Use these links to rapidly review the document
Table of Contents

Table of Contents

 

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

---

FORM 10-Q/A
Amendment No. 1

Commission File Number: 333-186802

Alphabet Holding Company, Inc.
(Exact name of registrant as specified in its charter)

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 February 3, 2014 through September 30, 2014. As of October 1, 2014, 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 February 3, 2014.

        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.

        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 Class A outstanding was 3,100,800 and the number of shares of common stock Class B outstanding was 2,886.

   

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
INDEX

---

Table of Contents

Explanatory Note
(in thousands)

        Alphabet Holding Company, Inc. (the "Company") is filing this amendment No. 1 on Form 10-Q/A (this "Amendment") to amend its Quarterly Report on Form 10-Q for the three month period ended December 31, 2015, as filed on February 9, 2016 (the "Original Filing"), to revise its consolidated financial statements.

        During the second quarter of 2016, the Company identified the following errors related to its previously issued financial statements that the Company concluded, based on its evaluation of both quantitative and qualitative factors, were not material to any of its previously issued consolidated financial statements:

•

In accounting for deferred taxes related to certain of the Company's long-lived assets recorded in connection with the acquisition of the Company by Carlyle, inclusive of intangible assets and property, plant and equipment, the Company did not properly consider the implications of income tax and foreign currency rate changes when recording deferred taxes at the end of each reporting period. The correction of these errors results in the reduction of long-term deferred income tax liabilities of $45,235 and $38,671 as of December 31, 2015 and September 30, 2015, respectively, the reduction in (Benefit) provision for income taxes of $4,680 for the three months ended December 31, 2015 and an increase in Foreign currency translation adjustments of $1,884 and $3,477, for the three months December 31, 2015 and 2014, respectively. Accordingly, the Consolidated Balance Sheets, Statements of Operations and Comprehensive Income (Loss) and Statements of Stockholders' Equity have been revised, as the impact of these errors for fiscal periods prior to 2013 but subsequent to the acquisition of the Company by Carlyle was recorded as an adjustment to Stockholders' Equity as of September 30, 2012.



•

In accounting for the acquisition of the Company by Carlyle, the Company improperly recorded a deferred tax liability related to carryover tax-deductible goodwill resulting in an overstatement of its long-term deferred tax liabilities and goodwill in the amount of $13,930. The Consolidated Balance Sheets have been revised to reflect this change.

        The correction of these errors had no impact on the total captions as reported in the Consolidated Statements of Cash Flows and no impact on any covenants contained in its debt agreements.

Refer to Note 1, Basis of Presentation, in the Notes to the Consolidated Financial Statements set forth in this Amendment for further information relating to this revision.

        This amended Quarterly Report on Form 10-Q/A sets forth the Original Filing in its entirety; however, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this amended Quarterly Report on Form 10-Q/A amends and revises the Original Filing only with respect to matters affected by the revision. The following items in the Original Filing have been amended as a result of this revision:

•

Part I, Item 1. Financial Statements



•

Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations



•

Part II, Item 6. Exhibits (with respect to Exhibits 31 and 32)

The Company's Chief Executive Officer and Chief Financial Officer are providing currently dated certifications in connection with this amended Quarterly Report on Form 10-Q/A and various exhibits related to XBRL. These certifications are filed as Exhibits 31 and 32 to this Amendment.

        This amended Quarterly Report on Form 10-Q/A does not modify or update other disclosures presented in the Original Filing, including the exhibits to the Original Filing, except as identified above. As such, except for the items identified above, this amended Quarterly Report on Form 10-Q/A is as of February 9, 2016, the original filing date, and any forward-looking statements represent management's views as of that date and should be not be assumed to be accurate as of any date thereafter. This amended Quarterly Report on Form 10-Q/A should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to February 9, 2016.

3

---

Table of Contents

PART I
Item 1. Financial Statements

Alphabet Holding Company, Inc. and Subsidiary

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

   

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

4

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands)

   

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

5

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

   

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

6

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

(in thousands)

1. Basis of Presentation

        Alphabet Holding Company, Inc., a Delaware corporation ("Holdings") and its wholly owned subsidiary NBTY, Inc. ("NBTY"), together with its subsidiaries, (the "Company," "we," or "us"), is the leading vertically integrated manufacturer, marketer, distributor and retailer 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/A 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 preparation of the annual consolidated financial statements for the fiscal year ended September 30, 2015 ("fiscal 2015"), the Company discovered a financial statement error attributable to the accounting for the accelerated depreciation of assets being sold in conjunction with the closure of its nutritional bar manufacturing plant. More specifically, the Company determined that accelerated depreciation had been understated for the three and nine months ended June 30, 2015 by $4,904 and $6,539, respectively. Accordingly, the Company restated those periods.

