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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                              WASHINGTON, DC 20549
 
                            ------------------------
 
                                   FORM 10-K
 
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998
                        COMMISSION FILE NUMBER 333-33121
 
                            ------------------------
 
                          LEINER HEALTH PRODUCTS INC.
 
             (Exact name of registrant as specified in its charter)
 
                            ------------------------
 
                  DELAWARE                             95-3431709
      (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)            Identification Number)
 
                901 EAST 233RD STREET, CARSON, CALIFORNIA 90745
                                 (310) 835-8400
 
         (Address and telephone number of principal executive offices)
 
                            ------------------------
 
    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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
 
    As of June 15, 1998, there were 1,000 shares of the registrant's Common
Stock, par value $0.01, outstanding, none of which were held by non-affiliates.
 
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                          LEINER HEALTH PRODUCTS INC.
                                   FORM 10-K
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998
                               TABLE OF CONTENTS
 
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PART I.
 
  Item 1.     Business.....................................................................................           4
 
  Item 2.     Properties...................................................................................          17
 
  Item 3.     Legal Proceedings and Product Liability......................................................          18
 
  Item 4.     Submission of Matters to a Vote of Security Holders..........................................          19
 
PART II.
 
  Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters........................          20
 
  Item 6.     Selected Financial Data......................................................................          20
 
  Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations........          23
 
  Item 8.     Financial Statements and Supplementary Data..................................................          30
 
  Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........          30
 
PART III.
 
  Item 10.    Directors and Executive Officers.............................................................          31
 
  Item 11.    Executive Compensation.......................................................................          33
 
  Item 12.    Security Ownership of Certain Beneficial Owners and Management...............................          36
 
  Item 13.    Certain Relationships and Related Transactions...............................................          37
 
PART IV.
 
  Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................          39
</TABLE>
 
                                       2
<PAGE>
    The data contained in this Form 10-K with respect to the Company's relative
market share and competitive position are based on retail sales, and are
approximations based on Company estimates and industry sources, including
FIND/SVP ("Packaged Facts"), Information Resources, Inc. ("IRI Infoscan"),
Multi-Sponsor Survey, Inc. ("Gallup"), Council for Responsible Nutrition ("CRN
Data") and Marketing and Management Information, Inc. ("MMI Data"). The Company
believes that such data are inherently imprecise, but are generally indicative
of its relative market share and competitive position. Market share data are for
the food, drug and mass merchandisers' sector of the vitamin industry ("Mass
Market") in the U.S. only and do not include Canadian market share information
for Vita Health.
 
                                       3
<PAGE>
                                     PART I
                                     ITEM 1
                                    BUSINESS
 
GENERAL
 
    Leiner Health Products Inc. ("Leiner" or the "Company") is the nation's
largest manufacturer of vitamins, minerals, and nutritional supplements and
distributes its products primarily through Mass Market retailers. The Company
has a share of over 20% of all Mass Market vitamin sales in the United States,
and a share of over 45% of the Mass Market private label segment. Leiner's U.S.
vitamin sales have grown at a compound annual rate of more than 18% per year
over the last six years, over one and one half times the U.S. industry growth
rate. Leiner is also one of the nation's largest private label over-the-counter
("OTC") pharmaceuticals manufacturers, with 15.4% of its sales in OTC
pharmaceutical and other products. In January 1997, the Company acquired Vita
Health Products Inc. ("Vita Health"), the second largest private label vitamin
and OTC pharmaceuticals manufacturer in the Canadian market.
 
    The Company sells a full line of vitamin products, including more than 500
products in more than 10,000 stock keeping units ("SKUs"). The Company's
products are sold in tablet and capsule forms, and in varying sizes with
different potencies, flavors and coatings. The Company's vitamin products
include national brand equivalents which compare to the dietary ingredients
contained in CENTRUM-REGISTERED TRADEMARK-, ONE-A-DAY-REGISTERED TRADEMARK-and
GINSANA-REGISTERED TRADEMARK-, natural vitamin products such as vitamins C and E
and folic acid, minerals such as calcium and herbal products such as St. John's
wort, echinacea and ginkgo biloba. The Company's vitamin products are sold under
its customers' store names ("private label products"), as well as under its own
YOUR LIFE-REGISTERED TRADEMARK-brand. The Company estimates that private label
vitamin products account for approximately 33% of total vitamin product sales by
Mass Market retailers in the United States and accounted for approximately 57%
of Leiner's total fiscal 1998 sales (excluding sales by Vita Health). The
Company also markets over 100 different OTC pharmaceutical products in over
2,000 SKUs, including products comparable to most major national brands in the
analgesic, cough and cold remedy and digestive aid categories.
 
    The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets, including drug store, supermarket, mass merchandising,
and warehouse club chains, as well as in convenience stores and through United
States military outlets worldwide. Leiner is the vitamin category manager for
many leading retailers. The Company's vitamin product customers include 9 of the
country's 10 largest drug store chains (including Walgreens, American Stores,
Eckerd, CVS and Rite Aid), 8 of the 10 largest supermarket chains (including
Safeway, Winn-Dixie, Albertson's, A&P and Lucky Stores), 8 of the 10 largest
mass merchandising chains (including Wal-Mart, Target and Kmart and the two
largest warehouse club chains (Sam's Club and Costco). The Company is also
expanding into channels outside of its core market of food, drug and mass
merchandisers. These new channels include television retailing and contract
manufacturing.
 
    Vita Health is currently the second largest industry participant in Canada
in terms of both private label sales and total sales. Vita Health has built
strong relationships with Canada's largest Mass Market retailers, a Mass Market
customer base that matches well with Leiner's customer base. Vita Health also
has a strong position in the health food channel in Canada, a distribution
channel Leiner is in the process of entering in the United States. Vita Health
sells to more than 500 retail accounts across Canada.
 
    The Company was incorporated in the state of Delaware in 1987. It is a
wholly-owned subsidiary of PLI Holdings Inc. ("PLI Holdings"), a Delaware
corporation, which is itself a wholly-owned subsidiary of Leiner Health Products
Group Inc. ("Leiner Group"). Leiner Group, a Delaware Corporation, was
recapitalized effective June 30, 1997. See "Recapitalization".
 
                                       4
<PAGE>
    The Company's fiscal year ends on March 31 of each year. References herein
to a "fiscal year" refer to the Company's fiscal year ended March 31 in the
calendar year indicated (e.g., references to fiscal 1998 are references to the
Company's fiscal year ended March 31, 1998).
 
RECAPITALIZATION
 
    On June 30, 1997, Leiner Group, completed a leveraged recapitalization
transaction (the "Recapitalization"). The Recapitalization was effected pursuant
to a Stock Purchase Agreement and Plan of Merger, dated as of May 31, 1997 (the
"Recapitalization Agreement") among Leiner Group, North Castle Partners I,
L.L.C. ("North Castle"), and LHP Acquisition Corp., a wholly-owned subsidiary of
North Castle (the "Merger Entity"). North Castle, a Delaware limited liability
company, is an investment fund formed by Mr. Charles F. Baird, Jr., to effect
the Recapitalization. Pursuant to the Recapitalization, Leiner Group repurchased
common stock from its existing shareholders in an amount totaling (together with
equity retained by such shareholders) $211.1 million, issued $80.4 million of
new shares of the recapitalized Leiner Group to North Castle, issued $85 million
of Senior Subordinated Notes (the "Notes"), and established a $210 million
senior secured credit facility that provides for both term and revolving credit
borrowings. Immediately upon consummation of the Recapitalization, the
obligations of Leiner Group under the Notes and the Credit Facility were
assigned to and assumed by the Company. The Recapitalization was accounted for
as a recapitalization of Leiner Group which had no impact on the historical
basis of assets and liabilities as reflected in the Company's consolidated
financial statements.
 
    Upon consummation of the Recapitalization, (i) current managers and
employees of the Company who had been existing shareholders had some of their
existing common stock exchanged for cash, but together with Mr. Baird, retained
approximately 8.3% of Leiner Group equity (consisting of approximately 58.6% of
the non-voting Leiner Group common stock and 5.6% of the voting Leiner Group
common stock) and received rights under certain circumstances to receive Leiner
Group common stock ("Equity Rights") equal to approximately 7.4% of Leiner Group
equity, as well as certain warrants to acquire Leiner Group common stock
("Warrants"), (ii) AEA Investors Inc. and certain of its co-investors (the "AEA
Group") and certain former managers of the Company, all of whom had been
existing shareholders, had most of their common stock purchased for cash, but
also retained Leiner Group common stock equal to approximately 10.1% of Leiner
Group equity (consisting of approximately 41.4% of the non-voting Leiner Group
common stock and 8.8% of the voting Leiner Group common stock), as well as
Warrants, and (iii) North Castle acquired the remainder of Leiner Group equity,
primarily through the purchase of newly issued voting Leiner Group common stock
equal to approximately 73.8% of Leiner Group equity for a cash investment of
$80.4 million. In connection with the Recapitalization, existing stock options
held by management shareholders were cashed out, exercised for common stock, or
converted into Equity Rights.
 
    In connection with the Recapitalization, the Company established a
management transaction bonus pool of $5.2 million which was paid by the Company
following consummation of the Recapitalization.
 
    A portion of a minority preferred stock interest in Vita Health was redeemed
in connection with the Recapitalization. The portion that remained outstanding
was redeemed in April 1998 for $1.0 million in cash.
 
PRODUCTS
 
    The following table sets forth the sales of the Company's vitamin, OTC
pharmaceutical and other product lines from fiscal 1994 through fiscal 1998 (in
millions):
 
<TABLE>
<CAPTION>
                                                                    FISCAL YEARS ENDED MARCH 31,
                                                                   -------------------------------
<S>                                                                <C>        <C>        <C>
                                                                     1996       1997       1998
                                                                   ---------  ---------  ---------
Vitamin products.................................................  $   267.7  $   321.7  $   424.7
OTC pharmaceuticals..............................................       58.8       61.3       61.1
Other products...................................................       11.9        9.8       16.3
                                                                   ---------  ---------  ---------
  Total..........................................................  $   338.4  $   392.8  $   502.1
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>
 
                                       5
<PAGE>
    VITAMIN PRODUCTS.  The Company sells a full line of vitamin products,
including more than 500 products in more than 10,000 SKUs. The Company's
products are sold in tablet and capsule forms, and in varying sizes with
different potencies, flavors and coatings. The Company's vitamin products
include national brand equivalents which compare to the dietary ingredients
contained in CENTRUM-REGISTERED TRADEMARK-, ONE-A-DAY-REGISTERED TRADEMARK-and
GINSANA-REGISTERED TRADEMARK-, natural vitamin products such as vitamins C and E
and folic acid, minerals such as calcium and herbal products such as St. John's
wort, echinacea and ginkgo biloba. In addition, Leiner's YOUR LIFE-REGISTERED
TRADEMARK-brand is one of the nation's largest broadline vitamin product brands.
Sales of vitamins C and E, in the aggregate, accounted for approximately 36% of
the Company's sales in fiscal 1998 (excluding sales by Vita Health).
 
    Vita Health produces more than 350 different types of vitamins and minerals.
However, the majority of Vita Health's sales in this segment are concentrated in
a few core product categories. The top 5 product categories, which comprise over
one-half of Vita Health's vitamin sales, are vitamin C products, vitamin E
products, multivitamins, herbal products and glucosamine. Vita Health has
extensive experience and expertise with herbal products which is the fastest
growing segment of the United States vitamin market.
 
    OTC PHARMACEUTICALS.  The Company markets over 100 different OTC
pharmaceutical products in over 2,000 SKUs, including products comparable to
most major national brands in the analgesic, cough and cold remedy and digestive
aid categories. The Company sells its OTC pharmaceuticals under its customers'
private labels as well as its own broadline brand, PHARMACIST FORMULA-REGISTERED
TRADEMARK-, first introduced in 1989.
 
    Vita Health's OTC pharmaceutical sales are primarily analgesic products and
cough and cold products. In Canada, there are two primary classes of analgesic
products, those with codeine and those without. Vita Health produces both types
of products.
 
    SERVICES; OTHER PRODUCTS.  The Company offers drug repackaging services to
major prescription pharmaceutical wholesalers and a major drug store chain. In
addition, the Company performs contract manufacturing services on a limited
basis for selected consumer products companies. In order to leverage further its
existing distribution system and marketing expertise, the Company markets
certain niche products. For example, the Company developed and markets the
BODYCOLOGY-REGISTERED TRADEMARK- line of hair, skin and bath care products.
 
CUSTOMERS
 
    The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets, including drug store, supermarket, mass merchandising,
and warehouse club chains, as well as in convenience stores and through the
United States military outlets worldwide. Leiner is the vitamin category manager
for many leading retailers. The Company's vitamin product customers include 9 of
the country's 10 largest drug store chains (including Walgreens, American
Stores, Eckerd, CVS and Rite Aid), 8 of the 10 largest supermarket chains
(including Safeway, Winn-Dixie, Albertson's, A&P and Lucky Stores), 8 of the 10
largest mass merchandising chains (including Wal-Mart, Target and Kmart) and the
two largest warehouse club chains (Sam's Club and Costco). The Company has over
175 active U.S. customers. In fiscal 1998, Wal-Mart Stores, Inc. and Costco
accounted for approximately 26% and 10%, respectively, of the Company's sales.
Each of the Company's other major customers accounted for less than 10% of the
Company's sales for fiscal 1998. The Company's top ten customers in the
aggregate accounted for approximately 67% of the Company's sales for fiscal
1998.
 
BACKLOG ORDERS
 
    The Company had approximately $19.1 million in backlog orders, believed to
be firm, as of March 31, 1998. Substantially all of these orders will be shipped
in fiscal 1999. The Company had $13.0 million in backlog orders, believed to be
firm, as of March 31, 1997.
 
                                       6
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PURCHASED MATERIALS
 
    The Company purchases from third party suppliers certain important
ingredients and products that the Company cannot manufacture. Although the
Company currently has supply arrangements with several suppliers of these
ingredients and products, and the Company's purchased materials are generally
available from numerous sources, an unexpected interruption of supply could
materially adversely affect the Company's results of operations. Two suppliers
provided approximately 27% of the materials purchased during fiscal 1998 by the
Company. No other single supplier accounts for more than 10% of the Company's
material purchases.
 
COMPETITION
 
    The markets for the Company's products are highly competitive. The Company
competes on the basis of customer service, product quality, pricing and
marketing support. In the Mass Market vitamin product business, the Company
believes that its major U.S. competitors are Pharmavite Corp., Rexall Sundown,
Inc. and NBTY, Inc. (manufacturer of Nature's Bounty vitamin products). In the
OTC pharmaceuticals business, the Company believes its major U.S. competitor is
Perrigo Company.
 
    In the United States, the Company sells substantially all of its vitamin
products to Mass Market and warehouse club retailers. Although the Company does
not currently participate significantly in other U.S. distribution channels such
as health food stores, direct mail and direct sales, the Company's products may
face competition from such alternative channels as more customers utilize these
channels of distribution to obtain vitamin products.
 
    The Company competes with other major private label and broadline brand
manufacturers, certain of which are larger and have access to greater resources
than the Company. Among other factors, competition among private label
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's results of
operations or market position could be adversely affected. However, the Company
believes that it competes favorably with other companies because of its (i) low
manufacturing costs, (ii) sales and marketing strategies, (iii) customer service
(including complexity and speed of delivery) and (iv) reputation of being a
quality supplier of products.
 
    The Company also competes with manufacturers of nationally advertised brand
name products such as American Home Products Corp., Bayer Group and
Bristol-Myers Squibb Co., which are larger and have resources substantially
greater than those of the Company, and are substantially less leveraged than the
Company. In the future, one or more of these companies could seek to compete
more directly with the Company by manufacturing private label products or by
significantly lowering the prices of their national brand products. The Company
believes, however, that the mass-oriented manufacturing and marketing methods
used by national brand manufacturers are less suited to the customized packaging
and marketing requirements of private label customers, which the Company
satisfies by utilizing its packaging and graphics facilities.
 
EMPLOYEES
 
    As of March 31, 1998, the Company had approximately 1,683 full-time
employees. Approximately 439 employees were engaged in executive or
administrative capacities and approximately 1,244 employees were engaged in
manufacturing, packaging or distribution. In addition, as of March 31, 1998, the
Company employed approximately 835 temporary employees. The large number of
temporary employees gives the Company significant flexibility to adjust staffing
levels in response to seasonal fluctuations in demand. Certain of the Vita
Health employees have voted to be represented by a collective bargaining unit.
The Company and the collective bargaining unit are currently in negotiations.
The Company considers its relations with its employees to be good.
 
                                       7
<PAGE>
GOVERNMENT REGULATION
 
    The manufacturing, processing, formulation, packaging, labeling, advertising
and sale of the Company's products are subject to regulation by one or more
United States and Canadian federal agencies, including the FDA, the FTC, the
CPSC and Health Canada. The activities are also regulated by various agencies of
the states, provinces and localities in which the Company's products are sold.
In addition, the Company manufactures and markets certain of its products in
compliance with the guidelines promulgated by voluntary standard organizations,
such as the USP.
 
    FDA.  The United States Food and Drug Administration exercises authority
over three aspects of the Company's business: (i) the labeling and marketing of
dietary supplements, (ii) the labeling and marketing of OTC pharmaceuticals and
(iii) the operation of its manufacturing and packaging facilities.
 
    DIETARY SUPPLEMENTS.  The Dietary Supplement Health and Education Act of
1994 ("DSHEA") was enacted on October 25, 1994 and amends the Federal Food, Drug
and Cosmetic Act to (i) define dietary supplements, (ii) expand with certain
limitations the number of products that can be marketed as dietary supplements,
(iii) permit "structure/function" statements for all vitamin products, including
herbal products and other nutritional supplements, and (iv) permit the use of
certain published literature in the sale of vitamin products. Dietary
supplements are regulated as food products under DSHEA, and the FDA is
prohibited from regulating the dietary ingredients in supplements as food
additives, or the supplements as drugs, unless product claims trigger drug
status.
 
    DSHEA provides for specific nutritional labeling requirements for dietary
supplements. The final FDA labeling regulations will be effective March 23,
1999. DSHEA permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, including describing the positive
effects on general well-being from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining structure
or function of the body. In addition, DSHEA also authorizes the FDA to
promulgate current good manufacturing practices specific to the manufacture of
dietary supplements, to be modeled after food current good manufacturing
practices. The Company currently manufactures its dietary supplement products
pursuant to the more detailed OTC pharmaceutical "Current Good Manufacturing
Practices for Finished Pharmaceutical's" ("cGMP").
 
    The Company cannot determine what effect the FDA's future regulations, when
and if promulgated, would have on its business in the future. Such regulations
could, however, among other things, require expanded documentation of the
properties of certain products, or scientific substantiation regarding
ingredients, product claims or safety. In addition, the Company cannot predict
whether new legislation regulating the Company's activities will be enacted, or
what effect any such legislation would have on the Company's business.
 
    OTC PHARMACEUTICALS.  FDA regulation of OTC pharmaceuticals takes two forms.
Most of the Company's OTC pharmaceutical products are governed by FDA monographs
covering well-known ingredients and specifying, among other things, permitted
claims, required warnings and precautions, allowable combinations of ingredients
and dosage levels. Marketing a product governed by a monograph or pending
monograph requires no prior approval of the FDA, only compliance with the
applicable monograph. Monographs may be changed from time to time, requiring
formulation, packaging or labeling changes for an affected product. While such
changes may cause the Company to incur costs to comply with such changes,
disruption of distribution or material obsolescence of inventory due to any such
changes is not likely.
 
    In the future, the Company may desire to market as over-the-counter products
previously "prescription only" pharmaceuticals ("Rx-to-OTC switch products"),
which require FDA approval before the products can be marketed. The marketing of
such products by the Company will require that the Company obtain FDA approvals
or arrange to obtain such products from manufacturers that have obtained FDA
approval. In addition, the Drug Price Competition & Patent Term Restoration Act
of 1984 (the Hatch-
 
                                       8
<PAGE>
Waxman Amendments to the Federal Food, Drug, and Cosmetic Act) gives a
three-year period of marketing exclusivity to a company that obtains FDA
approval of an Rx-to-OTC switch product. Unless Leiner establishes relationships
with such companies having exclusive marketing rights, the Company's ability to
market Rx-to-OTC switch products and offer its customers products comparable to
national brand products would be delayed until the expiration of the exclusivity
granted to the company initiating such a switch. There can be no assurance that,
in the event that the Company applies for FDA approvals, the Company would
obtain such approvals to market Rx-to-OTC switch products or, alternatively,
that the Company would be able to obtain such products from other manufacturers.
 
    The Company is also subject to the requirements of the Comprehensive
Methamphetamine Control Act of 1996, a law designed to allow the Drug
Enforcement Administration (DEA) to monitor transactions involving chemicals
that may be used illegally in the production of methamphetamine. The
Methamphetamine Control Act of 1996 establishes certain registration and
recordkeeping requirements for manufacturers of OTC cold, allergy, asthma and
diet medicines that contain ephedrine, pseudoephedrine or phenylpropanolamine.
While certain of the Company's OTC pharmaceutical products contain
pseudoephedrine, none of the Company's products contain ephedrine, a chemical
compound that is distinct from pseudoephedrine. Pseudoephedrine is a common
ingredient in decongestant products manufactured by the Company and other
pharmaceutical companies.
 
    MANUFACTURING AND PACKAGING.  All facilities where foods (including dietary
supplements) and pharmaceuticals are manufactured, packed, warehoused, or sold
must comply with the FDA manufacturing standards applicable to that type of
product. All of the Company's products are manufactured according to the cGMP.
The failure of a facility to be in compliance may lead to a breach of
representations made to private label customers or to regulatory action against
the products made in that facility, including seizure, injunction or recall. The
Company believes that its facilities are in compliance in all material respects
with the cGMPs and other applicable requirements for each facility.
 
    CPSC.  The United States Consumer Product Safety Commission ("CPSC") has
authority, under the Poison Prevention Packaging Act, to designate those
products, including vitamin products and OTC pharmaceuticals, that require child
resistant closures to help reduce the incidence of poisonings. The CPSC has
adopted regulations requiring numerous OTC pharmaceuticals and iron-containing
dietary supplements to have such closures, and has adopted rules on the testing
of such closures by both children and adults. The Company, working with its
packaging suppliers, believes that it is in compliance with all CPSC
requirements.
 
