Nbty, Inc. (NTY) - Description of business

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Company Description
Strategy   2     Operating Segments   4     Employees and Advertising   6     Manufacturing, Distribution and Quality Control   7     Research and Development   8     Competition; Customers   8     Government Regulation   8     International Operations   14     Trademarks   15     Raw Materials   15     Seasonality   15ITEM 1ARISK FACTORSITEM 1BUNRESOLVED STAFF COMMENTSITEM 2PROPERTIESITEM 3LEGAL PROCEEDINGSITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART II ITEM 5MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Dividend Policy29     Price Range of Common Stock   30     Securities Authorized for Issuance under Equity Compensation Plans   31     Purchases of Equity Securities by the Issuer and Affiliated Purchasers   31ITEM 6SELECTED FINANCIAL DATAITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Background33     Critical Accounting Estimates and Policies   34     General   41     Results of Operations   41     Seasonality   54     Off-Balance Sheet Arrangements   55     Indemnification of Officers and Directors   55           [/TABLE] i     Liquidity and Capital Resources   55     Related Party Transactions   62     Inflation   63     Financial Covenants and Credit Rating   63     New Accounting Developments   63 ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   66 ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   67 ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   67 ITEM 9A   CONTROLS AND PROCEDURES   68     Management's Report on Internal Control Over Financial Reporting   68 ITEM 9B   OTHER INFORMATION   70 PART III     ITEM 10   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT   70 ITEM 11   EXECUTIVE COMPENSATION   70 ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   70 ITEM 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   70 ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES   70 PART IV     ITEM 15   EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES   71     Index to Consolidated Financial Statements and Schedules   73     Report of Independent Registered Public Accounting Firm   F-1     Report of Independent Registered Public Accounting Firm   F-3     Financial Statements   F-4     Financial Statement Schedule   S-1     Signatures         Certifications         Exhibits     ii PART I Forward Looking Statements          This Annual Report on Form 10-K (this "Report") contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of NBTY, Inc. and its subsidiaries (collectively, the "Company"). Discussions containing such forward-looking statements may be found in Items 1, 1A, 2, 3, 7, 7A and 9A, as well as within this Report generally. In addition, when used in this Report, the words "subject to," "believe," "expect," "plan," "project," "estimate," "intend," "may," "should," "can," or "anticipate," or the negative thereof, or variations thereon, or similar expressions, and discussions of strategy, are intended to identify forward-looking statements, which 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 which may materially affect forward-looking statements include: (i) slow or negative growth in the nutritional supplement industry; (ii) 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; (iii) adverse publicity regarding nutritional supplements; (iv) our inability to retain customers of companies (or mailing lists) recently acquired; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of our management; (viii) increases in our cost of borrowings or unavailability of additional debt or equity capital, or both; (ix) unavailability of, or inability to consummate, advantageous acquisitions in the future, or our inability to integrate the acquisitions into the mainstream of our business; (x) changes in general worldwide economic and political conditions in the markets in which we may compete from time to time; (xi) our inability to gain or hold market share of our wholesale or retail customers anywhere in the world; (xii) unavailability of electricity in certain geographical areas; (xiii) our inability to obtain or renew insurance or the costs of same; (xiv) exposure to and expense of defending and resolving product liability claims, intellectual property claims and other litigation; (xv) our ability to implement our business strategy successfully; (xvi) our inability to manage our retail, wholesale, manufacturing and other operations efficiently; (xvii) consumer acceptance of our products; (xviii) our inability to renew leases for our retail locations; (xix) inability of our retail stores to attain or maintain profitability; (xx) the absence of clinical trials for many of our products; (xxi) sales and earnings volatility or trends for us and our market segments; (xxii) the efficacy of our internet and on-line sales and marketing strategies; (xxiii) fluctuations in foreign currencies, including the British Pound, the Euro and the Canadian Dollar; (xxiv) import-export controls on sales to foreign countries; (xxv) our inability to secure favorable new sites for, and delays in opening, new retail locations; (xxvi) 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, proposed Good Manufacturing Practices and Section 404 requirements of the Sarbanes-Oxley Act of 2002 in the United States, and the Food Supplements Directive and Traditional Herbal Medicinal Products Directive in Europe; (xxvii) the mix of our products and the profit margins thereon; (xxviii) the availability and pricing of raw materials; (xxix) risk factors discussed elsewhere in this Report; (xxx) adverse effects on us of increased gasoline prices and potentially reduced traffic flow to our retail locations; (xxxi) adverse tax determinations; (xxxii) the loss of a significant customer; and (xxxiii) other factors beyond our control.         Readers are cautioned not to place undue reliance on forward-looking statements. We cannot guarantee future results, trends, events, levels of activity, performance or achievements. 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.         Industry data used throughout this Report was obtained from industry publications and internal Company estimates. While we believe this information is reliable, its accuracy has not been independently verified and cannot be guaranteed. Item 1.    