News Column

ALPHABET HOLDING COMPANY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands)

May 13, 2014

Forward-Looking Statements

This Quarterly Report (this "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:



º •

º consumer perception of our products due to adverse scientific research or findings, regulatory investigations, litigation, national media attention and other publicity regarding nutritional supplements; º • º potential slow or negative growth in the vitamin, mineral and supplement market; º •



º increases in the cost of borrowings or unavailability of additional

debt or equity capital, or both;

º •

º volatile conditions in the capital, credit and commodities markets and

in the overall economy; º • º dependency on retail stores for sales; º • º the loss of significant customers; º •



º 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 in the United States, the Food Supplements Directive and Traditional Herbal Medicinal Products Directive in Europe and greater enforcement by any such federal, state, local or foreign governmental entities; º • º material product liability claims and product recalls; º •



º our inability to obtain or renew insurance, or to manage insurance

costs;

º •

º international market exposure and compliance with anti-corruption laws

in the U.S. and foreign jurisdictions; º • º difficulty entering new international markets; º • º legal proceedings initiated by regulators in the United States or abroad; º • º unavailability of, or our inability to consummate, advantageous



acquisitions in the future, or our inability to integrate acquisitions

into the mainstream of our business; º • º difficulty entering new international markets; º • º loss of executive officers or other key personnel; º • º loss of certain third party suppliers; 26



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Table of Contents º • º disruptions in manufacturing operations that produce nutritional supplements and loss of manufacturing certifications; º • º increased competition and failure to compete effectively; º • º our inability to respond to changing consumer preferences; º •



º 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; º • º work stoppages at our facilities; º • º increased raw material, utility and fuel costs; º • º fluctuations in foreign currencies, including the British pound, the euro, the Canadian dollar and the Chinese yuan; º • º interruptions in information processing systems and management



information technology, including system interruptions and security

breaches;

º •

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

º • º our inability to protect our intellectual property rights; º •



º our exposure to, and the expense of defending and resolving, product

liability claims, intellectual property claims and other litigation;

º • º failure to maintain effective controls over financial reporting; º • º other factors disclosed in this Report; and º • º other factors beyond our control. In light of these risks, uncertainties and assumptions, the forward-looking statements contained in this Report might not prove accurate. You should not place undue reliance upon them. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date of this Report, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The statements in the following discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 (our "2013 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 condensed consolidated financial statements, including the related notes, contained elsewhere herein and with the 2013 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. ("Holdings") 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. 27



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NBTY is the leading global vertically integrated manufacturer, distributor and retailer of a broad line of high-quality vitamins, nutritional supplements and related products in the United States, with operations worldwide. We currently market approximately 25,000 SKUs, including numerous private-label and owned brands, such as: Nature's Bounty®, Ester-C®, Balance Bar®, Solgar®, MET-Rx®, American Health®, Osteo Bi-Flex®, Flex-A-Min®, SISU®, Knox®, Sundown®, Rexall®, Pure Protein®, Body Fortress®, Worldwide Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC (UK)®, Physiologics®, De Tuinen®, Essenza®, and Vitamin World®. Our vertical integration includes purchasing raw materials and formulating and manufacturing products, which we then market through four channels of distribution.



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

º •

º Wholesale-This segment sells products worldwide under various brand names and third-party private labels, each targeting specific market groups which include virtually all major mass merchandisers, club stores, drug store chains and supermarkets. This segment also sells products to independent pharmacies, health food stores, the military and other retailers. º • º European Retail-This segment generates revenue through its 743



Holland & Barrett stores (including franchised stores in the following

countries: 27 in China, 27 in Singapore, eight in each of United Arab Emirates and Cyprus, four in Malta and one in each of Gibraltar and



Iceland), 131 De Tuinen stores (including seven franchised locations)

in the Netherlands , 57 GNC (UK) stores in the U.K., 47 Nature's Way stores in Ireland and 13 Essenza stores in Belgium which were acquired in June of 2013, as well as internet-based sales from www.hollandandbarret.com, www.detuinen.nl and www.gnc.co.uk. Such revenue consists of sales of proprietary brand and third-party products as well as franchise fees. º •



º Direct Response/E-Commerce-This segment generates revenue through the

sale of proprietary brand and third-party products primarily through

mail order catalog and internet under the Puritan's Pride tradename.

Catalogs are strategically mailed to customers who order by mail, internet, or by phone. º • º North American Retail-This segment generates revenue through its 417 owned and operated Vitamin World stores selling proprietary brand and third-party products, as well as internet-based sales from www.vitaminworld.com. 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, the following: human resources, legal, finance and various other corporate-level activity related expenses. We attribute such unallocated expenses to Corporate/Manufacturing.



Consent Solicitation and Debt Offering

On December 2, 2013, Holdings launched a consent solicitation (the "Consent Solicitation") of consents from holders of Holdings' existing 7.75%/8.50% contingent cash pay senior notes in the aggregate principal amount of $550,000 that mature on November 1, 2017 (the "existing Holdco Notes"). The purpose of the Consent Solicitation was to amend the restricted payment covenant in the indenture governing the Holdco Notes (as defined below). Holdings sought consent to add a new "basket" in the restricted payment covenant (Section 3.4 of the indenture governing the Holdco Notes) for a dividend or distribution to Holdings' shareholders up to the net proceeds of the offering of Holdings' additional 7.75%/8.50% contingent cash pay senior notes in the aggregate principal amount of $450,000 that mature on November 1, 2017 (the "additional Holdco Notes" and, together with the existing Holdco Notes, the "Holdco Notes") less the amount available as of September 30, 2013 for 28



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restricted payments under the "builder" basket in Section 3.4(a)(C) of the indenture governing the Holdco Notes (the "Proposed Amendments").