    FTC.  The United States Federal Trade Commission ("FTC") exercises primary
jurisdiction over the advertising and other promotional practices of food and
OTC pharmaceuticals marketers, and has concurrent jurisdiction with the FDA over
the advertising and promotional practices of marketers of dietary supplements.
The FTC has historically applied a different standard to health-related claims
than the FDA; the FTC has applied a "substantiation standard," which is less
restrictive than the standard under the NLEA. The FTC NLEA enforcement policy
uses FDA regulations as a baseline (and safe harbor) and permits (i) nutrient
content descriptions that are reasonable synonyms of FDA-permitted terms, and
(ii) qualified health claims not approved by FDA where adequate substantiation
exists for the qualified or limited claims.
 
    STATE REGULATION.  All states regulate foods and drugs under local laws that
parallel federal statutes. Because the NLEA gave the states the authority to
enforce many labeling prohibitions of the Federal Food, Drug, and Cosmetic Act,
after notification to the FDA, the Company and other dietary supplement
manufacturers may be subject to increasing state scrutiny for NLEA compliance,
as well as increasing FDA review. The Company is also subject to California
Proposition 65 and similar state consumer health and safety regulations which
could have a potential impact on the Company's business if any of the Company's
products were ever found not in compliance. The Company is not engaged in any
enforcement or other
 
                                       9
<PAGE>
regulatory actions and is not aware of any products which are not in compliance
with California Proposition 65 and other similar state regulations.
 
    USP.  The United States Pharmacopoeia Convention, Inc. is a
non-governmental, voluntary standard-setting organization. Its drug standards
are incorporated by reference into the Federal Food, Drug, and Cosmetic Act as
the standards that must be met for the listed drugs, unless compliance with
those standards is specifically disclaimed. USP standards exist for most OTC
pharmaceuticals. The FDA requires USP compliance as part of cGMP.
 
    The USP began adopting standards for vitamin and mineral dietary supplements
in 1994. These standards cover composition (nutrient ingredient potency and
combinations), disintegration, dissolution, manufacturing practices and testing
requirements. These standards are codified in the USP Monographs and the USP
Manufacturing Practices. In 1995, USP compliance included the standards for
disintegration and dissolution. While USP standards for vitamins are voluntary,
and not incorporated into federal law, customers of the Company may demand that
products they are supplied meet these standards. Label claims of compliance with
the USP may expose a company to FDA scrutiny for such claims. In addition, the
FDA may in the future require compliance, or such a requirement may be included
in new dietary supplement legislation. All of the Company's vitamin products
(excluding certain nutritional supplements products for which no USP standards
have been adopted) are formulated to comply with existing USP standards.
 
    CANADIAN REGULATION.  In Canada, the Company's products are subject to
federal and provincial law, particularly federal drug legislation. Government
regulation under the Food and Drug Act and the regulations thereunder (the
"Canadian Act") which require regulatory approvals of such products through a
drug identification number ("DIN") or general proprietary number ("GP") by
Health Canada--Health Protection Branch (the "HPB"). All substances sold for
ingestion by humans are regulated either as a food or drug under the Canadian
Act. In addition, certain of the Company's products are subject to government
regulation under the Canadian Controlled Drugs and Substances Act and the
regulations thereunder ("CDSA"). The Canadian Act and the CDSA are enforced by
the HPB.
 
    The Canadian Act governs the processing, formulation, packaging, labeling,
advertising and sale of the Company's products and regulates what may be
represented to the public on labels and in promotional material, in respect of
the properties of the various products. The Canadian Act also provides that any
drugs sold in Canada must have a label affixed thereto which shows certain
information such as its proper scientific or common name, the name and address
of the manufacturer, its lot number, adequate directions for use, a quantitative
list of its medical ingredients and its expiration date. In addition, no person
may sell a drug unless it has been assigned a DIN or GP. DINs and GPs are
obtained through an application to the HPB. Regulations under the Canadian Act
require all manufacturers to pay annual fees for their DINs and GPs. HPB
approval for the sale of the Company's products may be subject to significant
delays despite the Company's best efforts.
 
                                       10
<PAGE>
    The CDSA governs the manufacture and sale of controlled substances as
defined in the CDSA. The CDSA contains requirements for licenses of the factory,
approved security, a qualified person in charge of the factory and detailed
record keeping in connection with the manufacturing of controlled substances.
 
    Regulations under the Canadian Act set out mandatory and rigorous
procedures, practices and standards for manufacturers. Health Canada performs
inspections of companies in the industry to ensure compliance with the Canadian
Act and the CDSA. For each of the Company's products, the development process,
the manufacturing procedures, the use of equipment, and laboratory practices and
premises must comply with Good Manufacturing Practices and Establishment
Licensing regulations under the Canadian Act.
 
    The Company's herbal products which are being marketed with drug claims or
which contain drug substances require regulatory approval in the form of a DIN
or GP issued by Health Canada. Approvals are based on traditional references and
are approved as Traditional Herbal Medicines. In addition, the Canadian
government has established a panel to review the regulatory framework for
natural products. If the Canadian government implements new or amended
requirements for natural products it may result in additional costs to the
Company for the requisite regulatory approval, delay the entry of some products
onto the market or adversely affect sales of herbal products.
 
INTELLECTUAL PROPERTY
 
    The Company regards its trademarks and other proprietary rights as valuable
assets and believes they are important in the marketing of the Company's
products. Among the Company's most significant trademarks are YOUR
LIFE-REGISTERED TRADEMARK-, PHARMACIST FORMULA-REGISTERED TRADEMARK-, DAILY
PAK-REGISTERED TRADEMARK-, CENTRAL-VITE-REGISTERED TRADEMARK- and
BODYCOLOGY-REGISTERED TRADEMARK-. The Company has registered its marks in the
United States and more than thirty foreign countries. Leiner now owns 121
trademark registrations in the United States and 101 registrations abroad, as
well as 61 pending applications for registration of trademarks in the United
States and 49 pending application in other countries. The Company intends to
maintain the foreign and domestic registrations of its trademarks so long as
they remain valuable to its business. The Company vigorously polices its marks
and protects them from infringement.
 
    The Company does not currently have any patents on its proprietary
processes. The Company believes that it can better protect its trade secrets by
maintaining the confidentiality of the relevant information.
 
ENVIRONMENTAL MATTERS
 
    The Company is subject to various United States and Canadian federal, state,
provincial and local environmental laws and regulations. The costs of complying
with such laws and regulations have not been, and are not expected to have a
material adverse effect on the business of the Company.
 
RISK FACTORS
 
    SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS.  As a result of the
Recapitalization, the Company is highly leveraged, with indebtedness that is
very substantial in relation to its shareholder's equity. The Credit Facility
(as defined below) and the indenture governing the Notes will permit the Company
to incur or guarantee certain additional indebtedness, subject to certain
limitations. The Company will be required to repay the $144.4 million in term
loans under the Amended Credit Agreement over the seven and one-half year period
following May 15, 1998, with scheduled principal payments of $1.5 million
annually for the first five years, $48.7 million in the sixth year, $66.5
million in the seventh year, and $21.6 million in the final six months. All
outstanding revolving credit borrowings under the Amended Credit Agreement will
become due on June 30, 2003. The Company expects that its working capital needs
will require it to obtain replacement revolving credit facilities at that time.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Financing Arrangements."
 
                                       11
<PAGE>
    The Company's high degree of leverage could have important consequences to
holders of Notes, including but not limited to the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired in the
future; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations and other
purposes, including investments in research and development and capital
spending; (iii) the Company may be substantially more leveraged than certain of
its competitors, which may place the Company at a competitive disadvantage; (iv)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (v) the Company's substantial degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or its
business or changing market conditions and regulations.
 
    The Company's ability to repay or to refinance its obligations with respect
to its indebtedness will depend on its future financial and operating
performance, which, in turn, will be subject to prevailing economic and
competitive conditions and to certain financial, business, legislative,
regulatory and other factors, many of which are beyond the Company's control.
These factors could include operating difficulties, increased operating costs,
product pricing pressures, the response of competitors, regulatory developments,
and delays in implementing strategic projects. The Company's ability to meet its
debt service and other obligations may depend in significant part on the extent
to which the Company can implement successfully its business strategy. There can
be no assurance that the Company will be able to implement its strategy fully or
that the anticipated results of its strategy will be realized.
 
    If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital,
or to refinance or restructure its debt. There can be no assurance that the
Company's cash flow and capital resources will be sufficient for the payment of
principal of, and premium, if any, and interest on, its indebtedness in the
future, or that any such alternative measures would be successful or would
permit the Company to meet its scheduled debt service obligations. In addition,
because the Company's obligations under the Amended Credit Facility will bear
interest at floating rates, an increase in interest rates could adversely
affect, among other things, the Company's ability to meet its debt service
obligations. The Company entered into an interest protection arrangement
effective July 30, 1997 for a period of three years with respect to $29.5
million of its indebtedness under the Credit Facility that provides a cap of
6.17% on the interest rates payable thereon. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources-- Financing Arrangements."
 
    SUBORDINATION OF NOTES.  The Notes are unsecured, senior subordinated
obligations of Leiner, and as such, are subordinated in right of payment to all
existing and future senior debt of Leiner, including indebtedness of Leiner
under the Credit Facility and Leiner's guarantee of indebtedness of Vita Health
under the Credit Facility. The Notes rank PARI PASSU with all senior
subordinated indebtedness of Leiner, if any, and rank senior to all subordinated
indebtedness of Leiner, if any. The Notes are also effectively subordinated to
all secured indebtedness of Leiner to the extent of the value of the assets
securing such indebtedness, and to all existing and future obligations and
liabilities of Leiner's subsidiaries. The obligations of Leiner under the Credit
Facility are secured by substantially all of the assets of Leiner and any future
U.S. subsidiary of Leiner and a pledge of the capital stock of Leiner and any
such subsidiary and 65% of the capital stock of any direct foreign subsidiary of
Leiner. The obligations of Vita Health under the Credit Facility are
additionally secured by substantially all of the assets of Vita Health and its
Canadian parents and subsidiaries.
 
    In the event of bankruptcy, liquidation, dissolution, reorganization or any
similar proceeding regarding Leiner, or any default in payment or acceleration
of any debt thereof, the assets of Leiner will be available to pay obligations
on the Notes only after the senior debt of Leiner has been paid in full, and
 
                                       12
<PAGE>
there may not be sufficient assets remaining to pay amounts due on all or any of
such Notes. See "Description of the Notes--Subordination."
 
    RESTRICTIVE FINANCING COVENANTS.  The Credit Facility contains a number of
covenants that significantly restrict the operations of the Company. In
addition, the Company is required to comply with specified financial ratios and
tests, including minimum net worth requirements, maximum leverage ratios,
minimum fixed charge coverage ratios and minimum EBITDA to cash interest expense
ratios, and certain of these ratios and tests may be more restrictive in future
years. There can be no assurance that the Company will be able to comply with
such covenants or restrictions in the future. The Company's ability to comply
with such covenants and other restrictions may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions could result in a default under the
Credit Facility that would permit the lenders thereunder to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest, and terminate their commitments to make further extensions
of credit thereunder, and the Company could be prohibited from making any
payments on the Notes. In addition, the indenture governing the Notes contains a
number of restrictive covenants relating to the Company. These covenants,
however, are subject to a number of exceptions and limitations, and may not
afford holders of the Notes with protection in the event of a highly-leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect holders of the Notes.
 
    CHANGE OF CONTROL.  Upon the occurrence of a Change of Control (as defined
in the indenture governing the Notes), the Company will be required to make an
offer to purchase all of the outstanding Notes at a price equal to 101% of the
principal amount thereof at the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase. The occurrence of certain of the
events that would constitute a Change of Control under the indenture governing
the Notes would constitute a default under the Credit Facility and might
constitute a default under other indebtedness of the Company. In addition, the
Credit Facility prohibits the purchase of the Notes in the event of a Change of
Control, unless and until such time as the indebtedness under the Credit
Facility is repaid in full. The Company's failure to purchase the Notes in such
instance would result in a default under each of the indenture governing the
Notes and the Credit Facility. The inability to repay the indebtedness under the
Credit Facility, if accelerated, could have material adverse consequences to the
Company and to the holders of the Notes. Future indebtedness of the Company may
also contain prohibitions of certain events or transactions that could
constitute a Change of Control or require such indebtedness to be repurchased
upon a Change of Control. In the event of a Change of Control, there can be no
assurance that the Company would have sufficient assets to satisfy all of its
obligations under the Credit Facility and the Notes.
 
    FRAUDULENT TRANSFER CONSIDERATIONS.  The incurrence of the indebtedness
evidenced by the Notes may be subject to review under federal bankruptcy law or
relevant state fraudulent conveyance laws if a bankruptcy case or lawsuit is
commenced by or on behalf of unpaid creditors of the Company.
 
    CONTROL OF THE COMPANY.  North Castle holds approximately 84% of the issued
and outstanding Leiner Group voting common stock. Pursuant to the terms of the
Leiner Group Stockholders Agreement, dated as of June 30, 1997 (the
"Stockholders Agreement"), and entered among Leiner Group, North Castle, AEA
Group, and certain other shareholders represented by AEA Group in connection
with the Recapitalization, the AEA Group has the power to elect one member of
Leiner Group's Board of Directors and North Castle has the power to elect the
remaining directors of Leiner Group, and through Leiner Group, all the directors
of Leiner. Accordingly, North Castle controls the Company and has the power to
appoint new management and approve any action requiring the approval of the
holders of Group common stock, including adopting amendments to Leiner Group's
certificate of incorporation and approving mergers or sales of substantially all
of the Company's assets. There can be no assurance that the interests of North
Castle will not conflict with the interests of the holders of the Notes. Under
North Castle's operating agreement, Mr. Baird has authority and discretion over
the business, affairs and
 
                                       13
<PAGE>
operations of North Castle. See "Item 10. Directors and Executive Officers" and
"Item 13. Certain Relationships and Related Transactions."
 
    EFFECT OF RESEARCH AND PUBLICITY ON VITAMIN PRODUCT BUSINESS.  The Company
believes the growth experienced in the last several years by the vitamin product
business is based largely on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain vitamin products. Various studies published since 1992 by
researchers at major universities have suggested an association between regular
consumption of antioxidant supplements such as vitamins E and C and selenium and
a reduced risk of certain diseases and including heart disease, cancer and
Alzheimer's disease. In addition, certain other studies have reported that
consumption of folic acid (a B vitamin) can aid prevention of heart disease and
neural tube birth defects. Such research has been described in major medical
journals, magazines, newspapers and television programs. However, certain recent
studies relating to certain antioxidants have produced results contrary to the
favorable indications of other prior and subsequent studies. The scientific
research to date with respect to antioxidants and certain other of the Company's
products, including Dehydroepiandrosterone ("DHEA") is not conclusive, and there
can be no assurance of future favorable scientific results and media attention,
or the absence of unfavorable or inconsistent findings. In the event of future
unfavorable scientific results or media attention, the Company's sales of
vitamin products could be materially adversely affected.
 
    POTENTIAL FOR INCREASED GOVERNMENT REGULATION.  The manufacturing,
processing, formulation, packaging, labeling, advertising and sale of the
Company's products are subject to regulation by one or more United States and
Canadian federal agencies, including FDA, the FTC, CPSC and Health Canada. The
Company's activities are also regulated by various agencies of the states,
provinces, localities and countries in which the Company's products are sold. In
addition, the Company manufactures and markets certain of its products in
compliance with the guidelines promulgated by voluntary standard organizations,
such as the USP. See "--Government Regulations."
 
    RELIANCE ON CERTAIN CUSTOMERS AND CERTAIN PRODUCTS.  The Company has over
175 active U.S. customers. In fiscal 1998, Wal-Mart Stores, Inc. and Costco.
accounted for approximately 26% and 10%, respectively, of the Company's sales.
Each of the Company's other major customers accounted for less than 10% of the
Company's sales for fiscal 1998. The Company's top ten customers in the
aggregate accounted for approximately 67% of the Company's sales for fiscal
1998. Sales of vitamins C and E, in the aggregate, accounted for approximately
34% of the Company's sales in fiscal 1998 (excluding sales by Vita Health). If
one or more of the Company's major customers substantially reduced their volume
of purchases from the Company, or if sales of vitamin C or E were substantially
reduced, the Company's results of operations could be materially adversely
affected.
 
    DISRUPTION OF OPERATIONS.  Beginning in fiscal 1994, the Company implemented
a major facilities consolidation, capacity expansion and equipment modernization
program with respect to its western U.S. facilities, whereby the Company
consolidated its western U.S. facilities into a smaller number of larger units
with modern equipment and expanded capacity for the purpose of realizing certain
cost savings and manufacturing efficiencies. The Company believes further cost
reduction opportunities exist with respect to its eastern U.S. facilities and
plans to consolidate its three existing eastern U.S. packaging and distribution
facilities into a new facility in York County, South Carolina, an area just
south of Charlotte, North Carolina. While the Company believes that this program
will reduce the Company's manufacturing and distribution costs, there can be no
assurance that the expected cost reductions will be realized or that this
program will result in improved profit margins. A significant, unexpected
disruption during the expansion of this program to the Company's eastern U.S.
facilities could have a material adverse effect on the Company's results of
operations.
 
    POTENTIAL FOR INCREASED COMPETITION.  The market for the Company's products
is highly competitive. The Company competes with other vitamin product and OTC
pharmaceuticals manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers
 
                                       14
<PAGE>
significantly reduce their prices in an effort to gain market share, the
Company's results of operations or market position could be adversely affected.
Certain of the Company's competitors, particularly manufacturers of nationally
advertised brand name products, are larger and have resources substantially
greater than those of the Company, and are less leveraged than the Company. In
the future, one or more of these companies could seek to compete more directly
with the Company by manufacturing private label products or by significantly
lowering the prices of their national brand products.
 
    The Company sells substantially all of its vitamin products to Mass Market
and warehouse club retailers. Although the Company does not currently
participate significantly in other channels such as health food stores, direct
mail and direct sales, the Company's products may face competition from such
alternative channels as more customers utilize these channels of distribution to
obtain vitamin products.
 
    RELIANCE ON CERTAIN SUPPLIERS; AVAILABILITY AND COST OF PURCHASED
MATERIALS.  The Company purchases from third party suppliers certain important
ingredients and products that the Company cannot manufacture. Although the
Company currently has supply arrangements with several suppliers of these
ingredients and products, and the Company's purchased materials are generally
available from numerous sources, an unexpected interruption of supply could
materially adversely affect the Company's results of operations. See
"--Purchased Materials."
 
    POSSIBILITY OF TRADE DRESS CLAIMS.  The Company's packaging of certain of
its branded products identifies nationally branded products to which the
Company's products are comparable. Although the Company designs its packaging to
avoid infringing upon any proprietary rights of national brand marketers and is
not currently the subject of any legal actions regarding infringement, there can
be no assurance that the Company will not be subject to such legal actions in
the future.
 
    EXPOSURE TO PRODUCT LIABILITY CLAIMS.  The Company, like other retailers,
distributors and manufacturers of products that are ingested, faces an inherent
risk of exposure to product liability claims in the event that, among other
things, the use of its products results in injury. With respect to product
liability coverage, the Company currently has an aggregate of $81.0 million of
insurance coverage, including primary product liability and umbrella liability
coverage with deductibles of $0.25 million per claim, subject to an annual
aggregate deductible limit of $1 million. There can be no assurance that product
liability insurance will continue to be available at an economically reasonable
cost or that the Company's insurance will be adequate to cover liability the
Company incurs in respect of product liability claims. See also "Item 3. Legal
Proceedings and Product Liability."
 
    RELIANCE ON KEY MANAGEMENT.  The operation of the Company requires
managerial and operational expertise. Leiner does not have employment contracts
with any of its executive officers. Leiner has entered severance benefit
agreements with certain members of Leiner senior management. See "Item 11.
Executive Compensation--Severance Arrangements." If, for any reason, key
personnel do not continue to be active in Leiner management, operations could be
adversely affected.
 
    ACQUISITION RELATED RISKS.  Part of the Company's business strategy has been
and will continue to be to acquire other businesses that will complement its
existing business. Management is unable to predict whether or when any
prospective acquisition candidates will become available or the likelihood of a
material transaction being completed should any negotiations commence. The
Company's ability to finance acquisitions may be constrained by, among other
things, its high degree of leverage. The Credit Facility and the indenture which
governs the Notes may significantly limit the Company's ability to make
acquisitions and to incur indebtedness in connection with acquisitions. In
addition, acquisitions that the Company may make or in which the Company may
enter will involve risks, including the successful integration and management of
acquired technology, operations and personnel. The integration of acquired
businesses may also lead to the loss of key employees of the acquired companies
and diversion of management attention from ongoing business concerns. There can
be no assurance that any acquisition
 
                                       15
<PAGE>
will be made, that the Company will be able to obtain additional financing
needed to finance such transactions and, if any acquisitions are so made or
formed, that they will be successful.
 
    RISKS ASSOCIATED WITH INTERNATIONAL MARKETS.  The Company's continued growth
is dependent in part upon its ability to expand its operations into new markets,
including international markets. The Company may experience difficulty entering
new international markets due to greater regulatory barriers, the necessity of
adapting to new regulatory systems and problems related to entering new markets
with different cultural bases and political systems. Operating in international
markets exposes the Company to certain risks, including, among other things, (i)
changes in or interpretations of foreign import, currency transfer and other
restrictions and regulations that among other things may limit the Company's
ability to sell certain products or repatriate profits to the United States,
(ii) exposure to currency fluctuations, particularly in light of the Company's
substantial interest payment obligations, which must be paid in United States
and Canadian dollars, (iii) the potential imposition of trade or foreign
exchange restrictions or increased tariffs and (iv) economic and political
instability. As the Company continues to expand its international operations,
these and other risks associated with international operations are likely to
increase.
 
    LITIGATION INVOLVING PRODUCTS CONTAINING L-TRYPTOPHAN.  The Company has been
named in numerous actions brought in federal or state courts seeking
compensatory and, in some cases, punitive damages for alleged personal injuries
resulting from the ingestion of certain products containing L-Tryptophan. See
"Item 3. Legal Proceedings and Product Liability."
 
                                       16
<PAGE>
                                     ITEM 2
                                   PROPERTIES
 
    The following table sets forth the location, type of facility, square
footage and ownership interest in each of the Company's principal facilities. In
addition to the facilities shown below, the Company has entered into an
arrangement pursuant to which a new 535,000 square foot facility in Fort Mill,
South Carolina will be purchased by a third party and leased to the Company for
an extended term. The Company also leases certain additional office space
throughout the United States.
 