BUSINESS General         NBTY, Inc. (together with its subsidiaries, the "Company," "NBTY," "we," or "us") is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements in the United States ("US") and throughout the world. Under a number of the Company's and third-party brands, we offer over 22,000 products, including vitamins, minerals, herbs, sports nutrition products, diet aids and other nutritional supplements. We are vertically integrated because we purchase raw materials, formulate and manufacture our products, and then market these products through our four channels of distribution: • Wholesale distribution to mass merchandisers, drug store chains, supermarkets, independent pharmacies and health food stores under various brand names, including Nature's Bounty®, Solgar®, Ester-C®, SISU® and Sundown® brands; • Direct Response/Puritan's Pride, a leading US nutritional supplement e-commerce/direct response business segment, under the Puritan's Pride® brand in catalogs and through the internet; • North American retail operations, including 476 Vitamin World and Nutrition Warehouse retail stores as of September 30, 2006, operating throughout the United States in 44 states, Guam, Puerto Rico and the Virgin Islands, and 96 Le Naturiste retail stores in Quebec, Canada; and • European retail operations, consisting of 549 Holland & Barrett, GNC (UK) and Nature's Way retail stores as of September 30, 2006, operating throughout the United Kingdom, or UK, and Ireland, and 68 De Tuinen retail stores operating in the Netherlands.         At September 30, 2006, we manufactured about 90% of the nutritional supplements we sold.        The Company was incorporated in Delaware in 1979 under the name Nature's Bounty, Inc. On March 26, 1995, we changed our name to NBTY, Inc. Our principal executive offices are at 90 Orville Drive, Bohemia, New York 11716, our telephone number is (631) 567-9500, and our website is www.nbty.com . Our UK subsidiary, Holland & Barrett Holdings Limited, has its principal executive offices in Nuneaton, UK, and our Dutch subsidiary, De Tuinen, B.V., has its principal executive offices in Beverwijk, Netherlands.        Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed or furnished under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are available at no cost on our website. We make these reports available as soon as reasonably practicable after we file them electronically with the Securities and Exchange Commission (the "SEC").Business Strategy         The Company targets the growing value-conscious consumer segment by offering high-quality products at a value price. Our objectives are to increase sales, improve manufacturing efficiencies, increase profitability and strengthen our market position through the following key strategies.         Expand Existing Channels of Distribution.     We plan to continue expanding and improving our existing channels of distribution through aggressive marketing and synergistic acquisitions, to the extent available on terms acceptable to us, to increase our sales and profitability and enhance our overall market share. Specific plans to expand channels of distribution include the following. • Increase Wholesale Sales in the US and in Foreign Markets.     We expect to strengthen our wholesale business by continuing to increase our sales in food, drug and mass merchandising channels by (i) increasing revenues from existing customers through strong promotional activities and aggressive introduction of new and innovative products, (ii) increasing shelf space in major retailers, (iii) leveraging the advertising and promotion of our major specialty brands, such as Osteo-Bi-Flex®, MET-Rx®, Flex-a-min®, Knox®, and, most recently, Ester-C®, and (iv) continuing to increase our private label revenue with new customers and timely product introductions. In addition, we continue to seek to form new distribution alliances throughout the world for our products, while strengthening existing relationships. • Increase Direct Response/Puritan's Pride® Sales.     We expect to continue to strengthen our leading position in the e-commerce/direct response business by (i) continuing to build brand and customer loyalty across catalog and internet channels, (ii) increasing e-commerce activity from a variety of online media channels, including search, e-mail marketing, affiliate marketing and shopping portals, (iii) focusing on enhanced retention and re-activation programs on-line and off-line, while testing new promotions to further improve response rates, (iv) improving the shopping experience available to our customers with website enhancements and call center system upgrades, (v) improving automated picking and packing to fulfill sales order requests with greater speed and accuracy, and (vi) increasing manufacturing capability to quickly introduce and deliver new products in response to customer demand. We also intend to continue our strategy of acquiring customer lists, brand names and inventory of other mail order companies that have similar or complementary products that we believe we can integrate into our operations efficiently, without adding substantial overhead. • Increase Retail Sales in North America.     We intend to continue focusing on the development of a nationwide chain of profitable retail stores in the United States and Canada. To that end, at September 30, 2006, we operated 476 Vitamin World and Nutrition Warehouse retail stores in regional and outlet malls throughout the United States, and 96 Le Naturiste retail stores throughout Quebec, Canada. We opened nine Vitamin World stores in the United States since October 1, 2005, or approximately 1.9% of the total number of stores in operation in the United States at September 30, 2006, and closed 75 underperforming stores during the same period. As a result, as of September 30, 2006, we operated 66 fewer Vitamin World stores than in the fiscal year ended September 30, 2005. Although we plan to open ten new stores during the 2007 fiscal year, we may close up to 25 existing Vitamin World stores during that time. Fifty Vitamin World retail store leases expire during the 2007 fiscal year, and, in an effort to improve Vitamin World's profitability, any store whose lease cannot be renegotiated on favorable terms may be closed when its lease lapses. We maintain our Savings Passport Card, a customer loyalty program that we believe increases customer traffic and provides incentives to purchase at Vitamin World stores. The Savings Passport Card also helps us track customer preferences and purchasing trends. At the end of fiscal 2006, we had approximately seven million Savings Passport Card members. • Increase Retail Sales in the UK, Ireland and Europe.     