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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 December 31, 2015

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: 333-186802

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) 200-2000
(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 o    NO ý

        Note: The registrant was subject to the reporting requirements of Section 15(d) of the Exchange Act from June 16, 2011 through September 30, 2011. As of October 1, 2011, the registrant is a voluntary filer not subject to these filing requirements. However, the registrant has filed all reports required pursuant to Section 13 or 15(d) as if the registrant was subject to such filing requirements since June 16, 2011.

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o    NO ý

        As of February 8, 2016, the number of shares of common stock outstanding was 1,000.

   


Table of Contents

NBTY, Inc. and Subsidiaries
INDEX

 
   
  Page  

PART I

       

           

Item 1.

 

Financial Statements (Unaudited)

    3  

           

 

Consolidated Balance Sheets

    3  

           

 

Consolidated Statements of Operations and Comprehensive (Loss) Income

    4  

           

 

Consolidated Statements of Cash Flows

    5  

           

 

Notes to Consolidated Financial Statements

    6  

           

Item 2.

 

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

    34  

           

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    52  

           

Item 4.

 

Controls and Procedures

    53  

           

PART II

       

           

Item 1.

 

Legal Proceedings

    55  

           

Item 1A.

 

Risk Factors

    57  

           

Item 6.

 

Exhibits

    58  

           

Signatures

    59  

           

Exhibits

       

Table of Contents

PART I
Item 1. Financial Statements


NBTY, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 
  December 31,
2015
  September 30,
2015
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 204,925   $ 303,350  

Accounts receivable, net

    189,224     198,693  

Inventories

    855,193     844,223  

Deferred income taxes

    56,425     56,194  

Other current assets

    74,392     59,831  

Total current assets

    1,380,159     1,462,291  

Property, plant and equipment, net

   
573,826
   
605,708
 

Goodwill

    1,200,501     1,118,020  

Intangible assets, net

    1,714,112     1,664,538  

Other assets

    32,729     17,852  

Total assets

  $ 4,901,327   $ 4,868,409  

Liabilities and Stockholder's Equity

             

Current liabilities:

             

Current portion long-term debt

  $ 59,814   $ 34,496  

Accounts payable

    311,138     282,479  

Accrued expenses and other current liabilities

    199,145     249,561  

Total current liabilities

    570,097     566,536  

Long-term debt, net of current portion

    2,085,689     2,129,158  

Deferred income taxes

    723,201     701,694  

Other liabilities

    41,179     39,275  

Total liabilities

    3,420,166     3,436,663  

Redeemable non-controlling interest

    103,511      

Commitments and contingencies

             

Stockholder's equity:

             

Common stock, successor, $0.01 par; one thousand shares authorized, issued and outstanding at September 30, 2014 and 2013

         

Capital in excess of par

    1,507,408     1,542,584  

Accumulated deficit

        (1,136 )

Accumulated other comprehensive loss

    (129,758 )   (109,702 )

Total stockholder's equity

    1,377,650     1,431,746  

Total liabilities and stockholder's equity

  $ 4,901,327   $ 4,868,409  

   

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

3


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NBTY, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive (Loss) Income

(Unaudited)

(Dollars and shares in thousands, except per share amounts)

 
  Three Months Ended
December 31,
 
 
  2015   2014  

Net sales

  $ 801,990   $ 825,771  

Costs and expenses:

             

Cost of sales (See Note 3)

    443,144     448,887  

Advertising, promotion and catalog

    46,463     46,894  

Selling, general and administrative

    253,192     238,172  

Impairment of Vitamin World assets (See Note 7 and 14)

    11,656      

Facility restructuring charges (See Note 3)

    5,494      

Total costs and expenses

    759,949     733,953  

Income from operations

    42,041     91,818  

Other income (expense):

             

Interest

    (34,336 )   (34,747 )

Miscellaneous, net

    (1,962 )   (1,355 )

Total other expense

    (36,298 )   (36,102 )

Income from operations before income taxes

    5,743     55,716  

Provision for income taxes

   
1,945
   
19,809
 

Net income

    3,798     35,907  

Net loss attributable to noncontrolling interests

   
(139

)
 
 

Net income attributable to NBTY, Inc. 

  $ 3,937   $ 35,907  

Net income

 
$

3,798
 
$

35,907
 

Other comprehensive (loss) income, net of tax:

             

Foreign currency translation adjustment, net of taxes of ($997) and $396, respectively

    (20,630 )   (30,307 )

Change in fair value of interest rate swaps, net of taxes of $0 and $(442), respectively

        721  

Total other comprehensive loss, net of tax:

    (20,630 )   (29,586 )

Comprehensive (loss) income

   
(16,832

)
 
6,321
 

Less: Net loss attributable to non-controlling interest

    (139 )    

Less: Foreign currency translation adjustment attributable to non-controlling interest

    (574 )    

Comprehensive loss attributable to non-controlling interest

    (713 )    

Comprehensive (loss) income attributable to NBTY, Inc. 

 
$

(16,119

)

$

6,321
 

4


Table of Contents


NBTY, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 
  Three Months Ended
December 31,
 
 
  2015   2014  

Cash flows from operating activities:

             

Net income

  $ 3,798   $ 35,907  

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

             

Impairments and disposals of assets

    12,912     659  

Depreciation of property, plant and equipment

    20,208     16,707  

Amortization of intangible assets

    11,644     11,358  

Foreign currency transaction gain

    (1,359 )   (87 )

Amortization and write-off of deferred financing fees

    5,744     5,071  

Stock-based compensation

    773     732  

Allowance for doubtful accounts

    41     35  

Inventory reserves

    10,606     5,369  

Deferred income taxes

    5,499     (256 )

Changes in operating assets and liabilities, net of acquisitions:

             

Accounts receivable

    24,702     (12,105 )

Inventories

    10,024     41,311  

Other assets

    (10,953 )   6,229  

Accounts payable

    27,527     38,953  

Accrued expenses and other liabilities

    (56,537 )   (16,813 )

Net cash provided by operating activities

    64,629     133,070  

Cash flows from investing activities:

             

Purchase of property, plant and equipment

    (40,038 )   (19,090 )

Proceeds from sale of bar assets

    7,910     193  

Proceeds from sale of building and equipment

    384      

Cash paid for acquisitions, net of cash acquired

    (45,011 )    

Net cash used in investing activities

    (76,755 )   (18,897 )

Cash flows from financing activities:

             

Principal payments

    (56,941 )   (67 )

Proceeds from issance of debt

    6,123      

Payments for financing fees

        (611 )

Dividends paid

    (38,750 )   (38,750 )

Net cash used in financing activities

    (89,568 )   (39,428 )

Effect of exchange rate changes on cash and cash equivalents

    3,269     (2,186 )

Net (decrease) increase in cash and cash equivalents

    (98,425 )   72,559  

Cash and cash equivalents at beginning of period

    303,350     139,488  

Cash and cash equivalents at end of period

  $ 204,925   $ 212,047  

Non-cash investing and financing information:

             

Property, plant and equipment additions included in total liabilities

  $ 18,575   $ 11,748  

   

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

5


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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(in thousands)

1. Basis of Presentation

        NBTY, Inc. ("NBTY"), together with its subsidiaries, (the "Company," "we," or "us"), is the leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality vitamins, minerals, herbs, specialty supplements, and sports/active nutrition products ("VMHS") in the United States, with operations worldwide. 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 audited financial statements for the fiscal year ended September 30, 2015, including the notes thereto (our "2015 Financial Statements") included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 ("2015 Annual Report"). 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 notes necessary for a complete presentation in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the 2015 Financial Statements. Results for interim periods are not necessarily indicative of results which may be achieved for a full year.

Revision to Financial Statements

        During the three month period ended December 31, 2014, the Company had recorded an out-of-period adjustment to correct the Company's policy of expensing all labels upon receipt, which resulted in the Company increasing its label inventory by $3,708 with an offsetting decrease to cost of sales. This immaterial adjustment was the result of the Company correcting its policy of expensing all labels upon receipt. Accordingly on-hand labels were therefore recorded as a part of ending inventory on the consolidated balance sheet. As disclosed in the 2015 Financial Statements, the Company aggregated this out-of-period adjustment with other errors identified during the annual closing process and concluded that the aggregate impact of these errors resulted in a material misstatement to its consolidated financial statements for the three and nine months ended June 30, 2015. In connection with the Company's restatement of those interim consolidated financial statements the Company revised its historical financial statements to reflect the impact of correcting the accounting policy for its labels inventory. The impact of correcting this policy was recorded as an adjustment to stockholders' equity as of September 30, 2012.

        Accordingly, the Company has revised its previously reported Consolidated Statement of Operations for the three months ended December 31, 2014 as follows: increased Cost of sales and decreased Income from operations before income taxes by $3,708; decreased Provision for income taxes by $1,424; and decreased Net income by $2,284.

Estimates

        The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable

6


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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our most significant estimates include: sales returns, promotions and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including goodwill and intangible assets; income taxes, and accruals for the outcome of current litigation.

Accounts Receivable Reserves

        Accounts receivable are presented net of the following reserves:

 
  December 31,
2015
  September 30,
2015
 

Promotional program incentive allowances

  $ 102,758   $ 84,088  

Allowance for sales returns

    18,282     17,080  

Allowance for doubtful accounts

    2,632     2,600  

Other accounts receivable allowances

    3,516     3,091  

  $ 127,188   $ 106,859  

Redeemable non-controlling interest

        In December 2015, we acquired a controlling interest in Dr. Organic Limited ("Dr. Organic"). The Company assessed the terms of the redemption features related to the non-controlling interest ("NCI") and concluded that based on the nature of those features the NCI should be accounted for as redeemable non-controlling interest. Accordingly, the NCI is classified outside of stockholders' equity in the Consolidated Balance Sheets as temporary equity under the caption, Redeemable non-controlling interest. The Company measures the NCI at its redemption value at the end of each period and if the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value.