<TABLE>
<CAPTION>
                                                                             APPROX.    LEASED       DATE OF
                                                                             SQUARE       OR          LEASE
LOCATION                                    TYPE OF FACILITY                  FEET       OWNED     EXPIRATION
-----------------------------  -------------------------------------------  ---------  ---------  -------------
<S>                            <C>                                          <C>        <C>        <C>
Carson, CA...................  Packaging, distribution and corporate
                                 offices                                      471,500  Leased           3/31/04(1)
 
Carson, CA...................  Distribution and offices                        80,343  Leased           3/31/04
 
Carson, CA...................  Auxiliary warehouse                             30,000  Leased        Mo.-to-mo.
 
Garden Grove, CA.............  Manufacturing                                  138,500  Leased          10/31/02
 
Garden Grove, CA.............  Manufacturing                                    6,960  Leased           5/31/01
 
Kalamazoo, MI................  Manufacturing                                   51,250  Owned           --
 
Kalamazoo, MI................  Auxiliary warehouse                             10,000  Leased        Mo.-to-mo.
 
Winnipeg, Canada.............  Manufacturing, packaging, distribution         100,000  Owned           --
 
West Unity, OH...............  Packaging                                      109,786  Leased           5/31/99(2)
 
West Unity, OH...............  Distribution                                    66,000  Leased           5/31/99(3)
 
Madison, WI..................  Packaging and distribution                      95,500  Owned           --
 
Madison, WI..................  Auxiliary warehouse                             40,000  Leased        Mo.-to-mo.
 
Sherburne, NY................  Packaging and distribution                      10,300  Owned           --
 
Sherburne, NY................  Auxiliary warehouse                             13,600  Leased        Mo.-to-mo.
 
Chicago, IL..................  Not in use; held for sale                      379,000  Owned           --
 
Fort Mill, SC................  Manufacturing, packaging and distribution
                                 (for short-term use)                         121,767  Leased           5/31/98
</TABLE>
 
------------------------
 
(1) The Company has the option to extend by 10 years.
 
(2) The Company has opted to cancel this lease, effective December 19, 1998.
 
(3) The Company has opted to cancel this lease, effective November 5, 1998.
 
    The Company believes that its facilities and equipment generally are well
maintained and in good operating condittion.
 
    Leiner's active manufacturing and distribution facilities consist of
approximately 1.0 million square feet of owned or leased plant and office
facilities in six locations and five states. The Company also recently added
Vita Health's site in Canada and announced the construction of a new plant in
South Carolina. Combined, the Company is the largest manufacturer in the North
American vitamin products industry and is capable of packaging over 18 billion
doses each year. In April 1995, Leiner was the first major vitamin product
manufacturer to be certified as being in compliance with USP's vitamin
manufacturing standards, which became effective in January 1995. The Company's
U.S. facilities were audited by an independent quality assurance laboratory and
received the laboratory's highest categorical rating. All of
 
                                       17
<PAGE>
the Company's U.S. manufacturing facilities also have been audited by the FDA
and have been found to be in compliance with the FDA's cGMP.
 
    Leiner has two U.S. manufacturing facilities, which are located in Garden
Grove, California and Kalamazoo, Michigan. The primary manufacturing facility
for the Company's vitamin products is its 138,500 square foot Garden Grove
plant. The primary manufacturing facility for the Company's OTC pharmaceuticals
is the Company's 51,250 square foot Kalamazoo plant. In the event of a
catastrophic casualty to one of the Company's primary vitamin or OTC tableting
facilities, the Company has the ability to shift production to other facilities.
The Company operates 45 tableting machines in its Garden Grove, California
facility and 23 tableting machines in its Kalamazoo, Michigan facility. The
Company currently operates four packaging and distribution facilities, which are
located in Carson, California; West Unity, Ohio; Madison, Wisconsin; and
Sherburne, New York. These facilities are equipped with a total of 35 packaging
lines, and, as with tableting, products can be shifted between facilities in the
event such a need arises.
 
    The Company is in the process of establishing a new 535,000 square foot
regional manufacturing and distribution center in Fort Mill, South Carolina. The
center will serve the Company's retail customers throughout the eastern United
States and will employ approximately 700 employees when it becomes fully
operational within the next three years. Construction of the facility has begun.
The Company has begun training the staff required for initial operations at a
temporary 121,767 square foot facility adjacent to the permanent site of the
Fort Mill center. Occupancy of the permanent site is expected by late summer of
1998. Within the first year of operation at the permanent site, the Company
plans to hire up to 420 employees to work at the new center. The majority of
these employees will be recruited from the local labor force with a smaller
percentage relocating from the Company's other facilities. As the new facility
becomes operational, the West Unity, Ohio facility will be closed. The Company
has established accounting reserves in connection with the anticipated closure
of the West Unity facility, which the Company believes are adequate.
 
    Vita Health currently tablets, bottles and packages its products in a
modern, 100,000 square foot facility in Manitoba. The facility contains 80,000
square feet of manufacturing and distribution space and 20,000 square feet of
office space.
 
                                     ITEM 3
                    LEGAL PROCEEDINGS AND PRODUCT LIABILITY
 
    The Company is currently engaged in various legal actions and governmental
proceedings, and, although ultimate liability cannot be determined at the
present time, the Company is currently of the opinion that the amount of any
such liability from these other actions and proceedings, when taking into
consideration the Company's product liability coverage, will not have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.
 
    The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has an aggregate of $81 million of insurance coverage, including
primary products liability and umbrella liability coverage with deductibles of
$0.25 million per claim subject to an annual, aggregate deductible limit of $1
million.
 
    The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of May 5, 1998, the Company and/or certain of its customers,
many of whom have tendered their defense to the Company, had been named in 668
lawsuits of which 660 have been settled. The Company's supplier of bulk
L-Tryptophan has agreed to assume the
 
                                       18
<PAGE>
defense of all claims (including any future claims that may be made) and pay all
settlements and judgments, other than for certain punitive damages, against the
Company arising out of the ingestion of these L-Tryptophan products. To date,
such supplier has funded all settlements and paid all legal fees and expenses
incurred by the Company related to these matters. No punitive damages have been
awarded or paid in the 660 cases that have been settled. Of the remaining 8
cases, management does not expect that the Company will be required to make any
material payments in connection with their resolution by virtue of the
Agreement, or, in the event that the supplier ceases to honor the Agreement, by
virtue of the Company's product liability insurance, subject to deductibles with
respect to the 8 currently pending claims not to exceed $1.3 million in
aggregate. Accordingly, no provision has been made in the Company's consolidated
financial statements for any loss that may result from these remaining actions.
 
    The Company is subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
 
                                     ITEM 4
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
 
                                       19
<PAGE>
                                    PART II
 
                                     ITEM 5
                   MARKET FOR REGISTRANT'S COMMON EQUITY AND
                          RELATED STOCKHOLDER MATTERS
 
    There is no trading market for the Company's Common Stock. All of the
outstanding shares of the Company's Common Stock are held by PLI Holdings.
Except in connection with the consummation of the Recapitalization, the Company
did not pay any dividends in fiscal 1998.
 
                                     ITEM 6
                            SELECTED FINANCIAL DATA
 
    The following table presents selected historical financial data derived from
the consolidated financial statements of the Company. This data should be read
in conjunction with Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operation, and Item 8, Financial Statements and
Supplementary Data.
<TABLE>
<CAPTION>
                                                                               FISCAL YEARS ENDED MARCH 31,
                                                                   -----------------------------------------------------
<S>                                                                <C>        <C>        <C>        <C>        <C>
                                                                     1994       1995       1996      1997(1)     1998
                                                                   ---------  ---------  ---------  ---------  ---------
 
<CAPTION>
                                                                                   (DOLLARS IN MILLIONS)
<S>                                                                <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................  $   303.6  $   314.7  $   338.4  $   392.8  $   502.1
Cost of sales....................................................      226.0      236.6      253.3      288.6      368.6
                                                                   ---------  ---------  ---------  ---------  ---------
Gross profit.....................................................       77.6       78.1       85.1      104.2      133.5
Operating expenses...............................................       59.5       59.7       62.6       72.7       92.1
Expenses related to recapitalization of parent(2)................     --         --         --         --           32.8
Amortization of goodwill.........................................        1.6        1.6        1.6        1.5        1.7
Closure of facilities and impairment of long-lived
  assets(3)(4)...................................................     --         --            4.7        1.4        1.2
Management reorganization(5).....................................     --         --         --            1.0     --
Other charges(6).................................................        2.4        0.5        0.5        0.9        1.3
                                                                   ---------  ---------  ---------  ---------  ---------
Operating income.................................................       14.1       16.3       15.8       26.7        4.4
Other expenses...................................................     --         --         --         --            0.1
Interest expense, net............................................        7.1        9.0        9.9        8.3       19.5
                                                                   ---------  ---------  ---------  ---------  ---------
Income (loss) before income taxes and extraordinary item.........        7.0        7.3        5.9       18.4      (15.1)
Provision for income taxes before extraordinary item.............        3.6        3.5        4.7        8.0        1.2
                                                                   ---------  ---------  ---------  ---------  ---------
Income (loss) before extraordinary item..........................        3.4        3.8        1.2       10.4      (16.3)
Extraordinary loss, net of taxes.................................     --         --         --            2.8        1.1
                                                                   ---------  ---------  ---------  ---------  ---------
Net income (loss)................................................  $     3.4  $     3.8  $     1.2  $     7.6  $   (17.4)
                                                                   ---------  ---------  ---------  ---------  ---------
                                                                   ---------  ---------  ---------  ---------  ---------
BALANCE SHEET DATA (END OF PERIOD):
Working capital..................................................  $    63.8  $    61.7  $    72.3  $    79.4  $   106.1
Total assets.....................................................      244.6      257.4      251.3      284.6      365.8
Total debt.......................................................       98.5      106.7      104.2      105.4      258.8
Minority interest in subsidiary..................................     --         --         --            4.7        1.0
Total common shareholder's equity (deficit)......................       67.7       71.5       72.7       80.2      (29.9)
</TABLE>
 
                                       20
<PAGE>
<TABLE>
<CAPTION>
                                                                               FISCAL YEARS ENDED MARCH 31,
                                                                   -----------------------------------------------------
                                                                     1994       1995       1996      1997(1)     1998
                                                                   ---------  ---------  ---------  ---------  ---------
                                                                                   (DOLLARS IN MILLIONS)
<S>                                                                <C>        <C>        <C>        <C>        <C>
OTHER DATA:
Gross margin.....................................................       25.6%      24.8%      25.2%      26.5%      26.6%
EBITDA(7)........................................................  $    23.4  $    27.0  $    32.9  $    38.1  $    27.3
EBITDA margin(7).................................................        7.7%       8.6%       9.7%       9.7%       5.4%
Depreciation and amortization(8).................................  $     7.2  $    10.5  $    12.3  $    12.3  $    13.3
Capital expenditures.............................................       15.0       16.7        3.5        3.5       14.4
Cash flows from operating activities.............................      (17.1)      13.1       12.7       23.2      (18.4)
Cash flows from investing activities.............................      (18.3)     (21.9)      (8.7)      (8.5)     (18.9)
Cash flows from financing activities.............................       36.9        7.3       (2.6)     (13.8)      36.1
Ratio of total debt to EBITDA(7).................................        4.2x       4.0x       3.2x       2.8x       9.5x
Ratio of EBITDA to interest expense(7)...........................        3.3        3.1        3.4        4.7        1.5
Ratio of earnings to fixed charges(9)............................        1.8        1.7        1.5        2.9     --
</TABLE>
 
------------------------
 
(1) On January 30, 1997, the Company purchased Vita Health. The Vita Health
    acquisition was accounted for under the purchase method of accounting.
    Consequently, the results of operations of Vita Health were included in the
    consolidated financial results of the Company for two months ended March 31,
    1997.
 
(2) Represents non-recurring charges relating to the Recapitalization,
    consisting of (x) a compensation charge incurred by the Company for the
    in-the-money value of existing stock options of $15.6 million which were (i)
    converted into an equivalent value of Equity Rights at the date of the
    Recapitalization, (ii) paid out in cash, or (iii) exercised for common stock
    (or a combination thereof), (y) $5.2 million in transaction bonuses which
    were paid to members of the Company's management subsequent to the
    Recapitalization, and (z) expenses aggregating $12.0 million incurred by
    Leiner Group in connection with its capital raising activities. These
    non-recurring charges contributed significantly to the Company's net loss of
    $17.4 million for fiscal 1998. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations--Results of Operations--Fiscal
    1998 Compared to Fiscal 1997."
 
(3) During fiscal 1996, the Company decided to significantly reduce the size of
    its OTC liquid pharmaceuticals manufacturing business. Accordingly, the
    Company determined that certain long-lived assets with a carrying amount of
    $8.3 million were impaired and wrote them down by $4.7 million to their
    estimated fair value. During fiscal 1997, the Company closed the
    manufacturing facility and out-sourced the production to a third party. The
    costs incurred of $1.4 million include (i) the write-off of fixed assets of
    $0.8 million and (ii) closure costs including salaries in conjunction with
    the facility closing of $0.6 million. The expense does not include an
    additional charge to cost of sales of $0.5 million for the write-off of
    certain liquid OTC inventory which was no longer being manufactured by the
    Company.
 
(4) During fiscal 1998, the Company announced the closure of its West Unity,
    Ohio facility. Accordingly, the Company has reserved $1.2 million for
    closure costs of which $0.7 million is related to severance costs and $0.5
    million is related to other closure costs.
 
(5) During fiscal 1997, the Company reorganized the management team. Expenses of
    $1.0 million include severance expense for the previous Chief Financial
    Officer, Vice President of Product Development and Vice President of
    Corporate Development and include the hiring and relocation expenses for the
    new Chief Financial Officer and other corporate officers.
 
(6) Other charges for the fiscal years ended March 31, 1994 through March 31,
    1998 include management fees paid to related parties. Other charges also
    include costs related to the original acquisition of Leiner by the AEA Group
    and compensation expense arising from the sale of shares of common stock to
    management in connection with the acquisition of Leiner by the AEA Group in
    the fiscal year ended March 31, 1993, the write-off of deferred charges
    associated with the refinancing of the Company's revolving credit facility
    in the fiscal year ended March 31, 1994 and expenses incurred in
 
                                       21
<PAGE>
    connection with the withdrawn initial public offering in the fiscal year
    ended March 31, 1997. Other charges also include, in the fiscal years ended
    March 31, 1994 through March 31, 1997, non-cash compensation expense arising
    from the granting of stock options.
 
(7) For purposes of calculating the ratio of EBITDA to interest expense,
    interest expense excludes the amortization of deferred financing fees, which
    is included in interest expense in the income statement in the consolidated
    financial statements.
 
    "EBITDA," as presented, represents earnings before interest expense, income
    taxes, depreciation and amortization and other non-cash charges, consisting
    of (i) the write off of deferred financing charges, net of income taxes,
    included as an extraordinary item in the statements of operations for fiscal
    1997 and fiscal 1998, (ii) non-cash stock compensation charges, including
    those recorded in connection with the Recapitalization (see Note 2), (iii)
    expenses related to the impairment and closure of the OTC liquid
    pharmaceuticals manufacturing facility in fiscal 1996 and 1997 (see Note 3),
    (iv) expenses related to the closure of the West Unity, Ohio facility in
    fiscal 1998 (see Note 4), and (v) other non-cash charges in fiscal 1994 and
    fiscal 1997.
 
    EBITDA is calculated as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED MARCH 31,
                                                         ------------------------------------------------------
<S>                                                      <C>        <C>        <C>        <C>        <C>
                                                           1994       1995       1996       1997        1998
                                                         ---------  ---------  ---------  ---------  ----------
Net income (loss)......................................  $   3,417  $   3,813  $   1,166  $   7,638  $  (17,417)
Add back:
  Interest expense, net................................      7,144      9,010      9,924      8,281      19,494
  Income taxes.........................................      3,573      3,524      4,686      8,028       1,196
  Depreciation and amortization(8).....................      7,247     10,514     12,288     12,309      13,349
  Extraordinary item...................................     --         --         --            295       1,109
  Compensation related to stock options................        264        132        132         99       8,300
  Closure of facilities and impairment of long-lived
    asset..............................................     --         --          4,730      1,416       1,221
  Other non-cash charges...............................      1,753     --         --             18      --
                                                         ---------  ---------  ---------  ---------  ----------
    Subtotal...........................................     19,981     23,180     31,760     30,446      44,669
                                                         ---------  ---------  ---------  ---------  ----------
    EBITDA.............................................  $  23,398  $  26,993  $  32,926  $  38,084  $   27,252(a)
                                                         ---------  ---------  ---------  ---------  ----------
                                                         ---------  ---------  ---------  ---------  ----------
</TABLE>
 
    ----------------------------
 
    (a) Excluding the Recapitalization-related expenses, EBITDA would have been
       $51.8 million for fiscal 1998.
 
    Although EBITDA (as well as related EBITDA ratios) is a non-GAAP
    measurement, EBITDA, EBITDA margin, the ratio of total debt to EBITDA and
    the ratio of EBITDA to interest expense are included because management
    understands that such information is considered by certain investors to be
    an additional basis for evaluating the Company's ability to pay interest,
    repay debt and make capital expenditures. EBITDA should not be considered an
    alternative to measures of operating performance as determined in accordance
    with generally accepted accounting principles, including net income as a
    measure of the Company's operating results and cash flows as a measure of
    the Company's liquidity. Because EBITDA is not calculated identically by all
    companies, the presentation herein may not be comparable to other similarly
    titled measures of other companies.
 
(8) Depreciation and amortization as presented does not include the amortization
    of deferred financing fees. In the cash flow statement in the consolidated
    financial statements, the amortization of deferred financing fees is
    included in depreciation and amortization.
 
(9) In calculating the ratio of earnings to fixed charges, earnings consist of
    income before taxes plus fixed charges. Fixed charges consist of interest
    expense and amortization of deferred financing fees, whether capitalized or
    expensed, plus one-third of rental expense under operating leases (the
    portion that has been deemed by the Company to be representative of an
    interest factor). Earnings were inadequate to cover fixed charges by $15.0
    million for the year ended March 31, 1998.
 
                                       22
<PAGE>
                                     ITEM 7
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the consolidated financial
statements of the Company contained elsewhere in this report. The Company's
fiscal year ends on March 31 of each year. References herein to a "fiscal" year
refer to the Company's fiscal year ended March 31 in the calendar year indicated
(e.g., references to fiscal 1998 are references to the Company's fiscal year
ended March 31, 1998).
 
GENERAL
 
    CURRENT TRENDS.  The Company believes that overall trends in the vitamin
industry are the most significant trends affecting the Company's financial
performance. For the 52 week period ended March 29, 1998, sales for the U.S.
Mass Market increased over 24% versus the comparable period in the prior year.
According to industry sources, between 1992 and 1997, sales for the Mass Market
grew at a compound annual rate of approximately 12% to $2.5 billion, as the
percentage of American adults regularly using vitamins grew from 35% to 43%.
Between 1996 and 2005, the 50 to 64 age group is projected to be the fastest
growing segment of the United States population. Gallup polling data shows that
vitamin usage increases significantly with age, with 53% of individuals over age
50 regularly using vitamins, compared with 38% of younger adults.
 
    Increasing vitamin usage among the general population is linked to three
major factors. First, research expenditures devoted to the positive effects of
vitamin products have increased dramatically. Such research has been described
in major medical journals and reported in the popular media. Second, the
national trend towards improved fitness, greater self-care and preventive
medicine has increased the general population's focus on nutritional products
consumption. Finally, the more favorable regulatory environment resulting from
the DSHEA has generated increased new product introductions and more effective
point of sale communication of the health benefits of vitamins to consumers.
However, as has been the case in the past, adverse scientific research or
publicity concerning the health benefits of vitamin consumption can materially
impact the growth of the vitamin market.
 
    Beginning in fiscal 1996 and continuing through fiscal 1998, the retail
drugstore industry experienced several major consolidations. The Company
provides private label vitamin products to the 9 of the 10 largest drugstore
chains in the United States and believes it has strong relationships with the
leading drugstore chains. Consequently, management believes the Company is well
positioned to benefit from this consolidation trend due to (i) its strong
relationships with the acquiring companies in the largest consolidations and
(ii) the anticipated reduction in the number of vendors as the consolidated
companies streamline their purchasing. A number of the Company's customers made
significant acquisitions or were acquired during this period, with CVS
Corporation acquiring Revco D.S., Inc. and Arbor Drugs, Inc. and Rite Aid
Corporation acquiring Thrifty-Payless Inc., Harco, Inc. and Katz & Besthoff,
Incorporated. The Company believes that the consolidation of major drugstore
chains has had a positive effect on its sales and that the increased purchasing
scale of the consolidated retailers increases the relative importance of each of
these customers to the Company's financial performance.
 
    RECAPITALIZATION ACCOUNTING; FINANCIAL STATEMENT PRESENTATION; PARENT
COMPANY.  The Recapitalization was accounted for as a recapitalization of Leiner
Group, which had no impact on the historical basis of assets and liabilities as
reflected in the consolidated financial statements of Leiner Group or the
Company. The Recapitalization involved significant changes to the Company's
capital structure, which resulted in higher reported interest expense. As a
result, operating results for the periods subsequent to the Recapitalization
Date are not comparable in all material respects to earlier periods. Other than
with respect to redeemable preferred stock of Leiner Group, which was redeemed
in connection with the
 
                                       23
<PAGE>
Recapitalization, the consolidated financial statements of Leiner Group and
Leiner for the periods discussed below are not materially different.
 
