NTY Nbty Inc.

Intangible Assets

        The carrying amounts of intangible assets as of December 31, 2009 and September 30, 2009 were as follows:

        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 December 31, 2009 and 2008 was $3,999 and $4,035, respectively.

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

4. IT Project Termination Costs

        During December 2008, management determined that certain information technology projects relating to the Direct Response/E-Commerce segment that were ineffective and not economical would be terminated. As a result, previously capitalized software configuration and other related costs of $8,647 were written-off during the three months ended December 31, 2008.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

5. Accrued Expenses and Other Current Liabilities

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

6. Long-Term Debt

        The components of long-term debt were as follows:

        During December 2009, we made an additional principal payment of $3,000 on the Term Loan.

7. Litigation Summary

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 2008.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

7. Litigation Summary (Continued)

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. Most recently, the Court held a case-management conference on August 5, 2009, at which the parties requested, and the Court agreed, to keep the stay in place for at least another six months. We anticipate that the Court will hold another conference in early 2010. 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.

Claims in the Ordinary Course

        In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, intellectual property and 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.

8. 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 December 31, 2009 and 2008 was 34.8% and 36.1%, respectively. The effective income tax rate was lower for the three months ended December 31, 2009 as compared to the prior comparable period due to losses attributable to certain foreign subsidiaries for which no benefit was recognized in the prior year and due to 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 December 31, 2009, we had $1,314 and $688 accrued for the potential payment of interest and penalties, respectively. As of December 31, 2009, we were subject to U.S. Federal Income Tax examinations for the tax years 2006-2009, 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.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

8. Income Taxes (Continued)

        At December 31, 2009, we had a liability of $9,091 for unrecognized tax benefits, the recognition of which would have an effect of $6,126 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.

9. Stock-based Compensation

        During the three months ended December 31, 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. All stock options were granted at a price equal to the fair market value 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.

        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 during the three months ended December 31, 2009:

        During the three months ended December 31, 2009, the Company also granted 21 restricted stock units to directors and certain executives under the 2009 Equity Awards Plan. The fair market value 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.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

10. 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:

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Level 1—Quoted prices in active markets for identical assets or liabilities.



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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.



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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.

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 which 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 three months ended December 31, 2009 recorded through OCI, net of income tax was $800. At December 31, 2009, the swap contracts liability was $8,878. Of this amount, $3,260 is included in other current liabilities and $5,618 is included in other liabilities. At September 30, 2009, the swap contracts

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

10. Fair Value of Financial Instruments (Continued)

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).

7 ¹ / 8 % Senior Subordinated Notes

        The face value and the fair value of the 7 ¹ / 8 % Senior Subordinated Notes at December 31, 2009, was $190,000 and $190,475, respectively. The fair value of the 7 ¹ / 8 % Senior Subordinated Notes was based on then quoted market prices (Level 1).

11. 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 may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts), investments and trade accounts receivable. We mitigate our risk by investing in or through major financial institutions. At December 31, 2009, we had $1,425 of municipal bonds, which were classified as available-for-sale investments and included in non-current assets.

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 individual customers accounted for the following percentages of net sales for the three months ended December 31, 2009 and 2008, respectively:

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

11. Business and Credit Concentration (Continued)

        The loss of any one 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/U.S. Nutrition segment's gross accounts receivable as of December 31, 2009 and September 30, 2009, respectively:

12. Supplemental Disclosure of Cash Flow Information

13. 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. During fiscal 2009, we changed the way certain expenses are allocated to the segments. Specifically, certain shipping and warehouse costs, information technology and advertising costs previously included in the Corporate segment are now allocated to the Wholesale/US Nutrition, North American Retail and Direct Response/E-Commerce segments on a percentage of sales basis. All prior period segment information has been adjusted to conform with the current period presentation.

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

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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.



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North American Retail—This segment generates revenue through its 448 owned and operated Vitamin World and Nutrition Warehouse stores selling proprietary brand and third-party products, and through its Canadian operation of 86 owned and operated Le Naturiste stores.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

13. Segment Information (Continued)

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European Retail—This segment generates revenue through its 543 Holland & Barrett stores, 351 Julian Graves stores and 32 GNC stores in the UK, 82 DeTuinen stores in the Netherlands and 25 Nature's Way stores in Ireland. In addition, Holland and Barrett has 14 franchise locations in South Africa, Singapore and Malta. Such revenue consists of sales of proprietary brand and third-party products, as well as franchise fees.



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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.

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

         Net sales by location of customer:

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

13. Segment Information (Continued)