On December 10, 2013, the requisite holders of the existing Holdco Notes had consented to the Proposed Amendments and Holdings entered into a supplemental indenture (the "First Supplemental Indenture") to the indenture governing the Holdco Notes. The First Supplemental Indenture became operative upon the payment of the consent fee (the "consent fee") by Holdings to the paying agent on behalf of the holders of the existing Holdco Notes, which was paid concurrently with the closing of the offering of the additional Holdco Notes. On December 12, 2013, Holdings issued the additional Holdco Notes in the aggregate principal amount of $450,000. The additional $450,000 Holdco Notes and the $550,000 of existing Holdco Notes previously issued on October 17, 2012 have identical terms and are treated as a single class for all purposes under the indenture governing the Holdco Notes. The proceeds from the offering of the $450,000 additional Holdco Notes, were used to pay transaction fees and expenses, including the consent fee of $18,560, and a $445,537 dividend to Holdings' shareholders in December 2013.



Results of Operations

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013:

Net Sales Net sales by segment were as follows: Three Months Ended March 31, 2014 2013 Net Sales % of total Net Sales % of total $ change % change

Wholesale $ 443,449 56.9 % $ 445,672 58.8 % $ (2,223 ) (0.5 )% European Retail 215,317 27.6 % 187,103 24.7 % 28,214 15.1 % Direct Response/E-Commerce 63,601 8.2 % 63,898 8.4 % (297 ) (0.5 )% North American Retail 56,659 7.3 % 61,201 8.1 % (4,542 ) (7.4 )% Net sales $ 779,026 100.0 % $ 757,874 100.0 % $ 21,152 2.8 % Wholesale Net sales for the Wholesale segment decreased by $2,223, or 0.5%, to $443,449 for the three months ended March 31, 2014, as compared to the prior comparable period. This decrease is due to lower net sales of $12,191to certain contract manufacturing and private label accounts, partially offset by higher net sales of $9,968 of our branded products, both domestically and internationally. Domestic branded net sales increased by$396 and international branded net sales increased by $9,572 for the three months ended March 31, 2014, as compared to the prior comparable period. We continue to adjust shelf space allocation among our numerous wholesale brands to provide the best overall product mix and to respond to changing market conditions. Wholesale continues to leverage valuable consumer sales information obtained from our North American Retail and Direct Response/E-Commerce segments to provide its Wholesale customers with data and analyses to drive their sales.



We use targeted promotions to grow overall sales. Promotional programs and rebates were 16.0% of sales for the three months ended March 31, 2014, as compared to 16.3% of sales for the prior comparable period. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.

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Product returns were 1.5% of sales for each of the three months ended March 31, 2014 and 2013, 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 Wholesale sales in future quarters.

The following customers accounted for the following percentages of the Wholesale segment's net sales and our consolidated net sales:

Wholesale Total Segment Consolidated Net Sales Net Sales Three Months Three Months Ended Ended March 31, March 31, 2014 2013 2014 2013 Customer A 21 % 22 % 12 % 13 % Customer B 8 % 10 % 5 % 6 %



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

European Retail

Net sales for this segment increased by $28,214, or 15.1%, to $215,317 for the three months ended March 31, 2014, as compared to the prior comparable period. This increase is attributable to more successful promotional activity and additional stores opened or acquired as compared to the prior comparable period. In addition, the average exchange rate of the British pound to the US dollar strengthened 6.6% and the euro to the US dollar strengthened 3.7% as compared to the prior comparable period. In local currency, net sales increased 7.9% and same store sales (including internet sales) increased 3.9% as compared to the prior comparable period. The following is a summary of European Retail store activity: Three Months Ended March 31, 2014 2013 Company-owned stores Open at beginning of the period 902 864 Opened during the period 8 8 Closed during the period (2 ) (1 ) Open at end of the period 908 871 Franchised stores Open at beginning of the period 86 53 Opened during the period 1 10 Closed during the period (4 ) (4 ) Open at end of the period 83 59 Total company-owned and franchised stores Open at beginning of the period 988 917 Opened during the period 9 18 Closed during the period (6 ) (5 ) Open at end of the period 991 930 30



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Table of Contents Direct Response/E-Commerce Direct Response/E-Commerce net sales decreased by $297, or 0.5%, for the three months ended March 31, 2014 as compared to the prior comparable period. E-commerce net sales comprised 66% of total Direct Response/E-Commerce net sales for the three months ended March 31, 2014 as compared to 65% in the prior comparable period. We remain among the leaders for vitamin and nutritional supplements in the direct response and e-commerce sectors, and we continue to increase the number of products available via our catalog and websites. This segment varies its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs which are not offered in every quarter. Historical comparisons are impacted by this pattern and therefore this division should be viewed on an annual, and not quarterly, basis.