SEASONALITY
 
    Leiner's business is seasonal, as increased vitamin usage corresponds with
the cough, cold and flu season. A significant portion of the Company's sales and
a more significant portion of the Company's operating income, therefore, occurs
in the second half of the fiscal year as reflected in the table below:
 
<TABLE>
<CAPTION>
                                                             NET SALES   OPERATING INCOME (LOSS)
                                                            -----------  -----------------------
<S>                                                         <C>          <C>
Fiscal 1998
  First quarter...........................................   $    94.1          $   (28.2)
  Second quarter..........................................       112.2                5.3
  Third quarter...........................................       132.5               11.5
  Fourth quarter..........................................       163.3               15.8
                                                            -----------            ------
                                                             $   502.1          $     4.4(1)
                                                            -----------            ------
                                                            -----------            ------
 
Fiscal 1997
  First quarter...........................................   $    70.6          $     2.4
  Second quarter..........................................        85.6                1.1
  Third quarter...........................................       104.3                9.3
  Fourth quarter..........................................       132.3               13.9
                                                            -----------            ------
                                                             $   392.8          $    26.7(2)
                                                            -----------            ------
                                                            -----------            ------
 
Fiscal 1996
  First quarter...........................................   $    62.7          $     1.5
  Second quarter..........................................        78.7                2.6
  Third quarter...........................................        94.8                5.9
  Fourth quarter..........................................       102.2                5.8
                                                            -----------            ------
                                                             $   338.4          $    15.8(3)
                                                            -----------            ------
                                                            -----------            ------
</TABLE>
 
------------------------
 
(1) Includes expenses of $15.6 million related to stock option compensation,
    $5.2 million of management bonuses and expenses incurred by Leiner Group in
    connection with its capital raising activities of $12.0 million, all of
    which were incurred in connection with the Recapitalization. Without these
    expenses, operating income would have been $4.1 million for the first
    quarter of fiscal 1998 and $37.2 million for fiscal 1998. See Note 3 of
    Notes to Consolidated Financial Statements.
 
(2) Includes expenses incurred in connection with the closure of the OTC liquid
    pharmaceuticals manufacturing facility, a management reorganization,
    non-cash stock compensation expense and the preparation of a registration
    statement in connection with a withdrawn initial public offering. See Note 5
    of Notes to Consolidated Financial Statements.
 
(3) Includes charges for long-lived asset impairment of $4.7 million recorded in
    the fourth quarter of fiscal 1996 and non-cash stock compensation expense.
    See Note 5 of Notes to Consolidated Financial Statements.
 
                                       24
<PAGE>
RESULTS OF OPERATIONS
 
    The following table summarizes the Company's historical results of
operations as a percentage of net sales for the fiscal years ended March 31,
1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                                                                             PERCENTAGE OF NET SALES
                                                                                         -------------------------------
                                                                                           FOR THE FISCAL YEARS ENDED
                                                                                                    MARCH 31,
                                                                                         -------------------------------
                                                                                           1998       1997       1996
                                                                                         ---------  ---------  ---------
<S>                                                                                      <C>        <C>        <C>
Net sales..............................................................................      100.0%     100.0%     100.0%
Cost of sales..........................................................................       73.4       73.5       74.8
                                                                                         ---------  ---------  ---------
Gross profit...........................................................................       26.6       26.5       25.2
Marketing, selling and distribution expenses...........................................       12.5       13.1       13.1
General and administrative expenses....................................................        5.9        5.4        5.4
Expenses related to recapitalization of parent.........................................        6.5     --         --
Amortization of goodwill...............................................................        0.3        0.4        0.5
Closure of facilities and impairment of long-lived asset...............................        0.2        0.3        1.4
Management reorganization..............................................................     --            0.3     --
Other charges..........................................................................        0.3        0.2        0.1
                                                                                         ---------  ---------  ---------
Operating income.......................................................................        0.9        6.8        4.7
Other expenses.........................................................................     --         --         --
Interest expense, net..................................................................        3.9        2.1        2.9
                                                                                         ---------  ---------  ---------
Income (loss) before income taxes and extraordinary item...............................       (3.0)       4.7        1.7
Provision for income taxes before extraordinary item...................................        0.2          2        1.4
                                                                                         ---------  ---------  ---------
Income (loss) before extraordinary item................................................       (3.2)       2.6        0.3
Extraordinary loss, net of income taxes................................................        0.2        0.7     --
                                                                                         ---------  ---------  ---------
Net income (loss)......................................................................       (3.5)%       1.9%       0.3%
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
</TABLE>
 
FISCAL 1998 COMPARED TO FISCAL 1997
 
    Net sales for fiscal 1998 increased by $109.3 million, or 27.8%, over fiscal
1997, from $392.8 million to $502.1 million. Sales from Vita Health, which was
acquired in January 1997, accounted for $27.9 million of this increase.
Excluding Vita Health sales, the Company's net sales increased $81.4 million, or
21.0%, over fiscal 1997 due primarily to sales growth in the vitamin market.
Excluding Vita Health sales, vitamin product sales increased by $87.1 million,
or 27.3%, compared to the prior year. Management estimates that the overall U.S.
Mass Market grew by over 24% during the 52 week period ended March 29, 1998
compared to the comparable prior year period. Strong demand for herbal products
and supplements has pushed the vitamin sales volume higher in the current year.
Additionally, an increase in the volume of multi-vitamin sales also contributed
to the vitamin product sales increase. Sales of OTC pharmaceuticals, excluding
Vita Health, decreased by $7.2 million, or 12.0%, compared to the prior year.
This decrease in sales was due to strong competitive pressure and lost
distribution at two customers. It is also consistent with low sales growth in
the OTC market generally.
 
    Gross profit margin for fiscal 1998 was 26.6% versus 26.5% in the year ago
period. Gross profit increased $29.3 million, or 28.1%, from $104.2 million in
fiscal 1997 to $133.5 million in fiscal 1998. Excluding Vita Health, the
increase in gross profit was $21.4 million, or 20.8%. The increase in gross
profit is primarily attributed to the higher sales volume.
 
    Marketing, selling and distribution expenses together with general and
administrative expenses (collectively, "Operating Expenses") increased $19.4
million, or 26.7%, in fiscal 1998 when compared to fiscal 1997. Of this
increase, Vita Health accounted for $5.2 million. Operating Expenses for fiscal
1998 totaled $92.1 million, representing 18.4% of net sales, showing a slight
improvement over the prior year in
 
                                       25
<PAGE>
which Operating Expenses totaled $72.7 million or 18.5% of net sales. Fiscal
1998 marketing expenses were lower as a percentage of net sales versus fiscal
1997 because of the change in the timing and the reduction of advertising and
promotional expenditures. General and administrative expenses for fiscal 1998
are higher versus fiscal 1997 as a percentage of net sales primarily due to the
Company building an infrastructure to pursue alternative market channels.
 
    In fiscal 1998, the Company recorded compensation expenses related to the
in-the-money value of stock options issued to certain management personnel of
$15.6 million, management bonuses of $5.2 million, and expenses incurred by
Leiner Group in connection with its capital raising activities of $12.0 million,
all of which related to the Recapitalization.
 
    Goodwill amortization of $1.7 million in fiscal 1998 and $1.5 million in
fiscal 1997 related to the goodwill arising from the acquisitions of Leiner,
XCEL Laboratories, Inc. and Vita Health.
 
    During fiscal 1998, the Company announced its plans to close its West Unity,
Ohio facility in the second quarter of fiscal 1999. As a result, the Company
reserved $1.2 million primarily for severance and relocation costs related to
the closure in fiscal 1998. In fiscal 1997, the Company recorded a charge to its
operations in connection with the closure of its OTC liquid pharmaceuticals
manufacturing facility.
 
    In fiscal 1997, the Company reorganized its management team. Expenses of
$1.0 million were incurred relating to severance for the previous Chief
Financial Officer, Vice President of Product Development and Vice President of
Corporate Development, and include hiring and relocation expenses for the new
Chief Financial Officer and other corporate officers.
 
    Other charges for fiscal 1998 were $1.3 million versus $0.9 million in
fiscal 1997. The increase was due primarily to increased management fees as a
result of a consulting agreement entered into in connection with the
Recapitalization. See "Item 13. Certain Relationships and Related Transactions."
 
    Primarily due to the impact of the Recapitalization-related expenses, the
Company had operating income of only $4.4 million for fiscal 1998. Without these
Recapitalization-related expenses, the operating income would have been $37.2
million representing an increase of $10.5 million, or 39.3%, over the prior
fiscal year.
 
    Net interest expense increased by $11.2 million during fiscal 1998, compared
to fiscal 1997. Net interest expense during fiscal 1998 was $19.5 million,
compared to $8.3 million for fiscal 1997. This was due to an increase in the
indebtedness of the Company, as well as changes in the debt structure and
interest rates arising as a result of the Recapitalization and taking effect at
the end of the first quarter of fiscal 1998.
 
    The provision for income taxes for fiscal 1998 was $1.2 million, which
compares to $8.0 million for fiscal 1997. The Company's effective tax rate is 8%
for fiscal 1998 in spite of the recorded net loss before taxes primarily because
of the nondeductability of goodwill amortization, certain Recapitalization
expenses and certain accruals.
 
    The extraordinary loss recorded in fiscal 1998 represented the write off of
$1.9 million of deferred financing charges which had been incurred by the
Company when it entered into a credit facility on January 30, 1997. The income
tax effect of that charge was a benefit of $0.8 million.
 
    Primarily as a result of the previously discussed factors, a net loss of
$17.4 million was recorded in fiscal 1998 compared to net income of $7.6 million
recorded in fiscal 1997.
 
FISCAL 1997 COMPARED TO FISCAL 1996
 
    Net sales increased by $54.4 million, or 16.1%, to $392.8 million for fiscal
1997 from $338.4 million for fiscal 1996. Net sales for fiscal 1997 include $4.6
million of sales for Vita Health, which was acquired in January 1997. Vitamin
product sales, including Vita Health, increased by $54.0 million, or 20.2%, to
 
                                       26
<PAGE>
$321.7 million for fiscal 1997 from $267.7 million for fiscal 1996. The increase
was principally attributable to unit sales increases and selective price
increases in most major types of vitamin products including vitamin E, the
growth of the Company's herbal product line introduced in fiscal 1996 and fiscal
1997, including products such as echinacea and ginkgo biloba, and the Company's
introduction of new nutritional supplements, including products such as DHEA and
shark cartilage, as well as the added sales from Vita Health.
 
    OTC pharmaceutical sales increased by $2.5 million, or 4.3%, to $61.3
million for fiscal 1997 from $58.8 million for fiscal 1996. The increase was
principally due to market growth and the acquisition of Vita Health.
 
    Gross profit increased $19.1 million, or 22.4%, to $104.2 million for fiscal
1997 from $85.1 million for fiscal 1996. The gross margin also improved to 26.5%
in fiscal 1997 from 25.2% in fiscal 1996. The increase in the gross profit
margin was principally due to a decrease in the Company's manufacturing costs
from the investment in manufacturing equipment and facility consolidations
during the last four fiscal years and increased sales of higher margin new
products and the Company's YOUR LIFE-REGISTERED TRADEMARK- brand.
 
    Operating Expenses increased $10.1 million, or 16.1%, to $72.7 million for
fiscal 1997 from $62.6 million in fiscal 1996. Expressed as a percentage of
sales, Operating Expenses remained essentially flat at 18.5% in fiscal 1997 and
fiscal 1996. The dollar increase in Operating Expenses was partially driven by
the Company's investment of approximately $2.7 million in a national radio
advertising campaign (versus $1.1 million in 1996), and an increase in other
promotional expenses.
 
    During fiscal 1997, the Company closed its OTC liquid pharmaceuticals
manufacturing facility and out-sourced the production to a third party. As a
result, the Company incurred costs in fiscal 1997 of $1.4 million comprised of
(i) the write-off of fixed assets of $0.8 million and (ii) closure costs
including salaries in conjunction with the closing of $0.6 million. An
additional expense of $0.5 million for the write-off of certain liquid OTC
inventory which was no longer being manufactured by the Company was also
incurred and is included in cost of goods sold. The closure decision was made in
fiscal 1997 based on an evaluation of the OTC liquids pharmaceutical business,
as a result of which it was determined that it was more cost effective to
out-source this production to a third party. As a result of an earlier decision
in fiscal 1996 to reduce production, the Company recognized a long-lived asset
impairment charge of $4.7 million in fiscal 1996.
 
    In fiscal 1997, the Company reorganized its management team. Expenses of
$1.0 million were incurred relating to severance for the previous Chief
Financial Officer, Vice President of Product Development and Vice President of
Corporate Development, and include hiring and relocation expenses for the new
Chief Financial Officer and other corporate officers.
 
    Goodwill amortization of $1.5 million in fiscal 1997 and $1.6 million in
fiscal 1996 related to the goodwill arising from the acquisitions of Leiner,
XCEL and Vita Health. Other charges of $0.9 million for fiscal 1997 included
management fees paid to AEA, the write-off of expenses incurred in connection
with Leiner Group's withdrawn initial public offering and compensation expense
arising from the grant of stock options to certain members of management in
fiscal 1994. Other charges of $0.5 million for fiscal 1996 included management
fees paid to AEA and stock compensation expense.
 
    Primarily as a result of the factors discussed above, operating income
increased by $10.9 million to $26.7 million for fiscal 1997 from $15.8 million
for fiscal 1996.
 
    Net interest expense decreased by $1.6 million to $8.3 million in fiscal
1997 from $9.9 million in fiscal 1996. The decrease was principally due to a
reduction in the Company's outstanding indebtedness prior to the Vita Health
Acquisition. Additionally, the Company refinanced all of its outstanding
indebtedness in January 1997, which reduced the Company's average interest cost.
The interest rates on the majority of the Company's then existing debt were
based upon variable rates that are a spread above either LIBOR or prime rates.
 
                                       27
<PAGE>
    The Company's effective income tax rate of approximately 44% for fiscal 1997
was higher than the combined state and federal rate of 40% primarily because of
the nondeductibility of goodwill amortization.
 
    Primarily as a result of the factors discussed above, income before
extraordinary item for fiscal 1997 increased by $9.2 million to $10.4 million
for fiscal 1997 from $1.2 million for fiscal 1996.
 
    The extraordinary item for fiscal 1997 of $2.8 million, net of taxes, was a
result of the Company's refinancing on January 30, 1997. See Note 8 to the
Consolidated Financial Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    GENERAL.  The Company's cash has historically been used to fund capital
expenditures, working capital requirements and debt service. As a result of the
Recapitalization effective at the end of the first quarter of fiscal 1998, the
Company's liquidity requirements have significantly increased, primarily due to
significantly increased interest expense obligations. Interest expense,
excluding amortization of deferred financing fees, is estimated to be $26.6
million per year, associated with borrowings of $171.6 million under the Amended
Credit Agreement (as defined below), $85.0 million under the Notes, and $3.9
million under capitalized lease obligations. In addition, the Company is
required to repay the $144.4 million in term loans under the Amended Credit
Agreement over the seven and one-half year period following May 15, 1998, with
scheduled principal payments of $1.5 million for the first five years, $48.7
million in the sixth year, $66.5 million in the seventh year, and $21.6 million
in the final six months. The Company is also required to apply certain asset
sale proceeds, as well as 50% of its excess cash flow (as defined in the Amended
Credit Agreement) unless a leverage ratio test is met, to prepay the borrowings
under the Amended Credit Agreement. All outstanding revolving credit borrowings
under the Amended Credit Agreement will become due on June 30, 2003. The Company
incurred a non-cash, one-time charge of approximately $1.9 million related to
the write-off of existing deferred financing fees during fiscal 1998, as a
result of the Recapitalization.
 
    CASH FLOW.  During fiscal 1998, net cash used in operating activities
totaled $18.5 million. This resulted from the net loss of $17.4 million, offset
by non-cash charges to income of $20.1 million, including $8.3 million related
to stock option compensation expense incurred in connection with the
Recapitalization, plus a net change in operating assets and liabilities of $21.2
million. The increase in inventories of $51.2 million from March 31, 1997 to
March 31, 1998 was partially offset by the increase in accounts payable of $31.8
million for the same period. Management has made a strategic decision to
increase inventories in order to take advantage of certain opportunities to
increase market share. The increase of $12.0 million in accounts receivable as
of March 31, 1998 when compared to March 31, 1997 reflects the $31.0 million
increase in sales during the fourth quarter of fiscal 1998 when compared to the
comparable period in the prior year, partially offset by the timing of the cash
receipts for those sales at the end of fiscal 1998. The change from March 31,
1997 to March 31, 1998 in the amount of bank checks outstanding, net of cash on
deposit, was due primarily to differences in the amount of the last check runs
of the two years. Customer allowances payable increased at March 31, 1998
compared to the prior year-end primarily due to the higher sales dollars
resulting in higher volume rebates due to certain customers. Deferred income
taxes receivable increased by $4.7 million primarily as a result of the
Recapitalization.
 
    Net cash used in investing activities was $18.9 million in fiscal 1998. This
was primarily due to the net capital expenditures of $14.4 million. The capital
expenditures included the investment that the Company is making in its
information systems and in expanding its capacity at its Garden Grove tableting
plant, as well as in its new manufacturing and distribution facility in South
Carolina.
 
    Net cash provided by financing activities was $36.1 million in fiscal 1998.
This was due primarily to the financing transactions and related indebtedness
incurred in connection with the Recapitalization, offset by repayments of
existing indebtedness and, to a lesser extent, an increase in deferred financing
charges resulting from $11.9 million of deferred financing charges related to
the Credit Facility and Notes.
 
                                       28
<PAGE>
    FINANCING ARRANGEMENTS.  On May 15, 1998, the Company entered into an
Amended and Restated Credit Agreement ("Amended Credit Agreement"). The Amended
Credit Agreement provides for two U.S. term loans due December 30, 2004 and
December 30, 2005 in the amounts of $68,000,000 and $65,000,000, respectively, a
Canadian denominated term loan due December 30, 2004 in the amount of
approximately $12,000,000, and a revolving credit facility in the amount of
$125,000,000 (the "New Revolving Facility") (collectively, the "Credit
Facility") made available in U.S. dollars to the Company with a portion
denominated in Canadian dollars made available to Vita Health. The unpaid
principal amount outstanding on the New Revolving Facility is due and payable on
June 30, 2003. Amounts outstanding under the Company's credit facility in place
at March 31, 1998 were refinanced with the proceeds from the Amended Credit
Agreement. As of June 15, 1998 the Company's unused availability under the
Amended Credit Agreement was approximately $67.3 million.
 
    The New Revolving Credit Facility includes letter of credit and swingline
facilities. Borrowings under the Credit Facility bear interest at floating rates
that are based on LIBOR or on the applicable alternate base rate (as defined),
and accordingly the Company's financial condition and performance is and will
continue to be affected by changes in interest rates. The Company has entered
into an interest protection arrangement effective July 30, 1997 with respect to
$29.4 million of its indebtedness under the Credit Facility that provides a cap
of 6.17% on LIBOR rates plus applicable margin on the interest rates payable
thereon. The Credit Facility imposes certain restrictions on the Company,
including restrictions on its ability to incur additional debt, enter into
sale-leaseback transactions, incur contingent liabilities, pay dividends or make
distributions, incur or grant liens, sell or otherwise dispose of assets, make
investments or capital expenditures, repurchase or prepay the Notes or other
subordinated debt, or engage in certain other activities. The Company must also
comply with certain financial ratios and tests, including a minimum net worth
requirement, a maximum leverage ratio, a minimum interest coverage ratio and a
minimum cash flow coverage ratio.
 
    The Notes may be required to be purchased by the Company upon a Change of
Control (as defined) and in certain circumstances with the proceeds of asset
sales. The Notes are subordinated to the indebtedness under the Amended Credit
Agreement. The indenture governing the Notes imposes certain restrictions on the
Company and its subsidiaries, including restrictions on its ability to incur
additional debt, make dividends, distributions or investments, sell or otherwise
dispose of assets, or engage in certain other activities.
 
    A portion of the outstanding borrowings under the Credit Facility, amounting
to approximately U.S. $14.5 million as of March 31, 1998, is denominated in
Canadian dollars. All other outstanding borrowings under the Credit Facility,
and all of the borrowings under the Notes, are denominated in U.S. dollars.
 
    At March 31, 1998, borrowings under the Credit Facility bore interest at a
weighted average rate of 7.8% per annum. The Notes bear interest at a rate of
9.625% per annum.
 
    The Company is in the process of establishing a new packaging and
distribution facility in York County, South Carolina. As this new facility
becomes operational, other facilities located in the midwestern United States
may be closed. The Company expects to incur expenses estimated at approximately
$1.9 million annually through fiscal year 1999 in connection with the
establishment of the new facility and the closure of the midwestern U.S.
facilities. The Company will lease this new facility under a prearranged,
assigned purchase agreement to a third party that will provide the financing for
its construction, at an estimated annual lease expense, net of lease costs for
the facilities currently expected to be closed, of $1.4 million.
 
    The Company currently believes that cash flow from operating activities,
together with revolving credit borrowings available under the Amended Credit
Agreement, will be sufficient to fund the Company's currently anticipated
working capital, capital spending and debt service requirements until the
maturity of the Revolving Credit Facility (June 30, 2003), but there can be no
assurance in this regard. The Company expects that its working capital needs
will require it to obtain new revolving credit facilities at the
 
                                       29
<PAGE>
time that the Revolving Credit Facility matures, whether by extending, renewing,
replacing or otherwise refinancing the Revolving Credit Facility. No assurance
can be given that any such extension, renewal, replacement or refinancing can be
successfully accomplished.
 
YEAR 2000 COMPLIANCE
 
    The Company is in the process of modifying, upgrading or replacing its
computer software applications and systems to accommodate the "year 2000" dating
changes necessary to permit correct recording of year dates for 2000 and later
years. The Company does not expect that the cost of its year 2000 compliance
program will be material to its financial condition or results of operations.
The Company believes that it will be able to achieve compliance by December,
1998, and does not currently anticipate any material disruption in its
operations as the result of any failure by the Company to be in compliance. The
Company has begun a comprehensive inventory of, and is currently gathering
information concerning the compliance status of its suppliers and customers. In
the event that any of the Company's significant suppliers or customers do not
successfully and timely achieve year 2000 compliance, the Company's business or
operations could be adversely affected.
 
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
 
    Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including statements regarding, without limitation, (i) the
Company's growth strategies; (ii) trends in the Company's business; and (iii)
the Company's future liquidity requirements and capital resources.
 
    Forward-looking statements are made based upon Management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with Management's expectations or that the effect of
future developments on the Company will be those anticipated by Management. The
important factors described elsewhere in this report (including, without
limitation, those factors discussed in "Item 1. Business--Risk Factors", could
affect (and in some cases have affected) the Company's actual results and could
cause such results to differ materially from estimates or expectations reflected
in such forward-looking statements. In light of these factors, there can be no
assurance that events anticipated by the forward-looking statements contained in
this report will in fact transpire.
 
    While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of Management's discussion and analysis of
results of operations and financial condition contained in its periodic reports,
the Company does not intend to review or revise any particular forward-looking
statement referenced in this report in light of future events.
 
                                     ITEM 8
                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    The consolidated financial statements of the Company, including an index
thereto and the report of Ernst & Young LLP, the Company's independent auditors,
begin on page F-1.
 
