10-K 1 nbty-10k.txt FORM 10-K 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, 2000. 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 office) (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 of this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of shares of Common Stock on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System at December 7, 2000 was approximately $256,552,600. On such date, the closing price of the Registrant's Common Stock as reported by NASDAQ, was $5.03. The number of shares of Common Stock of the Registrant outstanding at December 7, 2000 was approximately 68,289,000. Documents Incorporated by Reference: None NBTY, INC. 2000 ANNUAL REPORT OF FORM 10-K TABLE OF CONTENTS Caption Page ------- ---- Forward Looking Statements 4 PART I ------ ITEM 1 BUSINESS 4 General 4 Business Strategy 4 Industry Overview 6 Marketing and Distribution 6 Sales, Marketing and Advertising 9 Manufacturing, Distribution and Quality Control 9 Research and Development 9 Competition 10 Compliance with Environmental Laws and Regulations 11 Government Regulation 11 Internal Operations 14 Trademarks 14 Associates 15 ITEM 2 PROPERTIES 15 ITEM 3 LEGAL PROCEEDINGS 17 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 PART II ------- ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 18 Dividend Policy 18 Price Range for Common Stock 18 ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA 19 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 20 Background 20 Results of Operations 20 Seasonality 24 Liquidity and Capital Resources 24 i Inflation 25 Recent Financial Accounting Standards Board Statements 26 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 26 PART III -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27 ITEM 11 EXECUTIVE COMPENSATION 30 Summary Compensation Table 30 Employment Agreements 30 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 31 NBTY Inc. Employee Stock Ownership and Trust ("ESOP") 33 Eligibility 33 Contributions 33 Vesting 33 Distribution 33 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34 PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES 35 Financial Statements 35 Financial Statement Schedule 35 Exhibits 35 Signatures 36 Contributions Contingency Plans Recent Financial Accounting Standards Board Statements ii Forward Looking Statements. This annual report on Form 10-K contains certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of the Company. All of these forward looking statements, which can be identified by the use of terminology such as "believe", "expects", "may", "will", "should", or "anticipates", or the negative thereof, or variations thereon, or comparable terminology, or by discussions of strategy which, although believed to be reasonable, are inherently uncertain. Factors that may affect such differences include (i) adverse publicity regarding the consumption of nutritional supplements; (ii) adverse federal, state or foreign legislation or regulation or adverse determinations by regulators; (iii) slow or negative growth in the nutritional supplement industry; (iv) inability of the Company to successfully implement its business strategy; (v) increased competition; (vi) increased costs; (vii) loss or retirement of key members of management; (viii) increases in the Company's cost of borrowings and unavailability of additional debt or equity capital; (ix) changes in general worldwide economic and political conditions in the markets in which the Company may compete from time to time; (x) the inability of the Company to assimilate acquisitions into the mainstream of its business; (xi) exposure to, expense of defending and resolving, product liability claims and other litigation; (xii) the Company's inability to manage growth and execute its business plan; (xiii) the ability of the Company to manage its retail operations efficiently; (xiv) consumer acceptance of the Company's products; (xv) the ability of the Company to renew leases on its retail locations; (xvi) the Company's ability to consummate future acquisitions; (xvii) the absence of clinical trials for many of the Company's products; (xviii) sales and earnings volatility; (xix) the Company's ability to manufacture its products efficiently; (xx) the rapidly changing nature of the internet and on-line commerce; (xxi) fluctuations in foreign currencies, and more particularly the British Pound; (xxii) import-export controls on sales to foreign countries; (xxiii) the inability of the Company to secure favorable new sites for, and delays in opening, new retail locations; (xxiv) unavailability of, or inability to consummate, advantageous acquisitions in the future; (xxv) the mix of the Company's products and the profit margins thereon; (xxvi) the availability and pricing of raw materials; (xxvii) other factors beyond the Company's control; and (xxviii) factors discussed in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. PART I Item 1. BUSINESS General NBTY, Inc. (the "Company") 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 and internationally. Under a number of brands, the Company offers approximately 1,000 products, including vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and other nutritional supplements. NBTY 1 targets the growing value-conscious consumer segment by offering high quality products at a value price point. NBTY markets its multi-branded products through a four channel distribution system: (i) Puritan's Pride/direct response, the leading U.S. nutritional supplement e- commerce/direct response program under the Puritan's Pride and Nutrition Headquarters brands, catalogs, and through the internet; (ii) Vitamin World retail stores, of which there are currently approximately 500 located strategically throughout the United States(1), Guam and Puerto Rico; (iii) Holland & Barrett retail stores of which there are currently 432 located strategically throughout the United Kingdom; and (iv) wholesale distribution to drug store chains, supermarkets, independent pharmacies and health food stores primarily under the Nature's Bounty brand and through a network marketing program. NBTY currently manufactures approximately 90% of the nutritional supplements it sells. [FN] -------------------- which includes 14 Nutrition Warehouse retail stores owned and operated by the Company. Business Strategy The Company's objective is to increase sales, improve profitability and strengthen its industry leading position through the following key strategies: Enhance Vertical Integration. Management believes that vertical integration creates 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) assure delivery schedules; (iv) reduce dependence on outside suppliers; and (v) improve overall operating margins. The Company continually evaluates ways to further enhance its vertical integration. For example, NBTY has become the primary supplier of nutritional supplements to Holland & Barrett, which was purchased in 1997. As a result, the costs of such products sold by Holland & Barrett stores have been lowered. Management believes this should increase overall profit margins while improving productivity for NBTY's manufacturing facilities. Introduce New Products and Product Innovations. The Company has consistently been among the first in the industry to introduce new products in response to recent scientific and popular reports. 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 attract new customers based upon its ability to rapidly respond to consumer demands with high quality, value-oriented products. Expand Existing Channels of Distribution. In order to increase sales and profitability, enhance overall market share, and leverage manufacturing, distribution, purchasing and marketing capabilities, the Company will continue to expand its existing channels of distribution. Increase Puritan's Pride direct response sales. NBTY expects to continue to strengthen its e-commerce/direct response sales 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) using more frequent 2 promotions to further improve response rates; and (iv) promoting the Internet website. In addition, the Company 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 and which the Company believes it can integrate into its own operations without adding substantial overhead expenses. Increase Retail Sales in the U.S. and U.K. In order to increase retail sales, NBTY is actively and strategically expanding its Vitamin World stores in the U.S. and selectively expanding its Holland & Barrett stores in the U.K. During calendar year 2000, the Company opened a total of 139 Vitamin World and Nutrition Warehouse stores to increase its penetration into regional malls and factory outlets. To date, the Company has more than 930 retail vitamin stores in operation, approximately 500 in the U.S. and 432 in the U.K. Integrate Strategic Acquisitions. NBTY completed the acquisition of Nutrition Warehouse, Inc. and affiliated companies at the end of 1999 and acquired the assets of: SDV Vitamins, a division of Rexall Sundown, Inc., Healthwatchers System and Feeling Fine Company in the year 2000. NBTY has integrated Nutrition Warehouse mail order operations by: (i) merging customer lists into the Company's computerized mailing list; (ii) expanded product lines; (iii) redesigned mail order catalogs; (iv) re-priced certain products; and (v) implemented proven marketing techniques. The Company intends to continue to pursue acquisition opportunities, both in the U.S. and internationally, that complement or extend its existing product lines, expand its distribution channels or are compatible with its business philosophy and strategic goals. Build Infrastructure to Support Growth. NBTY has technologically advanced, state-of-the-art manufacturing and production facilities, with total production capacity of approximately ten billion tablets and capsules per year. The Company's 131,000 square foot state-of-the-art soft gelatin encapsulation manufacturing facility on 62 acres, on Long Island, New York, is capable of producing five billion soft gel capsules per year. The Company regularly evaluates its operations and makes investments in building infrastructure, as necessary, to support its continuing growth. 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 and directors have an average of approximately 20 years with the Company. Industry Overview In the last several years, public awareness of the positive effects of vitamins and nutritional supplements on health has been heightened by widely publicized reports of scientific findings supporting such claims. Recent studies have indicated a correlation between the regular consumption of selected vitamins and nutritional supplements and reduced incidences of a wide range of conditions including cancer, heart disease, stroke, arthritis, osteoporosis, mental fatigue and depression, declining immune function, macular degeneration, memory loss and neural tube birth defects. The Company believes that the rise of alternative medicine and the holistic health movement has also contributed to increased sales of nutritional supplements and it is anticipated to increase in the future. 3 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 United Kingdom subsidiary, Holland & Barrett, has its principal executive office in Nuneaton, United Kingdom. Marketing and Distribution The Company operates in four reportable business segments: Puritan's Pride/direct response, U.S. retail, U.K. retail, and wholesale (which include network marketing). Operating Segments The following table sets forth the percentage of net sales for each of the Company's operating segments:

Fiscal Years Ended September 30, 1998 1999 2000 ---------------------------------- Puritan's Pride/direct response 33% 28% 25% Retail: U.S. 12% 17% 21% U.K. 32% 35% 34% Wholesale 23% 20% 20%