        Additionally, in prior interim periods during fiscal 2015 the Company had recorded and disclosed out-of-period adjustments that the Company concluded at the time of recording of those adjustments, based on its evaluation of both quantitative and qualitative factors, were not material to any of its previously issued consolidated financial statements.

        These adjustments included the following:

•

During the first quarter of fiscal 2015, the Company recorded an out-of-period adjustment to cost of sales and label inventory of $3,707. This immaterial adjustment is a result of the Company correcting its policy of expensing all labels upon receipt. Accordingly on-hand labels are now recorded as a part of ending inventory on the consolidated balance sheet.



•

During the second and third quarters of fiscal 2015, the Company recorded an out-of-period adjustment to selling, general and administrative expenses and cost of sales and prepaid rent totaling $3,252. This immaterial adjustment is a result of the Company correcting its policy of expensing rent, primarily at certain retail locations, at the payment date. Accordingly prepaid rent is now recorded on the consolidated balance sheet and expensed during the period of use.

        The Company 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

7

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

the Company revised its historical financial statements to reflect the impact of the correction of the accounting policies noted above. The impact of correcting these policies was recorded as an adjustment to stockholders' equity as of September 30, 2012. Therefore, the Consolidated Statements of Stockholders' Equity and the Consolidated Balance Sheet have been revised to reflect this change. There was no change to the previously reported Consolidated Statements of Operations and Comprehensive Income (Loss), for these adjustments as the impact to the Company's results of operations for all previously reported periods was de minimis. Furthermore, there was no change to the Consolidated Statements of Cash Flows and no impact on any covenants contained in its debt agreements.

        During the second quarter of 2016, the Company identified errors related to its previously issued financial statements that the Company concluded, based on its evaluation of both quantitative and qualitative factors, were not material to any of its previously issued consolidated financial statements:

•

In accounting for deferred taxes related to certain of the Company's long-lived assets recorded in connection with the acquisition of the Company by Carlyle, inclusive of intangible assets and property, plant and equipment, the Company did not properly consider the implications of income tax and foreign currency rate changes when recording deferred taxes at the end of each reporting period. The correction of these errors results in the reduction of long-term deferred income tax liabilities of $45,235 and $38,671 as of December 31, 2015 and September 30, 2015, respectively, the reduction in (Benefit) provision for income taxes of $4,680 for the three months ended December 31, 2015 and an increase in Foreign currency translation adjustments of $1,884 and $3,477, for the three months December 31, 2015 and 2014, respectively. Accordingly, the Consolidated Balance Sheets, Statements of Operations and Comprehensive Income (Loss) and Statements of Stockholders' Equity have been revised, as the impact of these errors for fiscal periods prior to 2013 but subsequent to the acquisition of the Company by Carlyle was recorded as an adjustment to Stockholders' Equity as of September 30, 2012.



•

In accounting for the acquisition of the Company by Carlyle, the Company improperly recorded a deferred tax liability related to carryover tax-deductible goodwill resulting in an overstatement of its long-term deferred tax liabilities and goodwill in the amount of $13,930. The Consolidated Balance Sheets have been revised to reflect this change.

        The correction of these errors had no impact on the total captions as reported in the Consolidated Statements of Cash Flows and no impact on any covenants contained in its debt agreements.

The aggregate impact of these revisions to correct the previously issued financial statements is follows:

8

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

 

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 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

9

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

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:

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.

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

10

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

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.

2. 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 after six months at the option of the holders, (iii) 399,000 class B ordinary shares, par value £0.01 (the

11

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

2. Acquisition of Dr. Organic (Continued)

"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. 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:

        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

12

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

2. Acquisition of Dr. Organic (Continued)

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 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

13

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

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

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.

4. Inventories

        The components of inventories are as follows:

5. Goodwill and Intangible Assets

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

        The previously reported amounts have been revised to correct for the impact of the error with regard to the improper recognition of a deferred tax liability related to carryover tax-deductible goodwill (see Note 2). The correction of this error resulted in a reduction in goodwill from what was previously reported in the amounts of $7,129, $3,086 and $3,715 related to the Consumer Products Group, Holland & Barrett International and Puritan's Pride segments, respectively.

