##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 333-33121
 LEINER HEALTH PRODUCTS INC.
  DELAWARE
    
    94-3431709(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 901 East 233rd Street, Carson, California
    
    90745(Address of principal executive offices)
    
    (Zip Code)
 (310) 835-8400
 Registrants telephone number, including area code
 None
 None
 o þ
 þ o
 o þ
 þ
 o þ
 o þ
  APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 þ o
 APPLICABLE ONLY TO CORPORATE REGISTRANTS




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##### 



LEINER HEALTH PRODUCTS INC.
 Form 10-K
For the Fiscal Year Ended March 31, 2007
 TABLE OF CONTENTS
 PART IITEM 1.
    
    BUSINESS
    
    
    3ITEM 1A.
    
    RISK FACTORS
    
    
    13ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
    
    
    21ITEM 2.
    
    PROPERTIES
    
    
    22ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    22ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    25ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    26ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    27ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    45ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
    
    
    45ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    45ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    45ITEM 9B.
    
    OTHER INFORMATION
    
    
    45PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    46ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    48ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF RELATED STOCKHOLDER MATTERS
    
    
    57ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    59ITEM 14.
    
    PRINCIPAL ACCOUNTANTS FEES AND SERVICES
    
    
    63PART IVITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
    
    
    65EXHIBIT 10.7EXHIBIT 10.10EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 History
         Fiscal year
  3




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General
  Your Life ®
 Pharmacist
Formula ® Advil ® Aleve ® Claritin ® TUMS ® Tylenol ® Zantac ®
  Recent Developments
 FDA Inspection.
   
    
    The Company recorded a $3.8 million sales return reserve related to the expected impact of
certain recalled OTC products.
    
    The Company recorded an additional $27.4 million inventory reserves relating to the
write down of certain OTC inventory assets.
    
    The Company recorded a non-cash asset impairment charge of $16.5 million.
 
 4




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
    
    asset relocation and related costs of approximately $5.0 to $6.0 million,
 
    
    severance, relocation and other employee related costs of approximately $9.0 to $11.0 million, and
 
    
    facility consolidation and other contractual costs of approximately $8.0 to $10.0 million.
   Dr. Reddy Laboratories Contract Termination.
   Restructuring Plan.
 Amendment to Credit Facility.
 5




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Products
  March 26,
    
    
    
    
    
    March 25,
    
    
    
    
    
    March 31,2005
    
    %
    
    2006
    
    %
    
    2007
    
    %(dollars in thousands)VMS products
    
    $
    419,491
    
    
    
    61
    %
    
    $
    418,858
    
    
    
    62
    %
    
    $
    451,580
    
    
    
    61
    %OTC products
    
    
    213,402
    
    
    
    31
    %
    
    
    198,681
    
    
    
    30
    %
    
    
    216,717
    
    
    
    30
    %Contract manufacturing services/Other
    
    
    52,008
    
    
    
    8
    %
    
    
    52,022
    
    
    
    8
    %
    
    
    66,939
    
    
    
    9
    %Total
    
    $
    684,901
    
    
    
    100
    %
    
    $
    669,561
    
    
    
    100
    %
    
    $
    735,236
    
    
    
    100
    %
 VMS Products. Caltrate ® Centrum ® One-A-Day ® , Your
Life ®
  OTC Products. Advil ® Aleve ® Claritin ® TUMS ® Tylenol ® Zantac ® Pharmacist
Formula ®
   Contract Manufacturing Services.
  6




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Geographical Business Units
   Customers
  Raw Materials
  Competition
  Employees
  Research and Development
  7




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Government Regulation
      OTC Pharmaceuticals.
 8




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9




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Manufacturing and Packaging .
 CPSC.
 FTC.
 State Regulation.
 USP.
  10




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Canadian Regulation.
      Intellectual Property
 Your
Life ® Pharmacist Formula ®
  11




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Environmental Matters
  Available Information
 www.leiner.com www.leiner.com/financials
 12




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ITEM 1A. RISK FACTORS
 A recent FDA investigation into our OTC operations could materially adversely affect our business.
    Product recalls costs could hurt our business.
    We may be unable to successfully implement our restructuring plan.
  Unfavorable research and negative publicity could adversely affect our sales of VMS products .
  13




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Regulatory matters governing our industry could have a significant negative effect on our business.
   