Puritan's Pride/direct response. The Company offers, through mail order and e-commerce, its full line of vitamins and other nutritional supplement products as well as selected personal care items under its Puritan's Pride and Nutrition Headquarters brand names at prices which are normally at a discount from those of similar products sold in retail stores. Through its Puritan's Pride and Nutrition Headquarters brands, NBTY is the leader in the U.S. direct response nutritional supplement industry with over six million customers and with response rates which management believes to be above the industry average. The Company mails its catalogs approximately eight times a year. 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. 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 websites and to increase average order sizes, the Company places advertisements in newspaper supplements, conducts insert programs with other mail order companies and has special promotions on a quarterly basis which offer customers combinations of products and quantities at promotional prices. The Company's use of state-of-the-art equipment in its catalog operations, such as computerized co-mailing, address bar coding and automated picking and packing systems enables the Company to fill orders typically within 48 hours of their 4 receipt. The Company's position as a leading direct response nutritional supplement distributor and its utilization of state-of-the-art picking and packing systems 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 website provides a practical and convenient method for consumers wishing to purchase products to promote healthy living. By using this website, consumers have access to the full line of more than 1,000 products which are offered through the Company's Puritan's Pride 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 website, www.vitaminworld.com, to accommodate customers who wish to purchase nutritional supplements on the internet, or in person, at any one of its stores. This website provides the consumer with information concerning the products offered in the Company owned and operated stores and with information about store locations. * Retail U.S. The Company is on target for operating approximately 500 stores located in 45 states, Guam and Puerto Rico, under the name Vitamin World by the end of calendar 2000. Such locations carry a full line of the Company's products under the Vitamin World brand name and also carry 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. Holland & Barrett ("H&B") is one of the leading nutritional supplement retailers in the United Kingdom, presently having 432 locations. H&B markets a broad line of nutritional supplement products, including vitamins, minerals and other nutritional supplements (approximately 60% of H&B's revenues) as well as food products, including fruits and nuts, confectionery and other items (approximately 40% of H&B's revenues). During the 2000 fiscal year, the Company built a 146,000 square foot warehouse in the U.K. in order to service a growing demand for nutritional supplements and to provide a facility for future growth and additional retail locations in the U.K. and operations in continental Europe. 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 brand is sold to drug store chains and drug wholesalers. The Company sells a full line of products to supermarket chains and wholesalers under the brand name Natural Wealth at prices designed for the "price conscious" consumer. The Company sells directly to health food stores under the brand name Good 'N Natural and sells products, including a specialty line of vitamins, to health food wholesalers under the brand name American Health. The Company has expanded sales of various products to many countries throughout Europe, Asia and Latin America. In 1999, NBTY established Dynamic Essentials (DE), Inc. ("DEI"), a company in the Network Marketing industry comprised of approximately 3,000 independent distributors, marketing nutritional and personal care products throughout the United States. DEI represents a strategic opportunity for NBTY to establish an additional 5 channel of distribution. Network Marketing offers NBTY the opportunity to develop and market a line of proprietary products such as LH12, a new weight loss system. Additionally, DEI utilizes innovative production techniques including an industry first SuperFresh Nitrogen Packaging, which is a modified atmosphere packaging process. Sales, Marketing and Advertising The Company has approximately 2,460 sales associates located throughout the U.S., Guam and Puerto Rico in its Vitamin World stores, and 60 associates who sell to NBTY's wholesale distributors and approximately 3,000 network marketing distributors. In addition, NBTY sells through commissioned sales representative organizations. For the fiscal years ended September 30, 1999 and 2000, NBTY spent approximately $33 million and $34 million, respectively, on advertising and promotions including print and media and cooperative advertising. NBTY creates its own advertising materials through a staff of approximately 30 associates. H&B employs approximately 3,000 associates, with approximately 2,752 in retail, 121 in distribution and 120 in administration. H&B runs advertisements in national newspapers. H&B conducts sales promotions and publishes a glossy magazine with articles and promotional materials. The Company expects advertising costs to increase as part of its effort to increase net sales. Manufacturing, Distribution and Quality Control The Company employs approximately 1,804 manufacturing, shipping and packaging associates throughout the United States. All of the Company's manufacturing is performed in the New York metropolitan area and in Illinois and is conducted in accordance with good manufacturing practice standards promulgated by the United States Food and Drug Administration and other applicable regulatory standards. 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 net sales. The Company's manufacturing process 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 production against 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, compression and sometimes coating operations. After the tablet 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 principal raw materials used in the manufacturing process are vitamins purchased from bulk manufacturers in the United States, Japan and Europe. Raw materials are available from numerous sources. No one supplier accounts for more than 10% of the Company's raw material purchases. 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. 6 Flexible production line changeover capabilities and reduced cycle times allow the Company to respond quickly to changes in manufacturing schedules. Research and Development In 2000, 1999 and 1998, the Company did not expend any significant amounts for research and development of new products. 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. This system provides functions such as scheduling of payments, receiving of payments, general ledger interface, vendor tracking and flexible reporting options. Competition The market for nutritional 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 independent, publicly and privately owned companies, highly fragmented in terms of both geographical market coverage and product categories. The Company also competes in the nutritional area with companies having broader product lines and larger sales volumes. There are numerous companies in the vitamin and nutritional supplement industry selling products to retailers, including mass merchandisers, drug store chains, independent drug stores and health food stores. Many companies within the industry are privately held and the Company is unable to precisely assess the size of all of its competitors or where it ranks in comparison to such privately held competitors with respect to sales to retailers. With respect to its network marketing organization, the Company believes its primary competition stems from other direct sales companies. The Company competes in the recruitment of independent sales people with other network marketing organizations some of whose product lines compete with the Company's products. 7 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. Compliance with Environmental Laws and Regulations The nature of the Company's business has not required any material capital expenditures to comply with Federal, State or local provisions enacted or adopted regulating the discharge of materials into the environment. No material expenditures to meet such provisions are anticipated. Such regulatory provisions have not had any material effect upon the Company's earnings or competitive position. Government Regulation United States. The manufacturing, packaging, labeling, advertising, distribution and sale of NBTY's products are subject to regulation by one or more federal agencies, the most active of which is the federal Food and Drug Administration ("FDA"). The Company's products are also subject to regulation by the Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the U. S. Department of Agriculture and the Environmental Protection Agency and by various agencies of the states and 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 production, packaging, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, and over-the- counter ("OTC") drugs. In addition, the FTC has jurisdiction to regulate advertising of dietary supplements and OTC drugs, while the U.S. Postal Service regulates advertising claims with respect to such products sold by mail order. The FDCA has been amended several times with respect to dietary supplements, most recently by the Dietary Supplement Health and Education Act of 1994 ("DSHEA") and the Nutrition Labeling and Education Act of 1990 ("NLEA"). DSHEA enacted on October 15, 1994, a new statutory framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA created a new class of "dietary supplements", consisting of vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, metabolites, extracts or combinations of such dietary ingredients. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be sold without FDA pre-approval and without notifying the FDA. On the other hand, a new dietary ingredient (one not on the market before October 15, 1994) requires proof that it has been used as an article of food without being chemically altered, or evidence of a history of use or other evidence of safety establishing that it is reasonably expected to be safe. The FDA must be supplied with such evidence at least 75 days before the initial use of a 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 decide to use, and the FDA's refusal to accept such evidence could result in regulation of such dietary ingredients as food additives requiring FDA pre-approval prior to marketing. As for labeling, DSHEA permits "statements of nutritional support" for dietary supplements without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well-being of the body, or the mechanism of action by which a dietary 8 ingredient may affect body structure, function or well-being (but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease). A company making a statement of nutritional support must possess substantiating evidence for the statement, disclose on the label that the FDA has not reviewed that statement and that the product is not intended for use for a disease, and notify the FDA of the statement within 30 days after its initial use. However, there can be no assurance that the FDA will not determine that a given statement of nutritional support that the Company decides to make is a drug claim rather than an acceptable nutritional support statement. Such a determination would require deletion of the drug claim or the Company's submission and the FDA's approval of a new drug application ("NDA"), which would entail costly and time-consuming clinical studies. In addition, DSHEA allows the dissemination of "third party literature", publications such as reprints of scientific articles linking particular dietary ingredients with health benefits. Third party literature may be used in connection with the sale of dietary supplements to consumers at retail or by mail order. Such a publication may be distributed if, among other things, it is not false or misleading, no particular manufacturer or brand of dietary supplement is mentioned, and a balanced view of available scientific information on the subject matter is presented. There can be no assurance, however, that all pieces of third party literature that may be disseminated in connection with the Company's products will be determined by the FDA to satisfy each of these requirements, and any such failure could subject the product involved to regulation as a new drug. Management anticipates that the FDA may promulgate good manufacturing practices ("GMPs") regulations authorized by DSHEA, which are specific to dietary supplements. GMP regulation would require supplements to be prepared, packaged and held in compliance with such rules, and may require similar quality control provisions contained in the GMP regulations for drugs. There can be no assurance that, if the FDA adopts GMP regulations specific to dietary supplements, NBTY will be able to comply with such GMP rules upon promulgation or without incurring material expenses to do so. NLEA prohibits the use of any health claim (as distinguished from "statements of nutritional support" permitted by DSHEA) for foods, unless the health claim is supported by significant scientific agreement and is pre-approved by the FDA. DSHEA created two new governmental bodies. The Commission on Dietary Supplements was established for two years to provide recommendations for the regulation of supplement labeling and health claims, including procedures for making disease-related claims. The Office of Dietary Supplements, established within the National Institute of Health, is charged with coordinating research on dietary supplements and disease prevention, compiling research results, and advising the Secretary of Health and Human Services on supplement regulation, safety and health claims. The FDA has broad authority to enforce the provisions of the FDCA applicable to dietary supplements, including the power to seize adulterated or misbranded products or unapproved new drugs, to request their recall from the market, to enjoin their further manufacture or sale, to publicize information about hazardous products, to issue warning letters and to institute criminal proceedings. Although the regulation of dietary supplements is less restrictive than that imposed upon drugs and food additives, there can be no assurance that dietary supplements will continue 9 to be subject to the less restrictive regulations than those imposed upon drugs and food additives, and there can also be no assurance that dietary supplements will continue to be subject to the less restrictive statutory scheme and regulations currently in effect. Further, there can be no assurance that, if more stringent statutes are enacted or regulations are promulgated, the Company will be able to comply with such statutes and regulations without incurring material expenses to do so. The over-the-counter pharmaceutical products distributed by the Company are subject to regulation by a number of Federal and State governmental agencies. In particular, the FDA regulates the formulation, manufacture, packaging and labeling of all OTC pharmaceutical products pursuant to a monograph system specifying OTC active drug ingredients that are generally recognized as safe and effective for particular therapeutic conditions. Compliance with applicable FDA monographs is required for the lawful interstate sale of OTC drugs. The FDA has the same above-noted enforcement powers for violations of the FDCA by drug manufacturers as it does for such violations by dietary supplement producers. The FTC, which exercises jurisdiction over the advertising of dietary supplements, has in the past several years instituted enforcement actions against several dietary supplement companies for false and misleading advertising of certain products. These enforcement actions have resulted in consent decrees and the payment of fines by the companies involved. In addition, the FTC has increased its scrutiny of infomercials. The Company is currently subject to an FTC consent decree for past advertising claims for certain of its products, and the Company is required to maintain compliance with this decree under pain of civil monetary penalties. Further, the U.S. 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 this order, subject to civil monetary penalties. The Company is also subject to regulation under various international, state and local laws that include provisions specifying, among other things, the marketing of dietary supplements and the operations of direct sales programs. The Company may be subject to additional laws or regulations administered by the FDA or other federal, state or foreign regulatory authorities, the repeal of laws or regulations that the Company considers favorable, such as DSHEA, or more stringent interpretations of current laws or regulations, from time to time in the future. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. These regulations could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record-keeping requirements, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on the Company's financial position, results of operations and cash flows. Government regulations in foreign countries where the company presently operates or plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of the Company's products. Compliance with such 10 foreign governmental regulations is generally the responsibility of the Company's distributors in those countries. These distributors are independent contractors over whom the Company has limited control. The Company's products are also subject to regulation by, among other regulatory entities, the Consumer Product Safety Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the Environmental Protection Agency (the "EPA"). Advertising and other forms of promotion and methods of marketing of the Company's products are subject to regulation by the U.S. Federal Trade Commission (the "FTC"), which regulates these activities under the Federal Trade Commission Act (the "FTCA"). The manufacture, labeling and advertising of the Company's products are also regulated by various state and local agencies as well as those of each foreign country to which the Company distributes its products. Various state agencies regulate network marketing distribution activities. The Company may be subject to additional laws or regulations administered by the FDA or other Federal, State or foreign regulatory authorities, the repeal or amendment of laws or regulations which the Company considers favorable, or more stringent interpretations of current laws or regulations, from time to time in the future. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require reformulation of certain products to meet new standards, recall or discontinuance of certain products not able to be reformulated, imposition of additional record-keeping requirements, expand documentation of the properties of certain products, expanded or different labeling and scientific substantiation. Any or all such requirements could have a material adverse effect on the Company's results of operations and financial position. United Kingdom. In the U.K., the manufacture, advertising, sale and marketing of food products is regulated by a number of government agencies, including the Ministry of Agriculture, Food and Fisheries and the Department of Health. In addition, there are various independent committees and agencies that report to the government, such as the Food Advisory Committee, which suggests appropriate courses of action by the relevant government department where there are areas of concern relating to food, and the Committee of Toxicity, which reports to the Department of Health. The relevant legislation governing the sale of food includes the Food Safety Act of 1990, which sets out general provisions relating to the sale of food. For example, this law makes it unlawful to sell food that is harmful to human health. 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 on which 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 11 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. International Operations In addition to the U.K., the Company markets its nutritional supplement products through distributors and direct mail in many countries throughout Europe, Asia, North America and the Pacific Rim countries. The Company's international operations are conducted in a manner substantially the same as those conducted domestically; however, in order to conform to local variations, economic realities, market customs, consumer habits and regulatory environments, differences exist in the products and in the distribution and marketing programs. 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 carrying on 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. Trademarks U.S. The Company owns trademarks registered with the United States Patent and Trademark Office and many other major jurisdictions throughout the world for its Nature's Bounty, Holland & Barrett, Good' N Natural, American Health, Puritan's Pride, Vitamin World, Natural Wealth and Nutrition Headquarters 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. Operations. H&B owns trademarks registered with the appropriate U.K. agencies for its Holland & Barrett trademark and has rights to use other names essential to its business. Associates NBTY. As of September 30, 2000, NBTY (excluding H&B) employed approximately 4,300 persons, of whom approximately 54 are in executive and administrative capacities, 2,523 are in sales and 1,804 are in manufacturing, shipping and packaging. None of the Company's associates are represented by a labor union. The Company believes its relationship with its associates is excellent. 12 H&B. During fiscal 2000, H&B employed an average of approximately 3,000 persons, of whom approximately 120 worked in executive or administrative capacities, 121 worked in warehouse and distribution and 2,752 worked in retail stores. There is no trade union representation at H&B. H&B management believes that its relationship with its associates is excellent. Item 2. PROPERTIES U.S. The Company owns a total of approximately 1,300,000 square feet of plant facilities located in Bohemia, New York, Holbrook, New York, Bayport, New York and elsewhere. The Company also leases approximately 75,000 square feet of warehouse space in Ronkonkoma, New York, 40,000 square feet in south Plainfield, New Jersey, and approximately 10,000 square feet of warehouse space in Reno, Nevada. The Company leases and operates approximately 496 retail locations under the name Vitamin World and Nutrition Warehouse in 45 States in the U.S. and Guam and Puerto Rico. The stores have an average selling area of 1,200 to 1,500 square feet. Generally, the Company leases the properties for three to five years at annual base rents ranging from $12,000 to $94,000 and percentage rents in the event sales exceed a specified amount. U.K. Holland & Barrett leases all of the locations of its 432 retail stores for terms varying between 10 and 25 years at varying rents. The stores have an average selling area of 1,200 square feet. No percentage rents are payable. The following is a listing of all properties owned or leased by the Company:

Type of Approx Leased Location Facility Sq. Feet or Owned ------------------------------------------------------------------------------- UNITED STATES: -------------- Bohemia, NY Administration & Production 169,000 Owned Bohemia, NY Manufacturing 80,000 Owned Bohemia, NY Manufacturing 75,000 Owned Holbrook, NY Warehouse & Distribution 230,000 Owned Holbrook, NY Engineering 17,000 Owned Ronkonkoma, NY Administration & Distribution 110,000 Owned Ronkonkoma, NY Warehouse 75,000 Leased (term - October 2005) Bayport, NY Production 17,500 Owned Bayport, NY* Manufacturing 131,000 Owned Mineola, NY Administrative 7,500 Owned Reno, NV Warehouse 25,000 Leased (term - June 2001) Carbondale, IL Administration & Production 80,000 Owned Carbondale, IL Administration 15,000 Owned South Plainfield, NJ Manufacturing 66,000 Owned Murphysboro, IL Manufacturing 65,000 Owned South Plainfield, NJ Warehouse 40,000 Leased (term - May 2006) 13 UNITED KINGDOM: --------------- September 2011 Hinckley Warehouse & Administration 50,000 Leased (term-October 2016) Nuneaton Administration 9,000 Leased (term-June 2012) Burton Administration & Warehouse 146,000 Owned

* Situated on 62 acres owned by the Company, which allows for construction of additional facilities, if required. Warehousing and Distribution The Company dedicated approximately 540,000 square feet to warehousing and distribution in its Long Island, NY; Carbondale, IL; Reno, NV; and Hinckley 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 48 hours of their receipt. Once a customer's telephone 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 25,000 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 ships its orders primarily through the U.S. Postal Service, 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 the U.S. and the U.K. Deliveries are made directly to Company owned and operated Vitamin World and Nutrition Warehouse 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 stores twice per week. Item 3. LEGAL PROCEEDINGS A consolidated stockholder class action is pending against the Company and certain of its officers and directors in the U. S. District Court of the Eastern District of New York, on behalf of stockholders who purportedly purchased shares of the Company between January 27, 2000 and June 15, 2000 (the "Class Period"). The class action alleges that the Company and individuals failed to disclose 14 material facts during the Class Period that resulted in a decline in the price of the Company's stock after June 15,2000. In addition to the consolidated class actions, two stockholder derivative actions were filed in 2000 in the Chancery Court in Delaware against certain officers and directors. The derivative claims, which are expected to be consolidated in the Delaware Court, are predicated upon the stockholder class actions pending in New York. The Company and the named individuals deny all claims of wrongdoing and intend to defend the actions vigorously. However, no determination can be made as to the final outcome. The Company maintains policies of directors and officers professional liability insurance. Miscellaneous Claims and Litigation. The Company is involved in miscellaneous claims and litigation, which taken individually or in the aggregate, would not materially impact the Company's financial position, results of operations or its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS [Not applicable.] PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DIVIDEND POLICY Since 1973, 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 shareholders 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 and capital requirements and such other factors as the Company's Board of Directors considers appropriate. 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 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: 15

Fiscal year ended September 30, 2000 High Low First Quarter 12.50 6.75 Second Quarter 16.00 9.94 Third Quarter 19.06 5.94 Fourth Quarter 7.88 5.75

Fiscal year ended September 30, 1999 High Low First Quarter 10.00 4.38 Second Quarter 8.00 4.63 Third Quarter 6.88 4.44 Fourth Quarter 9.00 5.81

On December 7, 2000, the closing sale price of the Common Stock was $5.03. There were approximately 990 record holders of Common Stock as of December 7, 2000. The Company believes that there were in excess of 10,000 beneficial holders of Common Stock as of such date. 16 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA (Dollars and shares in thousands, except per share amounts)

1996 1997 1998 1999 2000 ---------------------------------------------------------------- Selected Income Statement Data: Net sales $265,670 $355,336 $572,124 $630,894 $720,856 Costs & expenses: Cost of sales 138,186 177,909 271,233 293,521 312,960 Catalog printing, postage & promotion 26,695 27,932 32,176 32,895 33,709 Selling, general & administrative 68,414 96,653 190,276 236,367 279,379 Recovery of raw material costs (2,511) Litigation settlement costs 6,368 4,952 Merger costs 3,528 ---------------------------------------------------------------- Income from operations 32,375 46,474 74,911 63,159 97,319 Interest expense, net (2,431) (7,471) (16,518) (18,945) (18,858) Other, net 1,430 1,817 3,921 1,388 4,491 ---------------------------------------------------------------- Income before income taxes 31,374 40,820 62,314 45,602 82,952 Income taxes 9,168 11,694 23,474 18,323 31,444 ---------------------------------------------------------------- Net income $ 22,206 $ 29,126 $ 38,840 $ 27,279 $ 51,508 ================================================================ 17 Per Share Data: Net income per common share: Basic $ 0.35 $ 0.45 $ 0.59 $ 0.39 $ 0.77 Diluted $ 0.32 $ 0.42 $ 0.56 $ 0.39 $ 0.74 Weighted average common shares outstanding (000): Basic 64,197 64,611 65,563 69,640 67,327 Diluted 68,699 68,935 69,847 70,826 69,318 Selected Balance Sheet Data: Working capital $ 57,559 $ 70,850 $ 89,106 $121,103 $100,114 Total assets 171,948 571,177 500,457 539,384 603,613 Long-term debt, capital lease obligations and promissory notes payable, less current portion 23,570 341,159 173,531 219,508 200,478 Total stockholders' equity 107,645 131,291 230,339 223,949 272,443

18 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Background NBTY, founded in 1971, 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 17 companies participating in the direct response, retail and manufacturing of the nutritional supplement sector, including Holland & Barrett in August 1997, Nutrition Headquarters Group in 1998 and Nutrition Warehouse Group in fiscal 2000. In January 2000, NBTY completed the acquisition of a group of affiliated, privately-held companies located in Long Island, New York operating under the trade name of Nutrition Warehouse. The purchase price consisted of $20 million in cash and 1,059,000 shares of NBTY common stock. Nutrition Warehouse was comprised of a mail order operation and 14 retail stores. The acquisition was accounted for as a purchase. NBTY markets its multi-branded products through four distribution channels: (i) Puritan's Pride/direct response, (ii) Retail-Company owned and operated Vitamin World retail stores in the U.S., (iii) Company owned and operated Holland & Barrett retail stores in the U.K., and (iv) wholesale distribution to drug store chains, supermarkets, discounters, independent pharmacies, health food stores and network marketing. NBTY's net sales from Puritan's Pride/direct response, retail-U.S., retail-U.K. and wholesale operations were approximately 25%, 21%, 34% and 20%, respectively, for the year ended September 30, 2000. The Company recognizes revenue upon shipment or, 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, other than two-piece capsule forms. 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. 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, -------------------------------- 1998 1999 2000 ------------------------ Net Sales 100% 100% 100% 19 Costs and Expenses: Cost of sales 47.4 46.5 43.3 Catalog printing & promotion 5.6 5.2 4.7 Selling, general & administrative 33.3 37.5 38.8 Litigation 0.0 0.8 (0.3) Merger-related costs 0.6 0.0 0.0 ----------------------- 86.9 90.0 86.5 ----------------------- Income from operations 13.1 10.0 13.5 Interest expense & other, net (2.2) (2.8) (2.0) ----------------------- Income before income taxes 10.9 7.2 11.5 Income taxes 4.1 2.9 4.4 ----------------------- Net Income 6.8% 4.3% 7.1% =======================

