,903 | — | — | |||||||||||||
IT project termination costs |
— | — | — | 11,718 | — | |||||||||||||
Income from operations |
394,370 | 237,321 | 355,273 | 262,753 | 239,485 | |||||||||||||
Interest expense |
(158,584 | ) | (195,566 | ) | (30,108 | ) | (34,754 | ) | (18,623 | ) | ||||||||
Miscellaneous, net |
(1,003 | ) | 1,933 | 4,127 | (287 | ) | 13,058 | |||||||||||
Income before provision for income taxes |
234,783 | 43,688 | 329,292 | 227,712 | 233,920 | |||||||||||||
Provision for income taxes |
65,264 | 10,989 | 114,270 | 82,982 | 77,862 | |||||||||||||
Income before discontinued operations |
169,519 | 32,699 | 215,022 | 144,730 | 156,058 | |||||||||||||
(Loss)/income from discontinued operations |
(23,048 | ) | (2,780 | ) | (1,352 | ) | 999 | (2,907 | ) | |||||||||
Net income |
$ | 146,471 | $ | 29,919 | $ | 213,670 | $ | 145,729 | $ | 153,151 | ||||||||
Selected Balance Sheet Data: |
||||||||||||||||||
Working Capital (including cash and cash equivalents) |
$ | 882,495 | $ | 899,699 | $ | 849,338 | $ | 674,439 | $ | 573,402 | ||||||||
Total assets |
5,057,247 | 5,099,270 | 2,200,768 | 1,960,221 | 1,936,358 | |||||||||||||
Long-term debt, net of current portion |
2,157,500 | 2,369,375 | 341,128 | 437,629 | 538,402 | |||||||||||||
Total stockholders' equity |
1,705,232 | 1,536,895 | 1,379,953 | 1,127,825 | 998,196 | |||||||||||||
- (1)
- On October 1, 2010 we consummated the Merger which required us to record acquisition accounting adjustments that primarily impacted cost of sales due to recording the acquired inventory to fair value of $122,104, depreciation and amortization expense within our selling, general and administrative costs due to the recording of our property plant and equipment and various intangible assets to fair value as well as additional interest expense relating to the additional long-term debt associated with the Merger. (See Note 3 to our Consolidated Financial Statements for further information regarding the Merger.)
48
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations covers periods before and after the Transactions, as defined below. Accordingly, the discussion and analysis of periods before October 1, 2010 do not reflect the significant impact that the Transactions and Refinancing (as defined below)have had on us, including increased levels of indebtedness and the impact of acquisition accounting. In addition, the statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in this Report under the heading Forward Looking Statements" and "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the consolidated financial statements, including the related notes, contained elsewhere herein. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. All dollar values in this section, unless otherwise noted, are denoted in thousands. Numerical figures have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Carlyle Transaction
On October 1, 2010, NBTY consummated the Merger with an affiliate of Carlyle under which the Carlyle affiliate acquired 100% of NBTY for a net purchase price of $3,635,949. The purchase price was funded through the net proceeds of our $1,750,000 senior secured credit facilities, the issuance of $650,000 principal amount of notes and a cash equity contribution of $1,550,000 from an affiliate of Carlyle. We also refer to the Merger as the "Acquisition" and together with the financing as the "Transactions". For a detailed discussion of the Transactions, see Note 3 to our Consolidated Financial Statements for the year ended September 30, 2012 contained elsewhere herein.
As a result of the Acquisition and the application of acquisition accounting, our assets and liabilities have been adjusted to their fair market values as of October 1, 2010, the closing date of the Transactions. In addition, we incurred certain acquisition related expenses during the year ended September 30, 2011. Specifically, our cost of sales increased due to the increased carrying value of our fixed assets and inventory and our selling, general and administrative expenses increased due to the increased amortization of our intangible assets. Additionally, the excess of the total purchase price over the fair value of our assets and liabilities at closing was allocated to goodwill. As a result of our assessment of the fair value of our assets, the values of our intangible assets and goodwill increased significantly. The indefinite-lived intangible assets are subject to annual impairment testing.
Additionally, as discussed below in "Liquidity and Capital Resources," we incurred significant indebtedness in connection with the consummation of the Acquisition, and our total indebtedness and related interest expense is significantly higher than before the Acquisition.
Discontinued Operations
On July 2, 2012, Julian Graves Limited ("Julian Graves"), a subsidiary organized under the laws of the United Kingdom and Wales, was placed into administration and its management, affairs, business and property were under the direct control of Deloitte LLP as administrator. During the course of the administration, attempts to sell the business were unsuccessful and the operations were wound down by the end of August 2012. Additionally, on August 31, 2012, we sold Le Naturiste Inc. ("Le Naturiste"), a subsidiary organized under the laws of Canada, to an unrelated third party. As a result of these events, the results of these two former subsidiaries are no longer reflected in the results of continuing operations for 2012, but are reflected as discontinued operations. In addition, all prior periods in the Management's Discussion and Analysis of Financial Condition and Results of Operations below are presented exclusive of discontinued operations.
49
Executive Summary
We are the leading vertically integrated manufacturer, marketer, distributor and retailer of high-quality vitamins, nutritional supplements and related products in the United States, with operations worldwide. We currently market over 25,000 SKUs under numerous owned and private-label brands, including Nature's Bounty®, Ester-C®, Solgar®, MET-Rx®, American Health®, Osteo Bi-Flex®, SISU®, Knox®, Sundown®, Rexall®, Pure Protein®, Body Fortress®, Worldwide Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC (UK)®, Physiologics®, De Tuinen® and Vitamin World®. Our vertical integration includes purchasing raw materials and formulating and manufacturing products, which we then market through the following four channels of distribution.
- •
- Wholesale—This segment sells products worldwide under various brand names and third-party private labels, each
targeting specific market groups which include virtually all major mass merchandisers, club stores, drug store chains and supermarkets. This segment also sells products to independent pharmacies,
health food stores, the military and other retailers.
- •
- European Retail—This segment generates revenue through its 687 Holland & Barrett stores (including ten
franchised stores in Singapore, six franchised stores in Cyprus and China, three franchised stores in Malta and United Arab Emirates and one franchised store in Gibraltar and Hungary), and 55 GNC (UK)
stores in the U.K., 112 De Tuinen stores (including 10 franchised locations) in the Netherlands and 42 Nature's Way stores in Ireland. Such revenue consists of sales of proprietary brand and
third-party products as well as franchise fees.
- •
- Direct Response/E-Commerce—This 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 phone.
- •
- North American Retail—This segment generates revenue through its 426 owned and operated Vitamin World stores selling proprietary brand and third-party products.
Operating data for each of the four distribution channels does not include the impact of any intercompany transfer pricing mark-up, 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 and various other corporate-level activity related expenses. We attribute such unallocated expenses to corporate.
We have continued to grow through our marketing practices and through a series of strategic acquisitions. Since 1986, we have acquired and successfully integrated approximately 30 companies or businesses engaged in the manufacturing, retail and direct response sale of nutritional supplements, including:
- •
- Fiscal 1997: Holland & Barrett;
- •
- Fiscal 1998: Nutrition Headquarters Group;
- •
- Fiscal 2000: Nutrition Warehouse Group;
- •
- Fiscal 2001: Global Health Sciences, NatureSmart and Nature's Way;
- •
- Fiscal 2002: Healthcentral.com, Knox NutraJoint®, and Synergy Plus® product lines/operations;
- •
- Fiscal 2003: Rexall Sundown Inc., Health and Diet Group Ltd. ("GNC (UK)"), FSC Wholesale, and the De Tuinen
chain of retail stores;
- •
- Fiscal 2005: Le Naturiste Jean-Marc Brunet, SISU, Inc. ("SISU") and Solgar Vitamin and Herb ("Solgar"),
formerly a division of Wyeth Consumer Healthcare;
- •
- Fiscal 2007: The Ester-C Company (formerly Zila Nutraceuticals, Inc.);
50
- •
- Fiscal 2008: Doctor's Trust , Leiner and Julian Graves;
- •
- Fiscal 2010: Ultimate Biopharma (Zongshen) Corporation; and
- •
- Fiscal 2011: Vitarich Laboratories, Inc. and Sun Valley Natural Products, LLC.
Critical Accounting Estimates and Policies
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. 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. As with any set of assumptions and estimates, there is a range of reasonably likely amounts that may be reported.
The following critical accounting policies have been identified as those that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.
Revenue Recognition
We recognize product revenue when title and risk of loss have transferred to the customer, there is persuasive evidence of an arrangement to deliver a product, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. The delivery terms for most sales within the Wholesale and Direct Response/ E-Commerce segments are F.O.B. destination. Generally, title and risk of loss transfer to the customer at the time the product is received by the customer. With respect to our retail store operations, we recognize revenue upon sale of products to customers. Net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional program incentive allowances.
Allowance for Sales Returns
Estimates for sales returns are based on a variety of factors, including actual return experience of specific products or similar products. We are able to make reasonable and reliable estimates of product returns based on our 40-year history in this business. We also review our estimates for product returns based on expected return data communicated to us by customers. Additionally, we monitor the levels of inventory at our largest customers to avoid excessive customer stocking of merchandise. Allowances for returns of new products are estimated by reviewing data of any prior relevant new product introduction return information. We also monitor the buying patterns of the end-users of our products based on sales data received by our retail outlets in North America and Europe. Historically, the difference in the amount of actual sales returns compared to our estimate for sales returns has not been significant.
Promotional Program Incentive Allowance
We estimate our allowance for promotional program incentives based on specific outstanding marketing programs and historical experience. The allowance for sales incentives offered to customers is based on various contractual terms or other arrangements agreed to in advance with certain customers. Generally, customers earn such incentives as they achieve sales volumes. We accrue these incentives as a reduction to sales either at the time of sale or over the period of time in which they are earned, depending on the nature of the program. Historically, we have not experienced material
51
adjustments to the estimate of our promotional program incentive allowance and we do not expect that there will be a material change in the future estimates and assumptions we use.
Allowance for Doubtful Accounts
We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customers' current creditworthiness, as determined by our review of current credit information. We estimate bad debt expense based upon historical experience as well as customer collection issues to adjust the carrying amount of the related receivable to its estimated realizable value. While such bad debt expense has historically been within expectations and allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we had in the past. If the financial condition of one or more of our customers were to deteriorate, additional bad debt expense may be required.
Inventories
Inventories are stated at the lower of cost (first-in first-out method) or market. The cost elements of inventories include materials, labor and overhead. We use standard costs for labor and overhead and periodically adjust those standards. In evaluating whether inventories are stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory, remaining shelf life and current and expected market conditions, including levels of competition. Based on this evaluation, we record an adjustment to cost of goods sold to reduce inventories to net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or competition differ from expectations.
Long-Lived Assets
We evaluate the need for an impairment charge relating to long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We consider the following to be some examples of important indicators that may trigger an impairment review: (i) a history of cash flow losses at retail stores; (ii) significant changes in the manner or use of the acquired assets in our overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; and (v) regulatory changes.
Goodwill and indefinite-lived intangibles are tested for impairment annually, or more frequently if impairment indicators are present. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. These evaluations require the use of judgment as to the effects of external factors and market conditions on our operations, and they require the use of estimates in projecting future operating results. If actual external conditions or future operating results differ from our judgments, impairment charges may be necessary to reduce the carrying value of the subject assets. The estimated fair value of an asset could vary, depending upon the different valuation methods employed, as well as assumptions made. This may result in an impairment of the intangible assets and/or goodwill. An impairment charge would reduce operating income in the period it was determined that the charge was needed. We test goodwill annually unless an event occurs that would cause us to believe the value is impaired at an interim date. In conjunction with the Acquisition, we changed our annual impairment testing date to July 1, the first day of our fourth quarter, from September 30, the last day of our fourth quarter, which is the date it had been evaluated the preceding year. No impairment adjustments were deemed necessary based on our evaluations. We use a combination of the income and market approaches to estimate the fair value of our reporting units. A 10% change in the estimate of fair value would not have impacted our assessment.
52
The fair value of our trademarks is determined based on the relief from royalty method under the income approach, which requires us to estimate a reasonable royalty rate, identify relevant projected revenues and expenses, and select an appropriate discount rate. The evaluation of indefinite-lived intangible assets for impairment requires management to use significant judgments and estimates including, but not limited to, projected future net sales, operating results, and cash flow of our business.
Stock-Based Compensation
We record the fair value of stock-based compensation awards as an expense over the vesting period on a straight-line basis for all time vesting awards, and at the time performance is achieved or probable to be achieved for all performance based awards. To determine the fair value of stock options on the date of grant, we apply the Monte Carlo Simulation option-pricing model, including an estimate of forfeitures. Inherent in this model are assumptions related to expected stock-price volatility, risk-free interest rate, expected term and dividend yield.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as tax credit carrybacks and carryforwards. We periodically review the recoverability of deferred tax assets recorded on the balance sheet and provide valuation allowances as we deem necessary to reduce such deferred tax assets to the amount that will, more likely than not, be realized. We make judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. In our opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Accruals for Litigation and Other Contingencies
We are subject to legal proceedings, lawsuits and other claims related to various matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We determine the amount of reserves needed, if any, for each individual issue for which a loss is deemed probable based on our knowledge and experience and discussions with legal counsel. These reserves may change in the future due to new developments in each matter (including the enactment of new laws), the ultimate resolution of each matter or changes in approach, such as a change in settlement strategy. In some instances, we may be unable to make a reasonable estimate of the liabilities that may result from the final resolution of certain contingencies disclosed and accordingly, no reserve is recorded until such time that a reasonable estimate may be made.
Results of Operations
Operating results in all periods presented include the results of acquired businesses from the date of acquisition. The timing of those acquisitions and the changing mix of businesses as acquired companies are integrated may affect the comparability of results from one period to another.
53
The following table sets forth for the periods indicated, the consolidated statements of income items expressed as a percentage of total net sales. Percentages may not sum to 100% due to rounding.
| |
Fiscal year ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor | |
Predecessor | |||||||||
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
Net sales |
100 | % | 100 | % | 100 | % | ||||||
Costs and expenses: |
||||||||||||
Cost of sales |
53.6 | % | 57.3 | % | 54.4 | % | ||||||
Advertising, promotion and catalog |
5.5 | % | 5.3 | % | 5.1 | % | ||||||
Selling, general and administrative |
27.8 | % | 27.5 | % | 25.7 | % | ||||||
Merger expenses |
0.0 | % | 1.6 | % | 1.7 | % | ||||||
|
86.9 | % | 91.7 | % | 86.9 | % | ||||||
Income from operations |
13.1 | % | 8.3 | % | 13.1 | % | ||||||
Other income (expense): |
||||||||||||
Interest |
-5.3 | % | -6.8 | % | -1.1 | % | ||||||
Miscellaneous, net |
0.0 | % | 0.1 | % | 0.2 | % | ||||||
|
-5.3 | % | -6.8 | % | -1.0 | % | ||||||
Income before provision for income taxes |
7.8 | % | 1.5 | % | 12.2 | % | ||||||
Provision for income taxes |
2.2 | % | 0.4 | % | 4.2 | % | ||||||
Loss from discontinued operations |
-0.8 | % | -0.1 | % | -0.1 | % | ||||||
Net Income |
4.9 | % | 1.0 | % | 7.9 | % | ||||||
Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011
Net Sales
Net sales by segment for the fiscal year ended September 30, 2012 ("fiscal 2012") as compared to the fiscal year ended September 30, 2011 ("fiscal 2011") were as follows:
| |
Net Sales by Segment Fiscal year ended September 30, |
|
|
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | |
|
|||||||||||||||
Segment
|
Net Sales | % of total | Net Sales | % of total | $ change | % change | |||||||||||||
Wholesale |
$ | 1,826,781 | 60.9 | % | $ | 1,764,755 | 61.6 | % | $ | 62,026 | 3.5 | % | |||||||
European Retail |
675,889 | 22.5 | % | 636,303 | 22.2 | % | 39,586 | 6.2 | % | ||||||||||
Direct Response/E-Commerce |
277,278 | 9.2 | % | 257,466 | 9.0 | % | 19,812 | 7.7 | % | ||||||||||
North American Retail |
219,785 | 7.3 | % | 205,903 | 7.2 | % | 13,882 | 6.7 | % | ||||||||||
Net sales |
$ | 2,999,733 | 100.0 | % | $ | 2,864,427 | 100.0 | % | $ | 135,306 | 4.7 | % | |||||||
Wholesale
Net sales for the Wholesale segment were $1,826,781 for fiscal 2012 as compared to $1,764,755 for fiscal 2011. The increase of $62,026 or 3.5% was primarily attributable to the following:
- •
- $97,186 from domestic branded products, primarily driven by continued growth in key brands such as Nature's Bounty® and the sports nutrition brands (such as Pure Protein® and Body Fortress®),
54
- •
- ($61,660) from domestic private label products, primarily driven by decreased SKUs to existing customers and pricing
pressure, and
- •
- $26,500 from sales to international customers.
We continue to adjust shelf space allocation between the Wholesale brands to provide the best overall product mix and to respond to changing market conditions. These efforts have helped to strengthen Wholesale's position in the mass market. Wholesale continues to leverage valuable consumer sales information obtained from our retail stores and Direct Response/E-Commerce operations to provide our mass-market customers with data and analyses to drive mass market sales.
We use targeted promotions to grow overall sales. Promotional programs and rebates were $295,325, or 13.7% of sales for fiscal 2012 as compared to $290,663, or 14.0% of sales for fiscal 2011. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.
Product returns were $28,333, or 1.3% of sales for fiscal 2012 as compared to $27,562 or 1.3% of sales for fiscal 2011. The product returns for fiscal 2012 and fiscal 2011 were mainly attributable to returns in the ordinary course of business. We expect returns relating to normal operations to trend between 1% to 2% of Wholesale sales in future quarters.
One customer, Wal-Mart, represented 23% and 25% of the Wholesale segment's net sales for fiscal 2012 and 2011, respectively. It also represented 14% and 15% of consolidated net sales for fiscal 2012 and 2011, respectively. The loss of this customer, or any of our other major customers, could have a material adverse effect on our results of operations if we were unable to replace that customer.
European Retail
Net sales for this segment increased $39,586, or 6.2%, to $675,889 in fiscal 2012 from $636,303 for fiscal 2011. For fiscal 2012 same store sales in U.S. dollars increased 1.6%, or $9,922, as compared to fiscal 2011. In local currency, same store sales increased 3.5% as compared to fiscal 2011. During fiscal 2012 and 2011, nine and twenty-six Julian Graves stores, respectively were converted to either Holland & Barrett or GNC (UK) stores.
55
The following is a summary of European Retail store activity for the fiscal years ended September 30, 2012 and 2011:
European Retail stores:
|
Fiscal 2012 |
Fiscal 2011 |
|||||
|---|---|---|---|---|---|---|---|
Company-owned stores |
|||||||
Open at beginning of the period |
823 | 765 | |||||
Opened during the period* |
39 | 58 | |||||
Acquired during the period |
— | 3 | |||||
Closed during the period |
(6 | ) | (3 | ) | |||
Open at end of the period |
856 | 823 | |||||
Franchised stores |
|||||||
Open at beginning of the period |
28 | 22 | |||||
Opened during the period |
13 | 10 | |||||
Closed during the period |
(1 | ) | (4 | ) | |||
Open at end of the period |
40 | 28 | |||||
Total company-owned and franchised stores |
|||||||
Open at beginning of the period |
851 | 787 | |||||
Opened during the period* |
52 | 68 | |||||
Acquired during the period |
— | 3 | |||||
Closed during the period |
(7 | ) | (7 | ) | |||
Open at end of the period |
896 | 851 | |||||
- *
- Includes stores that were converted from Julian Graves to either Holland & Barrett or GNC (UK) stores.
Direct Response/E-Commerce
Direct Response/E-Commerce net sales increased $19,812, or 7.7%, to $277,278 in fiscal 2012 from $257,466 in fiscal 2011. The total number of orders increased approximately 10% and the average order size remained consistent for fiscal 2012 as compared to fiscal 2011. On-line net sales comprised 66% of this segment's net sales for fiscal 2012 as compared to 61% for fiscal 2011.
This segment continues to vary its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs which are not offered in every quarter. Historical results reflect this pattern and therefore this segment should be viewed on an annual, and not quarterly, basis.
North American Retail
Net sales for this segment increased $13,882, or 6.7%, to $219,785 for fiscal 2012. Same store sales increased 8.9%, or $17,516. The segment continues to benefit from updated in-store signage, SKU rationalization and a continued shift in the promotional strategy to an everyday low price rather than special savings days, which was the strategy in prior years.
56
The following is a summary of North American Retail store activity for the fiscal years ended September 30, 2012 and 2011:
North American Retail stores:
|
Fiscal 2012 |
Fiscal 2011 |
|||||
|---|---|---|---|---|---|---|---|
Total North American Retail |
|||||||
Open at beginning of the period |
443 | 457 | |||||
Opened during the period |
— | 2 | |||||
Closed during the period |
(17 | ) | (16 | ) | |||
Open at end of the period |
426 | 443 | |||||
Cost of Sales
Cost of sales for fiscal 2012 as compared to fiscal 2011 was as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ Change | % Change | |||||||||
Cost of Sales |
$ | 1,608,436 | $ | 1,641,887 | $ | (33,451 | ) | -2.0 | % | ||||
Percentage of net sales |
53.6 | % | 57.3 | % | |||||||||
The decrease in cost of sales relates primarily to an adjustment of $122,104 to acquired inventory to its fair value as required under acquisition accounting in connection with the Acquisition, resulting in a one-time increase in cost of sales as the acquired inventory was sold during the first quarter of the fiscal year ended September 30, 2011. Excluding this adjustment, cost of sales as a percentage of net sales increased by 0.5 percentage points as compared to the prior comparable period. Cost of sales as a percentage of net sales has fluctuated, in part due to competitive pressures in the private label business, product mix and fluctuations in the costs of certain raw materials. To address these matters, we continuously seek to implement improvements in our supply chain, and are also increasing our focus on branded sales.
Advertising, Promotion and Catalog Expenses
Total advertising, promotion and catalog expenses for fiscal 2012 as compared to fiscal 2011 were as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ Change | % Change | |||||||||
Advertising, promotion and catalog |
$ | 164,298 | $ | 152,021 | $ | 12,277 | 8.1 | % | |||||
Percentage of net sales |
5.5 | % | 5.3 | % | |||||||||
As a percentage of sales, advertising promotion and catalog expense remained relatively consistent. The increase in advertising, promotion and catalog expense is primarily due to media and website advertising.
57
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for fiscal 2012 as compared to fiscal 2011 were as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ Change | % Change | |||||||||
Selling, general and administrative |
$ | 832,629 | $ | 788,719 | $ | 43,910 | 5.6 | % | |||||
Percentage of net sales |
27.7 | % | 27.5 | % | |||||||||
As a percentage of sales, SG&A remained relatively consistent. SG&A costs increased by $43,910 compared to fiscal 2011 due primarily to increased payroll and related benefit costs of $17,085; Freight increases of $5,711 driven by sales volume and fuel costs; an increase in professional fees of $12,538, due principally to an increased use of external consultants to support our productivity and growth initiatives; and an increase in market research of $4,376, also in support or our growth initiatives.
Merger Expenses
There were no Merger related costs for fiscal 2012. In connection with the Acquisition described above, we incurred charges of $44,479 in fiscal 2011. For fiscal 2011, these charges consisted of $15,660 in financing costs associated with an unused bridge loan, $14,324 for a portion of the transaction fee paid to Carlyle and $14,495 of other Merger related costs.
Income from Operations
Income from operations for fiscal 2012 as compared to fiscal 2011 was as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ Change | % Change | |||||||||
Wholesale |
$ | 241,504 | $ | 283,775 | $ | (42,271 | ) | -14.9 | % | ||||
European Retail |
151,274 | 121,216 | 30,058 | 24.8 | % | ||||||||
Direct Response/E-Commerce |
56,391 | 59,193 | (2,802 | ) | -4.7 | % | |||||||
North American Retail |
22,812 | 12,575 | 10,237 | 81.4 | % | ||||||||
Corporate |
(77,611 | ) | (239,438 | ) | 161,827 | -67.6 | % | ||||||
Total |
$ | 394,370 | $ | 237,321 | $ | 157,049 | 66.2 | % | |||||
Percentage of net sales |
13.1 | % | 8.3 | % | |||||||||
The decrease in the loss of the Corporate segment relates to the Merger expenses of $44,479 described above as well as $122,104 to record acquired inventory to its fair value as required under acquisition accounting in connection with the Acquisition during fiscal 2011. The decrease in the Wholesale segment's income from operations is primarily due to lower margins on the private label business and increased advertising and professional fees. The increase in the European Retail segment's income from operations was related to the increase in sales partially offset by higher SG&A costs (primarily store occupancy costs). The decrease in the Direct Response/E-Commerce segment's income from operations was primarily due to higher freight costs, partially offset by higher sales and gross profits. The increase in the North American Retail segment's income from operations was a result of higher sales when compared to the prior comparable period.
58
Interest Expense
Interest expense decreased by $36,982 to $158,584 primarily due to lower balances outstanding resulting from the prepayment of $225,000 of our term loan B-1 on December 30, 2011, as well as the refinancing that took place in March 2011.
Miscellaneous, net
The components of miscellaneous, net were as follows:
| |
Fiscal year ended September 30, |
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ Change | |||||||
Foreign exchange gains (losses) |
$ | (53 | ) | $ | 124 | $ | (177 | ) | ||
Investment income |
1,160 | 665 | 495 | |||||||
Ineffectiveness on cross currency swap |
(3,358 | ) | — | (3,358 | ) | |||||
Other |
1,248 | 1,144 | 104 | |||||||
Total |
$ | (1,003 | ) | $ | 1,933 | $ | (2,936 | ) | ||
Miscellaneous, net decreased primarily due to ineffectiveness recorded in conjunction with our cross currency swap.
Provision for Income Taxes
Our provision for income taxes was 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 fiscal 2012 was 27.8%, compared to 25.2% in the prior fiscal year. The fiscal 2012 effective tax rate is higher than the fiscal 2011 effective tax primarily due to the domestic loss for fiscal 2011 due to $122,104 inventory costs associated with the Acquisition as well as $44,479 of Merger costs associated with the Merger, for which Federal and State tax benefits have been recognized as compared with domestic income for fiscal 2012 for which Federal and State taxes had been provided for as well as a $7,792 benefit for the sale of Le Naturiste.
Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30, 2010
Net Sales
Net sales by segment for fiscal 2011 as compared to the fiscal year ended September 30, 2010 ("fiscal 2010") were as follows:
| |
Net Sales by Segment Fiscal year ended September 30, |
|
|
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
|
|
2010 | |
|
|||||||||||||||
| |
2011 | |
|
|
|||||||||||||||||
| |
|
Predecessor | |
|
|||||||||||||||||
| |
Successor | |
|
|
|||||||||||||||||
| |
|
|
% of total | |
|
||||||||||||||||
Segment
|
Net Sales | % of total |
|
Net Sales | $ change | % change | |||||||||||||||
Wholesale |
$ | 1,764,755 | 61.6 | % | $ | 1,734,860 | 60.6 | % | $ | 29,895 | 1.7 | % | |||||||||
European Retail |
636,303 | 22.2 | % | 543,365 | 19.0 | % | 92,938 | 17.1 | % | ||||||||||||
Direct Response/E-Commerce |
257,466 | 9.0 | % | 233,972 | 8.2 | % | 23,494 | 10.0 | % | ||||||||||||
North American Retail |
205,903 | 7.2 | % | 193,640 | 6.8 | % | 12,263 | 6.3 | % | ||||||||||||
Net sales |
$ | 2,864,427 | 100.0 | % | $ | 2,705,837 | 94.5 | % | $ | 158,590 | 5.9 | % | |||||||||
59
Wholesale
Net sales for the Wholesale segment were $1,764,755 for fiscal 2011 as compared to $1,734,860 for fiscal 2010. The increase of $28,895 or 1.7% was primarily attributable to the following:
- •
- $100,578 from domestic branded products, primarily driven by continued growth in key brands such as Nature's
Bounty® and the sports nutrition brands (such as Pure Protein® and Body Fortress®),
- •
- ($105,138) from domestic private label products, primarily driven by decreased SKUs to existing customers,
and
- •
- $34,455 from international sales.
We continue to adjust shelf space allocation between the Wholesale brands to provide the best overall product mix and to respond to changing market conditions. These efforts have helped to strengthen Wholesale's position in the mass market. Wholesale continues to leverage valuable consumer sales information obtained from our Vitamin World retail stores and Direct Response/E-Commerce operations to provide our mass-market customers with data and analyses to drive mass market sales.
We use targeted promotions to grow overall sales. Promotional programs and rebates were $290,663, or 14.0% of sales for fiscal 2011 as compared to $246,654, or 12.3% of sales for fiscal 2010. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.
Product returns were $27,562 or 1.3% of sales for fiscal 2011 as compared to $25,203 or 1.3% of sales for fiscal 2010. The product returns for fiscal 2011 and fiscal 2010 were mainly attributable to returns in the ordinary course of business. We expect returns relating to normal operations to trend between 1% to 2% of Wholesale sales in future quarters.
One customer, Wal-Mart, represented 25% and 27% of the Wholesale segment's net sales for fiscal 2011 and 2010, respectively. It also represented 15% and 17% of consolidated net sales for fiscal 2011 and 2010, respectively. The loss of this customer, or any of our other major customers, would have a material adverse effect on our results of operations if we were unable to replace that customer.
European Retail
Net sales for this segment increased $92,938, or 17.1%, to $636,303 in fiscal 2011 from $543,365 for fiscal 2010. For fiscal 2011 same store sales in U.S. dollars increased 9.2%, or $49,070, as compared to fiscal 2010. In local currency, same store sales increased 5.9% as compared to fiscal 2010. During fiscal 2011 and 2010, twenty-six and sixty-seven Julian Graves stores, respectively were converted to either Holland & Barrett, GNC (UK) or Nature's Way stores.
60
The following is a summary of European Retail store activity for the fiscal years ended September 30, 2011 and 2010:
European Retail stores:
|
Fiscal 2011 |
Fiscal 2010 |
|||||
|---|---|---|---|---|---|---|---|
Company-owned stores |
|||||||
Open at beginning of the period |
765 | 653 | |||||
Opened during the period* |
58 | 108 | |||||
Acquired during the period |
3 | 6 | |||||
Closed during the period |
(3 | ) | (2 | ) | |||
Open at end of the period |
823 | 765 | |||||
Franchised stores |
|||||||
Open at beginning of the period |
22 | 28 | |||||
Opened during the period |
10 | 8 | |||||
Closed during the period |
(4 | ) | (14 | ) | |||
Open at end of the period |
28 | 22 | |||||
Total company-owned and franchised stores |
|||||||
Open at beginning of the period |
787 | 681 | |||||
Opened during the period* |
68 | 116 | |||||
Acquired during the period |
3 | 6 | |||||
Closed during the period |
(7 | ) | (16 | ) | |||
Open at end of the period |
851 | 787 | |||||
- *
- Includes stores that were converted from Julian Graves to either Holland & Barrett, GNC (UK) or Nature's Way stores.
Direct Response/E-Commerce
Direct Response/E-Commerce net sales increased $23,494, or 10.0%, to $257,466 in fiscal 2011 from $233,972 in fiscal 2010. The total number of orders increased approximately 10% and the average order size remained consistent for fiscal 2011 as compared to fiscal 2010. On-line net sales comprised 61% of this segment's net sales for fiscal 2011 as compared to 56% for fiscal 2010.
This segment continues to vary its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs which are not offered in every quarter. Historical results reflect this pattern and therefore this division should be viewed on an annual, and not quarterly, basis.
North American Retail
Net sales for this segment increased $12,263, or 6.3%, to $205,903 for fiscal 2011. Same store sales increased 5.1%, representing $9,431 of the overall increase in net sales. The business continues to benefit from updated in-store signage, SKU rationalization and a shift in the promotional strategy to an everyday low price rather than special savings days, which was the strategy in prior years.