North American Retail

Net sales for this segment decreased by $4,542, or 7.4%, to $56,659 for the three months ended March 31, 2014 as compared to the prior comparable period. Same store sales (including internet sales) declined 6.4% due to declines in volume which are partially attributable to severe winter weather in many of the areas where our stores are located, as well as a softer pricing environment and lower revenue in the weight management product category due to positive media attention to certain products in this category in the prior comparable period. The following is a summary of North American Retail store activity: Three Months Ended March 31, 2014 2013 Open at beginning of the period 423 426 Opened during the period 4 2 Closed during the period (10 ) (3 ) Open at end of the period 417 425 Cost of Sales Cost of sales was as follows: Three Months Ended March 31, 2014 2013 $ change % change Cost of sales $ 431,081$ 414,016$ 17,065 4.1 % Percentage of net sales 55.3 % 54.6 %



Cost of sales as a percentage of net sales increased by 0.7 percentage points. The increase in the percentage of cost of sales was due primarily to lower margins earned on our private label products as well as increased promotional activity in our Direct Response and North American Retail segments.

Due to competitive pressure in the private label business, the cost of sales for our private label business as a percentage of net sales may continue to fluctuate, which would adversely affect gross profits. To address this, we continuously seek to implement additional improvements in our supply chain and we are increasing our focus on our branded sales. 31



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Table of Contents Advertising, Promotion and Catalog Expenses Total advertising, promotion and catalog expenses were as follows: Three Months Ended March 31, 2014 2013 $ change % change Advertising, promotion and catalog $ 58,783$ 58,737$ 46 0.1 % Percentage of net sales 7.5 % 7.8 %



Advertising, promotion and catalog expense remained relatively consistent. We continue to increase brand awareness by using more cost-effective and targeted methods across all segments.

Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were as follows: Three Months Ended March 31, 2014 2013 $ change % change



Selling, general and administrative $ 239,019$ 231,540$ 7,479 3.2 %

Percentage of net sales 30.7 % 30.6 % The SG&A increase of $7,479, or 3.2%, for the three months ended March 31, 2014, as compared to the prior comparable period, is primarily due to increases of (i) $6,179 in building and occupancy costs due to additional stores in our European Retail segment; (ii) $3,300 in temporary help relating to additional costs associated with temporary personnel used in our distribution facilities; (iii) $2,915 in freight costs due to an increase in sales as well as increased movement between facilities as a result of the supply chain restructuring; (iv) $2,977 in salaries and related benefits, related to our European Retail segment as there was a significant increase in stores and (v) $2,554 of additional depreciation and amortization due to the implementation of our new ERP system in the third quarter of fiscal 2013, partially offset by a reduction of estimated litigation settlements due to $12,000 having been recorded for the Glucosamine case in the prior comparable period.



Facility Restructuring Charge

On March 12, 2013, NBTY initiated a restructuring plan to streamline its operations and improve the profitability and return on invested capital of its manufacturing/packaging and distribution facilities. The restructuring involved the sale or closure of seven of NBTY's manufacturing/packaging and distribution facilities. The restructuring plan commenced in the second quarter of fiscal 2013 and is expected to be completed in fiscal 2014. The restructuring resulted in aggregate charges of $30,200 before tax for the three months ended March 31, 2013. 32



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Table of Contents Income from Operations Income from operations was as follows: Three Months Ended March 31, 2014 2013 $ change % change Wholesale $ 19,004$ 26,964$ (7,960 ) (29.5 )% European Retail 49,915 42,517 7,398 17.4 % Direct Response/E-Commerce 7,388 11,075 (3,687 ) (33.3 )% North American Retail 1,702 6,866 (5,164 ) (75.2 )% Corporate (27,866 ) (64,041 ) 36,175 56.5 % Total $ 50,143$ 23,381$ 26,762 114.5 % Percentage of net sales 6.4 % 3.1 % The decrease in Wholesale segment income from operations was primarily due to the increase in cost of sales as a percentage of net sales, partially offset by decreases in advertising expenses and SG&A costs. The increase in the European Retail segment was the result of higher sales volume partially offset by increased advertising and SG&A costs (primarily payroll costs and building costs associated with new and acquired stores). The decrease in the Direct Response/E-Commerce segment was primarily due to additional sales promotions and increased advertising costs. The decrease in the North American Retail segment was primarily due to the decrease in net sales from same store sales and net store closures from the prior year and additional sales promotions. Corporate/Manufacturing loss decreased from the prior comparable period due to the prior period charges associated with the facilities restructuring.