Fiscal Year Ended September 30, 2000 Compared to Year Ended September 30, 1999 Net Sales. Net Sales for fiscal 2000 were $721 million, an increase of $90 million or 14% compared with net sales of $631 million in fiscal 1999. Of the $90 million increase, $46 million was attributable to retail- U.S. sales, $28 million was attributable to retail-U.K. sales, $9 million in wholesale and $7 million direct response/e-commerce. During 2000, the Company opened 139 stores which contributed $20 million in increased sales in the U.S. and 3 stores in the U.K. The acquisition of Nutrition Warehouse accounted for $7 million of the increase in retail U.S. sales. Cost of Sales. Cost of Sales for fiscal 2000 was $313 million, an increase of $19 million compared with the cost of sales of $294 million for fiscal 1999. As a percentage of sales, cost of sales decreased and, correspondingly, gross profit increased to 56.6% for 2000 from 53.5% for 1999. Such increase was due to various factors including: (i) lower manufacturing costs resulting from increased productivity at the Company's manufacturing facilities; (ii) increased sales of new products, which typically have higher gross margins; and (iii) generally higher margins on products manufactured by NBTY and sold in H&B stores. 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 $5.4 million for both 2000 and 1999, 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 $34 million and $33 million for fiscal 2000 and 1999, respectively. Such costs as a percentage of net sales were 4.7% for 2000 and 5.2% for 1999. The decreased percentage was due to more efficient printing and mailing methods of the Company's catalog operation and increased sales. Selling, General and Administrative. Selling, general and administrative expenses for fiscal 2000 were $279 million, an increase of $43 million, compared with $236 million for fiscal 1999. As a percentage of sales, selling, general and administrative expenses were 38.8% and 37.5% in 20 2000 and 1999, respectively. Of the $43 million increase, $11 million was attributable to rent expense, $17 million to payroll costs mainly associated with the retail-U.S. expansion program and $5 million was attributable to an increased depreciation expense as a result of the increase in capital expenditures. Recovery of raw materials costs. 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, Net. Interest expense was $19 million in fiscal 2000, the same amount as in fiscal 1999. Income Taxes. The Company's effective tax rate was 38.0% in fiscal 2000 and 40.2% in fiscal 1999. Such reduction is principally due to an increase in retail sales at Holland & Barrett, which has a lower effective tax rate than domestic sales. Net Income. Net income for fiscal 2000 was $52 million, compared with $27 million in fiscal 1999, an increase of $25 million. Fiscal Year Ended September 30, 1999 Compared to Year Ended September 30, 1998 Net Sales. Net sales for fiscal 1999 were $631 million, an increase of $59 million or 10% compared with net sales of $572 million in fiscal 1998. Of the $59 million increase, $37 million was attributable to retail- U.S. sales, $35 million was attributable to retail-U.K. sales, while there were decreases of $1 million in wholesale and $12 million in Puritan's Pride/direct response. During 1999, the Company opened 151 stores which contributed $18 million in increased sales in the U.S. and 8 stores in the U.K. The decrease in sales for Puritan's Pride/direct response was mainly due to the discontinuance of unprofitable sales at Nutrition Headquarters. Internet sales increased 550% to $4 million. Cost of Sales. Cost of Sales for fiscal 1999 was $294 million, an increase of $23 million compared with the cost of sales of $271 million for fiscal 1998. As a percentage of sales, gross profit increased to 53.5% for 1999 from 52.6% for 1998. Such increase was due to various factors including: (i) lower manufacturing costs resulting from increased productivity at the Company's manufacturing facilities; (ii) higher percentage of sales direct to the consumer; (iii) increased sales of new products, which typically have higher gross margins; and (iv) generally higher margins on products manufactured by NBTY and sold in H&B stores. 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 $5.4 million, which, is principally the result of the Company utilizing the gross profit method for interim reporting. Catalog, Printing, Postage and Promotion. Catalog, printing, postage and promotion expenses were $33 million and $32 million for fiscal 1999 and 1998, respectively. Such costs as a percentage of net sales were 5.2% for 1999 and 5.6% for 1998. The decreased percentage was due to more efficient printing and mailing methods of the Company's catalog operation and increased sales. Selling, General and Administrative. Selling, general and administrative expenses for fiscal 1999 were $236 million, an increase of 21 $46 million, compared with $190 million for fiscal 1998. As a percentage of sales, selling, general and administrative expenses were 37.5% and 33.3% in 1999 and 1998, respectively. Of the $46 million increase, $9 million was attributable to rent expense, $17 million to payroll costs, mainly associated with the retail-U.S. expansion program and $6 million was attributable to an increased depreciation expense as a result of the increase in capital expenditures. Litigation Settlement Costs and Merger Related Costs. In 1999 the Company incurred $5 million for litigation and settlement costs in connection with terms of the purchase agreement of the 1997 acquisition of Holland & Barrett and in 1998, $4 million for merger related costs for Nutrition Headquarters. Interest Expense, Net. Interest expenses was $19 million in fiscal 1999, an increase of $2 million, compared with net interest expense of $17 million in fiscal 1998. The increase in net interest primarily resulted from the increase of long term debt from $171 million in 1998 to $217 million in 1999. Income taxes. The Company's effective tax rate was 40.2% in fiscal 1999 and 37.7% in fiscal 1998. Prior to April 1998, Nutrition Headquarters Group was privately held and had subchapter S status and, accordingly, recorded no income tax provisions except for certain minimum taxes. Net Income. Net income for fiscal 1999 was $27 million, compared with $39 million in fiscal 1998, a decrease of $12 million. Seasonality The Company believes that its business is not seasonal. Historically the Company has slightly lower net sales in its first and third fiscal quarters, and slightly higher net sales in its second and fourth fiscal quarters. The Company may have higher net sales in a quarter depending upon when it has engaged in significant promotional activities. Liquidity and Capital Resources. The Company requires liquidity for capital expenditures and working capital needs, including debt service requirements. Total capital expenditures for the Company were $51.7 million for fiscal 2000, of which approximately $36.2 million was associated with the Company's retail expansion program. Working capital decreased $21 million to $100 million. The Company believes that the cash flow generated from its operations and amounts available under the Revolving Credit Facility should be sufficient to fund its debt service requirements, working capital needs, anticipated capital expenditures and other operating expenses for the foreseeable future. In April 1999, the Company entered into an amended and restated Credit and Guarantee Agreement ("CGA") which expires September 2003 for $135,000. On July 17, 2000, the CGA was amended to $149,300. The CGA is comprised of two Revolving Credit Agreements of $50,000 each and a term loan of $49,300. At September 30, 2000, there were borrowings of $54,100 under this facility. In January 2000, the Company borrowed $20,000 for the cash portion of the January 3, 2000 acquisition of Nutrition Warehouse, Inc. For the fiscal year 22 ended September 30, 2000, the Company paid down $35,400 and borrowed $34,000 under this facility. Virtually all the Company's assets are collateralized under the CGA. The Company utilized the CGA to buy back 288 shares ($2,511) during fiscal 2000 and 5,702 shares ($34,438) during fiscal year 1999 of its common stock under its stock purchase plan. The Company's debt instruments 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. 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. Year 2000 The Company will continue to monitor its business processes and third parties for potential problems that could arise during the calendar year 2000. Based on the Company's preparations prior to January 1, 2000 and the absence of any problems to date, no significant disruptions are anticipated. New Accounting Standards 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 application. SAB 101 is effective for the Company beginning July 1, 2001 or fourth quarter of fiscal 2001. Management is currently assessing the impact of SAB 101 on the Company's results of operations and financial position. The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998 ("SFAS 133"). This statement, as amended, is effective in fiscal years beginning after June 15, 2000, although early adoption is permitted. This statement requires the recognition of the fair value of any derivative financial instruments on the balance sheet. Changes in fair value of the derivative and, in certain instances, changes in the fair value of an underlying hedged asset or liability, are recognized through either income or as a component of other comprehensive income. The adoption of SFAS 133 is not expected to have a significant impact on the Company's financial position or results of operations. During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for Certain Sales Incentives", which addresses the recognition, measurement and income 23 statement classification for sales incentives offered voluntarily without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. EITF 00-14 requires that costs relating to sales incentives, be classified as a reduction of revenue, and not in marketing or selling expenses. The Company will adopt EITF 00-14 effective April 1, 2001. Management does not believe that the adoption of EITF 00-14 will have a material impact on the Company's results of operations or presentation thereof. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See attached financial statements. Part IV, Item 14. Exhibits. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names and other relevant information regarding executive officers and directors of the Company as of December 1, 2000. Their positions and tenure are as follows: 24

Year Commenced first term of elected office as Name Age Position Director Officer -------------------------------------------------------------------------------- Scott Rudolph 43 Chairman of the Board, Chief Executive Officer, and President 1986 1986 Harvey Kamil 56 Executive Vice President, Secretary ---- 1982 Michael C. Slade 51 Senior Vice President- Strategic Planning, Director 1998 1999 James P. Flaherty 43 Vice President- Advertising ---- 1988 William J. Shanahan 42 Vice President- Data Processing ---- 1988 Arthur Rudolph 72 Director 1971 1971 Aram Garabedian 65 Director 1971 ---- Bernard G. Owen 72 Director 1971 ---- Alfred Sacks 73 Director 1971 ---- Murray Daly 73 Director 1971 ---- Glenn Cohen 41 Director 1988 ---- Bud Solk 66 Director 1994 ---- 25 Nathan Rosenblatt 43 Director 1994 ---- Michael L. Ashner 47 Director 1998 ----

