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TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2010

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                             to                            

Commission File Number: 001-31788

LOGO

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.)

2100 Smithtown Avenue,
Ronkonkoma, New York 11779
(Address of principal executive offices) (Zip Code)

(631) 567-9500
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý    NO o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(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 Exchange Act). YES o    NO ý

        The number of shares of Common Stock (par value $.008 per share) outstanding as of August 2, 2010 was 63,418,619.


Table of Contents


NBTY, INC.
INDEX

 
   
  Page  

PART I. FINANCIAL INFORMATION

       

Item 1.

 

Financial Statements (Unaudited)

   
3
 

 

Condensed Consolidated Balance Sheets

   
3
 

 

Condensed Consolidated Statements of Income

   
4
 

 

Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income

   
5
 

 

Condensed Consolidated Statements of Cash Flows

   
6
 

 

Notes to Condensed Consolidated Financial Statements

   
7
 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

   
28
 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   
44
 

Item 4.

 

Controls and Procedures

   
45
 

PART II. OTHER INFORMATION

       

Item 1.

 

Legal Proceedings

   
46
 

Item 1A.

 

Risk Factors

   
48
 

Item 6.

 

Exhibits

   
50
 

Signatures

   
51
 

Exhibits

       

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

        

NBTY, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)

 
  June 30,
2010
  September 30,
2009
 

Assets

             

Current assets:

             
 

Cash and cash equivalents

  $ 293,632   $ 106,001  
 

Accounts receivable, net

    146,233     155,863  
 

Inventories

    642,305     658,534  
 

Deferred income taxes

    27,912     28,154  
 

Other current assets

    51,369     49,999  
           
   

Total current assets

    1,161,451     998,551  

Property, plant and equipment, net

   
367,661
   
373,817
 

Goodwill

    332,805     339,099  

Intangible assets, net

    198,569     214,139  

Other assets

    19,304     34,615  
           
   

Total assets

  $ 2,079,790   $ 1,960,221  
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             
 

Current portion of long-term debt

  $ 70,791   $ 38,893  
 

Accounts payable

    105,737     128,485  
 

Accrued expenses and other current liabilities

    154,120     156,734  
           
   

Total current liabilities

    330,648     324,112  

Long-term debt, net of current portion

   
361,830
   
437,629
 

Deferred income taxes

    40,198     36,422  

Other liabilities

    33,906     34,233  
           
   

Total liabilities

    766,582     832,396  
           

Commitments and contingencies

             

Stockholders' equity:

             
 

Common stock, $.008 par; authorized 175,000 shares; issued and outstanding 63,411 shares and 61,874 shares at June 30, 2010 and September 30, 2009, respectively

    507     495  
 

Capital in excess of par

    167,602     145,885  
 

Retained earnings

    1,173,222     984,797  
 

Accumulated other comprehensive income

    (28,123 )   (3,352 )
           
   

Total stockholders' equity

    1,313,208     1,127,825  
           
   

Total liabilities and stockholders' equity

  $ 2,079,790   $ 1,960,221  
           

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

3


Table of Contents

NBTY, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)

 
  Three months
ended June 30,
  Nine months
ended June 30,
 
 
  2010   2009   2010   2009  

Net sales

  $ 695,856   $ 651,707   $ 2,152,167   $ 1,907,813  
                   

Costs and expenses:

                         
 

Cost of sales

    363,355     359,240     1,155,470     1,091,386  
 

Advertising, promotion and catalog

    37,003     23,570     116,682     87,889  
 

Selling, general and administrative

    192,118     182,618     575,443     553,177  
 

IT project termination costs

        10,127         18,774  
                   

    592,476     575,555     1,847,595     1,751,226  
                   

Income from operations

    103,380     76,152     304,572     156,587  
                   

Other income (expense):

                         
 

Interest

    (7,312 )   (8,402 )   (22,984 )   (26,780 )
 

Miscellaneous, net

    68     3,396     2,613     (1,959 )
                   

    (7,244 )   (5,006 )   (20,371 )   (28,739 )
                   

Income before provision for income taxes

    96,136     71,146     284,201     127,848  

Provision for income taxes

   
29,953
   
25,229
   
95,776
   
45,386
 
                   
   

Net income

  $ 66,183   $ 45,917   $ 188,425   $ 82,462  
                   

Net income per share:

                         
 

Basic

  $ 1.04   $ 0.74   $ 2.99   $ 1.34  
 

Diluted

  $ 1.03   $ 0.73   $ 2.94   $ 1.31  

Weighted average common shares outstanding:

                         
 

Basic

    63,378     61,796     63,014     61,665  
 

Diluted

    64,139     63,264     64,087     63,124  

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

4


Table of Contents

NBTY, Inc.
Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income
Nine Months Ended June 30, 2010 and 2009
(Unaudited)
(in thousands)

 
  Common Stock    
   
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
(Loss) Income
   
 
 
  Number of
Shares
  Amount   Capital
in Excess
of Par
  Retained
Earnings
  Total
Stockholders'
Equity
 

Balance, September 30, 2009

    61,874   $ 495   $ 145,885   $ 984,797   $ (3,352 ) $ 1,127,825  

Components of comprehensive income:

                                     
 

Net income

                      188,425           188,425  
 

Foreign currency translation adjustment, net of taxes

                            (26,866 )   (26,866 )
 

Change in fair value of interest rate swaps, net of taxes

                            2,095     2,095  
                                     

Comprehensive income:

                                $ 163,654  
                                     

Exercise of stock options

    1,537     12     10,312                 10,324  

Excess tax benefit from exercise of stock options

                6,097                 6,097  

Stock-based compensation

                5,308                 5,308  
                           

Balance, June 30, 2010

    63,411   $ 507   $ 167,602   $ 1,173,222   $ (28,123 ) $ 1,313,208  
                           

Balance, September 30, 2008

    61,599   $ 493   $ 140,990   $ 839,068   $ 17,645   $ 998,196  

Components of comprehensive income:

                                     
 

Net income

                      82,462           82,462  
 

Foreign currency translation adjustment, net of taxes

                            (12,733 )   (12,733 )
 

Change in fair value of interest rate swaps, net of taxes

                            (4,797 )   (4,797 )
                                     

Comprehensive income:

                                $ 64,932  
                                     

Exercise of stock options

    273     2     1,435                 1,437  

Excess tax benefit from exercise of stock options

                55                 55  

Stock-based compensation

                2,013                 2,013  
                           

Balance, June 30, 2009

    61,872   $ 495   $ 144,493   $ 921,530   $ 115   $ 1,066,633  
                           

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

5


Table of Contents

NBTY, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
  Nine months
ended June 30,
 
 
  2010   2009  

Cash flows from operating activities:

             
 

Net income

  $ 188,425   $ 82,462  
 

Adjustments to reconcile net income to cash provided by operating activities:

             
   

Impairments and disposals of assets

    10,033     4,520  
   

Depreciation and amortization

    50,071     51,604  
   

IT project termination costs

        16,521  
   

Foreign currency transaction loss

    1,312     5,113  
   

Stock-based compensation

    5,308     2,013  
   

Amortization of deferred charges

    1,093     951  
   

Allowance for doubtful accounts

    1,977     (366 )
   

Inventory reserves

    3,317     5,666  
   

Deferred income taxes

    2,048     888  
   

Excess income tax benefit from exercise of stock options

    (6,097 )   (55 )
   

Changes in operating assets and liabilities, net of acquisitions:

             
     

Accounts receivable

    8,770     (11,129 )
     

Inventories

    6,445     (63,228 )
     

Other assets

    12,036     9,162  
     

Accounts payable

    (21,358 )   (7,061 )
     

Accrued expenses and other liabilities

    7,335     (8,915 )
           
       

Net cash provided by operating activities

    270,715     88,146  
           

Cash flows from investing activities:

             
 

Purchase of property, plant and equipment

    (40,358 )   (38,584 )
 

Proceeds from sale of available-for-sale investments

    2,000      
 

Cash paid for acquisitions, net of cash acquired

    (11,875 )   (264 )
 

Escrow refund, net of purchase price adjustments

        14,460  
           
       

Net cash used in investing activities

    (50,233 )   (24,388 )
           

Cash flows from financing activities:

             
 

Principal payments under long-term debt agreements and capital leases

    (42,992 )   (25,176 )
 

Proceeds from borrowings under the Revolving Credit Facility

        95,000  
 

Principal payments under the Revolving Credit Facility

        (155,000 )
 

Excess income tax benefit from exercise of stock options

    6,097     55  
 

Proceeds from stock options exercised

    10,324     1,437  
           
       

Net cash used in financing activities

    (26,571 )   (83,684 )
           

Effect of exchange rate changes on cash and cash equivalents

    (6,280 )   (437 )
           

Net increase (decrease) in cash and cash equivalents

    187,631     (20,363 )

Cash and cash equivalents at beginning of period

    106,001     90,180  
           

Cash and cash equivalents at end of period

  $ 293,632   $ 69,817  
           

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

6


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements

(Unaudited)
(in thousands, except per share amounts and number of stores)

1. Basis of Presentation

        NBTY, Inc. (together with its subsidiaries, "we," "our," "us," "NBTY," or the "Company") is a leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. We market over 25,000 products 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®, Rexall®, Pure Protein®, Body Fortress®, WORLDWIDE Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC (UK)®, Physiologics®, Le Naturiste®, De Tuinen®, Julian Graves® and Vitamin World®.

        We have prepared these financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") applicable to interim financial information and on a basis that is consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 ("2009 Form 10-K"). In our opinion, these financial statements reflect all adjustments (including normal recurring items) necessary for a fair presentation of our results for the interim periods presented. These financial statements do not include all information or disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in our 2009 Form 10-K. Results for interim periods are not necessarily indicative of results that may be achieved for a full year.