                                     ITEM 9
                       CHANGES IN AND DISAGREEMENTS WITH
               ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
    None.
 
                                       30
<PAGE>
                                    PART III
                                    ITEM 10
                        DIRECTORS AND EXECUTIVE OFFICERS
 
    Management of the business of Leiner is vested in its Board of Directors
(the "Board"). Currently, Leiner does not pay any compensation for services as a
director on its Board. The Board is currently comprised of Messrs. Baird,
Kaminski, Bensussen and Towne. The Board of Directors of Leiner Group, the
Company's indirect corporate parent, is currently comprised of Mr. Baird, who
was appointed Chairman of such Board following the Recapitalization, Messrs.
Kaminski and Bensussen who already were members of such Board prior to the
Recapitalization, and Messrs. Barry Twomey, Bruce Gorchow and Alan Colner, who
were appointed as members of such Board in September 1997, and Mr. John Heine,
who was appointed as a member of such Board in December 1997. Until the
formation of North Castle, Mr. Baird was a Managing Director of AEA. Pursuant to
the terms of the Stockholders Agreement, the AEA Group has the right to elect
one member of the Board of Leiner Group and North Castle has the right to elect
the remaining directors.
 
    The following table sets forth with respect to each of the directors and
executive officers of the Company, their respective years of employment with the
Company, ages and positions.
 
<TABLE>
<CAPTION>
                                  YEARS WITH
NAME                                COMPANY          AGE                                 POSITION
------------------------------  ---------------      ---      ---------------------------------------------------------------
<S>                             <C>              <C>          <C>
Robert M. Kaminski............            20             47   Chief Executive Officer and Director
 
Gale K. Bensussen.............            24             51   President and Director
 
Kevin J. Lanigan..............            25             51   Executive Vice President and Chief Operations Officer
 
William B. Towne..............             2             54   Executive Vice President, Chief Financial Officer, Director,
                                                                Treasurer and Secretary
 
Stanley J. Kahn...............            18             45   Executive Vice President - Sales
 
Giffen H. Ott.................             5             37   Senior Vice President - Operations
 
Scott C. Rexinger.............            10             52   Senior Vice President - Product Marketing & Development
 
Robert J. LaFerriere..........             1             49   Senior Vice President - Marketing
 
Steven E. Brunette............             1             48   General Counsel
 
Charles F. Baird, Jr..........             1             45   Director
</TABLE>
 
    Robert M. Kaminski has been the Chief Executive Officer of Leiner since May
1992, and a Director of Leiner since June 1992. He has been Chief Executive
Officer of Leiner Group since March 1994 and Vice Chairman of Leiner Group since
July 1996. From 1988 to 1992, Mr. Kaminski was Chief Operating Officer of the
Predecessor Company and from 1982 to 1988, he was Vice President - Sales of the
Predecessor Company. Mr. Kaminski joined the Predecessor Company in 1978.
 
    Gale K. Bensussen has been a Director of Leiner since June 1992 and
President of Leiner since May 1992. He has been a Director of Leiner Group since
June 1992 and President of Leiner Group since March 1994. Mr. Bensussen was
Senior Vice President - Marketing and Corporate Development of the Predecessor
Company from May 1991 to May 1992. From July 1988 to May 1991, Mr. Bensussen was
Senior Vice President - Sales and Marketing of the Predecessor Company. Mr.
Bensussen joined the Predecessor Company in 1974.
 
    Kevin J. Lanigan became Executive Vice President and Chief Operations
Officer of Leiner in May 1992 and of Leiner Group in March 1994. From 1986 to
1992, Mr. Lanigan was Senior Vice President-
 
                                       31
<PAGE>
Operations Planning of the Predecessor Company and, from 1979 to 1986, was Vice
President - Operations. Before joining the Predecessor Company in 1973, he held
various engineering positions in the aerospace industry.
 
    William B. Towne became Executive Vice President and Chief Financial Officer
of Leiner and Leiner Group in June 1996, Treasurer of Leiner in June 1996 and
Secretary of Leiner and Leiner Group in October 1997. Mr. Towne has been a
Director of Leiner since June 1996. From 1995 to 1996, Mr. Towne served as
Executive Vice President, Finance and Chief Financial Officer at L. Galoob Toys,
Inc. From 1990 to 1995, Mr. Towne served as Executive Vice President, Chief
Financial Officer for Forstmann & Co., Inc. (which entered into Chapter 11
bankruptcy proceedings in October 1995). From 1982 to 1990, Mr. Towne worked for
Tambrands, Inc. where he rose from Manager of Forecast and Planning to Chief
Financial Officer of its International Division.
 
    Stanley J. Kahn became Executive Vice President-Sales of Leiner in May 1992
and of Leiner Group in March 1994. Mr. Kahn became Executive Vice President -
Sales of Leiner Group in April 1997. From September 1989 to 1992, Mr. Kahn was
Vice President - Sales of the Predecessor Company and, from July 1988 to
September 1989, was Vice President - Business Development. Mr. Kahn was National
Key Account Manager from 1985 to 1988. Mr. Kahn joined the Predecessor Company
in 1980 as Regional Sales Manager.
 
    Giffen H. Ott became Senior Vice President - Operations of Leiner in April
1997. Mr. Ott became Vice President - Operations in September 1995 after joining
Leiner in March 1993 as Vice President of Manufacturing Development. Prior to
joining Leiner Mr. Ott worked as a Manager with Bain & Company, the
international management consulting firm, where the engagements he led included
an evaluation of the Company's market position and operations on behalf of AEA.
 
    Scott C. Rexinger became Senior Vice President - Product Marketing &
Development of Leiner in June 1996. From May 1992 to June 1996, Mr. Rexinger was
Vice President, Product Marketing, and from April 1991 to May 1992, he was
Director, New Category Development. Mr. Rexinger was Group Marketing Manager,
New Products and Brands from August 1988 to April 1991, and Marketing Manager,
Brands from November 1987 to August 1988. Prior to joining the Company, Mr.
Rexinger held various marketing positions in the consumer packaged goods
industry.
 
    Robert J. LaFerriere became Senior Vice President - Marketing of Leiner in
February 1997 and was a consultant to Leiner from 1996 to 1997. From 1992 to
1996, Mr. LaFerriere was President and Chief Executive Officer of Slim Fast
Foods and was a Vice President, then Senior Vice President - Purchasing, at
Thrifty Drug and Discount Stores from 1984 until 1990.
 
    Steven E. Brunette became General Counsel to the Company in January 1998,
and is responsible for all legal affairs of the Company. Prior to joining
Leiner, Mr. Brunette served 19 years in the Legal Department of Hunt-Wesson,
Inc., a major U.S. manufacturer of food products, where he assumed increasing
responsibilities and served as that company's Assistant General Counsel.
 
    Charles F. Baird, Jr. has been a Director of Leiner since October 1997 and
was elected Chairman in June 1998. He is the managing member of Baird Investment
Group, LLC, the managing member of North Castle. From 1989 until May 1997, Mr.
Baird served as a Managing Director of AEA. From 1979 to 1989, Mr. Baird worked
as a management consultant with Bain & Company.
 
                                       32
<PAGE>
                                    ITEM 11
                             EXECUTIVE COMPENSATION
 
    The following table sets forth the compensation of each of the Company's
chief executive officer and the four most highly paid executive officers (other
than the chief executive officer) (collectively, the "named executive officers")
for the fiscal year ended March 31, 1998.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                 LONG-TERM
                                                                               COMPENSATION
                                                                            -------------------
                                                   ANNUAL COMPENSATION(1)       SECURITIES
                                                  ------------------------      UNDERLYING          ALL OTHER
NAME AND PRINCIPAL POSITION                         SALARY      BONUS(2)      OPTIONS (#)(3)     COMPENSATION(4)
------------------------------------------------  ----------  ------------  -------------------  ----------------
<S>                                               <C>         <C>           <C>                  <C>
Robert M. Kaminski .............................  $  442,212  $  2,581,375          22,822          $   63,977
  Chief Executive Officer
 
Gale K. Bensussen ..............................     291,346     2,334,375          14,833               9,045
  President
 
William B. Towne ...............................     266,346       706,250          10,156               6,227
  Executive Vice President
 
Kevin J. Lanigan ...............................     243,077       325,000           6,989               9,039
  Executive Vice President
 
Stanley J. Kahn ................................     270,673       450,000           5,989               8,758
  Executive Vice President
</TABLE>
 
------------------------
 
(1) The compensation described in this table does not include medical and group
    life insurance received by the named executive officers which are available
    generally to all salaried employees of the Company and certain perquisites
    and other personal benefits received by the named executive officers, the
    value of which does not exceed the lesser of $50,000 or 10% of any such
    officer's total salary and bonus disclosed in this table.
 
(2) Includes a transaction bonus for the Recapitalization completed June 30,
    1997.
 
(3) Options are for Leiner Group common stock.
 
(4) Represents Company contributions to its defined contribution retirement
    plans and the dollar value of term life and income replacement insurance
    premiums paid on behalf of the executive.
 
                                       33
<PAGE>
    The following table sets forth the stock option grants to each of the named
executive officers for the fiscal year ended March 31, 1998.
 
                      OPTION GRANTS IN LAST FISCAL YEAR(1)
 
<TABLE>
<CAPTION>
                                                                                                     POTENTIAL REALIZABLE
                                                                                                             VALUE
                                                                                                       AT ASSUMED ANNUAL
                                                         INDIVIDUAL GRANTS                                   RATES
                                 ------------------------------------------------------------------     OF STOCK PRICE
                                    NUMBER OF          % OF TOTAL                                        APPRECIATION
                                   SECURITIES        OPTIONS GRANTED                                  FOR OPTION TERM(2)
                                   UNDERLYING         TO EMPLOYEES         EXERCISE     EXPIRATION   ---------------------
NAME                             OPTIONS GRANTED     IN FISCAL YEAR      PRICE ($/SH)      DATE         5%         10%
-------------------------------  ---------------  ---------------------  -------------  -----------  ---------  ----------
<S>                              <C>              <C>                    <C>            <C>          <C>        <C>
Robert M. Kaminski.............        18,822                  17%         $     100       6/30/07   $  94,110  $  188,220
                                        4,000                   4                100       11/1/07      20,000      40,000
 
Gale K. Bensussen..............        12,833                  11                100       6/30/07      64,165     128,330
                                        2,000                   2                100       11/1/07      10,000      20,000
 
William B. Towne...............         8,556                   8                100       6/30/07      42,780      85,560
                                        1,600                   1                100       11/1/07       8,000      16,000
 
Kevin J. Lanigan...............         5,989                   5                100       6/30/07      29,945      59,890
                                        1,000                   1                100       11/1/07       5,000      10,000
 
Stanley J. Kahn................         5,989                   5                100       6/30/07      29,945      59,890
</TABLE>
 
------------------------
 
(1) All options are for Leiner Group common stock and they generally vest on a
    pro rata basis at a rate of 25% per year, with 25% immediate vesting on the
    date of grant.
 
(2) Sets forth potential option gains based on assumed annualized rates of stock
    price appreciation from the exercise price at the date of grant of 5% and
    10% (compounded annually) over the full term of the grant with appreciation
    determined as of the expiration date. The 5% and 10% assumed rates of
    appreciation are mandated by the rules of the Securities and Exchange
    Commission, and do not represent the Company's estimate or projection of
    future Common Stock prices.
 
    The following table sets forth the stock option exercises for the fiscal
year ended March 31, 1998 and the stock option values as of March 31, 1998, in
each case, for each of the named executive officers.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                   AND OPTION VALUES AS OF MARCH 31, 1998(1)
 
<TABLE>
<CAPTION>
                                                                   NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                                                                  UNDERLYING UNEXERCISED      IN-THE-MONEY OPTIONS AT
                                                                OPTIONS AT FISCAL YEAR END       FISCAL YEAR END(2)
                                SHARES ACQUIRED     VALUE      ----------------------------  --------------------------
NAME                            ON EXERCISE(3)     REALIZED     EXERCISABLE   UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
------------------------------  ---------------  ------------  -------------  -------------  -----------  -------------
<S>                             <C>              <C>           <C>            <C>            <C>          <C>
Robert M. Kaminski............        24,067     $  2,406,711        5,706         17,116     $ 227,955    $   683,784
Gale K. Bensussen.............        18,484        1,848,438        3,708         11,125       148,135        444,444
William B. Towne..............         4,812          481,272        2,539          7,617       101,433        304,299
Kevin J. Lanigan..............         4,938        1,243,853        1,747          5,242        69,793        209,418
Stanley J. Kahn...............         5,576        1,549,489        1,497          4,492        59,805        179,455
</TABLE>
 
------------------------
 
(1) All options are for Leiner Group common stock.
 
(2) Sets forth values for "in-the-money" options that represent the positive
    spread between the respective exercise prices of outstanding stock options
    and the value of the Company's common stock as of March 31, 1998.
 
                                       34
<PAGE>
(3) In connection with the Recapitalization, all of these options were either
    exchanged for Equity Rights or cashed out. The Equity Rights represent the
    right to receive Recapitalized Common Stock upon the occurrence of certain
    events, including the termination of the holder's employment with the
    Company, a public offering or a change of control. See "The
    Recapitalization."
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
    The Board of Directors of Leiner Group established a Compensation Committee
to review all compensation arrangements for executive officers of Leiner Group
and its subsidiaries. The individuals serving on the Leiner Group Compensation
Committee during the fiscal year ended March 31, 1998 were Mr. Baird, Mr. Colner
and Mr. Heine.
 
SEVERANCE ARRANGEMENTS
 
    In November 1991, the Predecessor Company entered into certain severance
agreements with certain members of Leiner's senior management, pursuant to which
Leiner will pay severance benefits if the individual's employment is terminated
by Leiner other than for cause or if the individual resigns his or her
employment with Leiner for good reason. In May 1997, Leiner entered into a
substantially similar agreement with William B. Towne.
 
    The severance benefits that the Company has agreed to provide to each of
Robert M. Kaminski, Gale K. Bensussen, William B. Towne and Stanley J. Kahn
include (a) a lump-sum severance payment equal to the sum of (i) one year's base
salary, plus (ii) any annual individual performance bonus or targeted
commission, both as in effect at the time of the termination or resignation; (b)
outplacement assistance at the Company's expense, up to a maximum cost to the
Company of $20,000; and (c) any rights under applicable Company plans or
programs, including but not limited to stock option and incentive plans, as may
be determined pursuant to the terms of such plans or programs. The severance
benefits provided to Kevin J. Lanigan include a lump-sum severance payment equal
to three times the sum of one year's base salary plus any annual individual
performance bonus or targeted commission, both as in effect at the time of
termination or resignation, as well as the benefits described in clauses (b) and
(c) above, subject to certain limitations to the extent that the Company
determines that the foregoing benefits would not be deductible by the Company
because such payments constitute an "excess parachute payment" (as defined in
section 280G of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code").
 
    In March 1997, the Company entered into a non-competition and retirement
agreement with Mr. David F. Brubaker, former Chairman of Leiner, pursuant to
which, among other things, the Company has agreed to pay Mr. Brubaker an amount
equal to approximately $1 million spread across several installments through
February 2000. The agreement provides that under certain circumstances all of
the Company's payment obligations to Mr. Brubaker would accelerate.
 
STOCK OPTION PLAN
 
    Leiner Group has authorized options for issuance to members of management
and employees ("Management Options") representing the right to acquire an
additional 10% of the Group Common Stock on a fully-diluted basis immediately
after the Recapitalization (giving effect to the exercise of such options but
without giving effect to the exercise of the Warrants referred to under "The
Recapitalization" below), exercisable at a price equal to the greater of the
purchase price paid by North Castle or the fair market value of such shares at
the time of grant. A total of 88,300 of these Management Options were granted as
of June 30, 1997, 22,556 of these Management Options were granted as of November
1, 1997, 2,950 of these Management Options were granted as of December 31, 1997
and 9,966 of these Management Options were granted as of June 11, 1998.
Generally, options vest on a pro rata basis at a rate of 25% per year, with 25%
immediate vesting on the date of grant. It is expected that the remaining
Management Options will be granted in the ordinary course of business.
 
                                       35
<PAGE>
                                    ITEM 12
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    All of the shares of common stock of Leiner are owned by PLI Holdings and
all of the shares of common stock of PLI Holdings are owned by Leiner Group.
 
    The following table sets forth information regarding beneficial ownership of
common stock of Leiner Group as of June 17, 1998, by (i) each person who is
known by the Company to beneficially own more than 5% of voting Group Common
Stock, (ii) each director of Leiner Group, (iii) each named executive officer of
the Company listed on the Summary Compensation Table above and (iv) by all
directors and executive officers as a group.
 
<TABLE>
<CAPTION>
                                                            SHARES OF          SHARES OF
                                                          VOTING GROUP     NON-VOTING GROUP
                                                          COMMON STOCK       COMMON STOCK        PERCENTAGE OF CLASS
                                                          BENEFICIALLY       BENEFICIALLY     --------------------------
NAME                                                          OWNED              OWNED          VOTING      NON-VOTING
------------------------------------------------------  -----------------  -----------------  -----------  -------------
<S>                                                     <C>                <C>                <C>          <C>
North Castle Partners I, L.L.C.(1)....................        808,998             --                83.9%       --
Baird Investment Group, L.L.C.(2).....................        808,998             --                83.9%       --
Charles F. Baird, Jr..................................        833,868(3)          --                86.5%       --
AEA Investors Inc.....................................         83,131(4)          26,739(4)          8.6%         41.4%
Alan Colner...........................................         --                 --              --            --
Bruce Gorchow.........................................         --                 --              --            --
John Heine............................................          1,000                188             0.1%          0.3%
Barry Twomey..........................................         --                 --              --            --
Robert M. Kaminski....................................          4,146(5)          10,412             0.4%         13.9%
Gale K. Bensussen.....................................          8,490(5)           6,916             0.9%          9.7%
William B. Towne......................................            250(5)           4,678             0.0%          6.8%
Kevin J. Lanigan......................................          1,000(5)          19,826(5)          0.1%         29.2%
Stanley J. Kahn.......................................            500(5)           7,239(5)          0.1%         10.7%
Executive officers and directors as a group
  (14 persons)........................................        853,275(5)          62,377(5)         88.5%         62.2%
</TABLE>
 
------------------------
 
(1) The address for North Castle is 2 Greenwich Plaza, Greenwich, CT 06830.
 
(2) North Castle is an investment fund formed as a limited liability company.
    Baird Investment Group, L.L.C. ("Baird Investment") is the sole managing
    member of North Castle. Mr. Baird is the sole managing member of Baird
    Investment. The address for Baird Investment is 2 Greenwich Plaza,
    Greenwich, CT 06830.
 
(3) Includes 24,870 shares of voting Leiner Group common stock owned by Mr.
    Baird and the shares of Leiner Group common stock owned by North Castle
    which Mr. Baird may be deemed to have beneficial ownership of by virtue of
    his status as the managing member of Baird Investment. Mr. Baird expressly
    disclaims such beneficial ownership. Does not include 3,255 shares of voting
    Leiner Group common stock held by a trust in favor of Mr. Baird's children.
    Mr. Baird expressly disclaims beneficial ownership of such shares.
 
(4) Pursuant to an agreement between AEA and the other members of the AEA Group,
    AEA has voting power over shares of Leiner Group common stock held by the
    members of the AEA Group, and accordingly may be deemed to beneficially own
    such shares.
 
(5) Does not reflect Equity Rights owned by Messrs. Kaminski, Bensussen, Towne,
    Lanigan and Kahn reflecting the right to receive 24,067 shares, 18,484
    shares, 4,812 shares, 4,938 shares and 5,576 shares of Leiner Group common
    stock, respectively, as such Equity Rights are not exercisable within 60
    days of the date hereof.
 
                                       36
<PAGE>
                                    ITEM 13
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    STOCKHOLDERS AGREEMENT.  On the Recapitalization Closing Date, Leiner Group
and the stockholders of Leiner Group entered into the Stockholders Agreement,
which contains, among other terms and conditions, provisions relating to
corporate governance, certain restrictions with respect to transfer of
Recapitalized Common Stock by certain parties thereunder, certain rights and
obligations with respect to transfers of Recapitalized Common Stock and certain
registration rights granted by the Company with respect to shares of
Recapitalized Common Stock. The Stockholders Agreement gives the AEA Group the
power to elect one member of Leiner Group's Board of Directors and, so long as
North Castle owns at least 40% of all outstanding Leiner Group equity, gives
North Castle the power to elect the remaining directors of Leiner Group, and
through Leiner Group, all the directors of Leiner. If North Castle's ownership
of Leiner Group equity falls below 40%, it may elect the number of directors
that is proportionate to its shareholdings. Accordingly, North Castle controls
the Company and has the power to appoint new management and approve any action
requiring the approval of the holders of Leiner Group common stock, including
adopting amendments to Leiner Group's certificate of incorporation and approving
mergers or sales of substantially all of the Company's assets.
 
    The Stockholders Agreement also restricts the ability of existing
shareholders to transfer their Leiner Group equity to third parties prior to
June 30, 1998, and gives certain of these shareholders a right of first refusal
after that date. These restrictions either do not apply or change if there is a
public offering, or if North Castle sells more than 5% of all outstanding Leiner
Group equity. If North Castle seeks to sell more than 5% of the outstanding
Leiner Group equity, other existing shareholders have the right to sell their
shares at the same time. The Agreement also gives North Castle rights to require
Leiner Group to register Leiner Group equity under the Securities Act, subject
to certain limitations and conditions.
 
    MANAGEMENT AGREEMENTS.  Following its acquisition of Leiner on May 4, 1992,
AEA entered into a management agreement with Leiner Group, pursuant to which AEA
provided management, consulting and financial services to the Company for an
annual fee of $0.35 million plus expenses. In connection with the Vita Health
Acquisition, the Company paid to AEA an additional transaction fee of $0.3
million for services in arranging, structuring, and negotiating the terms of the
Vita Health Acquisition and related refinancing, and reimbursed it for certain
related expenses. AEA received a transaction fee of $3.5 million for similar
services rendered in connection with the Recapitalization.
 
