10-K 1 nbty-10k.txt FORM 10-K FOR SEPTEMBER 30, 2002 ========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to _____ Commission file number 0-10666 NBTY, INC. (Exact name of registrant as specified in charter) DELAWARE 11-2228617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 90 Orville Drive 11716 Bohemia, New York (Zip Code) (Address of principal executive offices) (631) 567-9500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.008 per share 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 [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] Indicate by check mark whether the Registrant is an accelerated filer. YES [X] NO [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 28, 2002, was approximately $930,000,000. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates. The number of shares of Common Stock of the Registrant outstanding at March 28, 2002, was approximately 65,984,000. The number of shares of Common Stock of the Registrant outstanding at December 9, 2002, was approximately 66,293,500. Documents Incorporated by Reference: None =========================================================================== NBTY, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS Caption Page Forward Looking Statements 1 PART I ITEM 1 BUSINESS 2 General 2 Business Strategy 3 Operating Segments 5 Employees and Advertising 7 Manufacturing, Distribution and Quality Control 7 Research and Development 9 Competition; Customers 9 Government Regulation 9 International Operations 14 Trademarks 15 Raw Materials 15 Seasonality 15 ITEM 2 PROPERTIES 15 ITEM 3 LEGAL PROCEEDINGS 18 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 20 Dividend Policy 20 Price Range for Common Stock 20 ITEM 6 SELECTED FINANCIAL DATA 21 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22 Background 22 Critical Accounting Policies and Estimates 23 Results of Operations 27 Seasonality 31 Liquidity and Capital Resources 31 Related Party Transactions 34 Inflation 35 Financial Covenants and Credit Rating 35 New Accounting Developments 35 i ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 37 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 38 Compensation of Directors 40 Section 16(a) Beneficial Ownership Reporting Compliance 40 ITEM 11 EXECUTIVE COMPENSATION 41 Summary Compensation Table 41 Option Value at the End of Fiscal 2002 42 Employment Agreements with Executive Officers and Directors 43 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 45 Securities Authorized For Issuance Under Equity Compensation Plans 48 NBTY, Inc. Employees' Stock Ownership Plan 49 Eligibility; Trustee 49 Contributions 49 Vesting 49 Distribution; Voting 49 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50 ITEM 14 CONTROLS AND PROCEDURES 50 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K 52 Index to Consolidated Financial Statements and Schedule 54 Financial Statements F-1 Financial Statement Schedule S-1 Signatures Certifications Exhibits ii PART I Forward Looking Statements This Annual Report on Form 10-K (the "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 1, 2, 3, 7 and 7A hereof, as well as within this Report generally. In addition, when used in this Report, the words "subject to," "believe," "expect," "plan," "estimate," "intend," "may," "will," "should," or "anticipate," or the negative thereof, or variations thereon, or similar expressions are intended to identify forward-looking statements. Similarly, discussions of strategy, although believed to be reasonable, are also forward-looking statements and are inherently uncertain. All forward- looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors which may materially affect such forward-looking statements include: (i) slow or negative growth in the nutritional supplement industry; (ii) interruption of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) adverse publicity regarding the consumption of nutritional supplements; (iv) inability to retain customers of companies (or mailing lists) recently acquired; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of management; (viii) increases in the cost of borrowings and unavailability of additional debt or equity capital; (ix) unavailability of, or inability to consummate, advantageous acquisitions in the future, including those that may be subject to bankruptcy approval or the inability of the Company (as defined below) to integrate acquisitions into the mainstream of its business; (x) changes in general worldwide economic and political conditions in the markets in which the Company may compete from time to time; (xi) the inability of the Company to gain and/or hold market share of its wholesale and retail customers; (xii) loss or reduction in ephedra sales; (xiii) unavailability of electricity in certain geographical areas; (xiv) exposure to and expense of defending and resolving, product liability claims and other litigation; (xv) the ability of the Company to successfully implement its business strategy; (xvi) the inability of the Company to manage its retail, wholesale, manufacturing and other operations efficiently; (xvii) consumer acceptance of the Company's products; (xviii) the inability of the Company to renew leases on its retail locations; (xix) inability of the Company's retail stores to attain or maintain profitability; (xx) the absence of clinical trials for many of the Company's products; (xxi) sales and earnings volatility and/or trends; (xxii) the effect on Company sales of the rapidly changing nature of the Internet and on-line commerce; (xxiii) fluctuations in foreign currencies, and more particularly the British Pound; (xxiv) import-export controls on sales to foreign countries; (xxv) the inability of the Company to secure favorable new sites for, and delays in opening, new retail locations; (xxvi) introduction of new federal, state, local or foreign legislation or regulation or adverse determinations by regulators, and more particularly the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive in Europe; (xxvii) the mix of the Company's products and the profit margins thereon; (xxviii) the availability and pricing of raw materials; (xxix) risk factors discussed in the Company's filings with the U.S. Securities and Exchange Commission (the "SEC"); and (xxx) other factors beyond the Company's control. 1 Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. Readers are cautioned not to place undue reliance on forward-looking statements. The Company cannot guarantee future results, events, and levels of activity, performance or achievements. The Company does not undertake and specifically declines any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. Industry data used throughout this Report was obtained from industry publications and internal Company estimates. While the Company believes such information to be reliable, its accuracy has not been independently verified and cannot be guaranteed. Item 1. BUSINESS General NBTY, Inc. (the "Company", "NBTY", "we" or "us") is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements in the United States, the United Kingdom, Ireland and internationally. Under a number of brands, the Company offers over 1,000 products, including vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and other nutritional supplements. The Company is vertically integrated in that it purchases raw materials, formulates and manufactures its products and then markets its products through its four channels of distribution: (i) Puritan's Pride/direct response, the leading U.S. nutritional supplement e- commerce/direct response program under the Puritan's Pride(R) brand in catalogs and through the Internet; (ii) 544 Vitamin World(R) and Nutrition Warehouse(R) retail stores, operating throughout the U.S. in 46 states, Guam and Puerto Rico; (iii) 468 Holland & Barrett(R) and Nature's Way(R) retail stores, operating throughout the United Kingdom and Ireland; and (iv) wholesale distribution to mass merchandisers, drug store chains, supermarkets, independent pharmacies and health food stores under various brand names, including the Nature's Bounty(R) brand. At September 30, 2002, the Company manufactured over 90% of the nutritional supplements it sold. The Company was incorporated in Delaware in 1979 under the name Nature's Bounty, Inc. On March 26, 1995, the Company changed its name to NBTY, Inc. The Company's principal executive offices are located at 90 Orville Drive, Bohemia, New York 11716 and its telephone number is (631) 567-9500. The Company's Internet address is www.nbty.com. The Company's United Kingdom subsidiary, Holland & Barrett, has its principal executive offices in Nuneaton, United Kingdom. The Company makes available, free of charge, on the Company's web site, the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as is reasonably practicable, after the Company electronically files such materials with the SEC. 2 Business Strategy The Company targets the growing value-conscious consumer segment by offering high-quality products at a value price. The Company's objective is to increase sales, improve manufacturing efficiencies, increase profitability and strengthen its market position through the following key strategies: Expand Existing Channels of Distribution. The Company plans to continue expanding and improving its existing channels of distribution through aggressive marketing and synergistic acquisitions in order to increase sales and profitability and enhance overall market share. * Increase Puritan's Pride direct response sales. NBTY expects to continue strengthening its leading position in the e- commerce/direct response business by: (i) improving automated picking and packing to fulfill sales order requests with greater speed and accuracy; (ii) increasing manufacturing capability to quickly introduce and deliver new products in response to customer demand; (iii) testing new and more frequent promotions to further improve response rates; and (iv) promoting its Internet web sites. The Company also intends to continue its strategy of acquiring the customer lists, brand names and inventory of other mail order companies which have similar or complementary products which the Company believes can be efficiently integrated into its own operations without adding substantial overhead expenses. * Increase Retail Sales in the U.S. Over the last several years, the Company's strategy has focused on the development of a nationwide chain of retail stores in the United States. To that end, at September 30, 2002, the Company operated 544 Vitamin World(R) and Nutrition Warehouse(R) retail stores located in regional and outlet malls. The Company has added approximately 218 retail stores in the past three fiscal years or approximately 40% of the total number of stores in operation at September 30, 2002. New stores historically do not have the same high customer traffic as more mature stores. During the fiscal year ended September 30, 2002 (the "fiscal 2002"), the Company opened 24 Vitamin World stores. The Company plans to open approximately 25 new stores in the next fiscal year. In an effort to increase customer traffic, the Company successfully introduced its Savings Passport Card, a customer loyalty program, which provides incentives for the consumer to purchase at Vitamin World(R). It is an additional tool for the Company to track customer preferences and purchasing trends. At the end of fiscal 2002, there were over 2.8 million Savings Passport Card members. * Increase Wholesale Sales in the U.S. and in Foreign Markets. The Company expects to strengthen its wholesale business by continuing to increase its sales in food, drug and mass merchandising channels by (i) increasing revenues derived from existing customers through strong promotional activities and the aggressive introduction of new and innovative products; (ii) increasing shelf 3 space in major retailers; (iii) leveraging the advertising and promotion of its major specialty brands, such as Flex-A-Min(R) and Knox(R) and; (iv) continuing to grow its private label revenue with new customers and timely product introductions. The Company also seeks increased sales in the health food store distribution channel by (a) adding new customers and growing sales to existing customers through the strategic use of advertising and promotion of core products; and (b) the introduction of unique new products such as CardioSmart, a special formulation to support cardiovascular health. In addition, the Company continues to form new distribution alliance throughout the world for its products. A new sales division in the U.K. has recently been established to take advantage of wholesale sales opportunities in the U.K. and the European continent. * Increase Retail Sales in the U.K. and Ireland. The Company continues its strategy of selectively expanding the number of its Holland & Barrett stores located throughout the U.K. At September 30, 2002, there were 468 Holland & Barrett(R) and Nature's Way(R) stores in the U.K. and Ireland. In fiscal 2002, Holland & Barrett opened 7 new stores in the U.K. and Ireland. The Company projects that, during the next fiscal year, the Company will open 28 new retail stores in the U.K. and Ireland. Introduce New Products. The Company has consistently been among the first in the industry to introduce innovative products in response to new studies, research and consumer preferences. Given the changing nature of consumer demands for new products and the growing publicity over the importance of vitamins, minerals and nutritional supplements in the promotion of general health, management believes that NBTY will continue to maintain its core customer base and attract new customers based upon its ability to rapidly respond to consumer demands with high quality, value- oriented products. Enhance Vertical Integration. The Company believes that its vertical integration gives it a significant competitive advantage by allowing the Company to: (i) maintain higher quality standards while lowering product costs, a portion of which are passed on to the customer as lower prices; (ii) more quickly respond to scientific and popular reports and consumer buying trends; (iii) more effectively meet customer delivery schedules; (iv) reduce dependence upon outside suppliers; and (v) improve overall operating margins. The Company continually evaluates ways to further enhance its vertical integration by leveraging manufacturing, distribution, purchasing and marketing capabilities, and otherwise improve its operations. Build Infrastructure to Support Growth. NBTY has technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately thirty billion tablets and capsules per year. The Company regularly evaluates its operations and makes investments in building infrastructure, as necessary, to support its continuing growth. 4 Strategic Acquisitions. The Company seeks acquisition opportunities, both in the U.S. and internationally, of companies which complement or extend its existing product lines, increase the Company's market presence, expand its distribution channels, and/or are compatible with its business philosophy. In fiscal 2002, NBTY completed three acquisitions: (i) the mail order operation of HealthCentral.com; (ii) the Knox(R) gelatine nutritional supplement business of Kraft Foods; and (iii) the Synergy Plus(R) product line of nutritional supplements. Experienced Management Team. The Company's management team has extensive experience in the nutritional supplement industry and has developed long-standing relationships with its suppliers and its customers. The executive officers of the Company have an average of approximately 20 years with the Company. Operating Segments NBTY and its subsidiaries operate in the nutritional supplement industry, focusing their products and services on four segments of this industry: Puritan's Pride/direct response, U.S. retail, U.K./Ireland retail, and wholesale (which includes network marketing). The following table sets forth the percentage of net sales for each of the Company's operating segments:

Fiscal Years Ended September 30, -------------------------------- 2002 2001 2000 ---- ---- ---- Puritan's Pride/direct response 19% 21% 25% Retail: U.S. 21% 22% 21% U.K./Ireland. 30% 33% 34% Wholesale 30% 24% 20% -- -- -- 100% 100% 100%