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 date of the financial statements and reported amounts of revenues and expenses during the reporting period. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our most significant estimates include: sales returns and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including goodwill; income taxes; and accruals for the outcome of current litigation.

Accounts Receivable Reserves

        Accounts receivable were net of the following reserves:

 
  June 30,
2010
  September 30,
2009
 

Allowance for sales returns

  $ 9,043   $ 11,707  

Promotional program incentive allowance

    63,269     49,071  

Allowance for doubtful accounts

    5,709     3,723  
           

  $ 78,021   $ 64,501  
           

7


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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

1. Basis of Presentation (Continued)

Net Income Per Share

        Basic net income per share is based on the weighted average number of common shares outstanding during the three and nine month periods ended June 30, 2010 and 2009. For the three and nine months ended June 30, 2010, diluted net income per share includes the dilutive effect of outstanding stock options and restricted stock units which resulted in a dilutive effect of 761 and 1,073 shares, respectively. For the three and nine months ended June 30, 2009, diluted net income per share includes the dilutive effect of outstanding stock options which resulted in a dilutive effect of 1,468 and 1,459 shares, respectively. There were 291 and 198 outstanding stock options for the three and nine months ended June 30, 2010, respectively, that were not included in the calculation of diluted net income per share since they would have been anti-dilutive. There were 910 and 871 outstanding stock options for the three and nine months ended June 30, 2009, respectively, that were not included in the calculation of diluted net income per share since they would have been anti-dilutive.

Recent Accounting Developments

        In June 2009, the Financial Accounting Standards Board ("FASB") issued authoritative guidance requiring an enterprise to perform an analysis to determine whether the enterprise's variable interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impacts the entity's economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. This guidance will become effective for us October 1, 2010. We anticipate that the adoption of this guidance will not have any impact on our consolidated financial position or results of operations because we currently do not have any variable interest entities.

2. Subsequent Event

        On July 15, 2010, we announced the execution of a definitive merger agreement under which an affiliate of The Carlyle Group ("Carlyle") will acquire all of the outstanding common shares of NBTY for $55.00 per share in cash. We filed a preliminary proxy statement with the Securities and Exchange Commission on August 3, 2010, in connection with the proposed transaction.

        The board of directors of NBTY has unanimously approved the merger agreement and recommended that NBTY's stockholders adopt the agreement with Carlyle. A special meeting of NBTY's stockholders will be held as soon as practicable after the preparation and filing of a proxy statement with the Securities and Exchange Commission and subsequent mailing to shareholders. The mailing of the proxy statement is expected to take place following the expiration of the 35 calendar day period following the date of the merger agreement, during the course of which NBTY is permitted to solicit alternative proposals from third parties. The transaction is expected to close by December 31, 2010.

        Completion of the transaction is subject to customary conditions to closing, including approval of NBTY's stockholders and regulatory approvals, but is not subject to any condition with regard to the financing of the transaction. The transaction has fully committed financing, consisting of a combination of equity contributed by Carlyle and external debt financing.

8


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

3. Acquisitions

    Ultimate BioPharma

        On May 14, 2010, our subsidiary, NBTY Global Hong Kong Limited, acquired Ultimate Biopharma (Zhongsham) Corporation ("Ultimate"), a Chinese-foreign joint venture limited company which manufactures softgel capsules for approximately $8,800 plus an adjustment for collected accounts receivable and other working capital components for a total purchase price of approximately $14,465. The preliminary allocation of net assets acquired consisted of accounts receivable, inventory, property, plant and equipment and goodwill. Since we acquired the equity of Ultimate, the goodwill associated with this acquisition is not deductible for tax purposes. The allocation of net assets acquired is based on preliminary estimates which we expect will be finalized by September 2010.

        Proforma financial information related to Ultimate is not provided as its impact was not material to our consolidated financial statements.

4. Inventories

        The components of inventories were as follows:

 
  June 30,
2010
  September 30,
2009
 

Raw materials

  $ 150,986   $ 166,447  

Work-in-process

    21,112     26,447  

Finished goods

    497,621     489,737  

Valuation and obsolescence reserves

    (27,414 )   (24,097 )
           

  $ 642,305   $ 658,534  
           

5. Goodwill and Intangible Assets

Goodwill

        The changes in the carrying amount of goodwill by segment for the nine-month period ended June 30, 2010, were as follows:

 
  Wholesale/
US Nutrition
  North
American
Retail
  European
Retail
  Direct
Response/
E-Commerce
  Consolidated  

Balance at October 1, 2009:

                               

Goodwill

  $ 180,276   $ 7,686   $ 142,718   $ 16,105   $ 346,785  

Accumulated impairment losses

        (7,686 )           (7,686 )
                       

    180,276         142,718     16,105     339,099  

Foreign currency translation

   
114
   
   
(9,918

)
 
   
(9,804

)

Acquisitions

    2,957         553         3,510  
                       

Balance at June 30, 2010:

                               

Goodwill

    183,347     7,686     133,353     16,105     340,491  

Accumulated impairment losses

        (7,686 )           (7,686 )
                       

  $ 183,347   $   $ 133,353   $ 16,105   $ 332,805  
                       

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

5. Goodwill and Intangible Assets (Continued)

Intangible Assets

        The carrying amounts of intangible assets as of June 30, 2010 and September 30, 2009 were as follows:

 
  June 30, 2010   September 30, 2009    
 
  Gross
carrying
amount
  Accumulated
amortization
  Gross
carrying
amount
  Accumulated
amortization
  Amortization
period
(years)

Definite lived intangible assets:

                           

Brands

  $ 97,798   $ 29,808   $ 98,093   $ 26,201   20

Customer lists

    64,918     46,475     64,948     43,667   2 - 15

Private label and customer relationships

    118,516     18,710     122,822     14,374   10 - 20

Trademarks and licenses

    16,276     7,370     17,844     7,417   2 - 20

Covenants not to compete

    3,544     3,388     3,540     3,249   3 - 5

Land use right

    1,468               40
                     

    302,520     105,751     307,247     94,908    

Indefinite lived intangible asset:

                           

Trademark

    1,800         1,800        
                     
 

Total intangible assets

  $ 304,320   $ 105,751   $ 309,047   $ 94,908    
                     

        In June 2010, we recorded an impairment charge of $3,533 ($2,429, net of taxes) related to a private label customer contract, renewal of which is no longer probable.

        The increase in intangible assets for the land use right relates to our acquisition in China and is based on a preliminary allocation of the purchase price.

        Aggregate amortization expense of other intangible assets included in the consolidated statements of income under the caption "selling, general and administrative" expenses for the three months ended June 30, 2010 and 2009 was $3,975 and $4,018, respectively. Amortization expense for the nine months ended June 30, 2010 and 2009 was $11,962 and $12,042, respectively.

        Assuming no changes in our definite lived intangible assets, estimated amortization expense for each of the five succeeding fiscal years is as follows:

For the fiscal year ending September 30,

       
 

2010

  $ 15,823  
 

2011

  $ 15,781  
 

2012

  $ 15,650  
 

2013

  $ 15,552  
 

2014

  $ 15,040  

6. IT Project Termination Costs

        During fiscal 2009, management terminated certain information technology projects relating to the Direct Response/E-Commerce, North American and European Retail segments that were determined

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

6. IT Project Termination Costs (Continued)


to be ineffective and uneconomical. Previously capitalized software configuration, coding and other related costs of $10,127 and $18,774 were written off for the three and nine months ended June 30, 2009, respectively.

7. Accrued Expenses and Other Current Liabilities

        The components of accrued expenses and other current liabilities were as follows:

 
  June 30,
2010
  September 30,
2009
 

Accrued compensation and related taxes

  $ 37,143   $ 38,945  

Accrued purchases

    20,072     17,664  

Income taxes payable

    5,668     16,700  

Other

    91,237     83,425  
           

  $ 154,120   $ 156,734  
           

8. Long-Term Debt

        The components of long-term debt were as follows:

 
  June 30,
2010
  September 30,
2009
 

Credit Agreement:

             
 

$300 million, five-year Term Loan

  $ 228,171   $ 270,000  

Senior Subordinated Notes

    188,974     188,856  

Multi-currency Term Loan

    14,362     15,336  

Mortgage and Capital Leases

    1,114     2,330  
           

    432,621     476,522  
   

Less: current portion

    70,791     38,893  
           
   

Total

  $ 361,830   $ 437,629  
           

        Principal payments on the Term Loan during the first nine months of the year included $20,000 in voluntary prepayments.

9. Litigation Summary

        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 the Company and certain officers, claiming that the defendants made allegedly false material statements, or concealed allegedly adverse material facts, for the purpose of causing members of the class to purchase NBTY stock at allegedly artificially inflated prices. To date, there has been no activity since the filing of the complaint. The Company believes the claims to be without merit and intends 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.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

9. Litigation Summary (Continued)

        On July 22, 2010, a putative class-action, captioned Philip Gottlieb v. NBTY, Inc., et al, was filed in the Supreme Court of the State of New York, County of Nassau, 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 "Carlyle"), challenging the Board of Directors' decision to sell the Company to Carlyle for the price of $55.00 per share. The complaint alleges that this price per share does not represent fair value for the Company and seeks to enjoin the anticipated sale and to invalidate certain related transactions. The Company believes the claims to be without merit and intends to vigorously defend this action. The Company cannot presently predict the ultimate outcome of the litigation or the amount of liability, if any, on the part of any of the defendants.