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The following is a summary of North American Retail store activity for the fiscal years ended September 30, 2011 and 2010:
North American Retail stores:
|
Fiscal 2011 |
Fiscal 2010 |
|||||
|---|---|---|---|---|---|---|---|
Total North American Retail |
|||||||
Open at beginning of the period |
457 | 442 | |||||
Opened during the period |
2 | 21 | |||||
Closed during the period |
(16 | ) | (6 | ) | |||
Open at end of the period |
443 | 457 | |||||
Cost of Sales
Cost of sales for fiscal 2011 as compared to fiscal 2010 was as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor |
|
Predecessor | |
|
||||||||||
| |
2011 |
|
2010 | $ Change | % Change | ||||||||||
Cost of Sales |
$ | 1,641,887 | $ | 1,473,095 | $ | 168,792 | 11.5 | % | |||||||
Percentage of net sales |
57.3 | % | 54.4 | % | |||||||||||
The increase in cost of sales relates primarily to an adjustment of $122,104 to acquired inventory to its fair value as required under acquisition accounting in connection with the Acquisition, resulting in a one-time increase in cost of sales as the acquired inventory was sold during the first quarter. Excluding this adjustment, the decrease in cost of sales as a percentage of net sales (53.1%) is attributable to a higher proportion of branded product sales, which traditionally have higher gross profit margins than private label product sales, as compared to the prior comparable period, partially offset by higher costs of certain raw materials.
Advertising, Promotion and Catalog Expenses
Total advertising, promotion and catalog expenses for fiscal 2011 as compared to fiscal 2010 were as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor |
|
Predecessor | |
|
||||||||||
| |
2011 |
|
2010 | $ Change | % Change | ||||||||||
Advertising, promotion and catalog |
$ | 152,021 | $ | 136,763 | $ | 15,258 | 11.2 | % | |||||||
Percentage of net sales |
5.3 | % | 5.1 | % | |||||||||||
The increase in advertising, promotion and catalog expense is primarily due to media and website advertising.
62
Selling, General and Administrative Expenses
SG&A for fiscal 2011 as compared to fiscal 2010 were as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor |
|
Predecessor | |
|
||||||||||
| |
2011 |
|
2010 | $ Change | % Change | ||||||||||
Selling, general and administrative |
$ | 788,719 | $ | 694,803 | $ | 93,916 | 13.5 | % | |||||||
Percentage of net sales |
27.5 | % | 25.7 | % | |||||||||||
SG&A costs increased by $93,916 compared to fiscal 2010 due to higher amortization expense of $29,293 associated with the increased value of trade-names and customer relationship intangible assets recorded in acquisition accounting as a result of the acquisition; increased payroll and payroll related costs of approximately $24,827 and higher rent and related utilities expenses of approximately $16,502 primarily associated with new store openings and store conversions in the European Retail segment. In addition, freight costs increased approximately $10,588 due to higher fuel costs as well as increased sales and professional fees increased by $5,589.
Merger Expenses
In connection with the Acquisition described above, we incurred charges of $44,479 in fiscal 2011 and $45,903 in fiscal 2010. For fiscal 2011, these charges consisted of $15,660 in financing costs associated with an unused bridge loan, $14,324 for a portion of the transaction fee paid to Carlyle and $14,495 of other Merger related costs. In fiscal 2010, these charges consisted of $29,761 primarily related to legal and professional advisory services and $16,142 of incremental stock-based compensation expense as a result of the mandatory acceleration of vesting of all unvested stock options and restricted stock units in connection with the Acquisition.
Income from Operations
Income from operations for fiscal 2011 as compared to fiscal 2010 was as follows:
| |
Fiscal year ended September 30, |
|
|
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor |
|
Predecessor | |
|
||||||||||
| |
2011 |
|
2010 | $ Change | % Change | ||||||||||
Wholesale |
$ | 283,775 | $ | 292,991 | $ | (9,216 | ) | -3.1 | % | ||||||
European Retail |
121,216 | 101,121 | 20,095 | 19.9 | % | ||||||||||
Direct Response/E-Commerce |
59,193 | 68,018 | (8,825 | ) | -13.0 | % | |||||||||
North American Retail |
12,575 | 11,272 | 1,303 | 11.6 | % | ||||||||||
Corporate |
(239,438 | ) | (118,128 | ) | (121,310 | ) | 102.7 | % | |||||||
Total |
$ | 237,321 | $ | 355,274 | $ | (117,953 | ) | -33.2 | % | ||||||
Percentage of net sales |
8.3 | % | 13.1 | % | |||||||||||
The increase in the expenses included in the Corporate segment relate to the Merger expenses described above as well as an increase in payroll and payroll related costs and $122,104 to record acquired inventory to its fair value as required under acquisition accounting in connection with the Acquisition. The decrease in Wholesale income from operations is primarily due to higher amortization of intangible assets resulting from the Acquisition offset by higher profits and the reversal of a legal accrual that is no longer necessary. The increase in the European Retail segment was related to the increase in sales partially offset by higher SG&A costs (primarily payroll and store occupancy costs). The decrease in Direct Response/E-Commerce income from operations was primarily due to higher
63
freight costs and higher amortization of definite lived intangible assets, offset by higher sales and gross profits. The increase in the North American Retail income was a result of higher sales with various increases in SG&A (primarily payroll and professional fees).
Interest Expense
Interest expense increased by $165,458 to $195,566 due to higher borrowing associated with the Acquisition described above.
Miscellaneous, net
The components of miscellaneous, net were as follows:
| |
Fiscal year ended September 30, |
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor |
|
Predecessor | |
||||||||
| |
2011 |
|
2010 | $ Change | ||||||||
Foreign exchange gains (losses) |
$ | 124 | $ | 1,108 | $ | (984 | ) | |||||
Investment income |
665 | 711 | (46 | ) | ||||||||
Rental income |
— | 581 | (581 | ) | ||||||||
Other |
1,144 | 1,727 | (583 | ) | ||||||||
Total |
$ | 1,933 | $ | 4,127 | $ | (2,194 | ) | |||||
Miscellaneous, net decreased primarily due to a decrease in unrealized foreign exchange gains on intercompany balances for fiscal 2011 as compared to fiscal 2010, as well as an insurance settlement received in 2010.
Provision for Income Taxes
Our provision for income taxes was 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 fiscal 2011 was 25.2%, compared to 34.7% in the prior fiscal year. The fiscal 2011 effective tax rate is lower than the fiscal 2010 effective tax primarily due to the domestic loss for fiscal 2011 due to $122,104 inventory costs associated with the Acquisition as well as $44,479 of Merger costs associated with the Merger, for which Federal and State tax benefits have been recognized as compared with domestic income for fiscal 2010 for which Federal and State taxes had been provided for.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash generated from operations and funds available under our revolving credit facility. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources of funds.
On October 1, 2010, we entered into senior secured credit facilities totaling $2,000,000, consisting of $1,750,000 term loan facilities and a $250,000 revolving credit facility. In addition, we issued $650,000 of notes with an interest rate of 9% and a maturity date of October 1, 2018.
On March 1, 2011, NBTY, Holdings, Barclays Bank PLC, as administrative agent and several other lenders entered into the Refinancing, pursuant to which we repriced our loans and amended certain other terms under our existing credit agreement. Under the terms of the Refinancing, the original $250,000 term loan A and $1,500,000 term loan B were replaced with a new $1,750,000 term loan B-1 and the $250,000 revolving credit facility was modified to $200,000. Borrowings under term loan B-1
64
bear interest at a floating rate which can be, at our option, either (i) Eurodollar rate plus an applicable margin or, (ii) base rate plus an applicable margin, in each case, subject to a Eurodollar rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for term loan B-1 and the revolving credit facility is 3.25% per annum for Eurodollar loans and 2.25% per annum for base rate loans, with a step-down in rate for the revolving credit facility upon the achievement of a certain total senior secured leverage ratio. Substantially all other terms are consistent with the original term loan B, including the amortization schedule of term loan B-1 and maturity dates. As a result of the Refinancing, $20,824 of previously capitalized deferred financing costs were expensed. In addition, $2,394 of the call premium on term loan B and termination costs on interest rate swap contracts of $1,525 were expensed.
On December 30, 2011, we prepaid $225,000 of principal on our term loan B-1. As a result of this prepayment, $9,289 of deferred financing costs were written off. In accordance with the prepayment provisions of the Refinancing, no scheduled payments of principal will be required until October 2017.
We must make prepayments on the term loan B-1 facility with the net cash proceeds of certain asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under our senior secured credit facilities unless specifically incurred to refinance a portion of our senior secured credit facilities) and 50% of excess cash flow (such percentage subject to reduction based on achievement of specified total senior secured leverage ratios), in each case, subject to certain reinvestment rights and other exceptions. We are also required to make prepayments under our revolving credit facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the revolving credit facility exceeds the aggregate amount of commitments in respect of the revolving credit facility.
In addition, the terms of the Refinancing require the maintenance of a maximum total senior secured leverage ratio on a quarterly basis, calculated with respect to Consolidated EBITDA, as defined therein, if at any time amounts are outstanding under the revolving credit facility (including swingline loans and any unreimbursed drawings under any letters of credit (not including drawings on letters of credit which have been cash collateralized by the borrower to at least 105% of their maximum stated amount)). We were in compliance with all covenants under the credit agreement governing our senior secured credit facilities at September 30, 2012. During fiscal 2012, there were no borrowings outstanding under the revolving credit facility. In connection with the acquisition of Balance Bar, approximately $80,000 was drawn in November 2012. All other financial covenants required by the senior secured credit facilities were removed as part of the Refinancing.
As a result of the Refinancing, $20,824 of previously capitalized deferred financing costs were expensed. In addition, $2,394 of the call premium on term loan B and termination costs on interest rate swap contracts of $1,525 were expensed. Financing costs capitalized in connection with the Refinancing of $24,320, consisting of bank fees of $11,714 and the remaining portion of the call premium on term loan B of $12,606, will be amortized over the remaining term using the effective interest rate method.
On October 17, 2012, Holdings, our parent company, issued $550,000 senior unsecured notes ("Holdco Notes") that mature on November 1, 2017. Interest on the notes will accrue at the rate of 7.75% per annum with respect to Cash Interest and 8.50% per annum with respect to any paid-in-kind interest ("PIK Interest"). Interest on the Holdco Notes will be payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. Holdings is a holding company with no operations of its own and has no ability to service interest or principal on the Holdco Notes, other than through dividends it may receive from NBTY. NBTY is restricted, in certain circumstances, from paying dividends to Holdings by the terms of the indentures governing its notes and the senior secured credit facility. NBTY has not guaranteed the indebtedness of Holdings, nor pledged any of its assets as collateral and the Holdco Notes are not reflected on NBTY's balance sheet. The proceeds from the
65
offering of the Holdco Notes, along with the $200,000 from NBTY described below, were used to pay transactions fees and expenses and a dividend of approximately $722,000 to Holdings' shareholders.
On October 11, 2012 we amended our credit agreement to allow Holdings, our parent company, to issue and sell Holdco Notes. In addition, among other things, the amendment (i) increases the general restricted payments basket, as defined by the credit agreement, (ii) increased the maximum total leverage ratio test which governs the making of restricted payments using Cumulative Credit (as defined in the credit agreement) and (iii) modified the definition of Cumulative Credit to be calculated retroactively using 50% of the consolidated net income as defined in NBTY's indenture governing the notes. Interest on the Holdco Notes will be paid via dividends from NBTY to Holdings, to the extent that it is permitted under our credit agreement. Approximately $6,000 of expenses related to the amendment was capitalized as a deferred financing cost and will be amortized using the effective interest method. In conjunction with the amendment, we paid Holdings a cash dividend of approximately $194,000 in October 2012.
Interest on the Holdco Notes is payable entirely in cash ("Cash Interest") to the extent that it is less than the maximum amount of allowable dividends and distributions, as discussed on page 37, plus cash at Holdings ("Applicable Amount") as defined by the indenture governing the Holdco Notes. For any interest period after May 1, 2013 (other than the final interest period ending at stated maturity), if the Applicable Amount as for such interest period will be:
(i) equal or exceed 75%, but be less than 100%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 25% of the then outstanding principal amount of the Holdco Notes by increasing the principal amount of the outstanding Holdco Notes or by issuing other PIK notes under the indenture governing the Holdco Notes, on the same terms and conditions of the Holdco Notes, in a principal amount equal to such interest ("PIK Interest") and (b) 75% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(ii) equal or exceed 50%, but be less than 75%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 50% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 50% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(iii) equal or exceed 25%, but be less than 50%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 75% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 25% of the then outstanding principal amount of the Holdco Notes as Cash Interest; or
(iv) be less than 25% of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on the Holdco Notes as PIK Interest.
The insufficiency or lack of funds available to Holdings to pay Cash Interest as required by the preceding paragraph shall not permit Holdings to pay PIK Interest in respect of any interest period and the sole right of Holdings to elect to pay PIK Interest shall be as (and to the extent) provided in the immediately preceding paragraph.
The indenture governing the notes, the indenture governing the Holdco Notes and the senior secured credit facilities contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take
66
advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to:
- •
- incur or guarantee additional indebtedness;
- •
- make certain investments;
- •
- pay dividends or make distributions on our capital stock;
- •
- sell assets, including capital stock of restricted subsidiaries;
- •
- agree to payment restrictions affecting our restricted subsidiaries;
- •
- consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
- •
- enter into transactions with our affiliates;
- •
- incur liens; and
- •
- designate any of our subsidiaries as unrestricted subsidiaries.
Our ability to make payments on and to refinance our indebtedness, including our notes, will depend on our ability to generate cash in the future. We believe that our cash on hand, together with cash from operations and, if required, borrowings under the revolving portion of our senior secured credit facilities, will be sufficient for our cash requirements for the next twelve months.
We or our affiliates may at any time and from time to time purchase notes or our other indebtedness. Any such purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as well as with such consideration as we or any of our affiliates may determine.
The following table sets forth, as of the dates indicated, cash balances and working capital:
| |
Fiscal year ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor | |
Predecessor | |||||||||
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
Cash and cash equivalents |
$ | 315,136 | $ | 393,335 | $ | 341,678 | ||||||
Working capital (including cash and cash equivalents) |
$ | 882,495 | $ | 899,699 | $ | 849,338 | ||||||
The following table sets forth, for the period indicated, net cash flows provided by (used in) operating, investing and financing activities and other operating measures:
| |
Fiscal year ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor | |
Predecessor | |||||||||
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
Cash flow provided by operating activities |
$ | 234,050 | $ | 284,637 | $ | 371,752 | ||||||
Cash flow used in investing activities |
$ | 85,799 | $ | (4,032,043 | ) | $ | (82,103 | ) | ||||
Cash flow provided by (used in) financing activities |
$ | (229,360 | ) | $ | 3,798,238 | $ | (47,227 | ) | ||||
Total inventory turnover |
2.28 | 2.33 | 2.33 | |||||||||
Finished goods inventory turnover (excluding bulk) |
4.34 | 4.28 | 4.89 | |||||||||
Days sales outstanding in accounts receivable |
32 | 30 | 30 | |||||||||
We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements. Cash and cash equivalents held by our foreign subsidiaries are subject to U.S. income taxes upon repatriation to the U.S. We generally
67
repatriate all earnings from our foreign subsidiaries where permitted under local law. However, during fiscal 2012 and 2010, we permanently reinvested approximately $25,000 and $17,000, respectively of our foreign earnings outside of the U.S.
Working capital of $882,495 as of September 30, 2012 remained relatively consistent as income from operations was offset by a substantial prepayment on our term loan B-1 which was a long term obligation. Cash provided by operating activities of $234,050 during fiscal 2012 was mainly attributable to net income of $146,471. During fiscal 2012, cash flows used in investing activities consisted primarily of cash paid purchases of property, plant and equipment. During fiscal 2012, cash flows used financing activities relate to principal payments under long-term debt agreements.
As of September 30, 2011, the increase in working capital of $59,339 as compared to September 30, 2010 was primarily due to increased cash balances, decreased current portion of long term debt due to the Transactions, partially offset by higher accounts payable balances. Cash provided by operating activities of $284,637 during fiscal 2011 was mainly attributable to net income of $27,637, non-cash amortization of the incremental inventory fair value associated with the Merger of $122,104, depreciation and amortization of $118,411 and other changes in operating assets and liabilities. During fiscal 2011, cash flows used in investing activities consisted primarily of cash paid for acquisitions relating to the Merger and purchases of property, plant and equipment. During fiscal 2011, cash flows from financing activities primarily relating to borrowings and capital contributions related to the Merger and Transactions offset by payments for financing fees and principal payments under long-term debt agreements and capital lease obligations.
Consolidated EBITDA
EBITDA consists of earnings before interest expense, taxes, depreciation and amortization. Consolidated EBITDA, as defined in our senior secured credit facilities, as amended, eliminates the impact of a number of items we do not consider indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. Consolidated EBITDA is a component of certain covenants under our senior secured credit facilities. We present EBITDA and Consolidated EBITDA because we consider these items to be important supplemental measures of our performance and believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industries with similar capital structures. We believe issuers of debt securities also present EBITDA and Consolidated EBITDA because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. We believe that these items are appropriate supplemental measures of debt service capacity, because cash expenditures for interest are, by definition, available to pay interest, and tax expense is inversely correlated to interest expense because tax expense goes down as deductible interest expense goes up; and depreciation and amortization are non-cash charges.
EBITDA and Consolidated EBITDA have limitations as analytical tools, and you should not consider these items in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
- •
- EBITDA and Consolidated EBITDA:
- •
- exclude certain tax payments that may represent a reduction in cash available to us;
- •
- do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
68
- •
- do not reflect changes in, or cash requirements for, our working capital needs; and
- •
- do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal
payments on our debt, including the notes;
- •
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will
often have to be replaced in the future, and EBITDA and Consolidated EBITDA do not reflect any cash requirements for such replacements; and
- •
- other companies in our industry may calculate EBITDA and Consolidated EBITDA differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Consolidated EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. As a result, we rely primarily on our U.S. GAAP results and use EBITDA and Consolidated EBITDA only supplementally.
In addition, in calculating Consolidated EBITDA, we make certain adjustments that are based on assumptions and estimates that may prove to have been inaccurate.
In addition, in evaluating Consolidated EBITDA, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of Consolidated EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
The following table reconciles net loss to EBITDA and Consolidated EBITDA (as defined in our senior secured credit facilities) for fiscal 2012 and 2011:
| |
Fiscal 2012 | Fiscal 2011 | |||||
|---|---|---|---|---|---|---|---|
Net income |
$ | 146,471 | $ | 29,919 | |||
Interest expense |
158,584 | 195,537 | |||||
Income tax provision |
56,199 | 9,990 | |||||
Depreciation and amortization |
104,375 | 103,335 | |||||
EBITDA |
465,629 | 338,781 | |||||
Merger related costs(a) |
— | 44,479 | |||||
Inventory fair value adjustment(b) |
— | 122,104 | |||||
Severance costs(c) |
3,206 | 5,055 | |||||
Stock-based compensation(d) |
2,680 | 1,788 | |||||
Consulting fee(e) |
3,000 | 3,000 | |||||
Impairments and disposals(f) |
32,565 | 2,673 | |||||
Proforma cost savings(g) |
56,054 | 24,320 | |||||
Other non-recurring items(h) |
27,990 | 13,901 | |||||
Limitation on certain EBITDA adjustments |
(30,199 | ) | — | ||||
Consolidated EBITDA |
$ | 560,925 | $ | 556,101 | |||
- (a)
- Reflects
the exclusion of costs incurred in connection with the Merger, including $15,660 of financing costs associated with an unused bridge loan, $14,324
representing the portion of the one-time sponsor transaction fee and $14,495 relating to other Merger related costs.
- (b)
- Reflects
the exclusion of the sell-through of the increased fair value of opening inventory at acquisition required under acquisition
accounting.
- (c)
- Reflects
the exclusion of severance costs incurred.
- (d)
- Reflects the exclusion of non-cash expenses related to stock options.
69
- (e)
- Reflects
the exclusion of the Carlyle consulting fee.
- (f)
- Reflects
the impairment of certain assets including the Julian Graves Limited impairment of $20,106.
- (g)
- Reflects
12 months of prospective savings in accordance with the credit agreement; specifically the amount of cost savings expected to be realized
from operating expense reductions and other operating improvements as a result of specified actions taken or initiated, less the amount of any actual cost savings realized during the period.
- (h)
- Reflects the exclusion of various non-recurring items, including $15,570 and $4,383 of one-time consulting fees for fiscal 2012 and fiscal 2011, respectively.
Off-Balance Sheet Arrangements
See description of the Holdco Notes above for off-balance sheet arrangements. For additional information relating to certain contractual cash obligations see below.
A summary of contractual cash obligations as of September 30, 2012 is as follows:
| |
Payments Due By Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Less Than 1 Year |
1-3 Years |
4-5 Years |
After 5 Years |
|||||||||||
Long-term debt, excluding interest(1) |
$ | 1,507,500 | $ | — | $ | — | $ | — | $ | 1,507,500 | ||||||
Interest(1) |
659,312 | 131,366 | 253,559 | 245,137 | 29,250 | |||||||||||
Operating leases |
693,584 | 112,977 | 185,790 | 145,437 | 249,380 | |||||||||||
Purchase commitments |
170,768 | 170,058 | 710 | — | — | |||||||||||
Capital commitments |
11,914 | 11,914 | — | — | — | |||||||||||
Employment and consulting agreements |
7,529 | 1,700 | 3,400 | 2,429 | — | |||||||||||
Total contractual cash obligations |
$ | 3,050,607 | $ | 428,015 | $ | 443,459 | $ | 393,003 | $ | 1,786,130 | ||||||
- (1)
- Excludes the $550 million Holdco Notes and related annual interest and approximately $43 million of interest at 7.75%
Future interest expense included in the above table on our variable rate debt is calculated based on the current rate in effect after the Refinancing. Variable interest on our senior secured credit facilities, included in the above table, is calculated assuming the current interest rate following the Refinancing of 4.25% (which assumes a 3.25% spread over the LIBOR floor of 1.00%) remains in effect for all future periods. To the extent future LIBOR rates are greater than 1.00%, actual future interest expense will be greater than noted in the above table.
We conduct retail operations under operating leases, which generally have lease terms between 5 and 15 years, with the longest lease term expiring in 2039. Some of the leases contain escalation clauses, as well as renewal options, and provide for contingent rent based upon sales plus certain tax and maintenance costs. At September 30, 2012, we had $693,584 in future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year are noted in the above table.
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During fiscal 2012, no one supplier individually represented greater than 10% of our raw material purchases. We do not believe that the loss of any single supplier would have a material adverse effect on our consolidated financial condition or results of operations. We were committed to make future purchases for inventory related items, such as raw materials and finished goods, under various purchase arrangements, some of which extend beyond one year, with fixed price provisions aggregating $170,768 at September 30, 2012. Generally, most of our purchase commitments are cancelable at our discretion until the order has been shipped, but require repayment of all expenses incurred through the date of cancellation.
We had $11,914 in open capital commitments at September 30, 2012, primarily related to leasehold improvements, as well as manufacturing equipment, computer hardware and software.
At September 30, 2012, we had a liability of $12,888 for unrecognized tax benefits, the recognition of which would have an effect of $10,160 on income tax expense and the effective income tax rate. We do not believe that the amount will change significantly in the next 12 months. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.
Seasonality
Although we believe that our business is not seasonal in nature, historically we have experienced, and expect to continue to experience, a substantial variation in our net sales and operating results from quarter to quarter. The factors that influence this variability of quarterly results include general economic and industry conditions affecting consumer spending, changing consumer demands and current news on nutritional supplements, the timing of our introduction of new products, promotional program incentives offered to customers, the timing of catalog promotions, the level of consumer acceptance of new products and actions of competitors. Accordingly, a comparison of our results of operations from consecutive periods is not necessarily meaningful, and our results of operations for any period are not necessarily indicative of future performance. Additionally, we may experience higher net sales in a quarter depending upon when we have engaged in significant promotional activities.
Foreign Currency
Approximately 31%, 32% and 32% of our net sales for fiscal 2012, 2011 and 2010, respectively, were denominated in currencies other than U.S. dollars, principally British pound sterling and to a lesser extent euros, Canadian dollars and Chinese yuan. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on us, as this would result in a decrease in our consolidated operating results.
Our foreign subsidiaries accounted for the following percentages of assets and total liabilities as of September 30, 2012 and 2011:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Total assets |
25 | % | 24 | % | |||
Total liabilities |
5 | % | 4 | % | |||
In preparing the consolidated financial statements, the financial statements of the foreign subsidiaries are translated from the functional currency, generally the local currency, into U.S. dollars. This process results in exchange rate gains and losses, which are included as a separate component of stockholders' equity under the caption "Accumulated other comprehensive income."
During fiscal 2012, 2011 and 2010, translation gains (losses) of $23,107, ($20,196) and ($4,603), respectively, were included in determining other comprehensive income. Accordingly, cumulative translation gains (losses) of approximately $2,911 and ($20,196) were included as part of accumulated
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other comprehensive income within the consolidated balance sheet at September 30, 2012 and 2011, respectively.
The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies against the U.S. dollar. These currencies include the British pound sterling, the euro, the Canadian dollar and the Chinese yuan. Any future translation gains or losses could be significantly different than those noted in each of these years.
Inflation affects the cost of raw materials, goods and services we use. High energy costs and fluctuations in commodity prices can affect the cost of all raw materials and components. The competitive environment somewhat limits our ability to recover higher costs resulting from inflation by raising prices. However, we anticipate passing these costs to our customers, to the extent possible. We seek to mitigate the adverse effects of inflation primarily through improved productivity and strategic buying initiatives.
Recent Accounting Developments
In June 2011, the Financial Accounting Standards Board ("FASB") amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. However, the requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income has been temporarily delayed by the FASB until further evaluation can be done on the impact of its implementation. We are currently evaluating the impact of adopting this guidance on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
(Dollar amounts are in thousands, unless otherwise noted.)
We are subject to currency fluctuations, primarily with respect to the British pound sterling, the euro, the Canadian dollar and the Chinese yuan, and interest rate risks that arise from normal business operations. We regularly assess these risks.
We have subsidiaries whose operations are denominated in foreign currencies (primarily the British pound sterling, the euro, the Canadian dollar and the Chinese yuan). We consolidate the earnings of our foreign subsidiaries by translating them into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the remeasurement of these foreign currency denominated transactions results in increased net sales, operating expenses and net income. Similarly, our net sales, operating expenses and net income will decrease when the U.S. dollar strengthens against foreign currencies.
To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound sterling, arising from our net investment in British pound sterling denominated operations, on December 16, 2010, we entered into three cross currency swap contracts to hedge a portion of the net investment in our British pound denominated foreign operations. The aggregate notional amount of the swap contracts is 194,200 British pounds (approximately $301,000 U.S. dollars), with a forward rate of 1.56, and a termination date of September 30, 2017.
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Net sales denominated in foreign currencies were approximately $917,385, or 31% of total net sales, for fiscal 2012. A majority of our foreign currency exposure is denominated in British pounds and Canadian dollars. For fiscal 2012, as compared to the prior comparable period, the British pound and the Canadian dollar decreased 2% as compared to the U.S. dollar. The combined effect of the changes in these currency rates resulted in a decrease of $14,367 in net sales and an increase of $1,625 in operating income.
We are exposed to changes in interest rates on our senior secured credit facilities. During December 2010, we entered into three interest rate swap contracts that we subsequently terminated in connection with the Refinancing, resulting in a termination payment of $1,525. During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior secured credit facilities until the indicated expiration dates of these swap contracts. Each swap contract has an initial notional amount of $333,333 (for a total of one billion dollars), with a fixed interest rate of 1.92% for a four-year term. The notional amount of each swap decreases to $266,666 in December 2012, decreases to $166,666 in December 2013 and has a maturity date of December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior secured credit facilities are swapped for fixed interest payments.
To manage the potential risk arising from changing interest rates and their impact on long-term debt, our policy is to maintain a combination of available fixed and variable rate financial instruments. Assuming our senior secured credit facilities are fully drawn, each one eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on our senior secured credit facilities by approximately $884 per year.
Item 8. Financial Statements and Supplemental Data
See the "Index to Consolidated Financial Statements" included in this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer ("CEO") and chief financial officer ("CFO"), we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act as of the end of the period covered by this Report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the three months ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive and principal financial officers, management assessed, as of September 30, 2012, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment using those criteria, management concluded that our internal control over financial reporting, as of September 30, 2012, was effective.
The effectiveness of our internal control over financial reporting as of September 30, 2012 has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:
- •
- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
- •
- provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements
in accordance with GAAP principles and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
- •
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
None.
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Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names and ages of members of our Board of Directors (the "Board" or "Directors") and executive officers and the positions they held with us as of November 15, 2012, each of whom serves an indefinite term until his or her successor has been appointed and qualified.
Name
|
Age | Position | |||
|---|---|---|---|---|---|
Sandra Horbach |
52 | Chairman of the Board | |||
David Bernauer |
68 | Director | |||
Marco De Benedetti |
50 | Director | |||
Robert Essner |
65 | Director | |||
Allan Holt |
60 | Director | |||
Elliot Wagner |
36 | Director | |||
Jeffrey Nagel |
48 | Director and CEO | |||
Michael Collins |
49 | CFO | |||
Harvey Kamil |
68 | Vice Chairman | |||
Joseph Looney |
55 | Chief Accounting Officer, Vice President—Finance | |||
Christopher Brennan |
41 | Senior Vice President—General Counsel | |||
James Flaherty |
55 | Senior Vice President—Marketing and Advertising | |||
Hans Lindgren |
51 | Senior Vice President—Operations and Corporate Secretary | |||
Karla Packer |
53 | Senior Vice President—Human Resources | |||
Glenn Schneider |
43 | President—Global Wholesale | |||
Katia Facchetti |
48 | Chief Marketing Officer | |||
Bernard O'Keefe |
59 | Chief Supply Chain Officer | |||
Sandra Horbach
Sandra Horbach has served as a member of our Board since October 2010 and Chairman of the Board since May 2011. She is a Managing Director of The Carlyle Group, where she focuses on U.S. buyout investment opportunities in the consumer and retail industries and serves as head of the Global Consumer and Retail team. She currently serves on the Board of Directors of Dunkin' Brands and CVC Brasil Operadora e Agencia de Viagens S.A. Ms. Horbach is a member of the Board of Trustees and Chairs the Investment Committee at Rockefeller University, is a member of the Stanford Business School Advisory Council, and serves on the Board of Trustees of The Chapin School in New York. Before joining Carlyle, Ms. Horbach spent 18 years at Forstmann Little, a private investment firm. She also spent two years in the mergers and acquisition department of Morgan Stanley. Ms. Horbach received her Masters in Business Administration from the Stanford University Graduate School of Business and her Bachelor of Arts from Wellesley College. This experience, in particular her extensive experience in the retail and consumer industries, and her experience on other boards, led to the conclusion that Ms. Horbach should serve as a Director.
David Bernauer
David Bernauer has served as a member of our Board since February 2011. He is the retired Chairman and Chief Executive Officer of Walgreen Co. He previously served as Chairman of Walgreen from July 2006 until July 2007. From 2003 until July 2006, Mr. Bernauer served as Chairman and Chief Executive Officer of Walgreen. From 2002 to 2003, he served as President and Chief Executive Officer of Walgreen; from 1999 to 2002 as President and Chief Operating Officer of Walgreen; and he has served in various management positions, with increasing areas of responsibility at Walgreen since 1966.
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Currently, he also is a Director of Lowe's Companies, Inc. Mr. Bernauer also served on the Board of Office Dept, Inc. from 2004 to April 2011.This experience, including his prior executive and other leadership roles at a major national retailer, led to the conclusion that Mr. Bernauer should serve as a Director.