14

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

5. Goodwill and Intangible Assets (Continued)

        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:

        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.

15

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt

        The components of long-term debt are as follows:

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, 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

16

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

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 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).

17

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

        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, 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

18

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Long-Term Debt (Continued)

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;

         (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:

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

19

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

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:

        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.

20

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

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 December 31, 2015:

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

        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:

21

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Fair Value of Financial Instruments (Continued)

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.

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:

22

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Fair Value of Financial Instruments (Continued)

Notes and Holdco Notes

        The fair value of the Notes and the Holdco Notes, based on quoted market prices (Level 2), was approximately $656,000 and $975,000, respectively, 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.

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

23

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

8. Litigation Summary (Continued)

"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 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

24

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

8. Litigation Summary (Continued)

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").

        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.

25

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

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 57.8% and 36.3%, 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; in fiscal 2016, the partial reinvestment of foreign earnings as well as a one-time benefit related to the remeasurement of our deferred taxes in the UK due to an enacted tax rate change.

        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.

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:

 

26

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

10. Accumulated Other Comprehensive Income (Loss) (Continued)

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 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:

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

27

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

11. Business and Credit Concentration (Continued)

        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.

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.

28

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Segment Information (Continued)

•

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)

        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.

29

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Segment Information (Continued)

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

        Total assets by segment are as follows:

        Assets by segment as of December 31, 2015 and September 30, 2015 were revised to reflect the correction of the Company's recording of deferred tax liabilities related to carryover tax-deductible goodwill in the amounts of $7,129, $3,086 and $3,715 related to the Consumer Products Group, Holland & Barrett International and Puritan's Pride segments, respectively.

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

30

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary

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.

31

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
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;



•

the availability and pricing of raw materials;

32

---

Table of Contents

•

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/A 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

        Alphabet Holding Company, Inc. is a holding company with no operations and is dependent on its wholly owned subsidiary, NBTY, Inc. and its wholly owned subsidiaries to service its debt and other obligations.

        We are 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

33

---

Table of Contents

broad portfolio of well-known brands and third party label products. Our key consumer product brands 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

34

---

Table of Contents

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.

        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

35

---

Table of Contents

$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.

Revision to Financial Statements

        During the second quarter of 2016, the Company identified errors related to its previously issued financial statements that the Company concluded, based on its evaluation of both quantitative and qualitative factors, were not material to any of its previously issued consolidated financial statements. These errors related to accounting for deferred taxes related to certain of the Company's long-lived assets, inclusive of intangible assets and property, plant and equipment, whereby the Company did not properly consider the implications of income tax and foreign currency rate changes when recording deferred taxes at the end of each reporting period. The correction of these errors results in the reduction of long-term deferred income tax liabilities of $45,235 and $38,671 as of December 31, 2015 and September 30, 2015, respectively, the reduction in (Benefit) provision for income taxes of $4,680 for the three months ended December 31, 2015 and an increase in Foreign currency translation adjustments of $1,884 and $3,477, for the three months December 31, 2015 and 2014, respectively. Additionally, in accounting for the acquisition of the Company by Carlyle the Company improperly recorded a deferred tax liability related to carryover tax-deductible goodwill, the correction of which results in a reduction of its long-term deferred tax liabilities and goodwill in the amount of $13,930.

        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 (loss) income from operations before income taxes by $3,708; decreased (Benefit) provision for income taxes by $1,423; and decreased Net (loss) income including non-controlling interests by $2,284.

36

---

Table of Contents

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 within the segments to conform to current period presentation for these above changes.

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:

Consumer Products Group

        Net sales for the Consumer Products Group segment decreased $22,275, or 4.5%, to $472,430 for the three months ended December 31, 2015, as compared to the prior comparable period. This decrease is due to $26,327 lower net sales to certain contract manufacturing and private label accounts, partially offset by $4,052 higher net sales of our branded products, primarily driven by increases in core brands. Domestic branded net sales increased $6,972 (primarily due to continued growth in Nature's Bounty and Pure Protein) and international branded net sales decreased $2,920 (primarily due to decreases in China as a result of regulatory constraints).

        We continue to adjust shelf space allocation among our numerous brands to provide the best overall product mix and to respond to changing market conditions. The Consumer Products Group segment continues to leverage valuable consumer sales information obtained from its customers and our direct to consumer operations to provide its customers with data and analyses to drive mass market sales.

