Vitamin Village, Inc. - Page 17

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          company’s compensation-to-sales ratio of 7.1 percent;19 and (4)             
          the guideline companies’ net margins.  The financial information            
          used in the four methods was obtained from the guideline                    
          companies’ financial statements.  The table below reflects Mr.              
          Hakala’s range of reasonable compensation for Mr. Reeves,                   
          computed by applying the four methods to the guideline companies’           
          financial information:                                                      

          0.002365149(X).  The regression equation for 1996 was Y =                   
          325357.1548 + 0.002408813(X).  Y equals CEO compensation and X              
          equals revenue.  Mr. Hakala’s report did not explain how he                 
          configured the variables used in the regression analysis.                   
               19 The sales ratio is CEO compensation divided by company              
          sales, expressed as a percent.  Mr. Hakala’s report stated that             
          he used the sales ratio from only one of the five guideline                 
          companies, Natural Health Trends Corp (Natural Health), because             
          it was the highest of the five companies’ ratios.  Natural                  
          Health’s sales ratios for its FY 1995 and FY 1996 were 9.4                  
          percent and 7.1 percent, respectively.  Without indicating his              
          reasoning, Mr. Hakala applied Natural Health’s sales ratio of 7.1           
          percent to petitioner’s sales for both FY 1995 and FY 1996.                 
          However, he should have computed the guideline company’s sales              
          ratio for FY 1995 by multiplying Natural Health’s sales ratio of            
          9.4 percent by petitioner’s sales for FY 1995, not the sales                
          ratio of 7.1 percent.  This computation would make the FY 1995              
          guideline company percent of sales $1,175,186, instead of                   
               Because the Court does not consider petitioner and UMI as a            
          single company, i.e., combine their income, reasonable                      
          compensation under the “percent of sales” method for petitioner             
          for FY 1996 is $405,388 instead of $409,323.                                

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