        Net income attributable to the NCI reflects the portion of the net income (loss) of the consolidated entities applicable to the NCI stockholders in the accompanying Consolidated Statements of Operations. The net income attributable to NCIs is classified in the Consolidated Statements of Operations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.

7


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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

        The changes in the temporary equity attributable to the redeemable NCI for the three months ended December 31, 2015 are as follows:

 
  Equity attributable
to redeemable
non-controlling
interest
 

Balance at September 30, 2015

  $  

Issuance of non-controlling interest—Doctor Organic Limited

    104,224  

Net loss attributable to non-controlling interests

    (139 )

Other comprehensive loss

    (574 )

Balance at December 31, 2015

  $ 103,511  

Recent Accounting Developments

        In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance on revenue from contracts with customers that will supersede virtually all existing revenue recognition guidance, including industry-specific guidance, and is designed to create greater comparability for financial statement users across industries and jurisdictions. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The guidance would have been effective for us beginning October 1, 2017, however in July 2015, the FASB decided to defer the effective date of the new standard by one year. Early adoption would be permitted for us beginning October 1, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial statements and related disclosures.

        In July 2015, the FASB issued guidance which applies to inventory for which cost is determined by methods other than the last-in first-out and the retail inventory method. Under the new guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for us beginning October 1, 2017, and should be applied prospectively with early adoption permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements and related disclosures.

        In November 2015, the Financial Accounting Standards Board issued guidance which requires all deferred tax assets and liabilities to be presented in the balance sheet as noncurrent. This guidance is effective for us on October 1, 2017. Upon adoption, we will present the net deferred tax assets as noncurrent and reclassify any current deferred tax assets and liabilities in our consolidated financial position on a retrospective basis and will not have a material impact on our Consolidated Balance Sheets.

8


Table of Contents


NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

2. Acquisition of Dr. Organic

        In December 2015, NBTY (2015) Limited ("NBTY (2015)"), a private limited company incorporated in England and Wales and an indirect subsidiary of Alphabet Holding Company, Inc. ("Holdings"), our parent company, and Holland & Barrett Group Limited ("H&B"), a company incorporated in England and Wales and an indirect subsidiary of Holdings, completed the purchase Dr. Organic, pursuant to which NBTY (2015) acquired all of the ordinary shares of Dr. Organic, a manufacturer, marketer and distributor of a broad line of naturally-inspired personal care products.

        The purchase price for the ordinary shares of Dr. Organic was £53,384 (approximately $80,519), paid in (i) cash of £33,384 (approximately $50,353) (the "cash consideration"), (ii) loan notes in an aggregate principal amount of £20,000 (approximately $30,166) (the "completion loan notes") issued by NBTY (2015) to the sellers, which mature 18 months after issuance and are redeemable at any time after six months at the option of the holders, (iii) 399,000 class B ordinary shares, par value £0.01 (the "rollover shares"), issued by NBTY (2015) to the sellers and (iv) 222,000 class C ordinary shares, par value £0.01, issued by NBTY (2015) to certain of the sellers at a premium of £0.04 each (which will be redeemed by NBTY (2015) for £0.05 18 months after issuance). Holders of the rollover shares may require us to repurchase them for an amount based on the future earnings of Dr. Organic and its subsidiaries (the "repurchase amount"), which amount is payable, at the election of holders, in cash or through the issuance of loan notes by NBTY (2015) with terms similar to the completion loan notes. To the extent the holders do not exercise their put right, we will have the right to call the rollover shares at the repurchase amount. The put is exercisable for thirty days commencing in January 2019 and the call is exercisable thirty days after the expiration of the put for a period of thirty days.

        The following allocation of the purchase price is preliminary and based on information available to the Company's management at the time the consolidated financial statements were prepared.

9


Table of Contents


NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

2. Acquisition of Dr. Organic (Continued)

Accordingly, the allocation is subject to change and the impact of such changes could be material. The allocation of the purchase price is as follows:

Fair value of consideration:

       

Cash

  $ 50,353  

Completion loan notes at fair value

    28,931  

Redeemable non-controlling interest

    104,224  

Less:

       

Settlement of payables due to Dr. Organic

    (6,032 )

Cash and cash equivalents acquired

    (5,342 )

  $ 172,134  

Allocated to:

       

Assets:

       

Accounts receivable

  $ 7,922  

Inventories

    22,474  

Other current assets

    2,045  

Property, plant, and equipment

    276  

Intangibles assets

    70,438  

Liabilities:

       

Accounts payable

    (7,175 )

Accrued expenses and other current liabilities

    (3,059 )

Deferred income taxes

    (15,186 )

Net assets acquired

    77,735  

Goodwill

  $ 94,399  

        The fair values of the net assets acquired were determined using discounted cash flow analyses and estimates made by management. The purchase price was allocated to intangible assets as follows: $94,399 to goodwill, which is non-amortizable and is not deductible for income tax purposes, approximately $46,000 to tradenames, which are amortizable over 10-15 years and approximately $25,000 to customer relationships, which are amortizable over 25 years. Acquisition costs for Dr. Organic amounted to approximately $5,000. The acquisition of Dr. Organic is expected to expand our operations in the Consumer Products Group segment in the distribution of natural personal care products. Additionally, we believe that we can leverage our existing distribution channels of our Consumer Products Group, which is the primary driver behind the excess of the purchase price paid over the fair value of the assets and liabilities acquired. Results since the acquisition to date and pro forma information with respect to Dr. Organic have not been provided as this acquisition was not considered material to our operations.

3. Sale of Nutritional Bar Assets and Powder Facility

        In March 2015, NBTY and Nellson Nutraceutical, LLC ("Nellson") entered into (i) a bar asset purchase agreement, (the "Bar APA") and (ii) a powder asset purchase agreement (the "Powder APA" and, together with the Bar APA, the "APAs"), pursuant to which NBTY agreed to sell certain

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

3. Sale of Nutritional Bar Assets and Powder Facility (Continued)

production assets, raw materials, packaging, labeling, in process products, component inventories and contracts (the "Transferred Assets") associated with NBTY's nutritional bar and powder manufacturing operations (the "Divested Manufacturing Operations").

        The closing of the sale pursuant to the Powder APA occurred on June 26, 2015. The sales price for the production assets and transferred contracts was $4,228. The sales price for the raw materials, packaging, labels, work-in-process and component inventories was $16,722, net of post-closing adjustments.

        A significant portion of the sale of assets pursuant to the Bar APA has already been completed with the remaining portion of the sale expected to be completed by the end of the first half of fiscal 2016. The aggregate sales price for the production assets to be sold pursuant to the Bar APA is approximately $12,000, which resulted in accelerated depreciation as noted below. The aggregate sales price for the raw materials, packaging, labels, work-in-process and component inventories to be transferred pursuant to the Bar APA is equal to NBTY's book value for such assets, as estimated by NBTY prior to the closing of the transactions, and subject to post-closing adjustments. As of December 31, 2015, $7,910 of production assets have been transferred. As of December 31, 2015, the remaining production assets of approximately $4,100 and inventory of $4,700 within the bar plant that are waiting to be transferred are recorded in other current assets, as they are no longer being used for manufacturing operations and are readily available to be sold in their existing condition.

        As a result of these arrangements, we will incur cumulative net charges ranging from $36,000 to $39,000 before tax over the period in which these transactions are completed, of which non-cash charges will consist primarily of accelerated depreciation and a write-off of goodwill of approximately $28,000; costs related to workforce reductions will be approximately $2,500 and other costs ranging from $7,000 to 10,000, partially offset by a gain of $1,692 on the sale of a contract. All costs associated with the Divested Manufacturing Operations are being reflected in Corporate / Manufacturing, with the exception of the write-off of goodwill for which $4,892 and $649 was recorded in the Consumer Products Group and Puritan's Pride segments, respectively.

        Charges related to these divestitures of $5,494 for the three months ended December 31, 2015 were $2,337 for accelerated depreciation and $3,157 of other costs, which primarily relate to inventory write-offs, and are recorded in Facility restructuring charges.

        Cumulative charges since inception of these arrangements totaled $34,987 through December 31, 2015 and include $22,540 for accelerated depreciation, $5,541 for a write off of goodwill associated with the fair value of the business; $2,510 for severance and employee related costs and $6,088 of other costs, which primarily relate to inventory write offs; partially offset by a gain on a transferred contract of $1,692, and are recorded in Facility restructuring charges.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

4. Inventories

        The components of inventories are as follows:

 
  December 31,
2015
  September 30,
2015
 

Raw materials

  $ 167,669   $ 178,464  

Work-in-process

    24,065     20,265  

Finished goods

    663,459     645,494  

Total

  $ 855,193   $ 844,223  

5. Goodwill and Intangible Assets

        The change in the carrying amount of goodwill by segment is as follows:

 
  Consumer
Products
Group
  Holland &
Barrett
International
  Puritan's
Pride
  Consolidated  

Balance at September 30, 2015

  $ 618,807   $ 296,467   $ 202,746   $ 1,118,020  

Acquisition of Dr. Organic Limited

    94,399             94,399  

Foreign currency translation

    (4,747 )   (7,171 )       (11,918 )

Balance at December 31, 2015

  $ 708,459   $ 289,296   $ 202,746   $ 1,200,501  

        The carrying amounts of acquired other intangible assets, which are subject to the impact of changes in foreign currency for the periods indicated are as follows:

 
  December 31, 2015   September 30, 2015    
 
  Gross
carrying
amount
  Accumulated
amortization
  Gross
carrying
amount
  Accumulated
amortization
  Amortization
period
(years)

Definite lived intangible assets:

                           

Brands and customer relationships

  $ 930,267   $ 204,082   $ 907,039   $ 194,407   10 - 25

Tradenames and other

    210,547     28,609     166,575     27,043   20 - 30

    1,140,814     232,691     1,073,614     221,450    

Indefinite lived intangible assets:

                           

Tradenames

    805,989         812,374        

Total intangible assets

  $ 1,946,803   $ 232,691   $ 1,885,988   $ 221,450    

        Aggregate amortization expense of definite lived intangible assets included in the consolidated statements of operations and comprehensive loss in selling, general and administrative expenses for the three months ended December 31, 2015 and 2014 was $11,644 and $11,358, respectively.