Further information about the financial results of each of these segments is found in Note 17 to the Consolidated Financial Statements in this Report. Puritan's Pride/direct response. The Company offers, through mail order and e-commerce, a full line of vitamins and other nutritional supplement products as well as selected personal care items under its Puritan's Pride(R) brand names at prices which are usually at a discount from those of similar products sold in retail stores. Through its Puritan's Pride(R) brand, NBTY is the leader in the U.S. direct response nutritional supplement industry with over four million active customers and with response rates which management believes to be above the industry average. NBTY intends to continue to appeal to new customers in its direct response operation through aggressive marketing techniques both in the U.S. and the U.K., and through selective acquisitions. 5 In order to maximize sales per catalog and reduce mailing and printing costs, the Company regularly updates its mail order list to include new customers and to eliminate those who have not placed an order within a designated period of time. In addition, in order to add new customers to its mailing lists and web sites and to increase average order sizes, the Company places advertisements in newspaper supplements and conducts insert programs with other mail order companies. The Company's use of state-of-the-art equipment in its direct response operations, such as computerized mailing, bar-coded addresses and automated picking and packing systems enables the Company to fill orders typically within 24 hours of their receipt. This allows the Company to lower its per customer distribution costs, thereby enhancing margins and enabling the Company to offer its products at lower prices than its competitors. The Company's www.puritan.com and www.vitamins.com web sites provide a practical and convenient method for consumers wishing to purchase products to promote healthy living. By using these web sites, consumers have access to the full line of more than 1,000 products which are offered through the Company's Puritan's Pride(R) mail order catalog. Consumer orders are processed with the speed, economy and efficiency of the Company's automated picking and packing system. The Company maintains another web site, www.vitaminworld.com, to accommodate customers who wish to purchase nutritional supplements on the Internet, or to find a conveniently located store to make purchases in person. This web site provides the consumer with information concerning the products offered in the Company's stores and with information about store locations. Retail U.S. At the end of fiscal 2002, the Company leased and operated 544 retail stores located in 46 states, Guam and Puerto Rico, under the Vitamin World(R) and Nutrition Warehouse(R) names. Each location carries a full line of the Company's products under the Company's brand names as well as products manufactured by others. Through direct interaction between the Company's personnel and the public, the Company is able to identify buying trends, customer preferences or dislikes, acceptances of new products and price trends in various regions of the country. This information is useful in initiating sales programs for all divisions of the Company. Retail U.K./Ireland Holland & Barrett ("H&B") is one of the leading nutritional supplement retailers in the United Kingdom, with 468 locations in the United Kingdom and Ireland at September 30, 2002. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements (approximately 65% of H&B's revenues) as well as food products, including fruits and nuts, confectionery and other items (approximately 35% of H&B's revenues). Nutritional supplement products manufactured by NBTY accounted for approximately 45% of H&B's total sales in fiscal 2002. Wholesale/Mass Marketing. The Company markets its products under various brand names to many stores, including leading drug store chains and supermarkets, independent pharmacies, health food stores, health food store wholesalers and other retailers such as mass merchandisers. The Nature's Bounty(R) brand is sold to drug store chains and drug wholesalers. The Company sells a full line of products to supermarket 6 chains and wholesalers under the brand name Natural Wealth(R) at prices designed for the "price conscious" consumer. The Company sells directly to health food stores under the brand name Good 'N Natural(R) and sells products, including a specialty line of vitamins, to health food wholesalers under the brand name American Health(R). The Company has expanded sales of various products to many countries throughout Europe, Asia and Latin America. For additional information regarding financial information about the geographic areas in which the Company and its subsidiaries conduct their business, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to the Company's Consolidated Financial Statements contained in this Report. Employees and Advertising As of September 30, 2002, the Company employed approximately 8,100 persons, which included: (i) 2,586 sales associates located throughout the U.S. in its Vitamin World(R) and Nutrition Warehouse(R) retail stores; (ii) 1,610 manufacturing, shipping and packaging associates throughout the U.S.; (iii) 632 associates in administration throughout the U.S.; (iv) 68 associates who sell to NBTY's wholesale distributors and customers; (v) 34 in-house advertising associates; and (vi) 3,157 associates in its H&B operations, including: (A) 2,885 retail associates, (B) 149 associates in distribution, and (C) 123 associates in administration. In addition, NBTY sells through commissioned sales representative organizations. The Company believes it has satisfactory employee and labor relations. For the fiscal years ended September 30, 2000, 2001 and 2002, NBTY spent approximately $34 million, $49 million and $48 million, respectively, on advertising and promotions, including print, media and cooperative advertising. NBTY creates its own advertising materials through its in- house staff of associates. In the U.K., H&B runs advertisements in national newspapers, conducts sales promotions and publishes a glossy magazine with articles and promotional materials. Manufacturing, Distribution and Quality Control The Company employs approximately 1,600 manufacturing, shipping and packaging associates throughout the United States. The Company's manufacturing facilities are located in New York, California, Colorado, New Jersey and Illinois and is conducted in accordance with good manufacturing practice standards promulgated by the United States Food and Drug Administration ("the FDA") and other applicable regulatory 7 standards. The Company manufactures products for its four operating segments as well as for third parties. The Company believes that the capacity of its manufacturing and distribution facilities is adequate to meet the requirements of its current business and will be adequate to meet the requirements of anticipated increases in sales. The Company places special emphasis on quality control. All raw materials used in production initially are held in quarantine during which time the Company's laboratory technicians assay the raw materials and the results are compared with the manufacturer's certificate of analysis. Once cleared, a lot number is assigned, samples are retained and the material is processed by formulating, mixing and granulating, compressing and sometimes coating operations. After the tablet or capsule is manufactured, laboratory technicians test its weight, purity, potency, dissolution and stability. When products such as vitamin tablets are ready for bottling, the Company's automated equipment counts the tablets, inserts them into bottles, adds a tamper-resistant cap with an inner safety seal and affixes a label. The Company uses computer-generated documentation for picking and packing for order fulfillment. The Company's manufacturing operations are designed to allow low cost production of a wide variety of products of different quantities, sizes and packaging while maintaining a high level of customer service and quality. Flexible production line changeover capabilities and reduced cycle times allow the Company to respond quickly to changes in manufacturing schedules. Inventory Control. The Company has installed inventory control systems at its facilities that enable it to track each product as it is received from its supply sources through manufacturing and shipment to its customers. To facilitate this tracking, a significant number of products sold by the Company are bar coded. The Company's inventory control systems report shipping, sales and individual SKU level inventory information. The Company manages the retail sales process by monitoring customer sales and inventory levels by product category. The Company believes that its distribution capabilities enable it to increase flexibility in responding to the delivery requirements of its customers. Information from the Company's point-of-sale computer system is regularly reviewed and analyzed by the purchasing staff to assist in making merchandise allocation and markdown decisions. The Company uses an automated reorder system to maintain in-stock positions on key items. These systems provide management with the information needed to determine the proper timing and quantity of reorders. Financial Reporting. The Company's financial reporting systems provide management with detailed financial reporting to support management's operating decisions and cost control efforts. These systems provide functions such as scheduling of payments, receiving of payments, general ledger interface, vendor tracking and flexible reporting options. 8 Research and Development In the last three fiscal years, the Company did not expend any significant amounts for basic research and development of new products. Competition; Customers The market for nutritional supplement products is highly competitive. Competition is based primarily on price, quality and assortment of products, customer service, marketing support, and availability of new products. The Company believes it competes favorably in all of these areas. The Company's direct competition consists primarily of publicly and privately owned companies, highly fragmented in terms of both geographical market coverage and product categories. The Company also competes in the nutritional supplement area with companies which may have broader product lines and/or larger sales volumes. The Company's products also compete with nationally advertised brand name products. Most of the national brand companies have resources substantially greater than those of the Company. There are numerous companies in the vitamin and nutritional supplement industry selling products to retailers, including mass merchandisers, drug store chains, independent drug stores, supermarkets and health food stores. Many companies within the industry are privately held. Therefore, the Company is unable to precisely assess the size of all of its competitors or where the Company ranks in comparison to such privately held competitors with respect to sales to retailers. Two customers of the wholesale division represented, individually, more than 10% of this segment's sales in fiscal 2002. However, the Company does not believe that the loss of either of these customers or any other any single customer of the Company would have a material adverse effect on the Company's consolidated financial condition or results of operations. Government Regulation United States. The formulation, manufacturing, packaging, labeling, advertising and distribution of NBTY's products are subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission ("FTC"), the Postal Service, the Consumer Product Safety Commission, the Department of Agriculture, the Environmental Protection Agency, and also by various agencies of the states, localities and foreign countries in which NBTY's products are sold. In particular, the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act ("FDCA"), regulates the formulation, manufacturing, packaging, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, and of over- the-counter ("OTC") drugs, while the FTC has jurisdiction to regulate advertising of these products, and the Postal Service regulates advertising claims with respect to such products sold by mail order. 9 The FDCA has been amended several times with respect to dietary supplements, in particular by the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). DSHEA established a new framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA defined "dietary supplements" as vitamins, minerals, herbs, other botanicals, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, metabolites, constituents, extracts or combinations of such dietary ingredients. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a "new" dietary ingredient (i.e., a dietary ingredient that was "not marketed in the United States before October 15, 1994") must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been "present in the food supply as an article used for food" without being "chemically altered." A new dietary ingredient notification must provide the FDA evidence of a "history of use or other evidence of safety" establishing that use of the dietary ingredient "will reasonably be expected to be safe." A new dietary ingredient notification must be submitted to the FDA at least 75 days before the initial marketing of the new dietary ingredient. There can be no assurance that the FDA will accept the evidence of safety for any new dietary ingredients that the Company may want to market, and the FDA's refusal to accept such evidence could prevent the marketing of such dietary ingredients. The botanical ingredient ephedra is currently used in several of the Company's dietary supplement products, comprising approximately 4 percent of the Company's sales during fiscal 2002 in the United States. The Company believes the ingredient is safe for use under the conditions set forth in the labeling of these products. However, there is a possibility that the FDA or one or more states or local governments may impose restrictions that would require the Company to cease sale of some or all of these products. There can be no assurance that such restrictions would not have a material adverse effect upon the Company's consolidated financial position or results of operations. DSHEA permits "statements of nutritional support" to be included in labeling for dietary supplements without the FDA pre-approval. Such statements may describe how a particular dietary ingredient affects the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well-being (but may not state that a dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease). A company that uses a statement of nutritional support in labeling must possess evidence substantiating that the statement is truthful and not misleading, must disclose on the label that the FDA has not "evaluated" the statement, must also disclose on the label that the product is not intended for use for a disease, and must notify the FDA about the company's use of the statement within 30 days after its initial use. However, there can be no assurance that the FDA will not determine that a particular statement of nutritional support that a company wants to use is an unacceptable drug claim or an unauthorized version of a "health claim." Such a determination might prevent a company from using the claim. In addition, DSHEA provides that certain so-called "third party literature," e.g., a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient with health benefits, may be used "in connection with the sale of a dietary supplement to 10 consumers" without the literature being subject to regulation as labeling. Such literature must not be false or misleading; the literature may not "promote" a particular manufacturer or brand of dietary supplement; and a balanced view of the available scientific information on the subject matter must be presented. There can be no assurance, however, that all third party literature that NBTY would like to disseminate in connection with its products will satisfy each of these requirements, and failure to satisfy all requirements could prevent use of the literature or subject the product involved to regulation as an illegal drug. Management expects that the FDA soon will propose "good manufacturing practice" ("GMP") regulations, authorized by DSHEA, specifically for dietary supplements. GMP regulations would require dietary supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs. There can be no assurance that, if the FDA adopts GMP regulations for dietary supplements, NBTY will be able to comply with the new rules without incurring substantial expenses. The FDA generally prohibits the use in labeling for a dietary supplement of any "health claim" (that is not authorized as a "statement of nutritional support" permitted by DSHEA) unless the claim is pre-approved by the FDA. There can be no assurance that some of the labeling statements that NBTY would like to use will not be deemed by the FDA to be "unauthorized health claims" that are not permitted to be used. Although the regulation of dietary supplements is in some respects less restrictive than the regulation of drugs, there can be no assurance that dietary supplements will continue to be subject to less restrictive regulation. Further, there can be no assurance that, if more stringent statutes are enacted for dietary supplements, or if more stringent regulations are promulgated, NBTY will be able to comply with such statutes or regulations without incurring substantial expense, or that it will be able to comply at all. The FDA regulates the formulation, manufacturing, packaging, labeling and distribution of OTC drug products pursuant to a "monograph" system that specifies active drug ingredients that are generally recognized as safe and effective for particular uses. If an OTC drug is not in compliance with an applicable the FDA monograph, the product generally cannot be sold without first obtaining the FDA approval of a new drug application, a long and expensive procedure. The FDA has broad authority to enforce the provisions of the FDCA applicable to dietary supplements, including powers to issue a public "warning letter" to a company, to publicize information about illegal products, to request a recall of illegal products from the market, and to request the Department of Justice to initiate a seizure action, an injunction action, or a criminal prosecution in the United States courts. FTC exercises jurisdiction over the advertising of dietary supplements. In recent years, FTC has instituted numerous enforcement actions against dietary supplement companies for failure to have adequate substantiation for claims made in advertising or for the use of false or misleading advertising claims. These enforcement actions have often resulted in consent decrees and the payment of civil penalties by the companies 11 involved. NBTY is currently subject to a FTC consent decree resulting from past advertising claims for certain of its products, and is required to maintain compliance with this decree and is subject to substantial civil monetary penalties if there should be any failure to comply. Further, the Postal Service has issued cease and desist orders against certain mail order advertising claims made by dietary supplement manufacturers including NBTY, and NBTY is required to maintain compliance with the order applicable to it, subject to civil monetary penalties for any noncompliance. Violations of these orders could result in substantial monetary penalties, which could have a material adverse effect on NBTY's consolidated financial position or results of operations. NBTY is also subject to regulation under various state, local, and international laws that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution of dietary supplements and OTC drugs. Government regulations in foreign countries may prevent or delay the introduction, or require the reformulation, of certain of NBTY's products. Compliance with such foreign governmental regulations is generally the responsibility of NBTY's distributors in those countries. These distributors are independent contractors over whom the Company has only limited or minimal control. In addition, from time to time in the future, NBTY may become subject to additional laws or regulations administered by the FDA or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that the Company considers favorable, such as DSHEA, or to more stringent interpretations of current laws or regulations. The Company is not able to predict the nature of such future laws, regulations, repeals or interpretations, and it cannot predict what effect additional governmental regulation, when and if it occurs, would have on its business in the future. Such developments could, however, require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, or other new requirements. Any such developments could have a material adverse effect on NBTY. United Kingdom. In the United Kingdom, the two laws that affect the operations of H&B are the Medicines Act 1968, which regulates the licensing and sale of medicines, and the Food Safety Act 1990 which provides for the safety of food products. A large volume of Secondary Legislation in the form of Statutory Instruments adds the detail to the main provisions of the above Acts. In the U.K. regulatory system a product intended to be taken orally will fall within the category of food or the category of medicine. There is no special category of dietary supplement as provided for in the US by DSHEA. Some products which are intended to be applied externally, for example creams and ointments, may be classified as medicines and others as cosmetics. The Medicines Control Agency ("MCA") has responsibility for the implementation and enforcement of the Medicines Act, and is the licensing authority for medicinal products. The MCA directly employs enforcement officers from a wide range 12 of backgrounds, including the police, and with a wide range of skills, including recently information technology. The MCA answers to Government Ministers in the Department of Health. The MCA decides whether a product is a medicine or not, and if so, considers whether it can be licensed. It determines the status of a product by considering whether it is medicinal by "presentation" or by "function". Many, though not all, herbal remedies are considered "medicinal" by nature of these two tests. The Food Standards Agency ("FSA") deals with legislation, policy and oversight of food products, with enforcement action in most situations being handled by local authority Trading Standards Officers. The FSA answers primarily to Ministers at the Department of Health, and the Department of Environment Food and Rural Affairs. Most vitamin and mineral supplements, and some products with herbal ingredients are considered to be food supplements and fall under general food law which requires them to be safe. In July 2002, the European Union ("EU") published in its Official Journal the final text of a Food Supplements Directive which came into EU law on that date, and which sets out a process and timetable by which the (currently 15) Member States of Europe must bring their domestic legislation in line with its provisions. It seeks to harmonise the regulation of the composition, labeling and marketing of food supplements (at this stage only vitamins and minerals) throughout the EU. It does this by specifying what nutrients and nutrients sources may be used (and by interpretation the rest which may not), the level at which those nutrients may be present in a supplement, and the labeling and other information which must be provided on packaging. By harmonising the legislation, the Food Supplements Directive should provide opportunities for businesses to market one product or range of products to a larger number of potential consumers without having to reformulate or repackage it. This development may lead to some liberalising of the more restrictive regimes in France and Germany, providing new business opportunities. Conversely, however, it may substantially limit the range of nutrients and nutrient sources, and the potencies at which some nutrients may be marketed by the Company in the more liberal countries, such as the U.K., which may lead to some reformulation costs and loss of some specialist products. The provisions of the Food Supplements Directive will be turned into U.K. domestic law through Statutory Instruments. The EU is also considering a Traditional Herbal Medicinal Products Directive which would allow a traditional herbal medicine to be licensed without having to demonstrate its efficacy in the way that pharmaceutical products have to do, provided that it is safe, is manufactured to high standards, and has been on the market for 30 years. This Directive is intended to provide a safe home in EU law for a number of categories of herbal remedies, which may otherwise be found to fall outside EU law. It does not, however, provide a mechanism for new product development, and would entail some compliance costs in registering the many herbal products already on the market. 13 Additional EU legislation is anticipated in the near future to further regulate the composition, labeling and marketing of other products including sports nutrition products, fortified foods, very low calorie diets, and foods for particular nutritional purposes. Further progress is expected with legislative initiatives to permit, but closely regulate, the use of health claims made for products. The EU has now established a new European Food Safety Authority, which will have an important role to play in focusing attention on food standards in Europe. Its new Executive Director, due to take up his position early in 2003, is Mr. Geoffrey Podger, until recently the Chief Executive of the U.K.'s Food Standards Agency. Ireland. The legislative and regulatory situation in the Republic of Ireland is similar, but not identical to that in the United Kingdom. The Irish Medicines Board has a similar role to that of the U.K. MCA, and the Food Safety Authority of Ireland is analogous to the U.K. FSA. Like the U.K., Ireland will be required to bring its domestic legislation into line with the provisions of the Food Supplements Directive and the Traditional Herbal Medicinal Products Directive when the latter is finalised, and, indeed, with the other forthcoming EU legislation mentioned above. Thus the market prospects for Ireland are, in general, similar to those outlined for the U.K. International Operations In addition to the U.K. and Ireland, the Company markets its nutritional supplement products through distributors, retailers and direct mail in more than 70 countries throughout Europe, North America, South America, Asia, the Pacific Rim countries, Africa and the Caribbean Islands. The Company's international operations are conducted in a manner to conform to local variations, economic realities, market customs, consumer habits and regulatory environments. The Company's products (including labeling of such products) and the distribution and marketing programs of the Company are modified in response to local and foreign legal requirements and customer preferences. The Company's international operations are subject to many of the same risks faced by the Company's domestic operations. These include competition and the strength of the relevant economy. In addition, international operations are subject to certain risks inherent in conducting business abroad, including foreign regulatory restrictions, fluctuations in monetary exchange rates, import-export controls and the economic and political policies of foreign governments. The importance of these risks increases as the Company's international operations grow and expand. Virtually all of the Company's international operations are affected by foreign currency fluctuations, and, more particularly, changes in the value of the British Pound as compared to the U.S. Dollar. For additional information regarding financial information about the geographic areas in which the Company and its subsidiaries conduct their business, see Item 7 14 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to the Company's Consolidated Financial Statements contained in this Report. Trademarks U.S. The Company and its subsidiaries have applied for or registered more than 1,000 trademarks with the United States Patent and Trademark Office and many other major jurisdictions throughout the world for its Nature's Bounty(R), Holland & Barrett(R), Good' N Natural(R), American Health(R), Puritan's Pride(R), Vitamin World(R), Natural Wealth(R), Nutrition Headquarters(R) and Nutrition Warehouse(R) trademarks, among others, and has rights to use other names essential to its business. Federally registered trademarks have a perpetual life, as long as they are maintained and renewed on a timely basis and used properly as trademarks, subject to the rights of third parties to seek cancellation of the trademarks if they claim priority or confusion of usage. The Company regards its trademarks and other proprietary rights as valuable assets and believes they have significant value in the marketing of its products. The Company vigorously protects its trademarks against infringement. U.K./Ireland. H&B owns trademarks registered in the United Kingdom and/or throughout the European community for its Holland & Barrett and Nature's Way trademarks and has rights to use other names essential to its business. Raw Materials In fiscal 2002, the Company spent approximately $196 million on raw materials. The principal raw materials required in the Company's operations are vitamins, minerals, herbs, gel caps, and bottling materials. The Company purchases its vitamins, minerals and herbs from bulk manufacturers in the United States, Japan and Europe. The Company believes that there are adequate sources of supply for all of its principal raw materials, and that the Company's relationships with its suppliers yield improved quality, pricing and overall service to its customers. Although there can be no assurance that the Company's sources of supply for its principal raw materials will be adequate in all circumstances, in the event that such sources are not adequate, the Company believes that alternate sources can be developed in a timely manner. During fiscal 2002, one supplier accounted for approximately 10% of the Company's raw material purchases. However, the Company does not believe that the loss of this or any other single supplier would have a material adverse effect on the Company's consolidated financial results of operations. Seasonality The Company's business is not seasonal in nature. Item 2. PROPERTIES U.S. At September 30, 2002, the Company owned a total of approximately 1,400,000 square feet of plant and administrative facilities. The Company also leased approximately 637,000 square feet of administrative, manufacturing, warehouse and 15 distribution space in various locations at the end of fiscal 2002. The Company leases and operates approximately 544 retail locations under the name Vitamin World(R) and Nutrition Warehouse(R) in 46 states in the U.S., Guam and Puerto Rico. Generally, the Company leases the properties for three to ten years at varying annual base rents and percentage rents in the event sales exceed a specified amount. The retail stores have an average selling area of approximately 1,070 square feet. U.K./Ireland. Holland & Barrett owns a 178,000 square foot administrative, manufacturing and distribution facility (which includes a 42,500 square foot mezzanine) in Burton, and leases a 9,300 square foot administrative building in Nuneaton. Additionally, H&B leases all but three of the locations of its 468 retail stores for terms varying between 10 and 35 years at varying annual base rents. Eight of H&B's stores are subject to percentage rents in the event sales exceed a specified amount. The stores have an average selling area of 935 square feet. The following is a listing of all material properties (excluding retail locations) owned or leased by the Company, which are used in all four of the Company's business segments:

Type of Approx. Leased Location Facility Sq. Feet or Owned -------- -------- -------- -------- UNITED STATES: Bohemia, NY Administration & Manufacturing 169,000 Owned Bohemia, NY Manufacturing 80,000 Owned Bohemia, NY (1) Manufacturing 75,000 Owned Bohemia, NY Leased to tenant 62,000 Owned (term-2003) Holbrook, NY (1) Distribution 230,000 Owned Holbrook, NY Distribution 108,000 Owned Ronkonkoma, NY Administration & Distribution 110,000 Owned Ronkonkoma, NY Warehouse 75,000 Leased (term-2005) Bayport, NY IT Services 12,000 Owned Bayport, NY Manufacturing 131,000 Owned Mineola, NY Administrative 13,000 Owned Reno, NV Distribution 25,000 Leased (term-2006) Carbondale, IL Administration, Manufacturing 77,000 Owned and Distribution Carbondale, IL Administration 15,000 Owned Murphysboro, IL Manufacturing 62,000 Owned Murphysboro, IL Warehouse 30,000 Leased (term-2003) South Plainfield, NJ Manufacturing 68,000 Owned South Plainfield, NJ Manufacturing and Distribution 60,000 Leased (term-2006) 16 North Glenn, CO Administration 4,900 Leased (term-2004) Thornton, CO Manufacturing 72,000 Leased (term-2006) Anaheim, CA Manufacturing and Distribution 286,140 Leased (term-2006) Anaheim, CA Manufacturing 64,000 Leased (term-2003) Anaheim, CA Administration & Manufacturing 20,000 Owned Lake Mary, FL Administration (term-2008) 10,850 Leased UNITED KINGDOM: Nuneaton Administration 9,300 Leased (term-2012) Burton Administration, Manufacturing 178,000 Owned and Distribution -------------------- The property is subject to a first mortgage. For additional information regarding the mortgage, see the Company's Consolidated Financial Statements contained in this Report.