        We use targeted promotions to grow overall sales. Promotional programs and rebates represented 16.2% of net sales for the three months ended December 31, 2015, as compared to 17.1% of net sales for the prior comparable period. We expect promotional programs and rebates as a percentage of net sales to fluctuate on a quarterly basis.

        Product returns represented 1.7% of net sales for the three months ended December 31, 2015 as compared to 1.2% of net sales for the prior comparable period, and are primarily attributable to returns in the ordinary course of business. We expect product returns relating to normal operations to trend between 1% and 2% of Consumer Products Group net sales in future quarters.

37

---

Table of Contents

        The following customers accounted for the following percentages of net sales for the three months ended December 31, 2015 and 2014, respectively:

        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.

Holland & Barrett International

        Net sales for the Holland & Barrett International segment increased $4,864, or 2.3%, to $218,461 for the three months ended December 31, 2015, as compared to the prior comparable period. This increase is attributable to additional stores opened during the period as well as more successful promotional activity. Offsetting the increase, the average exchange rate of the British pound sterling to the U.S. dollar decreased 4.1% and the euro to the U.S. dollar decreased 12.3% as compared to the prior comparable period. In local currency, net sales increased 8.5% and sales for stores open more than one year (same store sales which include online sales) increased 3.6% as compared to the prior comparable period.

        The following is a summary of Holland & Barrett International store activity:

38

---

Table of Contents

Puritan's Pride

        Net sales for the Puritan's Pride segment decreased by $2,012, or 3.2%, to $61,552 for the three months ended December 31, 2015, as compared to the prior comparable period. The total number of orders decreased approximately 9%, while the average order size increased approximately 5% for the three months ended December 31, 2015, as compared to the prior comparable period. E-commerce orders comprised 76% of total Puritan's Pride orders for the three months ended December 31, 2015 and 2014.

        This segment continues to vary its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs and internet promotions which are not offered on a consistent basis every quarter. Historical results reflect this pattern and therefore this segment should be viewed on an annual, and not quarterly, basis.

Vitamin World

        Net sales for the Vitamin World segment decreased $4,358, or 8.1%, to $49,547 for the three months ended December 31, 2015, as compared to the prior comparable period. Same store sales (same store sales which include online sales) declined 6.1% due to declines in sales of sports nutrition and weight loss products as well as overall declines in mall traffic.

        The following is a summary of Vitamin World store activity:

Cost of Sales

        Cost of sales was as follows:

        Cost of sales as a percentage of net sales increased by 0.9 percentage points. The increase in the percentage of cost of sales was primarily due to charges in our Consumer Products Group related to a SKU rationalization initiative, partially offset by lower raw material costs on certain sports nutrition products; as well as lower margins earned in our retail businesses due to increased promotional activity.

        Due to competitive pressure in the private label business, the cost of sales for our private label business as a percentage of net sales could fluctuate. This would adversely affect gross profits during the affected periods. To address these matters, we continuously seek to implement additional improvements in our supply chain and we are increasing our focus on our branded sales.

39

---

Table of Contents

Advertising, Promotion and Catalog Expenses

        Total advertising, promotion and catalog expenses were as follows:

        Advertising, promotion and catalog expenses remained relatively consistent as a percentage of sales for the three months ended December 31, 2015, as compared to the prior comparable period.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses ("SG&A") were as follows:

        The SG&A increase of $13,990 or 5.9%, for the three months ended December 31, 2015, as compared to the prior comparable period, is primarily due to increases of: (i) building and occupancy costs of $5,897 primarily relating to additional stores in the Holland & Barrett International segment; (ii) professional fees of $5,309 relating to various Consumer Product Group and Corporate / Manufacturing initiatives; (iii) salaries of $3,880 due to increased stores in the Holland & Barrett International segment; (iv) depreciation of $2,733 primarily due to increased stores in our Holland & Barrett International Segment and the ongoing implementation and support of our ERP system in Corporate/Manufacturing and (v) other SG&A costs of $5,776 primarily related to the recording of the estimated settlement value of various claims, partially offset by decreases of $5,510 due to changes in foreign currency exchange rates in our Holland & Barrett International segment, as the British pound sterling and Euro have weakened as compared to the U.S. dollar, and $3,596 of lower freight costs due to lower transportation rates and lower volume.