        Assuming no changes in our intangible assets, estimated amortization expense for each of the five succeeding years will be approximately $49,000 per year.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt

        The components of long-term debt are as follows:

 
  December 31,
2015
  September 30,
2015
 

Senior Secured Credit Facilities:

             

Term loan B-2

             

Principal amount

  $ 1,450,559   $ 1,507,500  

Less unamortized debt issuance costs

    (26,278 )   (31,046 )

    1,424,281     1,476,454  

Notes

             

Principal amount

    650,000     650,000  

Less unamortized debt issuance costs

    (9,484 )   (10,240 )

    640,516     639,760  

Long-term obligations under capital lease

    46,341     47,440  

Completion loan notes (See Note 2)

    28,444      

Other

    5,921      

    2,145,503     2,163,654  

Less current portion

    (59,814 )   (34,496 )

Total

  $ 2,085,689   $ 2,129,158  

Senior secured credit facilities

        On October 1, 2010, NBTY entered into its senior secured credit facilities with Barclays Bank PLC, as administrative agent (the "Original Credit Agreement"). The Original Credit Agreement was amended pursuant to the First Amendment and Refinancing Agreement, dated as of March 1, 2011, and further amended pursuant to that Second Amendment Agreement, dated as of October 11, 2012.

        On March 21, 2013, NBTY, Holdings, our parent company, Barclays Bank PLC, as administrative agent, and several other lenders entered into the Third Amendment and Second Refinancing Agreement (the "Second Refinancing") pursuant to which NBTY repriced its term loan B-1 under its then existing credit agreement. Under the terms of the Second Refinancing, the $1,750,000 term loan B-1 was replaced with a new $1,507,500 term loan B-2. Borrowings under term loan B-2 and the revolving credit facility bear interest at a floating rate which can be, at NBTY's option, either (i) eurodollar (LIBOR) rate plus an applicable margin, or (ii) base rate plus an applicable margin, in each case, subject to a eurodollar (LIBOR) rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for term loan B-2 is 2.50% per annum for eurodollar (LIBOR) loans and 1.50% per annum for base rate loans. The applicable margin for the revolving credit facility remained at 3.25% per annum for eurodollar (LIBOR) loans and 2.25% per annum for base rate loans, with a step-down of 25 basis points upon the achievement of a total senior secured leverage ratio as set forth in the senior secured credit facilities. Substantially all other terms are consistent with the original term loan B-1, including the maturity dates. Costs incurred and recorded as deferred financing costs were approximately $15,190, including $13,924 of the call premium paid on term loan B-1, and are

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

being amortized using the effective interest method. In accordance with the provisions of the credit agreement governing the senior secured credit facilities, future scheduled payments of principal will not be required until the final balloon payment at maturity in October 2017.

        On November 20, 2014, NBTY amended its senior secured revolving credit facility, extending its maturity to September 2017 and reducing the commitment from $200,000 to $175,000.

        The following fees are applicable under the revolving credit facility: (i) an unused line fee of 0.50% per annum, based on the unused portion of the revolving credit facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit available to be drawn equal to the applicable margin for eurodollar rate loans; (iii) a letter of credit fronting fee equal to 0.25% per annum on the daily amount of each letter of credit available to be drawn; and (iv) certain other customary fees and expenses of our letter of credit issuers.

        As of December 31, 2015, there were no borrowings drawn from our $175,000 revolving credit facility and there was a letter of credit totaling $6,100, reducing the net availability to $168,900.

        NBTY may voluntarily prepay loans or reduce commitments under its senior secured credit facilities, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty.

        NBTY must make prepayments on the term loan B-2 facility with the net cash proceeds of certain asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under its senior secured credit facilities unless specifically incurred to refinance a portion of its senior secured credit facilities) and 50% of excess cash flow, as defined in the credit agreement (such percentage subject to reduction based on achievement of total senior secured leverage ratios), in each case, subject to certain reinvestment rights and other exceptions. An excess cash flow payment of $31,941 was paid in November 2015. Furthermore NBTY made a voluntary prepayment of $25,000 on December 30, 2015. As a result of these two payments, $1,058 of deferred financing costs were written off during the three months ended December 31, 2015. For the fiscal year ending September 30, 2016 we anticipate an excess cash flow payment of approximately $30,000 and have recorded this in Current portion of long-term debt. NBTY is also required to make prepayments under its revolving credit facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the revolving credit facility exceeds the aggregate amount of commitments in respect of the revolving credit facility.

        Obligations under the senior secured credit facilities are guaranteed by Holdings and each of NBTY's current and future direct and indirect subsidiaries other than (i) foreign subsidiaries, (ii) unrestricted subsidiaries, (iii) non-wholly owned subsidiaries, (iv) certain receivables financing subsidiaries, (v) certain immaterial subsidiaries and (vi) certain holding companies of foreign subsidiaries, and are secured by a first lien on substantially all of their assets, including capital stock of subsidiaries (subject to certain exceptions).

        The senior secured credit facilities contain customary negative covenants, including, but not limited to, restrictions on NBTY and its restricted subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans,

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

advances or investments, pay dividends, sell or otherwise transfer assets, prepay or modify terms of certain junior indebtedness, enter into transactions with affiliates, amend organizational documents, or change our line of business or fiscal year. In addition, NBTY's senior secured credit facilities require the maintenance of a maximum total senior secured leverage ratio on a quarterly basis, calculated with respect to Consolidated EBITDA, as defined therein, if at any time amounts are outstanding under the revolving credit facility, including swingline loans and letters of credit. NBTY was in compliance with all financial covenants under the senior secured credit facilities at December 31, 2015.

        The senior secured credit facilities provide that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA/pension plan events, certain change of control events and other customary events of default.

Holdco Notes

        On October 17, 2012 and December 12, 2013, Holdings issued $550,000 and $450,000, respectively, in aggregate principal amount of 7.75%/8.50% contingent cash pay senior notes ("Holdco Notes") that mature on November 1, 2017. Interest on the Holdco Notes accrues at the rate of 7.75% per annum with respect to cash interest and 8.50% per annum with respect to any paid-in-kind interest ("PIK Interest"). Interest on the Holdco Notes is payable semi-annually in arrears on May 1 and November 1 of each year. All interest payments made to date have been in cash and were funded by dividends from NBTY. Holdings is a holding company with no operations and has no ability to service interest or principal on the Holdco Notes, other than through dividends it may receive from NBTY.

        NBTY is restricted, in certain circumstances, from paying dividends to Holdings by the terms of the indenture governing the Notes and the senior secured credit facilities. NBTY has not guaranteed the indebtedness of Holdings, nor pledged any of its assets as collateral and the Holdco Notes are not reflected on NBTY's balance sheet.

        Interest on the Holdco Notes shall be payable entirely in cash ("Cash Interest") to the extent that it is less than the maximum amount of allowable dividends and distributions plus any cash at Holdings ("Applicable Amount") as defined by the indenture governing the Holdco Notes. For any interest period after May 1, 2013 (other than the final interest period ending at stated maturity), if the Applicable Amount for such interest period will:

              (i)  equal or exceed 75%, but be less than 100%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 25% of the then outstanding principal amount of the Holdco Notes by increasing the principal amount of the outstanding Holdco Notes or by issuing payment in kind notes ("PIK Notes") in a principal amount equal to such interest and (b) 75% of the then outstanding principal amount of the Holdco Notes as Cash Interest;

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

             (ii)  equal or exceed 50%, but be less than 75%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 50% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 50% of the then outstanding principal amount of the Holdco Notes as Cash Interest;

            (iii)  equal or exceed 25%, but be less than 50%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 75% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 25% of the then outstanding principal amount of the Holdco Notes as Cash Interest; or

            (iv)  be less than 25% of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on the Holdco Notes as PIK Interest.

        As described above, Holdings' ability to pay PIK Interest depends on the calculation of the Applicable Amount regardless of the availability of cash at Holdings.

        Holdings may redeem the Holdco Notes, at its option, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on November 1 of the years set forth below:

Period
  Redemption
Price
 

2015

    101.00 %

2016 and thereafter

    100.00 %

Notes

        On October 1, 2010, NBTY issued $650,000 in aggregate principal amount of senior notes bearing interest at 9% in a private placement. On August 2, 2011, these privately placed notes were exchanged for substantially identical notes that were registered under the Securities Act of 1933, as amended, and therefore are freely tradable (the privately placed notes and such registered notes exchanged therefor, the "Notes"). The Notes are senior unsecured obligations and mature on October 1, 2018. Interest on the Notes is paid on April 1 and October 1 of each year, and commenced on April 1, 2011.