26 The Directors of the Company are elected to serve a three-year term or until their respective successors are elected and qualified. Officers of the Company hold office until the meeting of the Board of Directors immediately following the next annual shareholders meeting or until removal by the Board, whether with or without cause. Scott Rudolph is the Chairman of the Board of Directors, President, Chief Executive and a shareholder of the Company. He is the Vice Chairman of Dowling College, Long Island, New York. He joined NBTY in 1986. He is the son of Arthur Rudolph. Harvey Kamil is the Executive Vice President, Chief Financial Officer and Secretary. 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 NBTY in 1982. James P. Flaherty is the Vice President of Advertising. He joined NBTY in 1979. William J. Shanahan is the Vice President of Data Processing. He joined NBTY in 1980. Michael Slade is the Senior Vice President - Strategic Planning and is the President of the Company's wholly-owned subsidiary, Nutrition Headquarters (Delaware), Inc. He previously was an owner and Chief Executive Officer of that corporation's predecessor before its acquisition by the Company in 1998. Arthur Rudolph founded Arco Pharmaceuticals, Inc., NBTY's predecessor, in 1960 and founded the Company in 1971. He served as NBTY'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 a consultant to the Company. He is the father of Scott Rudolph. Aram Garabedian was elected a State Senator of the Commonwealth of Rhode Island in 2000 and had been a representative in that State's legislature from 1972 through 1978, 1998 through 2000. Since 1988, he has been a real estate developer in Rhode Island. He was associated with NBTY and its predecessor, Arco Pharmaceuticals, Inc., for 20 years in a sales capacity and as an officer. Bernard G. Owen has been associated with Cafiero, Cuchel and Owen Insurance Agency, Pitkin, Owen Insurance Agency and Wood-HEW Travel Agency for more than the past 5 years. He currently serves as Chairman of these firms. Alfred Sacks has been engaged as President of Al Sacks, Inc., an insurance agency for the past 30 years. Murray Daly, formerly a Vice President of J. P. Egan Office Equipment Co., has been a consultant to the office equipment industry for more than 5 years. Glenn Cohen is the President of Glenn-Scott Landscaping and Design and has served in that capacity for more than 5 years. 27 Bud Solk has been President of Chase/Ehrenberg & Rosene, Inc., an advertising and marketing agency located in Chicago, Illinois since 1995. Previously, Mr. Solk had been President of Bud Solk Associates, Inc., which he founded in 1958. Nathan Rosenblatt is the President and Chief Executive Officer of Ashland Maintenance Corp., a commercial maintenance organization located in Long Island, New York and has served in that capacity for more than 5 years. Michael L. Ashner is President and Chief Executive Officer of Winthrop Financial Assoc., a firm engaged in the organization and administration of real estate limited partnership and has served in that capacity for more than 5 years. 28 Item 11. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid or accrued by the Company during the period ended September 30, 2000 to the Company's Chief Executive Officer and certain other highest compensated executive officers of the Company whose total compensation exceeded $100,000. SUMMARY COMPENSATION TABLE

Long-Term All Other Compensation Awards Compensation: Name and Annual Compensation Restricted Stock Pension Plan Principal Position Year Salary $ Bonus$ Stock($) Options # and 401(k) Plan $ ----------------------------------------------------------------------------------------------------------------- Scott Rudolph 2000 621,792 425,000 1,000,000 7,316 Chairman of the Board, 1999 609,600 500,000 260,000 4,801 President and Chief 1998 600,008 400,000 1,050,000 7,672 Executive Officer --------- Harvey Kamil 2000 310,896 200,000 250,000 7,316 Executive Vice President, 1999 304,800 225,000 250,000 4,801 Chief Financial Officer 1998 300,000 225,000 150,000 7,672 ------- Michael C. Slade 2000 300,000 50,000 30,000 7,316 Senior Vice President 1999 275,000 ------- ------- 3,312 Strategic Planning 1998 ------- ------- ------- ----- James Flaherty 2000 185,000 75,000 30,000 7,316 Vice President 1999 174,700 75,000 20,000 4,801 Marketing & Advertising 1998 167,500 75,000 30,000 7,672 ------ William Shanahan 2000 165,000 70,000 20,000 7,316 Vice President 1999 152,000 60,000 20,000 4,801 Data Processing 1998 146,000 60,000 30,000 7,672 ------

29 Employment Agreements Scott Rudolph, Chairman of the Board, President and Chief Executive Officer of the Company, entered into an employment agreement effective February 1, 1994, as amended, to terminate January 31, 2004. During the period of the employment agreement, the salary payable to Scott Rudolph shall be fixed by the Board of Directors of the Company, provided that in no event will the executive salary be at a rate lower than $600,000 per year, with bonuses, certain fringe benefits accorded other executives of NBTY, and with annual cost of living index increases. Harvey Kamil, Executive Vice President, Chief Financial Officer and Secretary of the Company, entered into an employment agreement effective February 1, 1994, as amended, to terminate January 31, 2004. During the period of the employment agreement, the salary payable to Harvey Kamil shall be fixed by the Board of Directors of the Company, provided that in no event will the executive salary be at a rate lower than $300,000 per year, with bonuses, certain fringe benefits accorded other executives of NBTY, and with annual cost of living index increases. Each of the above agreements also provides for the immediate acceleration of the payment of all compensation for the term of the contract and the registration and sale of all issued stock, stock options and shares underlying options in the event of certain changes of control, or involuntary (i) termination of employment, (ii) reduction of compensation, or (iii) diminution of responsibilities or authority. Effective January 1, 1997, 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 agreement has been renewed for successive one year terms to provide services through December 31, 2001 with the consulting fee 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, payable monthly, with certain fringe benefits accorded to other executives of NBTY. On April 20, 1998, the Company entered into a one-year consulting agreement with Michael C. Slade, one of the former shareholders of Nutrition Headquarters Group. Under the terms of the agreement, as amended, Mr. Slade is the Senior Vice President - Strategic Planning of the Company and the President of Nutrition Headquarters Group subsidiary. He receives an annual compensation of $275,000 renewable at Mr. Slade's option, for up to two additional one-year periods. The agreement also provides for fringe benefits accorded other executives of NBTY. Mr. Slade has exercised his option to renew through 2001. Four members of Holland & Barrett's senior executive staff have service contracts, terminable by the Company upon twelve months' notice, at annual salaries ranging between approximately $75,000 and $200,000. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Management (a) Security Ownership of Certain Beneficial Owners 30 Security ownership of persons owning of record, or beneficially, 5% or more of the outstanding Common Stock, as of December 15, 2000. The Company is not aware of any other beneficial holders of 5% or more of the Common Stock. All information with respect to beneficial ownership, set forth in the foregoing stock ownership table, is based on information furnished by the shareholder, director or executive officer, or contained in filings made with the Securities and Exchange Commission.

Amount & Nature Percent Name and Address of of Beneficial of Title of Class Beneficial Owner Ownership (1) Class (1) ---------------------------------------------------------------------------- Common Stock Scott Rudolph 12,670,126 18.6 Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock NBTY, Inc. 3,095,109 4.5 (Par Value Employee Stock Record and $.008) Ownership Plan Beneficial Includes shares issuable upon exercise of options held by executive officers and directors.

(b) Security Ownership of Management (Directors and Executive Officers)

Amount & Nature Percent Name and Address of of Beneficial of Title of Class Beneficial Owner Ownership (1) Class (1) ---------------------------------------------------------------------------- Common Stock Scott Rudolph(2) 12,670,126 18.6 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Harvey Kamil 1,541,725 2.3 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Arthur Rudolph 1,586,893 2.3 (Par value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Michael Slade 2,200,698 3.1 (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial 31 Common Stock James Flaherty 131,750 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock William Shanahan 205,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Aram Garabedian 96,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Bernard G. Owen 69,400 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Alfred Sacks 95,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Murray Daly 88,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Glenn Cohen 60,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Bud Solk 80,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Nathan Rosenblatt 30,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock Michael Ashner 65,000 Nil (Par Value 90 Orville Drive Record and $.008) Bohemia, NY 11716 Beneficial Common Stock All Directors & 18,919,592 27.60 (Par Value Executive Officers Record and $.008) as a group Beneficial (14 persons) Each named person or group is deemed to be the beneficial owner of securities which may be acquired within 60 days through the exercise or conversion of options, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage of class beneficially owned by any person or group. Accordingly, the indicated number of shares includes shares issuable upon exercise of options (including employee stock options) and any other beneficial ownership of securities held by such person or group. Includes shares held in a Trust created by Arthur Rudolph for the 32 benefit of Scott Rudolph and others. Includes shares held in a Trust created for the benefit of Mr. Slade's wife.

NBTY Inc. Employee Stock Ownership Plan and Trust ("ESOP") ---------------------------------------------------------- The basic terms of the Plan are as follows: Eligibility All associates of the Company, including officers, over the age of 21 and who have been employed by the Company for one year or more are eligible participants in the Plan. Contributions Contributions are made on a voluntary basis by the Company. There is no minimum contribution required in any one year. There will be no contributions required by an associate. All contributions will be made by the Company at the rate of up to 15% of the Company's annual payroll, at the discretion of the Company. Each eligible associate receives an account or share in the Trust and the cash and/or shares of stock contributed to the Plan 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" each year, as follows:

Number of Years Percentage of Shares of Service earned each year ----------------------------------------- Less than 2 0% 2 but less than 3 20% 3 but less than 4 20% 4 but less than 5 20% 5 but less than 6 20% 6 or more 20%

Distribution 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 held in trust for such associate. At the end of the vesting period, the associates become full beneficial owners of the stock. There is no tax consequence attached to his or her Plan for an associate until that associate sells the shares, at which 33 time any profit realized by the associate is taxed as a capital gain. Distribution is to be made only in the shares of NBTY, Inc. which shares were purchased for the Trust from the cash contributions of the Company. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has had, and in the future may continue to have, business transactions with firms affiliated with certain of the Company's directors. Each such transaction is in the ordinary course of the Company's business. During the fiscal year ended September 30, 2000, the following transactions occurred: A. Gail Radvin, Inc., a corporation wholly-owned by Gail Radvin, received commissions from the Company totaling $520,000 on account of sales in certain foreign countries and had trade receivable balances of approximately $2.5 million as of September 30, 2000. Gail Radvin is the sister of Arthur Rudolph (a director) and the aunt of Scott Rudolph (Chairman and President). B. Chase/Ehrenberg & Rosene, Inc., a company partly owned by Bud Solk, a director, placed advertising for the Company and received commissions of $163,923. C. Glenn-Scott Landscaping & Design, a company owned by Glenn Cohen, a director, performed landscaping and maintenance on the Company's properties and received $81,477 in compensation. D. Arthur Rudolph, a director, has been retained under a Consulting Agreement, at a minimum annual fee of $400,000, payable monthly, which Agreement has been renewed until December 31, 2001. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES (a) The following documents are filed as a part of this report

Page Number ------ 1. Financial Statements Report of Independent Accountants F-1 34 Consolidated Balance Sheets as of September 30, 2000 and 1999 F-2 Consolidated Statements of Income for the years ended September 30, 2000, 1999 and 1998 F-3 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2000, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999 and 1998 F-5 to F-6 Notes to Consolidated Financial Statements F-7 to F-23 2. Financial Statement Schedule Schedule II S-1 3. Exhibits 11. Statement Re: Computation of Earnings Per Share