    Upon consummation of the Recapitalization, Leiner Group's management
agreement with AEA was terminated, and Leiner Group and Leiner entered into a
consulting agreement with North Castle Partners, L.L.C. (the "Sponsor"), an
affiliate of North Castle, to provide the Company with certain business,
financial and managerial advisory services. Mr. Baird acts as the managing
member of the Sponsor through Baird Investment. In exchange for such services,
Leiner Group and Leiner have agreed to pay the Sponsor an annual fee of $1.5
million, payable semi-annually in advance, plus the Sponsor's reasonable out-of-
pocket expenses, and to indemnify the Sponsor and certain affiliates against
certain liabilities. This fee may be reduced upon completion of an initial
public offering of Leiner's shares. The agreement also terminates on June 30,
2007, unless Baird Investment Group ceases to be the managing member of North
Castle or North Castle terminates before that date. Leiner Group and Leiner have
also paid the Sponsor a transaction fee of $3.5 million for services relating to
arranging, structuring and financing the Recapitalization, and reimbursed the
Sponsor's related out-of-pocket expenses.
 
    MANAGEMENT.  As part of the Recapitalization, the current managers and
employees of the Company were afforded the opportunity to choose the amount of
their existing equity they wished to retain in Leiner Group in the form of
Leiner Group equity. Managers and employees who retained their equity in Leiner
Group will, as a result of the increased leverage on the Company incurred as
part of the Recapitalization, acquired a greater percentage equity ownership.
Under the Stockholders Agreement, current managers
 
                                       37
<PAGE>
have the right, upon their death or permanent disability, to require Leiner
Group to purchase their Leiner Group common stock for its then fair market
value.
 
    In connection with the Recapitalization, the Company paid senior managers
transaction bonuses of $5.2 million in the aggregate. In addition, Leiner Group
established a new stock option plan which provides for the Board of Leiner Group
to grant Management Options to acquire 122,222 shares of Leiner Group common
stock. A total of 88,300 of these Management Options were granted as of June 30,
1997 and an additional 22,556, 2,950 and 9,966 of these Management Options were
granted on November 1, 1997, December 31, 1997 and June 11, 1998, respectively,
in each case subject to a vesting schedule.
 
    The Board of Leiner Group and management of the Company instituted a stock
purchase plan pursuant to which certain managers and employees of the Company
were afforded the opportunity to purchase Leiner Group common stock. The gross
proceeds of such offering was $1.9 million.
 
    On June 25, 1997, Baird Investment, the managing member of North Castle,
entered into separate agreements with three of the principal investors in North
Castle, Electra Fleming Inc. ("Electra"), Moore Capital Management, Inc.
("Moore") and PPM America, Inc. ("PPM"). As part of these agreements, Baird
Group caused North Castle to exercise its rights under the Stockholders
Agreement to nominate one person designated by Electra, Moore and PPM to serve
on the Board of Directors of Leiner Group. In connection with these agreements,
Leiner Group paid Electra, Moore and PPM a one-time board representation fee of
$100,000, $75,000 and $75,000, respectively.
 
                                       38
<PAGE>
                                    PART IV
                                    ITEM 14
        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
    (a) Documents filed as part of this Report:
 
        1.  FINANCIAL STATEMENTS.  The following financial statements of the
    Company are included in a separate section of this Annual Report on Form
    10-K commencing on the pages referenced below:
 
<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      -----
<S>                                                                                                <C>
Index to Consolidated Financial Statements.......................................................         F-1
Report of Independent Auditors...................................................................         F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997........................................         F-3
Consolidated Statements of Operations for the years ended March 31, 1998, 1997 and 1996..........         F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the years ended March 31, 1998,
  1997 and 1996..................................................................................         F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996..........         F-6
Notes to Consolidated Financial Statements.......................................................         F-7
</TABLE>
 
        2.  FINANCIAL STATEMENT SCHEDULES.  The following financial statement
    schedule of the Company is included in a separate section of this Annual
    Report on Form 10-K commencing on the page referenced below. All other
    schedules have been omitted because they are not applicable, not required,
    or the information is included in the Consolidated Financial Statements or
    notes thereto.
 
<TABLE>
<S>                                                                             <C>
Schedule II--Consolidated Valuation and Qualifying Accounts...................         S-1
</TABLE>
 
        3.  LIST OF EXHIBITS.
 
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
       2.1   Stock Purchase Agreement and Agreement and Plan of   Filed as Exhibit 2.1 to the Registration Statement
             Merger, dated as of May 31, 1997, by and among       on Form S-4 (Registration No. 333-33121) of Leiner
             Leiner Group, North Castle Partners I, L.L.C. and    Health Products Inc. under the Securities Act of
             LHP Acquisition Corp.                                1933, as amended (the "Registration Statement on
                                                                  Form S-4"), and incorporated herein by reference.
 
       2.2   Amendment No. 1 to Stock Purchase Agreement and      Filed as Exhibit 2.2 to the Registration Statement
             Agreement and Plan of Merger, dated as of June 30,   on Form S-4 and incorporated herein by reference.
             1997, by and among Leiner Group, North Castle
             Partners I, L.L.C. and LHP Acquisition Corp.
 
       3.1   Amended and Restated Certificate of Incorporation    Filed as Exhibit 3.1 to the Registration Statement
             of Leiner Health Products Inc. ("LHP").              on Form S-4 and incorporated herein by reference.
 
       3.2   Amended and Restated By-Laws of LHP (formerly known  Filed as Exhibit 3.2 to the Registration Statement
             as Amended and Restated By-Laws of LHP Funding       on Form S-4 and incorporated herein by reference.
             Corp.).
</TABLE>
 
                                       39
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
       4.1   Indenture, dated as of June 30, 1997, between        Filed as Exhibit 4.1 to the Registration Statement
             Leiner Group and United States Trust Company of New  on Form S-4 and incorporated herein by reference.
             York (the "Trustee").
 
       4.2   First Supplemental Indenture, dated as of June 30,   Filed as Exhibit 4.2 to the Registration Statement
             1997, among Leiner Group, LHP and the Trustee.       on Form S-4 and incorporated herein by reference.
 
       4.3   Purchase Agreement, dated as of June 19, 1997,       Filed as Exhibit 4.3 to the Registration Statement
             among Leiner Group, LHP, Merrill Lynch & Co.,        on Form S-4 and incorporated herein by reference.
             Salomon Brothers Inc and Scotia Capital Markets
             (USA) Inc. (the "Initial Purchasers").
 
       4.4   Registration Rights Agreement, dated as of June 30,  Filed as Exhibit 4.4 to the Registration Statement
             1997, among Leiner Group, LHP and the Initial        on Form S-4 and incorporated herein by reference.
             Purchasers.
 
       4.5   Amended and Restated Credit Agreement, dated as of   Filed as an exhibit hereto.
             May 15, 1998 (the "Credit Agreement"), among LHP,
             Vita Health Products Inc. (formerly Vita Health
             Company (1985) Ltd.), a Canadian corporation ("Vita
             Health"), the banks and other financial
             institutions party thereto, as lenders, The Bank of
             Nova Scotia, as U.S. Agent and Canadian Agent (the
             "Agents"), Merrill Lynch Capital Corporation, as
             documentation agent, and Salomon Brothers Holding
             Company Inc, as syndication agent.
 
       4.6   Affirmation and Consent, dated May 15, 1998, by PLI  Filed as an exhibit hereto.
             Holdings Inc., VH Holdings Inc., 64,804 Manitoba
             Ltd. and Westcan Pharmaceuticals Ltd. to the Bank
             of Nova Scotia as U.S. Agent under the Credit
             Agreement and each of the lenders party to the
             Credit Agreement.
 
       4.7   Assumption Agreement, dated as of June 30, 1997,     Filed as Exhibit 4.7 to the Registration Statement
             between Leiner Group and LHP and accepted and        on Form S-4 and incorporated herein by reference.
             acknowledged by the Agents on behalf of the lenders
             that are party to the Credit Agreement.
 
       4.8   U.S. Borrower Security Agreement, dated as of June   Filed as Exhibit 4.8 to the Registration Statement
             30, 1997, between LHP and The Bank of Nova Scotia,   on Form S-4 and incorporated herein by reference.
             as collateral agent.
 
       4.9   U.S. Borrower Pledge Agreement, dated as of June     Filed as Exhibit 4.9 to the Registration Statement
             30, 1997, made by LHP in favor of the Agents for     on Form S-4 and incorporated herein by reference.
             the secured parties, as defined therein.
</TABLE>
 
                                       40
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
       4.10  Parent Pledge Agreement, dated as of June 30, 1997,  Filed as Exhibit 4.10 to the Registration Statement
             made by PLI Holdings Inc. in favor of the Agents     on Form S-4 and incorporated herein by reference.
             for the secured parties, as defined therein.
 
       4.11  Canadian Holdings Pledge Agreement, dated as of      Filed as Exhibit 4.11 to the Registration Statement
             June 30, 1997, made by VH Holdings Inc. in favor of  on Form S-4 and incorporated herein by reference.
             The Bank of Nova Scotia, as agent for each of the
             secured parties, as defined therein.
 
       4.12  Canadian Borrower Pledge Agreement, dated as of      Filed as Exhibit 4.12 to the Registration Statement
             June 30, 1997, made by Vita Health in favor of The   on Form S-4 and incorporated herein by reference.
             Bank of Nova Scotia, as agent for each of the
             secured parties, as defined therein.
 
       4.13  U.S. Borrower Guaranty, dated as of June 30, 1997,   Filed as Exhibit 4.13 to the Registration Statement
             made by LHP in favor of the Agents for the secured   on Form S-4 and incorporated herein by reference.
             parties, as defined therein.
 
       4.14  Parent Guaranty, dated as of June 30, 1997, made by  Filed as Exhibit 4.14 to the Registration Statement
             PLI Holdings in favor of the Agents for the secured  on Form S-4 and incorporated herein by reference.
             parties, as defined therein.
 
       4.15  Canadian Holdings Guaranty, dated as of June 30,     Filed as Exhibit 4.15 to the Registration Statement
             1997, made by VH Holdings Inc. in favor of The Bank  on Form S-4 and incorporated herein by reference.
             of Nova Scotia as agent for the secured parties, as
             defined therein.
 
       4.16  Canadian Subsidiary Guaranties, each dated as of     Filed as Exhibit 4.16 to the Registration Statement
             June 30, 1997, made by each of 64804 Manitoba Ltd.   on Form S-4 and incorporated herein by reference.
             and Westcan Pharmaceuticals Ltd. in favor of The
             Bank of Nova Scotia as agent for the secured
             parties, as defined therein.
 
       4.17  Canadian Borrower Debenture, each dated as of June   Filed as Exhibit 4.17 to the Registration Statement
             30, 1997, made by Vita Health in favor of The Bank   on Form S-4 and incorporated herein by reference.
             of Nova Scotia on its own behalf and as agent for
             the Canadian secured parties as defined therein in
             the amount of $75,000,000.
 
       4.18  Canadian Holdings Debenture, dated as of June 30,    Filed as Exhibit 4.18 to the Registration Statement
             1997, made by VH Holdings Inc. in favor of The Bank  on Form S-4 and incorporated herein by reference.
             of Nova Scotia, on its own behalf and as agent for
             the Canadian secured parties, as defined therein in
             the amount of $75,000,000.
</TABLE>
 
                                       41
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
       4.19  Canadian Subsidiary Debenture, dated as of June 30,  Filed as Exhibit 4.19 to the Registration Statement
             1997, made by 64804 Manitoba Ltd. in favor of The    on Form S-4 and incorporated herein by reference.
             Bank of Nova Scotia, on its own behalf and as agent
             for the Canadian secured parties, as defined
             therein in the amount of $75,000,000.
 
       4.20  Canadian Subsidiary Debenture, dated as of June 30,  Filed as Exhibit 4.20 to the Registration Statement
             1997, made by Westcan Pharmaceuticals Ltd. in favor  on Form S-4 and incorporated herein by reference.
             of The Bank of Nova Scotia, on its own behalf and
             as agent for the Canadian secured parties, as
             defined therein in the amount of $75,000,000.
 
       4.21  Mortgage, Assignment of Leases and Rents, Security   Filed as Exhibit 4.21 to the Registration Statement
             Agreement and Fixture Filing, dated as of June 30,   on Form S-4 and incorporated herein by reference.
             1997 from LHP, as Mortgagor, to The Bank of Nova
             Scotia, as agent, relating to the property located
             at 3532 West 47th Place, Chicago, Illinois, as
             amended by the First Amendment to the Mortgage,
             Assignment of Leases and Rents, Security Agreement
             and Fixture Filing dated as of July 31, 1997.
 
       4.22  Mortgage, Assignment of Leases and Rents, Security   Filed as Exhibit 4.22 to the Registration Statement
             Agreement and Fixture Filing, dated as of August     on Form S-4 and incorporated herein by reference.
             20, 1997 from LHP, as Mortgagor, to The Bank of
             Nova Scotia, as agent, relating to the property
             located at 3308 Covington, Kalamazoo, Michigan.
 
       4.23  Mortgage, Assignment of Leases and Rents, Security   Filed as Exhibit 4.23 to the Registration Statement
             Agreement and Fixture Filing, dated as of June 30,   on Form S-4 and incorporated herein by reference.
             1997 from LHP, as Mortgagor, to The Bank of Nova
             Scotia, as agent, relating to the property located
             at 2300 Badger Lane, Madison, Wisconsin.
 
       4.24  Leasehold Deed of Trust, Assignment of Leases and    Filed as Exhibit 4.24 to the Registration Statement
             Rents, Security Agreement and Fixture Filing, dated  on Form S-4 and incorporated herein by reference.
             June 30, 1997 from LHP, as Trustor, in favor of
             Lawyers Title Company of California as Trustee, for
             the benefit of The Bank of Nova Scotia, as agent,
             relating to the property located at 7366 Orangewood
             Avenue, Garden Grove, California.
 
       4.25  Trademark Security Agreement, dated as of June 30,   Filed as Exhibit 4.25 to the Registration Statement
             1997, between LHP and The Bank of Nova Scotia as     on Form S-4 and incorporated herein by reference.
             collateral agent for the secured parties.
</TABLE>
 
                                       42
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
      10.1   Consulting Agreement, dated as of June 30, 1997,     Filed as Exhibit 10.1 to the Registration Statement
             among Leiner Group, LHP and North Castle.            on Form S-4 and incorporated herein by reference.
 
      10.2   Restated Standard Indemnity Agreement, dated         Filed as Exhibit 10.2 to the Registration Statement
             September 1, 1992 between Showa Denko America Inc.   on Form S-4 and incorporated herein by reference.
             and LHP Holdings Corp. (now LHP).
 
      10.3   Guaranty Agreement, dated September 1, 1992,         Filed as Exhibit 10.3 to the Registration Statement
             between Showa Denko K.K. and LHP Holdings Corp.      on Form S-4 and incorporated herein by reference.
             (now LHP).
 
      10.4   Leiner Group Stock Option Plan (formerly known as    Filed as Exhibit 10.4 to the Registration Statement
             PLI Investors Inc. Stock Option Plan).               on Form S-4 and incorporated herein by reference.
 
      10.5   First Amendment to the Leiner Group Stock Option     Filed as Exhibit 10.5 to the Registration Statement
             Plan, effective as of June 30, 1997.                 on Form S-4 and incorporated herein by reference.
 
      10.6   Leiner Group Stock Incentive Plan, adopted and       Filed as Exhibit 10.6 to the Registration Statement
             effective as of June 30, 1997.                       on Form S-4 and incorporated herein by reference.
 
      10.7   Lease, dated as of March 12, 1984, by and between    Filed as Exhibit 10.7 to the Registration Statement
             R&R Properties ("R&R") and Trupak, Inc. ("Trupak"),  on Form S-4 and incorporated herein by reference.
             as amended by the First Amendment, dated as of
             August 1, 1986 between R&R and Trupak, the Second
             Amendment, dated as of June 19, 1989 between R&R
             and Trupak, the Third Amendment, dated as of August
             3, 1992 between R&R and P. Leiner Nutritional
             Products Inc. (successor to merger to Trupak, Inc.
             ("P. Leiner"), the Fourth Amendment, dated as of
             August 2, 1994 between R&R and LHP (successor to P.
             Leiner), and the Fifth Amendment, dated May 20,
             1996 between R&R and LHP, related to a premise
             located in West Unity, Ohio.
 
      10.8   Lease Agreement, dated August 2, 1994, between       Filed as Exhibit 10.8 to the Registration Statement
             Square Feet Unlimited ("Square Feet Unlimited") and  on Form S-4 and incorporated herein by reference.
             LHP, relating to a premise in West Unity, Ohio, as
             amended by the First Amendment of Lease, dated May
             20, 1996, between Square Feet Unlimited and LHP.
 
      10.9   Lease, dated as of October 4, 1993, by and between   Filed as Exhibit 10.9 to the Registration Statement
             Watson Land Company ("Watson") and LHP, related to   on Form S-4 and incorporated herein by reference.
             a premise located at 810 East 233rd Street, Carson,
             California.
</TABLE>
 
                                       43
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
      10.10  Lease, dated as of October 4, 1993, by and between   Filed as Exhibit 10.10 to the Registration
             Watson and LHP, related to a premise located at 901  Statement on Form S-4 and incorporated herein by
             East 233rd Street, Carson, California.               reference.
 
      10.11  Sublease, dated as of October 8, 1993 by and         Filed as Exhibit 10.11 to the Registration
             between Teledyne, Inc. and LHP, related to a         Statement on Form S-4 and incorporated herein by
             premise located at 901 East 233rd Street, Carson,    reference.
             California.
 
      10.12  Standard Industrial Lease, dated February 19, 1988   Filed as Exhibit 10.12 to the Registration
             between Richard F. Burns, J. Grant Monahan and       Statement on Form S-4 and incorporated herein by
             Lawrence W. Doyle, as Trustees of AEW #113 Trust     reference.
             established under Declaration of Trust dated
             January 19, 1988 and Vita-Fresh Vitamin Co. Inc.
             and Vital Industries, Inc., as amended by the First
             Lease Amendment, dated as of June 12, 1997, between
             Sierra Pacific California LP and LHP, related to a
             premise located in Garden Grove, California.
 
      10.13  Lease, dated May 1, 1997 between Crescent            Filed as Exhibit 10.13 to the Registration
             Resources, Inc. and LHP, related to a premise        Statement on Form S-4 and incorporated herein by
             located in York County, South Carolina.              reference.
 
      10.14  Severance Benefit Agreement, dated as of November    Filed as Exhibit 10.14 to the Registration
             21, 1991, by and between LHP and Robert M.           Statement on Form S-4 and incorporated herein by
             Kaminski.                                            reference.
 
      10.15  Severance Benefit Agreement, dated as of November    Filed as Exhibit 10.15 to the Registration
             21, 1991, by and between LHP and Gale K. Bensussen.  Statement on Form S-4 and incorporated herein by
                                                                  reference.
 
      10.16  Severance Benefit Agreement, dated as of May 30,     Filed as Exhibit 10.16 to the Registration
             1997, by and between LHP and William B. Towne.       Statement on Form S-4 and incorporated herein by
                                                                  reference.
 
      10.17  Severance Benefit Agreement, dated as of November    Filed as Exhibit 10.17 to the Registration
             21, 1991, by and between LHP and Kevin J. Lanigan.   Statement on Form S-4 and incorporated herein by
                                                                  reference.
 
      10.18  Severance Benefit Agreement, dated as of November    Filed as Exhibit 10.18 to the Registration
             21, 1991, by and between LHP and Stanley J. Kahn.    Statement on Form S-4 and incorporated herein by
                                                                  reference.
 
      10.19  Net Lease, dated as of October 14, 1997, by and      Filed as Exhibit 10.19 to the Registration
             between MIT Unsecured, L.P. and LHP, related to a    Statement on Form S-4 and incorporated herein by
             premise located in York County, South Carolina.      reference.
</TABLE>
 
                                       44
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                          EXHIBIT
  NUMBER                         DESCRIPTION                                        CROSS REFERENCE
-----------  ---------------------------------------------------  ---------------------------------------------------
<C>          <S>                                                  <C>
      10.20  Stockholders Agreement, dated as of June 30, 1997,   Filed as Exhibit 10.1 to the Quarterly Report on
             among Leiner Health Products Group, Inc., North      Form 10-Q of Leiner Health Products Inc. for the
             Castle Partners I, L.L.C., AEA Investors Inc., and   Quarter Ended December 31, 1997, and incorporated
             each other person who is or becomes a party          herein by reference.
             thereto.
 
      10.21  Stock Purchase Plan of Leiner Health Products Group  Filed as Exhibit 10.2 to the Quarterly Report on
             Inc. as adopted by the Board of Directors of Leiner  Form 10-Q of Leiner Health Products Inc. for the
             Health Products Group Inc. on November 17, 1997.     Quarter Ended December 31, 1997, and incorporated
                                                                  herein by reference.
 
      12.1   Computation of Ratio of Earnings to Fixed Charges.   Filed as an exhibit hereto.
 
      12.2   Computation of EBITDA to Interest Expense.           Filed as an exhibit hereto.
 
      21     List of Subsidiaries of the Registrant.              Filed as an exhibit hereto.
 
      27     Financial Data Schedule--March 31, 1998              Filed as an exhibit hereto.
</TABLE>
 
    (b) Reports on Form 8-K: None.
 
                                       45
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, Leiner Health Products Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Carson, State of California, on the 29th day of June, 1998.
 
<TABLE>
<S>                             <C>  <C>
                                LEINER HEALTH PRODUCTS INC.
 
                                By:             /s/ WILLIAM B. TOWNE
                                     -----------------------------------------
                                               Name: William B. Towne
                                          Title: Executive Vice President,
                                              Chief Financial Officer,
                                         Director, Treasurer and Secretary
</TABLE>
 
    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.
 
<TABLE>
<C>                             <S>                         <C>
    /s/ ROBERT M. KAMINSKI      Chief Executive Officer,
------------------------------    Director (Principal          June 29, 1998
      Robert M. Kaminski          Executive Officer)
 
                                Executive Vice President,
     /s/ WILLIAM B. TOWNE         Chief Financial Officer,
------------------------------    Director, Treasurer and      June 29, 1998
       William B. Towne           Secretary (Principal
                                  Accounting Officer)
 
                                Executive Vice President,
     /s/ WILLIAM B. TOWNE         Chief Financial Officer,
------------------------------    Director, Treasurer and      June 29, 1998
       William B. Towne           Secretary (Principal
                                  Financial Officer)
 
    /s/ GALE K. BENSUSSEN
------------------------------  President and Director         June 29, 1998
      Gale K. Bensussen
</TABLE>
 
                                       46
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
                                    INDEX TO
                       CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                                    <C>
Consolidated Financial Statements:
 
  Report of Independent Auditors.....................................................        F-2
 
  Consolidated Balance Sheets as of March 31, 1998 and 1997..........................        F-3
 
  Consolidated Statements of Operations for the years ended March 31, 1998, 1997 and
    1996.............................................................................        F-4
 
  Consolidated Statements of Shareholder's Equity (Deficit) for the years ended March
    31, 1998, 1997 and 1996..........................................................        F-5
 
  Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and
    1996.............................................................................        F-6
 
  Notes to Consolidated Financial Statements.........................................        F-7
</TABLE>
 
                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholder
Leiner Health Products Inc.
 