        NBTY may redeem the Notes, at its option, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on the relevant record

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on October 1 of the years set forth below:

Period
  Redemption
Price
 

2015

    102.25 %

2016 and thereafter

    100.00 %

        The Notes are jointly and severally irrevocably and unconditionally guaranteed by each of NBTY's subsidiaries that is a guarantor under the credit agreement. The Notes are uncollateralized and rank senior in right of payment to existing and future indebtedness that is expressly subordinated to the Notes, rank equally in right of payment to NBTY and its subsidiary guarantors' senior unsecured debt, and are effectively junior to any of NBTY or its subsidiary guarantors' secured debt, to the extent of the value of the collateral securing such debt. The Notes contain certain customary covenants including, but not limited to, restrictions on NBTY and its restricted subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, or pay dividends. NBTY was in compliance with all financial covenants under the Notes at December 31, 2015.

7. Fair Value of Financial Instruments

        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 which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

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

    Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

    Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The following table summarizes the assets / (liabilities) measured at fair value on a recurring basis at December 31, 2015:

 
  Level 1   Level 2   Level 3  

Current (included in accrued expenses and other current liabilities):

                   

Cross currency swaps

  $   $   $ (2,174 )

Non-current (included in other assets):

                   

Cross currency swaps

  $   $   $ 14,145  

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Fair Value of Financial Instruments (Continued)

        The following table summarizes the assets / (liabilities) measured at fair value on a recurring basis at September 30, 2015:

 
  Level 1   Level 2   Level 3  

Current (included in accrued expenses and other current liabilities):

                   

Cross currency swaps

  $   $   $ (2,715 )

Non-current (included in other assets):

                   

Cross currency swaps

  $   $   $ 6,852  

        The Company's swap contracts are measured at fair value based on a market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. As non-performance risk of the Company and the counterparty is present in all swap contracts and is a component of the estimated fair values, and is a significant input to the fair value for our cross currency swap contracts, the Company classifies these swap contracts as "Level 3" in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of those contracts. The performance risk for the cross currency swap contracts as a percentage of the unadjusted assets / (liabilities) ranged from 2.0% to 3.0% (2.7% weighted average) as of December 31, 2015 and 6.1% to 11.4% (9.5% weighted average) as of September 30, 2015.

        The following table shows the Level 3 activity related to our cross currency swaps for the three months ended December 31, 2015 and 2014:

 
  Three Months Ended
December 31,
 
 
  2015   2014  

Beginning balance:

  $ 4,137   $ (18,630 )

Unrealized gain on cross currency swaps

    7,834     11,748  

Ending balance:

  $ 11,971   $ (6,882 )

Interest Rate Swaps

        During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior secured credit facilities until the indicated expiration dates of these swap contracts. Each swap contract had a declining notional amount with a fixed interest rate of 1.92% for a four-year term and matured in December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior secured credit facilities were swapped for fixed interest payments. These interest rate swap contracts were designated as a cash flow hedge of the variable interest payments on a portion of our term loan debt. Hedge effectiveness was assessed based on the overall changes in the fair value of the interest rate swap contracts. Hedge ineffectiveness was insignificant, and was recorded in Miscellaneous, net.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Fair Value of Financial Instruments (Continued)

Cross Currency Swaps

        To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound sterling, arising from our net investment in British pound sterling denominated operations, we entered into three cross currency swap contracts in December 2010, to hedge a portion of the net investment in our British pound denominated foreign operations. The aggregate notional amount of the swap contracts is £194,200 British pounds sterling (approximately $300,000 U.S. dollars), with a forward rate of 1.565, and a termination date of September 30, 2017.

        These cross currency contracts were designated as a net investment hedge to the net investment in our British pound sterling denominated operations. Hedge effectiveness is assessed based on the overall changes in the fair value of the cross currency swap contracts. Any potential hedge ineffectiveness is measured using the hypothetical derivative method and is recognized in current earnings. Hedge ineffectiveness loss for the three months ended December 31, 2015 and 2014 was $751 and $1,934, respectively, and is recorded in Miscellaneous, net.

        The following table shows the effect, net of tax impact, of the Company's derivative instruments designated as cash flow and net investment hedging instruments:

 
  Three Months Ended December 31,  
 
  2015   2014  
 
  Amount of Gain or
(Loss) Recognized
in Accumulated
OCI
on Derivative
(Effective Portion)
  Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI
into Income
(Effective Portion)
  Amount of Gain or
(Loss) Recognized
in Accumulated
OCI
on Derivative
(Effective Portion)
  Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI
into Income
(Effective Portion)
 

Cash Flow Hedges:

                         

Interest rate swaps

  $   $   $ (438 ) $ (1,159 )

Net Investment Hedges:

                         

Cross currency swaps

    5,467         9,171      

Total

  $ 5,467   $   $ 8,733   $ (1,159 )

Notes

        The fair value of the Notes, based on quoted market prices (Level 2), was approximately $656,000 as of December 31, 2015.

Completion Loan Notes (See Note 2)

        The face value of the completion loan notes issued in connection with the acquisition of Doctor Organic (see Note 2) is £20,000 (approximately $30,166). These notes were recorded at fair value in our Consolidated Balance Sheet on December 7, 2015, the date of acquisition of Doctor Organic, and as a result their carrying value continues to approximate fair value as of December 31, 2015.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Fair Value of Financial Instruments (Continued)

Term loan B-2

        The face amount of the term loan B-2 is $1,450,559, which approximates fair value based on Level 2 inputs, as this loan accrues interest at a variable interest rate.

Assets Re-measured at Fair Value on a Non-recurring Basis

        In connection with the sale of Vitamin World, the Company performed an impairment analysis with respect to the assets that will be sold, resulting in an impairment of $11,656 relating to the furniture and fixtures at the retail locations. This impairment analysis utilized unobservable inputs primarily with respect to the future cash flows of the Vitamin World business as well as potential cash flows from a sale transaction. (See Note 14).

8. Litigation Summary

Herbal Dietary Supplements

        In February 2015, the State of New York Office of the Attorney General (the "NY AG") began an investigation concerning the authenticity and purity of herbal supplements and associated marketing. As part of this investigation, the NY AG is reviewing the sufficiency of the measures that several manufacturers and retailers, including NBTY, are taking to independently assess the validity of their representations and advertising in connection with the sale of herbal supplements. On September 9, 2015, the NY AG sent letters to fourteen separate companies, including NBTY, concerning an additional herbal product. NBTY has fully cooperated with the NY AG; however until these investigations are concluded, no final determination can be made as to its ultimate outcome or the amount of liability, if any, on the part of NBTY.

        Following the NY AG investigation, starting in February 2015, numerous putative class actions were filed in various jurisdictions against NBTY, certain of its customers and/or other companies as to which there may be a duty to defend and indemnify, challenging the authenticity and purity of herbal supplements and associated marketing, under various states' consumer protection statutes. Motions for transfer and consolidation of all of the federal actions as multidistrict litigation into a single district before a single judge were granted on June 9, 2015, and the cases are consolidated before Judge John W. Darrah of the United States District Court, North District of Illinois—Eastern Division (the "MDL Case"). Three class actions against one of our customers to which we may have a duty to indemnify have not been transferred and consolidated with the MDL Case, and are at the initial stages of litigation. At this time, no determination can be made as to the ultimate outcome of the investigation and related litigation or the amount of liability, if any, on the part of NBTY.

Glucosamine-Based Dietary Supplements

        Beginning in June 2011, certain putative class actions have been filed in various jurisdictions against NBTY, its subsidiary Rexall Sundown, Inc. ("Rexall"), and/or other companies as to which there may be a duty to defend and indemnify, challenging the marketing of glucosamine-based dietary supplements, under various states' consumer protection statutes. The lawsuits against NBTY and its subsidiaries are: Cardenas v. NBTY, Inc. and Rexall Sundown, Inc. (filed June 14, 2011) in the United States District Court for the Eastern District of California, on behalf of a putative class of California

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

8. Litigation Summary (Continued)

consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief; Jennings v. Rexall Sundown, Inc. (filed August 22, 2011) in the United States District Court for the District of Massachusetts, on behalf of a putative class of Massachusetts consumers seeking unspecified trebled compensatory damages; and Nunez v. NBTY, Inc. et al. (filed March 1, 2013) in the United States District Court for the Southern District of California (the "Nunez Case"), on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus injunctive relief, as well as other cases in California and Illinois against certain Consumer Products Group customers as to which we may have certain indemnification obligations.

        In March 2013, NBTY agreed upon a proposed settlement with the plaintiffs, which included all cases and resolved all pending claims without any admission of or concession of liability by NBTY, and which provided for a release of all claims in return for payments to the class, together with attorneys' fees, and notice and administrative costs. Fairness Hearings took place on October 4, 2013 and November 20, 2013. On January 3, 2014, the court issued an opinion and order approving the settlement as modified (the "Order"). The final judgment was issued on January 22, 2014 (the "Judgment"). Certain objectors filed a notice of appeal of the Order and the Judgment on January 29, 2014 and the plaintiffs filed a notice of appeal on February 3, 2014. In fiscal 2013, NBTY recorded a provision of $12,000 reflecting its best estimate of exposure for payments to the class together with attorney's fees and notice and administrative costs in connection with this class action settlement. As a result of the court's approval of the settlement and the closure of the claims period, NBTY reduced its estimate of exposure to $6,100. This reduction in the estimated exposure was reflected in the Company's first quarter results for fiscal 2014.