Marco De Benedetti
Marco De Benedetti has served as a member of our Board since October 2010. He is a Partner and Managing Director of The Carlyle Group and Co-Head of its Europe buyout team. He is based in Milan, Italy. Mr. De Benedetti serves on the Board of Directors of Cofide S.p.A (since 1994), Moncler (since 2008) and Commscope (since 2010), as well as Save the Children Italia. Before joining Carlyle, Mr. De Benedetti was the Chief Executive Officer of Telecom Italia. Mr. De Benedetti was the Chief Executive Officer of Telecom Italia Mobile from 1999 until its merger with Telecom Italia. Previously, Mr. De Benedetti was the Chairman of Infostrada, the main alternative fixed-line carrier for voice services and internet access in Italy, and Chief Executive Officer of Olivetti Telemedia, the telecommunications and multimedia business of the Olivetti Group. Between 1987 and 1989, Mr. De Benedetti worked for Wasserstein, Perrella & Co. in New York. In 1990, he joined the Olivetti Group as Assistant to the Chief Executive Officer of Olivetti Systems and Networks, and he was later appointed as Group Director of Marketing and Services. In 1992, he was appointed General Manager of Olivetti Portugal. Mr. De Benedetti received his Bachelor's degree in history and economics from Wesleyan University and his Masters in Business Administration from the Wharton School at the University of Pennsylvania. This experience, in particular his extensive executive and business management experience, led to the conclusion that Mr. De Benedetti should serve as a Director.
Robert Essner
Robert Essner has served as a member of our Board since February 2011. He is a Senior Advisor at The Carlyle Group focused on identifying and evaluating global investment opportunities in the healthcare sector. Mr. Essner was Chairman for Wyeth from 2003 until 2008 and Chief Executive Officer for Wyeth from 2001 until 2008. Mr. Essner worked for 32 years in the pharmaceutical industry and during that time served in many leadership roles, including Chairman of the Pharmaceutical Research and Manufacturers Association. Mr. Essner is currently a director of MassMutual. He served as Chairman of the not-for-profit Children's Health Fund Corporate Council for 13 years and is presently on their Board of Trustees. Mr. Essner is Executive-in-Residence and Adjunct Professor at Columbia Business School, where he teaches courses in Healthcare Management. Mr. Essner received a Master's degree from the University of Chicago and a Bachelor's degree from Miami University. This experience, including his extensive background and experience in the pharmaceutical industry, led to the conclusion that Mr. Essner should serve as a Director.
Allan Holt
Allan Holt has served as a member of our Board since October 2010. Mr. Holt, a Partner and Managing Director of The Carlyle Group, is currently a Co-head of its U.S. Buyout group. Mr. Holt is a graduate of Rutgers University and received his M.B.A. from the University of California, Berkeley. He serves on the boards of directors of Booz Allen Hamilton Holding Corporation and SS&C Technologies, Inc., the boards of managers of HCR ManorCare, LLC and HCRMC Operations, LLC, as well as on the non-profit boards of directors of The Barker Foundation Endowment Fund, The Hillside Foundation, Inc., The National Children's Museum and The Smithsonian National Air and Space Museum. Mr. Holt also served on the boards of directors of Aviall, Inc. (from 2001 to 2006), Sequa Corporation (2007 until February 2011) and Vought Aircraft Industries, Inc. (from 2000 to June 2010). This experience, including his extensive experience in finance and his experience on other boards, led to the conclusion that Mr. Holt should serve as a Director.
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Elliot Wagner
Elliot Wagner has served as a member of our Board since October 2010. He is a Managing Director of The Carlyle Group, where he focuses on U.S. buyout opportunities in the consumer and retail sector. From 2000 to 2008, Mr. Wagner was a member of Carlyle's Global Aerospace, Defense, and Government/Business Services team. Before joining Carlyle in 2000, Mr. Wagner was with Lehman Brothers Inc., focusing on mergers, acquisitions and financings for aerospace, defense, consumer and technology companies. Mr. Wagner received his Bachelor of Science degree from Cornell University, where he currently serves on the Advisory Council of the Dyson School of Applied Economics and Management. Mr. Wagner was a member of the board of directors and audit committee of Sequa Corporation and Wesco Aircraft Hardware Corporation. This experience, in particular his experience with companies in the retail and consumer industries, led to the conclusion that Mr. Wagner should serve as a Director.
Jeffrey Nagel
Jeffrey Nagel has served as a member of our Board and has been our CEO since December 6, 2010. Mr. Nagel came to NBTY from General Electric Company. During his GE career, Mr. Nagel served in a variety of leadership positions throughout the organization. In 2006, he was made a GE corporate officer and appointed as the Vice President and General Manager of GE Oil & Gas Global Services. Previously, he served as President & Chief Executive Officer of GE Inspection Technologies, General Manager of Business Development in GE Aircraft Engines and President of GE Home Electric Products. Mr. Nagel joined GE in 1997 as a Manager in Business Development at GE Lighting. Before joining GE, Mr. Nagel worked at Energy Biosystems Corporation, Cannon Associates, Reid & Hostage and Strategic Planning Associates (now Mercer Management). Mr. Nagel received his Bachelor of Science and Masters in Business Administration from Carnegie Mellon. This experience led to the conclusion that Mr. Nagel should serve as a Director, so that his perspective as our CEO would be reflected in the Board's discussions.
Michael Collins
Michael Collins became our CFO on June 13, 2011. He came to NBTY from Sears Holdings Corporation, where he served as Chief Financial Officer since 2008. Before joining Sears, Mr. Collins served as Executive Vice President, Financial Planning & Analysis at NBC Universal from 2004 to 2008. Before joining NBC, Mr. Collins served in various roles at General Electric Company and its affiliates. Mr. Collins received his Bachelor of Science in Economics from the Wharton School of Business at the University of Pennsylvania.
Harvey Kamil
Harvey Kamil was our President from 2002 and our CFO from 1982, when he joined the Company. Effective June 13, 2011, Mr. Kamil stepped down as Executive Vice President and CFO of NBTY and became NBTY's Vice Chairman. Mr. Kamil taught as an adjunct professor at Suffolk County Community College for thirteen years. He serves on the Board of Directors of Council for Responsible Nutrition and on the Board of Directors of the Natural Products Association. Mr. Kamil received his Bachelor of Business Administration and Masters in Business Administration from the Baruch School of Business, City University of New York, and is a Certified Public Accountant and Certified Management Accountant.
Joseph Looney
Joseph Looney has served as Chief Accounting Officer since September 2012 and as Vice President-Finance since joining NBTY in June 2006. Mr. Looney was the Chief Financial Officer of EVCI Career College Holding Corp. from October 2005 to May 2006. Previously, he had been the
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Chief Financial Officer and Secretary of Astrex, Inc., a distributor of electronic components, since 2002. From 1996 to 2002, he was the Chief Financial Officer, V.P. of Finance and Assistant Secretary of Manchester Technologies, Inc., a network integrator and reseller of computer products. From 1984 to 1996, he was employed by the accounting firm of KPMG LLP. He is a Certified Public Accountant and has a B.A. from Queens College, City University of New York and an M.S. from Long Island University. Since 1996, Mr. Looney has also been an Adjunct Professor of Accounting and Business Law at Hofstra University.
Christopher Brennan
Christopher Brennan has served as our Senior Vice President/General Counsel since March 2012. Mr. Brennan served as Senior Vice President/General Counsel at PharmaNet Development Group, Inc., a contract research organization serving the clinical research needs of large and medium sized multi-national pharmaceutical companies from 2009 to early 2012. Before joining PharmaNet, Mr. Brennan was Executive Vice President/Corporate Affairs & General Counsel at Quinnova Pharmaceuticals, Inc., a specialty pharmaceutical company with global operations. Prior to joining Quinnova in 2005, Mr. Brennan was a corporate associate at the law firms of Cravath, Swaine & Moore LLP and Dechert LLP. Mr. Brennan served as a Captain in the United States Air Force for five years prior to attending law school. He received his Bachelor of Arts and Juris Doctorate degrees from Fordham University.
James Flaherty
James Flaherty has been the Senior Vice President/Marketing and Advertising of NBTY, Inc. since 1987. He joined the Company in 1979 as a Marketing Manager. In his current position, he directs the in-house staff of marketing, advertising, media and graphic design professionals in the planning, creation and execution of the Company's advertising, packaging and promotional programs across all mediums. Mr. Flaherty is Vice Chair of Council for Responsible Nutrition ("CRN") and serves on its Media Relations committee. Mr. Flaherty received his Bachelor of Science degree in Business Administration and Marketing from the State University of New York at Albany.
Hans Lindgren
Hans Lindgren has been the Senior Vice President/Operations and Corporate Secretary since January 1, 2008. He has been involved in various aspects of the Company's operations since joining the Company in 1992. Before joining the Company, Mr. Lindgren worked for the LM Ericsson Telephone Company. He joined Ericsson in 1982 and was responsible for the preparation of installation documentation and software implementation for various European, Middle East and Far East installation sites. Previously, Mr. Lindgren served as a Captain in the Swedish Army Reserves from 1980 to 1982. He received his degree in telecommunications from Alvkullegymnasiet, a technical college in Sweden.
Karla Packer
Karla Packer has served as Senior Vice President/Human Resources since April 2011. Ms. Packer previously served as Senior Vice President of Human Resources at IMS Health Incorporated, a leading provider of market intelligence to the pharmaceutical and healthcare industries since 2007. Before joining IMS Health, Ms. Packer was Vice President of Human Resources for IAC/InteractiveCorp, a $6 billion E-Commerce entity, whose brands include Ticketmaster, Expedia and Home Shopping Network. Ms. Packer spent six years at Avon Products, where she developed human resources strategies in support of Global Marketing, Brand Development, Manufacturing, Supply Chain Strategy, and Research and Development. She started her career at IBM, where she held several positions in the areas of information technology, sales, marketing and human resources. Ms. Packer received her Bachelor of Science in Mathematics from Tufts University.
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Glenn Schneider
Glenn Schneider has been Senior Vice President/Global Wholesale, since November 17, 2011 and CEO of United States Nutrition, Inc., our wholly owned subsidiary, since December 2008. Before November 2011, Mr. Schneider was Senior Vice President/Assistant to the CEO (from January 2009 to November 2011). He has been involved in the Company in various aspects of marketing, advertising and product development since he joined the Company in 2000. Previously, Mr. Schneider was an owner of Nutrition Warehouse, where he handled all aspects of sales and marketing. He joined NBTY when the Company acquired Nutrition Warehouse. Mr. Schneider received his Bachelor of Science in Marketing and Management from Ithaca College.
Katia Facchetti
Katia Facchetti has served as our Chief Marketing Officer, since March 2012. Prior to joining NBTY, Ms. Facchetti served as strategic growth consultant for Sugar Foods Corporation. Ms. Facchetti, served as the Chief Marketing Officer & Senior Vice President of Terex Corporation, a global manufacturer for construction, mining and infrastructure equipment from 2006 to 2009. Prior to joining Terex Corporation, Ms. Facchetti served as President of Fusion 5, a marketing innovation consultancy from 2000 to 2005. Prior to 2000, Ms. Facchetti held several positions in the areas of marketing at Nabisco, Inc. and Kraft/General Foods, Inc.
Bernard O'Keefe
Bernard O'Keefe has served as our Chief Supply Chain Officer, since September 2012. Mr. O'Keefe served as Vice President of Product Supply, for multiple businesses of Procter & Gamble, including Global Feminine Care, Corporate Manufacturing and Global Personal Health Care & Pharmaceuticals since 2002. Prior to 2002, Mr. O'Keefe held several positions in the areas of supply chain management within Procter & Gamble in Asia, Latin America and North America.
Director Independence and Selection
Following the Merger, all our equity securities are owned by Holdings; certain investment funds affiliated with Carlyle own substantially all the outstanding equity of Holdings. As a result, our common stock was delisted from the NYSE and its registration under Section 12 of the Exchange Act was terminated. As of November 15, 2012, our Board of Directors consisted of Jeffrey Nagel and six persons associated with and appointed by Carlyle. Our Board has not made a formal determination as to whether each director is "independent" because we have no equity securities listed for trading on a national securities exchange. Because of their relationships with Carlyle or with us, however, we do not believe that any of our directors would be considered independent under the NYSE's definition of independence.
In identifying nominees for director, consideration is given to the diversity of professional experience, education and backgrounds among the directors so that a variety of points of view are represented in Board discussions and deliberations concerning our business.
Committees of the Board of Directors
Following the Merger, the Board has three standing committees: (i) the Audit Committee; (ii) the Compensation Committee; and (iii) the Executive Committee.
Audit Committee. The Audit Committee is comprised of Messrs. Bernauer and Wagner and assists the Board in its oversight of:
- •
- the qualifications, independence and performance of our independent accountants and the performance of our internal auditors and internal audit function;
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- •
- the integrity of our financial statements and our financial reporting processes and systems of internal control;
and
- •
- our compliance with legal and regulatory requirements.
The Audit Committee provides an avenue of communication among management, the independent accountants, the internal auditors and the Board. In carrying out its responsibilities, the Audit Committee also meets with the Company's internal audit staff and with the independent accountants in executive session, without members of management present.
Mr. Wagner is an Audit Committee "financial expert," as defined by SEC rules, based on the experience noted in his biography above.
Compensation Committee. The Compensation Committee is comprised of Mr. De Benedetti and Ms. Horbach and assists the Board in:
- •
- developing and periodically reviewing the Company's compensation policies, including equity and similar awards, consistent
with, and linked to, the Company's strategies;
- •
- evaluating the performance of our CEO and determining his compensation annually;
- •
- evaluating the performance and compensation of our other executive officers annually;
- •
- reviewing management's recommendations on executive compensation policies and programs;
- •
- recommending to the Board the fees of outside directors;
- •
- reviewing and approving new Company benefit plans and amendments to existing benefit plans;
- •
- approving all equity-based compensation plans; and
- •
- reviewing benefit plan administration.
The Compensation Committee has the authority to retain and terminate any consultants, including legal counsel, to assist it in performing its duties and to approve all fee arrangements with consultants. From time to time, the Compensation Committee may seek information and advice regarding executive compensation market practices from outside independent consultants.
Executive Committee. The Executive Committee is composed of Messrs. Nagel and Wagner and Ms. Horbach. Its primary function is to act on behalf of the Board during intervals between regularly scheduled meetings of the Board. The Executive Committee may exercise all powers of the Board, except as otherwise provided by law and the Company's by-laws. The Board reviews all actions taken by the Executive Committee between Board meetings at the following Board meeting.
Code of Ethics for Senior Financial Officers
The Company has adopted a Code of Ethics for its Directors, officers and employees, including its senior financial officers and CEO. The Company will provide a copy of the Code of Ethics to any person upon written request made to Christopher Brennan, our General Counsel, at the Company's headquarters at 2100 Smithtown Avenue, Ronkonkoma, New York 11779. The Company intends to satisfy the disclosure requirements of amendments to or waivers from a provision of the code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions by posting such information on the Company's website, www.nbty.com. The Company's website and the information in or connected to its website are not incorporated into this annual report.
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Item 11. Executive Compensation
Compensation Discussion and Analysis
This Compensation Discussion and Analysis (this "CD&A") describes the principles underlying the Company's compensation policy for fiscal 2012 with respect to the individuals listed below and in the "2012 Summary Compensation Table", whom we call our "named executive officers".
Jeffrey
Nagel, Chief Executive Officer
Michael Collins, Chief Financial Officer
Harvey Kamil, Vice Chairman
Hans Lindgren, Senior Vice President—Operations and Corporate Secretary
Glenn Schneider, President—Global Wholesale
Overview; Compensation Philosophy and Objectives
During fiscal 2012, the boards of directors of the Company and Holdings, and the compensation committees of the Company and Holdings, each comprised of the same individuals (collectively, the "Compensation Committee" or the "Committee"), oversaw our executive compensation program. The Committee designed an executive compensation program to achieve the following goals:
- •
- Attract and retain talented professionals by providing competitive compensation levels;
- •
- Align the interests of our executive officers with those of our primary shareholder through equity-based awards with
long-term value; and
- •
- Reward our executives for their contributions to our overall performance as well as for their individual performance.
We have no formal policies or guidelines for allocating compensation between short-term and long-term compensation. The ratio of short-term compensation to long-term compensation for each executive varies depending upon the roles and responsibilities of that executive, with generally higher proportions of long-term compensation for more senior executives. The Compensation Committee sets the compensation of the named executive officers, taking into account compensation opportunities with other companies, to reward and retain the Company's high-performing executives.
The Compensation Committee seeks to encourage our executives to maximize their performance to achieve the Company's strategy and goals. As part of its compensation assessment, the Compensation Committee considers many factors to understand the compensation landscape among similarly sized companies. Although the Compensation Committee does not target specific compensations levels based upon an established group, the Compensation Committee uses external data to inform the decision-making process.
Executive Compensation Determinations for Fiscal 2012
During fiscal 2012, total compensation for our named executive officers consisted of the following components, each discussed in more detail below:
- •
- base salary,
- •
- annual cash bonuses,
- •
- retirement plans, and
- •
- perquisites.
Role of CEO in Compensation Determinations
Our Compensation Committee determines the nature and amount of all compensation for our executive officers. Our CEO, Jeffrey Nagel, provides recommendations to our Compensation
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Committee with respect to all elements of compensation for the named executed officers, except himself, and for the other executives that report to him. In addition, from time to time, at the invitation of the Compensation Committee, our CEO attends Compensation Committee meetings, except those that address his own compensation. Historically, including before the Merger, the Compensation Committee has given substantial weight to our CEO's recommendations, insights and observations. However, the Compensation Committee may modify or reject any of our CEO's recommendations.
An Overview
During fiscal 2012, the Company continued its transition from its prior status as a publicly held company to a privately-held company owned by Carlyle. The Compensation Committee's approach to compensation is consistent with that at other Carlyle portfolio companies, but takes into account factors particular to the Company, including the pre-existing compensation structure and levels of compensation and negotiations with individual executives to establish compensation levels appropriate to each executive's skills, experience and potential value to the Company.
Discussed below is how the Compensation Committee determined the amount and type of compensation best suited to the Company's goals and how the Compensation Committee believes these decisions reflect the Company's compensation philosophy. The Compensation Committee seeks to establish competitive levels of compensation, align executive interests with those of our primary shareholder and closely link compensation to both short-term and long-term Company and individual performance.
Competitive Market/Retention of Talent. The Compensation Committee considered the market for executive talent and attempted to set compensation at competitive levels when measured against other similarly-sized companies (based on revenue), regardless of industry. The Company seeks to set its total compensation to be competitive with the market but does not target specific compensation levels based upon an established group.
Company Performance. In evaluating performance, the Compensation Committee considered our overall financial and operating performance during the period, as well as our achievement of strategic and tactical goals. The performance measures considered by the Compensation Committee have varied from year to year. In fiscal 2012, the Committee principally assessed the Company's performance based on earnings before interest, tax, depreciation and amortization, or "EBITDA", adjusted for non-recurring and extraordinary items ("Adjusted EBITDA"). The Compensation Committee believes that Adjusted EBITDA is a useful performance metric for a portfolio company, and correlates closely with financial success and growth in equity value.
Individual Contributions and Performance. As discussed in further detail below, the Compensation Committee evaluated each executive's contributions to our financial and operational achievements. The Compensation Committee considered each executive's individual performance, both in terms of personal responsibilities and contributions to the Company's goals. The Compensation Committee also considered the executive's potential for future contributions to our long-term success, and evaluated the executive's experience, management skills and leadership abilities.
Retirement Plans
During fiscal 2012, our executive officers (including our named executive officers) participated in the same retirement plans on the same terms as provided to most of our associates. These plans consisted of the NBTY, Inc. Retirement Profit Sharing Plan (the "PSP") and the NBTY, Inc. 401(k) Savings Plan (the "401(k) Plan"), which were merged effective June 15, 2012 to form The NBTY Retirement Plan (the "Plan"). During fiscal 2012, the Company made a $4,095,000 contribution to the PSP for the 2011 plan year which was allocated to eligible participants based upon their relative eligible
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compensation. The Company intends to make a contribution to the Plan after December 31, 2012, for the 2012 plan year. The profit-sharing and 401(k) matching contributions are subject to the IRC 401(a)(17) compensation limit and IRC 402(g) deferral limit, which are relatively small components of an executive's compensation, as reflected in the "All Other Compensation" column of the Summary Compensation Table below. Contributions, if any, will be allocated among participants who completed at least 1,000 hours of service in the plan year and who were employed on the last day of the plan year, based upon their relative compensation for the year. Under the terms of the Plan, the Company provides a matching contribution of up to 4% of the eligible compensation of each participant who has met the eligibility requirements.
Perquisites
During fiscal 2012, we provided a limited number of perquisites to our named executive officers. One such perquisite is a life insurance arrangement under which certain executives are entitled to payments upon retirement, on or after age 65, or death. See "—Nonqualified Deferred Compensation Life Insurance Agreements". This cash value insurance program, which is similar to a defined contribution arrangement, provides an element of retirement income at reasonable annual cost to the Company. The cost of the fiscal 2012 Company-paid premiums is reflected as compensation to each participating executive in the "All Other Compensation" column of the Summary Compensation Table.
Each of our named executive officers is also entitled to a Company-paid automobile lease. In addition, in fiscal 2012 we reimbursed Mr. Collins for expenses in connection with his relocation from Chicago to New York, in addition to a limited gross-up of taxes to minimize the associated tax liabilities.
Other Benefits
We also offer certain benefits to substantially all employees, including our named executive officers. These include health and welfare benefits, disability and life insurance, education and tuition reimbursement and an employee assistance program.
Base Salary
We consider base salary adjustments, if any, annually, and we determine these adjustments based upon individual performance, assumption of new responsibilities, employee retention efforts, the Company's annual salary budget guidelines, and other factors that the Compensation Committee considers relevant, such as compensation packages that competitively sized (based on revenue) companies offer their executives. Larger annual increases may be made to higher performers and key contributors, if the overall increases are within our budgeted guidelines. We believe we must offer competitive base salaries to attract and retain high-quality executives who provide our shareholder and other stakeholders with increased value. Base salaries provide executives with a fixed level of income security, offering stability and predictability. Our executives understand that the Company's entrepreneurial atmosphere and need for performance accountability places their employment, and not their income alone, at risk. The actual base salaries paid to all of our named executive officers during fiscal 2012 are set forth in the "Summary Compensation Table" below.
The Compensation Committee determined that the level of base salaries was appropriate for the named executive officers and there were no base salary increases for our named executive officers in fiscal 2012.
Incentive Compensation; Annual Cash Bonuses.
We believe that annual cash bonuses reward our executives on a short-term basis for their individual performance and contributions to the Company's overall performance and motivate them to advance our goals on a year-over-year basis. With respect to our named executive officers, the
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Company's employment agreements with Messrs. Nagel, Collins and Schneider provide for a targeted annual cash bonus of 100%, 75% and 75% of annual base salary, respectively. Messrs. Lindgren and Kamil are provided a targeted annual cash bonus of 65% and 75% of annual base salary, respectively, subject to upward or downward adjustment at the discretion of the Compensation Committee. In each case, the Compensation Committee may adjust the cash bonus amount to reflect the executive's performance.
Under the terms of the annual bonus plan, results of at least 92.5% of the Adjusted EBITDA performance target must be achieved in order for executives to earn 62.5% of their targeted award. Achievement of 100% of the Adjusted EBITDA performance target results in an award of 100% of the targeted award. Achievement of at least 113% of the Adjusted EBITDA performance target results in an award of 200% of the targeted award. Once the achievement of the Adjusted EBITDA performance target has been determined, the Compensation Committee makes a subjective assessment of personal performance for each officer, and may adjust the award upward or downward based upon that assessment. In addition, incentive amounts paid under the performance based programs may be adjusted by the Compensation Committee to account for extraordinary transactions.
For fiscal 2012, the company achieved $535 million or 93% of the Adjusted EBITDA performance target of $575 million. Accordingly, before factoring in the achievement of personal objectives, the executive officers achieved 65.3% of the target award. Based on the criteria discussed above, for fiscal 2012 Messrs. Nagel, Collins, Kamil, Schneider and Lindgren were awarded cash bonuses of $600,000, $360,000, $375,000, $325,000 and $225,000, respectively.
The Compensation Committee exercised its discretion and awarded less than target but higher than calculated awards to the named executive officers in consideration of their performance that met or exceeded their multiple objectives in all but one area.
The following table sets forth the annual cash bonuses paid to our named executive officers for fiscal 2012 performance, compared to the annual cash bonuses paid to our named executive officers for fiscal 2011 performance.
Named Executive Officer
|
Bonus with respect to 2011 Fiscal Year Performance ($) |
Bonus with respect to 2012 Fiscal Year Performance ($) |
|||||
|---|---|---|---|---|---|---|---|
Jeffrey Nagel |
622,500 | 600,000 | |||||
Michael Collins |
149,850 | 360,000 | |||||
Harvey Kamil |
468,450 | 375,000 | |||||
Hans Lindgren. |
264,550 | 225,000 | |||||
Glenn Schneider |
393,750 | 325,000 | |||||
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Incentive Compensation; Long-Term Compensation
In 2011, the Company implemented an equity compensation program to provide our management team an opportunity to develop an ownership stake in Holdings, our parent company. Because the Company is now owned by a private equity investor, the Compensation Committee has concluded that equity awards generally will be granted based on target levels covering a multi-year period, without an expectation that an executive will receive successive annual grants. This approach more closely aligns the interests of the executive with the long-term investment horizon of our principal stockholder. For this reason, equity awards to named executive officers were granted in fiscal 2011 without further grants in fiscal 2012.
With respect to grants made in fiscal 2011, the specific number of stock option awards for each named executive officer was based upon an assessment of that officer's strategic importance to achieving the Company's goals and objectives for growth. The time-based portion of these awards typically vests in equal increments over five years, subject to continued employment, whereas the performance-based portion vests only upon the occurrence of a liquidity event and pre-determined performance criteria, also typically subject to continued employment.
The Compensation Committee reserves the right to grant equity awards from time-to-time, in its discretion, to maintain the competitiveness of our compensation program and to provide incentives to high performance and long-term service by our executives.
Severance and Change in Control Benefits
As more fully described below in the sections entitled under "Employment Agreements" and "Potential Payments upon Termination or Change in Control", Messrs. Nagel, Collins and Schneider are parties to employment agreements that each provide for certain payments and benefits upon a qualifying termination of employment, including salary continuation and a pro-rated bonus for the fiscal year of termination. In addition, our named executive officers may be eligible to receive acceleration of certain unvested equity awards in connection with a qualifying termination of employment or qualifying corporate event involving our company.
The Company recently implemented the Executive Severance Pay Plan that provides a select group of key management employees who do not have employment agreements with the Company, including Mr. Lindgren, with a severance payment equal to 12 months of continued base salary upon a qualifying termination of employment.
Employment Agreements
At the end of fiscal 2012, the Company was a party to employment agreements with Messrs. Nagel, effective December 6, 2010 (the "Nagel Agreement") and Collins, effective June 13, 2011 (the "Collins Agreement"). In addition, during fiscal 2011, the Company was a party to an employment agreement with Mr. Kamil (the "2008 Kamil Agreement"). By letter dated May 18, 2011, the Company and Mr. Kamil amended the 2008 Kamil Agreement, as discussed below under "—Employment Agreements—Kamil Agreements."
Employment Agreement with Jeffrey Nagel
Effective December 6, 2010, NBTY and Holdings entered into an employment agreement with Jeffrey Nagel under which Mr. Nagel was appointed as CEO of Holdings and NBTY, as well as a member of the board of directors of each of Holdings and NBTY. The employment agreement has an initial five-year term and provides for successive one-year renewals at the expiration of each term, unless prior written notice of non-renewal by any party is provided 60 days in advance. Under the employment agreement, Mr. Nagel's initial annual base salary is $750,000. His base salary may be
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increased but not decreased upon periodic review by the Compensation Committee. Mr. Nagel is eligible to receive a performance-based bonus under NBTY's annual bonus program targeted at 100% of annual base salary, subject to adjustments between the range of 50% and 200% for under or over performance, as determined by the Compensation Committee.
The employment agreement provides that if Mr. Nagel's employment is terminated by the Company without "cause," Mr. Nagel resigns with "good reason" (each, as defined in his employment agreement), or if the agreement is terminated due to non-extension of the term by NBTY and Holdings, then subject to his timely execution and non-revocation of a release, he will be entitled to receive an amount equal to two times his annual base salary, payable over the two-year period following his employment termination. In addition, in the event of any such termination or a termination due to his death or disability, he will receive a pro rata bonus, based on actual fiscal results, for the fiscal year in which the termination occurs. The employment agreement contains customary confidentiality provisions and non-solicitation, non-competition terms applicable to Mr. Nagel that survive for a period of two years following the termination of his employment with the Company and Holdings.
Employment Agreement with Michael Collins
NBTY and Holdings entered into an employment agreement, dated May 24, 2011, with Michael Collins under which Mr. Collins serves as CFO of Holdings and NBTY, beginning June 13, 2011. The agreement has an initial five-year term and provides for successive one-year renewals at the expiration of each term, unless prior written notice of non-renewal by any party is provided 60 days in advance. Under the employment agreement, Mr. Collins' initial annual base salary is $600,000. His base salary may be increased but not decreased upon periodic review by the Compensation Committee. Mr. Collins also is eligible to receive a performance-based bonus targeted at 75% of annual base salary, subject to adjustments between the range of 50% and 200% for under or over performance, as determined by the Compensation Committee. In addition, under the employment agreement Mr. Collins is entitled to the reimbursement of reasonable and necessary expenses incurred by the end of calendar year 2012 in connection with his relocation from Chicago to New York.
The employment agreement provides that if Mr. Collins's employment is terminated by the Company without "cause," Mr. Collins resigns with "good reason" (each, as defined in his employment agreement), or if the agreement is terminated due to non-extension of the term by NBTY and Holdings, then subject to his timely execution and non-revocation of a release, he will be entitled to receive an amount equal to his annual base salary, payable over the one-year period following his employment termination and a pro-rata bonus for the fiscal year in which the termination occurs if his employment termination occurs after April 1st of the applicable Company fiscal year. The employment agreement contains customary confidentiality provisions and non-solicitation and non-competition terms applicable to Mr. Collins that survive for a period of one year following the termination of his employment with the Company and Holdings.
Harvey Kamil Agreement
Under a letter agreement dated May 18, 2011, which amended an employment agreement that the Company and Mr. Kamil entered into in 2008 (the "2008 Agreement"), Mr. Kamil will serve as Vice Chairman of the Company. As Vice Chairman, Mr. Kamil provides services on an as-needed basis and is entitled to receive annual compensation at an annual rate of total compensation of $624,600. The amendment also provides that the provisions of the 2008 Agreement that were intended to survive the termination of the 2008 Agreement will continue to survive according to their terms, including the non-competition and non-solicitation provisions that continue for one-year beyond the termination of Mr. Kamil's employment.
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Employment Agreement with Glenn Schneider
NBTY and Holdings entered into an employment agreement, dated August 6, 2012, with Glenn Schneider under which Mr. Schneider serves as President, Global Wholesale of Holdings and NBTY. The agreement has an initial five-year term and provides for successive one-year renewals at the expiration of each term, unless prior written notice of non-renewal by any party is provided 60 days in advance. Under the employment agreement, Mr. Schneider's initial annual base salary is $525,000. His base salary may be increased but not decreased upon periodic review by the Compensation Committee. Mr. Schneider also is eligible to receive a performance-based bonus targeted at 75% of annual base salary, subject to adjustments between the range of 50% and 200% for under or over performance, as determined by the Compensation Committee.