    We have audited the accompanying consolidated balance sheets of Leiner
Health Products Inc. as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholder's equity (deficit) and cash flows for each
of the three years in the period ended March 31, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Leiner Health
Products Inc. at March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
 
                                          /S/ Ernst & Young LLP
 
Orange County, California
May 15, 1998
 
                                      F-2
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
                          CONSOLIDATED BALANCE SHEETS
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                                  MARCH 31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1998        1997
                                                                                            ----------  ----------
                                                      ASSETS
 
Current assets:
  Cash and cash equivalents...............................................................  $    1,026  $    2,066
  Accounts receivable, net of allowances of $4,713 and $3,840 at March 31, 1998 and 1997,
    respectively..........................................................................      89,358      77,436
  Inventories.............................................................................     137,853      86,823
  Deferred income taxes...................................................................       8,578       3,838
  Prepaid expenses and other current assets...............................................       2,298       2,639
                                                                                            ----------  ----------
    Total current assets..................................................................     239,113     172,802
Property, plant and equipment, less accumulated depreciation and amortization.............      48,899      42,367
Goodwill, less accumulated amortization of $8,790 and $7,131 at March 31, 1998 and 1997,
  respectively............................................................................      56,412      58,035
Deferred financing charges................................................................      11,465       1,875
Other noncurrent assets...................................................................       9,937       9,485
                                                                                            ----------  ----------
    Total assets..........................................................................  $  365,826  $  284,564
                                                                                            ----------  ----------
                                                                                            ----------  ----------
 
                                  LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
 
Current liabilities:
  Bank checks outstanding, less cash on deposit...........................................  $    3,730  $   10,410
  Current portion of long-term debt.......................................................       1,733       3,148
  Accounts payable........................................................................      93,226      61,623
  Customer allowances payable.............................................................      14,063       6,632
  Accrued compensation and benefits.......................................................      10,132       6,233
  Accrued interest expense................................................................       3,116         870
  Income taxes payable....................................................................       3,349       1,818
  Other accrued expenses..................................................................       3,709       2,665
                                                                                            ----------  ----------
    Total current liabilities.............................................................     133,058      93,399
Long-term debt............................................................................     257,059     102,290
Deferred income taxes.....................................................................       2,600       2,582
Other noncurrent liabilities..............................................................       1,997       1,425
Commitments and contingent liabilities
Minority interest in subsidiary...........................................................       1,028       4,718
Shareholder's equity (deficit):
  Common stock, $1 par value: 1,000 shares authorized, issued and outstanding at March 31,
    1998 and 1997.........................................................................           1           1
  Capital in excess of par value..........................................................       1,825      62,966
  Cumulative translation adjustment.......................................................        (138)       (173)
  Retained earnings (deficit), net of charges from recapitalization of Parent of $31,543
    and $0 at March 31, 1998 and 1997, respectively.......................................     (31,604)     17,356
                                                                                            ----------  ----------
    Total shareholder's equity (deficit)..................................................     (29,916)     80,150
                                                                                            ----------  ----------
    Total liabilities and shareholder's equity (deficit)..................................  $  365,826  $  284,564
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED MARCH 31,
                                                                               ----------------------------------
<S>                                                                            <C>         <C>         <C>
                                                                                  1998        1997        1996
                                                                               ----------  ----------  ----------
Net sales....................................................................  $  502,110  $  392,786  $  338,417
Cost of sales................................................................     368,599     288,579     253,272
                                                                               ----------  ----------  ----------
Gross profit.................................................................     133,511     104,207      85,145
Marketing, selling and distribution expenses.................................      62,626      51,477      44,228
General and administrative expenses..........................................      29,462      21,219      18,344
Expenses related to recapitalization of parent...............................      32,808      --          --
Amortization of goodwill.....................................................       1,663       1,514       1,585
Closure of facilities and impairment of long-lived asset.....................       1,221       1,416       4,730
Management reorganization....................................................      --           1,000      --
Other charges................................................................       1,285         878         482
                                                                               ----------  ----------  ----------
Operating income.............................................................       4,446      26,703      15,776
Other expenses...............................................................          64      --          --
Interest expense, net........................................................      19,494       8,281       9,924
                                                                               ----------  ----------  ----------
Income (loss) before income taxes and extraordinary item.....................     (15,112)     18,422       5,852
Provision for income taxes before extraordinary item.........................       1,196       8,028       4,686
                                                                               ----------  ----------  ----------
Income (loss) before extraordinary item......................................     (16,308)     10,394       1,166
Extraordinary loss on the early extinguishment of debt, net of income taxes
  of $761 and $1,833 for the years ended March 31, 1998 and 1997,
  respectively...............................................................       1,109       2,756      --
                                                                               ----------  ----------  ----------
Net income (loss)............................................................  $  (17,417) $    7,638  $    1,166
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
           CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                      CAPITAL                                         TOTAL
                                               COMMON STOCK          IN EXCESS    CUMULATIVE        RETAINED      SHAREHOLDER'S
                                        --------------------------    OF PAR      TRANSLATION       EARNINGS         EQUITY
                                          SHARES        AMOUNT         VALUE      ADJUSTMENT       (DEFICIT)        (DEFICIT)
                                        -----------  -------------  -----------  -------------  ----------------  -------------
<S>                                     <C>          <C>            <C>          <C>            <C>               <C>
Balance at March 31, 1995.............       1,000     $       1     $  62,966     $  --          $      8,552     $    71,519
Net income............................      --            --            --            --                 1,166           1,166
                                                              --
                                             -----                  -----------        -----          --------    -------------
Balance at March 31, 1996.............       1,000             1        62,966        --                 9,718          72,685
Net income............................      --            --            --            --                 7,638           7,638
Translation adjustment................      --            --            --              (173)          --                 (173)
                                                              --
                                             -----                  -----------        -----          --------    -------------
Balance at March 31, 1997.............       1,000             1        62,966          (173)           17,356          80,150
Net loss..............................      --            --            --            --               (17,417)        (17,417)
Recapitalization of parent............      --            --           (62,966)       --               (31,543)        (94,509)
Capital contribution from parent......      --            --             1,825        --               --                1,825
Translation adjustment................      --            --            --                35           --                   35
                                                              --
                                             -----                  -----------        -----          --------    -------------
Balance at March 31, 1998.............       1,000     $       1     $   1,825     $    (138)     $    (31,604)    $   (29,916)
                                                              --
                                                              --
                                             -----                  -----------        -----          --------    -------------
                                             -----                  -----------        -----          --------    -------------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                      YEARS ENDED MARCH 31,
                                                                                ----------------------------------
                                                                                   1998         1997       1996
                                                                                -----------  ----------  ---------
<S>                                                                             <C>          <C>         <C>
OPERATING ACTIVITIES
Net income (loss).............................................................  $   (17,417) $    7,638  $   1,166
Adjustments to reconcile net income (loss) to net cash provided by (used in)
  operating activities:
  Depreciation................................................................        7,294       5,146      5,103
  Amortization................................................................        7,386       7,454      7,393
  Stock option compensation expense...........................................        8,300          99        132
  Deferred income taxes.......................................................       (4,722)        270      3,364
  Extraordinary loss on the early extinguishment of debt......................        1,870       4,589     --
  Translation adjustment......................................................          (35)        173     --
  Charge for long-lived asset impairment......................................      --           --          4,730
  Changes in operating assets and liabilities, net of effects of acquisition:
    Accounts receivable.......................................................      (11,992)     (7,371)     4,742
    Inventories...............................................................      (51,205)     (8,694)    (7,818)
    Bank checks outstanding, less cash on deposit.............................       (6,654)      7,979     (9,900)
    Accounts payable..........................................................       31,766       5,418      4,756
    Customer allowances payable...............................................        7,431       1,161        260
    Accrued compensation and benefits.........................................        4,232       1,484       (925)
    Other accrued expenses....................................................        2,840      (1,956)    (1,252)
    Income taxes payable/receivable...........................................        1,215       1,246        691
    Other.....................................................................        1,236      (1,469)       261
                                                                                -----------  ----------  ---------
Net cash provided by (used in) operating activities...........................      (18,455)     23,167     12,703
INVESTING ACTIVITIES
Additions to property, plant and equipment, net...............................      (14,427)     (3,540)    (3,468)
Acquisition of business, net of cash acquired.................................      --           (2,420)    --
Increase in other noncurrent assets...........................................       (4,513)     (2,542)    (5,192)
                                                                                -----------  ----------  ---------
Net cash used in investing activities.........................................      (18,940)     (8,502)    (8,660)
FINANCING ACTIVITIES
Net borrowings (payments) under former bank line of credit....................     (100,405)     47,247         78
Borrowings under new bank revolving credit facility...........................       65,316      --         --
Borrowings under new bank term credit facility................................       85,000      --         --
Payments under new bank term credit facility..................................         (638)     --         --
Capital contribution from parent..............................................        1,825      --         --
Repurchase of minority interest...............................................       (3,599)     --         --
Increase in deferred financing charges........................................      (10,238)     (1,721)      (143)
Repayment of senior notes, including prepayment penalty.......................      --          (49,097)    --
Increase in other long-term debt..............................................      --            2,270      1,305
Payments on other long-term debt..............................................       (1,143)    (12,493)    (3,872)
                                                                                -----------  ----------  ---------
Net cash provided by (used in) financing activities...........................       36,118     (13,794)    (2,632)
Effect of exchange rate changes...............................................          237        (216)    --
                                                                                -----------  ----------  ---------
Net increase (decrease) in cash and cash equivalents..........................       (1,040)        655      1,411
Cash and cash equivalents at beginning of year................................        2,066       1,411     --
                                                                                -----------  ----------  ---------
Cash and cash equivalents at end of year......................................  $     1,026  $    2,066  $   1,411
                                                                                -----------  ----------  ---------
                                                                                -----------  ----------  ---------
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
                                      F-6
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. FORMATION AND OPERATIONS
 
    Leiner Health Products Inc. (the "Company") is primarily involved in a
single business segment, the manufacture and distribution of vitamins,
over-the-counter drugs and other health and beauty aid products to mass market
retailers and through other channels, primarily in the United States and Canada.
The Company is a wholly owned subsidiary of PLI Holdings Inc. ("PLI Holdings"),
which operates solely as a holding company and which is itself a wholly owned
subsidiary of Leiner Health Products Group Inc. ("Leiner Group"). These
consolidated financial statements include the accounts of the Company and its
subsidiaries, including VH Holdings Inc., a holding company which owns Vita
Health Products, Inc. ("Vita Health").
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    PRINCIPLES OF CONSOLIDATION
 
    The accompanying consolidated financial statements include the accounts of
the Company and its direct and indirect subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
 
    USE OF ESTIMATES
 
    The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
periods. Actual results could differ from those estimates. Significant estimates
made in preparing the consolidated financial statements include the allowance
for uncollectible accounts, product returns, sales allowances and inventory
reserves.
 
    CASH EQUIVALENTS
 
    The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
 
    FAIR VALUES OF FINANCIAL INSTRUMENTS
 
    Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the consolidated
financial statements.
 
    INVENTORIES
 
    Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
 
    PROPERTY, PLANT AND EQUIPMENT
 
    Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method, at rates designed to distribute
 
                                      F-7
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the cost of assets over their estimated service lives or, for leasehold
improvements, the shorter of their estimated service lives or their remaining
lease terms.
 
    OTHER ASSETS
 
    Goodwill, representing the excess of the purchase price over the fair values
of the net assets of acquired entities, is being amortized over the period of
expected benefit ranging from 35 to 40 years. Deferred financing charges are
being amortized based on the principal balance outstanding using the effective
interest method. Other intangible assets are being amortized over the period of
expected benefit of 15 years. Incentives provided to customers to secure
long-term sales agreements (primarily cash advances and credit memos to be
applied against purchases under the contract) are amortized over the terms of
the agreements or as related sales are recognized. Amounts deferred under such
agreements totaled $6,528,000 and $6,388,000 as of March 31, 1998 and 1997,
respectively.
 
    LONG-LIVED ASSETS
 
    During the fiscal year ended March 31, 1996, the Company adopted Statement
of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121),
which requires long-lived assets and certain intangibles held and used by the
Company to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability test is to be performed at the lowest level at
which undiscounted net cash flows can be directly attributable to long-lived
assets. Goodwill that is not associated with specific assets that are impaired
is assessed for impairment when impairment indicators are present and reduced to
its estimated fair value if less than its carrying value. See Note 5 for
disclosure regarding the effect of adoption of SFAS No. 121 on the Company's
consolidated financial statements.
 
    FOREIGN CURRENCY TRANSLATION
 
    The Company translates the foreign currency financial statements of its
Canadian subsidiary by translating balance sheet accounts at the year-end
exchange rates and income statement accounts at the weighted monthly average
exchange rate for the year. Translation gains and losses are recorded in
shareholder's equity, and realized gains and losses are reflected in income.
Transaction gains and losses were immaterial.
 
    REVENUE RECOGNITION
 
    The Company recognizes revenue from product sales at the time of shipment.
Provisions are made currently for estimated returns and allowances.
 
    STOCK-BASED COMPENSATION
 
    The Company has elected to account for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees", and related interpretations. Under the
provisions of APB 25, compensation expense is measured at the grant date for the
difference between the fair value of the stock, less the exercise price.
 
                                      F-8
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    ADVERTISING COSTS
 
    Advertising costs are expensed as incurred. Advertising expense for the
years ended March 31, 1998, 1997 and 1996 was $8,150,000, $11,257,000 and
$8,731,000, respectively.
 
    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
    In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No. 130), which
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income generally
represents all changes in shareholders' equity except those resulting from
investments by and/or distributions to shareholders. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The Company plans to adopt SFAS No. 130 in fiscal
1999, and does not expect adoption to have a material impact on the company's
financial position, results of operations or cash flows.
 
    Also in June 1997, the FASB issued Statement No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS No. 131), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. The
Company plans to adopt SFAS No. 131 in fiscal 1999 and does not expect adoption
to significantly change its reportable segments.
 
    RECLASSIFICATIONS
 
    Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
 
3. RECAPITALIZATION
 
    On June 30, 1997, Leiner Group completed a leveraged recapitalization
transaction ("Recapitalization"). This transaction was effected through receipt
of an equity investment from North Castle Partners I, L.L.C. ("North Castle"),
an investment fund formed by Mr. Charles F. Baird, Jr. to effect the
Recapitalization. Pursuant to the Recapitalization, Leiner Group repurchased
common stock from its existing shareholders in an amount totaling (together with
equity retained by such shareholders) $211,100,000, issued $80,400,000 of new
shares of the recapitalized Leiner Group to North Castle, issued $85,000,000 of
Senior Subordinated Notes (the "Notes"), and established a $210,000,000 senior
secured credit facility (the "Credit Facility") that provides for both term and
revolving credit borrowings. Immediately upon consummation of the
Recapitalization, the obligations of Leiner Group under the Notes and the Credit
Facility were assigned to and assumed by the Company. The Recapitalization was
accounted for as a recapitalization of Leiner Group which had no impact on the
historical basis of assets and liabilities as reflected in the Company's
consolidated financial statements.
 
    In connection with the Recapitalization, the Company wrote off $1,109,000 of
deferred financing charges, net of income taxes of $761,000, as an extraordinary
loss on the early extinguishment of debt in the year ended March 31, 1998.
Additionally in connection with the Recapitalization, the Company
 
                                      F-9
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3. RECAPITALIZATION (CONTINUED)
incurred expenses of $32,808,000 consisting of $11,954,000 related to Leiner
Group's capital raising activities, transaction bonuses granted to certain
management personnel in the aggregate amount of approximately $5,199,000 and
compensation expense related to the in-the-money value of stock options of
approximately $15,655,000. The compensation expense represented the excess of
the fair market value of the underlying common stock over the exercise price of
the options canceled in connection with the Recapitalization.
 
    The assumption of debt and the transfer of excess funds from Leiner Group
related to the Recapitalization totaled approximately $102,809,000 and consisted
of the following (in thousands):
 
<TABLE>
<S>                                                     <C>        <C>
Assumption of debt from Leiner Group:
  New Credit Facility.................................  $(149,736)
  Notes...............................................    (85,000) $(234,736)
                                                        ---------
Excess funds transferred from Leiner Group............               131,927
                                                                   ---------
                                                                   $(102,809)
                                                                   ---------
                                                                   ---------
</TABLE>
 
    Of this amount, $8,300,000 is reflected in expenses related to
Recapitalization of parent in the accompanying Consolidated Statement of
Operations, with the remainder first applied against capital in excess of par
value until that was exhausted and then against retained earnings (deficit).
 
4. ACQUISITION
 
    On January 30, 1997, the Company acquired all of the outstanding capital
stock of G. S. Investments Ltd. which owned, among other companies, Vita Health.
Vita Health is headquartered in Winnipeg, Manitoba, Canada and primarily
manufactures and distributes vitamins and over-the-counter drugs. The results of
operations of Vita Health are included in the accompanying consolidated
statements of operations since the date of acquisition. The total cost of the
acquisition, including direct acquisition costs of $1,151,000, was approximately
$16,030,000, represented by $2,420,000 of cash, $4,718,000 of preferred stock of
a subsidiary and $8,892,000 of liabilities assumed. The acquisition has been
accounted for as a purchase and, accordingly, the excess of cost over the fair
value of net assets acquired of $7,172,000 has been included in goodwill, and is
being amortized over its expected benefit period of 35 years.
 
    As part of the acquisition purchase price, the Company issued approximately
46,037 shares of Class A preferred stock and approximately 17,511 shares of
Class B preferred stock in VH Holdings Inc., a subsidiary of the Company. The
Class A preferred stock had an aggregate redemption value of approximately
$3,418,000 and the Class B preferred stock had an aggregate redemption value of
approximately $1,300,000. The preferred stock does not accrue dividends and has
no voting rights. A portion of the minority preferred stock interest in VH
Holdings Inc., aggregating $3,690,000, was redeemed in connection with the
Recapitalization. The remaining portion of outstanding preferred stock was
redeemed for cash of $1,028,000 in April 1998. This minority preferred stock has
been classified as minority interest in subsidiary in the accompanying
consolidated balance sheets.
 
5. CLOSURE OF FACILITIES, LONG-LIVED ASSET IMPAIRMENT AND MANAGEMENT
REORGANIZATION
 
    During the year ended March 31, 1998, the Company's Board of Directors
approved a plan to close the West Unity, Ohio facility during the summer of
1998. Estimated closure costs of $1,221,000 were
 
                                      F-10
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
5. CLOSURE OF FACILITIES, LONG-LIVED ASSET IMPAIRMENT AND MANAGEMENT
REORGANIZATION (CONTINUED)
recorded in the year ended March 31, 1998, of which $754,000 related to
severance costs and $467,000 related to other closure costs.
 
    Because of declining sales and continued operating losses during the year
ended March 31, 1996, the Company decided to significantly reduce the size of
its over-the-counter (OTC) liquids pharmaceutical manufacturing business.
Accordingly, the Company evaluated, based on the criteria prescribed by SFAS No.
121, the ongoing value of the plant, equipment and related goodwill that arose
as part of the XCEL acquisition in May 1992. Goodwill of $7,784,000 was
allocated based on the relative estimated fair value of the long-lived assets at
the date of acquisition. Based on its evaluation, the Company determined that
assets with a carrying amount of $8,256,000 were impaired and wrote them down by
$4,730,000 to their fair value. Fair value was based on independent appraisals
of the plant and equipment. This asset impairment charge was provided for as of
March 31, 1996 and is reflected in the consolidated balance sheet as a reduction
in the carrying amount of goodwill.
 
    During the year ended March 31, 1997, the Company closed its OTC liquids
pharmaceutical manufacturing facility and out-sourced this production to a third
party. The costs incurred of $1,416,000 included the write-off of fixed assets
($826,000) and closure costs ($590,000). In addition, an inventory write-down of
$499,000 was made and is included in cost of sales.
 
    During the year ended March 31, 1997, the Company reorganized the management
team. Expenses of $1,000,000 include severance expense for the previous Chief
Financial Officer, Vice President of Product Development and Vice President of
Corporate Development and include the hiring and relocation expenses for the new
Chief Financial Officer and other corporate officers.
 