We continue selectively expanding the number of our Holland & Barrett stores throughout the UK. At September 30, 2006, we had 498 Holland & Barrett and 19 Nature's Way stores operating in the UK and Ireland. In fiscal 2006, Nature's Way opened three new stores, and Holland & Barrett opened seven new stores, converted one GNC (UK) retail store to a Holland & Barrett store and bought back one franchise. We project that, during the next fiscal year, we will open additional new retail stores in the UK and Ireland.         At September 30, 2006, there were 32 GNC (UK) retail stores in operation in the UK and 68 De Tuinen retail stores in the Netherlands, including 21 franchise De Tuinen locations. We will continue to evaluate opportunities to open additional GNC (UK) stores in the UK and De Tuinen stores in Europe.         Introduce Innovative New Products.     We consistently have been among the first in the industry to introduce innovative products in response to new studies, research and consumer preferences. Given the changing nature of consumer demand for new products and the continued publicity about theimportance of vitamins, minerals and nutritional supplements in the promotion of general health, we believe that we will continue to maintain our core customer base and attract new customers based upon our ability to respond rapidly to consumer demand with high quality, value-oriented products.         Enhance Vertical Integration.     We believe our vertical integration gives us a significant competitive advantage by allowing us to (i) maintain higher quality standards while lowering product costs, which we pass on to our customers as lower prices, (ii) respond to scientific and popular reports and consumer buying trends more quickly, (iii) meet customer delivery schedules more effectively, (iv) reduce dependence on outside suppliers, and (v) improve overall operating margins. We continually evaluate ways to enhance our vertical integration by leveraging manufacturing, distribution, purchasing and marketing capabilities, and otherwise improving the efficiency of our operations.         Build Infrastructure to Support Growth.     We have technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately 45 billion tablets, capsules and softgels per year. In February 2006, we completed a 21 million square foot expansion of our softgel facility in Bayport, New York. As a result of this expansion, the Bayport facility's manufacturing capacity increased by approximately 53% to approximately 8.3 billion softgels per year. We regularly evaluate our manufacturing operations and make investments in infrastructure, as necessary, to support our continuing growth.         Implement Strategic Acquisitions.     In the normal course of our business, we seek acquisition opportunities, both in the United States and internationally, of companies that complement or extend our existing product lines, increase our market presence, expand our distribution channels, and are compatible with our business philosophy. We have successfully acquired more than 30 companies or businesses since 1986, enabling us to expand our product lines and scope of distribution significantly. On October 2, 2006, we acquired Zila Nutraceutical, Inc., and renamed it The Ester C Company. For more information about our acquisitions, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Notes to our Financial Statements in this Report. We will continue to evaluate acquisition opportunities across the industry and around the world.         Utilize Management Team Experience.     Our management team has extensive experience in the nutritional supplement industry and has developed long-standing relationships with our suppliers and customers. Our executive officers have an average of over 20 years in the industry. We will continue to employ the talent, experience and expertise of our management team to realize our goals.Operating Segments         We operate in the nutritional supplement industry, focusing our products and services on four segments of this industry: Wholesale/US Nutrition, North American Retail, European Retail and Direct Response/Puritan's Pride.        The following table sets forth the percentage of net sales for each of our operating segments:     Fiscal Year Ended September 30,       2006   2005   2004   Wholesale/US Nutrition   47 % 43 % 44 % North American Retail   13 % 13 % 13 % European Retail/Holland & Barrett/GNC (UK)   30 % 33 % 30 % Direct Response/Puritan's Pride   10 % 11 % 13 %               100 % 100 % 100 %         You can find more information about the financial results of each segment in Note 18 to the Consolidated Financial Statements in this Report.         Wholesale/US Nutrition.     We market our products under various brand names to many channels of distribution. We sell our products to leading mass merchandisers, drug store chains and supermarkets, independent pharmacies, health food stores, health food store wholesalers, and other retailers. We sell Nature's Bounty®, Rexall® and Sundown® brands to mass merchandisers, drug store chains, drug wholesalers, supermarket chains and wholesalers. We also sell directly to health food stores under the Solgar®, SISU® and Good 'N Natural® brands, and sell products, including a specialty line of vitamins, to health food wholesalers under our American Health® brand. Over the past several years, we have expanded product sales to many countries throughout Europe, Asia and Latin America.         North American Retail.     At the end of fiscal 2006, we operated 476 Vitamin World and Nutrition Warehouse retail stores in regional and outlet malls throughout the United States, and 96 Le Naturiste retail stores throughout Quebec, Canada. Each store carries a full line of products, both our brands and products manufactured by others. Nutritional supplement products that we manufactured accounted for approximately 70% of North American Retail's total sales in fiscal 2006. Our direct interaction with our retail customers helps us identify regional buying trends, customer preferences, product acceptances and price trends. We use this information in initiating sales programs and new product introductions for all our divisions. In addition to www.puritan.com and www.vitamins.com , which focus on our direct response segment, we also maintain www.vitaminworld.com . We designed the www.vitaminworld.com site to permit our customers to purchase nutritional supplements on the internet and to locate our retail stores. This website also provides information about the products we offer in our retail stores, and an easy and effective way to purchase Vitamin World® products through our e-commerce portal.         