The employment agreement provides that if Mr. Schneider's employment is terminated by the Company without "cause," he resigns with "good reason" (each, as defined in his employment agreement), or if the agreement is terminated due to non-extension of the term by NBTY and Holdings, then subject to his timely execution and non-revocation of a release, he will be entitled to receive an amount equal to his annual base salary, payable over the one-year period following his employment termination and a pro-rata bonus for the fiscal year in which the termination occurs if his employment termination occurs after April 1st of the applicable Company fiscal year. The employment agreement contains customary confidentiality provisions and non-solicitation and non-competition terms applicable to Mr. Schneider that survive for a period of one year following the termination of his employment with the Company and Holdings.
For a discussion of amounts payable to each of our named executive officers if his or her employment were terminated, or if a change of control occurred, as of the end of our most recent fiscal year, see "—Potential Payments upon Termination or Change of Control" below.
Tax and Accounting Considerations
Section 162(m) of the Internal Revenue Code
Generally, Section 162(m) of the Internal Revenue Code, or Section 162(m), disallows a tax deduction for any publicly-held corporation for individual compensation exceeding $1.0 million in any taxable year to its chief executive officer and each of its three other most highly compensated executive officers, other than its chief financial officer, unless compensation qualifies as "performance-based compensation" within the meaning of the Internal Revenue Code. We are not currently subject to the deduction limits of Section 162(m) and as a result we do not take Section 162(m) into consideration in setting compensation.
Section 409A of the Internal Revenue Code
Section 409A of the Internal Revenue Code, or Section 409A, requires that "nonqualified deferred compensation" be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities and penalty taxes and interest on their vested compensation under such plans. Accordingly, we generally intend to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including our named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A. With respect to our compensation and benefit plans that are subject to Section 409A, in accordance with Section 409A and regulatory guidance issued by the Internal Revenue Service, we are currently operating such plans in compliance with Section 409A.
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Section 280G of the Internal Revenue Code
Section 280G of the Code disallows a tax deduction with respect to excess parachute payments to certain executives of companies which undergo a change in control. In addition, Section 4999 of the Code imposes a 20% penalty on the individual receiving the excess payment.
Parachute payments are compensation that is linked to or triggered by a change in control and may include, but are not limited to, bonus payments, severance payments, certain fringe benefits, and payments and acceleration of vesting from long-term incentive plans including stock options and other equity-based compensation. Excess parachute payments are parachute payments that exceed a threshold determined under Section 280G of the Code based on the executive's prior compensation. In approving the compensation arrangements for our named executive officers in the future, the Committee will consider all elements of the cost to the Company of providing such compensation, including the potential impact of Section 280G of the Code. However, the Committee may, in its judgment, authorize compensation arrangements that could give rise to loss of deductibility under Section 280G of the Code and the imposition of excise taxes under Section 4999 of the Code when it believes that such arrangements are appropriate to attract and retain executive talent.
Accounting Standards
ASC Topic 718, Compensation—Stock Compensation, or ASC Topic 718 (formerly known as FASB 123(R)), requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of stock options, restricted stock, restricted stock units and performance units under our equity incentive award plans are accounted for under ASC Topic 718. The Committee regularly considers the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, we may revise certain programs to appropriately align accounting expenses of our equity awards with our overall executive compensation philosophy and objectives.
The members of the Company's Compensation Committee reviewed and discussed the above CD&A with management of the Company and, based on that review and discussion, recommended to the Board that the CD&A be included in this Report.
| By the Company's Compensation Committee Sandra Horbach Marco DeBenedetti |
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Compensation Committee Interlocks and Insider Participation
As of September 30, 2012, the Compensation Committee consisted of Sandra Horbach and Marco DeBenedetti. No member of the Compensation Committee had a relationship during fiscal 2012 requiring disclosure under Item 404 of Regulation S-K.
During fiscal 2012, none of our executive officers served as a member of the Board or Compensation Committee of any other company that has one or more executive officers serving as a member of our Board or Compensation Committee.
2012 Summary Compensation Table
The following table sets forth information concerning total compensation earned by or paid to our named executive officers as of September 30, 2012.
Name and Principal Position
|
|
Salary ($)* | Bonus ($)(1) | Stock Awards ($) |
Option Awards ($)(2) |
Non-Equity Incentive Plan Compensation ($) |
All Other Compensation ($)(3) |
Total ($) | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jeffrey Nagel |
2012 | 750,000 | — | — | — | 600,000 | 27,523 | 1,377,523 | |||||||||||||||||
Chief Executive Officer |
2011 | 614,423 | 3,122,500 | — | 6,186,715 | — | 327,957 | $ | 10,251,595 | ||||||||||||||||
Michael Collins |
2012 | 600,000 | — | — | — | 360,000 | 99,145 | 1,059,145 | |||||||||||||||||
Chief Financial Officer |
2011 | 173,077 | 1,149,850 | — | 1,373,640 | — | 52,663 | 2,749,230 | |||||||||||||||||
Harvey Kamil |
2012 | 624,600 | — | — | — | 375,000 | 37,325 | 1,036,926 | |||||||||||||||||
Vice Chairman |
2011 | 636,432 | 468,450 | — | 92,932 | — | 4,468,544 | (4) | 5,666,358 | ||||||||||||||||
|
2010 | 624,600 | — | 250,818 | 780,168 | 1,249,200 | 57,555 | 2,962,341 | |||||||||||||||||
Hans Lindgren |
2012 | 407,000 | — | — | — | 225,000 | 33,812 | 665,812 | |||||||||||||||||
Senior Vice President Operations |
2011 | 397,750 | 264,550 | — | 580,825 | — | 30,065 | 1,273,190 | |||||||||||||||||
and Corporate Secretary |
2010 | 360,490 | 225,000 | 47,171 | 146,677 | — | 49,619 | 828,957 | |||||||||||||||||
Glenn Schneider |
2012 | 525,000 | — | — | — | 325,000 | 24,181 | 874,181 | |||||||||||||||||
President Global Wholesale |
2011 | 523,558 | 393,750 | — | 958,361 | — | 18,739 | 1,894,408 | |||||||||||||||||
|
2010 | 477,885 | 350,000 | 78,238 | 243,407 | — | 25,120 | 1,174,650 | |||||||||||||||||
- *
- The
amount of salary may vary from the base compensation listed under "Executive Compensation" above because payroll periods may span more than one fiscal
year and therefore there may be 53 weekly pay periods in any given fiscal year, and the fiscal 2012 salary amount may reflect certain pay at the prior year's base salary rate.
- (1)
- Bonus
amounts shown for services rendered during the respective fiscal year. Jeffrey Nagel's and Michael Collins' bonuses for fiscal 2011
include $2,500,000 and $1,000,000 in sign on bonuses, respectively.
- (2)
- Amounts
shown with respect to 2011 represent the grant date fair value of stock option awards during the fiscal year. The Company calculated
this fair value based on a Monte Carlo Simulation option pricing model, determined in accordance with GAAP, based on the assumptions described in Note 15 to our audited financial statements
included in this Report.
- (3)
- Amounts reflected in table under "All Other Compensation" for fiscal 2012 consist of the following:
Name
|
Company Automobile |
Company Contributions to Defined Contribution Plans |
Moving & Temporary Housing |
Life Insurance Premiums |
Total ($) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jeffrey Nagel |
$ | 10,779 | $ | 16,384 | — | $ | 360 | $ | 27,523 | |||||||
Michael Collins |
11,464 | 10,000 | $ | 77,321 | (i) | 360 | 99,145 | |||||||||
Harvey Kamil |
6,030 | 13,084 | — | 18,211 | 37,325 | |||||||||||
Hans Lindgren |
9,176 | 14,084 | — | 10,552 | 33,812 | |||||||||||
Glenn Schneider |
9,857 | 14,084 | — | 240 | 24,181 | |||||||||||
- (i)
- Amount
represents reimbursement of relocation expenses in the amount of $51,326 and a related tax gross-up payment in the amount
of $25,995.
- (4)
- Amount reflects payments made to Mr. Kamil in fiscal year 2011 in connection with his change in roles from President and CFO to Vice Chairman, and the Merger, pursuant to Mr. Kamil's then-existing agreements with the Company.
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Grants of Plan-Based Awards in 2012
The following table sets forth information regarding grants of plan-based awards made to our named executive officers during the year ended September 30, 2012:
| |
|
Estimated Future Payouts Under Non-Equity Incentive Plan Awards |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Grant Date |
Threshold ($) |
Target ($) |
Maximum ($) |
|||||||||
Jeffrey Nagel |
2/23/2012 | 375,000 | 750,000 | 1,500,000 | |||||||||
Michael Collins |
2/23/2012 | 225,000 | 450,000 | 900,000 | |||||||||
Harvey Kamil |
2/23/2012 | 234,225 | 468,450 | 936,900 | |||||||||
Hans Lindgren |
2/23/2012 | 132,250 | 264,500 | 529,000 | |||||||||
Glenn Schneider |
2/23/2012 | 196,875 | 393,750 | 787,500 | |||||||||
2012 Outstanding Equity Awards at Fiscal Year-End
The following table shows the outstanding equity-based awards relating to the common stock of Holdings that were held by our named executive officers as of September 30, 2012.
| |
Option Awards | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable(1) |
Number of Securities Underlying Unexercised Unearned Options (#)(2) |
Option Exercise Price ($) |
Option Expiration Date |
|||||||||||
Jeffrey Nagel |
4,946 | 19,788 | 24,734 | 500 | 12/6/2020 | |||||||||||
Michael Collins |
600 | 5,400 | 6,000 | 500 | 6/13/2021 | |||||||||||
Harvey Kamil |
80 | 320 | 400 | 500 | 5/13/2021 | |||||||||||
Hans Lindgren |
500 | 2,000 | 2,500 | 500 | 5/13/2021 | |||||||||||
Glenn Schneider |
825 | 3,300 | 4,125 | 500 | 5/13/2021 | |||||||||||
- (1)
- The
grants vest in five equal increments on each of the first five anniversaries of December 6, 2010 (for Mr. Nagel),
June 13, 2011 (for Mr. Collins) and January 1, 2011 (for each of the other named executive officers).
- (2)
- The grants vest upon achievement of a certain performance condition and a market condition relating to the achievement of a minimum investor rate of return.
Nonqualified Deferred Compensation
The following table shows the non-qualified deferred compensation benefits for each of the named executive officers for the fiscal year ended September 30, 2012.
Name
|
Registrant Contributions in Last FY ($) |
Aggregate Earnings in Last FY ($) |
Aggregate Balance at Last FYE ($) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Harvey Kamil |
15,163 | 45,168 | 213,238 | |||||||
Hans Lindgren |
10,000 | 39,005 | 165,063 | |||||||
The Company has entered into deferred compensation life insurance agreements with certain employees, including certain named executive officers. Each agreement requires the Company to maintain a variable life insurance policy on the life of the officer.
Upon retirement on or after age 65, each agreement provides that the officer will be entitled to receive (i) the cash surrender value of the insurance policy maintained on the officer's life, pursuant to
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the officer's previously made election (A) in a cash lump sum, or (B) in monthly installments to be paid over a period not to exceed 10 years, or (ii) the insurance policy. The cash surrender value of the policy will vary over time.
If the officer dies while employed by the Company, or retires and subsequently dies before receiving all the post-retirement payments, the officer's beneficiary will be entitled to receive a lump sum payment equal to the death benefit under the insurance policy in full discharge of all the Company's obligations under the deferred compensation agreement.
If the officer's employment with the Company is terminated involuntarily due to a permanent disability (as defined in the relevant deferred compensation life insurance agreement) before the officer's voluntary retirement from the Company, the officer will receive a lump sum payment equal to the cash surrender value of the insurance policy unless the officer elects that the Company transfer the policy to him, and such payment or transfer will fully discharge all the Company's obligations under the deferred compensation agreement.
The officer will not be entitled to any benefits under the deferred compensation agreement if the officer's employment with the Company is terminated under circumstances other than as described above.
Potential Payments upon Termination or Change of Control
Our named executive officers are entitled to certain payments and benefits upon a qualifying termination of employment or a change in control. The following discussion describes the payments and benefits to which our named executive officers would have become entitled upon a qualifying termination of employment or a change in control occurring on September 30, 2012.
As described above, Mr. Nagel would receive an amount equal to twice his annual base salary, payable over the two-year period following the date of termination and Messrs. Collins and Schneider each would receive an amount equal to their respective annual base salaries, payable over the one-year period following the date of termination. In addition, each would receive a pro-rata bonus with respect to the fiscal year in which the employment termination occurs (if the termination occurs on or after April 1 in the case of Messrs. Collins and Schneider). The pro-rata bonus is also payable upon Mr. Nagel's death or termination due to disability.
The Company recently implemented the Executive Severance Pay Plan that provides a select group of key management employees who do not have employment agreements with the Company, including Mr. Lindgren, with a severance payment if the Company terminates their employment without "cause" (as defined in the Executive Severance Pay Plan). The monthly severance payment, generally payable for 12 months, will equal the participant's one-month stated base salary during the immediately prior year. Payments under the plan are subject to the employee's delivering a release of claims and complying with any non-compete, non-disclosure and non-solicitation agreement the participant has with the Company at the time of termination of employment.
In addition, our named executive officers may be entitled to accelerated vesting of their Holdings stock options in the event of a qualifying termination of employment or certain change of control transactions. Under the terms of a December 6, 2010 stock option grant to Mr. Nagel relating to Holdings common stock, 24,734 options were subject to time-based vesting provisions and 24,734 options were subject to performance-based vesting provisions. Of the options with time-based vesting provisions, 20% vest on each of the first five anniversaries of the start date under his employment agreement. In the event Mr. Nagel becomes entitled to receive severance payments pursuant to his employment agreement as described above, a pro rata portion of the options subject to time-based vesting provisions that would otherwise have vested on the next anniversary date will vest, based on the number of days in the annual period elapsed from the prior vesting date to the date of termination. In the event of a "liquidity event" as defined in the option agreement, any and all unvested time-based
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options will become fully vested. In the event of a "change in control" as defined in the option agreement, and if Mr. Nagel becomes entitled to severance payments following his termination of employment as described above, any and all time-based vesting options will also accelerate.
Mr. Nagel's performance-based options have vesting terms relating to the internal rate of return of our principal stockholders following a liquidity event. If Mr. Nagel's employment is terminated such that he becomes eligible to receive severance payments under his employment agreement as described above, subject to certain other conditions, the performance options will remain outstanding until the earlier of their expiration, the first liquidity event or the second anniversary of the termination. However, the vesting of such options will not be accelerated upon the termination.
Our other named executive officers also have stock option agreements under which vesting will accelerate under certain scenarios. Any and all time-based vesting options will become fully vested at the effective time of a "liquidity event," as described above. In the event of a "change in control" that is not also a liquidity event, any and all time-based vesting options will become fully vested if the executive's employment is terminated without cause or the executive resigns with good reason within the 12 month period following the change in control, provided certain other conditions are met. The portion of each option grant that is subject to performance-based conditions vests, in whole or in part, as of the effective date of the first liquidity event, as defined in the stock option agreement, as long as the named executive officer remains continuously in service through the effective date of such liquidity event based upon the achievement of pre-determined internal rate of return targets. Based on the most recent valuation, as of September 30, 2012, the value of the common stock underlying the options was $675 per share.
Please refer to the table under "—Nonqualified Deferred Compensation Life Insurance Agreements" above for a description of payments that may be made to our named executive officers in the event of the termination of their employment due to death or disability under certain deferred compensation life insurance agreements.
92
Summary of Potential Payments
The following table summarizes the payments that would be made to our named executive officers upon the occurrence of a qualifying termination of employment, change in control or liquidity event, assuming that each named executive officer's termination of employment with our company occurred on September 30, 2012 or in the event that a change in control of our company or liquidity event occurred on September 30, 2012, as applicable. Amounts shown do not include (i) accrued but unpaid salary through the date of termination, and (ii) other benefits earned or accrued by the named executive officer during his employment that are available to all employees, such as accrued vacation.
Name
|
Qualifying Termination (no Change in Control or Liquidity Event)(1) ($) |
Death or Disability ($) |
Qualifying Termination in connection with Change in Control ($) |
Liquidity Event ($) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jeffrey Nagel |
|||||||||||||
Cash Severance |
2,100,000 | (2) | 600,000 | (3) | 2,100,000 | (2) | — | ||||||
Life Insurance |
— | 250,000 | — | — | |||||||||
Acceleration of Equity Awards(4) |
709,183 | — | 3,462,725 | 3,462,725 | |||||||||
Total |
2,809,183 | 850,000 | 5,562,725 | 3,462,725 | |||||||||
Michael Collins |
|||||||||||||
Cash Severance |
960,000 | (2) | 360,000 | (3) | 960,000 | — | |||||||
Life Insurance |
— | 250,000 | — | — | |||||||||
Acceleration of Equity Awards(4) |
— | — | 840,000 | 840,000 | |||||||||
Total |
960,000 | 610,000 | 1,800,000 | 840,000 | |||||||||
Harvey Kamil |
|||||||||||||
Cash Severance |
375,000 | — | — | — | |||||||||
Life Insurance |
213,238 | 463,238 | — | — | |||||||||
Acceleration of Equity Awards(4) |
— | — | 56,000 | 56,000 | |||||||||
Total |
588,238 | 463,238 | 56,000 | 56,000 | |||||||||
Hans Lindgren |
|||||||||||||
Cash Severance |
632,000 | (2) | 225,000 | 632,000 | (2) | — | |||||||
Life Insurance |
— | 250,000 | — | — | |||||||||
Acceleration of Equity Awards(4) |
— | — | 350,000 | 350,000 | |||||||||
Total |
632,000 | 475,000 | 982,000 | 350,000 | |||||||||
Glenn Schneider |
|||||||||||||
Cash Severance |
850,000 | (2) | 325,000 | (3) | 850,000 | (2) | — | ||||||
Life Insurance |
— | 250,000 | — | — | |||||||||
Acceleration of Equity Awards(4) |
— | — | 577,500 | 577,500 | |||||||||
Total |
850,000 | 575,000 | 1,427,500 | 577,500 | |||||||||
- (1)
- With respect to Messrs. Nagel, Collins and Schneider, a qualifying termination includes a termination of employment by the Company without cause, by the executive for good reason or in connection with the Company's non-extension of the executive's employment agreement term. With respect to Mr. Lindgren, a qualifying termination includes a termination of employment by the Company without cause.
93
- (2)
- Amount
represents (1) cash severance and (2) a cash bonus for the 2012 fiscal year.
- (3)
- Amount
represents a cash bonus for the 2012 fiscal year.
- (4)
- Amounts represent the aggregate value of the executive's unvested time-vesting stock options that would have vested on the applicable event. Upon the occurrence of a liquidity event on September 30, 2012, no outstanding performance-based vesting stock options would have accelerated since the minimum internal rate of return would not have been achieved as of such date. The value of the accelerated stock option was calculated by multiplying (x) the number of shares subject to acceleration by (y) the difference between the fair market value of a share of our common stock on September 30, 2012 ($675) and the per share exercise price of the accelerated option.
Directors
Set forth below is a discussion of compensation the Company paid during fiscal 2012 to its non-employee Directors. In addition, each Director (other than Jeffrey Nagel) was reimbursed for out-of-pocket expenses incurred by him or her to attend meetings of our Board. Directors are also eligible for option grants or other equity awards (each relating to or exercisable for common stock of Holdings, our parent company) under the Company's equity awards plans, as determined in the discretion of the Compensation Committee. Except as described below, the Company does not offer a pension plan or other compensation to our Directors. During fiscal 2012, any Director who was an executive officer of the Company did not receive additional compensation for his services as a Director. See "2012 Summary Compensation Table" above for information regarding Jeffrey Nagel's compensation.
Name
|
Fees Earned or Paid in Cash ($) |
Total ($) | |||||
|---|---|---|---|---|---|---|---|
David Bernauer |
$ | 90,000 | $ | 90,000 | |||
Marco DeBenedetti |
— | — | |||||
Robert Essner |
75,000 | 75,000 | |||||
Sandra Horbach |
— | — | |||||
Allan Holt |
— | — | |||||
Elliot Wagner |
— | — | |||||
The aggregate number of option awards outstanding at September 30, 2012 was 600 for Mr. Bernauer and 600 for Mr. Essner.
Risk Assessment of Compensation Practices
Our compensation committee, with input from our management, assists our Board in reviewing and assessing whether any of our compensation policies and programs could potentially encourage excessive risk-taking. In considering our employee compensation policies and practices, the compensation committee reviews, in depth, our policies related to payment of salaries and wages, benefits, bonuses, stock-based compensation and other compensation-related practices and considers the relationship between risk management policies and practices, corporate strategy and compensation. A primary focus of our compensation program is intended to incentivize and reward growth in Adjusted EBITDA among other metrics. We believe these metrics are positive indicators of our long-term growth, operating results and increased stockholder value and therefore believe that our compensation program does not create risks that are reasonably likely to have a material adverse effect on the Company.
94
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We are a direct, wholly-owned subsidiary of Holdings, a Delaware corporation, all the outstanding capital stock of which is owned by Carlyle and certain of its affiliates and co-investors.
The following table sets forth the number of shares of Holdings common stock beneficially owned as of November 15, 2012 by: (i) each Director of the Company; (ii) the executive officers named in the Summary Compensation Table set forth above under Item 11, "Executive Compensation;" and (iii) the current Directors and executive officers as a group:
Name of Beneficial Owner
|
Number of Shares Beneficially Owned(6) |
Percent of Class(1) | |||
|---|---|---|---|---|---|
Funds affiliated with The Carlyle Group(2) |
3,100,000 | 99.5% | |||
Directors(3) |
|||||
David Bernauer |
120 | * | |||
Marco DeBenedetti(4) |
— | — | |||
Robert Essner |
120 | * | |||
Sandra Horbach(4) |
— | — | |||
Allan Holt(4) |
— | — | |||
Jeffrey Nagel |
10,693 | * | |||
Elliot Wagner(4) |
— | — | |||
Named Executive Officers(3)(5) |
|||||
Michael Collins |
1,200 | * | |||
Harvey Kamil |
160 | * | |||
Hans Lindgren |
1,000 | * | |||
Glenn Schneider |
1,650 | * | |||
All Directors and Executive Officers as a group (17 persons) |
16,763 | 0.5% | |||
- (1)
- *
Indicates percentage ownership of less than one percent.
- (2)
- Consists of 1,902,202 shares of Class A common stock owned directly by Carlyle Partners V, L.P., 38,256 shares of Class A common stock owned directly by Carlyle Partners V-A, L.P., 71,759 shares of Class A common stock owned directly by CP V Coinvestment A, L.P., 8,846 shares of Class A common stock owned directly by CP V Coinvestment B, L.P., 278,937 shares of Class A common stock owned directly by Carlyle NBTY Coinvestment, L.P., and 800,000 shares of Class A common stock owned directly by CEP III Participations S.à r.l., SICAR. Carlyle Group Management L.L.C. is the general partner of The Carlyle Group L.P., which is a publicly traded entity listed on NASDAQ. The Carlyle Group L.P. is the managing member of Carlyle Holdings II GP L.L.C., which is the general partner of Carlyle Holdings II L.P., which is the general partner of TC Group Cayman Investment Holdings, L.P., which is the general partner of TC Group Cayman Investment Holdings Sub L.P., which is the managing member of TC Group V, L.L.C. and the sole shareholder of CEP III Managing GP Holdings, Ltd. TC Group V, L.L.C. is the general partner of TC Group V, L.P., which is the general partner of each of Carlyle Partners V, L.P., Carlyle Partners V-A, L.P., CP V Coinvestment A, L.P., CP V Coinvestment B, L.P. and Carlyle NBTY Coinvestment, L.P. CEP III Managing GP Holdings, Ltd. is the general partner of CEP III Managing GP, L.P., which is the general partner of Carlyle Europe Partners III, L.P., which is the sole shareholder of CEP III Participations S.à r.l., SICAR. Accordingly, each of Carlyle Group Management L.L.C., The Carlyle Group L.P., Carlyle Holdings II GP L.L.C., Carlyle Holdings II L.P., TC Group Cayman Investment Holdings, L.P., TC Group Cayman Investment Holdings Sub L.P., TC Group V, L.L.C., TC Group V, L.P., CEP III Managing GP Holdings, Ltd., CEP III Managing GP, L.P., and Carlyle Europe Partners III, L.P. may be deemed to share beneficial ownership of the Class A common stock held of record by each of Carlyle Partners V, L.P., Carlyle Partners V-A, L.P.,
95
CP V Coinvestment A, L.P., CP V Coinvestment B, L.P., Carlyle NBTY Coinvestment, L.P. and CEP III Participations S.à r.l., SICAR.
- (3)
- The
address of each of our named executive officers and Directors is the Company's headquarters at 2100 Smithtown Avenue, Ronkonkoma, New York
11779.
- (4)
- Does
not include shares of common stock of Alphabet Holding Company, Inc., held by Carlyle. Messrs. DeBenedetti, Holt and Wagner
and Ms. Horbach are directors of NBTY Inc. and Managing Directors of Carlyle. Such persons disclaim beneficial ownership of the shares of Alphabet Holding Company, Inc. held by
Carlyle.
- (5)
- The
shares beneficially owned by directors and named executive officers, except for Mr. Nagel's, are Class B
non-voting shares.
- (6)
- This column includes shares which Directors and executive officers have the right to acquire within 60 days of November 15, 2012.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the Equity Incentive Plan of Holdings, our parent, as of September 30, 2012:
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders |
162,951 | 527 | 34,782 | |||||||
Equity compensation plans not approved by security holders |
— | — | — | |||||||
Total: |
162,951 | 527 | 34,782 | |||||||
Item 13. Certain Relationships and Related Party Transactions, and Director Independence
Procedures for Review, Approval or Ratification of Related Person Transactions
Our Code of Business Conduct requires our Directors, officers and employees to act in the best interests of the Company, regardless of personal relationships. To avoid actual or perceived conflicts of interests, the Board has implemented a written policy requiring the Board to review and approve all transactions in which any of the following persons had, has, or will have, a direct or indirect material interest:
- •
- any Director, nominee for Director, or executive officer;
- •
- any person we know beneficially owns more than 5% of our common stock;
- •
- any immediate family member of any Director, executive officer, or 5% beneficial owner; and
- •
- any entity in which any such person is employed or has a 5% or greater beneficial interest, or of which any such person is a partner or principal (or holds a similar position).
The Board (excluding the interested Director, if any) is responsible for reviewing and approving these transactions. Except as disclosed below, no transactions required review since the beginning of the last fiscal year and no proposed transactions are currently being considered.
96
The Board will approve only those transactions that are in, or are not inconsistent with, the best interests of the Company.
Related Person Transactions
Consulting Agreement—Carlyle
In connection with the Merger, we entered into a consulting agreement with Carlyle under which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. Pursuant to this agreement, we pay an annual consulting fee to Carlyle of $3 million and may pay Carlyle additional fees associated with other future transactions. Carlyle also received a one-time transaction fee of $30 million upon effectiveness of the Merger.
Employees Related to Our Directors and Officers
We employ certain members of the immediate family of Glenn Schneider (an officer of the Company). During fiscal 2012, two of Mr. Schneider's immediate family members received aggregate compensation (excluding bonuses) and fringe benefits from us totaling $912,938, of which $431,704 was paid to Darren Schneider and $481,234 was paid to Jeffrey Schneider, for services they rendered as associates of the Company.
Director Independence
Information on the independence of our Board is included above under Item 10, "Directors, Executive Officers and Corporate Governance—Director Independence and Selection."
Item 14. Principal Accounting Fees and Services
Audit Fees
PricewaterhouseCoopers LLP audit services during fiscal 2012 consisted of the examination of the Company's financial statements and services related to the Company's filings with the SEC. All fees paid to PricewaterhouseCoopers LLP and all services provided by PricewaterhouseCoopers LLP during fiscal 2012 were reviewed, considered for independence, and approved by the Audit Committee.
Aggregate fees billed to the Company for fiscal 2012 and 2011 represent the fees for services performed by PricewaterhouseCoopers LLP.
Type of Fee
|
Fiscal 2012 |
Fiscal 2011 |
|||||
|---|---|---|---|---|---|---|---|
Audit Fees |
$ | 2,607,000 | $ | 3,356,235 | |||
Audit-Related Fees |
65,000 | — | |||||
Tax Fees |
364,000 | 532,000 | |||||
All Other Fees |
7,000 | 11,300 | |||||
|
$ | 3,043,000 | $ | 3,899,535 | |||
Audit Fees
For fiscal 2012 aggregate audit fees, including out-of-pocket expenses, were for professional services rendered in connection with (i) the integrated audit of the Company's consolidated financial statements and internal control over financial reporting as of, and for the year ended, September 30, 2012, including statutory audits of the financial statements of the Company's affiliates, (ii) review of the Company's unaudited condensed consolidated interim financial statements as of December 31, 2011,
97
March 31, 2012 and June 30, 2012, (iii) reviews of documents filed with the SEC and (iv) agreed upon procedures for certain affiliates.
For fiscal 2011 aggregate audit fees, including out-of-pocket expenses, were for professional services rendered in connection with (i) the integrated audit of the Company's consolidated financial statements and internal control over financial reporting as of, and for the year ended, September 30, 2011, including statutory audits of the financial statements of the Company's affiliates, (ii) review of the Company's unaudited condensed consolidated interim financial statements as of December 31, 2010, March 31, 2011 and June 30, 2011, (iii) reviews of documents filed with the SEC and (iv) agreed upon procedures for certain affiliates.
Audit-Related Fees
For fiscal 2012, aggregate audit-related fees, including out-of-pocket expenses, were for professional services related to due diligence procedures in connection with acquisitions.
Tax Fees
For both fiscal 2012 and 2011, aggregate tax fees, including out-of-pocket expenses, were for professional services rendered in connection with tax compliance and advice for the applicable fiscal year. Tax services included U.S. and foreign tax compliance assistance, consultation and advice on various foreign tax matters.
All Other Fees
For fiscal 2012 and 2011 other fees were for accounting research software license fees.
Procedures for Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
The Charter for the Audit Committee provides that the Audit Committee pre-approve, on an annual basis, the audit, audit-related, tax and other non-audit services to be rendered by the Company's accountants, based on historical information and anticipated requirements for the following fiscal year. The Audit Committee must pre-approve specific types or categories of engagements constituting audit, audit-related, tax and other non-audit services, as well as the range of fee amounts corresponding to each such engagement. During fiscal 2012, the Audit Committee approved all fees for audit, audit-related, tax services and non-audit services rendered to the Company under this policy.
98
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedule.
See the "Index to Consolidated Financial Statements" included in this Report.