Interest Expense

Interest expense for the three months ended March 31, 2014 increased over the prior comparable period due to the issuance of the additional $450,000 Holdco Notes on December 12, 2013, partially offset by the lower interest rate on the term loan B-2 due to the refinancing that took place in March 2013 and the write off of deferred financing costs relating to the refinancing in the prior comparable period. Benefit for Income Taxes Our benefit 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 2014 and 2028. Our overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the three months ended March 31, 2014 and 2013 was 34.6% and 38.8%, respectively. The effective income tax rate was lower for the three months ended March 31, 2014 primarily due to the timing and mixture (foreign and domestic) of income. 33



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Six months ended March 31, 2014 Compared to the Six months ended March 31, 2013:

Net Sales Net sales by segment were as follows: Six Months Ended Six Months Ended March 31, 2014 March 31, 2013 Net Sales % of total Net Sales % of total $ change % change Wholesale $ 948,723 59.1 % $ 939,876 60.8 % $ 8,847 0.9 % European Retail 420,229 26.2 % 366,087 23.7 % 54,142 14.8 % Direct Response/E-Commerce 123,963 7.7 % 122,582 7.9 % 1,381 1.1 % North American Retail 113,216 7.0 % 118,556 7.7 % (5,340 ) (4.5 )% Net sales $ 1,606,131 100.0 % $ 1,547,101 100.0 % $ 59,030 3.8 % Wholesale Net sales for the Wholesale segment increased by $8,847, or 0.9%, to $948,723 for the six months ended March 31, 2014, as compared to the prior comparable period. This increase is due to higher net sales of $36,540 of our branded products, both domestically and internationally, partially offset by lower net sales of $27,693 to certain contract manufacturing and private label accounts. Domestic branded net sales increased by $18,782 and international branded net sales increased by $17,758 for the six months ended March 31, 2014, as compared to the prior comparable period. We continue to adjust shelf space allocation among our numerous wholesale brands to provide the best overall product mix and to respond to changing market conditions. Wholesale continues to leverage valuable consumer sales information obtained from our North American Retail and Direct Response/E-Commerce segments to provide its Wholesale customers with data and analyses to drive their sales. We use targeted promotions to grow overall sales. Promotional programs and rebates were 16.0% of sales for the six months ended March 31, 2014, as compared to 14.7% of sales for the prior comparable period. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis. Product returns were 1.5% and 1.4% of sales for each of the six months ended March 31, 2014 and 2013, respectively, 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 Wholesale sales in future quarters.



The following customers accounted for the following percentages of the Wholesale segment's net sales and our consolidated net sales for the six months ended March 31, 2014 and 2013, respectively:

Wholesale Total Segment Consolidated Net Sales Net Sales Six Months Six Months Ended Ended March 31, March 31, 2014 2013 2014 2013 Customer A 20 % 22 % 12 % 14 % Customer B 13 % 10 % 8 % 6 % Customer C 9 % 11 % 5 % 7 % 34



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

European Retail

Net sales for this segment increased by $54,142, or 14.8%, to $420,229 for the six months ended March 31, 2014, as compared to the prior comparable period. This increase is attributable to more successful promotional activity and additional stores opened or acquired during the period. In addition, the average exchange rate of the British pound to the US dollar strengthened 3.7% and the average exchange rate of the euro to the US dollar strengthened 4.3% as compared to the prior comparable period. In local currency, net sales increased 9.9% and same store sales (including internet sales) increased 5.1% as compared to the prior comparable period. The following is a summary of European Retail store activity: Six Months Ended March 31, 2014 2013 Company-owned stores Open at beginning of the period 901 856 Opened during the period 12 17 Closed during the period (5 ) (2 ) Open at end of the period 908 871 Franchised stores Open at beginning of the period 79 40 Opened during the period 10 24 Closed during the period (6 ) (5 ) Open at end of the period 83 59 Total company-owned and franchised stores Open at beginning of the period 980 896 Opened during the period 22 41 Closed during the period (11 ) (7 ) Open at end of the period 991 930 Direct Response/E-Commerce Direct Response/E-Commerce net sales increased by $1,381, or 1.1%, for the six months ended March 31, 2014 as compared to the prior comparable period. E-commerce net sales comprised 67% of total Direct Response/E-Commerce net sales for the six months ended March 31, 2014 as compared to 65% in the prior comparable period. We remain among the leaders for vitamin and nutritional supplements in the direct response and e-commerce sectors, and we continue to increase the number of products available via our catalog and websites. This segment varies its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs which are not offered in every quarter. Historical comparisons are impacted by this pattern and therefore this division should be viewed on an annual, and not quarterly, basis. 35



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Table of Contents North American Retail Net sales for this segment decreased by $5,340, or 4.5%, to $113,216 for the six months ended March 31, 2014 as compared to the prior comparable period. Same store sales (including internet sales) declined 3.9% due to declines in volume which are partially attributable to severe winter weather in many of the areas where our stores are located, as well as a softer pricing environment and lower revenue in the weight management product category due to positive media attention to certain products in this category in the prior comparable period. The following is a summary of North American Retail store activity: Six Months Ended March 31, 2014 2013 Open at beginning of the period 421 426 Opened during the period 12 3 Closed during the period (16 ) (4 ) Open at end of the period 417 425 Cost of Sales Cost of sales was as follows: Six Months Ended March 31, 2014 2013 $ change % change Cost of sales $ 872,799$ 842,764$ 30,035 3.6 % Percentage of net sales 54.3 % 54.5 % Cost of sales as a percentage of net sales declined by 0.2 percentage points. This was primarily a result of increased sales of our branded products which have higher margins on our Wholesale segment, offset by lower margin earned in our private label products as well as increased promotional activity in our Direct Response and North American Retail segments. Due to competitive pressure in the private label business, the cost of sales for our private label business as a percentage of net sales may continue to fluctuate, which would adversely affect gross profits. To address this, we continuously seek to implement additional improvements in our supply chain and we are increasing our focus on our branded sales.