        On November 19, 2014, the appellate court issued a decision granting the objectors' appeal. The appellate court reversed and remanded the matter to the district court for further proceedings consistent with the appellate court's decision. In April 2015, NBTY agreed upon a revised proposed settlement with certain plaintiffs which includes all cases and resolves all pending claims without any admission of or concession of liability by NBTY. The parties have signed settlement documentation providing for a release of all claims in return for payments to the class, together with attorneys' fees, and notice and administrative costs estimated to be in the amount of $9,000, which resulted in an additional charge of $4,300 in the second quarter results for fiscal 2015. On May 14, 2015, the settlement was submitted to the court for preliminary approval and a preliminary conference was held before the court on July 22, 2015. The court issued a preliminary approved order on February 1, 2016 preliminarily approving the settlement. Until the cases are resolved, no final determination can be made as to the ultimate outcome of the litigation or the amount of liability on the part of NBTY.

Telephone Consumer Protection Act Claim

        NBTY, and certain of its subsidiaries, are defendants in a class-action lawsuit, captioned John H. Lary Jr. v. Rexall Sundown, Inc.; Rexall Sundown 3001, LLC; Rexall, Inc.; NBTY, Inc.; Corporate Mailings, Inc. d/b/a CCG Marketing Solutions ("CCG") and John Does 1-10 (originally filed October 22, 2013), brought in the United States District Court, Eastern District of New York. The plaintiff alleges that the defendants faxed advertisements to plaintiff and others without invitation or permission, in violation of the Telephone Consumer Protection Act ("TCPA").

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

8. Litigation Summary (Continued)

        On May 2, 2014, NBTY and its named subsidiary defendants cross-claimed against CCG, who was a third party vendor engaged by NBTY, and CCG cross-claimed against NBTY and named subsidiary defendants on June 13, 2014. CCG brought a third party complaint against an unrelated entity, Healthcare Data Experts, LLC, on June 27, 2014. On July 21, 2014, CCG filed a motion to dismiss the amended complaint and on February 11, 2015 the court issued an Order and Opinion dismissing the class-action. On February 27, 2015, the plaintiff filed an appeal to the court's dismissal of the action and that appeal is pending. Oral arguments were held December 10, 2015 and the appeal is pending.

        At this time, no determination can be made as to the ultimate outcome of the litigation or the amount of liability on the part of NBTY.

Claims in the Ordinary Course

        In addition to the foregoing, other regulatory inquiries, audits, investigations, claims, suits and complaints (including false advertising, product liability, escheat laws, intellectual property and Proposition 65 claims) arise from time to time in the ordinary course of our business. We currently believe that such other inquiries, claims, suits and complaints would not have a material adverse effect on our consolidated financial statements, if adversely determined against us.

        Over the past several years, we have been served with various false advertising putative class action cases in various U.S. jurisdictions, as have various other companies in the industry. Over the past few years, the number of these cases has increased, such that at any given time we are defending several suits concerning a variety of products. These cases challenge the marketing of the subject dietary supplements under various states' consumer protection statutes and generally seek unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief. Until these cases are resolved, no determination can be made as to the ultimate outcome of the litigation or the amount of liability on our part.

9. 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 2016 and 2030. Therefore, our overall effective income tax rate could vary.

        The effective income tax rate for the three months ended December 31, 2015 and 2014 was 33.9% and 35.6%, respectively. Our effective tax rates for the three month periods are different than the federal statutory rate generally due to the impact of state and local taxes in fiscal 2016 and 2015 and the partial reinvestment of foreign earnings in fiscal 2016.

        We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. At December 31, 2015, we had accrued $330 and $137 for the potential payment of interest and penalties, respectively. As of December 31, 2015, we were subject to U.S. federal income tax examinations for the tax years 2012 through 2015, and to non-U.S. examinations for tax years 2010 through 2015. In addition, we are generally subject to state and local examinations for fiscal years 2012 through 2015.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

10. Accumulated Other Comprehensive Income (Loss)

        Additions to and reclassifications out of accumulated other comprehensive income (loss) attributable to the Company for the three months ended December 31, 2015 and 2014 were as follows:

 
  Three Months Ended December 31, 2015(1)  
 
  Foreign currency
translation
adjustments
  Gains and
losses on
cash flow hedges
  Total  

Balance at September 30, 2015

  $ (109,702 ) $   $ (109,702 )

Other comprehensive income (loss)

    (20,630 )       (20,630 )

Less: foreign currency translation adjustment attributable to non-controlling interest

    574         574  

Balance at December 31, 2015

  $ (129,758 ) $   $ (129,758 )

 

 
  Three Months Ended December 31, 2014(1)  
 
  Foreign currency
translation
adjustments
  Gains and
losses on
cash flow hedges
  Total  

Balance at September 30, 2014

  $ (28,481 ) $ (721 ) $ (29,202 )

Other comprehensive income (loss) before reclassifications

    (30,307 )   (438 )   (30,745 )

Amounts reclassified from accumulated other comprehensive income (loss)(2)

        1,159     1,159  

Balance at December 31, 2014

  $ (58,788 ) $   $ (58,788 )

(1)
All amounts are net of tax, amounts in parentheses indicate debits.

(2)
These losses are reclassified into Interest expense. See Note 7, Fair Value of Financial Instruments.

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.

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

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

11. Business and Credit Concentration (Continued)

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 months ended December 31, 2015 and 2014, respectively:

 
  Consumer
Products Group
Segment Net
Sales
  Total
Consolidated
Net Sales
 
 
  Three Months
Ended
December 31,
  Three Months
Ended
December 31,
 
 
  2015   2014   2015   2014  

Customer A

    22 %   18 %   13 %   11 %

Customer B

    15 %   17 %   9 %   10 %

Customer C

    7 %   11 %   4 %   6 %

        The following customers accounted for the following percentages of the Consumer Products Group segment's gross accounts receivable:

 
  December 31,
2015
  September 30,
2015
 

Customer A

    16 %   12 %

Customer B

    11 %   11 %

Customer C

    11 %   9 %

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

Suppliers

        For the quarter ended December 31, 2015 one supplier was in excess of 10% of our inventory purchases.

12. Related Party Transactions

Consulting Agreement—The Carlyle Group ("Carlyle")

        NBTY entered into a consulting agreement with Carlyle under which it pays Carlyle a fee for consulting services Carlyle provides to it and its subsidiaries. Under this agreement, subject to certain conditions, NBTY expects to pay an annual consulting fee to Carlyle of $3,000; NBTY reimburses Carlyle for out-of-pocket expenses, and may pay Carlyle additional fees associated with other future transactions. For the three months ended December 31, 2015 and 2014, these fees totaled $750 and are recorded in selling, general and administrative expenses. Out of pocket expenditures paid to Carlyle were $434 and $334 for the three months ended December 31, 2015 and 2014, respectively.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

12. Related Party Transactions (Continued)

Services from Portfolio Companies of Funds Affiliated with Carlyle

        From time to time, we receive services from other portfolio companies of funds that are affiliated with Carlyle, which includes payments for services to one such vendor in the amounts of $3,526 and $62 for the three months ended December 31, 2015 and 2014.

13. Segment Information

        We are organized by segments on a worldwide basis. We evaluate performance based on a number of factors; however, the primary measures of performance are the net sales and income or loss from operations (before corporate allocations) of each segment, as these are the key performance indicators that we review. Operating income or loss for each segment does not include the impact of any intercompany transfer pricing mark-up, corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to, human resources, legal, finance, and various other corporate-level activity related expenses. Such unallocated expenses remain within Corporate/Manufacturing.

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

    Consumer Products Group—This segment sells products worldwide under various brand names and third-party private labels. Our products are sold to the major mass merchandisers, club stores, drug store chains and supermarkets, as well as to online retailers, independent pharmacies, health food stores, the military and other retailers.

    Holland & Barrett International—This segment operates 1,088 stores including 857 Holland & Barrett stores (including 701 company-owned stores in the UK, 50 in Ireland and one in Sweden; and franchised stores in the following countries: 35 in China, 27 in Singapore, 19 in United Arab Emirates, 11 in Cyprus, five in Malta, four in Kuwait, three in Spain and one in Gibraltar). Holland & Barrett International also operated 167 De Tuinen stores (including cobranded stores) in the Netherlands (of which five were franchises), 18 Essenza stores in Belgium, and 46 GNC/MET-Rx stores in the UK. Holland & Barrett International operates Holland & Barrett retail websites in the UK, Ireland, the Netherlands and Belgium, as well as retail websites for De Tuinen in the Netherlands and the GNC/MET-Rx brands in the UK. The revenue generated by this segment consists of sales of its branded products and third-party products as well as franchise fees. We are in the process of rebranding or cobranding our De Tuinen and Essenza stores to leverage consumer awareness of our Holland & Barrett brand. We are also in the process of rebranding our GNC brand stores to MET-Rx.

    Puritan's Pride—This segment generates revenue through the sale of proprietary brand and third-party products primarily through mail order catalogs and the internet under the Puritan's Pride tradename. Catalogs are strategically mailed to customers who order by mail, internet, or phone.

    Vitamin World—This segment generates revenue through its 378 owned and operated U.S. Vitamin World stores selling proprietary brand and third-party products, as well as internet-based sales from www.vitaminworld.com. In February 2016, the company entered into an agreement to divest this segment. This transaction is expected to close during the second fiscal quarter of fiscal 2016. (See Note 14)

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Segment Information (Continued)

        In the first quarter of our fiscal year ending September 30, 2016, we changed our internal reporting by (i) presenting certain executive compensation within the segment that is managed by such executive rather than within Corporate/Manufacturing and (ii) transferring certain immaterial customers to the Puritan's Pride segment from the Consumer Products Group segment, as that is how this business is now managed. Accordingly, for the three months ended December 31, 2014, we made certain reclassifications to our segment presentation to conform to current period presentation for these above changes.