(b) Exhibits. The following exhibits are attached as a part of this Report, or incorporated by reference, and will be furnished to any security holder upon request for such exhibit and payment of any reasonable expenses incurred by the Company. A security holder should send requests for any of the exhibits set forth below to NBTY, Inc., 2100 Smithtown Avenue, Ronkonkoma, New York 11779, Attention: General Counsel.
| Exhibit No. | Description | |
|---|---|---|
| 2.1 | Agreement and Plan of Merger, dated July 15, 2010, among NBTY, Inc., Alphabet Holding Company, Inc. and Alphabet Merger Sub, Inc.(1) | |
| 2.2 | Stock Purchase Agreement among NBTY, Inc., Balance Bar Company, Balance Bar Holdings LLC dated November 19, 2012.(2) | |
| 3.1 | Amended and Restated Certificate of Incorporation of NBTY, Inc.(3) | |
| 3.2 | Second Amended and Restated By-Laws of NBTY, Inc.(3) | |
| 4.1 | Indenture, dated as of October 1, 2010, among NBTY, Inc., certain of its guarantor subsidiaries named therein, and The Bank of New York Mellon, as trustee, governing the 9% Senior Notes due 2018.(3) | |
| 4.2 | First Supplemental Indenture, dated May 3, 2011, among NBTY, Inc., NBTY Florida, Inc. and The Bank of New York Mellon(4) | |
| 4.3 | Form of 9% Senior Notes due 2018 (included as Exhibit A to Exhibit 4.1). | |
| 4.4 | Second Supplemental Indenture, dated June 29, 2012 among NBTY, Inc., NBTY Manufacturing Texas, LLC and The Bank of New York Mellon(5) | |
| 4.5 | Third Supplemental Indenture, dated August 14, 2012, among NBTY, Inc., NBTY Manufacturing South, LLC, Natural Products Group, LLC, NBTY Manufacturing New Jersey, Inc. and NBTY Manufacturing New York, Inc. and The Bank of New York Mellon* | |
| 10.1 | Employment Agreement, dated November 8, 2010, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Jeffrey A. Nagel(3) | |
| 10.2 | Stock Option Agreement, dated December 6, 2010, by and between Alphabet Holding Company, Inc. and Jeffrey Nagel(3) | |
| 10.3 | Stock Purchase Agreement, dated December 17, 2010, by and between Alphabet Holding Company, Inc. and Jeffrey Nagel(3) | |
| 10.4 | Employment Agreement, dated May 24, 2011, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Michael Collins(6) | |
| 10.5 | Employment Agreement, effective March 1, 2008, by and between NBTY, Inc. and Harvey Kamil(7) | |
| 10.6 | Indemnification Agreement, dated May 18, 2011 between NBTY, Inc. and Harvey Kamil(6) | |
| 10.7 | Letter Agreement, dated May 18, 2011, by and between NBTY, Inc. and Harvey Kamil(6) | |
| 10.8 | Employment Agreement, dated April 25, 2011, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Karla Packer(6) | |
| 10.9 | NBTY, Inc. Retirement Profit Sharing Plan(8) | |
| 10.10 | Credit Agreement, dated October 1, 2010 (the "Credit Agreement"), among NBTY, Inc., Alphabet Holding Company, Inc., Barclays Bank PLC and the other lenders party thereto.(3) | |
| 10.11 | First Amendment and Refinancing Agreement, dated March 1, 2011, amending the Credit Agreement.(3) |
99
| Exhibit No. | Description | |
|---|---|---|
| 10.12 | Subsidiary Guaranty, dated October 1, 2010, from the Guarantors named therein in favor of the secured parties named in the Credit Agreement(3) | |
| 10.13 | Security Agreement, dated October 1, 2010, from the Grantors named therein to Barclays Bank PLC.(3) | |
| 10.14 | Form of Director Indemnification Agreement(3) | |
| 10.15 | Equity Incentive Plan of Alphabet Holding Company, Inc.(3) | |
| 10.16 | Form of Stock Option Agreement for Equity Incentive Plan of Alphabet Holding Company, Inc.(3) | |
| 10.17 | Executive Severance Pay Plan(8) | |
| 10.18 | Form of Employment Agreement dated February 29, 2012, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Katia Facchetti.(9) | |
| 10.19 | Form of Employment Agreement dated March 2, 2012, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Christopher S. Brennan.(9) | |
| 10.20 | Employment Agreement, dated August 6, 2012, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Glenn Schneider.(5) | |
| 10.21 | Employment Agreement, dated August 14, 2012, by and among NBTY, Inc., Alphabet Holding Company, Inc. and Bernard O'Keefe.* | |
| 10.22 | Second Amendment Agreement, dated October 11, 2012, amending the Credit Agreement.* | |
| 12.1 | Statement regarding Computation of Ratio of Earnings to Fixed Charges* | |
| 21.1 | Subsidiaries of NBTY, Inc.* | |
| 31.1 | Rule 13a-14(a) Certification of Principal Executive Officer.* | |
| 31.2 | Rule 13a-14(a) Certification of Principal Financial Officer.* | |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| 99.1 | Indenture, dated as of October 17, 2012, between Alphabet Holding Company, Inc. and The Bank of New York Mellon, as trustee, governing the 7.75% / 8.50% Contingent Cash Pay Senior Notes due 2017.* | |
| 101.INS | XBRL Instance Document.** | |
| 101.SCH | XBRL Taxonomy Extension Schema Document** | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
- *
- Filed
herewith.
- **
- Pursuant
to rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed
not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
- (1)
- Incorporated
by reference to NBTY, Inc.'s Form 8-K, filed July 16, 2010 (File #001-31788).
- (2)
- Incorporated
by reference to NBTY, Inc.'s Form 8-K, filed November 26, 2012 (File #001-31788).
- (3)
- Incorporated by reference to NBTY, Inc.'s Registration Statement on Form S-4, filed March 21, 2011 (File #333-172973).
100
- (4)
- Incorporated
by reference to NBTY, Inc.'s Form 10-Q, filed August 10, 2011 (File #001-31788).
- (5)
- Incorporated
by reference to NBTY, Inc.'s Form 10-Q, filed August 7, 2012 (File #001-31788).
- (6)
- Incorporated
by reference to NBTY, Inc.'s Amendment No. 1 to the Registration Statement on Form S-4/A, filed
June 10, 2011 (File #333-172973).
- (7)
- Incorporated
by reference to NBTY, Inc.'s Form 8-K, filed April 3, 2008 (File #001-31788).
- (8)
- Incorporated
by reference to NBTY, Inc.'s Form 10-K, filed November 23, 2011 (File #001-31788).
- (9)
- Incorporated by reference to NBTY, Inc.'s Form 10-Q, filed May 9, 2012 (File #001-31788).
101
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NBTY, INC. (Registrant) |
||||
By: |
/s/ JEFFREY NAGEL Jeffrey Nagel Chief Executive Officer and Director |
|||
Dated: November 27, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
|---|---|---|---|---|
| /s/ JEFFREY NAGEL Jeffrey Nagel |
Chief Executive Officer and Director (Principal Executive Officer) |
November 27, 2012 | ||
/s/ MICHAEL COLLINS Michael Collins |
Chief Financial Officer (Principal Financial Officer) |
November 27, 2012 |
||
/s/ JOSEPH LOONEY Joseph Looney |
Chief Accounting Officer |
November 27, 2012 |
||
/s/ SANDRA HORBACH Sandra Horbach |
Director (Chairman) |
November 27, 2012 |
||
/s/ DAVID BERNAUER David Bernauer |
Director |
November 27, 2012 |
||
/s/ MARCO DE BENEDETTI Marco De Benedetti |
Director |
November 27, 2012 |
||
/s/ ROBERT ESSNER Robert Essner |
Director |
November 27, 2012 |
||
/s/ ALLAN HOLT Allan Holt |
Director |
November 27, 2012 |
||
/s/ ELLIOT WAGNER Elliot Wagner |
Director |
November 27, 2012 |
102
NBTY, Inc.
Index to Consolidated Financial Statements
September 30, 2012, 2011 and 2010
103
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of NBTY, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of NBTY, Inc. and its subsidiaries (the "Company") at September 30, 2012 and September 30, 2011, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2012 (the "Successor" period as discussed in Note 2) in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audit. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New
York, New York
November 27, 2012
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of NBTY, Inc.:
In our opinion, the consolidated statements of income, stockholder's equity and comprehensive income and cash flows for the year ended September 30, 2010 present fairly, in all material respects, the results of operations and cash flows of NBTY, Inc. and its subsidiaries (the "Company") for the year ended September 30, 2010 (the "Predecessor" period as defined in Note 2), in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended September 30, 2010 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. We conducted our audit of these statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New
York, New York
January 13, 2011, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of reporting discontinued operations as discussed in
Note 4, as to which the date is November 27, 2012
F-2
NBTY, Inc.
Consolidated Balance Sheets
September 30, 2012 and 2011
(in thousands, except share and per share amounts)
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Assets |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 315,136 | $ | 393,335 | |||
Accounts receivable, net |
160,095 | 138,031 | |||||
Inventories |
719,596 | 667,383 | |||||
Deferred income taxes |
26,242 | 24,340 | |||||
Other current assets |
64,326 | 56,138 | |||||
Current assets of discontinued operations |
— | 15,018 | |||||
Total current assets |
1,285,395 | 1,294,245 | |||||
Property, plant and equipment, net |
512,679 | 474,572 | |||||
Goodwill |
1,220,315 | 1,212,199 | |||||
Intangible assets, net |
1,951,804 | 1,986,401 | |||||
Other assets |
87,054 | 106,680 | |||||
Noncurrent assets of discontinued operations |
— | 25,173 | |||||
Total assets |
$ | 5,057,247 | $ | 5,099,270 | |||
Liabilities and Stockholder's Equity |
|||||||
Current liabilities: |
|||||||
Current portion of long-term debt |
$ | — | $ | 17,500 | |||
Accounts payable |
212,548 | 186,155 | |||||
Accrued expenses and other current liabilities |
190,352 | 186,177 | |||||
Current liabilities of discontinued operations |
— | 4,714 | |||||
Total current liabilities |
402,900 | 394,546 | |||||
Long-term debt, net of current portion |
2,157,500 | 2,369,375 | |||||
Deferred income taxes |
726,406 | 750,598 | |||||
Other liabilities |
65,209 | 47,470 | |||||
Noncurrent liabilities of discontinued operations |
— | 386 | |||||
Total liabilities |
3,352,015 | 3,562,375 | |||||
Commitments and contingencies (see Notes 12 and 16) |
|||||||
Stockholder's equity: |
|||||||
Common stock, successor, $0.01 par; one thousand shares authorized, issued and outstanding at September 30, 2012 and 2011 |
— | — | |||||
Capital in excess of par |
1,554,883 | 1,552,188 | |||||
Retained earnings |
168,943 | 22,472 | |||||
Accumulated other comprehensive loss |
(18,594 | ) | (37,765 | ) | |||
Total stockholder's equity |
1,705,232 | 1,536,895 | |||||
Total liabilities and stockholder's equity |
$ | 5,057,247 | $ | 5,099,270 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
NBTY, Inc.
Consolidated Statements of Income
Years Ended September 30, 2012, 2011 and 2010
(in thousands)
| |
Successor |
|
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
Net sales |
$ | 2,999,733 | $ | 2,864,427 | $ | 2,705,837 | ||||||
Costs and expenses: |
||||||||||||
Cost of sales |
1,608,436 | 1,641,887 | 1,473,095 | |||||||||
Advertising, promotion and catalog |
164,298 | 152,021 | 136,763 | |||||||||
Selling, general and administrative |
832,629 | 788,719 | 694,803 | |||||||||
Merger expenses |
— | 44,479 | 45,903 | |||||||||
|
2,605,363 | 2,627,106 | 2,350,564 | |||||||||
Income from operations |
394,370 | 237,321 | 355,273 | |||||||||
Other income (expense): |
||||||||||||
Interest |
(158,584 | ) | (195,566 | ) | (30,108 | ) | ||||||
Miscellaneous, net |
(1,003 | ) | 1,933 | 4,127 | ||||||||
|
(159,587 | ) | (193,633 | ) | (25,981 | ) | ||||||
Income from continuing operations before income taxes |
234,783 | 43,688 | 329,292 | |||||||||
Provision for income taxes on continuing operations |
65,264 | 10,989 | 114,270 | |||||||||
Income from continuing operations |
169,519 | 32,699 | 215,022 | |||||||||
Loss from discontinued operations, net of income taxes |
(23,048 | ) | (2,780 | ) | (1,352 | ) | ||||||
Net income |
$ | 146,471 | $ | 29,919 | $ | 213,670 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
NBTY, Inc.
Consolidated Statements of Stockholder's Equity and Comprehensive Income (Loss)
Years Ended September 30, 2012, 2011 and 2010
(in thousands)
| |
Common Stock | |
|
|
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|||||||||||||||
| |
Number of Shares |
Amount | Capital in Excess of Par |
Retained Earnings |
Total Stockholder's Equity |
||||||||||||||
Predecessor balance, September 30, 2009 |
61,874 | $ | 495 | $ | 145,885 | $ | 984,797 | $ | (3,352 | ) | $ | 1,127,825 | |||||||
Components of comprehensive income: |
|||||||||||||||||||
Net income |
213,670 | 213,670 | |||||||||||||||||
Foreign currency translation adjustment net of taxes |
(4,600 | ) | (4,600 | ) | |||||||||||||||
Change in fair value of interest rate swaps, net of taxes |
2,682 | 2,682 | |||||||||||||||||
Comprehensive income: |
$ | 211,752 | |||||||||||||||||
Exercise of stock options |
1,570 | 13 | 10,608 | 10,621 | |||||||||||||||
Tax benefit from exercise of stock options |
6,646 | 6,646 | |||||||||||||||||
Stock-based compensation |
23,109 | 23,109 | |||||||||||||||||
Predecessor balance, September 30, 2010 |
63,444 | 508 | 186,248 | 1,198,467 | (5,270 | ) | 1,379,953 | ||||||||||||
Acquisition accounting adjustments |
(63,444 | ) | (508 | ) | (186,248 | ) | (1,198,467 | ) | 5,270 | (1,379,953 | ) | ||||||||
Components of comprehensive loss: |
|||||||||||||||||||
Net income |
29,919 | 29,919 | |||||||||||||||||
Foreign currency translation adjustment, net of taxes |
(20,196 | ) | (20,196 | ) | |||||||||||||||
Change in fair value of interest rate and cross currency swaps, net of taxes |
(17,569 | ) | (17,569 | ) | |||||||||||||||
Comprehensive loss: |
$ | (7,846 | ) | ||||||||||||||||
Opening equity of Merger sub |
1 | — | (7,447 | ) | (7,447 | ) | |||||||||||||
Capital contribution from Holdings |
1,550,400 | 1,550,400 | |||||||||||||||||
Stock-based compensation |
1,788 | 1,788 | |||||||||||||||||
Successor balance, September 30, 2011 |
1 | — | 1,552,188 | 22,472 | (37,765 | ) | 1,536,895 | ||||||||||||
Components of comprehensive income: |
|||||||||||||||||||
Net income |
146,471 | 146,471 | |||||||||||||||||
Foreign currency translation adjustment, net of taxes |
23,107 | 23,107 | |||||||||||||||||
Change in fair value of interest rate and cross currency swaps, net of taxes |
(3,936 | ) | (3,936 | ) | |||||||||||||||
Comprehensive income: |
$ | 165,642 | |||||||||||||||||
Capital contribution from holdings |
15 | 15 | |||||||||||||||||
Stock-based compensation |
2,680 | 2,680 | |||||||||||||||||
Successor balance, September 30, 2012 |
1 | $ | — | $ | 1,554,883 | $ | 168,943 | $ | (18,594 | ) | $ | 1,705,232 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NBTY, Inc.
Consolidated Statements of Cash Flows
Years Ended September 30, 2012, 2011 and 2010
(in thousands)
| |
Successor |
|
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
Cash flows from operating activities: |
||||||||||||
Income from continuing operations |
$ | 146,471 | $ | 29,919 | $ | 213,670 | ||||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
||||||||||||
Impairments and disposals of assets |
764 | 2,104 | 10,417 | |||||||||
Loss from discontinued operations |
23,048 | 2,780 | 1,352 | |||||||||
Depreciation of property, plant and equipment |
58,311 | 55,589 | 47,505 | |||||||||
Amortization of intangible assets |
43,960 | 44,086 | 15,841 | |||||||||
Foreign currency translation (gain)/loss |
(289 | ) | 64 | 1,042 | ||||||||
Amortization of financing fees |
14,411 | 15,076 | 1,412 | |||||||||
Write-off of financing fees |
9,289 | 20,824 | — | |||||||||
Stock-based compensation |
2,680 | 1,788 | 23,109 | |||||||||
Allowance for doubtful accounts |
297 | 5,468 | 1,256 | |||||||||
Amortization of incremental inventory fair value |
— | 122,104 | — | |||||||||
Inventory reserves |
(2,652 | ) | 22,364 | 934 | ||||||||
Deferred income taxes |
(17,057 | ) | (30,934 | ) | (13,000 | ) | ||||||
Excess income tax benefit from exercise of stock options |
— | — | (6,646 | ) | ||||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||||||
Accounts receivable |
(22,380 | ) | (9,692 | ) | 22,988 | |||||||
Inventories |
(44,790 | ) | (38,934 | ) | (18,373 | ) | ||||||
Other assets |
(2,147 | ) | 8,943 | (3,755 | ) | |||||||
Accounts payable |
16,097 | 28,101 | 17,150 | |||||||||
Accrued expenses and other liabilities |
5,491 | 3,082 | 52,108 | |||||||||
Cash provided by operating activities of continuing operations |
231,504 | 282,732 | 367,010 | |||||||||
Cash provided by operating activities of discontinued operations |
2,546 | 1,905 | 4,742 | |||||||||
Net cash provided by operating activities |
234,050 | 284,637 | 371,752 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property, plant and equipment |
(86,314 | ) | (43,999 | ) | (69,454 | ) | ||||||
Proceeds from sale of available-for-sale marketable securities |
— | — | 2,000 | |||||||||
Cash paid for acquisitions |
— | (3,987,809 | ) | (14,200 | ) | |||||||
Net proceeds from sale of discontinued operations |
515 | — | — | |||||||||
Cash used in investing activities of continuing operations |
(85,799 | ) | (4,031,808 | ) | (81,654 | ) | ||||||
Cash used in investing activities of discontinued operations |
— | (235 | ) | (449 | ) | |||||||
Net cash used in investing activities |
(85,799 | ) | (4,032,043 | ) | (82,103 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Principal payments under long-term debt agreements and capital leases |
(229,375 | ) | (13,554 | ) | (56,410 | ) | ||||||
Payments of financing fees |
— | (138,227 | ) | (1,524 | ) | |||||||
Proceeds from borrowings |
— | 2,400,000 | — | |||||||||
Capital contribution |
15 | 1,550,400 | — | |||||||||
Termination of interest rate swaps |
— | — | (5,813 | ) | ||||||||
Excess income tax benefit from exercise of stock options |
— | — | 6,646 | |||||||||
Proceeds from stock options exercised |
— | — | 10,621 | |||||||||
Cash (used in) provided by financing activities of continuing operations |
(229,360 | ) | 3,798,619 | (46,480 | ) | |||||||
Cash used in financing activities of discontinued operations |
— | (381 | ) | (747 | ) | |||||||
Net cash (used in) provided by financing activities |
(229,360 | ) | 3,798,238 | (47,227 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
1,839 | (2,909 | ) | (1,940 | ) | |||||||
Net (decrease) increase in cash and cash equivalents |
(79,270 | ) | 47,923 | 240,482 | ||||||||
Change in cash for discontinued operations |
1,071 | 3,734 | 2,350 | |||||||||
Cash and cash equivalents at beginning of year |
393,335 | 341,678 | 98,846 | |||||||||
Cash and cash equivalents at end of year |
$ | 315,136 | $ | 393,335 | $ | 341,678 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NBTY, Inc.
Notes to Consolidated Financial Statements
(in thousands, except share amounts)
1. Nature of Business
NBTY, Inc. ("NBTY", and together with its subsidiaries, the "Company," "we," or "us") is the leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality vitamins, nutritional supplements and related products in the United States, with operations worldwide. We market over 25,000 individual stock keeping units ("SKUs") under numerous owned and private-label brands, including Nature's Bounty®, Ester-C®, Solgar®, MET-Rx®, American Health®, Osteo Bi-Flex®, Flex-A-Min®, SISU®, Knox®, Sundown®, Pure Protein®, Body Fortress®, WORLDWIDE Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC® (UK), Physiologics®, De Tuinen®, and Vitamin World®.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
On October 1, 2010, pursuant to an Agreement and Plan of Merger, dated as of July 15, 2010, among NBTY, Alphabet Holding Company, Inc., a Delaware corporation ("Holdings") formed by an affiliate of TC Group, L.L.C. (d/b/a The Carlyle Group) and Alphabet Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Holdings ("Merger Sub") formed solely for the purpose of entering into the Merger, Merger Sub merged with and into NBTY with NBTY as the surviving corporation (also referred herein as the "Merger" or the "Acquisition"). As a result of the Merger, NBTY became a wholly owned subsidiary of Holdings. See Note 3 for further information.
Merger Sub was determined to be the acquirer for accounting purposes and therefore, the Acquisition was accounted for using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interests. Accordingly, the purchase price of the Acquisition has been allocated to the Company's assets and liabilities based upon their estimated fair values at the acquisition date. Periods before October 1, 2010 reflect the financial position, results of operations, and changes in financial position of the Company before the Acquisition (the "Predecessor") and periods after October 1, 2010 reflect the financial position, results of operations, and changes in financial position of the Company after the Acquisition (the "Successor"). For accounting purposes, the purchase price allocation was applied on October 1, 2010.
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). The consolidated financial statements include the financial statements of the Company and its majority and wholly-owned subsidiaries. All inter-company balances and transactions are eliminated in consolidation.
Effective July 2, 2012, Julian Graves Limited was placed into administration under the laws of the United Kingdom, and this former subsidiary is reported as discontinued operations in the accompanying financial statements. All amounts related to discontinued operations are excluded from the notes to consolidated financial statement unless otherwise indicated. See Note 4 for additional information about discontinued operations. The operations of this subsidiary were previously reported in the European Retail Segment.
Effective August 31, 2012, we sold Le Naturiste, Inc., and have reported this former subsidiary as discontinued operations in the accompanying financial statements. All amounts related to discontinued operations are excluded from the notes to consolidated financial statement unless otherwise indicated.
F-7
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
2. Summary of Significant Accounting Policies (Continued)
See Note 4 for additional information about discontinued operations. The operations of this subsidiary were previously reported in the North American Retail Segment.
Estimates
The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. 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. Our most significant estimates include: sales returns, promotions and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets; stock-based compensation; income taxes; and accruals for the outcome of current litigation.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
We recognize product revenue when title and risk of loss have transferred to the customer, there is persuasive evidence of an arrangement to deliver a product, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. The delivery terms for most sales within the wholesale and direct response segments are F.O.B. destination. Generally, title and risk of loss transfer to the customer at the time the product is received by the customer. With respect to retail store operations, we recognize revenue upon the sale of products to retail customers. Net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns and other promotional program incentive allowances.
Sales Returns and Other Allowances
Allowance for sales returns: Estimates for sales returns are based on a variety of factors, including actual return experience of specific products or similar products. We are able to make reasonable and reliable estimates of product returns based on our 40 year history in this business. We also review our estimates for product returns based on expected return data communicated to us by customers. Additionally, we monitor the levels of inventory at our largest customers to avoid excessive customer stocking of merchandise. Allowances for returns of new products are estimated by reviewing data of any prior relevant new product return information. We also monitor the buying patterns of the end-users of our products based on sales data received by our retail outlets in North America and Europe.
Promotional program incentive allowances: We estimate our allowance for promotional program incentives based upon specific outstanding marketing programs and historical experience. The
F-8
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
2. Summary of Significant Accounting Policies (Continued)
allowance for sales incentives offered to customers is based on various contractual terms or other arrangements agreed to in advance with certain customers. Generally, customers earn such incentives as specified sales volumes are achieved. We accrue these incentives as a reduction to sales either at the time of sale or over the period of time in which they are earned, depending on the nature of the program.
Allowance for doubtful accounts: We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of current credit information. We estimate bad debt expense based upon historical experience as well as specifically identified customer collection issues to adjust the carrying amount of the related receivable to its estimated realizable value.
Accounts receivable are presented net of the following reserves at September 30:
| |
2012 |
|
2011 | ||||||
|---|---|---|---|---|---|---|---|---|---|
Allowance for sales returns |
$ | 10,360 | $ | 10,793 | |||||
Promotional programs incentive allowance |
71,845 | 74,593 | |||||||
Allowance for doubtful accounts |
5,244 | 5,376 | |||||||
|
$ | 87,449 | $ | 90,762 | |||||
Inventories
Inventories are stated at the lower of cost (first-in first-out method) or market. The cost elements of inventories include materials, labor and overhead. We use standard costs for labor and overhead and periodically adjust those standards. In evaluating whether inventories are stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory, remaining shelf life and current and expected market conditions, including levels of competition. Based on this evaluation, we record an adjustment to cost of goods sold to reduce inventories to net realizable value.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is charged on a straight-line basis over the estimated useful lives of the related assets. The costs of normal maintenance and repairs are charged to expense when incurred. Expenditures which significantly improve or extend the life of an asset are capitalized and depreciated over the asset's remaining useful life. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the related assets or the remaining lease term. Upon sale or disposition, the related cost and accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in earnings.
Capitalized Software Costs
We capitalize certain costs related to the acquisition and development of software for internal use and amortize these costs using the straight-line method over the estimated useful life of the software.
F-9
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
2. Summary of Significant Accounting Policies (Continued)
These costs are included in property, plant and equipment in the accompanying Consolidated Balance Sheets. Certain development costs not meeting the criteria for capitalization are expensed as incurred.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangibles are tested for impairment annually or more frequently if impairment indicators are present. We consider the following to be some examples of important indicators that may trigger an impairment review: (i) a history of cash flow losses at retail stores; (ii) significant changes in the manner or use of the acquired assets in our overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) regulatory changes. In conjunction with the Acquisition, we changed our annual impairment testing date to July 1, the first day of our fourth quarter, from September 30, the last day of our fourth quarter.
Goodwill is tested for impairment using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit goodwill is not considered impaired and no further testing is required. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We use a combination of the income and market approaches to estimate the fair value of our reporting units. For our indefinite-lived intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The fair value of our trademarks is determined based on the relief from royalty method under the income approach, which requires us to estimate a reasonable royalty rate, identify relevant projected revenues and expenses, and select an appropriate discount rate. The evaluation of indefinite-lived intangible assets for impairment requires management to use significant judgments and estimates including, but not limited to, projected future net sales, operating results, and cash flow of our business.
We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. If actual external conditions or future operating results differ from our judgments, this may result in an impairment of our goodwill and/or intangible assets. An impairment charge would reduce operating income in the period it was determined that the charge was needed.
Impairment of Long-Lived Assets
We evaluate the need for an impairment charge relating to long-lived assets, including definite lived intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to its expected future net cash flows generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. On a quarterly basis, we assess whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable. Considerable management judgment
F-10
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
2. Summary of Significant Accounting Policies (Continued)
is necessary to estimate projected future operating cash flows. Accordingly, if actual results fall short of such estimates, significant future impairments could result.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will, more likely than not, go unused. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reversed. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. We believe adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Accruals for Litigation and Other Contingencies
We are subject to legal proceedings, lawsuits and other claims related to various matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We determine the amount of reserves needed, if any, for each individual issue based on our knowledge and experience and discussions with legal counsel. These reserves may change in the future due to new developments in each matter (including the enactment of new laws), the ultimate resolution of each matter or changes in approach, such as a change in settlement strategy. In some instances, we may be unable to make a reasonable estimate of the liabilities that may result from the final resolution of certain contingencies disclosed and accordingly, no reserve is recorded until such time that a reasonable estimate may be made.
Stock-Based Compensation
We record the fair value of stock-based compensation awards as an expense over the vesting period on a straight-line basis for all time vesting awards, and at the time performance is achieved or probable to be achieved for all performance based awards. To determine the fair value of stock options on the date of grant, we apply the Monte Carlo Simulation option-pricing model, including an estimate of forfeitures. Inherent in this model are assumptions related to expected stock-price volatility, risk-free interest rate, expected term and dividend yield.
Shipping and Handling Costs
We incur shipping and handling costs in all divisions of our operations. These costs, included in selling, general and administrative expenses in the consolidated statements of income, were $85,784, $80,072 and $69,484 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively. Of
F-11
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
2. Summary of Significant Accounting Policies (Continued)
these amounts, $13,831, $16,660 and $16,312 have been billed to customers and are included in net sales for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.
Advertising, Promotion and Catalog
We expense the production costs of advertising as incurred, except for the cost of mail order catalogs, which are capitalized and amortized over our expected period of future benefit, which typically approximates two months. Capitalized costs for mail order catalogs at September 30, 2012 and 2011 was $477 and $575, respectively. Total mail order catalog expense was $9,416, $10,395 and $9,070 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively, and is included in advertising, promotion and catalog in the consolidated statements of income.
Foreign Currency
The functional currency of our foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into US dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts and cash flows using average rates of exchange prevailing during the year. Adjustments resulting from the translations of foreign currency financial statements are accumulated in a separate component of stockholder's equity.
Derivatives and Hedging Activities
All derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets and measurement of those instruments is at fair value. Changes in the fair values of those derivatives are reported in earnings or other comprehensive income depending on the designation of the derivative and whether it qualifies for hedge accounting. For derivatives that have been formally designated as cash flow hedges (interest rate swap agreements), the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income and reclassified into earnings when interest expense on the underlying borrowings is recognized. For hedges of the net investment in foreign subsidiaries (cross currency swap agreements), changes in fair value of the derivative are recorded in other comprehensive income (loss) to offset the change in the value of the net investment being hedged. We do not use derivative financial instruments for trading purposes.
Recent Accounting Developments
In June 2011, the Financial Accounting Standards Board ("FASB") amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, however the requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income, has been temporarily delayed by the FASB until further evaluation can be done on the implementation impact. We are currently evaluating the impact of adopting this guidance on our financial statements.
F-12
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
3. Carlyle Merger
On October 1, 2010, an affiliate of The Carlyle Group ("Carlyle") completed its Acquisition of NBTY for $55.00 per share of NBTY's common stock, or $3,570,191, plus the repayment of NBTY's historical debt of $427,367 (which includes accrued interest and a redemption premium on the notes) and net of cash acquired of $361,609 (which includes restricted cash collateral of $15,126) for a total net purchase price of $3,635,949. The purchase price was funded through the net proceeds from our $1,750,000 senior credit facilities, the issuance of $650,000 senior notes and a cash equity contribution from Holdings.
In connection with the Acquisition, the following transactions occurred:
- •
- investment funds affiliated with Carlyle and certain co-investors capitalized Holdings with an aggregate
equity contribution of $1,550,400;
- •
- Merger Sub, a subsidiary of Holdings formed solely for the purpose of completing the Acquisition, issued $650,000
aggregate principal amount of 9% senior notes due 2018 (the "Notes") and entered into senior credit facilities consisting of (1) senior secured term loan facilities of $1,750,000 and
(2) a senior secured revolving credit facility with commitments of $250,000. (See Note 8 for information related to the subsequent refinancing of the senior credit facilities);
- •
- at the effective time of the Merger, each share of NBTY's common stock outstanding and each restricted stock unit
outstanding immediately before the effective time of the Merger was cancelled and converted into the right to receive $55.00 per share in cash, without interest, less applicable withholding tax;
- •
- at the effective time of the Merger, each outstanding and unexercised option to purchase shares of NBTY's common stock,
whether or not then vested, was cancelled and entitled the holder thereof to receive a cash amount equal to the excess of $55.00 over the per-share exercise price of such option, without
interest, less applicable withholding tax;
- •
- NBTY's existing 71/8% senior subordinated notes due 2015 were satisfied and discharged and certain
indebtedness of NBTY was repaid, including its existing credit facilities, its multi-currency term loan facility and mortgage; and
- •
- approximately $184,600 of fees and expenses were incurred related to the foregoing, which included capitalized financing costs of $115,431 (of which $1,524 in financing costs were paid in fiscal 2010).
We refer to the Merger, the Acquisition, the equity contribution from Holdings, the borrowings under our senior credit facilities, the issuance of the 9% senior notes and the other transactions described above collectively as the "Transactions."
The Acquisition was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interests. The purchase price has
F-13
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
3. Carlyle Merger (Continued)
been allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities at the date of the Acquisition. The allocation of the purchase price is as follows:
| |
|
|||
|---|---|---|---|---|
Cash consideration |
$ | 3,982,432 | ||
Allocated to: |
||||
Cash and cash equivalents |
346,483 | |||
Accounts receivable |
135,377 | |||
Inventories |
782,354 | |||
Deferred income taxes |
7,457 | |||
Prepaids and other current assets |
51,078 | |||
Property, plant, and equipment |
493,115 | |||
Intangibles |
2,053,000 | |||
Other assets |
18,404 | |||
Accounts payable |
(141,139 | ) | ||
Accrued expenses and other current liabilities |
(190,459 | ) | ||
Deferred income taxes |
(762,774 | ) | ||
Other liabilities |
(27,601 | ) | ||
Debt and Capital leases |
(803 | ) | ||
Net assets acquired |
$ | 2,764,492 | ||
Goodwill |
$ | 1,217,940 | ||
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities were stated at their historical carrying values, which approximate their fair value, given the short-term nature of these assets and liabilities. Inventories were recorded at fair value, based on computations which considered many factors, including the estimated selling price of the inventory, the cost to dispose of the inventory, as well as the replacement cost of the inventory, where applicable.