Advertising, Promotion and Catalog Expenses

Total advertising, promotion and catalog expenses were as follows:

Six Months Ended March 31, 2014 2013 $ change



% change

Advertising, promotion and catalog $ 97,305$ 94,582$ 2,723

2.9 %

Percentage of net sales 6.1 % 6.1 % The $2,723 or 2.9% increase in advertising, promotion and catalog expense primarily related to increased spending on media and advertising costs to promote a loyalty program in our European Retail segment, increased spending related to internet advertising in our Direct Response segment, partially offset by reductions in our Wholesale segment due to the timing of certain advertising 36



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campaigns. We continue to increase brand awareness by using more cost-effective and targeted methods across all segments.

Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were as follows: Six Months Ended March 31, 2014 2013 $ change % change Selling, general and administrative $ 471,716$ 451,049$ 20,667 4.6 % Percentage of net sales 29.4 % 29.2 % The SG&A increase of $20,667, or 4.6%, for the six months ended March 31, 2014, as compared to the prior comparable period, is primarily due to increases of (i) $9,118 in building and occupancy costs due to additional stores in our European Retail segment; (ii) $7,564 in salaries and related benefits, related to our European Retail segment as there was a significant increase in stores; (iii) $6,151 relating to additional costs associated with temporary personnel used in our distribution facilities; (iv) $5,616 in freight costs due to an increase in sales as well as increased movement between facilities as a result of the facility restructuring restructuring and (v) $4,983 of additional depreciation and amortization due to the implementation of our new ERP system in the third quarter of fiscal 2013, partially offset by a net reduction of approximately $3,000 of actual and estimated litigation settlements in the current period and of $12,000 having been recorded for the Glucosamine case in the prior comparable period.



Facility Restructuring Charge

On March 12, 2013, NBTY initiated a restructuring plan to streamline its operations and improve the profitability and return on invested capital of its manufacturing/packaging and distribution facilities. The restructuring involved the sale or closure of seven of NBTY's manufacturing/packaging and distribution facilities. The restructuring plan commenced in the second quarter of fiscal 2013 and is expected to be completed in fiscal 2014. The restructuring resulted in aggregate charges of $30,200 before tax for the six months ended March 31, 2013. Income from Operations Income from operations was as follows: Six Months Ended March 31, 2014 2013 $ change % change Wholesale $ 101,732$ 96,891$ 4,841 5.0 % European Retail 93,875 82,501 11,374 13.8 %



Direct Response/E-Commerce 14,363 23,324 (8,961 )

(38.4 )% North American Retail 4,494 12,748 (8,254 ) (64.7 )% Corporate (50,153 ) (86,958 ) 36,805 42.3 % Total $ 164,311$ 128,506$ 35,805 27.9 % Percentage of net sales 10.2 % 8.3 % The increase in Wholesale segment income from operations was primarily due to the increase in net sales and decrease in advertising expense. The increase in the European Retail segment was the 37



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result of higher sales volume, partially offset by increased advertising and SG&A costs (primarily payroll costs and building costs associated with new and acquired stores). The decrease in the Direct Response/E-Commerce segment was primarily due to additional sales promotions, as well as increased advertising costs and SG&A costs. The decrease in the North American Retail segment was primarily due to the decrease in net sales from same store sales and net store closures from the prior year and additional sales promotions. Corporate/Manufacturing loss decreased from the prior comparable period due to the costs associated with the facilities restructuring.



Interest Expense

Interest expense for the six months ended March 31, 2014 increased over the prior comparable period due to the issuance of the additional $450,000 Holdco Notes on December 12, 2013, partially offset by the lower interest rate on the term loan B-2 due to the refinancing that took place in March 2013 and the write off of deferred financing costs relating to the refinancing in the prior comparable period.



Provision for Income Taxes

Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2014 and 2028. Our overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the six months ended March 31, 2014 and 2013 was 32.1% and 28.1%, respectively. The effective income tax rate was higher for the six months ended March 31, 2014 primarily due to the timing and mixture (foreign and domestic) of income.



Liquidity and Capital Resources

Alphabet Holding Company, Inc. ("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 of funds. The following table sets forth, for the periods indicated, cash balances and working capital: As of As of March 31, September 30, 2014 2013 Cash and cash equivalents $ 129,010$ 198,589



Working capital (including cash and cash equivalents) $ 808,630 $

731,935

The increase in working capital of $76,695 was primarily due to increases in inventory offset by a decrease in cash for the six months ended March 31, 2014.

The decrease in cash and cash equivalents of $69,579 at March 31, 2014 as compared to September 30, 2013 was primarily due to payments made for inventory and property, plant and equipment. 38



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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: Six Months Ended March 31, 2014 2013



Net cash (used in) provided by operating activities $ (19,296 )$ 142,159

Net cash used in investing activities $ (47,244 ) $



(134,694 )

Net cash used in financing activities $ (4,252 ) $



(176,290 )

Inventory turnover 2.2



2.3

Days sales (Wholesale) outstanding in accounts receivable 34

34

We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, investing and financing requirements. As of March 31, 2014, cash and cash equivalents of $78,671 was held by our foreign subsidiaries and are generally subject to U.S. income taxes upon repatriation to the U.S. We generally repatriate all earnings from our foreign subsidiaries where permitted under local law. However, during fiscal 2014, we plan to indefinitely reinvest $36,000 of our foreign earnings outside of the U.S. for capital expenditures. Net cash used in operating activities during the six months ended March 31, 2014 was attributable to increases in inventory to maintain satisfactory customer fulfillment rates and decreases in accrued expenses and other liabilities relating to the semi-annual interest payments for interest on the Notes and Holdco Notes, partially offset by increased net income.