European Retail.     Our Holland & Barrett, GNC (UK) and DeTuinen subsidiaries generate our European Retail sales from 498 Holland & Barrett stores in the UK, 19 Nature's Way stores in Ireland, 32 GNC (UK) stores in the UK, and 68 DeTuinen stores in the Netherlands. Holland & Barrett, one of the UK's leading nutritional supplement retailers, markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements. Holland & Barrett stores also sell food products, such as fruits and nuts, and confectionery. Our Nature's Way® product offerings are similar to those of Holland & Barrett. GNC (UK) stores specialize in vitamins, minerals and sports nutrition products. De Tuinen is a leading retailer of health food products, selected confectionery, and lifestyle giftware. Nutritional supplement products that we manufactured accounted for approximately 43% of European Retail's total sales in fiscal 2006.         Direct Response.     We offer, through mail order and internet e-commerce, a full line of vitamins and other nutritional supplement products as well as selected personal care items, under our Puritan's Pride® brand names at prices that are generally at a discount from those of similar products sold in retail stores. Through our Puritan's Pride® brand, we are a leader in the US direct response nutritional supplement industry with more than four million customers on our customer list, with response rates that we believe are above the industry average. We intend to attract new customers in our direct response operation through aggressive marketing techniques in the United States and around the world, and through selective acquisitions. We regularly update our mail order lists by adding new customers and deleting those who have not placed orders within a designated period of time. We believe this maximizes catalog sales while reducing mailing and printing costs. We also advertise in newspaper supplements and conduct insert programs with other mail order companies to add new customers to our mailing lists and websites, and to increase the average order size. Our use of state-of-the-art equipment, such as computerized mailing, bar-coded addresses and automated picking and packing systems enables us to process orders quickly, economically and efficiently. Typically, we fill orders within 24 hours of receipt. Our equipment and expertise also lowers our per customer distribution costs, thereby enhancing margins and enabling us to lower our prices. Our www.puritan.com and www.vitamins.com websites provide a practical and convenient method for consumers wishing topurchase products that promote healthy living. Through these websites, consumers have access to more than 1,500 products offered through our Puritan's Pride® mail order catalog.        See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Notes to our Consolidated Financial Statements in this Report, for more information regarding financial information about the geographic areas where we conduct our business.Employees and Advertising         As of September 30, 2006, we employed approximately 10,900 persons, including: (i) 2,247 sales associates located throughout the United States in our Vitamin World and Nutrition Warehouse retail stores; (ii) 2,840 manufacturing, shipping and packaging associates throughout the United States; (iii) 615 associates in administration throughout the United States; (iv) 183 associates who sell to wholesale distributors and customers; (v) 60 in-house advertising associates; (vi) 3,539 associates in our Holland & Barrett operations, including: (A) 3,106 retail associates, (B) 248 associates in distribution, and (C) 185 associates in administration; (vii) 352 associates in our De Tuinen operations, including: (A) 312 retail associates, and (B) 40 associates in administration and warehousing; (viii) 189 associates in GNC (UK) retail stores; (ix) 112 associates in Nature's Way retail stores; and (x) 364 associates in Le Naturiste operations, including (A) 304 retail associates, (B) 36 associates in distribution, and (C) 24 associates in administration; (xi) 255 associates in Direct Response operations; (xii) 83 associates in SISU operations (including 28 manufacturing associates); and (xiii) 90 associates in Solgar international operations. In addition, we sell products through commissioned sales representative organizations. We believe we have satisfactory employee and labor relations.        For the fiscal years ended September 30, 2006, 2005 and 2004, we spent approximately $104 million, $108 million and $85 million, respectively, on advertising and promotions, including print, media and cooperative advertising. We create our own advertising materials through our in-house staff of associates. In the UK and Ireland, both Holland & Barrett and Nature's Way advertise on television and in national newspapers, and conduct sales promotions. GNC (UK) and De Tuinen also advertise in newspapers and conduct sales promotions. In addition, Holland & Barrett and De Tuinen each publish their own magazines with articles and promotional materials. SISU advertises in trade journals and magazines and conducts sales promotions.Manufacturing, Distribution and Quality Control         At September 30, 2006, we employed approximately 2,840 manufacturing, shipping and packaging associates throughout the United States and 28 such associates in Burnaby, British Columbia. We manufacture in New York, California, Illinois, Florida, Georgia, New Jersey and Canada. We have technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately 45 billion tablets, capsules and softgels per year. In February 2006, we completed a $21 million expansion of our softgel facility in Bayport, New York. As a result of this expansion, the Bayport facility can produce approximately 8.3 billion softgels per year, or a 53% increase in capacity.        All our manufacturing operations are subject to good manufacturing practice regulations, or GMPs, promulgated by the United States Food and Drug Administration, or FDA, and other applicable regulatory standards. We are subject to similar regulations and standards in Canada. We believe our manufacturing processes are compliant with current GMPs. We manufacture products for our four operating segments and for third parties. We believe our manufacturing and distribution facilities generally are adequate to meet our current business requirements and our currently anticipated increases in sales.        