The following provides the fair value of property, plant and equipment acquired (as of the date of the Acquisition):
| |
Fair Value | Depreciation and amortization period (years) |
|||
|---|---|---|---|---|---|
Land |
$ | 67,832 | |||
Building and leasehold improvements |
216,571 | 4–40 | |||
Machinery and equipment |
119,405 | 3–13 | |||
Furniture and fixtures |
53,109 | 3–10 | |||
Computer equipment |
18,113 | 3–5 | |||
Transportation equipment |
5,844 | 3–4 | |||
Construction in progress |
12,241 | ||||
Total property, plant and equipment |
$ | 493,115 | |||
F-14
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
3. Carlyle Merger (Continued)
The following provides the fair value of identifiable intangible assets acquired (as of the date of the Acquisition):
| |
Fair Value | Amortization period (years) |
|||
|---|---|---|---|---|---|
Definite lived intangible assets: |
|||||
Brands and customer relationships |
$ | 885,000 | 17–25 | ||
Tradenames and other |
171,000 | 20–30 | |||
|
1,056,000 | ||||
Indefinite lived intangible asset: |
|||||
Tradenames |
997,000 | ||||
Total intangible assets |
$ | 2,053,000 | |||
The Company has allocated $997,000 to tradenames that have been determined to have indefinite lives. Management considered numerous factors in determining to account for these assets as indefinite-lived intangible assets, including the current market leadership position of the names as well as their recognition in the industry. The indefinite-lived intangible assets are not amortized, but instead tested for impairment at least annually (more frequently if certain conditions are present).
The following unaudited pro forma financial information presents a summary of our consolidated net sales and net income for the year ended September 30, 2010, assuming that the Acquisition took place October 1, 2009:
| |
2010 Pro Forma | |||
|---|---|---|---|---|
Net sales |
$ | 2,826,737 | ||
Net income |
$ | 622 | ||
The above unaudited pro forma financial information has been prepared for comparative purposes only and includes certain adjustments to actual financial results, such as imputed interest costs, and estimated additional depreciation and amortization expense as a result of property, plant and equipment and intangible assets acquired. The pro forma financial information does not purport to be indicative of the results of operations that would have been achieved had the Acquisition taken place on the date indicated or the results of operations that may result in the future.
Pro forma net income for the year ended September 30, 2010 includes an increase in cost of sales of $122,104 relating to an increase in acquired inventory to its fair value as required under acquisition accounting, which was sold during the period, as well as non-recurring Merger expenses of $90,382 which consisted of legal and professional advisory services, the acceleration of vesting of all unvested stock-based compensation, fees related to an unused bridge loan and a portion of the transaction fee paid to Carlyle.
F-15
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
4. Discontinued Operations
Julian Graves
On July 2, 2012, in accordance with the provisions of the United Kingdom Insolvency Act of 1986 and pursuant to a resolution of the board of directors of Julian Graves Limited, a company organized under the laws of the United Kingdom and Wales (the "UK Debtor") and an indirect, wholly-owned subsidiary of the Company, representatives from Deloitte LLP (the "Administrators") were appointed as administrators in respect of the UK Debtor (the "UK Administration"). The UK Administration, which was limited to the UK Debtor, was initiated in response to continuing operating losses of the UK Debtor and their related impact on the Company's cash flows. The effect of the UK Debtor's entry into administration was to place the management, affairs, business and property of the UK Debtor under the direct control of the Administrators. The Administrators have wound the operations down and the final settlement is pending.
The results of the Julian Graves business included in discontinued operations for the fiscal years ended September 30, 2012, 2011 and 2010 are summarized in the following table.
| |
|
|
|
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor | |
Predecessor | |||||||||
| |
2012 | 2011 |
|
2010 | ||||||||
Net sales |
$ | 43,999 | $ | 74,876 | $ | 101,886 | ||||||
Impairments and deconsolidation loss |
(27,509 | ) | — | — | ||||||||
Operating loss before income taxes |
(27,682 | ) | (2,855 | ) | (237 | ) | ||||||
Income tax benefit |
9,065 | 999 | 120 | |||||||||
Loss, net of income taxes |
(18,617 | ) | (1,856 | ) | (117 | ) | ||||||
At September 30, 2011, the major components of assets and liabilities of discontinued operations were as follows: Cash of $1,072, Inventory of $3,602 and Other current assets of $5,321, Property plant and equipment of $3,424, Intangible assets of $18,752, Other long-term assets of $1,719, Accounts payable and accrued expenses of $3,544 and Other long-term liabilities of $384.
As of June 30, 2012, the carrying value of all assets relating to the UK Debtor were evaluated and an impairment of $20,106, primarily relating to the Julian Graves Tradename, was recorded. As of July 2, 2012, concurrent with the transfer of control of the UK Debtor to the Administrator, a deconsolidation loss of approximately $7,403 was recorded.
Le Naturiste
On August 31, 2012 we sold certain assets and liabilities of our subsidiary Le Naturiste, Inc. for a net sales price of $1,600. The sale of Le Naturiste resulted in a loss of approximately $3,088 which is included in discontinued operations for the year ended September 30, 2012. The results of the Le
F-16
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
4. Discontinued Operations (Continued)
Naturiste business included in discontinued operations for the fiscal years ended September 30, 2012, 2011 and 2010 are summarized in the following table:
| |
|
|
|
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor | |
Predecessor | |||||||||
| |
2012 | 2011 |
|
2010 | ||||||||
Net sales |
$ | 17,228 | $ | 19,188 | $ | 19,015 | ||||||
Loss on sale of business |
(3,088 | ) | — | — | ||||||||
Operating loss before income taxes |
(4,431 | ) | (924 | ) | (1,235 | ) | ||||||
Income tax benefit |
— | — | — | |||||||||
Loss, net of income taxes |
(4,431 | ) | (924 | ) | (1,235 | ) | ||||||
At September 30, 2011, the major components of assets and liabilities of discontinued operations were as follows: Inventory of $4,384, Other current assets of $640, Property plant and Equipment of $1,278, Accounts payable and accrued expenses of $1,171.
5. Inventories
The components of inventories are as follows at September 30:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Raw materials |
$ | 169,735 | $ | 151,992 | |||
Work-in-process |
20,637 | 15,528 | |||||
Finished goods |
529,224 | 499,863 | |||||
Total |
$ | 719,596 | $ | 667,383 | |||
6. Property, Plant and Equipment
Property, plant and equipment is as follows at September 30:
| |
2012 | 2011 | Depreciation and amortization period (years) | |||||
|---|---|---|---|---|---|---|---|---|
Land |
$ | 69,745 | $ | 69,060 | ||||
Buildings and leasehold improvements |
232,076 | 228,443 | 4–40 | |||||
Machinery and equipment |
132,292 | 128,825 | 3–13 | |||||
Furniture and fixtures |
82,285 | 65,630 | 3–10 | |||||
Computer equipment |
25,407 | 22,585 | 3–5 | |||||
Transportation equipment |
5,871 | 5,779 | 3–4 | |||||
Construction in progress |
77,569 | 8,989 | ||||||
|
625,245 | 529,311 | ||||||
Less accumulated depreciation and amortization |
(112,566 | ) | (54,739 | ) | ||||
|
$ | 512,679 | $ | 474,572 | ||||
F-17
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
6. Property, Plant and Equipment (Continued)
Included in construction in process are assets related to two domestic facilities that will be used in manufacturing, which are expected to be operational during fiscal 2013, and costs related to implementing a new world-wide ERP system, as well as related capitalized interest.
Depreciation and amortization of property, plant and equipment for the fiscal years ended September 30, 2012, 2011 and 2010 was approximately $58,311, $55,589 and $47,505, respectively.
7. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment for the fiscal years ended September 30, 2012 and 2011 are as follows:
| |
Wholesale/ US Nutrition |
European Retail |
Direct Response/ E-Commerce |
North American Retail |
Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Predecessor balance at September 30, 2010 |
$ | 182,414 | $ | 136,640 | $ | 16,105 | $ | — | $ | 335,159 | ||||||
Elimination of predecessor goodwill |
(182,414 | ) | (136,640 | ) | (16,105 | ) | — | (335,159 | ) | |||||||
Acquisition accounting adjustments |
610,289 | 281,922 | 317,985 | 7,744 | 1,217,940 | |||||||||||
Successor balance October 1, 2010 |
610,289 | 281,922 | 317,985 | 7,744 | 1,217,940 | |||||||||||
Foreign currency translation |
(2,032 | ) | (4,426 | ) | — | — | (6,458 | ) | ||||||||
Acquisitions |
717 | — | — | — | 717 | |||||||||||
Successor balance at September 30, 2011 |
608,974 | 277,496 | 317,985 | 7,744 | 1,212,199 | |||||||||||
Foreign currency translation |
4,587 | 3,529 | — | — | 8,116 | |||||||||||
Successor balance at September 30, 2012 |
$ | 613,561 | $ | 281,025 | $ | 317,985 | $ | 7,744 | $ | 1,220,315 | ||||||
Other Intangible Assets
The carrying amounts of acquired other intangible assets are as follows at September 30:
| |
2012 | 2011 | |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Gross carrying amount |
Accumulated amortization |
Gross carrying amount |
Accumulated amortization |
Amortization period (years) |
|||||||||||
Definite lived intangible assets |
||||||||||||||||
Brands and customer relationships |
$ | 885,866 | $ | 76,893 | $ | 884,265 | $ | 38,382 | 17–25 | |||||||
Tradenames and other |
151,745 | 10,686 | 152,717 | 5,219 | 20–30 | |||||||||||
|
1,037,611 | 87,579 | 1,036,982 | 43,601 | ||||||||||||
Indefinite lived intangible asset |
||||||||||||||||
Tradenames |
1,001,772 | — | 993,020 | — | ||||||||||||
Total intangible assets |
$ | 2,039,383 | $ | 87,579 | $ | 2,030,002 | $ | 43,601 | ||||||||
F-18
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
7. Goodwill and Intangible Assets (Continued)
Aggregate amortization expense of other definite lived intangible assets included in the consolidated statements of income in selling, general and administrative expenses in fiscal 2012, 2011 and 2010 was approximately $43,960, $44,086 and $15,841, respectively.
Assuming no changes in our other intangible assets, estimated amortization expense for each of the five succeeding years will be approximately $45,000 per year.
8. Merger Expenses
In connection with the Acquisition described in Note 3, in fiscal 2011 we incurred $44,479 of Merger expenses which consisted of $15,660 in financing costs associated with an unused bridge loan, $14,324 for a portion of the transaction fee paid to Carlyle, $6,929 for an employment agreement termination payment due to a former executive officer and $7,566 of other Merger related costs.
For fiscal 2010, NBTY as the predecessor incurred charges of $45,903 which consisted of $29,761 primarily related to legal and professional advisory services and $16,142 of incremental stock-based compensation expense as a result of the mandatory acceleration of vesting of all unvested stock options and restricted stock units in connection with the Acquisition. Of these total costs, $38,123 were contingent upon closing of the Acquisition and recorded on September 30, 2010 as it represents the last day of operations of the Company prior to the Acquisition.
9. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows at September 30:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Accrued compensation and related taxes |
$ | 49,992 | $ | 44,645 | |||
Accrued interest |
29,358 | 29,285 | |||||
Income taxes payable |
9,416 | 14,823 | |||||
Other |
101,586 | 97,424 | |||||
|
$ | 190,352 | $ | 186,177 | |||
10. Long-Term Debt
Long-term debt consists of the following at September 30:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Senior Credit Facilities: |
|||||||
Term loan B-1 |
$ | 1,507,500 | $ | 1,736,875 | |||
Revolving credit facility |
— | — | |||||
Notes |
650,000 | 650,000 | |||||
|
2,157,500 | 2,386,875 | |||||
Less: current portion |
— | 17,500 | |||||
Total |
$ | 2,157,500 | $ | 2,369,375 | |||
F-19
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
10. Long-Term Debt (Continued)
Senior Credit Facilities
On October 1, 2010 (the "Closing Date"), we entered into our senior credit facilities consisting of a $250,000 revolving credit facility, a $250,000 term loan A and a $1,500,000 term loan B. The term loan facilities were used to fund, in part, the Transactions.
On March 1, 2011, NBTY, Holdings, Barclays Bank PLC, as administrative agent, and several other lenders entered into the First Amendment and Refinancing Agreement to the Credit Agreement (the "Refinancing") pursuant to which we repriced our loans and amended certain other terms under our then existing credit agreement. Under the terms of the Refinancing, the original $250,000 term loan A and $1,500,000 term loan B were replaced with a new $1,750,000 term loan B-1 and the $250,000 revolving credit facility was modified to $200,000. Borrowings under term loan B-1 bear interest at a floating rate which can be, at our option, either (i) Eurodollar rate plus an applicable margin, or (ii) base rate plus an applicable margin, in each case, subject to a Eurodollar rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for term loan B-1 and the revolving credit facility is 3.25% per annum for Eurodollar loans and 2.25% per annum for base rate loans, with a step-down in rate for the revolving credit facility upon the achievement of a certain total senior secured leverage ratio. Substantially all other terms are consistent with the original term loan B, including the amortization schedule of term loan B-1 and maturity dates.
As a result of the Refinancing, $20,824 of previously capitalized deferred financing costs were expensed. In addition, $2,394 of the call premium on term loan B and termination costs on interest rate swap contracts of $1,525 were expensed. Financing costs capitalized in connection with the Refinancing of $24,320, consisting of bank fees of approximately $11,714 and the remaining portion of the call premium on term loan B of $12,606, will be amortized over the remaining term using the effective interest rate method.
On December 30, 2011, we prepaid $225,000 of our future principal payments on our term loan B-1. As a result of this prepayment, $9,289 of deferred financing costs were charged to interest expense. In accordance with the prepayment provisions of the Refinancing, future scheduled payments of principal will not be required until the final balloon payment is due in October 2017.
On October 17, 2012, Holdings, our parent company, issued $550,000 senior unsecured notes ("Holdco Notes") that mature on November 1, 2017. Interest on the Holdco Notes will accrue at the rate of 7.75% per annum with respect to Cash Interest and 8.50% per annum with respect to any paid-in-kind interest ("PIK Interest"). Interest on the Holdco Notes will be payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. Holdings is a holding company with no operations of its own and has no ability to service interest or principal on the Holdco Notes, other than through dividends it may receive from NBTY. NBTY is restricted, in certain circumstances, from paying dividends to Holdings by the terms of the indentures governing its notes and the senior secured credit facility. NBTY has not guaranteed the indebtedness of Holdings, nor pledged any of its assets as collateral and the Holdco Notes are not reflected on NBTY's balance sheet. The proceeds from the offering of the Holdco Notes, along with the $200,000 from NBTY described below, were used to pay transactions fees and expenses and a $722,000 dividend to Holdings' shareholders.
F-20
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
10. Long-Term Debt (Continued)
On October 11, 2012 we amended our credit agreement to allow Holdings, our parent company, to issue and sell Holdco Notes. In addition, among other things, the amendment (i) increases the general restricted payments basket, as defined by the credit agreement, (ii) increased the maximum total leverage ratio test which governs the making of restricted payments using Cumulative Credit (as defined in the credit agreement) and (iii) modified the definition of Cumulative Credit to be calculated retroactively using 50% of the consolidated net income as defined in NBTY's indenture governing the notes. Interest on the Holdco Notes will be paid via dividends from the NBTY to Holdings, to the extent that it is permitted under our credit agreement. Approximately $6,000 of expenses related to the amendment was capitalized as a deferred financing cost and will be amortized using the effective interest method. In conjunction with the amendment, we paid Holdings a dividend of $194,040 in October 2012.
The following fees are applicable under the $200,000 revolving credit facility: (i) an unused line fee of 0.50% per annum, based on the unused portion of the revolving credit facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit available to be drawn equal to the applicable margin for Eurodollar rate loans; (iii) a letter of credit fronting fee equal to 0.25% per annum on the daily amount of each letter of credit available to be drawn; and (iv) certain other customary fees and expenses of our letter of credit issuers.
The revolving credit facility matures five years after the Closing Date and term loan B-1 matures seven years after the Closing Date. We may voluntarily prepay loans or reduce commitments under our senior credit facilities, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty.
We must prepay term loan B-1 with the net cash proceeds of asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under our senior credit facilities unless specifically incurred to refinance a portion of our senior credit facilities) and 50% of excess cash flow (such percentage subject to reduction based on achievement of specified total senior secured leverage ratios), in each case, subject to certain reinvestment rights and other exceptions. No repayment was required for 2012. We are also required to make prepayments under our revolving credit facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the revolving credit facility exceeds the aggregate amount of commitments in respect of the revolving credit facility.
Our obligations under our senior credit facilities are guaranteed by Holdings and each of our current and future direct and indirect subsidiaries other than (i) foreign subsidiaries, (ii) unrestricted subsidiaries, (iii) non-wholly owned subsidiaries, (iv) certain receivables financing subsidiaries, (v) certain immaterial subsidiaries and (vi) certain holding companies of foreign subsidiaries, and are secured by a first lien on substantially all of their assets, including capital stock of subsidiaries (subject to certain exceptions).
Our senior credit facilities contain customary negative covenants, including, but not limited to, restrictions on our, and our restricted subsidiaries', ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of certain junior indebtedness, enter into transactions with affiliates, amend organizational documents, or change our line of business or fiscal year. We were in compliance with all covenants
F-21
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
10. Long-Term Debt (Continued)
under the senior credit facilities at September 30, 2012. In addition, our senior credit facilities require the maintenance of a maximum total senior secured leverage ratio on a quarterly basis, calculated with respect to Consolidated EBITDA, as defined therein, if at any time amounts are outstanding under the revolving credit facility, including swingline loans and letters of credit. During the years ended September 30, 2012 and 2011, no amounts were outstanding under the revolving credit facility. All other financial covenants in the original senior credit facility were removed as part of the Refinancing.
Our senior credit facilities provide that, upon the occurrence of certain events of default, our obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA/pension plan events, certain change of control events and other customary events of default.
Notes
On October 1, 2010, NBTY issued $650,000 senior notes bearing interest at 9% in a private placement (the "Notes"). On August 2, 2011, these outstanding Notes were exchanged for substantially identical notes that were registered under the Securities Act of 1933, as amended, and therefore are freely tradable. The Notes are senior unsecured obligations and mature on October 1, 2018. Interest on the Notes is paid on April 1 and October 1 of each year, and commenced on April 1, 2011.
On and after October 1, 2014, we may redeem the Notes, at our option, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest and additional interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on October 1 of the years set forth below:
Period
|
Redemption Price |
|||
|---|---|---|---|---|
2014 |
104.50 | % | ||
2015 |
102.25 | % | ||
2016 and thereafter |
100.00 | % | ||
In addition, at any time prior to October 1, 2014, we may redeem the Notes at our option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium (as defined in the indenture governing the Notes) as of, and accrued and unpaid interest and additional interest, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
The Notes are jointly and severally, irrevocably and unconditionally guaranteed by each of our subsidiaries that is a guarantor under the Credit Agreement. The Notes are uncollateralized and rank senior in right of payment to existing and future indebtedness that is expressly subordinated to the Notes, rank equally in right of payment to our and our subsidiary guarantors' senior unsecured debt, and are effectively junior to any of our or our subsidiary guarantors' secured debt, to the extent of the
F-22
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
10. Long-Term Debt (Continued)
value of the collateral securing such debt. The Notes contain certain customary covenants including, but not limited to, restrictions on our and our restricted subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, or pay dividends. We were in compliance with all covenants under the Notes at September 30, 2012.
Holdco Notes
Interest on the Holdco Notes shall be payable entirely in cash ("Cash Interest") to the extent that it is less than the maximum amount of allowable dividends and distributions plus any cash at Holdings ("Applicable Amount") as defined by the indenture governing the Holdco Notes. For any interest period after the initial interest period (other than the final interest period ending at stated maturity), if the Applicable Amount as for such interest period will be:
(i) equal or exceed 75%, but be less than 100%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 25% of the then outstanding principal amount of the Holdco Notes by increasing the principal amount of the outstanding notes or by issuing PIK Notes in a principal amount equal to such interest ("PIK Interest") and (b) 75% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(ii) equal or exceed 50%, but be less than 75%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 50% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 50% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(iii) equal or exceed 25%, but be less than 50%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 75% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 25% of the then outstanding principal amount of the Holdco Notes as Cash Interest; or
(iv) be less than 25% of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then the Issuer may, at its option, elect to pay interest on the Holdco Notes as PIK Interest.
The insufficiency or lack of funds available to the Issuer to pay Cash Interest as required by the preceding paragraph shall not permit Holdings to pay PIK Interest in respect of any interest period and the sole right of the Issuer to elect to pay PIK Interest shall be as (and to the extent) provided in the immediately preceding paragraph.
11. Fair Value of Financial Instruments
GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market or paid to transfer a liability (an exit price) for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also
F-23
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
11. Fair Value of Financial Instruments (Continued)
establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
- •
- Level 1—Quoted prices in active markets for identical assets or liabilities.
- •
- Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
- •
- Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table summarizes the assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and 2011:
| |
2012 | 2011 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets (liabilities): |
|||||||||||||||||||
Current (included in other current liabilities): |
|||||||||||||||||||
Interest rate swaps |
$ | — | $ | (7,751 | ) | $ | — | $ | — | $ | (9,102 | ) | $ | — | |||||
Cross currency swaps |
$ | — | $ | — | $ | (3,818 | ) | $ | — | $ | — | $ | (2,160 | ) | |||||
Non-current (included in other liabilities): |
|||||||||||||||||||
Interest rate swaps |
$ | — | $ | (5,777 | ) | $ | — | $ | — | $ | (8,386 | ) | $ | — | |||||
Cross currency swaps |
$ | — | $ | — | $ | (21,044 | ) | $ | — | $ | — | $ | (8,966 | ) | |||||
The Company's swap contracts are measured at fair value based on a market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Although non-performance risk of the Company and the counterparty is present in all swap contracts and is a component of the estimated fair values, we do not view non-performance risk to be a significant input to the fair value for the interest rate swap contracts. However, with respect to our cross currency swap contracts, we believe that non-performance risk is higher; therefore the Company classifies these swap contracts as "Level 3" in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of those contracts. The performance risk for the cross currency swap contracts as a percentage of the unadjusted liabilities ranged from 12.4 to 15.0 (13.5 weighted average)/
The following table shows the activity related to net investment hedges for the fiscal years ended September 30, 2012 and 2011:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Beginning balance: |
$ | (11,126 | ) | $ | — | ||
Unrealized loss on hedging instruments |
(13,736 | ) | (11,126 | ) | |||
Ending balance: |
$ | (24,862 | ) | $ | (11,126 | ) | |
F-24
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
11. Fair Value of Financial Instruments (Continued)
Assets Re-measured at Fair Value on a Non-recurring Basis
In connection with the UK Administration (See note 4), we re-measured the Julian Graves tradename and certain fixed assets using Level 3 inputs, which resulted in an impairment of $20,106.
Interest Rate Swaps
To manage the potential risk arising from changing interest rates and their impact on long-term debt, our policy is to maintain a combination of available fixed and variable rate financial instruments.
During December 2010, we entered into three interest rate swap contracts that were subsequently terminated in connection with the Refinancing, resulting in a termination payment of $1,525. During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior credit facilities until the indicated expiration dates of these swap contracts. Each swap contract has an initial notional amount of $333,333 (for a total of one billion dollars), with a fixed interest rate of 1.92% for a four-year term. The notional amount of each swap decreases to $266,666 in December 2012, decreases to $166,666 in December 2013 and has a maturity date of December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior credit facilities are swapped for fixed interest payments. These interest rate swap contracts were designated as a cash flow hedge of the variable interest payments on a portion of our term loan debt. Hedge effectiveness will be assessed based on the overall changes in the fair value of the interest rate swap contracts. Any potential ineffectiveness is measured using the hypothetical derivative method. Any ineffectiveness will be recognized in current earnings. Hedge ineffectiveness from inception to September 30, 2012 was insignificant.
Cross Currency Swaps
To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound, arising from our net investment in British pound denominated operations, during December 2010, we entered into three cross currency swap contracts to hedge a portion of the net investment in our British pound denominated foreign operations. The aggregate notional amount of the swap contracts is 194,200 British pounds (approximately $300,000 U.S. dollars), with a forward rate of 1.56, and a termination date of September 30, 2017.
These cross currency contracts were designated as a net investment hedge to the net investment in our British pound denominated operations. Hedge effectiveness is assessed based on the overall changes in the fair value of the cross currency swap contracts. Any potential hedge ineffectiveness is measured using the hypothetical derivative method and is recognized in current earnings. Hedge ineffectiveness for the year ended September 30, 2012 resulted in an expense of $3,358, and for the year ended September 30, 2011, hedge ineffectiveness was insignificant.
F-25
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
11. Fair Value of Financial Instruments (Continued)
The following table shows the effect of the Company's derivative instruments designated as cash flow and net investment hedging instruments for the years ended September 30, 2012 and 2011:
| |
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2012 | 2011 | 2011 | |||||||||
Cash Flow Hedges: |
|||||||||||||
Interest rate swaps |
$ | (6,895 | ) | $ | (9,326 | ) | $ | (18,427 | ) | $ | (7,689 | ) | |
Net Investment Hedges: |
|||||||||||||
Cross currency swaps |
(6,367 | ) | — | (6,831 | ) | — | |||||||
Total |
$ | (13,262 | ) | $ | (9,326 | ) | $ | (25,258 | ) | $ | (7,689 | ) | |
Notes
The face value of the Notes at September 30, 2012 was $650,000. The fair value of the Notes, based on Level 2 quoted market prices, was $726,375 at September 30, 2012.
Term loan B-1
The face amount of the term loan B-1 is $1,507,500, which approximates fair value based on Level 2 inputs, as this loan accrues interest at a variable interest rate.
Other Fair Value Considerations
During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment using market data and a cash flow model using Level 3 inputs. Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs.
12. Litigation Summary
Stock Purchases
On May 11, 2010, a putative class-action, captioned John F. Hutchins v. NBTY, Inc., et al, was filed in the United States District Court, Eastern District of New York, against NBTY and certain current and former officers, claiming that the defendants made false material statements, or concealed adverse material facts, for the purpose of causing members of the class to purchase NBTY stock at allegedly artificially inflated prices. An amended complaint, seeking unspecified compensatory damages, attorneys' fees and costs, was served on February 1, 2011. The Company moved to dismiss the amended
F-26
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
12. Litigation Summary (Continued)
complaint on March 18, 2011 and that motion was denied on March 6, 2012. Discovery is ongoing. We believe the claims to be without merit and intend to vigorously defend this action. At this time, however, no determination can be made as to the ultimate outcome of the litigation or the amount of liability, if any, on the part of any of the defendants.
Employment Class Actions
On or about July 7, 2010, a putative class action captioned Hamilton and Taylor v. Vitamin World, Inc. was filed against one of our subsidiaries in the Alameda Superior Court, California. Plaintiffs seek to represent a class of employees in connection with several causes of action alleging, among other things, wage and hour violations. Plaintiffs describe the class as all non-exempt current and former employees of Vitamin World Stores in California. The complaint seeks compensatory damages, statutory penalties, restitution, disgorgement of profits, and attorneys' fees and costs in unidentified amounts. Vitamin World, Inc. has agreed upon a settlement with the plaintiffs, which provides for payments to the class, and the settlement documentation has been approved by the court. This settlement is not material to the consolidated financial statements.
On or about April 8, 2010, a putative class action captioned Dirickson v. NBTY Acquisition, LLC, NBTY Manufacturing, LLC, NBTY, Inc., and Volt Management Corporation ("Volt") was filed against the Company and certain subsidiaries in the Superior Court of California, County of Los Angeles. Volt is not related to the Company. Plaintiff seeks to represent a class of employees in connection with several causes of action alleging, among other things, wage and hour violations. The complaint seeks damages on behalf of all non-exempt employees within the State of California who worked for Volt or any of the NBTY entities between April 8, 2006 and April 8, 2010, including compensatory damages, unpaid wages, statutory penalties, restitution, unspecified injunctive relief, unjust enrichment and attorneys' fees and costs in unidentified amounts. The parties submitted to the court a settlement agreement providing for potential payments to the class and the court granted final approval of the settlement on or about September 6, 2012, which provides for payments to the class which will be funded by the Company on or before November 20, 2012. The settlement value is not material to the consolidated financial statements.
Glucosamine-Based Dietary Supplements
Beginning in June 2011, certain putative class actions have been filed in various jurisdictions against the Company, its subsidiary Rexall Sundown, Inc. ("Rexall"), and/or other companies as to which there may be a duty to defend and indemnify, challenging the marketing of glucosamine-based dietary supplements, under various states' consumer protection statutes. The lawsuits against the Company and its subsidiaries are: Cardenas v. NBTY, Inc. and Rexall Sundown, Inc. (filed June 14, 2011) in the United States District Court for the Eastern District of California, on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief); and Jennings v. Rexall Sundown, Inc. (filed August 22, 2011 in the United States District Court for the District of Massachusetts, on behalf of a putative class of Massachusetts consumers seeking unspecified trebled compensatory damages), as well as other cases in California and Illinois against certain wholesale customers as to which the Company may have certain indemnification obligations. Motions to dismiss have been filed in all of these cases. While most of the cases are still at the pleading state, the Jennings case is trial ready for a trial of
F-27
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
12. Litigation Summary (Continued)
limited issues. Settlement discussion to resolve all cases on a national level are ongoing. The Company disputes the allegations and intends to vigorously defend these actions. At this time, however, no determination can be made as to the ultimate outcome of the litigation or the amount of liability, if any, on the part of any of the defendants.
Claims in the Ordinary Course
In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, intellectual property and California Proposition 65 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 or cash flows, if adversely determined against us.
13. Income Taxes
Income from continuing operations before provision for income taxes consists of the following components:
| |
Successor | |
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
United States |
$ | 76,096 | $ | (80,927 | ) | $ | 237,306 | |||||
Foreign |
158,687 | 124,615 | 91,986 | |||||||||
|
$ | 234,783 | $ | 43,688 | $ | 329,292 | ||||||
Provision/(benefit) for income taxes consists of the following:
| |
Successor | |
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
Federal |
||||||||||||
Current |
$ | 32,287 | $ | 3,712 | $ | 86,896 | ||||||
Deferred |
(15,315 | ) | (29,177 | ) | (13,160 | ) | ||||||
State |
||||||||||||
Current |
5,261 | 3,637 | 12,459 | |||||||||
Deferred |
(2,275 | ) | (3,490 | ) | (1,045 | ) | ||||||
Foreign |
||||||||||||
Current |
44,773 | 34,574 | 27,915 | |||||||||
Deferred |
533 | 1,733 | 1,205 | |||||||||
Total provision |
$ | 65,264 | $ | 10,989 | $ | 114,270 | ||||||
F-28
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
13. Income Taxes (Continued)
The following is a reconciliation of the income tax expense computed using the statutory Federal income tax rate to the actual income tax expense and the effective income tax rate.
| |
Successor | |
Predecessor | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | |
2010 | |||||||||||||||||
| |
|
Percent of pretax income |
|
Percent of pretax income |
|
|
Percent of pretax income |
||||||||||||||
| |
Amount | Amount |
|
Amount | |||||||||||||||||
| |
|
||||||||||||||||||||
Income tax expense at statutory rate |
$ | 82,174 | 35.0 | % | $ | 15,291 | 35.0 | % | $ | 115,252 | 35.0 | % | |||||||||
State income taxes, net of federal income tax benefit |
1,566 | 0.6 | % | (1,125 | ) | (2.6 | %) | 7,090 | 2.2 | % | |||||||||||
Change in valuation allowance |
(539 | ) | (0.1 | %) | 786 | 1.8 | % | 1,556 | 0.5 | % | |||||||||||
Effect of international operations, including foreign export benefit and earnings indefinitely reinvested |
(8,476 | ) | (3.6 | %) | (3,625 | ) | (8.3 | %) | (6,638 | ) | (2.0 | %) | |||||||||
Domestic manufacturing deduction |
(1,918 | ) | (0.8 | %) | (1,874 | ) | (4.3 | %) | (4,200 | ) | (1.3 | %) | |||||||||
Transaction costs |
— | 0.0 | % | 1,164 | 2.7 | % | 2,745 | 0.8 | % | ||||||||||||
Tax benefit attributable to Le Naturiste sale |
(7,792 | ) | (3.3 | %) | |||||||||||||||||
Other |
249 | 0.0 | % | 372 | 0.8 | % | (1,535 | ) | (0.5 | %) | |||||||||||
|
$ | 65,264 | 27.8 | % | $ | 10,989 | 25.1 | % | $ | 114,270 | 34.7 | % | |||||||||
The difference in the effective rate in fiscal 2012 as compared to the statutory rate is mainly attributable to the benefit attributable to the sale of Le Naturiste, as well as the partial indefinite reinvestment of certain foreign earnings in the current year.