Prohormone Products

        In March 2004, a putative class-action lawsuit, captioned Jerry Beidler v. MET-Rx U.S.A, Inc, was filed in New Jersey Superior Court, Mercer County, against MET-Rx U.S.A, Inc. ("Met-Rx"), a subsidiary of the Company, claiming that the advertising and marketing of certain prohormone supplements were false and misleading and that plaintiff and the putative class of New Jersey purchasers of these products were entitled to damages and injunctive relief. Because these allegations were virtually identical to allegations made in a putative nationwide class-action previously filed against Met-Rx in California (in an action styled Eric Ayala v. MET-Rx U.S.A, Inc. et. al.), we moved in 2004 to dismiss or stay the New Jersey action pending the outcome of the California action. The motion was granted, and the New Jersey action is stayed at this time. The California action against Met-Rx was dismissed in 2009.

Nutrition Bars

        Our subsidiary, Rexall Sundown, Inc. ("Rexall"), and certain of its subsidiaries, are defendants in a class-action lawsuit, captioned Jamie Pesek, et al. v. Rexall Sundown, Inc., et al., brought in California Superior Court, County of San Francisco in 2002 on behalf of all California consumers who bought various nutrition bars. Plaintiffs allege misbranding of nutrition bars and violations of California unfair competition statutes, misleading advertising and other similar causes of action. Plaintiffs seek restitution, legal fees and injunctive relief. We have defended this action vigorously. Since December 2007, with Rexall's and the other defendants' renewed motion for judgment on the pleadings pending, the Court has stayed the case for all purposes, pending rulings on relevant cases before the California Supreme Court. Although the California Supreme Court has resolved some of those cases, others remain pending as of this date. Accordingly, the case remains stayed. The Court held a case-management conference ("CMC") on August 5, 2009. At that time, the parties requested, and the Court agreed, to keep the stay in place for at least another nine months. The Court scheduled a subsequent CMC for February 25, 2010, but canceled that conference upon being informed by the parties that the California Supreme Court had not yet acted. The Court set another CMC for May 21, 2010, and instructed the parties to report back before that date as to the status of the cases before the California Supreme Court. By agreement of the parties, the May 21, 2010 CMC has been continued for nine months. The California Supreme Court still has not resolved the outstanding issues pending before it. Based upon the information currently available, no determination can be made at this time as to the final outcome of this case, nor can its materiality be accurately ascertained.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

9. Litigation Summary (Continued)

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, if adversely determined against us.

10. Income Taxes

        Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2013 and 2016. Therefore, our overall effective income tax rate could vary as a result of these factors.

        The effective income tax rate for the three months ended June 30, 2010 and 2009 was 31.2% and 35.5%, respectively. The effective income tax rate for the nine months ended June 30, 2010 and 2009 was 33.7% and 35.5%, respectively. The effective income tax rate was lower for the three and nine month periods ended June 30, 2010 as compared to the prior comparable period primarily due to the impact of a UK restructuring completed during June 2010 which allows us to utilize certain tax benefits that were previously reserved and the partial release of a valuation allowance on state tax credits in the current year.

        We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At June 30, 2010, we had $1,372 and $439 accrued for the potential payment of interest and penalties, respectively. As of June 30, 2010, we were subject to U.S. Federal Income Tax examinations for the tax years 2007-2009, and to non-U.S. examinations for the tax years of 2004-2009. In addition, we are generally subject to state and local examinations for fiscal years 2006-2009.

        At June 30, 2010, we had a liability of $8,711 for unrecognized tax benefits, the recognition of which would have an effect of $5,931 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.

11. Stock-based Compensation

        On December 23, 2009, the Company granted 287 stock options to directors and certain employees under the 2008 and 2000 Stock Option Plans. These stock options were granted with an exercise price of $43.88, the closing price of the Company's common stock on the date of grant. The vesting period for these options is over four years, in three equal increments on each of the second, third and fourth anniversary of the date of grant, except those granted to Harvey Kamil, President and Chief Financial Officer, the vesting of which will accelerate if he retires after the second anniversary of the date of grant. All stock options granted expire ten years from the date of grant.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

11. Stock-based Compensation (Continued)

        The weighted average fair value per share of the options granted 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 in December 2009:

Risk-free rate(1)

    2.9 %

Expected term(2)

    6.4  

Expected volatility(3)

    48.0 %

Expected dividend yield

    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.

        On December 23, 2009, the Company also granted 21 restricted stock units to directors and certain executives under the 2009 Equity Awards Plan. The closing price of the Company's common stock on the date of grant was $43.88. These restricted stock units vest over four years, in three equal increments on each of the second, third and fourth anniversary of the date of grant, except those granted to Harvey Kamil, President and Chief Financial Officer, the vesting of which will accelerate if he retires after the second anniversary of the date of grant.

12. 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 or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also 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.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

12. Fair Value of Financial Instruments (Continued)

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. In fiscal 2008, we entered into two interest rate swap contracts to hedge the variability of future interest relating to a portion of the interest payments on our Term Loan. Each swap contract has a notional amount of $100 million. One swap contract has a fixed interest rate, before bank margin, of 3.88% for a two-year term and the other swap contract has a fixed interest rate, before bank margin, of 4.195% for a three-year term. Under the terms of the swap contracts, variable interest payments for a portion of our Term Loan are swapped for fixed interest payments.

        We have formally documented the relationship between the interest rate swap contracts and the Term Loan, as well as our risk management objective and strategy for undertaking the hedge transactions. This process includes linking the derivative that was designated as a cash flow hedge to the specific liability on the balance sheet. We record the change in the fair value of the swap contracts through Other Comprehensive Income ("OCI"), net of income tax. Since we expect these hedging relationships to be highly effective, both at inception of the hedges and on an ongoing basis, they are expected to be highly effective in achieving offsetting changes in fair value attributable to the hedged risk during the period that the hedges are designated. We have determined that there will be no ineffectiveness in the hedging relationships since the hedged forecasted interest payments are based on the same notional amount, have the same reset dates, and are based on the same benchmark interest rate designated under the variable rate Term Loan. We assess, at the inception of the hedges and on an ongoing basis, whether the derivatives used in the hedging transaction are highly effective in offsetting changes in the cash flows of the hedged item. The change in the fair value of the swap contracts for the nine months ended June 30, 2010 recorded through OCI, net of income tax was $2,095. At June 30, 2010, the swap contracts liability was $6,769. Of this amount, $1,664 is included in other current liabilities and $5,105 is included in other liabilities. At September 30, 2009, the swap contracts liability, included in other liabilities, was $10,181. The fair value of the swap contracts were valued using observable current market information such as the prevailing LIBOR interest rate and LIBOR yield curve rates (Level 2).

71/8% Senior Subordinated Notes

        The face value of the 71/8% Senior Subordinated Notes at June 30, 2010, was $190,000. The fair value of the 71/8% Senior Subordinated Notes, based on then quoted market prices (Level 1), approximated its carrying value at June 30, 2010.

13. Business and Credit Concentration

Financial Instruments

        Financial instruments that potentially subject us to credit risk consist primarily of cash and cash equivalents (the amounts of which, at times, may 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.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

13. Business and Credit Concentration (Continued)

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 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.

        The following customers accounted for the following percentages of net sales for the three and nine months ended June 30, 2010 and 2009, respectively:

 
  Wholesale/US
Nutrition
Segment
Net Sales
Three months
ended June 30,
  Total
Consolidated
Net Sales
Three months
ended June 30,
 
 
  2010   2009   2010   2009  

Customer A

    24 %   29 %   15 %   18 %

Customer C

    10 %   7 %   6 %   4 %

 

 
  Wholesale/US
Nutrition
Segment
Net Sales
Nine months
ended June 30,
  Total
Consolidated
Net Sales
Nine months
ended June 30,
 
 
  2010   2009   2010   2009  

Customer A

    27 %   30 %   17 %   18 %

        The loss of these customers, or any other major customer, would have a material adverse effect on our consolidated results of operations if we were unable to replace that customer.

        The following individual customers accounted for 10% or more of the Wholesale/US Nutrition segment's gross accounts receivable as of June 30, 2010 and September 30, 2009, respectively:

 
  June 30,
2010
  September 30,
2009
 

Customer A

    17 %   25 %

Customer B

    8 %   9 %

Customer C

    12 %   11 %

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

14. Supplemental Disclosure of Cash Flow Information

 
  Nine months
ended June 30,
 
 
  2010   2009  

Non-cash investing and financing information:

             

Property, plant and equipment additions included in accounts payable

  $ 1,349   $ 4,275  

Acquisitions accounted for under the purchase method:

             
 

Fair value of assets acquired

  $ 15,228   $ 264  
 

Liabilities assumed

    (211 )    
 

Less: Payable to seller

    (2,456 )    
 

Less: Cash acquired

    (686 )    
           
 

Net cash paid

  $ 11,875   $ 264  
           

15. 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, gross profit and income or loss from operations (prior to corporate allocations) of each segment, as these are the key performance indicators that we review. Operating income or loss for each segment does not include 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 the Corporate segment.

        All our products fall into one or more of these four segments:

    Wholesale/US Nutrition—This segment is comprised of several divisions, each targeting specific market groups, which include wholesalers, distributors, food, drug and mass merchandisers, pharmacies, health food stores, bulk and international customers.

    North American Retail—This segment generates revenue through its 451 owned and operated Vitamin World stores selling proprietary brand and third-party products, and through its Canadian operation of 83 owned and operated Le Naturiste stores.