Income from Operations

        Income (loss) from operations was as follows:

        The decrease in the Consumer Products Group segment was primarily due to the decrease in net sales and related margins. The decrease in the Holland & Barrett International segment was the result of increased SG&A expenses as well as the decline in the British pound sterling and Euro. The

40

---

Table of Contents

decrease in the Puritan's Pride segment was primarily due to lower net sales, partially offset by decreases in SG&A expenses, primarily freight costs. The decrease in the Vitamin World segment was primarily due to the decrease in net sales due to store closures and lower same store sales from the prior year, partially offset by decreases in SG&A expenses primarily related to reductions in salaries from store closures as compared to the prior comparable period. The loss from operations in Corporate / Manufacturing increased primarily due to increases in professional fees for certain corporate initiatives and the increase in costs related to the sale of the nutritional bar facility located in Facility restructuring charges.

Interest Expense

        Interest expense for the three months ended December 31, 2015 remained relatively consistent with the prior comparable period.

(Benefit) Provision for Income Taxes

        Our (benefit) 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. Our overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the three months ended December 31, 2015 and 2014 was 57.8% and 36.3%, respectively. Our effective tax rate for the three months ended December 31, 2015 was lower than the federal statutory rate generally due to the timing and mixture (foreign and domestic) of income and a one-time benefit related to the remeasurement of our deferred taxes in the UK due to an enacted tax rate change.

Liquidity and Capital Resources

        Holdings is the parent company of NBTY and its primary source of liquidity and capital resources are issuances of debt and dividends from NBTY, and Holdings expects that ongoing requirements for debt service will be funded from dividends from NBTY. NBTY's primary sources of liquidity and capital resources are cash generated from operations and funds available under its revolving credit facility. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources.

        The following table sets forth, for the periods indicated, cash balances and working capital:

        We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, investing and financing requirements. As of December 31, 2015, cash and cash equivalents of $67,904 were held by our foreign subsidiaries and are generally subject to U.S. income taxes upon repatriation to the United States. We generally repatriate all earnings from our foreign subsidiaries where permitted under local law. During fiscal 2016, the Company intends to indefinitely reinvest $59,000 of earnings from our foreign subsidiaries to fund various capital expenditures.

        The decrease in cash and cash equivalents of $98,172 at December 31, 2015 as compared to September 30, 2015 was primarily due to the payment for the acquisition of Dr. Organic as well as prepayments of debt relating to the excess cash flow payment under our senior secured credit facilities as well as an additional prepayment on December 30, 2015.

41

---

Table of Contents

        The decrease in working capital of $60,202 at December 31, 2015 as compared to September 30, 2015 was primarily due to the decrease in cash and cash equivalents and the increase in current portion of long-term debt, partially offset by a decrease in accrued expenses, primarily related to the timing of payments for interest and on long-term debt, income taxes and the annual bonus which was paid in December 2015.

        The following table sets forth, for the periods indicated, net cash flows provided by (used in) operating, investing and financing activities and other operating measures:

        Net cash provided by operating activities decreased for the three months ended December 31, 2015 as compared to the prior comparable period, primarily due to decreased earnings and accrued expenses due to the timing of payments of operational liabilities, offset by an increase in accounts payable and a decrease in accounts receivable due to timing of payments and collections.

        During the three months ended December 31, 2015, net cash used in investing activities consisted primarily of cash paid for the acquisition of Dr. Organic and purchases of property, plant and equipment, offset by proceeds received from sale of building and equipment. During the three months ended December 31, 2014, net cash used in investing activities consisted primarily of purchases of property, plant and equipment.

        For the three months ended December 31, 2015, net cash used in financing activities related to an additional principal payment and an excess cash flow payment under our long-term debt arrangements. For the three months ended December 31, 2014, net cash used in financing activities primarily related to payments for financing fees related to the extension of the revolving credit facility.

        We expect our fiscal 2016 capital expenditures to be higher than fiscal 2015 as a result of investments in stores of our Holland & Barrett International segment and continuous improvements in our supply chain facilities.

Senior Secured Credit Facilities, Holdco Notes and Notes

        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, Barclays Bank PLC, as administrative agent, and several other lenders entered into the Third Amendment and Second Refinancing Agreement and completed the Second Refinancing, amending the credit agreement governing NBTY's senior secured credit facilities 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 (the current principal amount outstanding) 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

42

---

Table of Contents

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 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. In connection with this amendment, deferred financing costs of $611 were incurred and are being amortized over the remaining period.

        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.

        In addition, the credit agreement requires 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). As of December 31, 2015, NBTY was in compliance with all covenants under the credit agreement.

        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.