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

 
  Total Reportable Business Segments    
   
 
 
  Consumer
Products
Group
  Holland &
Barrett
International
  Puritan's
Pride
  Vitamin
World(1)
  Total   Corporate/
Manufacturing
  Consolidated  

Three Months Ended December 31, 2015:

                                           

Net sales

  $ 472,430   $ 218,461   $ 61,552   $ 49,547   $ 801,990   $   $ 801,990  

Income (loss) from operations

    46,338     38,839     5,089     (13,137 )   77,129     (35,088 )   42,041  

Depreciation and amortization

    9,359     6,472     2,914     872     19,617     12,235     31,852  

Capital expenditures

    7,861     21,228     20     628     29,737     10,301     40,038  

Three Months Ended December 31, 2014:

                                           

Net sales

  $ 494,705   $ 213,597   $ 63,564   $ 53,905   $ 825,771   $   $ 825,771  

Income (loss) from operations

    61,148     46,315     5,677     1,200     114,340     (22,522 )   91,818  

Depreciation and amortization

    9,002     5,049     2,830     895     17,776     10,289     28,065  

Capital expenditures

    73     10,703     13     1,023     11,812     7,278     19,090  

(1)
Includes an impairment of $11,656 for the three months ended December 31, 2015. (See Note 7 and 14)

        Total assets by segment are as follows:

 
  December 31,
2015
  September 30,
2015
 

Reportable Business Segments:

             

Consumer Products Group

  $ 2,650,476   $ 2,542,942  

Holland & Barrett International

    948,965     944,825  

Puritan's Pride

    506,351     514,795  

Vitamin World

    41,941     51,881  

Total Reportable Business Segments:

    4,147,733     4,054,443  

Corporate / Manufacturing

    753,594     813,966  

Consolidated assets

  $ 4,901,327   $ 4,868,409  

14. Subsequent Event

        In February 2016, the Company entered into an agreement to sell its Vitamin World segment and certain other assets (including real property) associated with Vitamin World for aggregate consideration of approximately $25,000, consisting of $10,000 in cash, a promissory note with a face value of $15,000

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

14. Subsequent Event (Continued)

and a warrant to purchase 10% of the equity of the acquiring entity expiring ten years after the closing of the transaction. This transaction is expected to close during the second fiscal quarter of fiscal 2016, and is subject to post-closing adjustments. In conjunction with this divestiture, an impairment of $11,656, which contemplated this potential transaction, was recorded in our first fiscal quarter ended December 31, 2015 and a loss on the sale of the remaining assets will be recorded in the second fiscal quarter of fiscal 2016 based upon the fair value of the expected proceeds. The cumulative expected loss and impairments on this sale will range from $35,000 to $45,000; inclusive of the impairment described above.

15. Condensed Consolidating Financial Statements of Guarantors

        The Notes were issued by NBTY and are guaranteed by each of its current and future direct and indirect 100% owned subsidiaries, subject to certain exceptions. These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents:

    1.
    Condensed consolidating financial statements as of December 31, 2015 and September 30, 2015 and for the three months ended December 31, 2015 and 2014 of (a) NBTY, the parent and issuer, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries and (d) NBTY on a consolidated basis; and

    2.
    Elimination entries necessary to consolidate NBTY, 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, other comprehensive income, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. For cashflow presentation purposes, cash transfers between the Guarantors and Non-guarantors (the "Operating Entities") are presented as operating activities and cash transfers between the Parent and the Operating Entities are presented as financing cashflows, unless the cash transfers relate to a statutorily recorded dividend or a formally documented loan agreement. Cash transfers which are statutorily recorded as dividends are presented as a financing outflow by the remitting entity and an operating inflow for the receiving entity, provided that the dividends remitted do not exceed the cumulative earnings of the remitting entity at the time the dividend is remitted. Cash transfers related to formally documented loans are treated as financing activities for all entities that are party to the transfer. This financial information should be read in conjunction with the financial statements and other notes related thereto.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

15. Condensed Consolidating Financial Statements of Guarantors (Continued)

Condensed Consolidating Balance Sheet
As of December 31, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current assets:

                               

Cash and cash equivalents

  $ 133,351   $ 3,670   $ 67,904   $   $ 204,925  

Accounts receivable, net

        132,087     57,137         189,224  

Intercompany

    14,632         71,674     (86,306 )    

Inventories

        602,699     252,494         855,193  

Deferred income taxes

        56,352     73         56,425  

Other current assets

    876     35,003     38,513         74,392  

Total current assets

    148,859     829,811     487,795     (86,306 )   1,380,159  

Property, plant and equipment, net

   
122,812
   
218,721
   
232,293
   
   
573,826
 

Goodwill

        720,812     479,689         1,200,501  

Other intangible assets, net

        1,331,187     382,925         1,714,112  

Other assets

    15,021     17,658     50         32,729  

Intercompany loan receivable

    2,438,594     1,400,732         (3,839,326 )    

Investments in subsidiaries

    2,238,210     146,921         (2,385,131 )    

Total assets

  $ 4,963,496   $ 4,665,842   $ 1,582,752   $ (6,310,763 ) $ 4,901,327  

Liabilities and Stockholder's Equity

                               

Current liabilities:

                               

Current portion of long-term debt

  $ 30,000   $   $ 29,814   $   $ 59,814  

Accounts payable

        202,683     108,455         311,138  

Intercompany

        86,306         (86,306 )    

Accrued expenses and

                               

other current liabilities

    16,806     125,668     56,671         199,145  

Total current liabilities

    46,806     414,657     194,940     (86,306 )   570,097  

Intercompany loan payable

    1,400,732     2,064,797     373,797     (3,839,326 )    

Long-term debt, net of current portion

    2,034,797         50,892         2,085,689  

Deferred income taxes

        619,710     103,491         723,201  

Other liabilities

        14,133     27,046         41,179  

Total liabilities

    3,482,335     3,113,297     750,166     (3,925,632 )   3,420,166  

Noncontrolling interest

    103,511         103,511     (103,511 )   103,511  

Commitments and contingencies

                               

Stockholder's Equity:

                               

Common stock

                     

Capital in excess of par

    1,507,408     1,455,848     746,911     (2,202,759 )   1,507,408  

(Accumulated deficit) retained earnings

        116,857     98,407     (215,264 )    

Accumulated other comprehensive income (loss)

    (129,758 )   (20,160 )   (116,243 )   136,403     (129,758 )

Total stockholder's equity

    1,377,650     1,552,545     729,075     (2,281,620 )   1,377,650  

Total liabilities and stockholder's equity

  $ 4,963,496   $ 4,665,842   $ 1,582,752   $ (6,310,763 ) $ 4,901,327  

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

15. Condensed Consolidating Financial Statements of Guarantors (Continued)

Condensed Consolidating Balance Sheet
As of September 30, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current assets:

                               

Cash and cash equivalents

  $ 164,443   $ 1,344   $ 137,563   $   $ 303,350  

Accounts receivable, net

        149,423     49,270         198,693  

Intercompany

    29,258         85,513     (114,771 )    

Inventories

        630,013     214,210         844,223  

Deferred income taxes

        56,119     75         56,194  

Other current assets

    876     24,148     34,807         59,831  

Total current assets

    194,577     861,047     521,438     (114,771 )   1,462,291  

Property, plant and equipment, net

   
120,977
   
266,401
   
218,330
   
   
605,708
 

Goodwill

        720,813     397,207         1,118,020  

Other intangible assets, net

        1,341,784     322,754         1,664,538  

Other assets

    7,728     10,066     58         17,852  

Intercompany loan receivable

    2,497,035     1,319,331         (3,816,366 )    

Investments in subsidiaries

    2,078,945     146,539         (2,225,484 )    

Total assets

  $ 4,899,262   $ 4,665,981   $ 1,459,787   $ (6,156,621 ) $ 4,868,409  

Liabilities and Stockholder's Equity

                               

Current liabilities:

                               

Current portion of long-term debt

  $ 33,498   $   $ 998   $   $ 34,496  

Accounts payable

        188,599     93,880         282,479  

Intercompany

        114,771         (114,771 )    

Accrued expenses and other current liabilities

    31,971     137,817     79,773         249,561  

Total current liabilities

    65,469     441,187     174,651     (114,771 )   566,536  

Intercompany loan payable

    1,319,331     2,116,214     380,821     (3,816,366 )    

Long-term debt, net of current portion

    2,082,716         46,442         2,129,158  

Deferred income taxes

        613,165     88,529         701,694  

Other liabilities

        12,731     26,544         39,275  

Total liabilities

    3,467,516     3,183,297     716,987     (3,931,137 )   3,436,663  

Commitments and contingencies

   
 
   
 
   
 
   
 
   
 
 

Stockholder's Equity:

                               

Common stock

                     

Capital in excess of par

    1,542,584     1,404,431     746,911     (2,151,342 )   1,542,584  

(Accumulated deficit) retained earnings

    (1,136 )   96,025     92,282     (188,307 )   (1,136 )

Accumulated other comprehensive income (loss)

    (109,702 )   (17,772 )   (96,393 )   114,165     (109,702 )

Total stockholder's equity

    1,431,746     1,482,684     742,800     (2,225,484 )   1,431,746  

Total liabilities and stockholder's equity

  $ 4,899,262   $ 4,665,981   $ 1,459,787   $ (6,156,621 ) $ 4,868,409  

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

15. Condensed Consolidating Financial Statements of Guarantors (Continued)

Consolidated Statements of Operations and Comprehensive Income (Loss)
For three months ended December 31, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 537,364   $ 283,548   $ (18,922 ) $ 801,990  

Costs and expenses:

                               

Cost of sales (See Note 3)

        336,853     125,213     (18,922 )   443,144  

Advertising, promotion and catalog

        35,331     11,132         46,463  

Selling, general and administrative

    29,261     114,685     109,246         253,192  

Impairment of Vitamin World assets (See Note 7 and 14)

        11,656             11,656  

Facility restructuring charges (See Note 3)

        5,494             5,494  

    29,261     504,019     245,591     (18,922 )   759,949  

(Loss) income from operations

    (29,261 )   33,345     37,957         42,041  

Other income (expense):

                               

Intercompany interest

    38,605     (33,905 )   (4,700 )        

Interest

    (33,905 )       (431 )       (34,336 )

Miscellaneous, net

    (680 )   188     (1,470 )       (1,962 )

    4,020     (33,717 )   (6,601 )       (36,298 )

(Loss) income before income taxes

    (25,241 )   (372 )   31,356         5,743  

(Benefit) provision for income taxes

    (4,850 )   (136 )   6,931         1,945  

Equity in income of subsidiaries

    24,328     2,768         (27,096 )    

Net income (loss)

    3,937     2,532     24,425     (27,096 )   3,798  

Deduct net loss attributable to noncontrolling interests

            (139 )       (139 )

Net income (loss) attributable to NBTY, Inc. 