During the six months ended March 31, 2014, net cash used in investing activities consisted of purchases of property, plant and equipment.

For the six months ended March 31, 2014, net cash used in financing activities related to dividends paid to shareholders and payments for financing fees related to the Holdco Notes, partially offset by proceeds from borrowings under the Holdco Notes.



Cash provided by operating activities during the six months ended March 31, 2013 was mainly attributable to net income, reductions in inventories and changes in accounts payable and accrued expenses and other liabilities.

During the six months ended March 31, 2013, cash flows used in investing activities consisted of cash paid for acquisitions and the purchases of property, plant and equipment.

For the six months ended March 31, 2013, cash flows used in financing activities related to dividends paid to shareholders and payments for financing fees related to the refinancing of our term loan B-1, partially offset by net borrowings under the revolving credit facility, which were used to fund the acquisition of Balance Bar.



Senior credit facilities and Notes

On October 1, 2010, NBTY entered into senior secured credit facilities totaling $2,000,000, consisting of $1,750,000 term loan facilities and a $250,000 revolving credit facility. In addition, NBTY issued $650,000 aggregate principal amount of the Notes with an interest rate of 9% and a maturity date of October 1, 2018. On March 1, 2011, NBTY, Holdings and Barclays Bank PLC, as administrative agent, and several other lenders entered into the First Amendment and Refinancing Agreement. Under the terms of the agreement, the $1,750,000 term loan B-1 and revolving credit facility of $200,000 were established. Substantially all other terms are consistent with the original term loan B, including the amortization schedule of term loan B-1 and maturity dates. 39



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On December 30, 2011, NBTY prepaid $225,000 of principal on its term loan B-1. As a result of this prepayment, $9,289 of deferred financing costs were written off. In accordance with the prepayment provisions of the First Refinancing, no scheduled payments of principal will be required until the final balloon payment in October 2017. On October 11, 2012, NBTY amended its credit agreement to allow Holdings to issue and sell Holdco Notes. In addition, among other things, the amendment (i) increased the general restricted payments basket to $50,000, (ii) increased the maximum total leverage ratio test which governs the making of restricted payments using Cumulative Credit (as defined in the credit agreement) and (iii) modified the definition of Cumulative Credit so that it conforms to the builder basket used in NBTY's indenture governing the Notes. Interest on the Holdco Notes will be paid via dividends from NBTY to Holdings, to the extent that it is permitted under its credit agreement and the indenture governing the Notes. Approximately $6,000 of expenses related to the amendment was capitalized as a deferred financing cost and will be amortized using the effective interest method. In conjunction with the amendment, NBTY paid Holdings a cash dividend of approximately $193,956 in October 2012. On November 26, 2012, we acquired all of the outstanding shares of Balance Bar Company, a company that markets and sells nutritional bars, for a purchase price of approximately $78,000 of cash, subject to certain post-closing adjustments. We drew $80,000 from the revolving portion of our senior secured credit facilities to finance this acquisition. As of June 30, 2013, we repaid all of this borrowing. 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 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 (Second Refinancing). 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 bear interest at a floating rate which can be, at NBTY's option, either (i) eurodollar (LIBOR) rate plus an applicable margin, or (ii) base rate plus an applicable margin, in each case, subject to a eurodollar (LIBOR) rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for term loan B-2 is 2.50% per annum for eurodollar (LIBOR) loans and 1.50% per annum for base rate loans. The applicable margin for the revolving credit facility remained at 3.25% per annum for eurodollar (LIBOR) loans and 2.25% per annum for base rate loans, with a step-down of 25 basis points upon the achievement of a total senior secured leverage ratio as set forth in the senior secured credit facilities. Substantially all other terms are consistent with the original term loan B-1, including the maturity dates. As a result of the Second Refinancing, $4,232 of previously capitalized deferred financing costs as well as $1,151 of the call premium on term loan B-1 were expensed and 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 will be amortized using the effective interest method. NBTY must make prepayments on the term loan B-2 facility with the net cash proceeds of 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 (such percentage subject to reduction based on achievement of specified total senior secured leverage ratios), in each case, subject to certain reinvestment rights and other exceptions. 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). All other financial covenants required by the senior secured credit facilities were removed as part of the First Refinancing. 40



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Holdco Notes

On October 17, 2012, Holdings issued $550,000 of the existing Holdco Notes. Interest on the notes will accrue 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. Interest on the Holdco Notes will be payable semi-annually in arrears on May 1 and November 1 of each year. Holdings is a holding company with no operations of its own 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. The proceeds from the offering of the existing Holdco Notes, along with the $200,000 from NBTY described below, were used to pay transactions fees and expenses and a dividend of approximately $721,678 to Holdings' shareholders.