Warehousing and Distribution The Company has dedicated approximately 1,200,000 square feet to warehousing and distribution in its Long Island, NY; Carbondale, IL; Murphysboro, IL; Reno, NV; Anaheim, CA; Thornton, CO; South Plainfield, NJ and Burton, U.K. facilities. The Company's warehouse and distribution centers are efficiently integrated with the Company's order entry systems to enable the Company to ship out mail orders typically within 24 hours of their receipt. Once a customer's telephone, mail or Internet order is completed, the Company's computer system forwards the order to the Company's distribution center, where all necessary distribution and shipping documents are printed to facilitate processing. Thereafter, the orders are prepared, picked, packed and shipped continually throughout the day. The Company operates a proprietary, state-of-the-art, automated picking and packing system for frequently shipped items. The Company is capable of fulfilling 15,000 orders daily. A system of conveyors automatically routes boxes carrying merchandise throughout the distribution center for fulfillment of orders. Completed orders are bar-coded and scanned and the merchandise and ship date are verified and entered automatically into the customer order file for access by sales associates prior to being shipped. The Company currently ships its mail orders primarily through the United Parcel Service, Inc. (UPS), serving domestic and international markets. The Company currently distributes its products from its distribution centers through contract and common carriers in the U.S. and by Company- owned trucks in both 17 the U.S. and the U.K. Deliveries are made directly to the Vitamin World(R) and Nutrition Warehouse(R) stores once per week. In addition, the Company ships products overseas by container loads. The Company also operates additional distribution centers in Burton, U.K. Deliveries are made directly to Company owned and operated Holland & Barrett(R) stores once or twice per week, depending on the store's inventory requirements. All of the Company's properties are covered by all-risk and liability insurance, which the Company believes is customary for the industry. Management believes that these properties, taken as a whole, are generally well-maintained, and are adequate for current and reasonably foreseeable business needs. Management also believes that substantially all of the Company's properties are being utilized to a significant degree. Item 3. LEGAL PROCEEDINGS A consolidated stockholder derivative action, which was filed in 2000 in the Chancery Court in Delaware against certain officers and directors of the Company, was voluntarily dismissed in December 2002. The derivative claim alleged that the named officers and directors failed to disclose material facts during the period from January 27, 2000 to June 15, 2000, which purportedly resulted in a decline in the price of the Company's stock after June 15, 2000. A consolidated stockholder class action complaint, which was filed in the Eastern District of New York in 2000, predicated on the same allegations, was dismissed by that court on September 28, 2002, and the case formally closed on October 31, 2002. On July 25, 2002, a purported consumer class action was filed in New York state court against several manufacturers and retailers of so-called prohormone supplements including Vitamin World. Prohormones are substitutes such as androstenedione that plaintiffs allege are hormone precursors ingested to promote muscle growth. Plaintiffs allege that the advertising and labeling of certain prohormone supplements overstate their efficacy and do not fully disclose their risks, and seek class certification and injunctive and monetary relief. The action was severed into separate class actions against each of the defendants. On December 6, 2002, an amended class action complaint was filed against Vitamin World that purported to elaborate on the claims initially alleged. The Company believes that this action is without merit, and intends to move to dismiss the amended pleading and to vigorously defend against the claims asserted. However, because this action is in its early stages, no determination can be made at this time as to the final outcome of this action. On August 28, 2001, the Company was also named as a defendant, along with other companies, in a purported class action commenced in an Alabama state court. Plaintiffs allege that NBTY manufactured and marketed misbranded nutrition bars and seek class certification, injunctive, declaratory, and monetary relief. Class discovery is being taken, and a hearing is currently scheduled for the spring of 2003 to determine whether a class should be certified. NBTY is vigorously defending class certification on the basis that the plaintiffs were not damaged as alleged as a result of any action by NBTY. In addition, NBTY contends that this matter is not appropriate for class 18 certification because the named plaintiffs are inadequate class representatives and not typical of persons who purchased the nutrition bars in these proceedings. On October 3, 2002, the Company was named as a defendant in a second purported class action commenced in the same Alabama state court as the above-identified litigation. Plaintiffs, in an attempt to pursue several retailers, including NBTY, and not manufacturers of nutrition bars, allege that NBTY marketed misbranded nutrition bars. In November 2002, NBTY filed a motion to dismiss or abate the lawsuit based on the principle that the court lacks subject-matter jurisdiction because the earlier-filed lawsuit, which seeks identical relief for the same purported class action against the manufacturers, preempts this second attempt to certify a class against NBTY. The Company believes that both Alabama suits are without merit. However, no determination can be made as of the date of this Report as to the final outcome of these suits. In addition to the foregoing, other claims, suits and complaints arise in the ordinary course of the Company's business. The Company believes that such other claims, suits and complaints would not have a material adverse effect on the Company's consolidated financial condition or results of operations, if adversely determined against the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 19 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DIVIDEND POLICY Since its incorporation in 1979, the Company has not paid any cash dividends on its Common Stock. On April 24, 1992, the Company effected a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on May 8, 1992. On September 25, 1992, the Company effected a three-for-one stock split in the form of a 200% stock dividend to stockholders of record on November 2, 1992. On August 3, 1993, the Company effected a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on August 13, 1993. In addition, in March 1998, the Company effected a three-for-one stock split in the form of a 200% stock dividend. Future determination as to the payment of cash or stock dividends will depend upon the Company's results of operations, financial condition, capital requirements, restrictions contained in the Company's Third Amended and Restated Credit and Guarantee Agreement ("CGA"), limitations contained in the indenture governing the 8 5/8% Senior Subordinated Notes due 2007 of the Company, and such other factors as the Company's Board of Directors considers appropriate. The CGA prohibits the Company from paying dividends or making any other distributions (other than dividends payable solely in shares of the Company's common stock) to its stockholders. The Company's Indenture governing its 8 5/8% Senior Subordinated Notes due 2007 also prohibits the Company from paying dividends or making any other distributions to its stockholders. In addition, except as specifically permitted in the CGA, the CGA does not allow the Company's subsidiaries to advance or loan money to, or make a capital contribution to or invest in, the Company. Furthermore, except as expressly permitted in the Indenture, the Company's subsidiaries are not permitted to invest in the Company. However, the CGA and the Indenture do permit the Company's subsidiaries to pay dividends to the Company. For additional information regarding these lending arrangements and securities, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and the Notes to the Consolidated Financial Statements in this Report. PRICE RANGE OF COMMON STOCK The Common Stock is traded in the over-the-counter market and is included for quotation on the National Association of Securities Dealers National Market System ("NASDAQ/NMS")under the trading symbol "NBTY". The following table sets forth, for the periods indicated, the high and low closing sale prices for the Common Stock, as reported on NASDAQ/NMS: 20

Fiscal year ended September 30, 2002 ------------------------------------ High Low ---- --- First Quarter ended December 31, 2001 $13.50 $ 7.20 Second Quarter ended March 31, 2002 $17.45 $10.70 Third Quarter ended June 30, 2002 $19.07 $14.96 Fourth Quarter ended September 30, 2002 $17.07 $12.57

Fiscal year ended September 30, 2001 ------------------------------------ High Low ---- --- First Quarter ended December 31, 2000 $ 6.97 $ 3.94 Second Quarter ended March 31, 2001 $ 8.50 $ 4.38 Third Quarter ended June 30, 2001 $13.40 $ 8.00 Fourth Quarter ended September 30, 2001 $17.76 $10.55

On December 9, 2002, the closing sale price of the Common Stock was $16.53. There were approximately 690 record holders of Common Stock as of December 9, 2002. The Company believes that there were approximately 13,600 beneficial holders of Common Stock as of December 9, 2002. For additional information regarding the Company's securities authorized for issuance under the Company's equity compensation plans, see Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." Item 6. SELECTED FINANCIAL DATA The following table sets forth the selected financial data derived from the audited financial statements of the Company. For additional information, see the consolidated financial statements of the Company and the notes thereto. The selected historical financial data of the Company should also be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". 21

(Dollars and shares in thousands, except per share amounts) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Selected Income Statement Data: Net sales $964,083 $806,898 $720,856 $630,894 $572,124 Costs & expenses: Cost of sales 433,611 355,167 312,960 293,521 271,233 Catalog printing, postage & promotion 47,846 49,410 33,709 32,895 32,176 Selling, general & administrative 348,334 315,228 279,379 236,367 190,276 Recovery of raw material costs (21,354) (2,511) Litigation settlement costs 4,952 Merger costs 3,528 ------------------------------------------------------------ Income from operations 155,646 87,093 97,319 63,159 74,911 Interest, net (18,499) (21,958) (18,858) (18,945) (16,518) Miscellaneous, net 1,560 2,748 4,491 1,388 3,921 ------------------------------------------------------------ Income before income taxes 138,707 67,883 82,952 45,602 62,314 Provision for income taxes 42,916 25,958 31,444 18,323 23,474 ------------------------------------------------------------ Net income $ 95,791 $ 41,925 $ 51,508 $ 27,279 $ 38,840 ============================================================ Per Share Data: Net income per common share: Basic $ 1.45 $ 0.64 $ 0.77 $ 0.39 $ 0.59 Diluted $ 1.41 $ 0.62 $ 0.74 $ 0.39 $ 0.56 Weighted average common shares outstanding: Basic 65,952 65,774 67,327 69,640 65,563 Diluted 67,829 67,125 69,318 70,826 69,847 Selected Balance Sheet Data: Working capital $185,710 $131,108 $100,114 $121,103 $ 89,106 Total assets 734,677 708,462 603,613 539,384 500,457 Long-term debt, capital lease obligations and promissory notes payable, less current portion 163,874 237,236 200,478 219,508 173,531 Total stockholders' equity 419,257 302,406 272,443 223,949 230,339

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Readers are cautioned that forward-looking statements contained herein should be read in conjunction with the Company's disclosures under the heading "Forward Looking Statements" on page 1. This discussion should also be read in conjunction with the Notes to the Company's Consolidated Financial Statements contained in this Report. Dollar amounts are in thousands, unless otherwise noted. Background NBTY is a leading vertically integrated manufacturer, marketer and retailer of a broad line of high quality, value-priced nutritional supplements. NBTY has continued to grow through its marketing practices and through a series of strategic acquisitions. Since 1986, the Company has acquired and integrated approximately 30 companies and/or 22 businesses engaged in the direct response, retail and manufacturing of nutritional supplements sector, including Holland & Barrett in fiscal 1997, Nutrition Headquarters Group in fiscal 1998, Nutrition Warehouse Group in fiscal 2000, Global Health Sciences and NatureSmart in fiscal 2001, and Healthcentral.com, Knox(R), and Synergy Plus(R) product lines/operations in fiscal 2002. NBTY markets its products through four distribution channels: (i) Puritan's Pride/direct response, (ii) Vitamin World and Nutrition Warehouse retail stores in the U.S., (iii) Holland & Barrett retail stores in the U.K. and Ireland, and (iv) wholesale distribution to drug store chains, supermarkets, discounters, independent pharmacies, and health food stores. NBTY's net sales from Puritan's Pride/direct response, Vitamin World, Nutrition Warehouse, Holland & Barrett and wholesale operations were approximately 19%, 21%, 30% and 30%, respectively, for the year ended September 30, 2002. The Company recognizes revenues from products shipped when risk of loss and title transfers to its customers, and with respect to its own retail stores, upon the sale of products. Net sales are net of all discounts, allowances, returns and credits. Cost of sales includes the cost of raw materials and all labor and overhead associated with the manufacturing and packaging of the products. Gross margins are affected by, among other things, changes in the relative sales mix among the Company's four distribution channels. Historically, gross margins from the Company's direct response/e-commerce and retail sales have typically been higher than gross margins from wholesale sales. Critical Accounting Policies and Estimates: Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include the valuation of inventories, the allowance for doubtful accounts receivable and the recoverability of long-lived assets. Actual results could differ from those estimates. Significant accounting policies are described in Note 1 to the consolidated financial statements, which are included in Item 8 in this Form 10-K filing. Certain accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. A discussion of critical accounting policies, the judgments and uncertainties affecting their application, and the likelihood that materially different amounts could be reported under different conditions or using different assumptions follows: Revenue Recognition: The Company applies the provisions of Staff Accounting Bulletin 101 "Revenue Recognition". The Company recognizes revenue from products shipped when title and risk of loss has passed to its customers, and with respect to its own retail store operations, upon sale of products. The Company's net sales represent gross 23 sales invoiced to customers, less certain related charges, including discounts, returns, rebates and other allowances. Accounts Receivable: The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored and an allowance for doubtful accounts is maintained which is based upon historical experience and any specific customer collection issues that have been identified. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. At September 30, 2002, and September 30, 2001, one customer accounted for 21% and 16%, respectively, of the Company's accounts receivable. Inventories: Inventories are stated at the lower of cost or market. The cost elements of inventory include materials, labor and overhead. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and production requirements for the next twelve months. Goodwill and Intangible assets: On October 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Intangible Assets" (SFAS 142). SFAS 142 includes requirements to annually test goodwill and indefinite lived intangible assets for impairment rather than amortize them; accordingly, the Company no longer amortizes goodwill and indefinite lived intangibles, thereby eliminating an annual amortization charge of approximately $6,100, which is not deductible for tax purposes. Definite lived intangibles are amortized on a straight-line basis over periods not exceeding 15 years. Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. The Company currently has unamortized goodwill remaining from the acquisition of Holland & Barrett ($113,089), NatureSmart ($15,164), Nutrition Warehouse ($7,510), Nature's Way ($4,234), Feeling Fine ($3,069), Global Health Sciences ($1,640), and other ($293). Impairment of Long-Lived Assets: The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." This statement requires that certain assets be reviewed for impairment and, if impaired, remeasured at fair 24 value whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. During fiscal 2002 and 2001, the Company recognized impairment losses of $700 and $500, respectively, on assets to be held and used. The Company did not recognize an impairment loss during fiscal 2000. The impairment losses related primarily to leasehold improvements and furniture and fixtures for retail operations and were recorded in selling, general and administrative expense. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144 supersedes FASB Statement No. 121, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company does not expect the adoption of SFAS No. 143 and 144, effective October 1, 2002, to have a material impact on its consolidated financial position or results of operations. Foreign Currency: Foreign subsidiaries account for approximately 30% of net revenues, 31% of assets and 13% of total liabilities as of September 30, 2002. In preparing the consolidated financial statements, the financial statements of the foreign subsidiaries are translated from the currency in which they keep their accounting records, generally the local currency, into United States Dollars. This process results in exchange gains and losses, which, under the relevant accounting guidance, are either included within the statement of operations or as a separate component of stockholders' equity under the caption "Accumulated other comprehensive income (loss)." Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of each subsidiary. The functional currency is determined based on management's judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. If any subsidiary's functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in accumulated other comprehensive income (loss). However, if the functional currency is deemed to be the United States Dollar, then any gain or loss associated with the translation of these financial statements would be included within the statement of operations. If the Company disposes of 25 subsidiaries, then any cumulative translation gains or losses would be recorded into the statement of operations. If the Company determines that there has been a change in the functional currency of a subsidiary to the United States Dollar, any translation gains or losses arising after the date of change would be included within the statement of operations. Based on an assessment of the factors discussed above, the Company considers the relevant subsidiary's local currency to be the functional currency for each of its foreign subsidiaries. Accordingly, cumulative translation gains (losses) of approximately $4,625 and ($12,978) were included as part of accumulated other comprehensive income (loss) within the balance sheet at September 30, 2002 and September 30, 2001, respectively. During the fiscal years of 2002 and 2001, translation gains (losses) of $17,603 and ($126), respectively, were included under accumulated other comprehensive income (loss). Had the Company determined that the functional currency of its subsidiaries was the United States dollar, these gains (losses) would have increased (reduced) net income for each of the periods presented. The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies against the United States dollar. These currencies include the Euro and the United Kingdom Pound Sterling. Any future translation gains or losses could be significantly higher than those noted in each of these years. In addition, if a change in the functional currency of a foreign subsidiary has occurred at any point in time, then the Company would be required to include any translation gains or losses from the date of change in the statement of operations. General Operating results in all periods presented reflect the impact of acquisitions. The timing of those acquisitions and the changing mix of businesses as acquired companies are integrated into the Company may affect the comparability of results from one period to another. 26 Results of Operations The following table sets forth income statement data of the Company as a percentage of net sales for the periods indicated:

Fiscal years Ended September 30, ---------------------------- 2002 2001 2000 ---- ---- ---- Net sales 100.0% 100.0% 100.0% --------------------------- Costs and expenses: Cost of sales 45.0% 44.0% 43.3% Catalog printing, postage and promotion 5.0% 6.1% 4.7% Selling, general and administrative 36.1% 39.1% 38.8% Recovery of raw material costs -2.2% -0.3% --------------------------- 83.9% 89.2% 86.5% --------------------------- Income from operations 16.1% 10.8% 13.5% --------------------------- Other income (expense): Interest -1.9% -2.7% -2.6% Miscellaneous, net 0.2% 0.3% 0.6% --------------------------- -1.7% -2.4% -2.0% --------------------------- Income before income taxes 14.4% 8.4% 11.5% Income taxes 4.5% 3.2% 4.4% --------------------------- Net income 9.9% 5.2% 7.1% ===========================