We place special emphasis on quality control. We assign a lot number to all raw materials and initially hold them in quarantine, while our laboratory chemists assay them for compliance with established specifications. Once released, samples are retained, and we process the material according to approved formulae by mixing, granulating, compressing, encapsulating and, sometimes, coating operations. After a tablet or capsule is manufactured, laboratory chemists and technicians test its weight, purity, potency, disintegration and dissolution, if applicable. We hold the product in quarantine until we complete this evaluation, and determine that the product meets all applicable specifications. Generally, when products such as vitamin tablets are ready for bottling, our automated equipment counts the tablets, inserts them into bottles, adds a tamper-resistant cap with an inner safety seal and affixes a label with lot number and expiration date. We use computer-generated documentation for picking and packing for order fulfillment.        Our manufacturing operations are designed to allow low-cost production of a wide variety of products of different quantities, sizes and packaging, while maintaining a high level of customer service and quality. Flexible production line changeover capabilities and reduced cycle times allow us to respond quickly to changes in manufacturing schedules.         Inventory Control.     We have installed inventory control systems at our facilities that track each product as we receive it from our supply sources through manufacturing and shipment of each product to customers. To facilitate this tracking, most products we sell are bar coded. Our inventory control systems report shipping, sales and individual SKU level inventory information. We manage the retail sales process by monitoring customer sales and inventory levels by product category. We believe our distribution capabilities increase our flexibility in responding to our customers' delivery requirements.        Our purchasing staff regularly reviews and analyzes information from our point-of-sale computer system and makes merchandise allocation and markdown decisions based on this information. We use an automated reorder system to maintain in-stock positions on key items. These systems give us the information we need to determine the proper timing and quantity of reorders.         Financial Reporting.     Our financial reporting systems provide us with detailed financial reporting to support our operating decisions and cost control efforts. These systems provide functions such as scheduling of payments, receiving of payments, general ledger interface, vendor tracking and flexible reporting options.Research and Development         We did not expend material amounts for research and development of new products during the last three years.Competition; Customers         The market for nutritional supplement products is highly competitive. Competition is based primarily on price, quality and assortment of products, customer service, marketing support, and availability of new products. We believe we compete favorably in all these areas.        Our direct competition consists primarily of publicly and privately owned companies, which tend to be highly fragmented in terms of both geographical market coverage and product categories. We also compete with companies that may have broader product lines, larger sales volumes, or both. Our products also compete with nationally advertised brand name products. Most of the national brand companies have resources greater than we do.        There are numerous companies in the vitamin and nutritional supplement industry selling products to retailers, including mass merchandisers, drug store chains, independent drug stores, supermarkets and health food stores. Many companies within the industry are privately held. Therefore, we cannot assess precisely the size of all our competitors, or where we rank in comparison to such privately held competitors with respect to sales to retailers.        During fiscal 2006, two individual customers accounted for the following percentages of the Wholesale/US Nutrition division's net sales: Customer A   12 % Customer B   16 %         Customer A is primarily a supplier to Customer B. Therefore, the loss of Customer B would likely result in the loss of most of the net sales to Customer A.        As of September 30, 2006, only one individual customer accounted for more than 10% of the Wholesale/US Nutrition division's total gross accounts receivable. Customer B above accounted for 12% of the division's total gross accounts receivable as of September 30, 2006.        While no one customer represented, individually, more than 10% of our total gross accounts receivable, or our consolidated net sales, for fiscal 2006, the loss of either Customer A or Customer B would have a material adverse effect on the Wholesale/US Nutrition division if we were unable to replace it.Government Regulation         United States.     The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of our products are subject to regulation by federal agencies, including the FDA, the Federal Trade Commission, or FTC, the United States Postal Service, the Consumer Product Safety Commission, the Department of Agriculture, and the Environmental Protection Agency or EPA. These activities also are subject to regulation by various agencies of the states, localities and foreign countries in which our products are sold. In particular, the FDA, under the Federal Food, Drug, and Cosmetic Act, or FDCA, regulates the formulation, manufacturing, packaging, labeling, distribution and sale of dietary supplements, including vitamins, minerals and herbs, and of over-the-counter, or OTC, drugs. The FTC regulates the advertising of these products, and the Postal Service regulates advertising claims with respect to such products sold by mail order. The National Advertising Division, or NAD, of the Council of Better Business Bureaus oversees an industry-sponsored self-regulatory system that permits competitors to resolve disputes over advertising claims. The NAD has no enforcement authority of itsown, but may refer matters that the NAD views as violating FTC guides or rules to the FTC for further action.        