    European Retail—This segment generates revenue through its 586 Holland & Barrett stores, 296 Julian Graves stores and 43 GNC stores in the UK, 88 DeTuinen stores in the Netherlands and 29 Nature's Way stores in Ireland. In addition, Holland & Barrett has 8 franchise locations in South Africa, Singapore and Malta. This 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 by phone.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

15. Segment Information (Continued)

        The following table represents key financial information of our business segments:

 
  Wholesale /
US Nutrition
  North
American
Retail
  European
Retail
  Direct
Response/
E-Commerce
  Corporate/
Manufacturing
  Consolidated  

Three months ended June 30, 2010:

                                     
 

Net sales

  $ 434,592   $ 52,543   $ 152,051   $ 56,670   $   $ 695,856  
 

Income (loss) from operations

    82,537     3,955     20,401     15,440     (18,953 )   103,380  
 

Depreciation and amortization

    3,642     613     3,316     1,143     7,598     16,312  
 

Capital expenditures

    236     1,046     11,454         3,185     15,921  

Three months ended June 30, 2009:

                                     
 

Net sales

  $ 396,162   $ 51,223   $ 151,293   $ 53,029   $   $ 651,707  
 

Income (loss) from operations

    61,905     (2,274 )   14,070     18,166     (15,715 )   76,152  
 

Depreciation and amortization

    3,681     758     3,634     1,245     7,486     16,804  
 

Capital expenditures

    94     268     819         4,819     6,000  

Nine months ended June 30, 2010:

                                     
 

Net sales

  $ 1,332,280   $ 158,770   $ 487,059   $ 174,058   $   $ 2,152,167  
 

Income (loss) from operations

    224,229     6,479     80,924     49,841     (56,901 )   304,572  
 

Depreciation and amortization

    10,973     1,944     10,400     3,555     23,199     50,071  
 

Capital expenditures

    1,322     2,140     24,835     36     12,025     40,358  

Nine months ended June 30, 2009:

                                     
 

Net sales

  $ 1,152,930   $ 151,577   $ 441,757   $ 161,549   $   $ 1,907,813  
 

Income (loss) from operations

    110,968     (4,160 )   60,559     38,119     (48,899 )   156,587  
 

Depreciation and amortization

    10,991     2,255     10,598     3,777     23,983     51,604  
 

Capital expenditures

    725     2,786     9,844     4,162     21,067     38,584  

    Net sales by location of customer:

 
  Three months
ended June 30,
  Nine months
ended June 30,
 
 
  2010   2009   2010   2009  

United States

  $ 474,814   $ 436,059   $ 1,434,952   $ 1,292,914  

United Kingdom

    146,952     147,510     465,474     422,495  

Canada

    20,796     20,624     75,280     62,548  

Holland

    14,817     13,537     49,678     40,923  

Ireland

    5,938     5,333     18,241     15,211  

Other foreign countries

    32,539     28,644     108,542     73,722  
                   

  $ 695,856   $ 651,707   $ 2,152,167   $ 1,907,813  
                   

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

15. Segment Information (Continued)

    Total assets by segment:

 
  June 30,
2010
  September 30,
2009
 

Wholesale/US Nutrition

  $ 906,389   $ 915,783  

North American Retail

    31,311     28,334  

European Retail

    410,352     403,657  

Direct Response/E-Commerce

    54,354     54,348  

Corporate/Manufacturing

    677,384     558,099  
           

  $ 2,079,790   $ 1,960,221  
           

        Approximately 29% of our net sales during the nine months ended June 30, 2010 and 2009 were denominated in currencies other than U.S. dollars, principally the British pound sterling, the euro and the Canadian dollar. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on our results of operations.

        Foreign subsidiaries accounted for the following percentages of total assets and total liabilities:

 
  June 30,
2010
  September 30,
2009
 

Total Assets

    26 %   26 %

Total Liabilities

    14 %   13 %

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes

        The 71/8% Senior Subordinated Notes due 2015 are guaranteed by our domestic wholly-owned subsidiaries. These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents:

    1.
    Condensed consolidating financial statements as of June 30, 2010 and September 30, 2009 and for the three and nine months ended June 30, 2010 and 2009 of (a) NBTY, Inc., the parent and issuer, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries and (d) the Company on a consolidated basis; and

    2.
    Elimination entries necessary to consolidate NBTY, Inc., the parent, with guarantor and non-guarantor subsidiaries.

        The condensed consolidating financial statements are presented using the equity method of accounting for investments in wholly-owned subsidiaries. Under this method, the investments in subsidiaries are recorded at cost and adjusted for our share of the subsidiaries' cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. This financial information should be read in conjunction with the financial statements and other notes related thereto.

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NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)

Condensed Consolidating Balance Sheet
As of June 30, 2010

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current assets:

                               
 

Cash and cash equivalents

  $ 202,446   $   $ 91,186   $   $ 293,632  
 

Accounts receivable, net

        124,553     21,680         146,233  
 

Intercompany

        364,453     741,242     (1,105,695 )    
 

Inventories

        520,779     121,526         642,305  
 

Deferred income taxes

        24,140     3,772         27,912  
 

Other current assets

        7,957     43,412         51,369  
                       
     

Total current assets

    202,446     1,041,882     1,022,818     (1,105,695 )   1,161,451  

Property, plant and equipment, net

    35,068     231,246     101,347         367,661  

Goodwill

        197,701     135,104         332,805  

Other intangible assets, net

        174,735     23,834         198,569  

Other assets

        19,251     53         19,304  

Intercompany loan receivable

    320,348     40,735         (361,083 )    

Investments in subsidiaries

    2,309,863               (2,309,863 )    
                       
   

Total assets

  $ 2,867,725   $ 1,705,550   $ 1,283,156   $ (3,776,641 ) $ 2,079,790  
                       

Liabilities and Stockholders' Equity

                               

Current liabilities:

                               
 

Current portion of long-term debt

  $ 55,899   $   $ 14,892   $   $ 70,791  
 

Accounts payable

        64,997     40,740         105,737  
 

Intercompany

    1,105,695             (1,105,695 )    
 

Accrued expenses and other current liabilities

        118,515     35,605         154,120  
                       
     

Total current liabilities

    1,161,594     183,512     91,237     (1,105,695 )   330,648  

Intercompany loan payable

              361,083     (361,083 )    

Long-term debt, net of current portion

    338,776         23,054         361,830  

Deferred income taxes

    37,561         2,637         40,198  

Other liabilities

    16,586     2,757     14,563         33,906  
                       
     

Total liabilities

    1,554,517     186,269     492,574     (1,466,778 )   766,582  

Commitments and contingencies

                               

Stockholders' Equity:

                               
 

Common stock

    507                 507  
 

Capital in excess of par

    167,602     352,019     301,270     (653,289 )   167,602  
 

Retained earnings

    1,173,222     1,167,262     501,846     (1,669,108 )   1,173,222  
 

Accumulated other comprehensive loss

    (28,123 )       (12,534 )   12,534     (28,123 )
                       
     

Total stockholders' equity

    1,313,208     1,519,281     790,582     (2,309,863 )   1,313,208  
                       
     

Total liabilities and stockholders' equity

  $ 2,867,725   $ 1,705,550   $ 1,283,156   $ (3,776,641 ) $ 2,079,790  
                       

20


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)


Condensed Consolidating Balance Sheet
As of September 30, 2009

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current assets:

                               
 

Cash and cash equivalents

  $ 46,169   $   $ 59,832   $   $ 106,001  
 

Accounts receivable, net

        132,762     23,101         155,863  
 

Intercompany

        141,489     744,496     (885,985 )    
 

Inventories

        530,218     128,316         658,534  
 

Deferred income taxes

        24,124     4,030         28,154  
 

Other current assets

        20,910     29,089         49,999  
                       
     

Total current assets

    46,169     849,503     988,864     (885,985 )   998,551  

Property, plant and equipment, net

    39,246     245,415     89,156         373,817  

Goodwill

        197,701     141,398         339,099  

Other intangible assets, net

        189,022     25,117         214,139  

Other assets

        21,403     13,212         34,615  

Intercompany loan receivable

    340,710     40,733         (381,443 )    

Investments in subsidiaries

    2,082,257             (2,082,257 )    
                       
   

Total assets

  $ 2,508,382   $ 1,543,777   $ 1,257,747   $ (3,349,685 ) $ 1,960,221  
                       

Liabilities and Stockholders' Equity

                               

Current liabilities:

                               
 

Current portion of long-term debt

  $ 38,138   $ 115   $ 640   $   $ 38,893  
 

Accounts payable

        90,835     37,650         128,485  
 

Intercompany

    885,985             (885,985 )    
 

Accrued expenses and other current liabilities

        114,851     41,883         156,734  
                       
     

Total current liabilities

    924,123     205,801     80,173     (885,985 )   324,112  

Intercompany loan payable

            381,443     (381,443 )    

Long-term debt, net of current portion

    398,411         39,218         437,629  

Deferred income taxes

    35,959         463         36,422  

Other liabilities

    22,064     2,602     9,567         34,233  
                       
     

Total liabilities

    1,380,557     208,403     510,864     (1,267,428 )   832,396  

Commitments and contingencies

                               

Stockholders' Equity:

                               
 

Common stock

    495                 495  
 

Capital in excess of par

    145,885     352,019     301,269     (653,288 )   145,885  
 

Retained earnings

    984,797     983,355     450,168     (1,433,523 )   984,797  
 

Accumulated other comprehensive loss

    (3,352 )       (4,554 )   4,554     (3,352 )
                       
     

Total stockholders' equity

    1,127,825     1,335,374     746,883     (2,082,257 )   1,127,825  
                       
     