Fiscal Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 Net Sales. Net sales for fiscal 2002 were $964,083, an increase of $157,185 or 19.5% compared with net sales of $806,898 in fiscal 2001. Of the $157,185 increase, $94,455 was attributable to wholesale, $23,615 was attributable to US retail sales, $28,005 was attributable to U.K./Ireland retail sales, and $11,110 was attributable to Puritan's Pride direct response/e-commerce. The increase in wholesale segment sales was primarily due to an increase in sales of its core products to the mass market, drug chains and supermarkets and newly acquired businesses ($39,489, of which $35,522 was attributable to Global Health Sciences). Products such as Apple Cider Vinegar, Flex-a-min(R), and the Knox NutraJoint(R) products continue to help the Company strengthen its leading market position. By obtaining new customer accounts, the Company has expanded its distribution channel for its products. Sales growth in the US retail channel reflected an increase in same store sales for stores open more than one year (8.5% or 27 $13,485) and the greater number of stores compared to last year (24 new stores contributed $4,001). U.K./Ireland retail sales increases were attributable to an increase in same store sales for stores open more than one year (7% or $18,035) and the opening of 7 new U.K. stores (contributed $1,056). Puritan's Pride direct response/e-commerce sales increased as a result of increased mailing distribution from customer lists acquired and as a result of an increase in the number of products available via catalog and website. At September 30, 2002, 544 retail stores in the U.S. and 468 retail stores in the U.K./Ireland were operated under the NBTY/Holland & Barrett banner, compared to 525 stores in the U.S. and 461 in the U.K./Ireland as of September 30, 2001. Cost of Sales. Cost of sales for fiscal 2002 was $433,611, an increase of $78,444 compared with the cost of sales of $355,167 for fiscal 2001. As a percentage of sales, cost of sales increased and, correspondingly, gross profit decreased to 55% for 2002 from 56% for 2001. Such decrease was primarily due to the Puritan's Pride direct response segment's gross profit, which decreased from 66.3% to 61.5% as a percentage of sales. Reduced gross margins associated with price reductions on certain products and the type of catalog promotions the Company ran in fiscal 2002 versus fiscal 2001 were major factors in such decrease. This gross profit decrease was mitigated by gross profit increases in the Company's other segments. The wholesale segment's gross profit increased from 38.7% to 40.8% as a percentage of sales, primarily due to higher gross margins on new product introductions. The U.S. retail gross profit increased as a percentage of sales from 58% to 58.5%. The U.K./Ireland retail gross profit increased from 60.8% to 62.9% as a percentage of sales. The Company's strategy is to improve margins by continuing to increase in- house manufacturing while decreasing the use of outside suppliers in both the U.S. and the U.K. In fiscal 2001, cost of sales included a year end adjustment to inventory of approximately $3,900, which was principally the result of the Company utilizing the gross profit method for interim reporting, and the year-end valuation of the Company's annual physical inventory. Included in fiscal 2002 and fiscal 2001 costs of sales was under-absorbed factory overhead of $11,375 and $5,752, respectively. Catalog, Printing, Postage and Promotion. Catalog, printing, postage and promotion expenses were $47,846 and $49,410 for fiscal 2002 and 2001, respectively. Such costs as a percentage of net sales were 5% for 2002 and 6.1% for 2001. The $1,564 decrease was primarily attributable to a decrease in direct response advertising promotion and media ($1,080) and catalog printing ($1,183). Such decrease was offset by an increase in wholesale advertising for new products introduced and existing core products ($603). The Company also had a small increase in retail advertising and promotion ($51). Selling, General and Administrative. Selling, general and administrative expenses for fiscal 2002 were $348,334, an increase of $33,106, compared with $315,228 for fiscal 2001. As a percentage of sales, selling, general and administrative expenses were 36.1% and 39.1% in 2002 and 2001, respectively. Of the $33,106 increase, $4,489 was attributable to increase in rent expense, $14,880 to increase in payroll costs mainly associated with business acquisitions and the Vitamin World expansion program, $5,871 to increased insurance costs mainly associated with an increase in general insurance rates, $4,186 to increased freight and $3,418 to increased broker commissions, which was 28 directly associated with the increase in wholesale sales, and $1,259 was attributable to increased depreciation expense as a result of an increase in capital expenditures. Such expenses were offset by a $5,624 decrease in selling, general, and administrative goodwill amortization expense resulting from the Company's adoption of SFAS 142, effective October 1, 2001. Recovery of Raw Materials Costs. In fiscal 2002, the Company received $21,354 in partial settlement of ongoing price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest Expense. Interest expense was $18,499 in fiscal 2002, a decrease of $3,459, compared with interest expense of $21,958 in fiscal 2001. Interest expense decreased due to the Company repaying bank debt during the year. The major components are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, and the CGA used for acquisitions and capital expenditures. Miscellaneous, Net. Miscellaneous, net was $1,560 and $2,748 for fiscal 2002 and 2001, respectively. The $1,188 decrease was primarily attributable to exchange rate fluctuations ($1,074). Income Taxes. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are lower than the federal statutory rate, state tax rates in the jurisdictions where the Company conducts business, and the Company's ability to utilize various tax credits and foreign tax credits. The effective income tax rate for fiscal 2002 was 30.9%, compared to 38.2% for fiscal 2001. The change in the effective rate was due to tax saving strategies implemented in fiscal 2002, primarily the one-time recognition of a foreign tax credit. In addition, the effective rate decreased due to ceasing the amortization of goodwill in fiscal 2002, most of which was not deductible for income tax purposes, and lower overall effective tax rates in foreign jurisdictions (approximately 30%). Net Income. Net income for fiscal 2002 was $95,791, compared with $41,925 in fiscal 2001, an increase of $53,866, of which $21,354 was attributable to the partial settlement of ongoing price fixing litigation against certain raw material vitamin suppliers. Fiscal Year Ended September 30, 2001 Compared to Year Ended September 30, 2000 Net Sales. Net sales for fiscal 2001 were $806,898, an increase of $86,042 or 11.9% compared with net sales of $720,856 in fiscal 2000. Of the $86,042 increase, $25,932 was attributable to U.S. retail sales, $14,274 was attributable to U.K./Ireland retail sales, and $56,326 was attributable to wholesale, offset by a decrease of $10,490 in Puritan's Pride direct response/e-commerce. During 2001, the Company opened 50 stores, which contributed $8,393 in increased sales in the U.S., and 26 stores in the U.K., which contributed $2,294 in sales. The acquisition of Global Health Sciences and NatureSmart accounted for $29,415 of the increase in sales. 29 Cost of Sales. Cost of sales for fiscal 2001 was $355,167, an increase of $42,207 compared with the cost of sales of $312,960 for fiscal 2000. As a percentage of sales, cost of sales increased and, correspondingly, gross profit decreased to 56% for 2001 from 56.7% for 2000. Such decrease was primarily due to Global Health Sciences' cost of sales of $18,017 on sales of $16,765. The increase was mitigated by a decrease in the Puritan's Pride direct response/e-commerce segment's cost of sales, which decreased from 36.4% to 33.7% as a percentage of sales, primarily due to higher gross margins on new product introductions and improvements in manufacturing efficiencies. The increase was also mitigated by the U.S. retail segment's cost of sales decreasing as a percentage of sales from 43% to 41.6%, primarily due to sales price increases on all product lines during the current year. The Company's strategy is to continue to increase in-house manufacturing while decreasing the use of outside suppliers in both the U.S. and the U.K. In addition, cost of sales includes a year end adjustment to inventory of approximately $3,900 for 2001 and $5,400 for 2000, which is principally the result of the Company utilizing the gross profit method for interim reporting, and the year-end valuation of the Company's annual physical inventory. Catalog, Printing, Postage and Promotion. Catalog, printing, postage and promotion expenses were $49,410 and $33,709 for fiscal 2001 and 2000, respectively. Such costs as a percentage of net sales were 6.1% for 2001 and 4.7% for 2000. The increased percentage was due to an increase in printing and mailing costs per catalog, resulting from an increase in postage costs, and the change to a larger catalog order size and for radio and television advertisements relating to the Flex-a-min(R) advertising campaign. Selling, General and Administrative. Selling, general and administrative expenses for fiscal 2001 were $315,228, an increase of $35,849, compared with $279,379 for fiscal 2000. As a percentage of sales, selling, general and administrative expenses were 39.1% and 38.8% in 2001 and 2000, respectively. Of the $35,849 increase, $6,846 was attributable to rent expense, $18,814 to payroll costs mainly associated with the Vitamin World expansion program and $4,386 was attributable to increased depreciation expense as a result of an increase in capital expenditures. Recovery of raw materials costs. In fiscal 2000, the Company received $2,511 in partial settlement of ongoing price fixing litigation brought by the Company against certain raw material vitamin suppliers. Interest Expense. Interest expense was $21,958 in fiscal 2001, an increase of $3,100, compared with net interest expense of $18,858 million in fiscal 2000. Interest expense increased due to the additional borrowings to fund the two acquisitions completed in the third quarter of 2001. The major components are interest on Senior Subordinated Notes associated with the Holland & Barrett acquisition, and the CGA Agreement used for acquisitions and capital expenditures. Miscellaneous, Net. Miscellaneous, net was $2,748 and $4,491 for fiscal 2001 and 2000, respectively. The $1,743 decrease was primarily attributable to exchange rate 30 fluctuations ($897), and a gain on disposal of certain businesses and related fixed assets ($577) in 2000. Income Taxes. The Company's effective income tax rate was approximately 38% for fiscal years 2001 and 2000. Net Income. Net income for fiscal 2001 was $41,925, compared with $51,508 in fiscal 2000, a decrease of $9,583. Seasonality The Company's business is not seasonal in nature. Liquidity and Capital Resources The Company's primary sources of liquidity and capital resources are cash generated from operations and borrowings under its Credit & Guarantee Agreement ("CGA"). Cash and cash equivalents totaled $26,229 and $34,434 at September 30, 2002 and 2001, respectively. The Company generated cash from operating activities of $103,531, $62,785, and $123,418 in fiscal 2002, 2001 and 2000, respectively. The overall increase in cash from operating activities during fiscal 2002 was mainly attributable to an increase in earnings. The increase in earnings was a result of increased sales, continued effort to control selling, general and administrative expenses, the recovery of raw material costs, lower interest expense due to the pay down of debt, and a decrease in income tax expense as a result of tax planning strategies implemented during the current year. Such increase was offset slightly by the Company experiencing an increase in its accounts receivable and inventory levels over the prior year. The increase in accounts receivable was primarily due to increased sales, offset by an increase in collections. Inventory increased due to the Company trying to respond to customer orders quickly, thereby eliminating and/or decreasing the number of products on backorder. For additional information regarding the ability of the Company's subsidiaries to transfer funds or assets to the Company, see Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters" above. The overall decline in cash from operating activities during fiscal 2001 was attributable to a significant increase in inventories, accounts receivable and deferred tax assets, which were offset by an increase in non-cash charges for depreciation and amortization, and an increase in accounts payable. Cash used in investing activities was $36,376, $96,134, and $96,649 in fiscal 2002, 2001 and 2000, respectively. Fiscal 2002 cash flows used in investing activities consisted primarily of the purchase of property, plant and equipment ($21,489), cash paid for asset acquisitions ($7,702), offset by proceeds from the sale of property, plant and equipment and intangibles ($1,057). In addition, the Company made a strategic investment in high yield, less than investment grade corporate bonds ($8,242). There is only a thinly traded market for such securities and recent market ratings of such debt are Caa2 from Moody's Investors Service, Inc. and CCC- from Standard & Poor's. Both credit agencies' ratings remained unchanged from the prior period. Market quotes may 31 not represent firm bids of such dealers or prices for actual sales. The estimated fair value for these debt securities at September 30, 2002 was $8,194. Cash used in investing activities in fiscal 2001 primarily related to the cash paid for the business acquisitions of Global Health Sciences and NatureSmart ($63,010), and the purchase of property, plant and equipment ($37,197), offset by proceeds from the sale of property, plant and equipment ($4,232). Fiscal 2000 net cash used in investing activities consisted primarily of cash paid for business acquisitions and a mailing list and the purchase of property and equipment. Net cash paid for business acquisitions/mailing list and property, plant and equipment in fiscal 2000 were ($51,786) and ($45,119), respectively. Cash (used in) provided by financing activities was ($78,854), $35,627 and ($11,971) in fiscal 2002, 2001 and 2000, respectively. Fiscal 2002 net cash flows used in financing activities included principal payments under long-term debt agreements ($85,353), offset by proceeds from the exercise of stock options ($1,899), and cash received that was previously held in escrow for the acquisition of Global Health Sciences ($4,600). Net cash provided by financing activities during fiscal 2001 included borrowings under the CGA of $71,502, proceeds from the exercise of stock options of $2,604, which were offset by principal payments under long-term debt agreements ($12,780), purchase of treasury stock ($15,699) and cash held in escrow ($10,000). Net cash used in financing activities during fiscal 2000 included principal payments under long-term debt agreements ($17,667) and the purchase of treasury stock ($1,512) offset by borrowings under the CGA ($2,800) and proceeds from the exercise of stock options ($4,408). The Company's financial position continues to be solid. Working capital increased $54,602 to $185,710 in fiscal 2002. This increase was primarily attributable to the Company repaying its bank debt under the CGA and increasing its current assets, specifically accounts receivable and inventories. Continued growth of the Company's principal promoted products during the period, as noted above, contributed to such increases in accounts receivable and inventories. Presently, the CGA is comprised of one term loan and a revolving credit facility. At September 30, 2002, there were borrowings of $31,188 under the term loan. This term loan has an annual borrowing rate of 4.422% and is payable in quarterly installments of $5,563. The current portion of this term loan at September 30, 2002 was $22,250. The Company repaid the other term loan during the third quarter 2002. The $50,000 revolving credit facility expires on September 30, 2003 and was unused at September 30, 2002. A stand-by letter of credit of $600 was outstanding under such facility at September 30, 2002. The Company is required to pay a commitment fee, which varies between .25% and .50% per annum, depending on the Company's ratio of Debt to EBITDA (each as defined in the CGA), on any unused portion of the revolving credit facility. The CGA provides that loans be made under a selection of rate formulas, including prime or Euro currency rates. Virtually all of the Company's assets are collateralized under the CGA. In addition, the Company is subject to the maintenance of various financial ratios and covenants. In connection with the August 1997 acquisition of Holland & Barrett, the Company issued $150,000 of 8-5/8% Senior Subordinated Notes (the "Notes") due in 32 2007. The Notes are unsecured and subordinated in right of payment to all existing and future senior indebtedness of the Company. Interest expense relating to such debt during fiscal 2002 amounted to $13,819. A summary of contractual cash obligations as of September 30, 2002 is as follows:

Payments Due By Period ------------------------------------------------------------- Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years ----- --------- ----- ----- ------- Long-term debt $186,676 $ 22,806 $ 10,193 $150,849 $ 2,828 Operating leases 351,422 52,173 89,089 73,306 136,854 Purchase commitments 13,304 13,304 Capital commitments 16,544 12,594 3,950 Employment & consulting agreements 6,650 1,970 2,340 2,340 Standby letter of credit 600 600 Capital leases 242 238 4 ------------------------------------------------------------- Total contractual cash obligations $575,438 $103,685 $105,576 $226,495 $139,682 =============================================================

The Company conducts retail operations under operating leases, which expire at various dates through 2029. Some of the leases contain renewal options and provide for contingent rent based upon sales plus certain tax and maintenance costs. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 2002 are noted in the above table. The Company was committed to make future purchases under various purchase arrangements with fixed price provisions aggregating approximately $13,304 at September 30, 2002. The Company had approximately $744 in open capital commitments at September 30, 2002, primarily related to manufacturing equipment as well as to computer hardware and software. Also, the Company has a $15,800 commitment for the construction of an automated warehouse over the next 18 months. The Company has employment agreements with two of its executive officers. The agreements, initially entered into in October 2002, have a term of 5 years and are automatically renewed each year thereafter unless either party notifies the other to the contrary. These agreements provide for minimum salary levels and contain provisions regarding severance and changes in control of the Company. The annual commitment for salaries to these two officers as of September 30, 2002 was approximately $1,170. In addition, four members of Holland & Barrett's senior executive staff have service contracts terminable by the Company upon twelve months notice. The annual aggregate commitment for such H&B executive staff as of September 30, 2002 was approximately $700. 33 The Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. See "Related Party Transactions" below for further discussion of such agreement. The Company believes that existing cash balances, internally- generated funds from operations, and amounts available under the CGA will provide sufficient liquidity to satisfy the Company's required interest payments, working capital needs for the next 12 months and to finance anticipated capital expenditures incurred in the normal course of business and potential acquisitions. NBTY has grown through acquisitions, and expects to continue seeking to acquire entities in similar or complementary businesses. Such acquisitions are likely to require the incurrence and/or assumption of indebtedness and/or obligations, the issuance of equity securities or some combination thereof. In addition, NBTY may from time to time determine to sell or otherwise dispose of certain of its existing businesses. NBTY cannot predict if any such transactions will be consummated, nor the terms or forms of consideration which might be required in any such transactions. Related Party Transactions The Company has had, and in the future may continue to have, business transactions with individuals and firms affiliated with certain of the Company's directors. Each such transaction has been in the ordinary course of the Company's business. During the fiscal year ended September 30, 2002, the following transactions occurred: A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin, received commissions from the Company totaling approximately $585 on account of sales in certain foreign countries and had trade receivable balances of approximately $3,632 as of September 30, 2002. Gail Radvin is the sister of Arthur Rudolph (a director of the Company) and the aunt of Scott Rudolph (Chairman and Chief Executive Officer). B. The Company paid $400 to Rudolph Management Associates, Inc., pursuant to the Consulting Agreement between the Company and Rudolph Management Associates, Inc. Mr. Arthur Rudolph, a director of the Company, is the President of Rudolph Management Associates, Inc. See "Employment Agreements with Executive Officers and Directors" below. C. Glenn-Scott Landscaping & Design, a company owned by the brother of Glenn Cohen, a director of the Company, performed landscaping and maintenance on the Company's properties and received approximately $93 in compensation during fiscal 2002. D. Certain members of the immediate families (as defined in Rule 404 of Regulation S-K) of Arthur Rudolph, Scott Rudolph and Michael Slade 34 (each a director of the Company) are employed by the Company. During fiscal 2002, these immediate family members received aggregate compensation from the Company totaling approximately $937 for services rendered by them as employees of the Company. Inflation Inflation has not had a significant impact on the Company in the past three years nor is it expected to have a significant impact in the foreseeable future. Financial Covenants and Credit Rating The Company's credit arrangements impose certain restrictions on the Company regarding capital expenditures and limit the Company's ability to: incur additional indebtedness, dispose of assets, make repayments of indebtedness or amendments of debt instruments, pay distributions, create liens on assets and enter into sale and leaseback transactions, investments, loans or advances and acquisitions. Such restrictions could limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business or acquisition opportunities. Moody's Investors Service, Inc. currently rates the Notes as a B1, and the CGA has an implied rating of Ba2. Standard & Poor's currently rates the Notes as a B+, the CGA as a BB+, and gives the Company an overall corporate credit rating as BB. Both credit agencies' ratings remained unchanged from the prior period. New Accounting Developments In February 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)" effective no later than periods beginning after December 15, 2001. EITF Issue No. 01-09 addresses the following items: 1) The income statement characterization of consideration given by a vendor to a customer, specifically whether that consideration should be presented in the vendor's income statement as a reduction of revenue or as a cost or expense. 2) Whether a vendor should recognize consideration given to a customer as an asset in certain circumstances rather than as an immediate charge in the income statement. 3) When to recognize the "cost" of a sales incentive and how to measure it. The Company has determined that the impact of adoption and subsequent application of EITF Issue No. 01-09 did not have a material effect on its consolidated financial position or results of operations. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under SFAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. 35 Adoption of this statement is required for fiscal years beginning after May 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations. In July 2002, the FASB issued Statement 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to currency fluctuations, primarily with respect to the British Pound, and interest rate risks that arise from normal business operations. The Company regularly assesses these risks. As of September 30, 2002, the Company had not entered into any hedging transactions. To manage the potential loss arising from changing interest rates and its impact on long-term debt, the Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements, notes thereto, supplementary schedule, and the related independent auditors' report contained on page F-1 to NBTY's consolidated financial statements, are herein incorporated: Consolidated Balance Sheets - As of September 30, 2002 and 2001 Consolidated Statements of Income - Fiscal years ended September 30, 2002, 2001 and 2000 Consolidated Statements of Shareholder's Equity and Comprehensive Income - Fiscal years ended September 30, 2002, 2001 and 2000. Consolidated Statements of Cash Flows - Fiscal years ended September 30, 2002, 2001 and 2000. Notes to Consolidated Financial Statements. 36 All other schedules have been omitted as not required or not applicable or because the information required to be presented is included in the consolidated financial statements and related notes. For more information, see Part IV, Item 15, Exhibits, below. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 37 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of NBTY, all of whom are U.S. citizens, and their ages as of December 9, 2002, are as follows:

Year Commenced first term of elected office as Name Age Position Director Officer ---- --- -------- -------- --------- Scott Rudolph 45 Chairman of the Board and Chief Executive Officer 1986 1986 Harvey Kamil 58 President and Chief Financial Officer - 1982 Michael C. Slade 53 Senior Vice President Director and Corporate Secretary 1998 1999 James P. Flaherty 45 Senior Vice President-Marketing and Advertising - 1988 William J. Shanahan 44 Vice President-Information Systems - 1988 Arthur Rudolph 74 Director 1979 - Aram G. Garabedian 67 Director 1979 - Bernard G. Owen 74 Director 1979 - Alfred Sacks 75 Director 1979 - Murray Daly 75 Director 1979 - Glenn Cohen 43 Director 1988 - Nathan Rosenblatt 46 Director 1994 - Michael L. Ashner 50 Director 1998 - Peter J.White 48 Director 2001 -