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

43

---

Table of Contents

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 is payable entirely in cash ("Cash Interest") to the extent that it is less than the maximum amount of allowable dividends and distributions, plus 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 other PIK notes under the indenture governing the Holdco Notes, on the same terms and conditions of the Holdco Notes, in a principal amount equal to such interest ("PIK Interest") and (b) 75% of the then outstanding principal amount of the Holdco Notes as Cash Interest;

         (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. All interest payments made to date have been in cash. As of December 31, 2015, NBTY currently anticipates that it will have sufficient restricted payment capacity to enable Holdings to pay cash interest on the Holdco Notes for the current interest period; however, this may change as a result of a variety of factors. To the extent Holdings makes such interest payments in cash, NBTY will be required to provide the necessary funding.

        The indenture governing the Notes, the credit agreement and the indenture governing the Holdco Notes contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to:

•

incur or guarantee additional indebtedness;



•

make certain investments;



•

pay dividends or make distributions on our capital stock;



•

sell assets, including capital stock of restricted subsidiaries;



•

agree to payment restrictions affecting our restricted subsidiaries;



•

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;



•

enter into transactions with our affiliates;



•

incur liens; and



•

designate any of our subsidiaries as unrestricted subsidiaries.

44

---

Table of Contents

        Our ability to make payments on and to refinance our indebtedness, including the Notes and Holdco Notes, will depend on our ability to generate cash in the future. We believe that our cash on hand, together with dividends from NBTY generated by NBTY's cash from operations and, if required, available borrowing capacity under the revolving portion of our senior secured credit facilities, will be sufficient for our cash requirements for the next twelve months.

        We or our affiliates, at any time and from time to time, may purchase Notes, Holdco Notes, or other indebtedness. Any such purchases may be made through the open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine.

Completion loan notes

        In conjunction with the acquisition of Dr. Organic, we issued completion loan notes in an aggregate principal amount of £20,000 (approximately $30,166) to the sellers, which mature 18 months after issuance and are redeemable at any time after six months at the option of the holders. As these notes are redeemable after six months of issuance they have been classified as short-term. If these notes are called by the seller prior to their contractual maturity cash on hand would likely be utilized to satisfy this obligation and the outflows associated with this payment would partially offset any required excess cash flow payment.

EBITDA and Consolidated EBITDA

        EBITDA consists of earnings before interest expense, taxes, depreciation and amortization. Consolidated EBITDA, as defined in our senior secured credit facilities, as amended, eliminates the impact of a number of items we do not consider indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. Consolidated EBITDA is a component of certain covenants under NBTY's senior secured credit facilities. We present Consolidated EBITDA because NBTY's senior secured credit facilities provide for certain total senior secured leverage ratio thresholds calculated on a period of four consecutive fiscal quarters, with respect to Consolidated EBITDA and the senior secured debt which can be reduced by unrestricted cash-on-hand up to a maximum of $150 million during any fiscal quarter end that revolving loans or letters of credit (to the extent not cash collateralized) are outstanding or at the time of incurrence of revolving loans. The maximum senior secured leverage ratio thresholds, to the extent then applicable, are as follows: 3.75 to 1.00 in fiscal 2015; 3.50 to 1.00 in fiscal 2016 and 3.25 to 1.00 in fiscal 2017. Furthermore, we present both EBITDA and Consolidated EBITDA because we consider these items to be important supplemental measures of our performance and believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry with similar capital structures. We believe issuers of debt securities also present EBITDA and Consolidated EBITDA because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. We believe that these items are appropriate supplemental measures of debt service capacity, because cash expenditures for interest are, by definition, available to pay interest, and tax expense is inversely correlated to interest expense because tax expense goes down as deductible interest expense goes up; and depreciation and amortization are non-cash charges.

45

---

Table of Contents

        The computation of NBTY's senior secured leverage ratio, to the extent then applicable, is as follows:

        EBITDA and Consolidated EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•

EBITDA and Consolidated EBITDA:



•

exclude certain tax payments that may represent a reduction in cash available to us;



•

do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;



•

do not reflect changes in, or cash requirements for, our working capital needs; and



•

do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt, including the Notes and the Holdco Notes;



•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Consolidated EBITDA do not reflect any cash requirements for such replacements; and



•

other companies in our industry may calculate EBITDA and Consolidated EBITDA differently than we do, limiting their usefulness as comparative measures.

        Because of these limitations, EBITDA and Consolidated EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. As a result, we rely primarily on our GAAP results and use EBITDA and Consolidated EBITDA only supplementally.