Total liabilities and stockholders' equity

  $ 2,508,382   $ 1,543,777   $ 1,257,747   $ (3,349,685 ) $ 1,960,221  
                       

21


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)

Condensed Consolidating Statements of Income
Three Months Ended June 30, 2010

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 518,175   $ 194,966   $ (17,285 ) $ 695,856  

Costs and expenses:

                               
 

Cost of sales

        294,826     85,814     (17,285 )   363,355  
 

Advertising, promotion and catalog

        30,195     6,808           37,003  
 

Selling, general and administrative

    18,954     90,634     82,530           192,118  
                       

    18,954     415,655     175,152     (17,285 )   592,476  
                       

Income from operations

    (18,954 )   102,520     19,814         103,380  
                       

Other income (expense):

                               
   

Equity in income of subsidiaries

    78,872             (78,872 )    
   

Intercompany interest

    2,143         (2,143 )        
   

Interest

    (7,096 )       (216 )       (7,312 )
   

Miscellaneous, net

    77     (464 )   455         68  
                       

    73,996     (464 )   (1,904 )   (78,872 )   (7,244 )
                       

Income before provision for income taxes

    55,042     102,056     17,910     (78,872 )   96,136  

(Benefit)/ provision for income taxes

   
(11,140

)
 
35,720
   
5,373
   
   
29,953
 
                       

Net income

  $ 66,182   $ 66,336   $ 12,537   $ (78,872 ) $ 66,183  
                       

22


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)


Condensed Consolidating Statements of Income
Three Months Ended June 30, 2009

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 483,797   $ 189,498   $ (21,588 ) $ 651,707  

Costs and expenses:

                               
 

Cost of sales

        292,517     88,311     (21,588 )   359,240  
 

Advertising, promotion and catalog

        17,804     5,766         23,570  
 

Selling, general and administrative

    15,382     86,880     80,356         182,618  
 

IT project termination costs

        4,299     5,828         10,127  
                       

    15,382     401,500     180,261     (21,588 )   575,555  
                       

Income from operations

    (15,382 )   82,297     9,237         76,152  
                       

Other income (expense):

                               
   

Equity in income of subsidiaries

    59,809             (59,809 )    
   

Intercompany interest

    2,993         (2,993 )        
   

Interest

    (8,078 )       (324 )       (8,402 )
   

Miscellaneous, net

    217     1,064     2,115         3,396  
                       

    54,941     1,064     (1,202 )   (59,809 )   (5,006 )
                       

Income before provision for income taxes

    39,559     83,361     8,035     (59,809 )   71,146  

(Benefit)/ provision for income taxes

   
(6,358

)
 
29,176
   
2,411
   
   
25,229
 
                       

Net income

  $ 45,917   $ 54,185   $ 5,624   $ (59,809 ) $ 45,917  
                       

23


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)


Condensed Consolidating Statements of Income
Nine Months Ended June 30, 2010

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 1,577,866   $ 625,939   $ (51,638 ) $ 2,152,167  

Costs and expenses:

                               
 

Cost of sales

        931,575     275,533     (51,638 )   1,155,470  
 

Advertising, promotion and catalog

        97,784     18,898         116,682  
 

Selling, general and administrative

    56,904     267,389     251,150         575,443  
                       

    56,904     1,296,748     545,581     (51,638 )   1,847,595  
                       

Income from operations

    (56,904 )   281,118     80,358         304,572  
                       

Other income (expense):

                               
   

Equity in income of subsidiaries

    235,585             (235,585 )    
   

Intercompany interest

    6,502         (6,502 )        
   

Interest

    (22,411 )       (573 )       (22,984 )
   

Miscellaneous, net

    254     1,816     543         2,613  
                       

    219,930     1,816     (6,532 )   (235,585 )   (20,371 )
                       

Income before provision for income taxes

    163,026     282,934     73,826     (235,585 )   284,201  

(Benefit)/ provision for income taxes

   
(25,399

)
 
99,027
   
22,148
   
   
95,776
 
                       

Net income

  $ 188,425   $ 183,907   $ 51,678   $ (235,585 ) $ 188,425  
                       

24


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)


Condensed Consolidating Statements of Income
Nine Months Ended June 30, 2009

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 1,414,913   $ 553,222   $ (60,322 ) $ 1,907,813  

Costs and expenses:

                               
 

Cost of sales

        906,352     245,356     (60,322 )   1,091,386  
 

Advertising, promotion and catalog

        72,444     15,445         87,889  
 

Selling, general and administrative

    47,790     271,455     233,932         553,177  
 

IT project termination costs

        12,946     5,828         18,774  
                       

    47,790     1,263,197     500,561     (60,322 )   1,751,226  
                       

Income from operations

    (47,790 )   151,716     52,661         156,587  
                       

Other income (expense):

                               
   

Equity in income of subsidiaries

    122,441             (122,441 )    
   

Intercompany interest

    15,603         (15,603 )        
   

Interest

    (25,279 )   (2 )   (1,499 )       (26,780 )
   

Miscellaneous, net

    (255 )   (2,553 )   849         (1,959 )
                       

    112,510     (2,555 )   (16,253 )   (122,441 )   (28,739 )
                       

Income before provision for income taxes

    64,720     149,161     36,408     (122,441 )   127,848  

(Benefit)/ provision for income taxes

   
(17,742

)
 
52,206
   
10,922
   
   
45,386
 
                       

Net income

  $ 82,462   $ 96,955   $ 25,486   $ (122,441 ) $ 82,462  
                       

25


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2010

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Cash flows from operating activities:

                               
 

Net income

  $ 188,425   $ 183,907   $ 51,678   $ (235,585 ) $ 188,425  
 

Adjustments to reconcile net income to net cash & cash equivalents provided by operating activities:

                               
   

Equity in earnings of subsidiaries

    (235,585 )           235,585      
   

Impairments and disposals of assets

        9,418     615         10,033  
   

Depreciation and amortization

    3,692     33,575     12,804         50,071  
   

Foreign currency transaction loss

    2,158         (846 )       1,312  
   

Stock-based compensation

    4,365     469     474         5,308  
   

Amortization of deferred charges

    1,093                 1,093  
   

Allowance for doubtful accounts

        1,977             1,977  
   

Inventory reserves

        3,317             3,317  
   

Deferred income taxes

        2,082     (34 )       2,048  
   

Excess income tax benefit from exercise of stock options

    (6,097 )               (6,097 )
   

Changes in operating assets and liabilities, net of acquisitions:

                               
     

Accounts receivable

        769     8,001         8,770  
     

Inventories

        5,005     1,440         6,445  
     

Other assets

        13,212     (1,176 )       12,036  
     

Accounts payable

        (26,928 )   5,570         (21,358 )
     

Accrued expenses and other liabilities

        5,458     1,877         7,335  
                       
       

Net cash (used in) provided by operating activities

    (41,949 )   232,261     80,403         270,715  
                       

Cash flows from investing activities:

                               
 

Intercompany accounts

    222,903     (219,102 )   (3,801 )        
 

Purchase of property, plant and equipment

    (819 )   (13,013 )   (26,526 )       (40,358 )
 

Proceeds from sale of available-for-sale investments

    2,000                 2,000  
 

Cash paid for acquisitions, net of cash acquired

            (11,875 )       (11,875 )
                       
       

Net cash provided by (used in) investing activities

    224,084     (232,115 )   (42,202 )       (50,233 )
                       

Cash flows from financing activities:

                               
 

Principal payments under long-term debt agreements and capital leases

    (42,279 )   (146 )   (567 )       (42,992 )
 

Excess income tax benefit from exercise of stock options

    6,097                 6,097  
 

Proceeds from stock options exercised

    10,324                 10,324  
                       
       

Net cash used in financing activities

    (25,858 )   (146 )   (567 )       (26,571 )
                       

Effect of exchange rate changes on cash and cash equivalents

            (6,280 )       (6,280 )
                       

Net increase in cash and cash equivalents

    156,277         31,354         187,631  

Cash and cash equivalents at beginning of period

   
46,169
   
   
59,832
   
   
106,001
 
                       

Cash and cash equivalents at end of period

  $ 202,446   $   $ 91,186   $   $ 293,632  
                       

26


Table of Contents


NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)
(in thousands, except per share amounts and number of stores)

16. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2009

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Cash flows from operating activities:

                               
 

Net income

  $ 82,462   $ 96,955   $ 25,486   $ (122,441 ) $ 82,462  
 

Adjustments to reconcile net income to net cash & cash equivalents provided by operating activities:

                               
   

Equity in earnings of subsidiaries

    (122,441 )           122,441      
   

Impairments and disposals of assets

    45     3,773     702         4,520  
   

Depreciation and amortization

    3,693     35,215     12,696         51,604  
   

IT project termination costs

        10,693     5,828         16,521  
   

Foreign currency transaction loss

    4,194     789     130         5,113  
   

Stock-based compensation

    1,837     29     147         2,013  
   

Amortization of deferred charges

    951                 951  
   

Allowance for doubtful accounts

        (770 )   404         (366 )
   

Inventory reserves

        5,666             5,666  
   

Deferred income taxes

        876     12         888  
   

Excess income tax benefit from exercise of stock options

    (55 )               (55 )
   

Changes in operating assets and liabilities, net of acquisitions:

                               
     

Accounts receivable

        (10,980 )   (149 )       (11,129 )
     

Inventories

        (41,524 )   (21,704 )       (63,228 )
     

Other assets

        10,401     (1,239 )       9,162  
     

Accounts payable

        (10,535 )   3,474         (7,061 )
     

Accrued expenses and other liabilities

        3,623     (12,538 )       (8,915 )
                       
       