The difference in the effective rate in fiscal 2011 as compared to the statutory rate is mainly attributable to certain foreign benefits and other deductions that became higher in proportion to the net tax expense and thus decreased the effective tax rate for fiscal 2011.
F-29
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
13. Income Taxes (Continued)
The components of deferred tax assets and liabilities are as follows as of September 30:
| |
Successor | ||||||
|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | |||||
Deferred tax assets: |
|||||||
Inventory reserves and UNICAP |
$ | 7,652 | $ | 7,481 | |||
Accrued expenses and reserves not currently deductible |
18,860 | 18,785 | |||||
Other comprehensive income |
13,522 | 11,386 | |||||
Foreign and state tax credits |
88,296 | 54,210 | |||||
Foreign/State net operating losses |
13,660 | 12,614 | |||||
Valuation allowance |
(14,867 | ) | (15,404 | ) | |||
Total deferred income tax assets, net of valuation allowance |
127,123 | 89,072 | |||||
Deferred tax liabilities: |
|||||||
Property, plant and equipment |
(45,515 | ) | (53,468 | ) | |||
Intangibles |
(696,814 | ) | (711,230 | ) | |||
Undistributed foreign earnings |
(84,958 | ) | (50,632 | ) | |||
Total deferred income tax liabilities |
(827,287 | ) | (815,330 | ) | |||
Total net deferred income tax assets / (liabilities) |
(700,164 | ) | (726,258 | ) | |||
Less current deferred income tax assets |
(26,242 | ) | (24,340 | ) | |||
Long-term deferred income tax liabilities |
$ | (726,406 | ) | $ | (750,598 | ) | |
At September 30, 2012, we had foreign net operating losses, foreign tax credit and New York State ("NYS") investment tax credit carryforwards of $32,469, $84,810 and $3,486, respectively. At September 30, 2011, we had foreign net operating losses, foreign tax credit and New York State ("NYS") investment tax credit carryforwards of $35,878, $50,316 and $3,393, respectively. At September 30, 2012 and 2011, we maintained a valuation allowance of $3,486 and $2,790, respectively, against the NYS investment tax credits that expire primarily between 2013 and 2016 and $11,381 and $12,614, respectively, against foreign loss carryforwards which expire in accordance with applicable tax law. We provide a valuation allowance for these credit and loss carryforwards because we do not consider realization of such assets to be more likely than not. We continue to monitor the need for these valuation allowances on an on-going basis.
At September 30, 2012, we had $108,249 of undistributed international earnings on which we have not provided any U.S. tax expense as we intend to permanently reinvest these earnings outside of the U.S.
F-30
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
13. Income Taxes (Continued)
The change in the valuation allowance for the fiscal years ended September 30, 2012, 2011 and 2010 is as follows:
| |
Successor | |
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
Beginning balance |
$ | (15,404 | ) | $ | (14,618 | ) | $ | (13,063 | ) | |||
NYS investment tax credit carryforwards (generated) /utilized |
(694 | ) | 319 | 342 | ||||||||
Foreign net operating losses utilized/ (generated)—net |
1,231 | (1,105 | ) | (1,897 | ) | |||||||
Balance at September 30 |
$ | (14,867 | ) | $ | (15,404 | ) | $ | (14,618 | ) | |||
The following table summarizes the activity related to gross unrecognized tax benefits from October 1, 2010 to September 30, 2012:
| |
Successor | |
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
| |
|
|||||||||||
Beginning balance |
$ | 10,687 | $ | 9,210 | $ | 9,229 | ||||||
Increases related to prior year tax positions |
888 | 2,207 | 1,252 | |||||||||
Increase based on tax positions related to the current year |
1,313 | — | — | |||||||||
Decreases related to settlements with taxing authorities |
— | — | (669 | ) | ||||||||
Decreases related to lapsing of statute of limitations |
— | (730 | ) | (602 | ) | |||||||
Balance as of September 30 |
$ | 12,888 | $ | 10,687 | $ | 9,210 | ||||||
These liabilities are primarily included as a component of other liabilities in our consolidated balance sheet because we generally do not anticipate that settlement of the liabilities will require payment of cash within the next twelve months.
Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $10,160 and $8,195 as of September 30, 2012 and 2011, respectively. We do not believe that the amount will significantly change in the next 12 months.
We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At September 30, 2012, we had accrued $1,385 and $700 for the potential payment of interest and penalties, respectively. As of September 30, 2012, we were subject to U.S. Federal Income Tax examinations for the tax years 2007 through 2011, and to non-US examinations for the tax years of 2006–2011. In addition, we are generally subject to state and local examinations for fiscal years 2009–2011. There were no significant changes to accrued penalties and interest during the fiscal year ended September 30, 2012.
The Company is under an Internal Revenue Service ("IRS") examination for tax years 2007-2011. Among other issues, the IRS has questioned the values used by the Company to transfer product and provide services to an international subsidiary. The Company believes it has appropriately valued such product transfers and services and intends to continue to support this position as the IRS examination continues to progress.
F-31
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
14. Stockholder's Equity
In connection with the Merger, each of the outstanding shares of NBTY common stock was converted into the right to receive cash consideration of $55.00 per share (see Note 3 for further information). As of October 1, 2010, Holdings owns 100% of NBTY's issued and outstanding common stock.
During December 2010, Holdings made an additional capital contribution of $400.
The opening accumulated deficit of Merger Sub consists of acquisition related expenses incurred prior to October 1, 2010.
15. Stock-Based Compensation and Employee Benefit Plans
Successor
On November 30, 2010, Holdings adopted the Equity Incentive Plan of Alphabet Holding Company, Inc. (the "Plan"), pursuant to which Holdings may grant options to selected employees and directors of the Company. The aggregate number of shares which may be issued under the Plan is 50,268 shares of the Class A common stock and 148,404 shares of the Class B common stock. Options granted under the Plan expire no later than 10 years from the date of grant and the exercise price may not be less than the fair market value of the common stock on the date of grant.
During fiscal 2012, Holdings granted 24,850 Class B common stock options to certain Company employees under the Plan. During fiscal 2011, Holdings granted 49,468 Class A common stock options and 103,710 Class B common stock options to certain Company employees under the Plan. Vesting of the awards is based on the passage of time, in equal installments over five years /or the achievement of a performance condition (i.e., a liquidity event as defined in the plan agreement) and a market condition (i.e., the achievement of a minimum investor rate of return). The fair value of each of the Company's time-based stock option awards is expensed on a straight-line basis over the requisite service period, which is generally the five year vesting period of the options. However, for options granted with a performance condition, compensation expense is recognized when it is probable that the performance condition will be met. As the Company has determined it is not probable the performance condition will be achieved, no compensation cost has been recognized relating to the performance based awards. Pursuant to the Plan, Holdings is required to modify all options in an equitable manner under certain circumstances. The $722,000 dividend in October 2012, as described in Note 10, will require this modification.
The weighted-average grant date fair value per share of options granted in fiscal 2012 was $239 for time based vesting and $108 for performance based vesting. The weighted-average grant date fair value per share of options granted in fiscal 2011 was $180 for time based vesting and $56 for performance based vesting. The fair value of each option award is estimated on the date of grant utilizing a Monte
F-32
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
15. Stock-Based Compensation and Employee Benefit Plans (Continued)
Carlo simulation model. The following weighted-average assumptions were used for the options granted:
| |
Fiscal year ended September 30, 2012 |
Fiscal year ended September 30, 2011 |
|||||
|---|---|---|---|---|---|---|---|
Significant assumptions: |
|||||||
Time based vesting |
|||||||
Risk-free rate(1) |
.10%–3.12 | % | .12%–4.5 | % | |||
Expected term(2) |
6.5 years | 6.5 years | |||||
Expected volatility(3) |
37% | 33% | |||||
Expected dividends |
0.0% | 0.0% | |||||
Performance based vesting |
|||||||
Risk-free rate(1) |
.10%–3.12 | % | .12%–4.5 | % | |||
Expected term(4) |
5.6 years | 6.6 years | |||||
Expected volatility(3) |
38% | 34% | |||||
Expected dividends |
0.0% | 0.0% | |||||
- (1)
- The
risk free interest rate assumption was based on yields of U.S. Treasury securities in effect at the date of grant with terms similar to
the expected term.
- (2)
- The
expected term of the options was estimated utilizing the simplified method. We utilize the simplified method because the Company does not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The simplified method was used for all stock options that require only a service vesting
condition.
- (3)
- Expected
volatility was estimated based on historical volatility of peer companies over a period equivalent to the expected term. Peer
companies are determined based on relevant industry and/or market capitalization.
- (4)
- The expected term of the options was estimated utilizing a Monte Carlo simulation model.
A summary of stock option activity follows:
| |
Fiscal Year Ended September 30, 2012 |
Fiscal Year Ended September 30, 2011 |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Number of shares |
Weighted average exercise price |
Number of shares |
Weighted average exercise price |
||||||||||
Outstanding at beginning of period |
152,678 | $ | 500.00 | — | $ | — | ||||||||
Granted |
24,850 | $ | 675.00 | 153,178 | $ | 500.00 | ||||||||
Exercised |
(450 | ) | $ | 500.00 | — | $ | — | |||||||
Forfeited |
(14,127 | ) | $ | 500.00 | (500 | ) | $ | 500.00 | ||||||
Outstanding at end of period |
162,951 | $ | 527.00 | 152,678 | $ | 500.00 | ||||||||
Exercisable at end of period |
14,357 | $ | 500.00 | — | $ | — | ||||||||
Number of shares available for future grant |
34,782 | |||||||||||||
F-33
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
15. Stock-Based Compensation and Employee Benefit Plans (Continued)
As share-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures of 0% and 5% per year for senior management and other management, respectively. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical and forecasted turnover.
The following table summarizes information about stock options outstanding at September 30, 2012:
| |
Options Outstanding | Options Exercisable | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices
|
Shares Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Shares Exercisable |
Weighted Average Exercise Price |
Intrinsic Value |
|||||||||||||
| $500.00 | 138,101 | 8.5 | $ | 500.00 | 14,357 | $ | 500.00 | $ | 2,512,475 | ||||||||||
| $675.00 | 24,850 | 9.7 | $ | 675.00 | — | $ | — | $ | — | ||||||||||
As of September 30, 2012, $10,950 of total unrecognized compensation cost related to the non-vested time-based vesting options is expected to be recognized over the weighted average period of 3.6 years.
As of September 30, 2012, the total potential unrecognized compensation cost related to the performance-based vesting options is $5,208 and no compensation cost will be recognized until the related performance condition is deemed probable of occurring.
Predecessor
As a result of the Merger (see Note 3) each outstanding and unexercised option to purchase shares of NBTY's common stock, issued under previously existing plans whether or not then vested, was cancelled and entitled the holder thereof to receive a cash amount equal to the excess, if any, of $55.00 over the per-share exercise price of such option, without interest, less applicable withholding tax.
The weighted-average grant-date fair value per share of the options granted in fiscal 2010 was $22.13. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model. The following weighted-average assumptions were used for the options granted:
| |
2010 | |||
|---|---|---|---|---|
Risk-free rate(1) |
2.9 | % | ||
Expected term(2) |
6.4 years | |||
Expected volatility(3) |
48 | % | ||
Expected dividends |
0.0 | % | ||
- (1)
- The
risk-free rate is based upon the rate on a zero coupon U.S. Treasury bill, for the expected term of the option, in effect at
the time of grant.
- (2)
- The
expected term of the option is based on historical employee exercise behavior, the vesting terms of the respective option and a
contractual life of ten years.
- (3)
- Expected volatility is primarily based on the daily historical volatility of our stock price, over a period similar to the expected term of the option.
F-34
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
15. Stock-Based Compensation and Employee Benefit Plans (Continued)
| |
Fiscal Year Ended September 30, 2010 | ||||||
|---|---|---|---|---|---|---|---|
| |
Number of shares |
Weighted average exercise price |
|||||
Outstanding at beginning of period |
3,765 | $ | 14.38 | ||||
Granted |
287 | $ | 43.88 | ||||
Exercised |
(1,570 | ) | $ | 6.76 | |||
Forfeited |
(28 | ) | $ | 26.10 | |||
Outstanding at end of period |
2,454 | $ | 22.57 | ||||
Exercisable at end of period |
838 | $ | 12.08 | ||||
A summary of stock option exercise and related activity follows:
| |
2010 | |||
|---|---|---|---|---|
Stock options exercised |
1,570 | |||
Aggregate proceeds |
$ | 10,613 | ||
Compensation deduction for tax purposes |
$ | 6,940 | ||
Tax benefit credited to capital in excess of par |
$ | 6,646 | ||
Intrinsic value of options exercised |
$ | 55,383 | ||
Employee Benefit Plans
We sponsor a Retirement Savings Plan consisting of a 401(k) plan covering substantially all employees with more than six months of service. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute from one to fifty percent of their annual compensation to the Plan, limited to a maximum annual amount as set, and periodically updated, by the Internal Revenue Service. We provide a Company match of 100% of employee contributions, up to three percent of the employee's gross earnings and 50% match of the next two percent of earnings, limited to an annual match contribution of $10 per employee. Employees become fully vested in employer match contributions after three years of service.
We also have an Associate Profit Sharing Plan ("PSP), which is allocated among participants who have completed 1,000 hours of service in the plan year end who were employed on the last day of the plan year, based upon their relative compensation for the year. As of September 30, 2012, the amount allocated and accrued for the PSP was $3,498.
16. Commitments
Operating Leases
We conduct retail operations under operating leases, which expire at various dates through 2034. Some of the leases contain escalation clauses, as well as renewal options, and provide for contingent rent based upon sales plus certain tax and maintenance costs.
F-35
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
16. Commitments (Continued)
Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms are as follows for the fiscal year ending September 30:
2013 |
$ | 112,977 | ||
2014 |
98,840 | |||
2015 |
86,950 | |||
2016 |
77,673 | |||
2017 |
67,764 | |||
Thereafter |
249,380 | |||
|
$ | 693,584 | ||
Operating lease rent expense (including real estate taxes and maintenance costs) and leases on a month to month basis was approximately $153,763, $149,921 and $133,719 during fiscal 2012, 2011 and 2010, respectively.
Purchase Commitments
We were committed to make future purchases primarily for inventory related items, such as raw materials and finished goods, under various purchase arrangements with fixed price provisions aggregating approximately $170,768 at September 30, 2012.
Capital Commitments
We had approximately $11,914 in open capital commitments at September 30, 2012, primarily related to leasehold improvements, as well as manufacturing equipment, computer hardware and software.
17. Related Party Transactions
Consulting Agreement—Carlyle
We entered into a consulting agreement with Carlyle under which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. Under this agreement, subject to certain conditions, we expect to pay an annual consulting fee to Carlyle of $3 million, we will reimburse them for their out-of-pocket expenses and we may pay Carlyle additional fees associated with other future transactions. For the year ended September 30, 2012, these fees totaled $3,000 and are recorded in Selling, general and administrative expenses. For the year ended September 30, 2011, Carlyle also received a one-time transaction fee of $30 million upon effectiveness of the Merger. Of this amount, $14,324 was recorded in Merger expenses and $15,676 was included with deferred financing costs. There were no transaction or consulting fees from Carlyle charged to any periods prior to Fiscal 2011.
Consulting Agreement—Rudolph Management
We paid $113 during Fiscal 2012 and $450 during each of Fiscal 2011 and 2010 to Rudolph Management Associates, Inc., under the Rudolph Consulting Agreement. Arthur Rudolph, father of the Company's former CEO, Scott Rudolph and a director through October 1, 2010, is the President of
F-36
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
17. Related Party Transactions (Continued)
Rudolph Management Associates, Inc. In addition, under this Consulting Agreement, Arthur Rudolph receives certain health, hospitalization and similar benefits provided to our executives and a car allowance. The aggregate value of these benefits was $6 during Fiscal 2012. This agreement was terminated December 31, 2011.
Sales Commissions
During Fiscal 2011, Gail Radvin, Inc., a corporation wholly owned by Gail Radvin, received sales commissions from us totaling approximately $207 for sales in certain foreign countries. Gail Radvin is the aunt of the Company's former CEO, Scott Rudolph. The entity also received sales commissions of $721 in Fiscal 2010. During the quarter ended December 31, 2010, the commission agreement was terminated.
18. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, net of income taxes, as of September 30, 2012 and 2011 are as follows:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Cumulative foreign currency translation adjustments |
$ | 2,911 | $ | (20,196 | ) | ||
Change in fair value of interest rate swaps |
(21,505 | ) | (17,569 | ) | |||
Total |
$ | (18,594 | ) | $ | (37,765 | ) | |
The change in the cumulative foreign currency translation adjustment primarily relates to our investment in our European subsidiaries and fluctuations in exchange rates between their local functional currencies and the U.S. dollar.
During the fiscal years ended September 30, 2012, 2011 and 2010 we recorded a decrease in our deferred tax liability relating to other comprehensive income incurred during the year of $2,478, $10,667 and $109, respectively.
19. Business and Credit Concentration
Financial instruments
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.
Customers
We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customers' current creditworthiness, as determined by review of their current credit information. Customers' account activity is continuously monitored. As a result of this review process, we record bad debt expense, which is based upon historical experience as well as specific customer collection issues that have been identified, to adjust the carrying amount of the related
F-37
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
19. Business and Credit Concentration (Continued)
receivable to its estimated realizable value. While such bad debt expenses historically have been within expectations and the allowances established, if the financial condition of one or more of our customers were to deteriorate, additional bad debt provisions may be required.
One customer accounted for the following percentages of net sales for the fiscal years ended September 30:
| |
Wholesale/US Nutrition Segment Net Sales |
Total Consolidated Net Sales |
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor |
|
Predecessor | Successor |
|
Predecessor | |||||||||||||||||
| |
2012 | 2011 |
|
2010 | 2012 | 2011 |
|
2010 | |||||||||||||||
Customer A |
23 | % | 25 | % | 27 | % | 14 | % | 15 | % | 17 | % | |||||||||||
The loss of this customer, or any of our other major customers, would have a material adverse effect on our consolidated results of operations if we were unable to replace such customer(s).
The following customers accounted for the following percentages of the Wholesale/US Nutrition segment's gross accounts receivable at fiscal years ended:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Customer A |
18 | % | 18 | % | |||
Customer B |
11 | % | 11 | % | |||
Suppliers
During fiscal 2012, 2011 and 2010, no one supplier provided more than 10% of our raw material purchases. We do not believe that the loss of any single supplier would have a material adverse effect on our consolidated financial condition or results of operations.
20. Supplemental Disclosure of Cash Flow Information
| |
Successor |
|
Predecessor | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 |
|
2010 | ||||||||
Cash interest paid |
$ | 139,768 | $ | 129,194 | $ | 27,695 | ||||||
Cash income taxes paid (net of refunds of $30,984 for Fiscal 2011) |
$ | 73,638 | 29,688 | 122,022 | ||||||||
Non-cash investing and financing information: |
||||||||||||
Acquisitions accounted for under the purchase method: |
||||||||||||
Fair value of assets acquired |
$ | — | $ | 5,111,188 | $ | 15,563 | ||||||
Liabilities assumed |
— | (1,123,379 | ) | (676 | ) | |||||||
Less: Cash acquired |
— | — | (687 | ) | ||||||||
Net cash paid |
$ | — | $ | 3,987,809 | $ | 14,200 | ||||||
Property, plant and equipment additions included in accounts payable |
11,986 | 5,524 | 2,034 | |||||||||
F-38
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
21. Segment Information
We are organized by sales segments on a worldwide basis. We evaluate performance based on a number of factors; however, the primary measures of performance are the net sales and income or loss from operations (before 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 the impact of any intercompany transfer pricing mark-up, 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, and various other corporate level activity related expenses. Such unallocated expenses remain within Corporate.
All our products fall into one or more of these four segments:
- •
- Wholesale—This segment sells products worldwide under various brand names and third-party private labels, each
targeting specific market groups which include virtually all major mass merchandisers, club stores, drug store chains and supermarkets. This segment also sells products to independent pharmacies,
health food stores, the military and other retailers.
- •
- European Retail—This segment generates revenue through its 687 Holland & Barrett stores (including ten
franchised stores in Singapore, six franchised stores in Cyprus and China, three franchised stores in Malta, and United Arab Emirates and one franchised store in Gibraltar and Hungary), 55 GNC (UK)
stores in the U.K., 112 De Tuinen stores (including 10 franchised locations) in the Netherlands and 42 Nature's Way stores in Ireland. Such revenue consists of sales of proprietary brand and
third-party products as well as franchise fees.
- •
- Direct Response/E-Commerce—This segment generates revenue through the sale of proprietary brand
and third-party products primarily through mail order catalog and internet. Catalogs are strategically mailed to customers who order by mail, internet, or by phone.
- •
- North American Retail—This segment generates revenue through its 426 owned and operated Vitamin World stores selling proprietary brand and third-party products.
F-39
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
21. Segment Information (Continued)
The following table represents key financial information of our business segments:
| |
Wholesale | European Retail |
Direct Response / E-Commerce |
North American Retail |
Corporate / Manufacturing |
Consolidated | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Successor |
|||||||||||||||||||
Fiscal 2012: |
|||||||||||||||||||
Net sales |
$ | 1,826,780 | $ | 675,889 | $ | 277,278 | $ | 219,786 | $ | — | $ | 2,999,733 | |||||||
Income (loss) from continuing operations |
241,504 | 151,274 | 56,391 | 22,812 | (77,611 | ) | 394,370 | ||||||||||||
Depreciation and amortization |
39,692 | 13,988 | 10,704 | 2,996 | 34,891 | 102,271 | |||||||||||||
Capital expenditures |
804 | 22,428 | 131 | 596 | 62,355 | 86,314 | |||||||||||||
Successor |
|||||||||||||||||||
Fiscal 2011: |
|||||||||||||||||||
Net sales |
$ | 1,764,755 | $ | 636,303 | $ | 257,466 | $ | 205,903 | $ | — | $ | 2,864,427 | |||||||
Income (loss) from continuing operations |
283,775 | 121,219 | 59,193 | 12,575 | (239,441 | ) | 237,321 | ||||||||||||
Depreciation and amortization |
38,840 | 13,277 | 10,649 | 2,997 | 33,912 | 99,675 | |||||||||||||
Capital expenditures |
652 | 19,338 | 40 | 955 | 23,014 | 43,999 | |||||||||||||
Predecessor |
|||||||||||||||||||
Fiscal 2010: |
|||||||||||||||||||
Net sales |
$ | 1,734,860 | $ | 543,364 | $ | 233,972 | $ | 193,641 | $ | — | $ | 2,705,837 | |||||||
Income (loss) from continuing operations |
292,991 | 101,121 | 68,018 | 11,272 | (118,129 | ) | 355,273 | ||||||||||||
Depreciation and amortization |
14,578 | 10,705 | 4,698 | 2,032 | 31,333 | 63,346 | |||||||||||||
Capital expenditures |
1,473 | 38,827 | 36 | 3,309 | 25,809 | 69,454 | |||||||||||||
Net sales by location of customer:
| |
|
|
|
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Successor | |
Predecessor | |||||||||
| |
2012 | 2011 |
|
2010 | ||||||||
United States |
$ | 1,922,549 | $ | 1,898,535 | $ | 1,870,622 | ||||||
United Kingdom |
653,170 | 596,927 | 516,200 | |||||||||
Canada |
111,047 | 95,639 | 81,335 | |||||||||
Netherlands |
84,167 | 80,221 | 65,591 | |||||||||
Ireland |
33,341 | 33,774 | 24,567 | |||||||||
Other foreign countries |
195,459 | 159,331 | 147,522 | |||||||||
Consolidated net sales |
$ | 2,999,733 | $ | 2,864,427 | $ | 2,705,837 | ||||||
F-40
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
21. Segment Information (Continued)
Long-lived
assets—Property, plant and equipment
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
United States |
$ | 358,648 | $ | 333,863 | |||
United Kingdom |
113,929 | 103,760 | |||||
Netherlands |
10,101 | 7,635 | |||||
Ireland |
4,782 | 4,716 | |||||
Canada |
12,503 | 12,500 | |||||
Other foreign countries |
12,716 | 12,098 | |||||
Consolidated long-lived assets |
$ | 512,679 | $ | 474,572 | |||
Total assets by segment as of September 30, 2012 and 2011 are as follows:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Wholesale |
$ | 2,531,145 | $ | 2,527,402 | |||
European Retail |
864,231 | 853,717 | |||||
Direct Response/E-Commerce |
772,240 | 781,464 | |||||
North American Retail |
91,510 | 93,164 | |||||
Corporate/Manufacturing |
792,121 | 803,332 | |||||
Assets of discontinued operations |
— | 40,191 | |||||
Consolidated assets |
$ | 5,051,247 | $ | 5,099,270 | |||
Approximately 31%, 32% and 29% of our net sales for the fiscal years ended September 30, 2012, 2011 and 2010, respectively, 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 the Company, as this would result in a decrease in our consolidated operating results.
Foreign subsidiaries accounted for the following percentages of assets and total liabilities as of September 30, 2012 and 2011:
| |
2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Total Assets |
25 | % | 24 | % | |||
Total Liabilities |
5 | % | 4 | % | |||
22. Condensed Consolidating Financial Statements of Guarantors of the Notes
The 9% senior notes due 2018 were issued by NBTY and are guaranteed by each of its current and future direct and indirect subsidiaries, subject to certain exceptions. These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents:
- (1)
- Condensed
consolidating balance sheets as of September 30, 2012 and 2011, and statements of income and statements of cash flows for the fiscal years
ended September 30, 2012, 2011 and 2010 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.
F-41
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
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.