35 Item 8 Financial Statements and Supplementary Data Report of Independent Accountants To the Board of Directors and Stockholders of NBTY, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 34, present fairly, in all material respects, the financial position of NBTY, Inc. and Subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 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 14(a)(2) on page 35, 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 audits 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. PricewaterhouseCoopers LLP November 14, 2000 New York, New York F-1 NBTY, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2000 and 1999 (Dollars and shares in thousands) ---------------------------------------------------------------------------

Assets 2000 1999 Current assets: Cash and cash equivalents $ 31,464 $ 18,269 Accounts receivable, less allowance for doubtful accounts of $1,227 in 2000 and $1,248 in 1999 24,913 24,336 Inventories 130,741 135,466 Deferred income taxes 3,549 3,250 Prepaid expenses and other current assets 20,269 19,243 ---------------------- Total current assets 210,936 200,564 Property, plant and equipment, net 214,164 189,562 Intangible assets, net 172,124 141,410 Other assets 6,389 7,848 ---------------------- Total assets $603,613 $539,384 ====================== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 12,829 $ 1,799 Accounts payable 61,100 45,366 Accrued expenses 36,893 32,296 ---------------------- Total current liabilities 110,822 79,461 Long-term debt 199,095 217,136 Obligations under capital leases 1,383 2,372 Deferred income taxes 17,050 12,233 Other liabilities 2,820 4,233 ---------------------- Total liabilities 331,170 315,435 ---------------------- Commitments and contingencies (Notes 11 and 15) Stockholders' equity: Common stock, $.008 par; authorized 175,000 shares in 2000 and 1999; issued 68,524 shares in 2000 and 66,096 shares in 1999 and outstanding 68,289 shares in 2000 and 66,096 shares in 1999 548 529 Capital in excess of par 123,798 106,332 Retained earnings 163,300 111,792 ---------------------- 287,646 218,653 Less, 235 treasury shares at cost, in 2000 (1,512) Stock subscriptions receivable (839) (839) Accumulated other comprehensive (loss) earnings (12,852) 6,135 ---------------------- Total stockholders' equity 272,443 223,949 ---------------------- Total liabilities and stockholders' equity $603,613 $539,384 =====================

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, 2000, 1999 and 1998 (Dollars and shares in thousands, except per share amounts) ---------------------------------------------------------------------------

2000 1999 1998 Net sales $720,856 $630,894 $572,124 ------------------------------------ Costs and expenses: Cost of sales 312,960 293,521 271,233 Catalog printing, postage and promotion 33,709 32,895 32,176 Selling, general and administrative 279,379 236,367 190,276 Recovery of raw material costs (2,511) Litigation settlement costs 4,952 Merger related costs 3,528 ------------------------------------ 623,537 567,735 497,213 ------------------------------------ Income from operations 97,319 63,159 74,911 ------------------------------------ Other income (expense): Interest, net (18,858) (18,945) (16,518) Miscellaneous, net 4,491 1,388 3,921 ------------------------------------ (14,367) (17,557) (12,597) ------------------------------------ Income before income taxes 82,952 45,602 62,314 Income taxes 31,444 18,323 23,474 ------------------------------------ Net income $ 51,508 $ 27,279 $ 38,840 ==================================== Net income per share: Basic $ 0.77 $ 0.39 $ 0.59 Diluted $ 0.74 $ 0.39 $ 0.56 Weighted average common shares outstanding: Basic 67,327 69,640 65,563 Diluted 69,318 70,826 69,847

The accompanying notes are an integral part of these consolidated financial statements. F-3 NBTY, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended September 30, 2000, 1999 and 1998 (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, 1997 23,041 $185 $ 56,550 $ 75,199 1,503 $ (3,206) $ - $ 2,563 $131,291 Net income for year ended September 30, 1998 38,840 38,840 $ 38,840 S corporation distributions (8,050) (8,050) Exercise of stock options 44 40 40 Three-for-one stock split effected in the form of a 200% stock dividend 46,169 369 (369) 3,008 - Exercise of stock options 10 3 3 Tax benefit from exercise of stock options 611 611 Public offering of common stock 3,450 28 58,826 58,854 Foreign currency translation adjustment 8,750 8,750 8,750 ------------------------------------------------------------------------------------------------------------ Balance, September 30, 1998 72,714 582 115,661 105,989 4,511 (3,206) - 11,313 230,339 $ 47,590 ======== Net income for year ended September 30, 1999 27,279 27,279 $ 27,279 Purchase of treasury shares, at cost 5,702 (34,438) (34,438) Treasury stock retired (10,213) (82) (16,086) (21,476) (10,213) 37,644 - Exercise of stock options 3,595 29 888 (839) 78 Tax benefit from exercise of stock options 5,869 5,869 Foreign currency translation adjustment (5,178) (5,178) (5,178) ------------------------------------------------------------------------------------------------------------ Balance, September 30, 1999 66,096 529 106,332 111,792 - - (839) 6,135 223,949 $ 22,101 ======== Net income for year ended September 30, 2000 51,508 51,508 $ 51,508 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 Foreign currency translation adjustment (18,987) (18,987) (18,987) ------------------------------------------------------------------------------------------------------------ Balance, September 30, 2000 68,524 $548 $123,798 $163,300 235 $(1,512) $(839) $(12,852) $272,443 $ 32,521 ===========================================================================================================

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, 2000, 1999 and 1998 (Dollars in thousands) ---------------------------------------------------------------------------

2000 1999 1998 Cash flows from operating activities Net income $ 51,508 $ 27,279 $ 38,840 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of product line (2,563) Loss on disposal/sale of property, plant and equipment 1,119 401 587 Depreciation and amortization 38,501 29,228 22,059 Amortization of deferred financing costs 787 683 704 Amortization of bond discount 124 124 119 Allowance for doubtful accounts 21 11 38 Deferred income taxes 4,827 2,892 2,139 Tax benefit from exercise of stock options 1,833 5,869 611 Changes in assets and liabilities, net of acquisitions: Accounts receivable 5,803 11,155 (2,673) Inventories 8,039 (16,785) (31,890) Prepaid real estate tax, catalog costs and other current assets 1,914 (7,870) 5,178 Other assets 417 1,323 2,938 Accounts payable 6,093 (16,588) (1,133) Accrued expenses 2,643 1,193 (3,962) Other liabilities (211) 1,240 ------------------------------------- Net cash provided by operating activities 123,418 38,915 32,232 ------------------------------------- Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired (45,119) Purchase of property, plant and equipment (51,786) (45,810) (68,044) Increase in intangible assets (513) (7,171) Proceeds from sale of property, plant and equipment 256 493 Proceeds from sale of short-term investments 8,362 Proceeds from sale of product line 4,640 ------------------------------------- Net cash used in investing activities (96,649) (46,323) (61,720) ------------------------------------- Cash flows from financing activities: Net proceeds under line of credit agreement 2,800 46,193 8,000 Proceeds from public offering, less expenses 58,854 Cash held in escrow 144,262 Principal payments under long-term debt agreements and capital leases (17,667) (1,365) (8,012) Purchase of treasury stock (1,512) (34,438) Proceeds from stock options exercised 4,408 78 43 Distributions to stockholders (8,050) Repayment of promissory note (169,909) ------------------------------------- Net cash (used in) provided by financing activities (11,971) 10,468 25,188 ------------------------------------- Effect of exchange rate changes on cash and cash equivalents (1,603) 901 (1,654) -------------------------------------

Continued The accompanying notes are an integral part of these consolidated financial statements. F-5 NBTY, Inc. and Subsidiaries Consolidated Statements of Cash Flows September 30, 2000, 1999 and 1998 (Dollars in thousands) ---------------------------------------------------------------------------

2000 1999 1998 Net increase (decrease) in cash and cash equivalents $ 13,195 $ 3,961 $ (5,954) Cash and cash equivalents at beginning of year 18,269 14,308 20,262 ------------------------------------- Cash and cash equivalents at end of year $ 31,464 $ 18,269 $ 14,308 ===================================== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 20,224 $ 18,320 $ 19,852 Cash paid during the period for income taxes $ 16,116 $ 8,785 $ 18,105

Non-cash investing and financing information: 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 market value of approximately $12,200 (Note 2). During fiscal 2000 and 1999, the Company entered into a capital lease for computer equipment for approximately $1,000 and $1,600, respectively. In July 2000, the Company sold certain assets for approximately $650 in exchange for a note to be paid over the next 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 and the United Kingdom. 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, 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 on which 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. Principles of consolidation and basis of presentation The consolidated financial statements of NBTY, Inc. and Subsidiaries ("NBTY") have been prepared to give retroactive effect to the merger between Nutrition Headquarters, Inc., Lee Nutrition, Inc. and Nutro Laboratories, Inc. (collectively, the "Nutrition Headquarters Group" and with NBTY collectively, the "Company"), which has been accounted for as a pooling of interests. On April 20, 1998, Nutrition Headquarters Group was merged with and into NBTY. Under terms of the merger agreement, each share of Nutrition Headquarters Group common stock was exchanged for approximately 30 shares of NBTY's common stock with approximately 8,772 shares of NBTY's common stock exchanged for all the outstanding stock of Nutrition Headquarters Group. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Revenue recognition The Company recognizes revenue upon shipment or, 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 or accounts receivable as of and for the years ended September 30, 2000, 1999 and 1998. F-7 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. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the weighted average method which approximates first-in, first-out basis. The cost elements of inventory include materials, labor and overhead. In fiscal 2000 and 1999, no one supplier provided more than 10% of 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 three months. Advertising All media and cooperative advertising costs are generally expensed as incurred. Total expenses relating to advertising and promotion for fiscal 2000, 1999 and 1998 were $17,046, $13,323 and $16,356, respectively. Included in prepaid expenses and other current assets is approximately $1,172 and $1,185 relating to prepaid advertising at September 30, 2000 and 1999, 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. Intangible assets Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and other intangibles are amortized on a straight-line basis over periods not exceeding 40 years. The Company follows the provisions of 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. 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. F-8 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 $19,277, $19,096 and $16,404 for the years ended September 30, 2000, 1999 and 1998, respectively. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. New accounting standards 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 application. SAB 101 is effective for the Company beginning July 1, 2001, the fourth quarter of fiscal 2001. Management is currently assessing the impact of SAB 101 on the Company's results of operations and financial position. The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. This statement, as amended, is effective in fiscal years beginning after June 15, 2000, although early adoption is permitted. This statement requires the recognition of the fair value of any derivative financial instruments on the balance sheet. Changes in fair value of the derivative and, in certain instances, changes in the fair value of an underlying hedged asset or liability, are recognized through either income or as a component of other comprehensive income. The adoption of SFAS 133 is not expected to have a significant impact on the Company's financial position or results of operations. During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for Certain Sales Incentives", which addresses the recognition, measurement and income statement classification for sales incentives offered voluntarily without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. EITF 00-14 requires that costs relating to sales incentives be classified as a reduction of revenue, and not in marketing or selling expenses. The Company will adopt EITF 00-14 effective April 1, 2001. Management does not believe that the adoption of EITF 00-14 will have a material impact on the Company's results of operations or presentation thereof. 2. 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 F-9 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 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 Company's Credit and Guarantee Agreement. 3. Divestitures In July 2000, the Company sold certain assets of Bio Nutritional Formulas, Inc. for approximately $650 which will be paid in full over the ensuing five years. Bio Nutritional Formulas had sales of approximately $1,200 and operating income of approximately $150 in fiscal 1999. No gain was recognized on the sale. In April 1998, the Company sold certain assets of its cosmetic pencil operation for approximately $6,000, of which $4,500 was paid in cash with additional payments aggregating $1,500 to be paid over the ensuing three years. The cosmetic pencil business had insignificant operating results in fiscal 1998. The gain on such sale of approximately $2,600 is included in other income in the consolidated statements of income for the year ended September 30, 1998. 4. Inventories