Net cash (used in) provided by operating activities

    (29,314 )   104,211     13,249         88,146  
                       

Cash flows from investing activities:

                               
 

Intercompany accounts

    62,939     (77,860 )   14,921          
 

Purchase of property, plant and equipment

    (4,124 )   (24,730 )   (9,730 )       (38,584 )
 

Cash paid for acquisitions, net of cash acquired

            (264 )       (264 )
 

Escrow refund, net of purchase price adjustments

    11,904         2,556         14,460  
                       
       

Net cash provided by (used in) investing activities

    70,719     (102,590 )   7,483         (24,388 )
                       

Cash flows from financing activities:

                               
 

Principal payments under long-term debt agreements and capital leases

    (23,119 )   (1,621 )   (436 )       (25,176 )
 

Proceeds from borrowings under the Revolving Credit Facility

    95,000                 95,000  
 

Principal payments under the Revolving Credit Facility

    (155,000 )               (155,000 )
 

Excess income tax benefit from exercise of stock options

    55                 55  
 

Proceeds from stock options exercised

    1,437                 1,437  
                       
       

Net cash used in financing activities

    (81,627 )   (1,621 )   (436 )       (83,684 )
                       

Effect of exchange rate changes on cash and cash equivalents

            (437 )       (437 )
                       

Net (decrease) increase in cash and cash equivalents

    (40,222 )       19,859         (20,363 )

Cash and cash equivalents at beginning of period

   
49,662
   
   
40,518
   
   
90,180
 
                       

Cash and cash equivalents at end of period

  $ 9,440   $   $ 60,377   $   $ 69,817  
                       

27


Table of Contents


NBTY, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(in thousands, except per share amounts and number of stores)

Forward-Looking Statements

        This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "subject to," "believe," "expect," "plan," "project," "estimate," "intend," "may," "should," "can," and "anticipate," and the negatives thereof, or variations thereof, or similar expressions, are intended to identify forward-looking statements, which are inherently uncertain. Similarly, discussions of strategy, although believed to be reasonable, are also forward-looking statements and are inherently uncertain.

        All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may materially affect forward-looking statements include:

    slow or negative growth in the nutritional supplement industry;

    changes in worldwide general economic and political conditions, and in economic and political conditions in the markets in which we compete from time to time;

    application of anti-trust or similar merger control laws in any jurisdiction, which may limit our expansion plans;

    our inability to retain customers of companies (or mailing lists) recently acquired;

    increased competition;

    increased costs;

    loss or retirement of key members of our management;

    increases in the cost of borrowings or unavailability of additional debt or equity capital, or both;

    unavailability of, or inability to consummate, advantageous acquisitions in the future, including those that may be subject to bankruptcy court approval, or our inability to integrate acquisitions into the mainstream of our business;

    interruption of business or negative impact on sales and earnings due to acts of God, acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service;

    our inability to gain or hold market share of our wholesale or retail customers anywhere in the world;

    our inability to obtain or renew insurance or to manage insurance costs;

    our exposure to, and the expense of defending and resolving, product liability claims, intellectual property claims and other litigation;

    our inability to implement our business strategy successfully;

    our inability to manage our retail, wholesale, manufacturing or other operations efficiently;

    consumer acceptance of our products due to adverse publicity regarding nutritional supplements;

    our inability to renew leases for our retail locations;

    the inability of our retail stores to attain or maintain profitability;

    the absence of clinical trials for many of our products;

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    sales and earnings volatility or trends for us and our market segments;

    the efficacy of our internet and on-line sales and marketing strategies;

    fluctuations in foreign currencies, including the British pound sterling, the euro, the Canadian dollar and the Chinese yuan;

    controls on sales to, or purchases from, foreign countries or certain persons;

    our inability to secure favorable new sites for, and delays in opening, new retail and manufacturing locations;

    introduction of, and compliance with, new federal, state, local or foreign legislation or regulation, or adverse determinations by regulators anywhere in the world (including the banning of products) and, more particularly, Good Manufacturing Practices in the United States and the Food Supplements Directive and Traditional Herbal Medicinal Products Directive in Europe;

    the mix of our products and the profit margins thereon;

    the availability and pricing of raw materials;

    adverse effects on us of increased energy prices and potentially reduced traffic flow to our retail locations;

    adverse tax determinations;

    our inability to comply with, or adverse consequences stemming from, new government regulation or enforcement policies;

    the loss of a significant customer;

    risk factors discussed elsewhere in this report; and

    other factors beyond our control.

        Consequently, readers should regard these forward-looking statements solely as our current plans, estimates and beliefs. We caution readers not to place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. Except as required by law, we do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

        We obtained industry data used throughout this report from industry publications and internal company estimates. While we believe this information to be reliable, we have not independently verified, and cannot guarantee, its accuracy.

        The following discussion should also be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere herein and with our 2009 Form 10-K.

Overview

        NBTY, Inc. (together with its subsidiaries, the "Company," "NBTY," "we," or "us") is a leading global vertically integrated manufacturer, marketer and retailer of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. We market approximately 25,000 products 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®, Rexall®, Pure Protein®, Body Fortress®, WORLDWIDE Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC (UK)®, Physiologics®, Le Naturiste®, De Tuinen®,

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Julian Graves® 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/US Nutrition operations—distributes products under various US Nutrition brand names and third party private labels, each targeting specific market groups that include mass market retailers, supermarkets, club stores, drugstore chains, pharmacies, health and natural food stores, healthcare practitioners, wholesalers, distributors and international customers;

    North American Retail operations—includes 451 Vitamin World stores in the United States and 83 Le Naturiste stores operating in Canada, each selling branded and third-party products;

    European Retail operations—includes 586 Holland & Barrett stores in Europe and 8 franchise Holland & Barrett stores in South Africa, Singapore and Malta (which we include in this segment); 296 Julian Graves stores and 43 GNC (UK) stores in the United Kingdom ("UK"); 88 De Tuinen stores (including 16 franchise locations) in the Netherlands; and 29 Nature's Way stores in Ireland, each selling branded and third-party products; and

    Direct Response/E-Commerce operations—includes the sale of branded and third-party products primarily through mail order catalogs and the internet.

Subsequent Event

        On July 15, 2010, we announced the execution of a definitive merger agreement under which an affiliate of The Carlyle Group ("Carlyle") will acquire all of the outstanding common shares of NBTY for $55.00 per share in cash. We filed a preliminary proxy statement with the Securities and Exchange Commission on August 3, 2010, in connection with the proposed transaction.

        The board of directors of NBTY has unanimously approved the merger agreement and recommended that NBTY's stockholders adopt the agreement with Carlyle. A special meeting of NBTY's stockholders will be held as soon as practicable after the preparation and filing of a proxy statement with the Securities and Exchange Commission and subsequent mailing to shareholders. The mailing of the proxy statement is expected to take place following the expiration of the 35 calendar day period following the date of the merger agreement, during the course of which NBTY is permitted to solicit alternative proposals from third parties. The transaction is expected to close by December 31, 2010.

        Completion of the transaction is subject to customary conditions to closing, including approval of NBTY's stockholders and regulatory approvals, but is not subject to any condition with regard to the financing of the transaction. The transaction has fully committed financing, consisting of a combination of equity contributed by Carlyle and external debt financing.

Results of Operations

        The timing of acquisitions and the changing mix of our businesses may affect the comparability of results from one period to another.

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Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009:

    Net Sales

        Net sales by segment for the three months ended June 30, 2010 as compared with the prior comparable period were as follows:

 
  Net Sales by Segment
Three months ended June 30,
 
 
  2010   2009   Comparison
2010 vs. 2009
 
Segment
  Net Sales   % of total   Net Sales   % of total   $ change   % change  

Wholesale/US Nutrition

  $ 434,592     62.4 % $ 396,162     60.8 % $ 38,430     9.7 %

North American Retail

    52,543     7.6 %   51,223     7.9 %   1,320     2.6 %

European Retail

    152,051     21.9 %   151,293     23.2 %   758     0.5 %

Direct Response/E-Commerce

    56,670     8.1 %   53,029     8.1 %   3,641     6.9 %
                           
 

Net sales

  $ 695,856     100.0 % $ 651,707     100.0 % $ 44,149     6.8 %
                           

    Wholesale/US Nutrition

        Net sales for the Wholesale/US Nutrition segment increased $38,430 or 9.7% to $434,592 for the three months ended June 30, 2010. This increase was attributable to the following:

    Net sales from our major brands increased $13,381. Some of the major brands in this segment include Nature's Bounty®, Solgar®, Osteo Bi-Flex®, Sundown® and Ester-C®.

    Net sales from our sports nutrition brands (such as WORLDWIDE Sport Nutrition®, Pure Protein® and Met-Rx®) increased $12,801.

    Higher net sales of domestic private label products, which increased $6,184. This increase is attributable to higher sales volume.

    Wholesale net sales to international customers increased $5,050.

        We continue to adjust shelf space allocation among our wholesale brands to provide the best overall product mix and to respond to changing market conditions. These efforts have helped to strengthen US Nutrition's position in the mass marketplace. Wholesale/US Nutrition continues to leverage valuable consumer sales information obtained from our Vitamin World retail stores and Puritan's Pride Direct Response/E-Commerce operations in order to provide its mass-market customers with data and analyses to drive mass market sales.

        We use targeted promotions to grow overall net sales. Promotional programs and rebates as a percentage of sales were 11.7% for the three months ended June 30, 2010 as compared to 9.8% for the prior comparable period. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.

        Product returns were $5,700 or 1.1% of sales for the three months ended June 30, 2010 as compared to $7,982 or 1.8% of sales for the prior comparable period. We expect returns relating to normal operations to trend between 1% to 2% of Wholesale/US Nutrition sales in future quarters.