Additional Holdco Notes

On December 2, 2013, Holdings launched the Consent Solicitation. The purpose of the Consent Solicitation was to amend the restricted payment covenant in the indenture governing the Holdco Notes. Holdings sought consent to add a new "basket" in the restricted payment covenant (Section 3.4 of the indenture governing the Holdco Notes) for a dividend or distribution to Holdings' shareholders up to the net proceeds of the offering of additional Holdco Notes in the aggregate principal amount of $450,000 less the amount available as of September 30, 2013 for restricted payments under the "builder" basket in Section 3.4(a)(C) of the indenture governing the Holdco Notes. On December 10, 2013, the requisite holders of the existing Holdco Notes had consented to the Proposed Amendments and Holdings entered into the First Supplemental Indenture to the indenture governing the Holdco Notes. The First Supplemental Indenture became operative upon the payment of the consent fee by Holdings to the paying agent on behalf of the holders of the existing Holdco Notes, which was paid concurrently with the closing of the offering of the additional Holdco Notes. On December 12, 2013, Holdings, issued $450,000 of additional Holdco Notes that mature on November 1, 2017. The additional $450,000 Holdco Notes and the $550,000 of existing Holdco Notes previously issued on October 17, 2012 have identical terms and are treated as a single class for all purposes under the indenture governing the Holdco Notes. The gross proceeds from the offering of the $450,000 additional Holdco Notes was $460,125, inclusive of a $10,125 premium, which was used to pay transaction fees and expenses, including the consent fee, and a $445,537 dividend to Holdings' shareholders in December 2013. 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 be:



(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;

41



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Table of Contents (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 March 31, 2014, 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. As part of the offering of the $450,000 additional Holdco Notes, Holdings entered into a registration rights agreement which requires Holdings to file a registration statement to offer to exchange the outstanding additional Holdco Notes for a like principal amount of exchange notes in a registered offering within 180 days after December 12, 2013. Holdings filed a Registration Statement on Form S-4 to register the $450,000 additional Holdco Notes which was declared effective by the Securities and Exchange Commission on February 3, 2014 and an exchange offer commenced on the same day. On March 10, 2014 and June 21, 2013, $450,000 and $549,925, respectively, in aggregate principal amount of the Holdco Notes were exchanged for substantially identical notes that were registered under the Securities Act of 1933, as amended, and therefore are freely tradable. 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: º • º incur or guarantee additional indebtedness; º • º make certain investments; º • º pay dividends or make distributions on our capital stock; º • º sell assets, including capital stock of restricted subsidiaries; º •



º agree to payment restrictions affecting our restricted subsidiaries;

º •

º consolidate, merge, sell or otherwise dispose of all or substantially

all of our assets; º • º enter into transactions with our affiliates; º • º incur liens; and º • º designate any of our subsidiaries as unrestricted subsidiaries. 42



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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 cash from operations and, if required, as of March 31, 2014 we have borrowing capacity of $200,000 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. We expect our fiscal 2014 capital expenditures to be less than fiscal 2013, primarily due to the expansion of certain manufacturing facilities in fiscal 2013.



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: 4.25 to 1.00 in fiscal 2013; 4.00 to 1.00 in fiscal 2014; 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.



The computation of NBTY's senior secured leverage ratio is as follows:

March 31, 2014 March 31, 2013 Senior secured debt $ 1,507,500 $



1,532,500

Less up to $150,000 unrestricted cash balance (119,492 ) (132,237 ) (a) $ 1,388,008$ 1,400,263 NBTY Consolidated EBITDA (Four consecutive quarters) (b) $ 545,225$ 543,085 Senior Secured Leverage Ratio (a /b) 2.55x



2.58x

Maximum Allowed (per the senior secured credit facilities) 4.00x 4.25x 43



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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: º • º EBITDA and Consolidated EBITDA: º • º exclude certain tax payments that may represent a reduction in cash available to us; º • º do not reflect our cash expenditures, or future



requirements, for

capital expenditures or contractual commitments; º • º do not reflect changes in, or cash requirements for, our working capital needs; and º • º 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; º • º 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 º •



º 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. 44



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The following table reconciles net income to EBITDA and Consolidated EBITDA (as defined in our senior secured credit facilities) for the three and six months ended and four consecutive quarters ended March 31, 2014 and 2013:

Four Consecutive Three Months Ended Six Months Ended quarters ended March 31, March 31, March 31, 2014 2013 2014 2013 2014 2013 Net (loss) income $ (3,789 )$ (18,151 )$ 41,395$ 20,980$ 119,864$ 106,176 Interest expense 54,223 53,032 102,649 99,754 194,176 172,436 (Benefit) provision for income taxes (2,005 ) (11,526 ) 19,542 8,195 51,732 34,213 Depreciation and amortization 25,833 29,279 51,399 52,670 109,365 104,725 EBITDA 74,262 52,634 214,985 181,599 475,137 417,550 Severance costs(a) 750 17,361 1,297 21,017 2,515 21,914 Stock-based compensation(b) 936 735 2,556 1,040 3,498 2,221 Management fee(c) 750 750 1,500 1,500 3,000 3,000 Inventory fair value adjustment(d) - 1,294 - 2,417 - 2,417 Consulting fees(e) 3,061 5,293 10,376 11,064 26,157 20,847 Impairments and disposals(f) 4,360 1,132 4,459 1,851 4,803 32,846 Other items(g) 8,834 27,950 7,336 33,274 15,233 41,403 Pro forma cost savings(h) 8,171 14,305 16,342 28,610 32,685 57,218 Limitation on certain EBITDA adjustments(i) (4,561 ) (14,083 ) (9,122 ) (28,166 ) (18,245 ) (56,331 ) Consolidated EBITDA(1) $ 96,563$ 107,371$ 249,729$ 254,206$ 544,783$ 543,085 Consolidated EBITDA differences between Holdings and NBTY(j) 115 - 181 - 442 - NBTY's Consolidated EBITDA $ 96,678$ 107,371$ 249,910$ 254,206$ 545,225$ 543,085