  $ 3,937   $ 2,532   $ 24,564   $ (27,096 ) $ 3,937  

Net income (loss)

  $ 3,937   $ 2,532   $ 24,425   $ (27,096 ) $ 3,798  

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustment, net of taxes

    (20,630 )   (2,388 )   (20,424 )   22,812     (20,630 )

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

                     

Total other comprehensive income (loss), net of tax

    (20,630 )   (2,388 )   (20,424 )   22,812     (20,630 )

Comprehensive income (loss)

  $ (16,693 ) $ 144   $ 4,001   $ (4,284 ) $ (16,832 )

Less: Net loss attributable to non-controlling interests

            (139 )       (139 )

Less : Foreign currency translation adjustment attributable to non-controlling interest

            (574 )       (574 )

Comprehensive loss attributable to non-controlling interest

            (713 )       (713 )

Comprehensive (loss) income attributable to NBTY, Inc. 

  $ (16,693 ) $ 144   $ 4,714   $ (4,284 ) $ (16,119 )

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

15. Condensed Consolidating Financial Statements of Guarantors (Continued)

Consolidated Statements of Operations and Comprehensive Income (Loss)
For three months ended December 31, 2014

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 557,361   $ 289,017   $ (20,607 ) $ 825,771  

Costs and expenses:

                               

Cost of sales

        342,653     126,841     (20,607 )   448,887  

Advertising, promotion and catalog

        34,947     11,947         46,894  

Selling, general and administrative

    22,890     114,937     100,345         238,172  

    22,890     492,537     239,133     (20,607 )   733,953  

Income (loss) from operations

    (22,890 )   64,824     49,884         91,818  

Other income (expense):

                               

Intercompany interest

    39,809     (34,781 )   (5,028 )        

Interest

    (34,781 )   65     (31 )       (34,747 )

Miscellaneous, net

    (1,746 )   (843 )   1,234         (1,355 )

    3,282     (35,559 )   (3,825 )       (36,102 )

Income (loss) before income taxes

    (19,608 )   29,265     46,059         55,716  

Provision (benefit) for income taxes

   
(1,166

)
 
10,612
   
10,363
   
   
19,809
 

Equity in income of subsidiaries

    54,349     6,333         (60,682 )    

Net income (loss)

    35,907     24,986     35,696     (60,682 )   35,907  

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustment, net of taxes

    (30,307 )   (5,681 )   (30,447 )   36,128     (30,307 )

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

    721     721         (721 )   721  

Total other comprehensive income (loss), net of tax

    (29,586 )   (4,960 )   (30,447 )   35,407     (29,586 )

Comprehensive income (loss)

 
$

6,321
 
$

20,026
 
$

5,249
 
$

(25,275

)

$

6,321
 

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

15. Condensed Consolidating Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows
Three Months Ended December 31, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Cash (used in) provided by operating activities

  $ (11,049 ) $ 84,026   $ 9,952   $ (18,300 ) $ 64,629  

Cash flows from investing activities:

                               

Purchase of property, plant and equipment

    (7,029 )   (7,317 )   (25,692 )       (40,038 )

Proceeds from sale of bar assets

        7,910             7,910  

Proceeds from sale of property, plant and equipment

        384             384  

Cash paid for acquisition, net of cash acquired

            (45,011 )       (45,011 )

Net cash used in investing activities

    (7,029 )   977     (70,703 )       (76,755 )

Cash flows from financing activities:

                               

Principal payments under long-term agreements

    (56,941 )               (56,941 )

Proceeds from issuance of debt

            6,123         6,123  

Dividends paid

    (38,750 )       (18,300 )   18,300     (38,750 )

Intercompany accounts

    82,677     (82,677 )            

Net cash used in financing activities

    (13,014 )   (82,677 )   (12,177 )   18,300     (89,568 )

Effect of exchange rate changes on cash

            3,269         3,269  

Net increase in cash and cash equivalents

    (31,092 )   2,326     (69,659 )       (98,425 )

Cash and cash equivalents at beginning of period

    164,443     1,344     137,563         303,350  

Cash and cash equivalents at end of period

  $ 133,351   $ 3,670   $ 67,904   $   $ 204,925  

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

15. Condensed Consolidating Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows
Three Months Ended December 31, 2014

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Cash (used in) provided by operating activities

  $ (24,334 ) $ 142,688   $ 23,505   $ (8,789 ) $ 133,070  

Cash flows from investing activities:

                               

Purchase of property, plant and equipment          

    (8,954 )   (1,009 )   (9,127 )       (19,090 )

Proceeds from sale of property, plant and equipment

        193               193  

Investment in subsidiary

    (7,000 )           7,000      

Net cash used in investing activities

    (15,954 )   (816 )   (9,127 )   7,000     (18,897 )

Cash flows from financing activities:

                               

Principal payments under long-term agreements

            (67 )       (67 )

Payments for financing fees

    (611 )               (611 )

Dividends paid

    (38,750 )       (8,789 )   8,789     (38,750 )

Capital contribution

            7,000     (7,000 )    

Intercompany accounts

    138,949     (138,949 )            

Net cash used in financing activities

    99,588     (138,949 )   (1,856 )   1,789     (39,428 )

Effect of exchange rate changes on cash

            (2,186 )       (2,186 )

Net increase in cash and cash equivalents

    59,300     2,923     10,336         72,559  

Cash and cash equivalents at beginning of period

    77,550     751     61,187         139,488  

Cash and cash equivalents at end of period

  $ 136,850   $ 3,674   $ 71,523   $   $ 212,047  

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NBTY, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Dollar amounts in thousands)

Forward-Looking Statements

        This Quarterly Report ("Report") contains "forward-looking statements" within the meaning of the securities laws. You should not place undue reliance on these statements. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. As you read and consider this Report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Many factors could affect our actual financial results and could cause actual results to differ materially from those expressed in the forward-looking statements. Some important factors include:

    consumer perception of our products due to adverse scientific research or findings, regulatory investigations, litigation, national media attention and other publicity regarding nutritional supplements;

    potential slow or negative growth in the vitamin, mineral and supplement market;

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

    volatile conditions in the capital, credit and commodities markets and in the overall economy;

    dependency on retail stores for sales;

    the loss of significant customers;

    compliance with new and existing federal, state, local or foreign legislation or regulation, or adverse determinations by regulators anywhere in the world (including the banning of products) and, in particular, Good Manufacturing Practices ("GMPs") in the United States, the Food Supplements Directive and Traditional Herbal Medicinal Products Directive (the "Herbal Products Directive") in Europe, the new Food Safety Law in China and greater enforcement by any such federal, state, local or foreign governmental entities;

    material product liability claims and product recalls;

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

    international market exposure and compliance with anti-corruption laws in the United States and foreign jurisdictions;

    difficulty entering new international markets;

    legal proceedings initiated by regulators in the United States or abroad, or lawsuits arising in the ordinary course of business;

    unavailability of, or our inability to consummate, advantageous acquisitions in the future, or our inability to integrate acquisitions into the mainstream of our business;

    loss of executive officers or other key personnel;

    loss of certain third-party suppliers and contract manufacturers;

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    the availability and pricing of raw materials;

    disruptions in manufacturing operations that produce nutritional supplements and loss of manufacturing certifications;

    increased competition and failure to compete effectively;

    our inability to respond to changing consumer preferences;

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

    work stoppages at our facilities;

    increased raw material, utility and fuel costs;

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

    interruptions in information processing systems and management information technology, including system interruptions and security breaches;

    failure to maintain and/or upgrade our information technology systems;

    our inability to protect our intellectual property rights;

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

    failure to maintain effective controls over financial reporting;

    other factors disclosed in this Report; and

    other factors beyond our control.

        In light of these risks, uncertainties and assumptions, the forward-looking statements contained in this Report might not prove accurate. You should not place undue reliance upon them. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date of this Report, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

        The statements in the following discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (our "2015 Annual Report"). Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the consolidated financial statements, including the related notes, contained elsewhere herein and with the 2015 Annual Report. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. All dollar values in this section, unless otherwise noted, are denoted in thousands. Numerical figures have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

Executive Summary

        NBTY is the leading vertically integrated manufacturer, marketer, distributor and retailer of high-quality VMHS products in the United States, with operations worldwide. We currently market a broad portfolio of well-known brands and third party label products. Our key consumer product brands

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include Nature's Bounty®, Sundown®, Pure Protein®, Solgar®, Body Fortress®, Osteo Bi Flex®, MET Rx®, Balance Bar®, Ester C® and Dr Organic®. We also operate specialty retailers of health and wellness products, primarily focused on providing VMHS solutions to our end consumers. Our specialty retailer businesses primarily operate under the Holland & Barrett®, Puritan's Pride® and Vitamin World® banners.