        In addition, in calculating Consolidated EBITDA, we make certain adjustments that are based on assumptions and estimates that may prove to be inaccurate.

        In addition, in evaluating Consolidated EBITDA, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of Consolidated EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

46

---

Table of Contents

        The following table reconciles net income (loss) to EBITDA and Consolidated EBITDA (as defined in NBTY's senior secured credit facilities) for the three months ended and four consecutive quarters ended December 31, 2015 and 2014:

47

---

Table of Contents

Off-Balance Sheet Arrangements

        We have no off-balance sheet arrangements.

Seasonality

        Although we believe that our business is not seasonal in nature, historically we have experienced, and expect to continue to experience, variations in our net sales and operating results from quarter to quarter. The factors that influence this variability of quarterly results include general economic and industry conditions affecting consumer spending, changing consumer demands and current news on nutritional supplements, the timing of our introduction of new products, promotional program incentives offered to customers, the timing of catalog promotions, the level of consumer acceptance of new products and actions of competitors. Accordingly, a comparison of our results of operations from consecutive periods is not necessarily meaningful, and our results of operations for any period are not necessarily indicative of future performance. Additionally, we may experience higher net sales in a quarter depending upon when we have engaged in significant promotional activities.

Foreign Currency

        Approximately 35% of our net sales during the three months ended December 31, 2015 and 2014 were denominated in currencies other than U.S. dollars, principally British pounds sterling and to a lesser extent euros, Canadian dollars and Chinese renminbi. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on us, as this would result in a decrease in our consolidated operating results.

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

        In preparing the consolidated financial statements, the financial statements of the foreign subsidiaries are translated from the functional currency, generally the local currency, into U.S. dollars. This process results in exchange rate gains and losses, which are included as a separate component of stockholders' equity under the caption "Accumulated other comprehensive income (loss)."

        During the three months ended December 31, 2015 and 2014, translation losses of ($18,746) and ($26,830), respectively, were included in determining other comprehensive income (loss). Accordingly, cumulative translation losses of ($120,951) and ($102,779) were included as part of accumulated other comprehensive loss within the consolidated balance sheets at December 31, 2015 and September 30, 2015, respectively.

48

---

Table of Contents

        The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies against the U.S. dollar. These currencies include the British pound sterling, the euro, the Canadian dollar and the Chinese renminbi. Any future translation gains or losses could be significantly different than those noted in each of these years.

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.

Critical Accounting Policies and Estimates

        We describe our significant accounting policies in Note 2 of the notes to consolidated financial statements included in our 2015 Annual Report. We discuss our critical accounting estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2015 Annual Report. There have been no significant changes in our significant accounting policies or critical accounting estimates since September 30, 2015. As noted in the Form 10-K/A, relatively small declines in the future performance and cash flows within the Consumer Products Group business may result in the recognition of asset impairment charges. Certain categories within the Consumer Products Group and Puritan's Pride segment are performing below expectations increases the risk of impairment for the indefinite-lived tradenames associated with those categories. The carrying value of the tradenames associated with the Consumer Products Group segment as of December 31, 2015 was approximately $429,000 and $166,000, for indefinite and definite lived intangible assets, respectively. The carrying value of the indefinite lived tradenames associated with the Puritan's Pride segment as of December 31, 2015 was approximately $160,000. The carrying value of goodwill associated with the Consumer Products Group and Puritan's Pride segments are $701,330 and $199,031, respectively.

49

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(in thousands)

Quantitative and Qualitative Disclosures About Market Risk

        We are subject to currency fluctuations, primarily with respect to the British pound sterling, the euro, the Canadian dollar and the Chinese renminbi, and interest rate risks that arise from normal business operations. We regularly assess these risks.

        We have subsidiaries whose operations are denominated in foreign currencies (primarily the British pound sterling, the euro, the Canadian dollar and the Chinese renminbi). We consolidate the earnings of our foreign subsidiaries by translating them into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the remeasurement of these foreign currency denominated transactions results in increased net sales, operating expenses and net income. Similarly, our net sales, operating expenses and net income will decrease when the U.S. dollar strengthens against foreign currencies.

        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, on December 16, 2010, we entered into three cross currency swap contracts to hedge a portion of the net investment in our British pound sterling denominated foreign operations. The aggregate notional amount of the swap contracts is £194,200 (approximately $300,000), with a forward rate of 1.565, and a termination date of September 30, 2017.