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º (1)

º Consolidated EBITDA has been calculated in a manner consistent with NBTY's

senior secured credit facilities.

º (a)

º Reflects the exclusion of severance costs incurred at various subsidiaries

of the Company. Included in the three months, six months and four

consecutive quarters ended March 31, 2013 are workforce reduction costs of

approximately $17,000 relating to the facility restructuring. º (b) º Reflects the exclusion of non-cash expenses related to stock options. º (c) º Reflects the exclusion of the Carlyle consulting fee. º (d)



º Reflects the exclusion of the sell-through of the increased fair value of

opening inventory at time of acquisition required under acquisition accounting. º (e) º Reflects the exclusion of consulting fees, as permitted in our senior secured credit facilities, for items such as business optimization consulting. º (f)



º Reflects the impairment of certain assets, including Julian Graves Limited

impairment of $20,106 and the deconsolidation loss of $7,403 in the four

consecutive quarters ended March 31, 2013.

º (g)

º Reflects the exclusion of various items, as permitted in NBTY's senior

secured credit facilities, which among other items includes: restructuring

charges, business optimization expenses, ineffectiveness on certain

derivative instruments, gains and losses on dispositions and integration

costs associated with acquisitions.

45



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Table of Contents º (h) º Reflects three months, six months and four consecutive quarters of prospective savings in accordance with NBTY's senior secured credit facilities; specifically, the amount of cost savings expected to be



realized from operating expense reductions and other operating improvements

as a result of specified actions taken or initiated, less the amount of any

actual cost savings realized during the period. º (i) º In accordance with the definition of Consolidated EBITDA under NBTY's



senior secured credit facilities, this represents the limitation of certain

Consolidated EBITDA adjustments such as pro forma cost savings,

restructuring charges, business optimization expenses and integration costs

associated with acquisitions that exceed 10% of Consolidated EBITDA for the

applicable period, without giving effect to these adjustments.

º (j)

º Consists of selling, general and administrative costs related solely to the

Alphabet Holding Company parent company and differences in the amount of

limitation on certain EBITDA adjustments, as dictated by the NBTY senior

secured credit facilities.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

On December 12, 2013, Holdings issued $450,000 of additional Holdco Notes. The $450,000 additional Holdco Notes and the $550,000 of existing Holdco Notes previously issued on October 17, 2012 have identical terms and are treated as a single class for all purposes under the indenture. The Holdco Notes are 7.75%/8.50% contingent cash pay senior notes and mature on November 1, 2017.



Seasonality

We believe that our business is not seasonal in nature. However, we have historically 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% and 32%, respectively, of our net sales during the six months ended March 31, 2014 and 2013 were denominated in currencies other than U.S. dollars, principally British pounds and to a lesser extent euros, Canadian dollars and Chinese yuan. 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: March 31, September 30, 2014 2013 Total Assets 26 % 26 % Total Liabilities 3 % 3 % 46



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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 translation gains and losses, which are included as a separate component of Stockholders' equity under the caption "Accumulated other comprehensive loss."

During the six months ended March 31, 2014 and 2013, translation gains (losses) of $11,489 and ($42,364), respectively, were included in determining other comprehensive income. Cumulative translation gains (losses) of approximately $1,809 and ($9,680) were included as part of accumulated other comprehensive loss within the consolidated balance sheets at March 31, 2014 and September 30, 2013, respectively. The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies against the U.S. dollar. Any future translation gains or losses could be significantly different than those noted in each of these years.



Recent Accounting Developments

In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance on disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income ("AOCI"). This new guidance requires entities to present (either on the face of the income statement or in the notes hereto) the effects on the line items of the income statement for amounts reclassified out of AOCI. The new guidance became effective for us beginning October 1, 2013. See Note 10, "Accumulated Other Comprehensive Income (loss)" and the Consolidated Statements of Operations and Comprehensive Income (Loss). In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning on October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's financial statements. In July 2013, the FASB issued guidance which amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss carryforward whenever the net operating loss carryforward or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This guidance is effective for annual and interim periods for fiscal years beginning after December 15, 2013, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements. In April 2014, the FASB issued revised guidance to reduce diversity in practice for reporting discontinued operations. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The revised guidance is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.



Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 2 of the notes to Consolidated Financial Statements included in our 2013 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 2013 Annual Report. There have been no significant changes in our significant accounting policies or critical accounting estimates since September 30, 2013. 47



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Alphabet Holding Company, Inc. and Subsidiary


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