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

    Consumer Products Group—This segment sells products worldwide under various brand names and third-party private labels. Our products are sold to the major mass merchandisers, club stores, drug store chains and supermarkets, as well as to online retailers, independent pharmacies, health food stores, the military and other retailers.

    Holland & Barrett International—This segment operates 1,088 stores including 857 Holland & Barrett stores (including 701 company-owned stores in the UK, 50 in Ireland and one in Sweden; and franchised stores in the following countries: 35 in China, 27 in Singapore, 19 in United Arab Emirates, 11 in Cyprus, five in Malta, four in Kuwait, three in Spain and one in Gibraltar). Holland & Barrett International also operated 167 De Tuinen stores (including cobranded stores) in the Netherlands (of which five were franchises), 18 Essenza stores in Belgium, and 46 GNC/MET-Rx stores in the UK. Holland & Barrett International operates Holland & Barrett retail websites in the UK, Ireland, the Netherlands and Belgium, as well as retail websites for De Tuinen in the Netherlands and the GNC/MET-Rx brands in the UK. The revenue generated by this segment consists of sales of its branded products and third-party products as well as franchise fees. We are in the process of rebranding or cobranding our De Tuinen and Essenza stores to leverage consumer awareness of our Holland & Barrett brand. We are also in the process of rebranding our GNC brand stores to MET-Rx.

    Puritan's Pride—This segment generates revenue through the sale of proprietary brand and third-party products primarily through mail order catalogs and the internet under the Puritan's Pride tradename. Catalogs are strategically mailed to customers who order by mail, internet, or phone.

    Vitamin World—This segment generates revenue through its 378 owned and operated Vitamin World stores selling proprietary brand and third-party products, as well as internet-based sales from www.vitaminworld.com. In February 2016, the company entered into an agreement to divest this segment. This transaction is expected to close during the second fiscal quarter of fiscal 2016.

        Operating data for each of the four distribution channels does not include the impact of any intercompany transfer pricing mark-up, corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to, human resources, legal, finance and various other corporate-level activity related expenses. We attribute such unallocated expenses to Corporate/Manufacturing.

Acquisition of Dr. Organic

        In December 2015, NBTY (2015) Limited, a private limited company incorporated in England and Wales and an indirect subsidiary of Holdings ("NBTY (2015)"), and Holland & Barrett Group Limited ("H&B"), a company incorporated in England and Wales and an indirect subsidiary of Holdings, completed the purchase Dr. Organic, pursuant to which NBTY (2015) acquired all of the ordinary shares of Dr. Organic, a manufacturer, marketer and distributor of a broad line of naturally-inspired personal care products.

        The purchase price for the ordinary shares of Dr. Organic was £53,384 (approximately $80,519), paid in (i) cash of £33,384 (approximately $50,353) (the "cash consideration"), (ii) loan notes in an aggregate principal amount of £20,000 (approximately $30,166) (the "completion loan notes") issued by NBTY (2015) to the sellers, which mature 18 months after issuance and are redeemable at any time

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after six months at the option of the holders, (iii) 399,000 class B ordinary shares, par value £0.01 (the "rollover shares"), issued by NBTY (2015) to the sellers and (iv) 222,000 class C ordinary shares, par value £0.01, issued by NBTY (2015) to certain of the sellers at a premium of £0.04 each (which will be redeemed by NBTY (2015) for £0.05 18 months after issuance). Holders of the rollover shares may require us to repurchase them for an amount based on the future earnings of Dr. Organic and its subsidiaries (the "repurchase amount"), which amount is payable, at the election of holders, in cash or through the issuance of loan notes by NBTY (2015) with terms similar to the completion loan notes. To the extent the holders do not exercise their put right, we will have the right to call the rollover shares at the repurchase amount. The put is exercisable for thirty days commencing in January 2019 and the call is exercisable thirty days after the expiration of the put for a period of thirty days.

Divestiture of Vitamin World

        In February 2016, the Company entered into an agreement to sell its Vitamin World segment and certain other assets (including real property) associated with Vitamin World for aggregate consideration of approximately $25,000, consisting of $10,000 in cash, a promissory note with a face value of $15,000 and a warrant to purchase 10% of the equity of the acquiring entity expiring ten years after the closing of the transaction. This transaction is expected to close during the second fiscal quarter of fiscal 2016, and is subject to post-closing adjustments. In conjunction with this divestiture, an impairment of $11,656, which contemplated this potential transaction, was recorded in our first fiscal quarter ended December 31, 2015 and a loss on the sale of the remaining assets will be recorded in the second fiscal quarter of fiscal 2016 based upon the fair value of the expected proceeds. The cumulative expected loss and impairments on this sale will range from $35,000 to $45,000; inclusive of the impairment described above.

Sale of Nutritional Bar Assets and Powder Facility

        In March 2015, NBTY and Nellson Nutraceutical, LLC ("Nellson") entered into (i) a bar asset purchase agreement, (the "Bar APA") and (ii) a powder asset purchase agreement (the "Powder APA" and, together with the Bar APA, the "APAs"), pursuant to which NBTY agreed to sell certain production assets, raw materials, packaging, labeling, in process products, component inventories and contracts (the "Transferred Assets") associated with NBTY's nutritional bar and powder manufacturing operations (the "Divested Manufacturing Operations").

        The closing of the sale pursuant to the Powder APA occurred on June 26, 2015. The sales price for the production assets and transferred contracts was $4,228. The sales price for the raw materials, packaging, labels, work-in-process and component inventories was $16,722, net of post-closing adjustments.

        A significant portion of the sale of assets pursuant to the Bar APA has already been completed with the remaining portion of the sale expected to be completed by the end of the first half of fiscal 2016. The aggregate sales price for the production assets to be sold pursuant to the Bar APA is approximately $12,000, which resulted in accelerated depreciation as noted below. The aggregate sales price for the raw materials, packaging, labels, work-in-process and component inventories to be transferred pursuant to the Bar APA is equal to NBTY's book value for such assets, as estimated by NBTY prior to the closing of the transactions, and subject to post-closing adjustments. As of December 31, 2015, $7,910 of production assets have been transferred. As of December 31, 2015, the remaining production assets of approximately $4,100 and inventory of $4,700 within the bar plant that are waiting to be transferred are recorded in other current assets, as they are no longer being used for manufacturing operations and are readily available to be sold in their existing condition.

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        As a result of these arrangements, we will incur cumulative net charges ranging from $36,000 to $39,000 before tax over the period in which these transactions are completed, of which non-cash charges will consist primarily of accelerated depreciation and a write-off of goodwill of approximately $28,000; costs related to workforce reductions will be approximately $2,500 and other costs ranging from $7,000 to $10,000, partially offset by a gain of $1,692 on the sale of a contract. All costs associated with the Divested Manufacturing Operations are being reflected in Corporate / Manufacturing, with the exception of the write-off of goodwill for which $4,892 and $649 which recorded in the Consumer Products Group and Puritan's Pride segments, respectively.

        Charges related to these divestitures of $5,494 for the three months ended December 31, 2015 were $2,337 for accelerated depreciation and $3,157 of other costs, which primarily relate to inventory write-offs, and are recorded in Facility restructuring charges.

        Cumulative charges since inception of these arrangements totaled $34,987 through December 31, 2015 and include $22,540 for accelerated depreciation, $5,541 for a write off of goodwill associated with the fair value of the business; $2,510 for severance and employee related costs and $6,088 of other costs, which primarily relate to inventory write offs; partially offset by a gain on a transferred contract of $1,692, and are recorded in Facility restructuring charges.

Revision to Financial Statements

        During the period ended December 31, 2014, the Company had recorded an out-of-period adjustment to correct the Company's policy of expensing all labels upon receipt, which resulted in the Company increasing its label inventory by $3,708 with an offsetting decrease to cost of sales. This immaterial adjustment was the result of the Company correcting its policy of expensing all labels upon receipt. Accordingly on-hand labels were therefore recorded as a part of ending inventory on the consolidated balance sheet. As disclosed in the 2015 annual consolidated financial statements, the Company aggregated this out-of-period adjustment with other errors identified during the annual closing process and concluded that the aggregate impact of these errors resulted in a material misstatement to its consolidated financial statements for the three and nine months ended June 30, 2015. In connection with the Company's restatement of those interim consolidated financial statements the Company revised its historical financial statements to reflect the impact of correcting the accounting policy for its labels inventory. The impact of correcting this policy was recorded as an adjustment to stockholders' equity as of September 30, 2012.

        Accordingly, the Company has revised its previously reported Consolidated Statement of Operations for the three months ended December 31, 2014 as follows: increased Cost of sales and decreased income from operations before income taxes by $3,708; decreased Provision for income taxes by $1,424; and decreased Net income including non-controlling interests by $2,283.

Reclassifications

        In the first quarter of our fiscal year ending September 30, 2016, we changed our internal reporting by (i) presenting certain executive compensation within the segment that is managed by such executive rather than within Corporate/Manufacturing and (ii) transferring certain immaterial customers to the Puritan's Pride segment from the Consumer Products Group segment, as that is how this business is now managed. Accordingly, within the consolidated statement of operations for the three months ended December 31, 2014, we made certain reclassifications to conform to current period presentation for these above changes. These reclassifications were not material to our financial statements.

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Results of Operations

Three Months Ended December 31, 2015 Compared to the Three Months Ended December 31, 2014:

    Net Sales

        Net sales by segment were as follows:

 
  Three Months Ended December 31,    
   
 
 
  2015   2014    
   
 
 
  Net Sales   % of total   Net Sales   % of total   $ change