September 30, ------------------ 2000 1999 ---- ---- Raw materials $ 42,982 $ 47,212 Work-in-process 2,101 4,904 Finished goods 85,658 83,350 ---------------------- $130,741 $135,466 ======================

F-10 5. Property, Plant and Equipment

Depreciation September 30, and ---------------------- Amortization 2000 1999 Period ---- ---- ------------ Land $ 10,571 $ 10,128 Buildings and leasehold improvements 72,314 64,388 5 - 40 Machinery and equipment 75,973 70,801 3 - 10 Furniture and fixtures 130,322 100,938 5 - 10 Transportation equipment 4,907 4,237 4 Computer equipment 31,923 26,541 5 ---------------------- 326,010 277,033 Less accumulated depreciation and amortization 111,846 87,471 ---------------------- $214,164 $189,562 ======================

Depreciation and amortization of property, plant and equipment for the years ended September 30, 2000, 1999 and 1998 was approximately $29,275, $22,177 and $15,952, respectively. Property, plant and equipment includes approximately $6,010 and $4,803 for assets recorded under capital leases at September 30, 2000 and 1999, respectively. Accumulated amortization of these capital leases at September 30, 2000 and 1999 was approximately $2,075 and $1,528, respectively. 6. Intangible Assets Intangible assets, at cost, acquired at various dates are as follows:

Depreciation September 30, and ---------------------- Amortization 2000 1999 Period ---- ---- ------------ Goodwill $139,550 $142,889 20 - 40 Customer lists 60,862 19,867 6 - 15 Trademarks and licenses 1,661 1,472 2 - 3 Covenants not to compete 1,854 1,305 5 - 7 --------------------- 203,927 165,533 Less accumulated amortization 31,803 24,123 --------------------- $172,124 $141,410 =====================

Amortization included in the consolidated statements of income under the caption "selling, general and administrative expenses" in 2000, 1999 and 1998 was approximately $9,226, $7,051 and $6,107, respectively. F-11 7. Accrued Expenses

September 30, 2000 1999 Payroll and related taxes $ 6,953 $ 6,453 Customer deposits 5,543 4,838 Accrued purchases and interest 1,522 3,081 Income taxes payable 11,405 5,566 Other 11,470 12,358 -------------------- $36,893 $32,296 ====================

8. Long-Term Debt

September 30, 2000 1999 Senior debt: 8-5/8% Senior subordinated notes due 2007, net of unamortized discount of $871 in 2000 and $995 in 1999 (a) $149,129 $149,005 Note payable due in monthly payments of $9, including interest at 8%, maturing March 2001 205 683 Mortgages: First mortgage payable in monthly principal and interest (10.375%) installments (b) 7,010 First mortgage payable in monthly principal and interest (9.73%) installments of $25, maturing in November 2009 1,844 1,963 First mortgage payable in monthly principal and interest (7.375%) installments of $55 through 2011 4,881 5,218 First mortgage payable in monthly principal and interest (9.0%) installments of $3 through 2011 209 Credit and Guarantee Agreement (c) 7,500 54,000 Term loan payable in quarterly principal and interest installments of $2,700 through March 2005 (c) 46,600 -------------------- 210,368 217,879 Less current portion 11,273 743 -------------------- $199,095 $217,136 ==================== (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. F-12 (b) The Company repaid the outstanding mortgage during fiscal 2000 with long-term borrowings available under its Credit and Guarantee Agreement. (c) In April 1999, the Company entered into an amended and restated Credit and Guarantee Agreement ("CGA"), which expires September 30, 2003, for $135,000. On July 17, 2000, the CGA was amended to $149,300. The CGA is comprised of two revolving credit agreements of $50,000 each and a term loan of $49,300. At September 30, 2000, there were borrowings of $54,100 under this facility at an annual borrowing rate of 7.81%. 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.

Required principal payments of long-term debt are as follows:

Years ending September 30, 2001 $ 11,273 2002 11,312 2003 11,355 2004 18,901 2005 4,051 Thereafter 153,476 -------- $210,368 ========

The fair value of the Company's long-term debt at September 30, 2000 and 1999, based upon current market rates, approximates the amounts disclosed above. 9. 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, 2000 are as follows:

Years ending September 30, 2001 $ 1,496 2002 1,355 2003 254 2004 4 2005 1 -------- 3,110 Less, amount representing interest 171 -------- Present value of minimum lease payments (including $1,556 due within one year) $ 2,939 ========

F-13 10. Income Taxes Provision for income taxes consists of the following:

Year ended September 30, 2000 1999 1998 Federal Current $12,640 $ 6,214 $16,398 Deferred 4,551 2,810 2,596 State Current 1,300 639 1,686 Deferred 468 289 267 Foreign provision 12,485 8,371 2,527 ----------------------------- Total provision $31,444 $18,323 $23,474 =============================

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.

Year ended September 30, 2000 1999 1998 -------------------- -------------------- -------------------- Percent Percent Percent of pretax of pretax of pretax Amount income Amount income Amount income Income tax expense at statutory rate $29,033 35.0% $15,961 35.0% $21,810 35.0% State income taxes, net of federal income tax benefit 2,986 3.6% 1,642 3.6% 2,243 3.6% S corporation earnings not subject to income taxes (a) (2,988) (4.8%) Amortization of goodwill 2,155 2.6% 2,155 4.7% 2,155 3.5% Other, individually less than 5% (2,730) (3.3%) (1,435) (3.1%) 254 0.5% ----------------------------------------------------------------- $31,444 37.9% $18,323 40.2% $23,474 37.8% ================================================================= (a) Prior to the merger, Nutrition Headquarters Group had been treated as an S corporation for Federal and state tax purposes. Accordingly, taxable income had previously been reported to the individual stockholders for inclusion in their respective income tax returns with no provision for these taxes, other than certain minimum taxes, included in its financial statements.

F-14 The components of deferred tax assets and liabilities are as follows:

2000 1999 Deferred tax assets: Current Inventory capitalization $ 637 $ 455 Accrued expenses and reserves not currently deductible 2,512 2,395 Tax credits 400 400 --------------------- Total current $ 3,549 $ 3,250 ===================== Noncurrent Intangibles (347) Reserves not currently deductible $ 270 653 --------------------- Total noncurrent $ 270 $ 306 ===================== Deferred tax liabilities: Property, plant and equipment $(17,320) $(12,539) =====================

11. Commitments Operating leases The Company conducts retail operations under operating leases which expire at various dates through 2020. 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, 2000 are as follows:

Years ending September 30, 2001 $ 49,769 2002 48,119 2003 45,739 2004 40,659 2005 35,857 Thereafter 23,119 -------- $243,262 ========

Operating lease rental expense (including real estate taxes and maintenance costs), and leases on a month to month basis were approximately $54,749, $44,299 and $31,562 for the years ended September 30, 2000, 1999 and 1998, respectively. F-15 Purchase commitments The Company was committed to make future purchases under various purchase order arrangements with fixed price provisions aggregating approximately $10,595 at September 30, 2000. Capital commitments The Company had approximately $2,696 in open capital commitments at September 30, 2000, primarily related to a manufacturing facility as well as to computer hardware and software. Employment and consulting agreements The Company has employment agreements with two of its officers. The agreements, which expire in January 2004, provide for minimum salary levels, including cost of living adjustments, and also contain provisions regarding severance and changes in control of the Company. The commitment for salaries as of September 30, 2000 was approximately $900 per year. The Company entered into an employment agreement with a former stockholder and officer of Nutrition Headquarters Group who is currently an officer and director of the Company. Such agreement was for a one-year term, subject to extension at the sole option of the officer for two additional one-year terms, and requires an annual payment of $275. The agreement was extended to April 2001. 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 services to be provided to the Company through December 31, 2001 with the consulting fee 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 per year, payable monthly, with certain fringe benefits accorded to other executives of the Company. Four members of H&B's senior executive staff have service contracts terminable by the Company upon twelve months notice, at annual salaries ranging between approximately $75,000 and $200,000. 12. 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:

Year ended September 30, 2000 1999 1998 Numerator: Numerator for basic EPS - income available to common stockholders $51,508 $27,279 $38,840 ============================== Numerator for diluted EPS - income available to common stockholders $51,508 $27,279 $38,840 ============================== F-16 Denominator: Denominator for basic EPS - weighted-average shares $67,327 $69,640 $65,563 Effect of dilutive securities: Stock options 1,991 1,186 4,284 ------------------------------ Denominator for diluted EPS - weighted-average shares $69,318 $70,826 $69,847 ============================== Net EPS: $ 0.77 $ 0.39 $ 0.59 Basic EPS ============================== Diluted EPS $ 0.74 $ 0.39 $ 0.56 ==============================

13. Stock Option Plans The Board of Directors approved the issuance of 6,660 non-qualified options on September 23, 1990, exercisable at $0.21 per share, which terminated on September 23, 2000. In addition, on March 11, 1992, the Board approved the issuance of an aggregate of 5,400 non-qualified 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 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. The exercise price of each of the aforementioned issuances was at or in excess of the market price 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. During fiscal 2000, options were exercised with 1,422 shares of common stock issued to certain officers and directors for $4,408. As a result of the exercise of those options, the Company will receive 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. During fiscal 1999, options were exercised with 3,595 shares of common stock issued to certain officers and directors for $78 and interest bearing notes aggregating $839. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $15,049. Accordingly, a tax benefit of approximately $5,869 was credited to capital in excess of par. During fiscal 1998, options were exercised with 142 shares of common stock issued to certain directors for $43. As a result of the exercise of those options, the Company received a compensation deduction for tax purposes of approximately $1,652. Accordingly, a tax benefit of approximately $611 was credited to capital in excess of par. F-17 A summary of stock option activity is as follows:

2000 1999 1998 --------------------- --------------------- --------------------- 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 3,720 4.53 4,316 $ .26 4,458 $.25 Exercised (1,422) 2.87 (3,596) .26 (142) .31 Forfeited (50) Granted 2,288 5.88 3,000 5.55 -------------------------------------------------------------------- Outstanding at end of year 4,536 $5.71 3,720 $4.53 4,316 $.26 ==================================================================== Exercisable at end of year 4,536 $5.71 3,650 $4.53 4,316 $.26 ==================================================================== Fair value of options granted during year $3.64 =====

As of September 30, 2000, the weighted average remaining contractual life of outstanding options was 8.5 years. The following table summarizes information about stock options outstanding at September 30, 2000:

Options Outstanding Options Exercisable -------------------------------------- ----------------------- Weighted Weighted Remaining Average Average Range of Shares Contractual Exercise Shares Exercise Exercise Prices Outstanding Life Price Exercisable Price $0.31 120 1 year $ .31 120 $ .31 $4.75 - $5.88 4,416 9 years $5.88 4,416 $5.88 ----- ----- 4,536 4,536 ===== =====

The fair value of options granted during fiscal 2000 has been estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions: no dividend yield; expected volatility of 70%; a risk-free interest rate of 6%; and a weighted average expected life of 4.8 years. The Company applies APB Opinion 25 and related interpretations in accounting for stock options; accordingly, no compensation cost has been recognized. 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 2000 would have been reduced to the following pro forma amounts indicated. F-18 Net income attributable to common stockholders as reported $51,508 Pro forma net income $46,428 Basic EPS as reported $ .77 Diluted EPS as reported $ .74 Pro forma basic EPS $ .69 Pro forma diluted EPS $ .67 14. Employee Benefit Plans The Company maintains defined contribution savings plans and an employee stock ownership plan. The accompanying financial statements reflect contributions to these plans in the approximate amount of $1,670, $1,966 and $501 for the years ended September 30, 2000, 1999 and 1998, respectively. 15. Litigation Shareholder litigation A consolidated stockholder class action is pending against the Company and certain of its officers and directors in the U.S. District Court of the Eastern District of New York, on behalf of stockholders who purportedly purchased shares of the Company between January 27, 2000 and June 15, 2000 (the "Class Period"). The class action alleges that the Company and individuals failed to disclose material facts during the Class Period that resulted in a decline in the price of the Company's stock after June 15, 2000. In addition to the pending consolidated class actions, two stockholder derivative actions were filed in 2000 in the Chancery Court in Delaware against certain officers and directors. The derivative claims, which are expected to be consolidated in the Delaware Court, are predicated upon the stockholder class actions pending in New York. The Company and the named individuals deny all claims of wrongdoing and intend to defend the actions vigorously, however, no determination can be made as to the final outcome. The Company maintains policies of directors and officers professional liability insurance. Gehe AG In August 1997, the Company acquired Holland & Barrett Holdings Ltd. from German-based Gehe AG. A dispute arose over certain provisions of the purchase agreement. On July 30, 1999, the court rendered a decision in favor of Gehe AG. Accordingly, a litigation charge of $4,952, which includes the amount of the judgment plus interest and plaintiff legal fees, was reflected separately in the statement of income for fiscal 1999. Other litigation The Company is also involved in miscellaneous claims and routine litigation which management believes, taken individually or in the aggregate, would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 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. F-19 16. 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 of each segment. Accordingly, the Company reports four worldwide segments: Puritan's Pride/Direct Response, Retail: United States and United Kingdom and Wholesale. All of the Company's products fall into one of these four segments. The Puritan's Price/Direct Response segment generates revenue through the sale of its products primarily through mail order catalog and internet. Catalogs are strategically mailed to customers who order by mail or by phoning customer service representatives in New York, Illinois and the United Kingdom. The Retail United States segment generates revenue through the sale of proprietary brand and third-party products through its 476 Company-operated stores. The Retail United Kingdom segment generates revenue through the sale of proprietary brand and third-party products in 427 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. The following table represents key financial information of the Company's business segments (in thousands, except for number of locations):

Fiscal years ended September 30, 2000 1999 1998 Puritan's Pride/Direct Response Revenue $ 182,693 $ 176,053 $ 187,820 Operating income 53,865 43,496 41,010 Depreciation and amortization 3,682 2,074 996 Identifiable assets 69,513 29,926 32,404 Capital expenditures 1,980 320 120 Retail: United States Revenue $ 149,055 $ 103,172 $ 66,576 Operating (loss) income (19,782) (12,147) 5,418 Depreciation and amortization 11,438 6,051 2,919 Identifiable assets 78,672 55,960 46,805 Capital expenditures 25,173 25,148 12,917 Locations open at end of year 476 352 193 F-20 United Kingdom Revenue $ 248,602 $ 220,405 $ 185,833 Operating income 40,977 26,830 9,228 Depreciation and amortization 12,347 12,294 11,445 Identifiable assets 200,373 221,817 223,742 Capital expenditures 13,949 11,753 13,526 Locations open at end of year 427 423 415 Wholesale: Revenue $ 140,506 $ 131,264 $ 131,895 Operating income 29,542 18,243 29,055 Depreciation and amortization 1,240 498 427 Identifiable assets 17,003 18,209 17,225 Capital expenditures 1,486 1,134 516 Corporate: Depreciation and amortization $ 9,794 $ 8,311 $ 6,272 Recovery of raw material costs (2,511) Litigation settlement costs 4,952 Merger related costs 3,528 Manufacturing identifiable assets 238,052 213,472 180,280 Capital expenditures - manufacturing 4,439 3,627 29,611 Capital expenditures - Other 4,759 3,828 11,354 Consolidated totals: Revenue $ 720,856 $ 630,894 $ 572,124 Recovery of raw material costs (2,511) Litigation settlement costs 4,952 Operating income 97,319 63,159 74,911 Depreciation and amortization 38,501 29,228 22,059 Merger related costs 3,528 Interest expense, net 18,858 18,945 16,518 Income taxes (a) 31,444 18,323 23,474 Net income 51,508 27,279 38,840 Identifiable assets 603,613 539,384 500,456 Capital expenditures 51,786 45,810 68,044 F-21 Revenue by location of customer United States $ 458,543 $ 392,617 $ 369,796 United Kingdom 248,602 224,364 189,555 Other foreign countries 13,711 13,913 12,773 ----------------------------------- Consolidated totals $ 720,856 $ 630,894 $ 572,124 =================================== Long-lived assets United States $ 238,019 $ 167,120 $ 141,272 United Kingdom 148,269 163,852 177,489 ----------------------------------- Consolidated totals $ 386,288 $ 330,972 $ 318,761 =================================== (a) Reflects taxes at subchapter "S" rates for pooling of interests prior to April 1998.

17. Related Party Transactions Nutrition Headquarters Group had outstanding loans to a stockholder in the aggregate amount of $617, which were paid in fiscal 1999. Interest on these loans amounted to approximately $21 and $35 for the years ended September 30, 1999 and 1998, respectively. For the year ended September 30, 1998, Nutrition Headquarters Group provided distributions to its stockholders in the aggregate amount of $8,050. Nutrition Headquarters Group had outstanding promissory notes of $2,245 as of September 30, 1997, which were payable to a relative of a stockholder. Interest on the obligation amounted to approximately $124 for the year ended September 30, 1998. In addition, an entity owned by a relative of an officer received sales commissions of $520, $472 and $474 in 2000, 1999 and 1998, respectively, and had trade receivable balances approximating $2,529 and $2,200 at September 30, 2000 and 1999, respectively. F-22 18. Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations for fiscal 2000 and 1999:

Quarter ended ------------------------------------------------------ December 31, March 31, June 30, September 30, 2000: Net sales $171,172 $200,107 $172,102 $177,475 Gross profit 90,229 115,954 98,082 103,631 Income before income taxes 14,028 30,105 20,094 18,725(a) Net income 8,417 18,063 12,057 12,971 Net income per diluted share $ .12 $ .26 $ .17 $ .19 1999 Net sales $141,013 $167,673 $155,062 $167,146 Gross profit 72,055 89,124 81,080 95,116 Income before income taxes 6,035 11,485 7,051 21,032(a) Net income 3,468 6,838 4,334 12,639 Net income per diluted share $ .05 $ .09 $ .06 $ .19 (a) Year-end adjustments resulting in an increase to pre-tax income of approximately $5,400 in both 2000 and 1999, primarily related to adjustments of inventory amounts. These adjustments principally result from the utilization of the gross profit method to value inventory during interim periods and the year-end valuation of the Company's annual physical inventory.

F-23 NBTY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts for the years ended September 30, 2000, 1999 and 1998 (Dollars in thousands)

Column A Column B Column C Column D Column E Additions Balance at Balance at beginning Charged to Charged to end of Description of period costs and expenses other accounts Deductions period ----------- ---------- ------------------ -------------- ---------- ---------- Fiscal year ended September 30, 2000: Allowance for doubtful accounts $1,248 $ 6 $(27)(a) $1,227 Fiscal year ended September 30, 1999: Allowance for doubtful accounts $1,045 $278 $(75)(a) $1,248 Fiscal year ended September 30, 1998: Allowance for doubtful accounts $1,116 $ 15 $(86)(a) $1,045

(a) Uncollectable accounts written off. S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 22, 2000 By: /s/ Scott Rudolph ----------------- Scott Rudolph President, Chief Executive Officer Dated: December 22, 2000 By: /s/ Harvey Kamil ---------------- Harvey Kamil Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: December 22, 2000 By: /s/ Scott Rudolph ------------------------------- Scott Rudolph Chairman, President and Chief Executive Officer Dated: December 22, 2000 By: /s/ Arthur Rudolph ------------------------------- Arthur Rudolph, Director Dated: December 22, 2000 By: /s/ Aram Garabedian ------------------------------- Aram Garabedian, Director Dated: December 22, 2000 By: /s/ Bernard G. Owen ------------------------------- Bernard G. Owen, Director Dated: December 22, 2000 By: /s/ Alfred Sacks ------------------------------- Alfred Sacks, Director Dated: December 22, 2000 By: /s/ Murray Daly ------------------------------- Murray Daly, Director Dated: December 22, 2000 By: /s/ Glenn Cohen ------------------------------- Glenn Cohen, Director Dated: December 22, 2000 By: /s/ Bud Solk ------------------------------- Bud Solk, Director Dated: December 22, 2000 By: /s/ Nathan Rosenblatt ------------------------------- Nathan Rosenblatt, Director Dated: December 22, 2000 By: /s/ Michael L. Ashner ------------------------------- Michael L. Ashner, Director Dated: December 22, 2000 By: /s/ Michael Slade ------------------------------- Michael Slade, Director