Successor
Condensed Consolidating Balance Sheet
As of September 30, 2012
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 183,661 | $ | 14,589 | $ | 116,886 | $ | — | $ | 315,136 | ||||||
Accounts receivable, net |
— | 130,281 | 29,814 | — | 160,095 | |||||||||||
Intercompany |
1,106,055 | — | 257,151 | (1,363,206 | ) | — | ||||||||||
Inventories |
— | 546,032 | 173,564 | — | 719,596 | |||||||||||
Deferred income taxes |
— | 25,609 | 633 | — | 26,242 | |||||||||||
Other current assets |
6,000 | 28,997 | 29,329 | — | 64,326 | |||||||||||
Total current assets |
1,295,716 | 745,508 | 607,377 | (1,363,206 | ) | 1,285,395 | ||||||||||
Property, plant and equipment, net |
61,640 | 297,009 | 154,030 | — | 512,679 | |||||||||||
Goodwill |
— | 813,187 | 407,128 | — | 1,220,315 | |||||||||||
Intangible assets, net |
— | 1,605,290 | 346,514 | — | 1,951,804 | |||||||||||
Other assets |
— | 85,860 | 1,194 | — | 87,054 | |||||||||||
Intercompany loan receivable |
355,141 | 40,734 | — | (395,875 | ) | — | ||||||||||
Investments in subsidiaries |
2,913,403 | — | — | (2,913,403 | ) | — | ||||||||||
Total assets |
$ | 4,625,900 | $ | 3,587,588 | $ | 1,516,243 | $ | (4,672,484 | ) | $ | 5,057,247 | |||||
Liabilities and Stockholder's Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Current portion of long-term debt |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||
Accounts payable |
— | 154,374 | 58,174 | — | 212,548 | |||||||||||
Intercompany |
— | 1,363,211 | — | (1,363,211 | ) | — | ||||||||||
Accrued expenses and other current liabilities |
13,751 | 111,489 | 65,112 | — | 190,352 | |||||||||||
Total current liabilities |
13,751 | 1,629,074 | 123,286 | (1,363,211 | ) | 402,900 | ||||||||||
Intercompany loan payable |
— | — | 395,870 | (395,870 | ) | — | ||||||||||
Long-term debt, net of current portion |
2,157,500 | — | — | — | 2,157,500 | |||||||||||
Deferred income taxes |
717,959 | — | 8,447 | — | 726,406 | |||||||||||
Other liabilities |
31,458 | 9,576 | 24,175 | — | 65,209 | |||||||||||
Total liabilities |
2,920,668 | 1,638,650 | 551,778 | (1,759,081 | ) | 3,352,015 | ||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholder's Equity: |
||||||||||||||||
Common stock |
— | — | — | — | — | |||||||||||
Capital in excess of par |
1,554,883 | 352,019 | 301,271 | (653,290 | ) | 1,554,883 | ||||||||||
Retained earnings |
168,943 | 1,596,919 | 664,157 | (2,261,076 | ) | 168,943 | ||||||||||
Accumulated other comprehensive (loss)/income |
(18,594 | ) | — | (963 | ) | 963 | (18,594 | ) | ||||||||
Total stockholder's equity |
1,705,232 | 1,948,938 | 964,465 | (2,913,403 | ) | 1,705,232 | ||||||||||
Total liabilities and stockholder's equity |
$ | 4,625,900 | $ | 3,587,588 | $ | 1,516,243 | $ | (4,672,484 | ) | $ | 5,057,247 | |||||
F-42
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Successor
Condensed Consolidating Balance Sheet
As of September 30, 2011
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 261,098 | $ | 3,288 | $ | 128,949 | $ | — | $ | 393,335 | ||||||
Accounts receivable, net |
— | 112,841 | 25,190 | — | 138,031 | |||||||||||
Intercompany |
1,454,068 | — | 111,471 | (1,565,539 | ) | — | ||||||||||
Inventories |
— | 517,121 | 150,262 | — | 667,383 | |||||||||||
Deferred income taxes |
— | 23,706 | 634 | — | 24,340 | |||||||||||
Other current assets |
— | 31,615 | 24,523 | — | 56,138 | |||||||||||
Current assets of discontinued operations |
— | — | 15,018 | — | 15,018 | |||||||||||
Total current assets |
1,715,166 | 688,571 | 456,047 | (1,565,539 | ) | 1,294,245 | ||||||||||
Property, plant and equipment, net |
46,507 | 287,356 | 140,709 | — | 474,572 | |||||||||||
Goodwill |
— | 813,315 | 398,884 | — | 1,212,199 | |||||||||||
Intangible assets, net |
— | 1,645,970 | 340,431 | — | 1,986,401 | |||||||||||
Other assets |
— | 106,622 | 58 | — | 106,680 | |||||||||||
Intercompany loan receivable |
325,985 | 40,734 | — | (366,719 | ) | — | ||||||||||
Investments in subsidiaries |
2,609,651 | — | — | (2,609,651 | ) | — | ||||||||||
Noncurrent assets of discontinued operations |
— | — | 25,173 | — | 25,173 | |||||||||||
Total assets |
$ | 4,697,309 | $ | 3,582,568 | $ | 1,361,302 | $ | (4,541,909 | ) | $ | 5,099,270 | |||||
Liabilities and Stockholder's Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Current portion of long-term debt |
$ | 17,500 | $ | — | $ | — | $ | — | $ | 17,500 | ||||||
Accounts payable |
— | 131,307 | 54,848 | — | 186,155 | |||||||||||
Intercompany |
— | 1,565,539 | — | (1,565,539 | ) | — | ||||||||||
Accrued expenses and other current liabilities |
11,262 | 123,242 | 51,673 | — | 186,177 | |||||||||||
Current liabilities of discontinued operations |
— | — | 4,714 | — | 4,714 | |||||||||||
Total current liabilities |
28,762 | 1,820,088 | 111,235 | (1,565,539 | ) | 394,546 | ||||||||||
Intercompany loan payable |
— | — | 366,718 | (366,718 | ) | — | ||||||||||
Long-term debt, net of current portion |
2,369,375 | — | — | — | 2,369,375 | |||||||||||
Deferred income taxes |
742,968 | — | 7,630 | — | 750,598 | |||||||||||
Other liabilities |
19,309 | 12,936 | 15,225 | — | 47,470 | |||||||||||
Noncurrent liabilities of discontinued operations |
— | — | 386 | — | 386 | |||||||||||
Total liabilities |
3,160,414 | 1,833,024 | 501,194 | (1,932,257 | ) | 3,562,375 | ||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholder's Equity: |
||||||||||||||||
Common stock |
— | — | — | — | — | |||||||||||
Capital in excess of par |
1,552,188 | 352,020 | 301,271 | (653,291 | ) | 1,552,188 | ||||||||||
Retained earnings |
22,472 | 1,397,524 | 572,993 | (1,970,517 | ) | 22,472 | ||||||||||
Accumulated other comprehensive (loss)/income |
(37,765 | ) | — | (14,156 | ) | 14,156 | (37,765 | ) | ||||||||
Total stockholder's equity |
1,536,895 | 1,749,544 | 860,108 | (2,609,652 | ) | 1,536,895 | ||||||||||
Total liabilities and stockholder's equity |
$ | 4,697,309 | $ | 3,582,568 | $ | 1,361,302 | $ | (4,541,909 | ) | $ | 5,099,270 | |||||
F-43
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Successor
Condensed Consolidating Statement of Income
Year Ended September 30, 2012
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | — | $ | 2,173,443 | $ | 947,941 | $ | (121,651 | ) | $ | 2,999,733 | |||||
Costs and expenses: |
||||||||||||||||
Cost of sales |
— | 1,303,122 | 426,965 | (121,651 | ) | 1,608,436 | ||||||||||
Advertising, promotion and catalog |
— | 134,076 | 30,222 | — | 164,298 | |||||||||||
Selling, general and administrative |
77,156 | 431,047 | 324,426 | — | 832,629 | |||||||||||
|
77,156 | 1,868,245 | 781,613 | (121,651 | ) | 2,605,363 | ||||||||||
Income/(loss) from operations |
(77,156 | ) | 305,198 | 166,328 | — | 394,370 | ||||||||||
Other income (expense): |
||||||||||||||||
Equity in income of subsidiaries |
290,559 | — | — | (290,559 | ) | — | ||||||||||
Intercompany interest |
4,769 | — | (4,769 | ) | — | — | ||||||||||
Interest |
(158,584 | ) | — | — | — | (158,584 | ) | |||||||||
Miscellaneous, net |
365 | 1,564 | (2,932 | ) | — | (1,003 | ) | |||||||||
|
137,109 | 1,564 | (7,701 | ) | (290,559 | ) | (159,587 | ) | ||||||||
Income from continuing operations before income taxes |
59,953 | 306,762 | 158,627 | (290,559 | ) | 234,783 | ||||||||||
(Benefit)/provision for income taxes |
(86,518 | ) | 107,367 | 44,415 | — | 65,264 | ||||||||||
Income before discontinued operations |
146,471 | 199,395 | 114,212 | (290,559 | ) | 169,519 | ||||||||||
Loss from discontinued operations, net of income taxes |
— | — | (23,048 | ) | — | (23,048 | ) | |||||||||
Net income |
$ | 146,471 | $ | 199,395 | $ | 91,164 | $ | (290,559 | ) | $ | 146,471 | |||||
F-44
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Successor
Condensed Consolidating Statement of Income
Year Ended September 30, 2011
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | — | $ | 2,129,211 | $ | 867,339 | $ | (132,123 | ) | $ | 2,864,427 | |||||
Costs and expenses: |
||||||||||||||||
Cost of sales |
— | 1,349,302 | 424,708 | (132,123 | ) | 1,641,887 | ||||||||||
Advertising, promotion and catalog |
— | 120,882 | 31,139 | — | 152,021 | |||||||||||
Selling, general and administrative |
73,315 | 404,659 | 310,745 | — | 788,719 | |||||||||||
Merger expenses |
43,857 | — | 622 | — | 44,479 | |||||||||||
|
117,172 | 1,874,843 | 767,214 | (132,123 | ) | 2,627,106 | ||||||||||
Income/(loss) from operations |
(117,172 | ) | 254,368 | 100,125 | — | 237,321 | ||||||||||
Other income (expense): |
||||||||||||||||
Equity in income of subsidiaries |
227,054 | — | — | (227,054 | ) | — | ||||||||||
Intercompany interest |
10,608 | — | (10,608 | ) | — | — | ||||||||||
Interest |
(195,527 | ) | — | (39 | ) | — | (195,566 | ) | ||||||||
Miscellaneous, net |
(33 | ) | 4,977 | (3,011 | ) | — | 1,933 | |||||||||
|
42,102 | 4,977 | (13,658 | ) | (227,054 | ) | (193,633 | ) | ||||||||
Income/(loss) from continuing operations before income taxes |
(75,070 | ) | 259,345 | 86,467 | (227,054 | ) | 43,688 | |||||||||
(Benefit)/provision for income taxes |
(104,989 | ) | 90,769 | 25,209 | — | 10,989 | ||||||||||
Income before discontinued operations |
29,919 | 168,576 | 61,258 | (227,054 | ) | 32,699 | ||||||||||
Loss from discontinued operations, net of income taxes |
— | — | (2,780 | ) | — | (2,780 | ) | |||||||||
Net income |
$ | 29,919 | $ | 168,576 | $ | 58,478 | $ | (227,054 | ) | $ | 29,919 | |||||
F-45
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Predecessor
Condensed Consolidating Statement of Income
Year Ended September 30, 2010
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | — | $ | 2,067,065 | $ | 712,495 | $ | (73,723 | ) | $ | 2,705,837 | |||||
Costs and expenses: |
||||||||||||||||
Cost of sales |
— | 1,225,826 | 320,992 | (73,723 | ) | 1,473,095 | ||||||||||
Advertising, promotion and catalog |
— | 112,827 | 23,936 | — | 136,763 | |||||||||||
Selling, general and administrative |
74,129 | 355,011 | 265,663 | — | 694,803 | |||||||||||
Merger expenses |
45,903 | — | — | — | 45,903 | |||||||||||
|
120,032 | 1,693,664 | 610,591 | (73,723 | ) | 2,350,564 | ||||||||||
Income/(loss) from operations |
(120,032 | ) | 373,401 | 101,904 | — | 355,273 | ||||||||||
Other income (expense): |
||||||||||||||||
Equity in income of subsidiaries |
308,889 | — | — | (308,889 | ) | — | ||||||||||
Intercompany interest |
8,754 | — | (8,754 | ) | — | — | ||||||||||
Interest |
(29,388 | ) | — | (720 | ) | — | (30,108 | ) | ||||||||
Miscellaneous, net |
123 | 4,445 | (441 | ) | — | 4,127 | ||||||||||
|
288,378 | 4,445 | (9,915 | ) | (308,889 | ) | (25,981 | ) | ||||||||
Income from continuing operations before income taxes |
168,346 | 377,846 | 91,989 | (308,889 | ) | 329,292 | ||||||||||
(Benefit)/provision for income taxes |
(45,324 | ) | 132,245 | 27,349 | — | 114,270 | ||||||||||
Income before discontinued operations |
213,670 | 245,601 | 64,640 | (308,889 | ) | 215,022 | ||||||||||
Loss from discontinued operations, net of income taxes |
— | — | (1,352 | ) | — | (1,352 | ) | |||||||||
Net income |
$ | 213,670 | $ | 245,601 | $ | 63,288 | $ | (308,889 | ) | $ | 213,670 | |||||
F-46
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Successor
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended September 30, 2012
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||
Income from continuing operations |
$ | 146,471 | $ | 199,395 | $ | 91,164 | $ | (290,559 | ) | $ | 146,471 | |||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
||||||||||||||||
Equity in earnings of subsidiaries |
(290,559 | ) | — | — | 290,559 | — | ||||||||||
Impairments and disposals of assets, net |
— | 266 | 498 | — | 764 | |||||||||||
Loss from discontinued operations |
— | — | 23,048 | — | 23,048 | |||||||||||
Depreciation of property, plant and equipment |
5,275 | 37,603 | 15,433 | — | 58,311 | |||||||||||
Amortization of intangible assets |
— | 40,680 | 3,280 | — | 43,960 | |||||||||||
Foreign currency translation gain |
(12 | ) | — | (277 | ) | — | (289 | ) | ||||||||
Stock-based compensation |
2,482 | 72 | 126 | — | 2,680 | |||||||||||
Amortization of financing fees |
14,411 | — | — | — | 14,411 | |||||||||||
Write off of financing fees |
9,289 | — | — | — | 9,289 | |||||||||||
Allowance for doubtful accounts |
— | 297 | — | — | 297 | |||||||||||
Inventory reserves |
— | (2,652 | ) | — | — | (2,652 | ) | |||||||||
Deferred income taxes |
— | (23,852 | ) | 6,795 | — | (17,057 | ) | |||||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||||||||||
Accounts receivable |
— | (18,843 | ) | (3,537 | ) | — | (22,380 | ) | ||||||||
Inventories |
— | (28,139 | ) | (16,651 | ) | — | (44,790 | ) | ||||||||
Other assets |
— | 2,066 | (4,213 | ) | — | (2,147 | ) | |||||||||
Accounts payable |
— | 14,220 | 1,877 | — | 16,097 | |||||||||||
Accrued expenses and other liabilities |
— | (14,924 | ) | 20,415 | — | 5,491 | ||||||||||
Intercompany accounts |
279,288 | (153,706 | ) | (125,582 | ) | — | — | |||||||||
Cash provided by operating activities of continuing operations |
166,645 | 52,483 | 12,376 | — | 231,504 | |||||||||||
Cash provided by operating activities of discontinued operations |
— | — | 2,546 | — | 2,546 | |||||||||||
Net cash provided by operating activities |
166,645 | 52,483 | 14,922 | — | 234,050 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchase of property, plant and equipment |
(20,287 | ) | (41,182 | ) | (24,845 | ) | — | (86,314 | ) | |||||||
Net proceeds from sale of discontinued operations |
515 | — | — | — | 515 | |||||||||||
Net cash used in investing activities of continuing operations |
(19,772 | ) | (41,182 | ) | (24,845 | ) | — | (85,799 | ) | |||||||
Cash flows from financing activities: |
||||||||||||||||
Principal payments under long-term debt agreements and capital leases |
(224,325 | ) | — | (5,050 | ) | — | (229,375 | ) | ||||||||
Proceeds from stock options exercised |
15 | — | — | — | 15 | |||||||||||
Net cash used in financing activities |
(224,310 | ) | — | (5,050 | ) | — | (229,360 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
— | — | 1,839 | — | 1,839 | |||||||||||
Net (decrease) increase in cash and cash equivalents |
(77,437 | ) | 11,301 | (13,134 | ) | — | (79,270 | ) | ||||||||
Change in cash for discontinued operations |
— | — | 1,071 | — | 1,071 | |||||||||||
Cash and cash equivalents at beginning of year |
261,098 | 3,288 | 128,949 | — | 393,335 | |||||||||||
Cash and cash equivalents at end of year |
$ | 183,661 | $ | 14,589 | $ | 116,886 | $ | — | $ | 315,136 | ||||||
F-47
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Successor
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended September 30, 2011
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||
Income from continuing operations |
$ | 29,919 | $ | 168,576 | $ | 58,478 | $ | (227,054 | ) | $ | 29,919 | |||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
||||||||||||||||
Equity in earnings of subsidiaries |
(227,054 | ) | — | — | 227,054 | — | ||||||||||
Impairments and disposals of assets, net |
— | 1,555 | 549 | — | 2,104 | |||||||||||
Loss from discontinued operations |
— | — | 2,780 | — | 2,780 | |||||||||||
Depreciation of property, plant and equipment |
4,840 | 36,211 | 14,538 | — | 55,589 | |||||||||||
Amortization of intangible assets |
— | 40,405 | 3,681 | — | 44,086 | |||||||||||
Foreign currency translation loss/(gain) |
(331 | ) | — | 395 | — | 64 | ||||||||||
Stock-based compensation |
1,506 | 179 | 103 | — | 1,788 | |||||||||||
Amortization of financing fees |
15,076 | — | — | — | 15,076 | |||||||||||
Write off of financing fees |
20,824 | — | — | — | 20,824 | |||||||||||
Allowance for doubtful accounts |
— | 5,468 | — | — | 5,468 | |||||||||||
Amortization of incremental inventory fair value |
— | 83,952 | 38,152 | — | 122,104 | |||||||||||
Inventory reserves |
— | 22,364 | — | — | 22,364 | |||||||||||
Deferred income taxes |
— | (30,934 | ) | — | — | (30,934 | ) | |||||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||||||||||
Accounts receivable |
— | (10,132 | ) | 440 | — | (9,692 | ) | |||||||||
Inventories |
— | (10,887 | ) | (28,047 | ) | — | (38,934 | ) | ||||||||
Other assets |
— | 4,303 | 4,640 | — | 8,943 | |||||||||||
Accounts payable |
— | 25,261 | 2,840 | — | 28,101 | |||||||||||
Accrued expenses and other liabilities |
— | (14,936 | ) | 18,018 | — | 3,082 | ||||||||||
Intercompany accounts |
321,271 | (297,364 | ) | (23,907 | ) | — | — | |||||||||
Cash provided by operating activities of continuing operations |
166,051 | 24,021 | 92,660 | — | 282,732 | |||||||||||
Cash provided by operating activities of discontinued operations |
— | — | 1,905 | — | 1,905 | |||||||||||
Net cash provided by operating activities |
166,051 | 24,021 | 94,565 | — | 284,637 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchase of property, plant and equipment |
(1,652 | ) | (17,443 | ) | (24,904 | ) | — | (43,999 | ) | |||||||
Cash paid for acquisitions |
(3,983,806 | ) | (3,196 | ) | (807 | ) | — | (3,987,809 | ) | |||||||
Cash used in investing activities of continuing operations |
(3,985,458 | ) | (20,639 | ) | (25,711 | ) | — | (4,031,808 | ) | |||||||
Cash used in investing activities of discontinued operations |
— | — | (235 | ) | — | (235 | ) | |||||||||
Net cash used in investing activities |
(3,985,458 | ) | (20,639 | ) | (25,946 | ) | — | (4,032,043 | ) | |||||||
Cash flows from financing activities: |
||||||||||||||||
Principal payments under long-term debt agreements and capital leases |
(13,125 | ) | (429 | ) | — | — | (13,554 | ) | ||||||||
Payments for financing fees |
(138,227 | ) | — | — | — | (138,227 | ) | |||||||||
Proceeds from borrowings |
2,400,000 | — | — | — | 2,400,000 | |||||||||||
Capital contribution |
1,550,400 | — | — | — | 1,550,400 | |||||||||||
Cash provided by (used in) financing activities of continuing operations |
3,799,048 | (429 | ) | — | — | 3,798,619 | ||||||||||
Cash used in financing activities of disontinued operations |
— | — | (381 | ) | — | (381 | ) | |||||||||
Net cash provided by (used in) financing activities |
3,799,048 | (429 | ) | (381 | ) | — | 3,798,238 | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
— | 335 | (3,244 | ) | — | (2,909 | ) | |||||||||
Net (decrease) increase in cash and cash equivalents |
(20,359 | ) | 3,288 | 64,994 | — | 47,923 | ||||||||||
Change in cash for discontinued operations |
— | — | 3,734 | — | 3,734 | |||||||||||
Cash and cash equivalents at beginning of year |
281,457 | — | 60,221 | — | 341,678 | |||||||||||
Cash and cash equivalents at end of year |
$ | 261,098 | $ | 3,288 | $ | 128,949 | $ | — | $ | 393,335 | ||||||
F-48
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
22. Condensed Consolidating Financial Statements of Guarantors of the Notes (Continued)
Predecessor
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended September 30, 2010
| |
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||
Income from continuing operations |
$ | 213,670 | $ | 245,601 | $ | 63,288 | $ | (308,889 | ) | $ | 213,670 | |||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
||||||||||||||||
Equity in earnings of subsidiaries |
(308,889 | ) | — | — | 308,889 | — | ||||||||||
Impairments and disposals of assets, net |
— | 10,033 | 384 | — | 10,417 | |||||||||||
Loss from discontinued operations |
— | — | 1,352 | 1,352 | ||||||||||||
Depreciation of property, plant and equipment |
4,909 | 30,548 | 12,048 | — | 47,505 | |||||||||||
Amortization of intangible assets |
— | 14,324 | 1,517 | 15,841 | ||||||||||||
Foreign currency translation loss/(gain) |
1,234 | — | (192 | ) | — | 1,042 | ||||||||||
Stock-based compensation |
21,865 | 617 | 627 | — | 23,109 | |||||||||||
Amortization of financing fees |
1,412 | — | — | — | 1,412 | |||||||||||
Allowance for doubtful accounts |
— | 1,256 | — | — | 1,256 | |||||||||||
Inventory reserves |
— | 934 | — | — | 934 | |||||||||||
Deferred income taxes |
— | (17,751 | ) | 4,751 | — | (13,000 | ) | |||||||||
Excess income tax benefit from exercise of stock options |
(6,646 | ) | — | — | — | (6,646 | ) | |||||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||||||||||
Accounts receivable |
— | 21,759 | 1,229 | — | 22,988 | |||||||||||
Inventories |
— | (5,106 | ) | (13,267 | ) | — | (18,373 | ) | ||||||||
Other assets |
— | 2,890 | (6,645 | ) | — | (3,755 | ) | |||||||||
Accounts payable |
— | (4,959 | ) | 22,109 | — | 17,150 | ||||||||||
Accrued expenses and other liabilities |
— | 39,131 | 12,977 | — | 52,108 | |||||||||||
Intercompany accounts |
353,896 | (317,852 | ) | (36,044 | ) | — | — | |||||||||
Cash provided by operating activities of continuing operations |
281,451 | 21,425 | 64,134 | — | 367,010 | |||||||||||
Cash provided by operating activities of discontinued operations |
— | — | 4,742 | — | 4,742 | |||||||||||
Net cash provided by operating activities |
281,451 | 21,425 | 68,876 | — | 371,752 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchase of property, plant and equipment |
(1,829 | ) | (21,279 | ) | (46,346 | ) | — | (69,454 | ) | |||||||
Proceeds from sale of investments |
2,000 | — | — | — | 2,000 | |||||||||||
Cash paid for acquisitions, net of cash acquired |
— | — | (14,200 | ) | — | (14,200 | ) | |||||||||
Cash provided by (used in) investing activities of continuing operations |
171 | (21,279 | ) | (60,546 | ) | — | (81,654 | ) | ||||||||
Cash provided by investing activities of discontinued operations |
(449 | ) | (449 | ) | ||||||||||||
Net cash provided by (used in) investing activities |
171 | (21,279 | ) | (60,995 | ) | — | (82,103 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||||||
Principal payments under long-term debt agreements and capital leases |
(56,264 | ) | (146 | ) | — | — | (56,410 | ) | ||||||||
Termination of interest rate swaps |
(5,813 | ) | — | — | — | (5,813 | ) | |||||||||
Payments for financing fees |
(1,524 | ) | — | — | — | (1,524 | ) | |||||||||
Excess income tax benefit from exercise of stock options |
6,646 | — | — | — | 6,646 | |||||||||||
Proceeds from stock options exercised |
10,621 | — | — | — | 10,621 | |||||||||||
Cash used in financing activities of continuing operations |
(46,334 | ) | (146 | ) | — | — | (46,480 | ) | ||||||||
Cash used in financing activities of discontinued operations |
— | — | (747 | ) | — | (747 | ) | |||||||||
Net cash used in financing activities |
(46,334 | ) | (146 | ) | (747 | ) | — | (47,227 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
— | — | (1,940 | ) | — | (1,940 | ) | |||||||||
Net increase in cash and cash equivalents |
235,288 | — | 5,194 | — | 240,482 | |||||||||||
Change in cash for discontinued operations |
— | — | 2,350 | — | 2,350 | |||||||||||
Cash and cash equivalents at beginning of year |
46,169 | — | 52,677 | — | 98,846 | |||||||||||
Cash and cash equivalents at end of year |
$ | 281,457 | $ | — | $ | 60,221 | $ | — | $ | 341,678 | ||||||
F-49
NBTY, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share amounts)
23. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for fiscal 2012 and 2011 (amounts may not equal fiscal year totals due to rounding):
| |
Quarter ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2011 |
March 31, 2012 |
June 30, 2012 |
September 30, 2012 |
|||||||||
Fiscal 2012: |
|||||||||||||
Net sales |
$ | 715,209 | $ | 752,986 | $ | 782,316 | $ | 749,222 | |||||
Gross profit |
325,627 | 348,687 | 368,430 | 348,553 | |||||||||
Income from continuing operations before income taxes |
39,251 | 52,086 | 78,659 | 64,787 | |||||||||
Income/(loss) from discontinued operations, net of taxes |
674 | (768 | ) | (13,925 | ) | (9,029 | ) | ||||||
Net income |
27,083 | 34,193 | 41,239 | 43,956 | |||||||||
| |
Quarter ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2010(1)(2) |
March 31, 2011(1) |
June 30, 2011(1) |
September 30, 2011 |
|||||||||
Fiscal 2011: |
|||||||||||||
Net sales |
$ | 713,192 | $ | 684,261 | $ | 740,897 | $ | 726,077 | |||||
Gross profit |
215,487 | 316,386 | 354,119 | 336,548 | |||||||||
Income/(loss) from continuing operations before income taxes |
(86,086 | ) | (2,777 | ) | 80,986 | 51,565 | |||||||
Income/(loss) from discontinued operations, net of taxes |
1,428 | (1,590 | ) | (668 | ) | (1,950 | ) | ||||||
Net income/(loss) |
(63,436 | ) | (20,161 | ) | 75,628 | 37,889 | |||||||
- (1)
- Includes
merger expenses of $38,874, $4,991, and $614 in the quarters ended December 31, 2010, March 31, 2011 and
June 30, 2011, respectively, relating to the Merger. (See Note 3 for additional information.)
- (2)
- Includes an increase in cost of sales of $122,104 relating to an increase in acquired inventory to its fair value as required under acquisition accounting relating to the Merger.
24. Subsequent Events
On November 26, 2012, we acquired all of the outstanding shares of Balance Bar Company, a company that manufactures and markets nutritional bars, for a purchase price of $78,000 of cash, subject to certain post-closing adjustments. We used funds drawn from the revolving portion of our senior secured credit facilities to finance this acquisition.
F-50
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of NBTY, Inc.:
In our opinion, the statements of operations, stockholders' deficit and cash flows present fairly, in all material respects, the results of operations and cash flows of Alphabet Merger Sub, Inc. for the period from May 11, 2010 (date of inception) to September 30, 2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/
PricewaterhouseCoopers LLP
New
York, New York
March 21, 2011
F-51
Alphabet Merger Sub, Inc.
Statement of Operations
(in thousands)
| |
May 11, 2010 (date of inception) to September 30, 2010 |
|||
|---|---|---|---|---|
Merger expenses |
$ | 11,286 | ||
Loss before income taxes |
(11,286 | ) | ||
Benefit for income taxes |
3,839 | |||
Net loss |
$ | (7,447 | ) | |
The accompanying notes are an integral part of these financial statements.
F-52
Alphabet Merger Sub, Inc.
Statement of Stockholders' Deficit
(in thousands, except share amounts)
| |
Common Stock | |
|
|
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Number of Shares |
Amount | Capital in Excess of Par |
Accumulated deficit |
Total Stockholders' deficit |
|||||||||||
Balance at inception (May 11, 2010) |
— | $ | — | $ | — | $ | — | $ | — | |||||||
Initial capitalization |
1,000 | — | 1 | 1 | ||||||||||||
Net loss |
(7,447 | ) | (7,447 | ) | ||||||||||||
Balance at September 30, 2010 |
1,000 | $ | — | $ | 1 | $ | (7,447 | ) | $ | (7,446 | ) | |||||
The accompanying notes are an integral part of these financial statements.
F-53
Alphabet Merger Sub, Inc.
Statement of Cash Flows
(in thousands)
| |
May 11, 2010 (date of inception) to September 30, 2010 |
|||
|---|---|---|---|---|
Cash flows from operating activities: |
||||
Net loss |
$ | (7,447 | ) | |
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
Deferred income taxes |
(3,839 | ) | ||
Changes in operating assets and liabilities: |
||||
Other assets |
(3,712 | ) | ||
Accrued expenses |
14,998 | |||
Net cash provided by operating activities |
— | |||
Cash flows from financing activities: |
||||
Initial capitalization |
1 | |||
Net cash provided by financing activities |
1 | |||
Net increase in cash |
1 | |||
Cash at beginning of period |
— | |||
Cash at end of period |
$ | 1 | ||
The accompanying notes are an integral part of these financial statements.
F-54
Alphabet Merger Sub, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
1. Background and Summary of Significant Accounting Policies
Basis of Presentation: The accompanying financial statements reflect the results of operations and cash flows of Alphabet Merger Sub, Inc. ("we," "our," "us," "Merger Sub" or the "Company") for the period May 11, 2010 (date of inception) to September 30, 2010.
Organization: The Company was incorporated on July 13, 2010 as a Delaware corporation and is a wholly-owned subsidiary of Alphabet Holding Company, Inc. ("Holdings"). Holdings was formed by an affiliate of TC Group, L.L.C. (d/b/a The Carlyle Group). Holdings and Merger Sub were formed exclusively for the purpose of entering into a merger agreement with NBTY, Inc. ("NBTY").
On October 1, 2010, pursuant to an Agreement and Plan of Merger, dated July 15, 2010, among NBTY, Merger Sub and Holdings, Merger Sub merged with and into NBTY with NBTY as the surviving corporation (also referred herein as the "Merger" or "Acquisition") for a net purchase price of approximately $3,635,949. For accounting purposes, Merger Sub was determined to be the accounting acquirer.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other Assets: Other assets consist of deferred financing costs associated with the Company's debt issuance on October 1, 2010, which will be amortized over the applicable life of the debt using the effective interest rate method of amortization.
Accrued Expenses: Accrued expenses consist of legal and professional advisory costs incurred in connection with the Merger.
Income Taxes: Deferred income taxes are provided at the currently enacted income tax rates for the difference between the financial statement and income tax basis of assets and liabilities.
2. Merger Expenses
Merger expenses consist of legal and professional advisory costs incurred in connection with the Acquisition.
3. Income Taxes
Merger Sub is treated as a transitory entity and is ignored for federal and state income tax purposes. Accordingly, Merger Sub's tax deductible expenses and related deferred tax asset were assumed by NBTY on the effective date of the Merger. The effective income tax rate of Merger Sub is 34%. The effective tax rate is comprised of the federal statutory rate of 35% and the state tax rate, net of federal benefit, of 5% offset by non-deductible merger costs of 4%.
F-55
Alphabet Merger Sub, Inc.
Notes to Financial Statements (Continued)
(in thousands, except per share amounts)
4. Litgation
Sale of the Company
On July 22, 2010 and on August 10, 2010, respectively, plaintiffs filed two actions, captioned Philip Gottlieb v. NBTY, Inc., et al, ("Gottlieb"), and Bredthauer v. NBTY, Inc., et al.,("Bredthauer"), each as a purported class action against the Company, the members of its Board of Directors, The Carlyle Group and certain Carlyle-related entities (The Carlyle Group and the Carlyle-related entities, collectively the "Carlyle Group"), challenging the Board of Directors' decision to sell the Company to the Carlyle Group for the price of $55 per share. The complaint, in each of these cases, alleged that this price per share did not represent fair value for the Company and sought to enjoin the anticipated sale and to invalidate certain related transactions. The Bredthauer lawsuit, filed in the Supreme Court of the State of New York, County of Suffolk, was dismissed by Plaintiff. Plaintiff then joined in the Gottlieb lawsuit, filed in the Supreme Court of the State of New York, County of Nassau. On January 11, 2011, the parties entered into a stipulation of settlement providing for the proposed settlement and dismissal with prejudice of the remaining action, which is subject to, among other things, court approval following notice to the members of the putative class. If approved by the court, the settlement provides for, among other things, our payment of certain attorneys' fees and expenses if awarded by the court. We believe the claims to be without merit.
F-56
SCHEDULE II
NBTY, INC.
Valuation and Qualifying Accounts
Column A
|
Column B | Column C | Column D | Column E | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
Additions | |
|
||||||||||||
Description
|
Balance at beginning of period |
Charged to costs and expenses |
Charged to other accounts |
Deductions | Balance at end of period |
|||||||||||
Successor: |
||||||||||||||||
Fiscal year ended September 30, 2012: |
||||||||||||||||
Inventory reserves |
$ | 22,364 | $ | (2,652 | ) | $ | — | $ | — | $ | 19,712 | |||||
Allowance for doubtful accounts |
$ | 5,376 | $ | 297 | $ | — | $ | (429 | ) | $ | 5,244 | |||||
Promotional program incentive allowance |
$ | 74,593 | $ | 307,371 | $ | — | $ | (310,119 | ) | $ | 71,845 | |||||
Allowance for sales returns |
$ | 10,793 | $ | 28,333 | $ | — | $ | (28,766 | )(b) | $ | 10,360 | |||||
Valuation allowance for deferred tax assets |
$ | 15,404 | $ | 1,240 | $ | — | $ | (1,777 | ) | $ | 14,867 | |||||
Successor: |
||||||||||||||||
Fiscal year ended September 30, 2011: |
||||||||||||||||
Inventory reserves |
$ | — | $ | 22,364 | $ | — | $ | — | $ | 22,364 | ||||||
Allowance for doubtful accounts |
$ | — | $ | 5,376 | $ | — | $ | — | $ | 5,376 | ||||||
Promotional program incentive allowance |
$ | 56,968 | $ | 292,298 | $ | — | $ | (274,673 | ) | $ | 74,593 | |||||
Allowance for sales returns |
$ | 9,457 | $ | 27,562 | $ | — | $ | (26,226 | )(b) | $ | 10,793 | |||||
Valuation allowance for deferred tax assets |
$ | 14,618 | $ | 1,105 | $ | — | $ | (319 | ) | $ | 15,404 | |||||
Predecessor: |
||||||||||||||||
Fiscal year ended September 30, 2010: |
||||||||||||||||
Inventory reserves |
$ | 24,097 | $ | 934 | $ | — | $ | — | $ | 25,031 | ||||||
Allowance for doubtful accounts |
$ | 3,723 | $ | 1,256 | $ | 822 | $ | (226 | )(a) | $ | 5,575 | |||||
Promotional program incentive allowance |
$ | 49,071 | $ | 244,985 | $ | — | $ | (237,088 | ) | $ | 56,968 | |||||
Allowance for sales returns |
$ | 11,707 | $ | 25,203 | $ | — | $ | (27,453 | )(b) | $ | 9,457 | |||||
Valuation allowance for deferred tax assets |
$ | 13,063 | $ | 1,897 | $ | — | $ | (342 | ) | $ | 14,618 | |||||
- (a)
- Uncollectible
accounts written off.
- (b)
- Represents actual product returns.
S-1