6. COMPOSITION OF CERTAIN BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
                                                                               MARCH 31,
                                                                         ----------------------
<S>                                                   <C>                <C>         <C>
                                                                            1998        1997
                                                                         ----------  ----------
 
<CAPTION>
                                                                             (IN THOUSANDS)
<S>                                                   <C>                <C>         <C>
Inventories:
  Raw materials, bulk vitamins and packaging
    materials.......................................                     $   83,475  $   51,488
  Work-in-process...................................                          9,832       5,849
  Finished products.................................                         44,546      29,486
                                                                         ----------  ----------
                                                                         $  137,853  $   86,823
                                                                         ----------  ----------
                                                                         ----------  ----------
Property, plant and equipment:
<CAPTION>
                                                      DEPRECIABLE LIVES
                                                      -----------------
                                                           (YEARS)
<S>                                                   <C>                <C>         <C>
  Land..............................................         --          $      729  $      734
  Buildings and improvements........................         31-40            5,143       5,206
  Leasehold improvements............................          7-40           11,013      10,549
  Machinery and equipment...........................          3-20           54,318      42,194
  Furniture and fixtures............................          3-10            4,783       3,425
                                                                         ----------  ----------
                                                                             75,986      62,108
  Less accumulated depreciation and amortization....                        (27,087)    (19,741)
                                                                         ----------  ----------
                                                                         $   48,899  $   42,367
                                                                         ----------  ----------
                                                                         ----------  ----------
</TABLE>
 
                                      F-11
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
                                                                     YEARS ENDED MARCH 31,
                                                                -------------------------------
<S>                                                             <C>        <C>        <C>
                                                                  1998       1997       1996
                                                                ---------  ---------  ---------
 
<CAPTION>
                                                                        (IN THOUSANDS)
<S>                                                             <C>        <C>        <C>
Cash paid during the year for:
  Interest....................................................  $  17,990  $  11,248  $   9,532
  Income taxes, net of refunds received.......................      2,942      5,603        616
</TABLE>
 
8. LONG-TERM DEBT
 
    Long-term debt consists of (in thousands):
 
<TABLE>
<CAPTION>
                                                                              MARCH 31,
                                                                        ----------------------
<S>                                                                     <C>         <C>
                                                                           1998        1997
                                                                        ----------  ----------
Credit Facility:
  Revolving facility..................................................  $   85,513  $   35,600
  Term facility.......................................................      84,363      64,778
                                                                        ----------  ----------
  Total credit facility...............................................     169,876     100,378
Capital lease obligations.............................................       3,916       5,060
Senior subordinated notes.............................................      85,000      --
                                                                        ----------  ----------
                                                                           258,792     105,438
Less current portion..................................................      (1,733)     (3,148)
                                                                        ----------  ----------
  Total long-term debt................................................  $  257,059  $  102,290
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    CREDIT FACILITY
 
    The Credit Facility consists of two term loans ("Term Facility") due
December 30, 2004 and December 30, 2005 in the amounts of $45,000,000 and
$40,000,000, respectively, and a revolving credit facility in the amount of
$125,000,000 (the "Revolving Facility"), made available in U.S. dollars to the
Company (such portion, the "U.S. Revolving Facility") with a portion denominated
in Canadian dollars made available to Vita Health (such portion, the "Canadian
Revolving Facility"). The unpaid principal amount outstanding on the Revolving
Facility is due and payable on June 30, 2003. The Term Facility requires
quarterly amortization payments of approximately 1% per annum over the next six
years. Amortization payments scheduled during the period April 1, 1998 through
March 31, 1999 total $850,000. Borrowings under the Credit Facility bear
interest at floating rates that are based on the lender's base rate (8.5% at
March 31, 1998), the lender's Canadian prime rate (6.75% at March 31, 1998),
LIBOR (5.69% at March 31, 1998) or the lender's banker's acceptance rate (4.77%
at March 31, 1998), as the case may be, plus an "applicable margin" that is
itself based on the Company's leverage ratio. The leverage ratio is defined
generally as the ratio of total funded indebtedness to the consolidated EBITDA
and varies as follows: (a) for revolving credit borrowings, from 0.75% to 2.5%
for LIBOR- or banker's acceptance-based loans and from zero to 1.5% for
alternate base rate- or Canadian prime rate-based loans, and (b) for loans under
the Term Facility, from 2.375% to 2.875% or 2.5% to 3.0% for LIBOR-based loans
and from 1.375% to 1.875% or 1.5% to 2.0% for alternate base rate-based loans.
As of March 31, 1998, the Company's interest rates were 7.92% for U.S.
borrowings and 6.81% for Canadian borrowings under the Credit
 
                                      F-12
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8. LONG-TERM DEBT (CONTINUED)
Facility. In addition to certain agent and up-front fees, the Credit Facility
requires a commitment fee of up to 0.5% of the average daily unused portion of
the revolving credit facility based on the Company's leverage ratio.
 
    The obligations of the Company under the U.S. Revolving Facility and Term
Facility are guaranteed by the direct parent of the Company, PLI Holdings, and
by any direct or indirect U.S. subsidiaries of the Company. The obligations of
Vita Health under the Canadian Revolving Facility are guaranteed by the Company,
PLI Holdings, the Company's direct or indirect U.S. subsidiaries and direct or
indirect subsidiaries of Vita Health. The Credit Facility also is secured by
substantially all the assets of the Company and any of its direct or indirect
U.S. subsidiaries, all of the stock of the Company and any such direct or
indirect U.S. subsidiaries, and 65% of the common stock of any direct non-U.S.
subsidiaries of the Company and its U.S. subsidiaries. The Canadian Revolving
Facility is also secured by substantially all assets of Vita Health, its direct
and indirect Canadian parents and any direct or indirect non-U.S. subsidiaries
of the Company, and all of the common stock of any such direct or indirect
non-U.S. subsidiaries. The Revolving Facility also allows the Company to issue
up to $35,000,000 in letters of credit in lieu of borrowing on the Revolving
Facility. As of March 31, 1998, the Company had $5,979,000 of letters of credit
outstanding, and had $33,508,000 available for borrowing under the Revolving
Facility.
 
    On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Amended Credit Agreement"). The Amended Credit Agreement
consists of two U.S. term loans due December 30, 2004 and December 30, 2005 in
the amounts of $68,000,000 and $65,000,000, respectively, a Canadian denominated
term loan due December 30, 2004 in the amount of approximately $12,000,000, and
a revolving credit facility in the amount of $125,000,000 (the "New Revolving
Facility") made available in U.S. dollars to the company with a portion
denominated in Canadian dollars made available to Vita Health. The unpaid
principal amount outstanding on the New Revolving Facility is due and payable on
June 30, 2003. Amounts outstanding under the Credit Facility in place at March
31, 1998 were refinanced with the proceeds from the Amended Credit Agreement.
The terms, conditions and restrictions of the Amended Credit Facility are
consistent with the terms, conditions and restorations of the Credit Facility
discussed above.
 
    On July 30, 1997, the Company entered into an interest protection
arrangement covering $29,460,000 of its borrowings under the Credit Facility.
Under this arrangement, the Company obtained a fixed interest rate of 6.17% on
LIBOR, instead of the fluctuating rate as described above and pays a fee of
approximately $15,800 per annum. That fee is charged to interest expense as
incurred and payments received as a result of the cap are accrued as a reduction
of interest expense on the floating-rate borrowings under the Credit Facility.
The agreement expires July 30, 2000.
 
    SENIOR SUBORDINATED NOTES
 
    The Company assumed the Notes issued by Leiner Group upon the consummation
of the Recapitalization. The Notes accrue interest at the rate of 9 5/8% per
annum and are due on June 30, 2007. Interest on the Notes is payable
semiannually on January 1 and July 1 of each year.
 
                                      F-13
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8. LONG-TERM DEBT (CONTINUED)
    CAPITAL LEASE OBLIGATIONS
 
    The capital lease obligations are payable in variable monthly installments
through January 2002, bear interest at effective rates ranging from 6.8% to
10.3% and are secured by equipment with a net book value of approximately
$4,321,000 and $5,088,000 at March 31, 1998 and 1997, respectively.
 
    COVENANTS AND MINIMUM PAYMENTS
 
    Provisions of certain of the Company's credit agreements include terms,
among others, that require the Company to maintain certain financial ratios and
tests, including those that relate to the maintenance of specified levels of
cash flow and shareholder's equity. Furthermore, the agreements restrict
indebtedness and expenditures for dividend distributions, certain capital
expenditures and investments. A change of control, as defined, will constitute a
default under the Amended Credit Agreement. As of March 31, 1998, the Company
was in compliance with the covenants and conditions of the Amended Credit
Agreement. Due to restrictions in the Amended Credit Agreement, none of the
retained earnings (deficit) are available for dividends.
 
    Principal payments on long-term debt through fiscal 2003 and thereafter are
(in thousands):
 
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------------------------------
<S>                                                                                 <C>
1999..............................................................................  $    1,733
2000..............................................................................       2,402
2001..............................................................................       2,321
2002..............................................................................         861
2003..............................................................................         850
Thereafter........................................................................     250,625
                                                                                    ----------
  Total...........................................................................  $  258,792
                                                                                    ----------
                                                                                    ----------
</TABLE>
 
    RETIREMENT OF DEBT
 
    In connection with the establishment of the Credit Facility on June 30, 1997
described above, the previous borrowings were retired and the unamortized debt
issuance costs of $1,870,000 were written off and included in the consolidated
statement of operations as an extraordinary loss on the early extinguishment of
debt in the year ended March 31, 1998.
 
    In connection with a new credit agreement on the previous January 30, 1997,
borrowings were retired and the unamortized debt issuance costs of $492,000 were
written off and included in the consolidated statement of operations as an
extraordinary loss on the early extinguishment of debt in the year ended March
31, 1997. In addition, certain senior notes were prepaid in full on January 30,
1997, along with accrued interest and a prepayment charge of $4,097,000 which is
included in the consolidated statement of operations as an extraordinary loss on
the early extinguishment of debt in the year ended March 31, 1997.
 
                                      F-14
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
9. INCOME TAXES
 
    The Company is included in the consolidated Federal income tax return of
Leiner Group. Under a tax sharing agreement, the Federal income tax provision is
computed on a consolidated return basis and provides that the Company, by
participating in the consolidated filing, shall be liable and make payment to
Leiner Group for its proportionate share of the total tax liability. The
agreement also provides that the Company shall receive benefit to the extent
that its losses and other credits result in a reduction of the consolidated tax
liability. In the event that a combined or consolidated state, local or foreign
tax return is filed, the tax sharing arrangement for the Federal provision shall
apply in a similar manner in computing the state, local and foreign tax
liability or benefit.
 
    Deferred income taxes are computed using the liability method and reflect
the effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to estimated realizable amounts. The provision for income
taxes reflects the taxes to be paid for the period and the change during the
period in the deferred tax assets and liabilities.
 
    Significant components of the Company's deferred tax assets and liabilities
are (in thousands):
 
<TABLE>
<CAPTION>
                                                                                MARCH 31,
                                                                           --------------------
<S>                                                                        <C>        <C>
                                                                             1998       1997
                                                                           ---------  ---------
Deferred tax assets:
  Compensation accruals..................................................  $   4,125  $     405
  Allowances for doubtful accounts and sales returns.....................      1,773      1,392
  Inventory obsolescence reserves........................................      1,604        863
  Inventory capitalization...............................................        656        634
  Other..................................................................        420        544
                                                                           ---------  ---------
Total deferred tax assets................................................      8,578      3,838
Deferred tax liabilities:
  Fixed assets book versus tax basis difference..........................     (2,600)    (2,582)
                                                                           ---------  ---------
Deferred tax assets, net of deferred tax liabilities.....................  $   5,978  $   1,256
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>
 
    The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate before extraordinary item:
 
<TABLE>
<CAPTION>
                                                                                   YEARS ENDED MARCH 31,
                                                                           -------------------------------------
<S>                                                                        <C>          <C>          <C>
                                                                              1998         1997         1996
                                                                              -----        -----        -----
Tax at U.S. statutory rates..............................................         (35)%         35%          35%
Recapitalization expense.................................................          28       --           --
Tax contingency reserve..................................................          10       --           --
Goodwill amortization....................................................           3            3            9
Higher effective income taxes of other countries.........................           2       --           --
State income taxes, net of federal tax benefit...........................      --                6            8
Charge for long-lived asset impairment...................................      --           --               28
                                                                                   --           --           --
                                                                                    8%          44%          80%
                                                                                   --           --           --
                                                                                   --           --           --
</TABLE>
 
                                      F-15
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
9. INCOME TAXES (CONTINUED)
    United States and foreign income (loss) before taxes and extraordinary item
are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                    YEARS ENDED MARCH 31,
                                                               --------------------------------
<S>                                                            <C>         <C>        <C>
                                                                  1998       1997       1996
                                                               ----------  ---------  ---------
U.S..........................................................  $  (17,171) $  17,971  $   5,852
Foreign......................................................       2,059        451     --
                                                               ----------  ---------  ---------
                                                               $  (15,112) $  18,422  $   5,852
                                                               ----------  ---------  ---------
                                                               ----------  ---------  ---------
</TABLE>
 
    Significant components of the provision for income taxes are (in thousands):
 
<TABLE>
<CAPTION>
                                                                      YEARS ENDED MARCH 31,
                                                                 -------------------------------
<S>                                                              <C>        <C>        <C>
                                                                   1998       1997       1996
                                                                 ---------  ---------  ---------
Current:
  Federal......................................................  $   4,344  $   6,622  $   1,176
  State........................................................        592        954        146
  Foreign......................................................        982        182     --
                                                                 ---------  ---------  ---------
    Total current..............................................      5,918      7,758      1,322
 
Deferred:
  Federal......................................................     (4,071)      (131)     2,846
  State........................................................       (681)       401        518
  Foreign......................................................         30     --         --
                                                                 ---------  ---------  ---------
    Total deferred.............................................     (4,722)       270      3,364
                                                                 ---------  ---------  ---------
      Provision for income taxes before extraordinary item.....      1,196      8,028      4,686
 
Tax benefit from extraordinary loss:
  Federal......................................................       (663)    (1,833)    --
  Foreign......................................................        (98)    --         --
                                                                 ---------  ---------  ---------
    Total tax benefit from extraordinary loss..................       (761)    (1,833)    --
                                                                 ---------  ---------  ---------
      Total provision for income taxes.........................  $     435  $   6,195  $   4,686
                                                                 ---------  ---------  ---------
                                                                 ---------  ---------  ---------
</TABLE>
 
10. EMPLOYEE BENEFITS
 
    STOCK OPTION PLAN
 
    Leiner Group's Stock Option Plan, as amended in 1996, provides for the
issuance of nonqualified stock options to certain key employees and directors to
purchase up to 122,222 shares of Leiner Group's common stock. Options granted
are at exercise prices as determined by Leiner Group's Board of Directors, but
not less than $100 per share. Options generally vest on a pro rata basis at a
rate of 25% per year, with 25% immediate vesting on the date of grant, and
expire no later than ten years from the date of grant.
 
                                      F-16
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
10. EMPLOYEE BENEFITS (CONTINUED)
    Pro forma information regarding net income (loss) is required by SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which also requires that the
information be determined as if Leiner Group accounted for its employee stock
options granted subsequent to March 31, 1995 under the fair value method for
that Statement. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because Leiner Group's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
 
    In calculating pro forma information regarding net income (loss), the fair
value of the stock options granted during the years presented was determined
using the Black-Scholes option pricing model and the following weighted average
assumptions:
 
<TABLE>
<CAPTION>
                                                                              1998         1997         1996
                                                                              -----        -----        -----
<S>                                                                        <C>          <C>          <C>
Risk free interest rate..................................................         5.8%         6.0%         6.0%
Expected option life.....................................................         9.3          6.0          6.0
Volatility...............................................................         0.0          0.0          0.0
Dividend yield...........................................................         0.0          0.0          0.0
</TABLE>
 
    The pro forma net income (loss) for the years ended March 31, 1998, 1997 and
1996 was $(18,571,000), $7,377,000 and $1,101,000, respectively.
 
    Activity under the Stock Option Plan for the years ended March 31, 1998,
1997 and 1996 is set forth below:
 
<TABLE>
<CAPTION>
                                                                                 OPTIONS OUTSTANDING
                                                                 ---------------------------------------------------
<S>                                                              <C>         <C>         <C>         <C>
                                                                   SHARES                               WEIGHTED
                                                                 AVAILABLE     NUMBER      PRICE         AVERAGE
                                                                 FOR GRANT   OF SHARES   PER SHARE   EXERCISE PRICE
                                                                 ----------  ----------  ----------  ---------------
Balance at March 31, 1995......................................      --          81,552  $      100     $     100
Common shares reserved for issuance............................      18,448      --          --            --
Options granted................................................     (18,448)     18,448     125-145           137
                                                                 ----------  ----------  ----------         -----
Balance at March 31, 1996......................................      --         100,000     100-145           107
Common shares reserved for issuance............................      75,000      --          --            --
Options granted................................................      (6,074)      6,074         175           175
Options canceled...............................................       6,074      (6,074)    100-145           107
                                                                 ----------  ----------  ----------         -----
Balance at March 31, 1997......................................      75,000     100,000     100-175           111
Common shares reserved for issuance............................     122,222      --          --            --
Common shares canceled for issuance............................     (75,000)     --          --            --
Options granted................................................    (113,806)    113,806         100           100
Options exercised..............................................      --        (100,000)    100-175           111
Options canceled...............................................       3,288      (3,288)        100           100
                                                                 ----------  ----------  ----------         -----
Balance at March 31, 1998......................................      11,704     110,518  $      100     $     100
                                                                 ----------  ----------  ----------         -----
                                                                 ----------  ----------  ----------         -----
</TABLE>
 
                                      F-17
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
10. EMPLOYEE BENEFITS (CONTINUED)
    Options exercisable at March 31, 1998, 1997 and 1996 were 27,992, 86,721 and
83,147, respectively. The weighted-average fair value of options granted during
the years ended March 31, 1998, 1997 and 1996 were $41, $52 and $40,
respectively. The weighted average remaining contractual life was 9.3 years as
of March 31, 1998.
 
    CONTRIBUTORY RETIREMENT PLANS
 
    The Company has contributory retirement plans that cover substantially all
of the Company's employees who meet minimum service requirements. The Company's
contributions to the plans are discretionary and are determined and funded
annually by Leiner Group's Board of Directors. The Company's contributions
totaled $1,304,000, $1,109,000 and $1,011,000 for the plan years ended March 31,
1998, 1997 and 1996, respectively.
 
11. RELATED PARTY TRANSACTIONS
 
    Under a Management Agreement dated as of May 4, 1992 by and between the
Company and AEA Investors Inc. ("AEA"), one of the Company's shareholders, the
Company paid AEA management fees of $350,000 during each of the two years ended
March 31, 1997 and $88,000 in the year ended March 31, 1998 in exchange for
advisory and consulting services rendered in connection with certain financial,
management and other matters relating to the business and operations of the
Company. The annual management fees were included in other charges in the
accompanying consolidated statements of operations.
 
    Upon consummation of the Recapitalization, Leiner Group's management
agreement with AEA was terminated, and Leiner Group and the Company entered into
a consulting agreement with North Castle Partners, L.L.C. (the "Sponsor"), an
affiliate of North Castle, to provide the Company with certain business,
financial and managerial advisory services. Mr. Baird acts as the managing
member of the Sponsor through Baird Investment Group, L.L.C. ("Baird
Investment"). In exchange for such services, Leiner Group and the Company have
agreed to pay the Sponsor an annual fee of $1,500,000, payable semi-annually in
advance, plus the Sponsor's reasonable out-of-pocket expenses. This fee may be
reduced upon completion of an initial public offering of Leiner Group's shares.
The agreement also terminates on June 30, 2007, unless Baird Investment ceases
to be the managing member of North Castle, or upon the earliest of June 30, 2007
or the date that North Castle terminates before that date. During the year ended
March 31, 1998, the management fee and expenses paid to the sponsor, totaling
$1,197,000 were included in other charges in the accompanying Statement of
Operations. Leiner Group and the Company have also paid the Sponsor a
transaction fee of $3,500,000 for services relating to arranging, structuring
and financing the Recapitalization, and reimbursed the Sponsor's related
out-of-pocket expenses.
 
12. COMMITMENTS
 
    The Company leases certain real estate for its manufacturing facilities,
warehouses, corporate and sales offices, as well as certain equipment under
operating leases (noncancelable) that expire at various dates through March 2004
and contain renewal options. Total rents charged to operations were $5,244,000,
$4,755,000 and $4,679,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
 
                                      F-18
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
12. COMMITMENTS (CONTINUED)
    Minimum future obligations on noncancelable operating leases in effect at
March 31, 1998 are (in thousands):
 
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------------------------------
<S>                                                                                  <C>
1999...............................................................................  $   6,611
2000...............................................................................      6,096
2001...............................................................................      5,857
2002...............................................................................      5,200
2003...............................................................................      4,243
Thereafter.........................................................................     27,704
                                                                                     ---------
Total minimum lease payments.......................................................  $  55,711
                                                                                     ---------
                                                                                     ---------
</TABLE>
 
13. CONTINGENT LIABILITIES
 
    L-TRYPTOPHAN
 
    The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of May 5, 1998, the Company and/or certain of its customers,
many of whom have tendered their defense to the Company, had been named in 668
lawsuits of which 660 have been settled.
 
    The Company has entered into an agreement (the Agreement) with the Company's
supplier of bulk L-Tryptophan, under which the supplier has agreed to assume the
defense of all claims and to pay all settlements and judgments, other than for
certain punitive damages, against the Company arising out of the ingestion of
L-Tryptophan products. To date, the supplier has funded all settlements and paid
all legal fees and expenses incurred by the Company related to these matters. No
punitive damages have been awarded or paid in any settlement.
 
    Of the remaining 8 cases, management does not expect that the Company will
be required to make any material payments in connection with their resolution by
virtue of the Agreement, or, in the event that the supplier ceases to honor the
Agreement, by virtue of the Company's product liability insurance, subject to
deductibles not to exceed $1,250,000 in the aggregate. Accordingly, no provision
has been made in the Company's consolidated financial statements for any loss
that may result from these remaining actions.
 
    OTHER
 
    In August 1997, the Food and Drug Administration ("FDA") announced a
proposal to ban the use of phenolthalein in laxatives. The FDA reportedly took
this action in response to certain studies which concluded that the
administration of very high doses of yellow phenolthalein could cause cancer in
laboratory animals. The reports concerning these studies state that the dosages
administered substantially exceeded the dosages commonly used by human beings.
In response, the Company voluntarily discontinued production of its laxative
product containing yellow phenolthalein and notified its customers that they may
return this product. Management does not expect that the Company will be
required to make any material payments related to this action. The Company
reformulated this product and started shipping the reformulated version in
November 1997.
 
                                      F-19
<PAGE>
                          LEINER HEALTH PRODUCTS INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
13. CONTINGENT LIABILITIES (CONTINUED)
    The Company is subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
 
14. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
 
    Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to a geographically diverse customer base in the
drugstore, supermarket and discount chain industries. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
losses. For the years ended March 31, 1998, 1997 and 1996, two customers
represented approximately 26% and 10%, 27% and 12%, and 21% and 13%,
respectively, of net sales.
 
                                      F-20
<PAGE>
                                  SCHEDULE II
 
                          LEINER HEALTH PRODUCTS INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           BALANCE AT      ADDITIONS
                                                            BEGINNING   CHARGED TO COST                BALANCE AT
                                                            OF PERIOD    AND EXPENSES    DEDUCTIONS   END OF PERIOD
                                                           -----------  ---------------  -----------  -------------
<S>                                                        <C>          <C>              <C>          <C>
Year ended March 31, 1996:
  Accounts receivable allowance..........................   $   3,316      $   4,443      $   5,220     $   2,539
  Inventory valuation reserve............................       4,409          2,320          2,828         3,901
 
Year ended March 31, 1997:
  Accounts receivable allowance..........................   $   2,539      $   6,761      $   5,460     $   3,840
  Inventory valuation reserve............................       3,901          4,687          3,837         4,751
 
Year ended March 31, 1998:
  Accounts receivable allowance..........................   $   3,840      $   8,278      $   7,405     $   4,713
  Inventory valuation reserve............................       4,751          7,278          3,433         8,596
</TABLE>
 
                                      S-1