Certain information regarding each person listed above, including such person's principal occupation during the past five years and current directorships, is set forth below. Unless indicated otherwise, all directors and executive officers have had the indicated principal occupations for the past five years. Scott Rudolph is the Chairman of the Board of Directors, Chief Executive Officer and a more than 5% stockholder of the Company. He served as the Chairman of the Board of Directors of Dowling College, Long Island, New York, from 1997 through 38 2000, and is currently the Vice Chairman of Dowling College Board. He joined the Company in 1986. He is the son of Arthur Rudolph. Harvey Kamil is the President and Chief Financial Officer of the Company. He is on the Board of Directors of the Council for Responsible Nutrition and is on the Board of Directors of the National Nutritional Food Association. He joined the Company in 1982. Michael C. Slade is the Senior Vice President, Director and Corporate Secretary of the Company. He previously was an owner and Chief Executive Officer of Nutrition Headquarters, Inc. and Nutro Laboratories, Inc. before their acquisition by the Company in 1998. Mr. Slade is a member of the Board of Trustees of North Shore-LIJ Health System and Franklin Hospital. He is also a member of the Board of Directors of North Shore - LIJ Research Institute. James P. Flaherty is the Senior Vice President-Marketing and Advertising. He joined the Company in 1979. William J. Shanahan is the Vice President-Information Systems. He joined the Company in 1980. Arthur Rudolph founded Arco Pharmaceuticals, Inc., the Company's predecessor, in 1960 and founded the Company in 1979. He served as the Company's Chief Executive Officer and Chairman of the Board of Directors since that date until his resignation in September 1993. He remains a member of the Board of Directors and is a consultant to the Company. He is the father of Scott Rudolph. Aram G. Garabedian was elected a State Senator of the State of Rhode Island in 2000 and had been a representative in that State's legislature from 1972 through 1978, and 1998 through 2000. Since 1988, he has been a real estate property manager and developer in Rhode Island and is the President of Bliss Properties, Inc. He was associated with the Company and its predecessor, Arco Pharmaceuticals, Inc., for more than 20 years in a sales capacity and as an officer. Bernard G. Owen is retired, having been previously associated with Cafiero, Cuchel and Owen Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency. Alfred Sacks has been President of Al Sacks, Inc., an insurance consulting firm, for the past 40 years. Murray Daly, formerly a Vice President of J. P. Egan Office Equipment Co., is a consultant to the office equipment industry. Glenn Cohen is the President of Save-On Sprinkler Co. Nathan Rosenblatt is the President and Chief Executive Officer of Ashland Maintenance Corp., a commercial maintenance organization located in Long Island City, New York. 39 Michael L. Ashner is President and Chief Executive Officer of Winthrop Financial Associates, a real estate investment banking firm affiliated with Apollo Real Estate, since 1995. Mr. Ashner serves on the Board of Directors of Shelbourne Properties I, Shelbourne Properties II, Shelbourne Properties III and Greate Bay Hotel and Casino, Inc. Peter J. White is President of I.J. White Corporation, a company based in Farmingdale, New York, engaged in the worldwide engineering and manufacturing of conveying systems for the food industry. The directors of the Company are divided into three classes, designated as Class I, Class II and Class III. Each class consists, as nearly as possible, of one third of the total number of directors constituting the entire Board of Directors. After their initial term, the directors of each class serve for a term of three years and until their successors are elected and qualified and subject to prior death, resignation, retirement, disqualification or removal. Currently, the Class I directors are Messrs. Garabedian, Owen and Sacks; the Class II directors are Messrs. Scott Rudolph, Daly, Rosenblatt and White; and the Class III directors are Messrs. Arthur Rudolph, Cohen, Ashner and Slade. The current terms of the Class I, Class II and Class III directors expire at the annual meetings of the Company's stockholders in 2003, 2005, and 2004, respectively. At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. The term of office of each executive officer is until the organizational meeting of the Board of Directors of the Company following the next annual meeting of the Company's stockholders and until such officer's successor is elected and qualified or until such officer's prior death, resignation, retirement, disqualification or removal. Compensation of Directors Directors of the Company who are also executive officers of the Company or its subsidiaries do not receive any additional compensation for service as a member of the Board of Directors of the Company or any of its committees. For information relating to compensation of the Company's management directors, see "Employment Agreements with Executive Officers and Directors" below. All other directors of the Company are paid an annual fee of $30,000 for serving on the Board of Directors. See also "Employment Agreements with Executive Officers and Directors" below for a discussion of the Company's consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph. Section 16(a) Beneficial Ownership Reporting Compliance 40 Section 16(a) of the Exchange Act, requires NBTY's directors, executive officers, and persons who own more than ten percent of NBTY's Common Stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC and NASDAQ. Directors, executive officers and greater than ten percent stockholders are required by the SEC regulations to furnish NBTY with copies of all Forms 3, 4 and 5 they file with the SEC. Based solely on NBTY's review of the copies of the SEC filings it has received, or written representations from certain reporting person that no Form 5's were required for these persons, NBTY believes that all its directors, executive officers and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to fiscal 2002. Item 11. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid by the Company in respect of fiscal years ended September 30, 2000, 2001 and 2002 to the Company's Chairman and Chief Executive Officer and to each of the other four (4) most highly paid executive officers of the Company (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE

Long Term Compensation Annual Compensation Awards ---------------------------------- ------------ Other Securities Annual Underlying Name and Fiscal Compen- Options/ All Other Principal Position Year Salary($) Bonus($) sation($) SARs(#)(1) Compensation($)(2) ------------------ ------ --------- -------- --------- ------------ ------------------ Scott Rudolph 2002 710,197 600,000 (3) - 6,428 Chairman and 2001 634,024 500,000 (3) 500,000 6,748 Chief Executive Officer 2000 621,792 425,000 (3) 1,000,000 7,311 Harvey Kamil 2002 383,656 250,000 (3) - 6,440 President and 2001 317,012 225,000 (3) 125,000 6,741 Chief Financial Officer 2000 310,896 200,000 (3) 250,000 7,311 Michael C. Slade 2002 322,692 70,000 (3) - 6,428 Senior Vice President and 2001 306,346 50,000 (3) 70,000 6,741 Corporate Secretary 2000 291,341 50,000 (3) 30,000 7,311 James Flaherty - 2002 212,692 65,000 (3) - 3,740 Senior Vice President 2001 194,519 75,000 (3) - 4,841 Marketing and Advertising 2000 185,000 75,000 (3) 30,000 7,311 William Shanahan 2002 181,711 75,000 (3) - 6,428 Vice President - 2001 171,981 75,000 (3) - 6,748 Information Systems 2000 165,000 70,000 (3) 20,000 7,311 -------------------- 41 All stock option grants were made pursuant to the NBTY, Inc. Year 2000 Incentive Stock Option Plan (the "2000 Plan"). Represents amounts contributed by the Company to 401(k) plan and the NBTY, Inc. Employees' Stock Ownership Plan on behalf of the Named Executive Officer. Perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported under the headings of "Salary" and "Bonus".

The Company did not grant any stock appreciation rights or stock options during fiscal 2002. Option Value at the End of Fiscal 2002 The following table sets forth certain information concerning the number and the value at the end of fiscal 2002 of unexercised in-the-money options to purchase Common Stock granted to the Named Executive Officers as of the end of fiscal 2002. No stock appreciation rights have been granted to any of the Named Executive Officers. 42 Aggregated Option Exercises in Last Fiscal Year And Fiscal Year-End Option Values

Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at Fiscal 2002 End(#) Fiscal 2002 End($) Shares ------------------ ------------------ Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized($) Unexercisable Unexercisable(1) ---- ----------- ----------- ------------------ ------------------ Scott Rudolph 0 0 2,810,000/0 20,134,150/0 Harvey Kamil 0 0 525,000/0 3,818,413/0 Michael C. Slade 0 0 100,000/0 738,941/0 James Flaherty 30,000 257,250 0/0 0/0 William Shanahan 0 0 70,000/0 525,490/0 -------------------- Based on the closing price of $12.98 of NBTY's Common Stock on September 30, 2002, the last trading day of fiscal 2002, less the exercise price payable for such Common Stock.

Employment Agreements with Executive Officers and Directors Scott Rudolph Employment Agreement. The Company has entered into an employment agreement with Mr. Scott Rudolph (the "Rudolph Agreement"), superseding Mr. Scott Rudolph's prior employment agreement with the Company. The Rudolph Agreement was effective October 1, 2002. Pursuant to the Rudolph Agreement, Mr. Scott Rudolph currently serves as Chairman of the Board and Chief Executive Officer of the Company. The initial term of the Rudolph Agreement is five years, subject to automatic one-year extensions, unless either the Company or Mr. Rudolph provides specified notice to the contrary. Mr. Rudolph is required to devote to the Company substantially all of his working time, attention and efforts. Under the Rudolph Agreement, Mr. Rudolph currently receives a base salary of $750,000 and certain fringe benefits accorded to the other senior executives of NBTY. Mr. Rudolph is also eligible to earn an annual bonus targeted at not less than 50% of his base salary, as determined by the Compensation Committee of the Board, taking into account the achievement by the Company of certain performance goals. Mr. Rudolph has the right to terminate the Rudolph Agreement in the event of a material breach by the Company or for other "good reason" (as defined in the Rudolph Agreement). In such event, or if the Company terminates Mr. Rudolph's employment without cause (as defined in the Rudolph Agreement), (i) Mr. Rudolph will be entitled to receive a lump sum amount equal to the greater of: (1) the base salary, automobile allowance and annual bonus (in the amount of 50% of his then base salary) that would be payable for the remaining term of the Rudolph Agreement had such termination not taken place, and (2) three times the sum of (x) his then base salary plus (y) the annual bonus Mr. Rudolph received in the year preceding such termination, (ii) all outstanding equity incentive awards (including stock options) will immediately vest and remain exercisable 43 for a period of one year following the date of such termination (or, if earlier, until the end of the option term), and (iii) Mr. Rudolph would be entitled to receive a payment sufficient to offset the effects of any excise tax ("Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, if a Change of Control (as defined in the Rudolph Agreement) of the Company occurs after such termination of employment. Upon termination of Mr. Rudolph's employment with the Company, following a "Change of Control" of the Company, Mr. Rudolph would (i) be entitled to receive a lump sum amount equal to 2.99 times the average compensation received by Mr. Rudolph during the five years immediately preceding such termination, (ii) become vested in all outstanding equity incentive awards (including stock options), (iii) have the right to receive a cash payment equal to the "spread" on all outstanding stock options, and (iv) be entitled to a payment sufficient to offset the effects of any Excise Tax. During the term of the Rudolph Agreement (and, in the event Mr. Rudolph terminates his employment other than for good reason or the Company terminates Mr. Rudolph's employment for cause, for a period of one year beyond the expiration of the employment term), Mr. Rudolph will be subject to certain non-competition requirements. Harvey Kamil Employment Agreement. The Company has entered into an employment agreement with Mr. Harvey Kamil (the "Kamil Agreement"), superseding Mr. Kamil's prior employment agreement with the Company. The Kamil Agreement was effective October 1, 2002. Pursuant to the Kamil Agreement, Mr. Kamil currently serves as President and Chief Financial Officer of the Company. The initial term of the Kamil Agreement is five years, subject to automatic one-year extensions, unless either the Company or Mr. Kamil provides specified notice to the contrary. Mr. Kamil is required to devote to the Company substantially all of his working time, attention and efforts. Under the Kamil Agreement, Mr. Kamil currently receives a base salary of $420,000 and certain fringe benefits accorded to the other senior executives of NBTY. Mr. Kamil is also eligible to earn an annual bonus targeted at not less than 50% of his base salary, as determined by the Compensation Committee of the Board, taking into account the achievement by the Company of certain performance goals. Mr. Kamil has the right to terminate the Kamil Agreement in the event of a material breach by the Company or for other "good reason" (as defined in the Kamil Agreement). In such event, or if the Company terminates Mr. Kamil's employment without cause (as defined in the Kamil Agreement), (i) Mr. Kamil will be entitled to receive a lump sum amount equal to the greater of: (1) the base salary, automobile allowance and annual bonus (in the amount of 50% of his then base salary) that would be payable for the remaining term of the Kamil Agreement had such termination not taken place, and (2) three times the sum of (x) his then base salary plus (y) the annual bonus Mr. Kamil received in the year preceding such termination, (ii) all outstanding equity incentive awards (including stock options) will immediately vest and remain exercisable for a period of one year following the date of such termination (or, if earlier, until the end of the option term), and (iii) Mr. Kamil would be entitled to receive a payment sufficient to offset the effects of any Excise Tax, if a Change of Control (as defined in the Kamil Agreement) of the Company occurs after such termination of employment. 44 Upon termination of Mr. Kamil's employment with the Company, following a "Change of Control" of the Company, Mr. Kamil would (i) be entitled to receive a lump sum amount equal to 2.99 times the average compensation received by Mr. Kamil during the five years immediately preceding such termination, (ii) become vested in all outstanding equity incentive awards (including stock options), (iii) have the right to receive a cash payment equal to the "spread" on all outstanding stock options, and (iv) be entitled to a payment sufficient to offset the effects of any Excise Tax. During the term of the Kamil Agreement (and, in the event Mr. Kamil terminates his employment other than for good reason or the Company terminates Mr. Kamil's employment for cause, for a period of one year beyond the expiration of the employment term), Mr. Kamil will be subject to certain non-competition requirements. Arthur Rudolph Consulting Agreement. Effective January 1, 2002, the Company entered into a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director and founder of the Company. The consulting fee (which is paid monthly) is fixed by the Board of Directors of the Company, provided that in no event will the consulting fee be at a rate lower than $400,000 per year. In addition, Mr. Arthur Rudolph receives certain fringe benefits accorded to other executives of NBTY. The Company currently intends to renew this consulting agreement for a period of one year on substantially similar terms. Four members of Holland & Barrett's senior executive staff have service contracts, terminable by the Company upon twelve months' notice. The aggregate commitment for these salaries as of September 30, 2002, was approximately $700,000 per year. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth the beneficial ownership as of December 9, 2002 by each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock (constituting the only class of voting stock of the Company), each director of the Company, each Named Executive Officer, and all directors and executive officers as a group.

Shares Benefically Owned ------------------------------- Amount and Nature Percent Name and Address of of Beneficial of Beneficial Owner Ownership (a) Class (a) Scott Rudolph (b) 8,941,929 12.94% c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 45 Morgan Stanley Dean Witter & Co. (c) 4,353,099 6.57% 1585 Broadway New York, NY 10036 Barclays Global Investors, 3,913,339 5.90% N.A. (c) 45 Fremont Street San Francisco, CA 94105 NBTY, Inc. 2,934,614 4.43% Employees' Stock Ownership Plan Arthur Rudolph (d)(e) 2,156,893 3.25% c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Harvey Kamil (f) 1,817,344 2.72% c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Michael Slade (g) 2,295,698 3.46% c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 James Flaherty 101,750 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 William Shanahan (h) 177,000 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Aram G. Garabedian 3,000 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 46 Bernard G. Owen (e) 68,500 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Alfred Sacks (e) 60,500 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Murray Daly (i) 35,000 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Glenn Cohen -- -- c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Nathan Rosenblatt (j) 75,000 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Michael Ashner 25,000 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 Peter J. White (k) 3,000 * c/o NBTY, Inc. 90 Orville Drive Bohemia, NY 11716 All Directors & 15,760,614 22.51% Executive Officers as a group (14 persons) -------------------- * Less than one percent (a) This column includes shares which directors and executive officers have the right to acquire within 60 days. Except as otherwise indicated, each person and entity has the sole voting and investment power with respect to the shares set forth in the table. (b) Includes shares held in a Trust created by Arthur Rudolph for the benefit of Scott Rudolph and others and options to purchase 2,810,000 shares of common stock which are presently exercisable. 47 (c) Information is based solely upon the stockholder's Schedule 13G filings with the SEC. (d) Includes 40,000 shares owned by Mr. Arthur Rudolph's wife, as to which Mr. Arthur Rudolph disclaims beneficial ownership. (e) Includes options to purchase 60,000 shares of common stock which are presently exercisable. (f) Includes options to purchase 525,000 shares of common stock which are presently exercisable. (g) Includes (i) options to purchase 100,000 shares of common stock which are presently exercisable and (ii) 530,847 shares of common stock held in a trust for the benefit of Mr. Slade's wife, as to which Mr. Slade disclaims beneficial ownership. (h) Includes options to purchase 70,000 shares of common stock which are presently exercisable. (i) Includes options to purchase 10,000 shares of common stock which are presently exercisable. (j) Represents options to purchase 30,000 shares of common stock which are presently exercisable and 45,000 shares owned by Mr. Rosenblatt's wife, as to which Mr. Rosenblatt disclaims beneficial ownership. (k) Includes 1,000 shares of common stock owned by Mr. White's wife, as to which Mr. White disclaims beneficial ownership.

Securities Authorized for Issuance Under Equity Compensation Plans ------------------------------------------------------------------ The following table summarizes the Company's equity compensation plans as of September 30, 2002.

Number of securities to be Weighted- Number of securities issued upon average exercise remaining available for exercise of price of future issuance under outstanding outstanding equity compensation options, options, plans (excluding warrants and warrants and securities reflected in rights rights column (a)) Plan Category (a) (b) (c) ------------- ---------------- ---------------- ----------------------- Equity compensation plans approved by security holders 4,372,343 $5.77 2,487,500 Equity compensation plans not approved by security holders -- -- -- Total: 4,372,343 $5.77 2,487,500

48 NBTY, Inc. Employees' Stock Ownership Plan (the "ESOP") ------------------------------------------------------- The ESOP provides as follows: Eligibility; Trustee All associates of the Company, including officers, over the age of 20 1/2 and who have been employed by the Company for at least one year and completed at least 1,000 hours of employment are eligible to participate in the ESOP. Mr. Arthur Rudolph is the Trustee of the ESOP. Contributions Contributions of either cash or Company common stock are made on a voluntary basis by the Company, as authorized and directed by the Board of Directors. There is no contribution required to be made by the Company in any one year. The ESOP is maintained on a calendar year basis. There are no contributions required or permitted to be made by an associate of the Company. All contributions, if any, made by the Company in any plan year may not exceed 15% of the aggregate compensation of all participants during such plan year. Each eligible associate receives an account or share in the ESOP, and the cash and/or shares of stock contributed to the ESOP each year are credited to his or her account. Vesting Once an associate is eligible, a portion of the stock in his or her account becomes "vested", as follows:

Number of Years Percentage of Shares of Service earned each year --------------- -------------------- Less than 5 0% 5 or more 100%

Distribution; Voting If an associate retires, is disabled, dies or his or her employment is otherwise terminated, that associate or that associate's estate will receive the vested portion of such associate's account. Each participant directs the Trustee as to the manner in which the Company's common stock represented by such participant's account is to be voted and as to the manner in which rights other than voting rights are to be exercised. Distribution is to be made only upon a participant's retirement, termination of employment, death or disability (as defined in the ESOP). All distributions are made only in the shares of the Company's common stock. 49 Distribution of shares of the Company's common stock are not taxable to a participant at the time of distribution. Instead, a participant is taxed at the time the participant sells such shares. If the distribution is a lump sum distribution, the amount of gain subject to tax is equal to the amount received upon the sale of the stock less the amount contributed to the plan in exchange for such stock. Any unrealized appreciation inherent in the stock at the time of distribution will be taxed at long- term capital gains rates. Any subsequent appreciation in the stock will be capital gains, and will be long-term capital gains if the participant owns the stock for at least one year at the time of sale. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has had, and in the future may continue to have, business transactions with individuals and firms affiliated with certain of the Company's directors. Each such transaction has been in the ordinary course of the Company's business. During the fiscal year ended September 30, 2002, the following transactions occurred: A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin, received commissions from the Company totaling approximately $585,000 on account of sales in certain foreign countries and had trade receivable balances of approximately $3,632,000 as of September 30, 2002. Gail Radvin is the sister of Arthur Rudolph (a director of the Company) and the aunt of Scott Rudolph (Chairman and Chief Executive Officer). B. The Company paid $400,000 to Rudolph Management Associates, Inc., pursuant to the Consulting Agreement between the Company and Rudolph Management Associates, Inc. Mr. Arthur Rudolph, a director of the Company, is the President of Rudolph Management Associates, Inc. See "Employment Agreements with Executive Officers and Directors" above. C. Glenn-Scott Landscaping & Design, a company owned by the brother of Glenn Cohen, a director of the Company, performed landscaping and maintenance on the Company's properties and received approximately $93,000 in compensation during fiscal 2002. D. Certain members of the immediate families (as defined in Rule 404 of Regulation S-K) of Arthur Rudolph, Scott Rudolph and Michael Slade (each a director of the Company) are employed by the Company. During fiscal 2002, these immediate family members received aggregate compensation from the Company totaling approximately $937,000 for services rendered by them as employees of the Company. Item 14. CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer have concluded, based on their evaluation as of a date within 90 days of the filing date of this report, that the Company's disclosure controls and procedures (as defined in Rules 13a- 50 14(c) and 15d-14(c) under the Exchange Act) are effective for recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, the information required to be disclosed in the reports filed by the Company under the Exchange Act. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. 51 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Reference is made to the financial statements listed in Section 1 of the Index to Consolidated Financial Statements and Schedules in this Report. (a)(2) Financial Statement Schedules. Reference is made to the financial statement schedules listed in Section 2 of the Index to Consolidated Financial Statements and Schedules in this Report. All other schedules have been omitted as not required, not applicable or because the information required to be presented is included in the financial statements and related notes. (a)(3) Exhibits. The following exhibits are filed as a part of this Report or incorporated by reference and will be furnished to any security holder upon request for such exhibit and payment of any reasonable expenses incurred by the Company. A security holder should send requests for any of the exhibits set forth below to the Company, 90 Orville Drive, Bohemia, New York, 11716; Attention: General Counsel.

Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of NBTY, Inc., as amended* 3.2 Amended and Restated By-Laws of NBTY, Inc. (1) 4.1 Indenture, dated as of September 23, 1997, between NBTY, Inc. and IBJ Schroder Bank & Trust Company, as Trustee, relating to $150,000,000 in aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2007, Series A and Series B. (1) 10.1 Third Amended and Restated Credit and Guarantee Agreement, dated as of April 27, 2001, among NBTY, Inc., as Borrower, Holland & Barrett Holdings Limited, as Foreign Subsidiary Borrower, the several lenders from time to time parties thereto, and The Chase Manhattan Bank, as Administrative Agent. * 10.2 Amended and Restated Guarantee and Collateral Agreement, dated as of April 16, 1999, by NBTY 52 and its subsidiary guarantors party thereto in favor of The Chase Manhattan Bank.* 10.3 Employment Agreement, effective October 1, 2002, by and between NBTY, Inc. and Scott Rudolph.* 10.4 Employment Agreement, effective October 1, 2002, by and between NBTY, Inc. and Harvey Kamil.* 10.5 Consulting Agreement, effective January 1, 2002, by and between NBTY, Inc. and Rudolph Management Associates, Inc.* 10.6 NBTY, Inc. Employees' Stock Ownership Plan, dated December 28, 1999.* 10.7 Amendment to the NBTY, Inc. Employees' Stock Ownership Plan, effective January 1, 2000* 10.8 NBTY, Inc. Year 2002 Stock Option Plan (2) 21.1 Subsidiaries of NBTY, Inc.* 23.1 Consent of Independent Accountants* 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* -------------------- * Filed herewith Incorporated by reference to NBTY, Inc.'s Registration Statement on Form S-4, filed on November 5, 1997 (Registration No. 333-39527). Incorporated by reference to NBTY, Inc. Proxy Statement, dated March 25, 2002 (File # 0-10666)

(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year ended September 30, 2002. (c) The exhibits required by Item 601 of Regulation S-K to be filed as part of this Report or incorporated herein by reference are listed in Item 15(a)(3) above. (d) See Item 15(a)(2) of this Report. 53 NBTY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Page Number ------ 1. Financial Statements Report of Independent Accountants F-1 Consolidated Balance Sheets as of September 30, 2002 and 2001 F-2 Consolidated Statements of Income for the years ended September 30, 2002, 2001 and 2000 F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended September 30, 2002, 2001 and 2000 F-4 Consolidated Statements of Cash Flows for the years ended September 30, 2002, 2001 and 2000 F-5 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedule Schedule II S-1

54 Report of Independent Accountants To the Board of Directors and Stockholders of NBTY, Inc. and Subsidiaries: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 54 present fairly, in all material respects, the financial position of NBTY, Inc. and its subsidiaries at September 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 54 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the Company changed the manner in which it accounts for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", on October 1, 2001. PricewaterhouseCoopers LLP New York, New York November 5, 2002, except as to Notes 16 and 20, which are as of December 11, 2002 F-1 NBTY, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2002 and 2001 (Dollars and shares in thousands) ---------------------------------------------------------------------------

2002 2001 ---- ---- Assets Current assets: Cash and cash equivalents $ 26,229 $ 34,434 Investments in bonds 8,194 Accounts receivable, less allowance for doubtful accounts of $4,194 in 2002 and $3,222 in 2001 41,362 34,730 Inventories 204,402 184,745 Deferred income taxes 11,206 5,318 Prepaid expenses and other current assets 24,691 21,341 --------- --------- Total current assets 316,084 280,568 Property, plant and equipment, net 216,245 229,216 Goodwill, net 144,999 137,818 Intangible assets, net 48,413 47,910 Other assets 8,936 12,950 --------- --------- Total assets $ 734,677 $ 708,462 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 23,044 $ 34,911 Accounts payable 48,616 50,673 Accrued expenses and other current liabilities 58,714 63,876 --------- --------- Total current liabilities 130,374 149,460 Long-term debt 163,874 237,236 Deferred income taxes 16,928 16,761 Other liabilities 4,244 2,599 --------- --------- Total liabilities 315,420 406,056 --------- --------- Commitments and contingencies (Notes 12 and 16) Stockholders' equity: Common stock, $.008 par; authorized 175,000 shares in 2002 and 2001; issued and outstanding 66,133 shares in 2002 and 65,724 shares in 2001 529 526 Capital in excess of par 126,283 122,513 Retained earnings 287,868 193,184 --------- --------- 414,680 316,223 Stock subscriptions receivable - (839) Accumulated other comprehensive income (loss) 4,577 (12,978) --------- --------- Total stockholders' equity 419,257 302,406 --------- --------- Total liabilities and stockholders' equity $ 734,677 $ 708,462 ========= =========

The accompanying notes are an integral part of these consolidated financial statements. F-2 NBTY, Inc. and Subsidiaries Consolidated Statements of Income Years ended September 30, 2002, 2001 and 2000 (Dollars and shares in thousands, except per share amounts) ---------------------------------------------------------------------------

2002 2001 2000 ---- ---- ---- Net sales $ 964,083 $ 806,898 $ 720,856 --------- --------- --------- Costs and expenses: Cost of sales 433,611 355,167 312,960 Catalog printing, postage and promotion 47,846 49,410 33,709 Selling, general and administrative 348,334 315,228 279,379 Recovery of raw material costs (21,354) (2,511) --------- --------- --------- 808,437 719,805 623,537 --------- --------- --------- Income from operations 155,646 87,093 97,319 --------- --------- --------- Other income (expense): Interest, net (18,499) (21,958) (18,858) Miscellaneous, net 1,560 2,748 4,491 --------- --------- --------- (16,939) (19,210) (14,367) --------- --------- --------- Income before income taxes 138,707 67,883 82,952 Provision for income taxes 42,916 25,958 31,444 --------- --------- --------- Net income $ 95,791 $ 41,925 $ 51,508 ========= ========= ========= Net income per share: Basic $ 1.45 $ 0.64 $ 0.77 Diluted $ 1.41 $ 0.62 $ 0.74 Weighted average common shares outstanding: Basic 65,952 65,774 67,327 Diluted 67,829 67,125 69,318

The accompanying notes are an integral part of these consolidated financial statements. F-3 NBTY, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended September 30, 2002, 2001 and 2000 (Dollars and shares in thousands) ---------------------------------------------------------------------------

Accumulated Other Common Stock Treasury Stock Compre- Total ----------------- Capital ----------------- Stock hensive Total Compre- Number of in Excess Retained Number of Subscriptions Income Stockholders' hensive Shares Amount of Par Earnings Shares Amount Receivable (Loss) Equity Income --------- ------ --------- -------- --------- ------ ------------- ----------- ------------- ------- Balance, September 30, 1999 66,096 $529 $106,332 $111,792 - $ - $(839) $ 6,135 $ 223,949 $ 22,101 ======== Components of com- prehensive income: Net income 51,508 51,508 $ 51,508 Foreign currency translation adjustment (18,987) (18,987) (18,987) Purchase of treasury shares, at cost 288 (2,511) (2,511) Acquisition of Nutrition Warehouse 1,059 8 12,235 12,243 Treasury stock retired (53) (999) (53) 999 - Exercise of stock options 1,422 11 4,397 4,408 Tax benefit from exercise of stock options 1,833 1,833 ------ ---- -------- -------- ------ ------- ----- -------- --------- -------- Balance, September 30, 2000 68,524 548 123,798 163,300 235 (1,512) (839) (12,852) 272,443 $ 32,521 ======== Components of com- prehensive income: Net income 41,925 41,925 $ 41,925 Foreign currency translation adjustment (126) (126) (126) Purchase of treasury shares, at cost 3,023 (15,699) (15,699) Treasury stock retired (3,258) (26) (5,144) (12,041) (3,258) 17,211 - Exercise of stock options 458 4 2,600 2,604 Tax benefit from exercise of stock options 1,259 1,259 ------ ---- -------- -------- ------ ------- ----- -------- --------- -------- Balance, September 30, 2001 65,724 526 122,513 193,184 - - (839) (12,978) 302,406 $ 41,799 ======== Components of com- prehensive income: Net income 95,791 95,791 $ 95,791 Foreign currency translation adjustment 17,603 17,603 17,603 Change in net un- realized gain on available-for- sale investments (48) (48) (48) Treasury stock retired (71) (1) (113) (1,107) (1,221) Exercise of stock options 480 4 2,068 2,072 Repayment of stock subscriptions receivable 839 839 Tax benefit from exercise of stock options 1,815 1,815 - ------ ---- -------- -------- ------ ------- ----- -------- --------- -------- Balance, September 30, 2002 66,133 $529 $126,283 $287,868 - $ - $ - $ 4,577 $ 419,257 $113,346 ====== ==== ======== ======== ====== ======= ===== ======== ========= ========

The accompanying notes are an integral part of these consolidated financial statements. F-4 NBTY, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended September 30, 2002, 2001 and 2000 (Dollars and shares in thousands) ---------------------------------------------------------------------------

2002 2001 2000 ---- ---- ---- Cash flows from operating activities Net income $ 95,791 $ 41,925 $ 51,508 Adjustments to reconcile net income to net cash provided by operating activities: Loss on disposal/sale of property, plant and equipment 102 385 1,119 Depreciation and amortization 42,192 44,946 38,501 Amortization of deferred financing costs 782 782 787 Amortization of bond discount 124 124 124 Allowance for doubtful accounts 972 1,995 21 Deferred income taxes (5,829) (2,036) 4,827 Tax benefit from exercise of stock options 1,815 1,259 1,833 Changes in assets and liabilities, net of acquisitions: Accounts receivable (7,011) (3,652) 5,803 Inventories (14,277) (34,723) 8,039 Prepaid expenses and other current assets (3,432) 343 1,914 Other assets (586) 119 417 Accounts payable (3,442) (11,959) 6,093 Accrued expenses and other current liabilities (3,891) 23,500 2,643 Other liabilities 221 (223) (211) -------- -------- -------- Net cash provided by operating activities 103,531 62,785 123,418 -------- -------- -------- Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired (7,702) (63,010) (45,119) Purchase of property, plant and equipment (21,489) (37,197) (51,786) Purchase of short-term investments (8,242) - - Proceeds from sale of property, plant and equipment 1,004 4,232 256 Proceeds from sale of intangibles 53 - - Increase in intangible assets - (159) - -------- -------- -------- Net cash used in investing activities (36,376) (96,134) (96,649) -------- -------- -------- Cash flows from financing activities: Principal payments under long-term debt agreements and capital leases (85,353) (12,780) (17,667) Net borrowings under Credit & Guarantee Agreement - 71,502 2,800 Cash held in escrow - (10,000) - Release of cash held in escrow 4,600 - - Purchase of treasury stock - (15,699) (1,512) Proceeds from stock options exercised 1,899 2,604 4,408 -------- -------- -------- Net cash (used in) provided by financing activities (78,854) 35,627 (11,971) -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 3,494 692 (1,603) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (8,205) 2,970 13,195 Cash and cash equivalents at beginning of year 34,434 31,464 18,269 -------- -------- -------- Cash and cash equivalents at end of year $ 26,229 $ 34,434 $ 31,464 ======== ======== ========

Continued The accompanying notes are an integral part of these consolidated financial statements. F-5 NBTY, Inc. and Subsidiaries Consolidated Statements of Cash Flows, continued Years ended September 30, 2002, 2001 and 2000 (Dollars and shares in thousands) ---------------------------------------------------------------------------

2002 2001 2000 ---- ---- ---- Supplemental disclosure of cash flow information: Cash paid during the period for interest $18,513 $23,019 $20,224 Cash paid during the period for income taxes $55,101 $22,269 $16,116

Non-cash investing and financing information: During fiscal 2002, certain officers surrendered 61 shares as consideration for stock subscriptions receivable plus interest, aggregating $1,048. Such shares were retired by the Company during 2002. During fiscal 2001, the Company adjusted its goodwill related to the acquisition of Feeling Fine LLC (September 2000) for the write-off of uncollectible accounts receivable amounting to $1,144. In connection with the acquisition of Nutrition Warehouse, Inc. and its affiliated companies, on January 1, 2000, the Company issued 1,059 shares of NBTY stock having a total then market value of approximately $12,200 (Note 2). During fiscal 2000, the Company entered into capital leases for computer equipment for approximately $1,000. In July 2000, the Company sold certain assets for approximately $650 in exchange for a note to be paid over five years. The accompanying notes are an integral part of these consolidated financial statements. F-6 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- 1. Business Operations and Summary of Significant Accounting Policies Business operations The Company (as defined below) manufactures and sells vitamins, food supplements, and health and beauty aids primarily in the United States, the United Kingdom and Ireland. The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Environmental Protection Agency and the United States Postal Service. Within the United Kingdom and Ireland, the manufacturing, advertising, sales and marketing of food products is regulated by a number of governmental agencies, including the Ministry of Agriculture, Fisheries and Food, the Department of Health, the Food Advisory Committee and the Committee on Toxicity. In addition, there are various statutory instruments and European Community ("E.C.") regulations governing specific areas such as the use of sweeteners, coloring and additives in food. Trading standards officers under the control of the Department of Trade and Industry also regulate matters such as the cleanliness of the properties where food is produced and sold. Food that has medicinal properties may fall under the jurisdiction of the Medicine Control Agency ("MCA"), a regulatory authority whose responsibility is to ensure that all medicines sold or supplied for human use in the U.K. meet acceptable standards of safety, quality and efficacy. These standards are determined by the 1968 Medicines Act together with an increasing number of E.C. regulations and directives established by the European Union. The latter take precedence over national laws. The MCA has a "borderline department" which determines when food should be treated as a medicine and should therefore fall under the relevant legislation relating to medicines. The MCA is responsible, for example, for licensing, inspection and enforcement to ensure that legal requirements concerning manufacture, distribution, sale, labeling, advertising and promotion are upheld. In Ireland, the sale of nutritional supplements and herbal products falls under the jurisdiction of the Irish Medicines Board ("IMB"). Its role is similar in nature, but not identical to that of the MCA in the U.K. as described above. Principles of consolidation and basis of presentation The consolidated financial statements of NBTY, Inc. and Subsidiaries (the "Company" or "NBTY") include the accounts of the Company and its wholly owned subsidiaries. The Company's fiscal year ends on September 30. All intercompany accounts and transactions have been eliminated. Revenue recognition The Company recognizes revenue from products shipped when risk of loss and title transfers to its customers, and with respect to its own retail store operations, upon the sale of products. The Company has no single customer that represents more than 10% of annual net sales of the Company for the fiscal years ended September 30, 2002, 2001 and 2000. One customer accounted for 21% and 16% of the Company's accounts receivable at September 30, 2002 and 2001, respectively. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"). SAB 101 does not change existing revenue recognition rules, but rather addresses and clarifies existing rules and their F-7 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- application. The Company adopted SAB 101, effective October 1, 2000. The impact of SAB 101 for the year ended September 30, 2001 resulted in a reduction of sales of approximately $4 million and net income of approximately $1.4 million. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include the valuation of inventories, the allowance for doubtful accounts receivable and the recoverability of long-lived assets. Actual results could differ from those estimates. Concentration of credit risk Financial instruments which potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash balances may, at times, exceed FDIC limits on insurable amounts. The Company mitigates its risk by investing in or through major financial institutions. To manage credit risk with regard to trade accounts receivable, the Company performs ongoing credit evaluations of its customers' financial condition. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. The cost elements of inventory include materials, labor and overhead. In fiscal 2002, 2001 and 2000, no one supplier provided more than 10% of the Company's overall purchases. Prepaid catalog costs Mail order production and mailing costs are capitalized as prepaid catalog costs and charged to expense over the catalog period, which typically approximates two months. Advertising All media and advertising costs are generally expensed as incurred. Total expenses relating to advertising and promotion for fiscal 2002, 2001 and 2000 were $26,019, $28,747 and $17,046, respectively. Included in prepaid expenses and other current assets is approximately $1,044 and $417 relating to prepaid advertising at September 30, 2002 and 2001, respectively. Property, plant and equipment Property, plant and equipment are carried at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Expenditures, which significantly improve or extend the life of an asset are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the related assets or lease term. Maintenance and repairs are charged to expense in the year incurred. Cost and related accumulated depreciation for property, plant and equipment are removed from the accounts upon sale or disposition and the resulting gain or loss is reflected in earnings. F-8 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Goodwill and intangible assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS 142") as of October 1, 2001. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Prior to fiscal 2002, goodwill was amortized over periods not exceeding 40 years. Other definite lived intangibles are amortized on a straight-line basis over periods not exceeding 15 years. Impairment of long-lived assets The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." This statement requires that certain assets be reviewed for impairment and, if impaired, remeasured at fair value whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. During fiscal 2002 and 2001, the Company recognized impairment losses of $700 and $500, respectively, on assets to be held and used. The Company did not recognize an impairment loss during fiscal 2000. The impairment losses related primarily to leasehold improvements and furniture and fixtures for retail operations and were recorded in selling, general and administrative expense. In August 2001, the SFAS issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company does not expect the adoption of SFAS No. 143 and 144, effective October 1, 2002, to have a material impact on its consolidated financial position or results of operations. Stock-based compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Foreign currency The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholders' equity. During fiscal 2002, 2001 and 2000, the Company recognized foreign currency transaction gains (losses) of $(1,556), $(481) and $415, respectively. Comprehensive income Comprehensive income represents the change in stockholders' equity resulting from transactions other than stockholder investments and distributions. Included in accumulated other comprehensive income (loss) are net gains on foreign currency translation of $4,625 and unrealized holding losses of $48 on available-for-sale securities. F-9 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Income taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Shipping and handling costs The Company incurs shipping and handling costs in all divisions of its operations. These costs are included in selling, general and administrative costs and are $23,985, $19,799 and $19,277 for the fiscal years ended September 30, 2002, 2001 and 2000, respectively. Change in accounting estimate During fiscal 2001, the Company changed its accounting estimate for the useful lives of certain long-lived assets, primarily leasehold improvements and furniture and fixtures, based upon the terms of the lease agreements which approximate the useful lives of the assets. The effect of this change in estimate has been accounted for on a prospective basis and resulted in a decrease in depreciation and amortization expense of approximately $1,248 for the year ended September 30, 2001. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. New accounting developments In February 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," effective no later than periods beginning after December 15, 2001. EITF Issue No. 01-09 addresses the following items: a. The income statement characterization of consideration given by a vendor to a customer, specifically whether that consideration should be presented in the vendor's income statement as a reduction of revenue or as a cost or expense. b. Whether a vendor should recognize consideration given to a customer as an asset in certain circumstances rather than as an immediate charge in the income statement. c. When to recognize the "cost" of a sales incentive and how to measure it. The Company has determined that the impact of adoption and subsequent application of EITF Issue No. 01-09 did not have a material effect on its consolidated financial position or results of operations. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under SFAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. Adoption of this statement is required for fiscal years beginning after May 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations. F-10 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a cost associated with an exit or disposal activity be recognized when incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up-front. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. 2. Acquisitions Fiscal 2002 acquisitions: On December 6, 2001, the Company acquired out of bankruptcy certain assets of HealthCentral.com for approximately $2,800 in cash. The assets include the customer list of the mail order operation, L&H Vitamins, and the customer list and URLs of Vitamins.com and WebRx.com. Assets acquired were classified as intangibles, specifically as a customer list ($2,800) which is being amortized over 15 years. These operations had sales for the 12 month period ended November 2001 of approximately $15,000 and a combined customer list of approximately 1.8 million names, which has been merged into the existing customer base of the Puritan's Pride/Direct Response business. On December 13, 2001, the Company acquired certain assets of the Knox NutraJoint(R) and Knox for Nails nutritional supplement business from Kraft Foods North America, Inc. for approximately $4,500 in cash. Assets acquired include inventory ($2,456) and intangibles ($2,000). Approximately $1,800 of the $2,000 has been classified as a trademark with an indefinite life. Kraft's revenues for these brands were approximately $15,000 in 2001. NBTY has licensed the Knox trademark at no charge to Kraft Foods North America, Inc. for use in the Knox gelatine business, which was not part of the acquisition. All 2002 acquisitions were funded with internally generated cash. Fiscal 2001 acquisitions: Global Group On May 25, 2001, the Company acquired certain assets and liabilities of the business of Global Health Sciences, Inc. and certain of its affiliated companies ("Global Group"). NBTY was the successful bidder in an auction ordered by a bankruptcy court in California. The purchase price was approximately $40 million in cash, less adjustments. The Global Group is located in Anaheim, California and is a leading manufacturer of nutritional powders used for meal replacements, weight control and protein powders formulated to improve physical performance. Global Group also produces formulations for herbal, vitamin and mineral tablets. Assets acquired and liabilities assumed include cash ($1,427), accounts receivable ($8,569), inventory ($7,894), other current assets ($1,663), property, plant and equipment ($14,000) and current liabilities ($241). Global Group had sales of $171 million for the 12-month period ended April 2001. The excess cost of investment over the net book value of Global Group at the date of acquisition amounted to $6,923 of which $6,681 was classified by the Company as other long-term assets in 2001. In fiscal 2002, the Company received $4,600 from an escrow account and anticipates approximately $1,850 to be received. The remaining excess has been classified as goodwill. NatureSmart On May 15, 2001, the Company acquired certain assets and liabilities of NatureSmart, LLC from F-11 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Whole Foods Market, Inc. for approximately $29 million in cash. NatureSmart, through its four divisions, manufactures and markets nutritional supplements, including vitamins, minerals, herbs and personal care products through mail order operations having approximately 350,000 active customers. It also manufactures private label vitamins for mass market, specialty retailers and healthcare professionals. Assets acquired and liabilities assumed include accounts receivable ($607), inventory ($10,882), other current assets ($618), property, plant and equipment ($3,462), intangibles ($1,893), and current liabilities ($4,487). The excess cost of investment over the net book value of NatureSmart at the date of acquisition resulted in an increase in goodwill of $16,395. NatureSmart's annual sales for the year ended September 24, 2000 were approximately $59 million. Both 2001 transactions were funded by borrowings under the Credit and Guarantee Agreement ("CGA"). These two acquisitions contributed $29 million of sales and a marginal operating profit for the Company's 2001 fiscal year. Fiscal 2000 acquisitions: In September 2000, the Company acquired certain assets and liabilities of Feeling Fine Company LLC for $2,964. In June 2000, the Company acquired certain assets and liabilities of Longevity Formulas, Inc. (also known as "Healthwatchers System") and Martin Health Systems, Inc. for $5,150. In April 2000, the Company acquired the mailing list of Rexall Sundown's SDV vitamin catalog and mail order list for $16,500. On January 1, 2000, the Company acquired Nutrition Warehouse, Inc. and its affiliated companies ("NW") for $20,000 in cash and approximately 1,059 shares of NBTY stock having a total then market value of $12,200. NW operated a direct response/e-commerce business as well as 14 retail stores in various locations in New York State. The e-commerce business has been combined with the Company's Puritan.com operations and the retail stores have been merged into the Company's U.S. retail operations. Annual revenues approximated $14,000 for the e-commerce/direct response business as well as $14,000 in retail sales for the year ended December 31, 1999. The cash portion of the acquisition was funded with $20,000 in borrowings under the CGA. 3. Divestitures In July 2000, the Company sold certain assets of Bio Nutritional Formulas, Inc. for a note in principal amount of approximately $650 which is being repaid over five years. No gain or loss was recognized on the sale. 4. Investments in bonds The Company classifies its debt securities as available for sale and are reported at fair market value (based on quoted market prices), with net unrealized gains or losses on the securities recorded as accumulated other comprehensive income (loss) in stockholders' equity. Unrealized losses are charged against income when a decline in the fair market value of an individual security is determined to be other-than-temporary. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of the securities. There were no realized gains or losses in fiscal 2002. F-12 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- At September 30, 2002, the Company held $8,242, net of reserves, of high yield, less than investment grade corporate debt securities with an aggregate market value of $8,194. Investments in less than investment grade corporate debt securities have greater risks than other investments in corporate debt securities rated investment grade. Risk of loss upon default by the borrower is significantly greater with respect to such corporate debt securities than with other corporate debt securities because these securities are generally unsecured and are often subordinated to other creditors of the issuer. Further, issuers of less than investment grade securities usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. There is only a thinly traded market for such securities and recent market ratings of such debt are as follows: Moody's Investors Service, Inc. currently rates these debt securities as Caa2 and Standard & Poor's currently rates these debt securities as a CCC-. Both credit agencies' ratings remained unchanged from the prior period. Market quotes may not represent firm bids of such dealers or prices for actual sales. The cost and estimated fair value for these available-for-sale investments in debt securities at September 30, 2002 by contractual maturity was $8,242 and $8,194, respectively, due beyond 1 year and within 5 years. 5. Inventories