The FDCA has been amended several times with respect to dietary supplements, in particular by the Dietary Supplement Health and Education Act of 1994, known as DSHEA. DSHEA established a new framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA defines "dietary supplements" as vitamins, minerals, herbs, other botanicals, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, constituents, extracts or combinations of such dietary ingredients. Generally, under DSHEA, dietary ingredients that were marketed in the United States before October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a "new" dietary ingredient (a dietary ingredient that was not marketed in the United States before October 15, 1994) must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been "present in the food supply as an article used for food" without being "chemically altered." A new dietary ingredient notification must provide the FDA evidence of a "history of use or other evidence of safety" establishing that use of the dietary ingredient "will reasonably be expected to be safe." A new dietary ingredient notification must be submitted to the FDA at least 75 days before the initial marketing of the new dietary ingredient. There can be no assurance that the FDA will accept the evidence of safety for any new dietary ingredients that we may want to market, and the FDA's refusal to accept such evidence could prevent the marketing of such dietary ingredients. The FDA is in the process of developing guidance for the industry to clarify the FDA's interpretation of the new dietary ingredient notification requirements, and this guidance may raise new and significant regulatory barriers for new dietary ingredients. In addition, increased FDA enforcement could lead the FDA to challenge dietary ingredients already on the market as "illegal" under the FDCA because of the failure to submit a new dietary ingredient notification.        DSHEA permits "statements of nutritional support" to be included in labeling for dietary supplements without FDA pre-approval. Such statements may describe how a particular dietary ingredient affects the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well-being (but may not state that a dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease). A company that uses a statement of nutritional support in labeling must possess evidence substantiating that the statement is truthful and not misleading. In some circumstances, it is necessary to disclose on the label that the FDA has not "evaluated" the statement, to disclose that the product is not intended for use for a disease, and to notify the FDA about our use of the statement within 30 days of marketing the product. However, there can be no assurance that the FDA will not determine that a particular statement of nutritional support that we want to use is an unacceptable disease claim or an unauthorized version of a "health claim." Such a determination might prevent us from using the claim.        In addition, DSHEA provides that certain so-called "third-party literature," such as a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient with health benefits, may be used "in connection with the sale of a dietary supplement to consumers" without the literature being subject to regulation as labeling. Such literature must not be, among other things, false or misleading, among other things; the literature may not "promote" a particular manufacturer or brand of dietary supplement; and a balanced view of the available scientific information on the subject matter must be presented. There can be no assurance, however, that all third-party literature that we would like to disseminate in connection with our products will satisfy all the requirements, and failure to satisfy all requirements could prevent use of the literature or subject the product involved to regulation as an unapproved drug.        As authorized by DSHEA, the FDA recently has proposed GMPs specifically for dietary supplements. These new GMP regulations, if finalized (as predicted to occur in the near future), would be more detailed than the GMPs that currently apply to dietary supplements and may require, amongother things, dietary supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs. There can be no assurance that, if the FDA adopts GMP regulations for dietary supplements, we will be able to comply with the new rules without incurring substantial expense.        The FDA generally prohibits the use in labeling for a dietary supplement of any "health claim" unless the claim is pre-approved by the FDA. There can be no assurance that some of the labeling statements that we would like to use will not be deemed by the FDA to be "unauthorized health or disease claims" that are not permitted to be used.        Although the regulation of dietary supplements in some respects is less restrictive than the regulation of drugs, there can be no assurance that dietary supplements will continue to be subject to less restrictive regulation. Legislation has been periodically introduced in Congress, including in 2006, 2005 and 2004, to amend the FDCA to place more restrictions on the marketing of dietary supplements. In addition, Congress has been asked to consider various systems for pre-market and post-market review of dietary supplements to make the regulation of these products more like the regulation of drugs under the FDCA. The FDA regulates the formulation, manufacturing, packaging, labeling and distribution of OTC drug products under a "monograph" system that specifies active drug ingredients that are generally recognized as safe and effective for particular uses. If an OTC drug is not in compliance with the applicable FDA monograph, the product generally cannot be sold without first obtaining the FDA approval of a new drug application, a long and expensive procedure. There can be no assurance that, if more stringent statutes are enacted for dietary supplements, or if more stringent regulations are promulgated, we will be able to comply with such statutes or regulations without incurring substantial expense.        The FDA has broad authority to enforce the provisions of the FDCA applicable to dietary supplements and OTC drugs, including powers to issue a public "warning letter" to a company, to publicize information about illegal products, to request a voluntary recall of illegal products from the market, and to request the Department of Justice to initiate a seizure action, an injunction action, or a criminal prosecution in the US courts.        