        Net sales denominated in foreign currencies were approximately $280,077, or 34.9%, of total net sales for the three months ended December 31, 2015. A majority of our foreign currency exposure is denominated in British pounds sterling, the euro, Canadian dollar and the Chinese renminbi. For the three months ended December 31, 2015, as compared to the prior comparable period, the British pound sterling, the euro, the Canadian dollar and the Chinese renminbi decreased 4.1%, 12.3%, 14.9% and 4.0%, respectively, as compared to the U.S. dollar. The combined effect of the changes in these currency rates resulted in a decrease of $20,070 in net sales and a decrease of $2,679 in operating income.

        Additionally, NBTY's senior secured credit facilities are subject to market conditions, whereby interest rates will fluctuate based on the Eurodollar LIBOR, as defined in the agreement. Assuming NBTY's senior secured credit facilities are fully drawn, each one quarter percentage point increase or decrease, above the interest rate floor, in the applicable interest rates would correspondingly change our interest expense on our senior secured credit facilities by approximately $4,000 per year.

50

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        Under the supervision, and with the participation, of our management, including our Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the CEO and CFO concluded that, due to the material weaknesses in internal control over financial reporting described in Part II, Item 9A of the 2015 Form 10-K, filed on November 17, 2015, the Company's disclosure controls and procedures were not effective as of December 31, 2015. For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

        Notwithstanding the material weaknesses identified, each of the Company's CEO and CFO has certified that, based on his knowledge, the financial statements, and other financial information included in this report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report.

Changes in Internal Control Over Financial Reporting

        As described below under Plans for Remediation of Material Weaknesses, there were changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Plans for Remediation of Material Weaknesses

        Our remediation efforts were ongoing during the three months ended December 31, 2015. We have taken certain remediation steps to address the material weaknesses that were identified and disclosed in our 2015 Form 10-K, filed on November 17, 2015. If not remediated these deficiencies could result in further material misstatements to our financial statements. The Company and the Board take the control and integrity of the Company's financial statements seriously and believe that the remediation steps described below are essential to maintaining a strong internal control environment. The following remediation steps are among the measures taken by the Company during the quarter:

        The Company has established and initiated implementation of a remediation plan as follows:

•

To remediate the deficiency with respect to the accounting for property and equipment in connection with a triggering event, the Company has developed communications to reinforce its current design of its existing controls such that the review of any calculations prepared in connection with a triggering event analysis will include a comparison of the calculations to the final accounting memorandum prepared by the Company as well as to the final signed agreement, to the extent applicable.



•

To remediate the deficiency with respect to the evaluation of out of period adjustments, the Company has enhanced the design of its controls such that a formal, documented quantitative

51

---

Table of Contents

and qualitative evaluation of the following were performed on an individual and aggregate basis by members of the senior finance team:

•

Accounting conventions used in the preparation of the Company's financial statements;



•

Unrecorded financial statement adjustments and disclosures;



•

Out of period adjustments recorded to correct misstatements.

As part of this evaluation the senior finance team assessed the impact these items have on the precision of other controls to mitigate the increasing risk of a material misstatement.

        Management believes the foregoing efforts will effectively remediate these material weaknesses. We will continue to devote significant time and attention to these remediation efforts in order to remediate them as soon as reasonably possible. As the Company continues to evaluate and work to improve its internal control over financial reporting management may execute additional measures to address these material weaknesses or modify the remediation steps described above, and will continue to review and make necessary changes to improve the overall design of its internal controls. We will test the ongoing operating effectiveness of the revised controls in future periods. A material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

        There were no other material changes in our internal control over financial reporting that occurred during the three months ended December 31, 2015 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

52

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
PART II. OTHER INFORMATION
Item 1. Legal Proceedings

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 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

53

---

Table of Contents

provision of $12.0 million 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 $6.1 million. 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 $9.0 million, which resulted in an additional charge of $4.3 million 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").

        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.

54

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
Item 1A. Risk Factors

Risk Factors

        In addition to the other information set forth in this Report, you should carefully consider the risk factors disclosed under the caption "Risk Factors" in the 2015 Annual Report. These factors could materially adversely affect our business, financial condition, operating results and cash flows. The risks and uncertainties described in the 2015 Annual Report are not the only ones we face. Risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results or cash flows. Since September 30, 2015 there have been no significant changes relating to risk factors.

55

---

Table of Contents

Alphabet Holding Company, Inc. and Subsidiary
Item 6. Exhibits

56

---

Table of Contents

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

57

---