September 30, ----------------------- 2002 2001 ---- ---- Raw materials $ 77,051 $ 66,519 Work-in-process 8,527 4,558 Finished goods 118,824 113,668 -------- -------- $204,402 $184,745 ======== ========

6. Property, Plant and Equipment

Depreciation September 30, and ---------------------- Amortization 2002 2001 Period (Years) ---- ---- -------------- Land $ 10,781 $ 10,549 Buildings and leasehold improvements 94,360 87,627 5 - 40 Machinery and equipment 95,961 91,651 3 - 10 Furniture and fixtures 142,026 140,627 5 - 10 Transportation equipment 5,411 5,013 4 Computer equipment 43,494 37,376 5 -------- -------- 392,033 372,843 Less accumulated depreciation and amortization 175,788 143,627 -------- -------- $216,245 $229,216 ======== ========

Depreciation and amortization of property, plant and equipment for the fiscal years ended September 30, 2002, 2001 and 2000 was approximately $37,863, $34,866 and $29,275, respectively. F-13 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Property, plant and equipment includes approximately $6,010 for assets recorded under capital leases at September 30, 2002 and 2001. Accumulated depreciation of these capital leases at September 30, 2002 and 2001 was approximately $3,541 and $2,808, respectively. 7. Goodwill and Intangible Assets The carrying amount of acquired intangible assets is as follows:

September 30, 2002 September 30, 2001 ----------------------- ----------------------- Gross Gross carrying Accumulated carrying Accumulated Amortization amount amortization amount amortization period (years) -------- ------------ -------- ------------ -------------- Amortized intangible assets: Customer lists $64,283 $18,668 $61,511 $15,107 6 - 15 Trademark and licenses 2,429 2,188 2,404 1,763 2 - 3 Covenants not to compete 2,605 1,848 2,405 1,540 5 - 7 ------- ------- ------- ------- 69,317 22,704 66,320 18,410 Unamortized intangible asset: Trademark 1,800 - - - ------- ------- ------- ------- Total intangible assets $71,117 $22,704 $66,320 $18,410 ======= ======= ======= =======

The changes in the carrying amount of goodwill by segment for the fiscal year ended September 30, 2002 are as follows:

Retail Retail Puritan's Pride/ United United Kingdom/ Direct Response States Ireland Wholesale Consolidated ---------------- ------ --------------- --------- ------------ Balance at September 30, 2001 $16,202 $7,588 $110,536 $3,492 $137,818 Purchase price adjustments (1,005) - - 1,400 395 Foreign currency translation - - 6,786 - 6,786 ------- ------ -------- ------ -------- Balance at September 30, 2002 $15,197 $7,588 $117,322 $4,892 $144,999 ======= ====== ======== ====== ========

The Company currently has unamortized goodwill remaining from the acquisition of Holland & Barrett ($113,089), NatureSmart ($15,164), NW ($7,510), Nature's Way ($4,234), Feeling Fine ($3,069), Global Group ($1,640), and other ($293), and the Company currently owns one trademark, Knox ($1,800), all of which are subject to the provisions of SFAS 142. The Company did not record any transition intangible asset impairment loss upon adoption of SFAS 142. The changes in the carrying amount of goodwill for the year ended September 30, 2002 primarily related to the translation of the Company's international subsidiaries into U.S. dollars. Aggregate amortization expense of definite lived intangible assets included in the consolidated statements of income under the caption "selling, general and administrative expenses" in fiscal 2002, 2001 and 2000 was approximately $4,329, $3,862 and $2,932, respectively. F-14 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Estimated amortization expense for the next five fiscal years is as follows: For the fiscal year ending September 30, 2003 $4,140 2004 $3,862 2005 $3,714 2006 $3,656 2007 $3,594 As required by SFAS 142, the results of prior fiscal years have not been restated. A reconciliation of net income, as if SFAS 142 had been adopted, is presented below for the fiscal years ended September 30, 2002, 2001 and 2000, exclusive of amortization expense that is related to goodwill that is not being amortized:

Fiscal year ended September 30, --------------------------------- 2002 2001 2000 ---- ---- ---- Reported net income $95,791 $41,925 $51,508 Addback: goodwill amortization - 6,082 6,294 ------- ------- ------- Adjusted net income $95,791 $48,007 $57,802 ======= ======= ======= Basic earnings per share Reported net income $ 1.45 $ 0.64 $ 0.77 Addback: goodwill amortization - 0.09 0.09 ------- ------- ------- Adjusted net income $ 1.45 $ 0.73 $ 0.86 ======= ======= ======= Diluted earnings per share Reported net income $ 1.41 $ 0.62 $ 0.74 Addback: goodwill amortization - 0.09 0.09 ------- ------- ------- Adjusted net income $ 1.41 $ 0.71 $ 0.83 ======= ======= =======

8. Accrued Expenses and Other Current Liabilities

September 30, -------------------- 2002 2001 ---- ---- Payroll and related taxes $11,117 $ 7,713 Customer deposits 10,114 13,220 Accrued purchases 12,770 4,206 Accrued interest 970 983 Income taxes payable 7,525 20,568 Other 16,218 17,186 ------- ------- $58,714 $63,876 ======= =======

F-15 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- 9. Long-Term Debt

September 30, ---------------------- 2002 2001 ---- ---- Senior debt: 8-5/8% Senior subordinated notes due 2007, net of unamortized discount of $624 in 2002 and $748 in 2001 (a) $149,376 $149,252 Note payable due in monthly payments of $2, including interest at 4%, maturing May 2009 142 162 Mortgages: First mortgage payable in monthly principal and interest (9.73%) installments of $25, maturing November 2009 1,555 1,713 First mortgage payable in monthly principal and interest (7.375%) installments of $55, maturing May 2011 4,232 4,569 First mortgage payable in monthly principal and interest (9.0%) installments of $3, maturing June 2011 183 197 Credit and Guarantee Agreement (b): Term loan payable in quarterly principal and interest installments of $2,700 - 31,200 Term loan payable in quarterly principal and interest installments of $5,563, maturing June 2005 31,188 83,438 -------- -------- 186,676 270,531 Less current portion 22,806 33,564 -------- -------- $163,870 $236,967 ======== ======== (a) The 8-5/8% Senior Subordinated Notes (the "Notes") are unsecured and subordinated in right of payment for all existing and future indebtedness of the Company. The Notes provide for the payment of interest semi-annually at the rate of 8-5/8% per annum. (b) The CGA is comprised of two term loans and a revolving credit facility. At September 30, 2002, there were borrowings of $31,188 under one term loan. This term loan has an annual borrowing rate of 4.422% and is payable in quarterly installments of $5,563. The current portion of this term loan at September 30, 2002 was $22,250. The Company repaid the other term loan during the third quarter 2002. The $50,000 revolving credit facility expires on September 30, 2003 and was unused at September 30, 2002. A stand-by letter of credit of $600 was outstanding under such facility at September 30, 2002. The Company is required to pay a commitment fee, which varies between .25% and .50% per annum, depending on the Company's ratio of debt to EBITDA, on any unused portion of the revolving credit facility. The CGA provides that loans be made under a selection of rate formulas, including prime or Euro currency rates. Virtually all of the Company's assets are collateralized under the CGA. In addition, the Company is subject to the maintenance of various financial ratios and covenants.

F-16 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Required principal payments of long-term debt are as follows:

Fiscal year ending September 30, ------------------ 2003 $ 22,806 2004 9,540 2005 653 2006 707 2007 150,142 Thereafter 2,828 -------- $186,676 ========

The fair value of the Company's long-term debt at September 30, 2002 and 2001, based upon current market rates, approximates the amounts disclosed above. 10. Capital Lease Obligations The Company enters into various capital leases for machinery and equipment, which provide the Company with bargain purchase options at the end of such lease terms. Future minimum payments under capital lease obligations as of September 30, 2002 are as follows:

Fiscal year ending September 30, ------------------ 2003 $242 2004 4 2005 1 ---- 247 Less, amount representing interest 5 ---- Present value of minimum lease payments (including $238 due within one year) $242 ====

F-17 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- 11. Income Taxes Provision for income taxes consists of the following:

Fiscal year ended September 30, --------------------------------- 2002 2001 2000 ---- ---- ---- Federal Current $26,835 $14,713 $12,640 Deferred (4,386) (1,682) 4,551 State Current 2,760 1,513 1,300 Deferred (451) (172) 468 Foreign provision 18,158 11,586 12,485 ------- ------- ------- Total provision $42,916 $25,958 $31,444 ======= ======= =======

The following is a reconciliation of the income tax expense computed using the statutory Federal income tax rate to the actual income tax expense and its effective income tax rate.

Fiscal year ended September 30, -------------------------------------------------------------------------- 2002 2001 2000 ---------------------- ---------------------- ---------------------- Percent Percent Percent of pretax of pretax of pretax Amount income Amount income Amount income ------ --------- ------ --------- ------ --------- Income tax expense at statutory rate $ 48,548 35.0% $ 23,759 35.0% $ 29,033 35.0% State income taxes, net of federal income tax benefit 1,501 1.1% 2,444 3.6% 2,986 3.6% Amortization of goodwill - 2,277 3.3% 2,155 2.6% Foreign income taxed at different rates (4,411) (3.2%) (1,596) (2.4%) (1,443) (1.7%) Foreign tax credit (12,975) (9.4%) - - - Valuation allowance 8,275 6.0% - - - Other, individually less than 5% 1,978 1.4% (926) (1.3%) (1,287) (1.6%) -------- ---- -------- ---- -------- ---- $ 42,916 30.9% $ 25,958 38.2% $ 31,444 37.9% ======== ==== ======== ==== ======== ====

F-18 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- The components of deferred tax assets and liabilities are as follows as of September 30:

2002 2001 ---- ---- Current Inventory capitalization $ 954 $ 770 Accrued expenses and reserves not currently deductible 6,316 4,394 Intangibles - 13 Tax credits 13,375 13,375 Valuation allowance (8,275) (12,975) -------- -------- Total deferred income tax assets 12,370 5,577 -------- -------- Deferred tax liabilities: Property, plant and equipment (17,731) (17,020) Intangibles (361) - -------- -------- Total deferred income tax liabilities (18,092) (17,020) -------- -------- Total net deferred income tax liabilities (5,722) (11,443) Less current deferred income tax assets (11,206) (5,318) -------- -------- Long-term deferred income taxes $(16,928) $(16,761) ======== ========

Deferred tax assets, net of valuation allowances, have been recognized to the extent that, as of September 30, 2002, the likelihood of their realization is more likely than not. The valuation allowance of $8,275 relates to foreign tax credits, which are not more likely than not realizable. The decrease in the valuation allowance during fiscal 2002 resulted from the realization of foreign tax credits due to tax planning strategies identified in fiscal 2002. The amount of deferred tax assets considered realizable could be adjusted in the future as further tax planning strategies are identified. The change in the valuation allowance for the fiscal years ended September 30, 2002 and 2001 is as follows:

Fiscal year ended September 30, ----------------------- 2002 2001 ---- ---- Balance at October 1 $(12,975) $(12,975) Utilization of foreign tax credit carryforwards 4,700 - -------- -------- Balance at September 30 $ (8,275) $(12,975) ======== ========

F-19 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- 12. Commitments Operating leases The Company conducts retail operations under operating leases, which expire at various dates through 2029. Some of the leases contain renewal options and provide for contingent rent based upon sales plus certain tax and maintenance costs. Future minimum rental payments (excluding real estate tax and maintenance costs) for retail locations and other leases that have initial or noncancelable lease terms in excess of one year at September 30, 2002 are as follows:

Fiscal year ending September 30, ------------------ 2003 $ 52,173 2004 47,024 2005 42,065 2006 38,715 2007 34,591 Thereafter 136,854 -------- $351,422 ========

Operating lease rental expense (including real estate taxes and maintenance costs) and leases on a month to month basis were approximately $68,104, $62,355 and $54,749 for the years ended September 30, 2002, 2001 and 2000, respectively. Purchase commitments The Company was committed to make future purchases under various purchase arrangements with fixed price provisions aggregating approximately $13,304 at September 30, 2002. Capital commitments The Company had approximately $744 in open capital commitments at September 30, 2002, primarily related to manufacturing equipment as well as to computer hardware and software. Also, the Company has a $15,800 commitment for the construction of an automated warehouse over the next 18 months. Employment and consulting agreements The Company has employment agreements with two of its executive officers. The agreements, initially entered into in October 2002, have a term of 5 years and are automatically renewed each year thereafter unless either party notifies the other to the contrary. These agreements provide for minimum salary levels and contain provisions regarding severance and changes in control of the Company. The annual commitment for salaries to these two officers as of September 30, 2002 was approximately $1,170. The Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. The agreement requires Mr. Rudolph to provide consulting services to the Company through December 31, 2002, in exchange for a consulting F-20 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- fee of $400 per year, payable monthly. In addition, Mr. Rudolph receives certain fringe benefits accorded to other executives of the Company. The Company currently intends to renew this consulting agreement for a period of one year on substantially similar terms. Four members of H&B's senior executive staff have service contracts terminable by the Company upon twelve months notice. The annual aggregate commitment for such H&B executive staff as of September 30, 2002 was approximately $700. Other In the ordinary course of business, the Company has entered into a $600 stand-by letter of credit agreement under the CGA. 13. Earnings Per Share Basic earnings per share ("EPS") computations are calculated utilizing the weighted average number of common shares outstanding during the fiscal years. Diluted EPS include the weighted average number of common shares outstanding and the effect of common stock equivalents. The following is a reconciliation between basic and diluted EPS:

Fiscal year ended September 30, --------------------------------- 2002 2001 2000 ---- ---- ---- Numerator: Numerator for basic EPS - income available to common stockholders $95,791 $41,925 $51,508 ======= ======= ======= Numerator for diluted EPS - income available to common stockholders $95,791 $41,925 $51,508 ======= ======= =======

Fiscal year ended September 30, --------------------------------- 2002 2001 2000 ---- ---- ---- Denominator: Denominator for basic EPS - weighted-average shares 65,952 65,774 67,327 Effect of dilutive securities: Stock options 1,877 1,351 1,991 ------- ------- ------- Denominator for diluted EPS - weighted-average shares 67,829 67,125 69,318 ======= ======= ======= Net EPS: Basic EPS $ 1.45 $ 0.64 $ 0.77 ======= ======= ======= Diluted EPS $ 1.41 $ 0.62 $ 0.74 ======= ======= =======

14. Stock Option Plans On March 11, 1992, the Board approved the issuance of an aggregate of 5,400 stock options to directors and officers, exercisable at $0.31 per share and expiring on March 10, 2002. During fiscal 1999, the Board approved the issuance of 3,000 options expiring at varying dates in 2008 and 2009 F-21 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- with exercise prices ranging from $4.75 to $6.19 per share. During fiscal 2000, the Board approved the issuance of 2,288 options expiring in 2010 with an exercise price of $5.88 per share. During fiscal 2001, the Board approved the issuance of 805 options expiring in 2011 with an exercise price of $5.47 per share. The exercise price of each of the aforementioned issuances was at or in excess of the closing price on NASDAQ at the date such options were granted. Stock options granted under the plans generally become exercisable on grant date and have a maximum term of ten years. The Company did not grant any stock options during fiscal 2002. During fiscal 2002, options for 480 shares of common stock were exercised, with an aggregate exercise price of $2,072 for which the Company received cash proceeds of $1,899 and surrendered shares with a fair value of $173. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $3,882. Accordingly, a tax benefit of approximately $1,409 was credited to capital in excess of par. Also during fiscal 2002, the Company received an additional compensation deduction of approximately $1,118 due to the early disposition of certain incentive stock options exercised by employees. Accordingly, a tax benefit of approximately $406 was credited to capital in excess of par. During fiscal 2001, options for 458 shares of common stock were exercised, with an aggregate exercise price of $2,604. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $1,990. Accordingly, a tax benefit of approximately $759 was credited to capital in excess of par. Also during fiscal 2001, the Company received an additional compensation deduction of approximately $1,299 due to the early disposition of certain incentive stock options exercised by employees. Accordingly, a tax benefit of approximately $500 was credited to capital in excess of par. During fiscal 2000, options for 1,422 shares of common stock were exercised, with an aggregate exercise price of $4,408. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $4,700. Accordingly, a tax benefit of approximately $1,833 was credited to capital in excess of par. A summary of stock option activity is as follows:

Fiscal Year Ended September 30, --------------------------------------------------------------------- 2002 2001 2000 --------------------- --------------------- --------------------- Weighted Weighted Weighted average average average Number exercise Number exercise Number exercise of shares price of shares price of shares price --------- -------- --------- -------- --------- -------- Outstanding at beginning of year 4,853 $5.62 4,536 $5.71 3,720 $4.53 Exercised (480) $4.32 (458) $5.67 (1,422) $2.87 Forfeited (30) $5.13 (50) $4.75 Granted 805 $5.47 2,288 $5.88 ----- ----- ----- ----- ------ ----- Outstanding at end of year 4,373 $5.77 4,853 $5.62 4,536 $5.71 ===== ===== ===== ===== ====== ===== Exercisable at end of year 4,373 $5.77 4,853 $5.62 4,536 $5.71 ===== ===== ===== ===== ====== ===== Fair value of options granted during year $3.80 $3.64 ===== =====

F-22 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at September 30, 2002:

Options Outstanding Options Exercisable -------------------------------------- ----------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Shares Contractual Exercise Shares Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $4.75 - $6.19 4,373 7.2 years $5.77 4,373 $5.77

The Company applies APB Opinion 25 and related interpretations in accounting for stock options; accordingly, no compensation cost has been recognized in the year of grant. Had compensation cost been determined based upon the fair value of the stock options at grant date, consistent with the method under SFAS No. 123, the Company's net income and earnings per share for fiscal 2001 and 2000 would have been reduced to the following pro forma amounts indicated. There were no grants during fiscal 2002. Therefore, the pro forma and actual net income and related EPS are the same as amounts reported.

Fiscal year ended September 30, --------------------------------- 2002 2001 2000 ---- ---- ---- Net income attributable to common stockholders as reported $95,791 $41,925 $51,508 Pro forma net income $95,791 $40,034 $46,428 Basic EPS as reported $ 1.45 $ .64 $ .77 Diluted EPS as reported $ 1.41 $ .62 $ .74 Pro forma basic EPS $ 1.45 $ .61 $ .69 Pro forma diluted EPS $ 1.41 $ .60 $ .67

Under SFAS No. 123, the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2000 and 2001: (a) expected life of option of 4.8 years and 6.7 years; (b) dividend yield of 0%; (c) expected volatility of 70%; and (d) risk-free interest rate of 6% and 5%, respectively. 15. Employee Benefit Plans The Company sponsors a 401(k) plan covering substantially all employees with more than 6 months of service. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute from 1% to 50% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. Company contributions are 2% of the participant's gross earnings to an annual maximum contribution of $4 per participant. Employees become fully vested in employer contributions after 3 years of service. The Company also sponsors an Employee Stock Ownership Plan and Trust (ESOP) which covers substantially all employees who are employed at calendar year end and have completed one year of service (providing they worked at least 1,000 hours during such plan year). The ESOP is designed to comply with Section 4975(e)(7) and the regulations thereunder of the Internal Revenue Code of 1986, as amended (Code) and is subject to the applicable provisions of the Employee Retirement Income F-23 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- Security Act of 1974 (ERISA). Contributions are made on a voluntary basis by the Company. There is no minimum contribution required in any one year. There are no contributions required or permitted to be made by an employee. All contributions are allocated to participant accounts as defined. Employees become vested in their respective accounts after 5 years of service, provided the Plan is not considered top-heavy. If the Plan is considered top-heavy, employees will become vested after 3 years of service. For more information regarding the plan, please refer to the Company's annual Form 11-K filings of the Plan. The accompanying financial statements reflect contributions to these plans in the approximate amount of $1,429, $1,480 and $1,670 for the fiscal years ended September 30, 2002, 2001 and 2000, respectively. 16. Litigation A consolidated stockholder derivative action was filed in 2000 in the Chancery Court in Delaware against certain officers and directors of the Company. The derivative claim alleged that the named officers and directors failed to disclose material facts during the period from January 27, 2000 to June 15, 2000, which purportedly resulted in a decline in the price of the Company's stock after June 15, 2000. The derivative action was voluntarily dismissed in December 2002. A consolidated stockholder class action complaint filed in the Eastern District of New York in 2000, predicated on the same facts, was dismissed by that court on September 28, 2002, and the case formally closed on October 31, 2002. On July 25, 2002, a purported consumer class action was filed in New York State Court against several manufacturers and retailers of so-called prohormone supplements including the U.S. retail subsidiary of the Company. Prohormones are substitutes such as androstenedione that plaintiffs allege are hormone precursors ingested to promote muscle growth. Plaintiffs allege that the advertising and labeling of certain pro hormone supplements overstate their efficacy and do not fully disclose their risks, and seek class certification and injunctive and monetary relief. The action was severed into separate class actions against each of the defendants. On December 6, 2002, an amended class action complaint was filed against the U.S. retail subsidiary of the Company that purported to elaborate on the claims initially alleged. The Company believes that this action is without merit, and intends to move to dismiss the amended pleading and to vigorously defend against the claims asserted. However, because this action is in its early stages, no determination can be made at this time as to the final outcome. On August 28, 2001, the Company was also named as a defendant, along with other companies, in a purported class action commenced in an Alabama state court. Plaintiffs allege that NBTY manufactured and marketed misbranded nutrition bars and seek class certification, injunctive declaratory, and monetary relief. Class discovery is being taken, and a hearing is currently scheduled for the spring of 2003 to determine whether a class should be certified. NBTY is vigorously defending class certification on the basis that the plaintiffs were not damaged as alleged as a result of any action by NBTY. In addition, NBTY contends that this matter is not appropriate for class certification because the named plaintiffs are inadequate class representatives and not typical of persons who purchased the nutrition bars in these proceedings. On October 3, 2002, the Company was named as a defendant in a second purported class action commenced in the same Alabama state court as the above-identified litigation. Plaintiffs, in an attempt to pursue several retailers, including NBTY, and not manufacturers of nutrition bars, allege F-24 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- that NBTY marketed misbranded nutrition bars. In November 2002, NBTY filed a motion to dismiss or abate the lawsuit based on the principle that the court lacks subject-matter jurisdiction because the earlier-filed lawsuit, which seeks identical relief for the same purported class action against the manufacturers, preempts this second attempt to certify a class against NBTY. The Company believes that both Alabama suits are without merit. However, no determination can be made as of the date of this report as to the final outcome of these suits. In addition to the foregoing, other claims, suits and complaints arise in the ordinary course of the Company's business. The Company believes that such other claims, suits and complaints would not have a material adverse effect on the Company's consolidated financial condition or results of operations, if adversely determined against the Company. The Company is a plaintiff in a vitamin antitrust litigation brought in the United States District Court in the District of Columbia against F. Hoffman-La Roche Ltd. and others for alleged price fixing. Certain of the defendants have pleaded guilty in criminal proceedings arising from the same set of facts. Partial settlements with certain defendants have been made and negotiations with other defendants are currently being held. In fiscal 2002 and 2000, the Company received $21,354 and $2,511, respectively, in partial settlement of ongoing price fixing litigation. 17. Segment Information The Company's segments are organized by sales market on a worldwide basis. The Company's management reporting system evaluates performance based on a number of factors; however, the primary measure of performance is the pre- tax operating income or loss (prior to corporate allocations) of each segment. The Company's segment reporting disclosures have been changed to exclude corporate general and administrative allocations, as this is the key performance indicator reviewed by management. Prior periods presented have been reclassified to conform to the current year presentation. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Such unallocated expenses remain in the corporate segment. The U.K./Ireland retail operations do not include any transfer pricing absorption. The Company reports four worldwide segments: Puritan's Pride/Direct Response, Retail: United States, Retail: United Kingdom/Ireland, and Wholesale. All of the Company's products fall into one of these four segments. The Puritan's Pride/Direct Response segment generates revenue through the sale of its products primarily through mail order catalog and the Internet. Catalogs are strategically mailed to customers who order by mail or phoning customer service representatives in New York, Illinois or the United Kingdom. The Retail United States segment generates revenue through the sale of proprietary brand and third-party products through its 544 Company-operated stores. The Retail United Kingdom/Ireland segment generates revenue through the sale of proprietary brand and third-party products in 468 Company-operated stores. The Wholesale segment (including Network Marketing) is comprised of several divisions each targeting specific market groups. These market groups include wholesalers, distributors, chains, pharmacies, health food stores, bulk and international customers. F-25 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- The following table represents key financial information of the Company's business segments (in thousands, except for number of locations):

Fiscal Year Ended September 30, ------------------------------------- 2002 2001 2000 ---- ---- ---- Puritan's Pride/Direct Response Revenue $ 183,313 $ 172,203 $ 182,693 Operating income 66,273 67,264 67,714 Depreciation and amortization 5,347 4,991 4,019 Identifiable assets 67,337 71,821 69,513 Capital expenditures 925 407 1,980 Retail: United States Revenue $ 198,602 $ 174,987 $ 149,055 Operating loss (4,975) (12,737) (7,722) Depreciation and amortization 13,235 13,820 11,314 Identifiable assets 73,278 79,401 78,672 Capital expenditures 4,633 9,118 25,173 Locations open at end of year 544 525 476 United Kingdom/Ireland Revenue $ 290,881 $ 262,876 $ 248,602 Operating income 79,420 59,654 45,459 Depreciation and amortization 8,295 12,564 12,282 Identifiable assets 225,471 220,662 200,373 Capital expenditures 3,773 7,829 13,949 Locations open at end of year 468 461 427 Wholesale: Revenue $ 291,287 $ 196,832 $ 140,506 Operating income 60,197 27,234 31,060 Depreciation and amortization 1,155 1,434 1,100 Identifiable assets 36,123 51,451 17,003 Capital expenditures 1,370 1,310 1,486 Corporate: Recovery of raw material costs $ 21,354 $ - $ 2,511 Corporate expenses (66,623) (54,322) (41,703) Depreciation and amortization - manufacturing 9,909 8,291 6,950 Depreciation and amortization - other 4,251 3,846 2,836 Corporate manufacturing identifiable assets 332,468 285,127 238,052 Capital expenditures - manufacturing 5,677 9,916 4,439 Capital expenditures - other 5,111 8,617 4,759

F-26 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) ---------------------------------------------------------------------------

Fiscal Year Ended September 30, ------------------------------------ 2002 2001 2000 ---- ---- ---- Consolidated totals: Revenue $964,083 $806,898 $720,856 Operating income 155,646 87,093 97,319 Depreciation and amortization 42,192 44,946 38,501 Identifiable assets 734,677 708,462 603,613 Capital expenditures 21,489 37,197 51,786 Revenue by location of customer United States $658,732 $530,361 $458,543 United Kingdom/Ireland 290,881 262,876 248,602 Other foreign countries 14,470 13,661 13,711 -------- -------- -------- Consolidated totals $964,083 $806,898 $720,856 ======== ======== ======== Long-lived assets United States $257,308 $267,690 $238,019 United Kingdom 152,349 147,254 148,269 -------- -------- -------- Consolidated totals $409,657 $414,944 $386,288 ======== ======== ========

18. Related Party Transactions An entity owned by a relative of a director received sales commissions of $585, $501 and $520 in fiscal 2002, 2001 and 2000, respectively, and had trade receivable balances approximating $3,632 and $3,142 at September 30, 2002 and 2001, respectively. An entity owned by a relative of a director performed landscaping and maintenance on the Company's properties and received compensation of $93, $128 and $80 in 2002, 2001 and 2000, respectively. F-27 NBTY, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) --------------------------------------------------------------------------- 19. Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations for fiscal 2002 and 2001:

Quarter ended ------------------------------------------------------- December 31, March 31, June 30, September 30, ------------ --------- -------- ------------- 2002: Net sales $215,090 $251,544 $251,987 $245,462 Gross profit 114,180 138,555 140,080 137,657 Income before income taxes 18,153 41,581 49,286 29,687 Net income 11,164 25,571 29,707 29,349 Net income per diluted share $ .17 $ .38 $ .44 $ .43 (b) 2001: Net sales $166,829 $224,775 $203,926 $211,368 Gross profit 92,324 126,971 116,466 115,970 Income before income taxes 1,038 29,183 21,734 15,928 (a) Net income 639 17,948 13,366 9,972 Net income per diluted share $ .01 $ .27 $ .20 $ .15 (b) (a) A year-end inventory adjustment resulted in an increase to pre-tax income of approximately $3,900 in 2001. This adjustment was due to the Company utilizing the gross profit method to value inventory during interim periods and the year-end valuation of the Company's annual physical inventory. (b) Amounts may not equal fiscal year totals due to rounding.

20. Subsequent Event On December 11, 2002, the Company signed a letter of intent to purchase a chain of health food stores located throughout the Netherlands for approximately [Euro] 16,500 (approximately $16,620) in cash. The chain has annual net sales of approximately $30,219. The transaction, which is subject to certain Dutch approvals, is expected to be completed in the first quarter of 2003. F-28 SCHEDULE II NBTY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts For the years ended September 30, 2002, 2001 and 2000

(Dollars in thousands) Column A Column B Column C Column D Column E Additions Balance at Charged to Charged to Balance at beginning costs and Other end of Description of period expenses Accounts Deductions period ----------- ---------- ---------- ---------- ---------- ---------- Fiscal year ended September 30, 2002: Allowance for doubtful accounts $ 3,222 $1,064 $ (92)(a) $ 4,194 Valuation allowance for deferred tax assets $12,975 $(4,700)(b) $ 8,275 Fiscal year ended September 30, 2001 Allowance for doubtful accounts $ 1,227 $2,014 $ (19)(a) $ 3,222 Valuation allowance for deferred tax assets $12,975 $12,975 Fiscal year ended September 30, 2000 Allowance for doubtful accounts $ 1,248 $ 6 $ (27)(a) $ 1,227 Valuation allowance for deferred tax assets $12,975 $12,975 -------------------- (a) Uncollectible accounts written off. (b) Utilization of foreign tax credits.

S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NBTY, Inc. (Registrant) By: /s/ Scott Rudolph ------------------------------------ Scott Rudolph Chairman and Chief Executive Officer Dated: December 18, 2002 Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date --------- ----- ---- /s/ Scott Rudolph Chairman and -------------------------- Chief Executive Officer Scott Rudolph (Principal Executive Officer) December 18, 2002 /s/ Harvey Kamil President and Chief -------------------------- Financial Officer Harvey Kamil (Principal Operating Officer, Principal Financial and Accounting Officer) December 18, 2002 /s/ Arthur Rudolph Director December 18, 2002 -------------------------- Arthur Rudolph /s/ Aram Garabedian Director December 18, 2002 -------------------------- Aram Garabedian /s/ Bernard G. Owen Director December 18, 2002 -------------------------- Bernard G. Owen

Signature Title Date --------- ----- ---- /s/ Alfred Sacks Director December 18, 2002 -------------------------- Alfred Sacks /s/ Murray Daly Director December 18, 2002 -------------------------- Murray Daly /s/ Glenn Cohen Director December 18, 2002 -------------------------- Glenn Cohen /s/ Nathan Rosenblatt Director December 18, 2002 -------------------------- Nathan Rosenblatt /s/ Michael L. Ashner Director December 18, 2002 -------------------------- Michael L. Ashner /s/ Michael C. Slade Director December 18, 2002 -------------------------- Michael C. Slade /s/ Peter White Director December 18, 2002 -------------------------- Peter White

CERTIFICATIONS -------------- I, Scott Rudolph, certify that: 1. I have reviewed this annual report on Form 10-K of NBTY, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to name the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of , and for, the periods presented in the annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective action with regard to significant deficiencies and material weaknesses. Dated: December 19, 2002 -- Signature: /s/ Scott Rudolph ------------------------------------ Scott Rudolph Principal Executive Officer 2 CERTIFICATIONS -------------- I, Harvey Kamil, certify that: 1. I have reviewed this annual report on Form 10-K of NBTY, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to name the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of , and for, the periods presented in the annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective action with regard to significant deficiencies and material weaknesses. Dated: December 19, 2002 -- Signature: /s/ Harvey Kamil ------------------------------------ Harvey Kamil Principal Financial Officer 2