The FTC exercises jurisdiction over the advertising of dietary supplements. In recent years, the FTC has instituted numerous enforcement actions against dietary supplement companies for failure to adequately substantiate claims made in advertising or for the use of false or misleading advertising claims. These enforcement actions have often resulted in consent decrees and the payment of civil penalties, restitution, or both, by the companies involved. We currently are subject to FTC consent decrees resulting from past advertising claims for certain of our products. Our subsidiary, Rexall Sundown, also is currently subject to FTC consent decrees resulting from past advertising claims for certain of its products. As a result, we are required to maintain compliance with these decrees and are subject to an injunction and substantial civil monetary penalties if there should be any failure to comply. Further, the Postal Service has issued cease and desist orders against certain mail order advertising claims made by dietary supplement manufacturers, including us, and we are required to maintain compliance with the orders applicable to us, subject to civil monetary penalties for any noncompliance. Violations of these orders could result in substantial monetary penalties. Civil penalty actions could have a material adverse effect on our consolidated financial position or results of operations.        In June 2003, we received a letter of inquiry from the FTC concerning our marketing of a certain weight loss program, as well as the marketing of the Royal Tongan Limu dietary supplement by our subsidiary, Dynamic Essentials, Inc. ("DEI"). Subsequent to the receipt of this letter, we voluntarily stopped all sales and promotions of the weight loss product in question and of Royal Tongan Limu. We also ceased all DEI operations and terminated all DEI employees. In October 2005, the United States District Court for the Eastern District of New York entered a Consent Decree that required us to pay a $2 million civil penalty, and imposed an injunction that requires us to comply with the terms of a1995 consent order between the FTC and us. We have paid the civil penalty and are complying with the consent order.        In March 2003, we ceased selling products that contain ephedra. Though we continue to believe that the ephedra products we sold are safe to use as directed, the adverse publicity surrounding ephedra products and the regulatory environment in the United States led us to the decision to cease selling ephedra products, in our best interests and that of our shareholders. Overall, sales of ephedra products represented an insignificant portion of our business. Subsequent to the decision to cease selling ephedra products, we were named as a defendant or a third-party defendant in several actions, alleging liability (under various theories, including negligence, false advertising, strict liability in tort and failure to warn) as well as personal injury with respect to our sales, manufacturing and distribution of products containing ephedra. We have notified our insurance carriers and third-party vendors with regard to each suit and vigorously contest the allegations in these actions. We did not acquire any ephedra assets, liabilities or operations in connection with our 2003 purchase of Rexall Sundown. All such operations were retained by Royal Numico N.V., the prior owner of Rexall Sundown. The FDA issued a final regulation on February 11, 2004 prohibiting the sale of ephedra based on the FDA's safety concerns. This final regulation has been challenged in at least three third-party lawsuits. In one of the lawsuits, a 2005 Utah District Court declared the FDA's rule banning ephedra invalid. The Court of Appeals for the 10 th Circuit overturned that case. A petition has been filed with the Supreme Court seeking review of the 10th Circuit's decision. Legislation also has been introduced in Congress to impose a risk/benefit standard on dietary supplement safety reviews.        We also are subject to regulation under various state, local, and international laws that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution of dietary supplements and OTC drugs. Government regulations in foreign countries may prevent or delay the introduction, or require the reformulation, of certain of our products. Compliance with such foreign governmental regulations is generally the responsibility of our distributors in those countries. These distributors are independent contractors whom we do not control.        In addition, from time to time in the future, we may become subject to additional laws or regulations administered by the FDA or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that we consider favorable, such as DSHEA, or to more stringent interpretations of current laws or regulations. We are not able to predict the nature of such future laws, regulations, repeals or interpretations, and we cannot predict what effect additional governmental regulation, when and if it occurs, would have on our business in the future. Such developments, however, could require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, additional personnel, or other new requirements. Any such development could have a material adverse effect on us.         Europe.     In Europe, the European Union Commission is responsible for developing legislation to regulate foodstuffs and medicines. Although the government of each Member State may implement legislation governing these products, national legislation must be compatible with, and cannot be more restrictive than, European requirements. Each Member State is responsible for its enforcement of the provisions of European and national legislation.         United Kingdom.     In the United Kingdom, the two main pieces of legislation that affect the operations of Holland & Barrett and GNC (UK) are the Medicines Act 1968, which regulates the licensing and sale of medicines, and the Food Safety Act 1990, which provides for the safety of food products. A large volume of secondary legislation in the form of Statutory Instruments adds detail to the main provisions of the above Acts, governing composition, packaging, labeling and advertising of products.        In the UK regulatory system, a product intended to be taken orally will fall within either the category of food or the category of medicine. There is currently no special category of dietary supplement as provided for in the United States by DSHEA. Some products which are intended to be applied externally, for example creams and ointments, may be classified as medicines and others as cosmetics.        