        One customer represented 24% and 29% of the Wholesale/US Nutrition segment's net sales for the three months ended June 30, 2010 and 2009, respectively. It also represented 15% and 18% of consolidated net sales for the three months ended June 30, 2010 and 2009, respectively. The loss of this customer, or any other major customer, would have a material adverse effect on our results of operations if we were unable to replace that customer.

    North American Retail

        Net sales for this segment increased $1,320 or 2.6% to $52,543 for the three months ended June 30, 2010. Sales for stores open more than one year (same store sales) increased 1.6%, representing $811 of the overall increase.

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        The following is a summary of North American Retail store activity for the three months ended June 30, 2010 and 2009:

 
  Three months
ended
June 30,
 
North American Retail stores:
  2010   2009  

Vitamin World

             
 

Open at beginning of the period

    446     444  
 

Opened during the period

    5     1  
 

Closed during the period

        (3 )
 

Open at end of the period

    451     442  

Le Naturiste

             
 

Open at beginning of the period

    85     87  
 

Opened during the period

         
 

Closed during the period

    (2 )   (1 )
 

Open at end of the period

    83     86  

Total North American Retail

             
 

Open at beginning of the period

    531     531  
 

Opened during the period

    5     1  
 

Closed during the period

    (2 )   (4 )
 

Open at end of the period

    534     528  

        We anticipate opening up to 10 additional Vitamin World stores during the remainder of this fiscal year. We also continually evaluate when and whether to close underperforming retail stores in this segment.

    European Retail

        Net sales for this segment increased $758 or 0.5% to $152,051 for the three months ended June 30, 2010. In local currency, same store sales increased 1.2% and total net sales increased 4.8% from the prior like period.

        The following is a summary of European Retail store activity for the three months ended June 30, 2010 and 2009:

 
  Three months
ended
June 30,
 
European Retail stores:
  2010   2009  

Company-owned stores

             

Open at beginning of the period

    1,020     984  

Opened during the period

    10     9  

Acquired during the period

         

Closed during the period

    (4 )   (1 )

Open at end of the period

    1,026     992  

Franchised stores

             

Open at beginning of the period

    32     27  

Opened during the period

        2  

Closed/sold during the period

    (8 )    

Open at end of the period

    24     29  

Total company-owned and franchised stores

             

Open at beginning of the period

    1,052     1,011  

Opened during the period

    10     11  

Acquired during the period

         

Closed/sold during the period

    (12 )   (1 )

Open at end of the period

    1,050     1,021  

        We anticipate opening approximately 22 additional stores during the remainder of this fiscal year. We also continually evaluate when and whether to close underperforming retail stores.

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    Direct Response/E-Commerce

        Direct Response/E-Commerce net sales increased $3,641 or 6.9% for the three months ended June 30, 2010 as compared to the prior comparable period. The total number of orders increased approximately 8.1% and the average order size decreased approximately 2.2% for the three months ended June 30, 2010 as compared to 2009. We are a leader in the U.S. direct response nutritional supplement industry and continue to increase the number of products available through our catalogs and websites.

        This segment continues to vary its promotional strategy throughout the fiscal year. Historical results reflect this pattern and therefore this segment should be viewed on an annual, and not quarterly, basis.

    Gross Profit

        Gross Profit by segment for the three months ended June 30, 2010 as compared with the prior comparable period was as follows:

 
  Gross Profit by Segment
Three months ended June 30,
 
 
  2010   2009   Comparison
2010 vs. 2009
 
 
   
  % of sales    
  % of sales  
Segment
  Gross Profit   Gross Profit   $ change   % change  

Wholesale/US Nutrition

  $ 167,998     38.7 % $ 131,587     33.2 % $ 36,411     27.7 %

North American Retail

    35,216     67.0 %   34,493     67.3 %   723     2.1 %

European Retail

    93,796     61.7 %   92,698     61.3 %   1,098     1.2 %

Direct Response/E-Commerce

    35,491     62.6 %   33,689     63.5 %   1,802     5.3 %
                           
 

Gross Profit

  $ 332,501     47.8 % $ 292,467     44.9 % $ 40,034     13.7 %
                           

        The Wholesale/US Nutrition segment's gross profit percentage increased to 38.7% for the three months ended June 30, 2010 as compared to 33.2% for the prior comparable period. The improved gross profit percentage reflects an increase in branded sales as a percentage of the total, which traditionally have higher margins than private label sales as well as efficiencies generated in manufacturing and supply chain management brought about by economies of scale.

        Due to competitive pressure in the private label business, we anticipate gross profit margins for our private label business will decrease for the remainder of fiscal 2010. This should adversely affect gross profits for our Wholesale/US Nutrition segment during this period. To address this issue, we have begun the process of initiating additional improvements in supply chain management. We are also increasing our focus on our branded product sales, which traditionally have higher gross profit margins.

        The increase in gross profit dollars across the other three segments is mainly attributable to sales increases, as the gross profit percentages remained relatively consistent with the prior comparable period.

    Advertising, Promotion and Catalog Expenses

        Total advertising, promotion and catalog expenses by segment for the three months ended June 30, 2010 as compared with the prior comparable period were as follows:

 
   
   
  Dollar
Change
  Percentage
Change
 
 
  Three months ended
June 30,
 
 
  2010 vs. 2009   2010 vs. 2009  
 
  2010   2009  

Wholesale / US Nutrition

  $ 26,916   $ 15,054   $ 11,862     79 %

North American Retail

    985     869     116     13 %

European Retail

    3,814     3,644     170     5 %

Direct Response / E-Commerce

    5,252     3,919     1,333     34 %

Corporate

    36     84     (48 )   (57 )%
                   
 

Total

  $ 37,003   $ 23,570   $ 13,433     57 %
                   
 

Percentage of net sales

    5.3 %   3.6 %            

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        The increase in the Wholesale/US Nutrition segment's advertising, promotion and catalog expense is primarily the result of an increase in co-op advertising of $7,966 and television advertising campaigns for some of our major brands. The increase in the Direct Response/E-Commerce advertising relates to an increase in internet advertising of $1,161.

    Selling, General and Administrative Expenses

        Selling, general and administrative expenses ("SG&A") by segment for the three months ended June 30, 2010 as compared with the prior comparable period were as follows:

 
   
   
  Dollar
Change
  Percentage
Change
 
 
  Three months ended
June 30,
 
 
  2010 vs. 2009   2010 vs. 2009  
 
  2010   2009  

Wholesale / US Nutrition

  $ 58,544   $ 54,629   $ 3,915     7 %

North American Retail

    30,275     30,069     206     1 %

European Retail

    69,582     69,156     426     1 %

Direct Response / E-Commerce

    14,799     13,133     1,666     13 %

Corporate

    18,918     15,631     3,287     21 %
                   
 

Total

  $ 192,118   $ 182,618   $ 9,500     5 %
                   
 

Percentage of net sales

    27.6 %   28.0 %            

        The increase in the Wholesale/US Nutrition segment's SG&A for the three months ended June 30, 2010 as compared to the prior comparable period is due to a charge of $3,533 for the write-down of an intangible asset associated with a private label customer contract, renewal of which is no longer probable.

        The increase in the Direct Response/E-Commerce SG&A is mainly due to additional freight costs, including fuel surcharges.

        The Corporate segment SG&A increased $3,287 primarily due to additional payroll and payroll related costs and charitable donations.

    IT Project Termination Costs

        During fiscal 2009, management terminated certain information technology projects relating to the Direct Response/E-Commerce, North American and European Retail segments that were determined to be ineffective and uneconomical. Previously capitalized software configuration, coding and other related costs of $10,127 were written off for the three months ended June 30, 2009.

    Interest Expense

        Interest expense decreased $1,090 due to lower principal balances outstanding on our Term Loan. The Term Loan balance was reduced by $49,329 to $228,171 at June 30, 2010 as compared to $277,500 at June 30, 2009.

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    Miscellaneous, net

        The components of miscellaneous, net were as follows:

 
   
   
  Dollar
Change
 
 
  Three months
ended
June 30,
 
 
  2010 vs. 2009  
 
  2010   2009  

Foreign exchange (losses) gains

  $ (589 ) $ 2,672   $ (3,261 )

Rental income

    141     308     (167 )

Investment income

    243     118     125  

Other

    273     298     (25 )
               

Total

  $ 68   $ 3,396   $ (3,328 )
               

        Miscellaneous, net decreased primarily due to changes in foreign currency exchange rates, primarily with respect to the British pound sterling and Canadian dollar, which resulted in foreign exchange losses for the three months ended June 30, 2010 as compared to gains in the prior comparable quarter.

    Provision for Income Taxes

        Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2013 and 2016. Therefore, our overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the three months ended June 30, 2010 and June 30, 2009 was 31.2% and 35.5%, respectively. The effective income tax rate was lower for the three months ended June 30, 2010 as compared to the prior comparable period primarily due to the impact of a UK restructuring completed during June 2010 which allows us to utilize certain tax benefits that were previously reserved and the partial release of a valuation allowance on state tax credits in the current year. We expect our overall effective income tax rate will be approximately 34.2% for the full year ending September 30, 2010.