The Medicines and Healthcare products Regulatory Agency, or MHRA, now has responsibility for the implementation and enforcement of the Medicines Act, and is the licensing authority for medicinal products. The MHRA directly employs enforcement officers from a wide range of backgrounds, including the police, and with a wide range of skills, including information technology. However, the MHRA still relies heavily on competitor complaints to identify non-compliant products. The MHRA is an Executive Agency of the Department of Health. The MHRA decides whether a product is a medicine or not and, if so, considers whether it can be licensed. It determines the status of a product by considering whether it is medicinal by "presentation" or by "function." Many, though not all, herbal remedies are considered "medicinal" by virtue of these two criteria.        The Food Standards Agency, or FSA, deals with legislation, policy and oversight of food products, with enforcement action in most situations being handled by local authority Trading Standards Officers. The large number of local authorities in the UK can lead to an inconsistent approach to enforcement. Unlike the MHRA, local authorities regularly purchase products and analyze them to identify issues of non-compliance. The FSA answers primarily to Ministers at the Department of Health and the Department of Environment Food and Rural Affairs. Most vitamin and mineral supplements, and some products with herbal ingredients, are considered to be food supplements and fall under general food law which requires them to be safe. Despite the differences in approaches in identifying non-compliant products, both the MHRA and local authorities can, and do, prosecute where issues of non-compliance are identified.        In July 2002, the European Union, or EU, published in its Official Journal the final text of a Food Supplements Directive which became effective in the EU at that time, and which sets out a process and timetable by which the Member States of Europe must bring their domestic legislation in line with its provisions. The Directive seeks to harmonize the regulation of the composition, labeling and marketing of food supplements (at this stage only vitamins and minerals) throughout the EU. It does this by specifying what nutrients and nutrient sources may be used (and by interpretation the rest which may not), and the labeling and other information which must be provided on packaging. In addition, this Directive is intended to regulate the levels at which these nutrients may be present in a supplement. These maximum permitted levels are due to be announced shortly.        By harmonizing the legislation, the Food Supplements Directive should provide opportunities for businesses to market one product or a range of products to a larger number of potential customers without having to reformulate or repackage it. This development may lead to some liberalizing of the more restrictive regimes in France and Germany, providing new business opportunities. Conversely, however, it may limit the range of nutrients and nutrient sources substantially, and eventually the potencies at which some nutrients may be marketed by us in the more liberal countries, such as the UK, which may lead to some reformulation costs and loss of some specialty products.        Following the publication of the Food Supplements Directive, two challenges were brought in the UK Courts attacking its validity. Subsequently, the matters were referred to the European Court of Justice, or ECJ, for resolution. The ECJ upheld the validity of the Directive, ruling that its contents were legal under European Law. However, due to the ECJ's comments on procedure, the EU Commission has undertaken to look at ways to ensure the Directive is implemented in a transparent and timely manner.        The provisions of the Food Supplements Directive have been incorporated into UK domestic law (which includes England & Wales, Scotland and Northern Ireland) by Statutory Instrument and apply from August 2005.         On April 30, 2004, the EU published the Traditional Herbal Medicinal Products Directive, or THMPD, which requires traditional herbal medicines to be registered in each Member State in which they are intended to be marketed. A registration requires a product be manufactured to pharmaceutical GMP standards; however, generally, there is no need to demonstrate efficacy, provided that the product is safe, is manufactured to high standards, and has a history of supply on the market for 30 years, 15 years of which must be in the EU. The THMPD is intended to provide a safe home in EU law for a number of categories of herbal remedies, which may otherwise be found to fall outside EU law. However, it does not provide a mechanism for new product development, and would entail some compliance costs in registering the many herbal products already on the market. Member States had to put into place the provisions for national compliance by October 2005, the date on which Traditional Herbal Medicinal products could begin to be registered. A transitional period of seven years has been granted in the UK to allow all relevant products to be registered. Full compliance is required by April 2011. While we currently believe that we will comply with this Directive, it has become apparent that we cannot do so without incurring substantial expense.        Additional European legislation is being developed to regulate sports nutrition products, including the composition of such products. In particular, such legislation could restrict the type of nutrients we may use in our products. Legislation introducing maximum permitted levels for nutrients in fortified foods is also under discussion together with legislation introducing a positive list for enzymes. These proposals, if implemented, could require us to reformulate our existing products. Also, proposals to amend medicine legislation will impact traditional herbal medicines and introduce new requirements, such as Braille labeling, which may lead to higher associated costs.        The EU has established a European Food Safety Authority, which will have an important role to play in focusing attention on food standards in Europe. Its Executive Director is Mr. Geoffrey Podger, who until 2003 was the Chief Executive of the UK's Food Standards Agency.         Ireland.     The legislative and regulatory situation in the Republic of Ireland is similar, but not identical to that in the UK. The Irish Medicines Board has a similar role to that of the UK's MHRA and the Food Safety Authority of Ireland is analogous to the UK's FSA. Like the UK, Ireland will be required to bring its domestic leg

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