Nine Months Ended June 30, 2010 Compared to the Nine Months Ended June 30, 2009:

    Net Sales

        Net sales by segment for the nine months ended June 30, 2010 as compared with the prior comparable period were as follows:

 
  Net Sales by Segment
Nine months ended June 30,
 
 
  2010   2009   Comparison
2010 vs. 2009
 
Segment
  Net Sales   % of total   Net Sales   % of total   $ change   % change  

Wholesale/US Nutrition

  $ 1,332,280     61.9 % $ 1,152,930     60.4 % $ 179,350     15.6 %

North American Retail

    158,770     7.4 %   151,577     7.9 %   7,193     4.7 %

European Retail

    487,059     22.6 %   441,757     23.2 %   45,302     10.3 %

Direct Response/E-Commerce

    174,058     8.1 %   161,549     8.5 %   12,509     7.7 %
                           
 

Net sales

  $ 2,152,167     100.0 % $ 1,907,813     100.0 % $ 244,354     12.8 %
                           

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    Wholesale/US Nutrition

        Net sales for the Wholesale/US Nutrition segment increased $179,350 or 15.6% to $1,332,280 for the nine months ended June 30, 2010. This increase was attributable to the following:

    Net sales from our major brands increased $68,897. Some of the major brands in this segment include Nature's Bounty®, Solgar®, Osteo Bi-Flex®, Sundown® and Ester-C®.

    Net sales from our sports nutrition brands (such as WORLDWIDE Sport Nutrition®, Pure Protein® and Met-Rx®) increased $29,303.

    Higher net sales of domestic private label products, which increased $59,436. This increase is attributable to higher sales volume as well as a re-allocation of shelf space at a major customer.

    Wholesale net sales to international customers increased $32,222.

    Net sales from all other brands decreased $10,509 due primarily to a re-allocation of shelf space at a major customer.

        We continue to adjust shelf space allocation among our numerous wholesale brands to provide the best overall product mix and to respond to changing market conditions. These efforts have helped to strengthen US Nutrition's position in the mass marketplace. Wholesale/US Nutrition continues to leverage valuable consumer sales information obtained from our Vitamin World retail stores and Puritan's Pride Direct Response/E-Commerce operations in order to provide its mass-market customers with data and analyses to drive mass market sales.

        We use targeted promotions to grow overall net sales. Promotional programs and rebates as a percentage of sales were 11.6% for the nine months ended June 30, 2010 as compared to 9.6% for the prior comparable period. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.

        Product returns were $16,387 or 1.1% of sales for the nine months ended June 30, 2010 as compared to $26,306 or 2.0% of sales for the prior comparable period. The product returns for the nine months ended June 30, 2010 are mainly attributable to returns in the ordinary course of business. Product returns for the prior comparable period were higher than normal due to the reallocation of shelf space by customers of our US Nutrition brands and approximately $2,000 for bars primarily related to the recall of our Met-Rx® bars containing peanut butter. We expect returns relating to normal operations to trend between 1% to 2% of Wholesale/US Nutrition sales in future quarters.

        One customer represented 27% and 30% of the Wholesale/US Nutrition segment's net sales for the nine months ended June 30, 2010 and 2009, respectively. It also represented 17% and 18% of consolidated net sales for the nine months ended June 30, 2010 and 2009, respectively. The loss of this customer, or any other major customer, would have a material adverse effect on our results of operations if we were unable to replace that customer.

    North American Retail

        Net sales for this segment increased $7,193 or 4.7% to $158,770 for the nine months ended June 30, 2010. Sales for stores open more than one year (same store sales) increased 3.7%, representing $5,487 of the overall increase.

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        The following is a summary of North American Retail store activity for the nine months ended June 30, 2010 and 2009:

 
  Nine months
ended
June 30,
 
North American Retail stores:
  2010   2009  

Vitamin World

             
 

Open at beginning of the period

    442     441  
 

Opened during the period

    12     8  
 

Closed during the period

    (3 )   (7 )
 

Open at end of the period

    451     442  

Le Naturiste

             
 

Open at beginning of the period

    86     81  
 

Opened during the period

        6  
 

Closed during the period

    (3 )   (1 )
 

Open at end of the period

    83     86  

Total North American Retail

             
 

Open at beginning of the period

    528     522  
 

Opened during the period

    12     14  
 

Closed during the period

    (6 )   (8 )
 

Open at end of the period

    534     528  

        We anticipate opening up to 10 additional Vitamin World stores during the remainder of this fiscal year. We also continually evaluate when and whether to close underperforming retail stores in this segment.

    European Retail

        Net sales for this segment increased $45,302 or 10.3% to $487,059 for the nine months ended June 30, 2010. Same store sales increased 7.2%, representing $29,979 of the overall increase. In local currency, same store sales increased 4.4% from the prior comparable period.

        The following is a summary of European Retail store activity for the nine months ended June 30, 2010 and 2009:

 
  Nine months
ended
June 30,
 
European Retail stores:
  2010   2009  

Company-owned stores

             

Open at beginning of the period

    1,004     975  

Opened during the period

    29     17  

Acquired during the period

    3     2  

Closed during the period

    (10 )   (2 )

Open at end of the period

    1,026     992  

Franchised stores

             

Open at beginning of the period

    28     22  

Opened during the period

    7     9  

Closed/sold during the period

    (11 )   (2 )

Open at end of the period

    24     29  

Total company-owned and franchised stores

             

Open at beginning of the period

    1,032     997  

Opened during the period

    36     26  

Acquired during the period

    3     2  

Closed/sold during the period

    (21 )   (4 )

Open at end of the period

    1,050     1,021  

        We anticipate opening approximately 22 additional stores during the remainder of this fiscal year. We also continually evaluate when and whether to close underperforming retail stores.

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Table of Contents

    Direct Response/E-Commerce

        Direct Response/E-Commerce net sales increased $12,509 or 7.7% for the nine months ended June 30, 2010 as compared to the prior comparable period. The total number of orders increased approximately 10.8% and the average order size decreased 0.5% as compared to the prior comparable period. We are a leader in the U.S. direct response nutritional supplement industry and continue to increase the number of products available through our catalogs and websites.

        This segment continues to vary its promotional strategy throughout the fiscal year. Historical results reflect this pattern and therefore this segment should be viewed on an annual, and not quarterly, basis.

    Gross Profit

        Gross Profit by segment for the nine months ended June 30, 2010 as compared with the prior comparable period was as follows:

 
  Gross Profit by Segment
Nine months ended June 30,
 
 
  2010   2009   Comparison
2010 vs. 2009
 
 
   
  % of sales    
  % of sales  
Segment
  Gross Profit   Gross Profit   $ change   % change  

Wholesale/US Nutrition

  $ 479,131     36.0 % $ 339,060     29.4 % $ 140,071     41.3 %

North American Retail

    106,377     67.0 %   101,267     66.8 %   5,110     5.0 %

European Retail

    302,427     62.1 %   275,667     62.4 %   26,760     9.7 %

Direct Response/E-Commerce

    108,762     62.5 %   100,433     62.2 %   8,329     8.3 %
                           
 

Gross Profit

  $ 996,697     46.3 % $ 816,427     42.8 % $ 180,270     22.1 %
                           

        The Wholesale/US Nutrition segment's gross profit percentage increased to 36.0% for the nine months ended June 30, 2010 as compared to 29.4% for the prior comparable period. The prior comparable period was affected by higher raw material and other manufacturing costs that were not offset by higher prices charged to customers and lower margins on domestic private label products. During the nine months ended June 30, 2010, the improved gross profit percentage reflects a more stable raw materials environment as well as efficiencies generated in manufacturing and supply chain management brought about by economies of scale.

        Due to competitive pressure in the private label business, we anticipate gross profit margins for our private label business will decrease for the remainder of fiscal 2010. This should adversely affect gross profits for our Wholesale/US Nutrition segment during this period. To address this issue, we have begun the process of initiating additional improvements in supply chain management. We are also increasing our focus on our branded product sales, which traditionally have higher gross profit margins.

        The increase in gross profit dollars for the other three segments relates primarily to higher sales volume for the nine months ended June 30, 2010 as compared to the prior comparable period.

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Table of Contents

    Advertising, Promotion and Catalog Expenses

        Total advertising, promotion and catalog expenses by segment for the nine months ended June 30, 2010 as compared with the prior comparable period were as follows:

 
   
   
  Dollar
Change
  Percentage
Change
 
 
  Nine months ended
June 30,
 
 
  2010 vs. 2009   2010 vs. 2009  
 
  2010   2009  

Wholesale / US Nutrition

  $ 85,471   $ 58,176   $ 27,295     47 %

North American Retail

    6,971     6,925     46     1 %

European Retail

    10,090     9,128     962     11 %

Direct Response / E-Commerce

    13,911     13,343     568     4 %

Corporate

    239     317     (78 )   (25 )%
                   
 

Total

  $ 116,682   $ 87,889   $ 28,793     33 %
                   
 

Percentage of net sales

    5.4 %   4.6 %            

        The increase in the Wholesale/US Nutrition segment's advertising, promotion and catalog expense is the result of an increase in co-op advertising of $16,342 and television advertising campaigns of $5,082 for some of our major brands. The increase in the European Retail advertising also relates to television advertising.

    Selling, General and Administrative Expenses

        SG&A by segment for the nine months ended June 30, 2010 as compared with the prior comparable period were as follows:

 
   
   
  Dollar
Change
  Percentage
Change
 
 
  Nine months ended
June 30,
 
 
  2010 vs. 2009   2010 vs. 2009  
 
  2010   2009  

Wholesale / US Nutrition

  $ 169,431   $ 169,917   $ (486 )   %

North American Retail

    92,928     92,673     255     %

European Retail

    211,413     200,152     11,261     6 %

Direct Response / E-Commerce

    45,010     41,853     3,157     8 %

Corporate

    56,661     48,582     8,079     17 %
                   
 

Total

  $ 575,443   $ 553,177   $ 22,266     4 %