    
    change product labeling, packaging or advertising or take other corrective action;
    
    change product formulations;
    
    suspend the sale of products with non-complying specifications;
    
    initiate product recalls;
    
    prepare and submit a new drug application (NDA) or abbreviated NDA (ANDA) or
foreign equivalent; or
    
    suspend manufacturing operations.
      14




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We depend on a limited number of customers for most of our net sales and the loss of one or more of
these customers could reduce our net sales.
  A significant, unexpected disruption of operations at our facilities could adversely affect our
financial position, results of operations or cash flows.
  Our industry is highly competitive and price competition could diminish our sales volumes and
revenues and our gross profits.
   15




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Our inability to continue to execute our business plan could adversely affect our business .
  Our failure to meet our industrys demand for new products could adversely affect our financial
position, results of operations or cash flows.
  
    
    accurately anticipate customer needs;
    
    innovate and develop new products;
    
    successfully commercialize new products in a timely manner;
    
    price our products competitively and manufacture and deliver our products in sufficient
volumes and on time; and
    
    differentiate our product offerings from those of our competitors.
  We rely on third-party suppliers for some important ingredients and products that we cannot
manufacture.
    We are subject to risks associated with our international operations.
  16




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A rise in raw material prices could increase our product costs and dilute our margins.
  If we are unable to protect our intellectual property rights, our ability to compete could be
negatively impacted .
     The unfavorable resolution of pending product liability claims or of any additional product
liability claims brought in the future could have a material adverse effect on our financial
position, results of operations or cash flows.
    17




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We have limited long-term human consumption experience for some products; if adverse reactions from
long-term consumption of these products occur, we could be subject to product liability claims.
  We depend on key personnel for our current and future performance.
  Rising insurance costs and changes in the availability of insurance could have a material adverse
effect on our financial position, results of operations or cash flows.
   Our substantial level of indebtedness could adversely affect our financial condition and prevent us
from fulfilling our obligations on the Notes.
   
    
    make it more difficult for us to satisfy our obligations on the Notes;
    
    require us to dedicate a substantial portion of our cash flow from operations to
interest and principal payments on our indebtedness, thereby reducing the availability of
our cash flow for other purposes, such as capital expenditures, acquisitions and working
capital;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    place us at a disadvantage compared to our competitors that have less debt;
    
    expose us to fluctuations in the interest rate environment because the Credit Facility
is at a variable rate of interest; and
    
    limit our ability to borrow additional funds.
 18




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The right of holders of Notes to receive payments on the Notes and guarantees is subordinated to
our and the guarantors senior debt.
   The indenture for the Notes and our Credit Facility impose significant operating and financial
restrictions, which may prevent us from capitalizing on business opportunities and taking some
actions.
  Claims of creditors of our non-guarantor subsidiaries will generally have priority with respect to
the assets and earnings of these subsidiaries over the claims of holders of the Notes.
  We may not be able to purchase the Notes upon a change of control.
  19




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We are controlled by our principal stockholders, which may have interests in conflict with the
interests of holders of the Notes.
   The Notes and guarantees may be voided under specific legal circumstances.
  
    
    it received less than reasonably equivalent value or fair consideration for issuing the
Notes or the guarantee, as applicable, and at the time;
    
    it was insolvent or rendered insolvent by reason of issuing the Notes or the guarantee, as
applicable;
    
    it was engaged, or about to engage, in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital to carry on its business;
    
    it intended to incur, or believed that it would incur, debts beyond its ability to pay as
they mature;
    
    it was a defendant in an action for money damages, or had a judgment for money damages
docketed against it if, in either case, after final judgment, the judgment is unsatisfied; or
    
    it issued the Notes or the guarantee, as applicable, to delay, hinder or defraud present or
future creditors,
   A change in our enterprise resource planning system could disrupt our operations.
  20




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ITEM 1B. UNRESOLVED STAFF COMMENTS
  21




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ITEM 2. PROPERTIES
  Approx.
    
    Leased
    
    Date ofSquare
    
    or
    
    LeaseLocation
    
    Type of Facility
    
    Feet
    
    Owned
    
    ExpirationFort Mill, SC
    
    Manufacturing, Packaging and Distribution
    
    
    680,000
    
    
    Leased
    
    8/31/2013Carson, CA
    
    HQ, Sales, Packaging, Distribution
    
    
    488,000
    
    
    Leased
    
    3/31/2014Winnipeg, Manitoba
    
    Manufacturing, Packaging,
    
    
    185,000
    
    
    Owned
    
    Distribution
    
    
    34,500
    
    
    Leased
    
    8/31/2008Garden Grove, CA
    
    Manufacturing
    
    
    165,000
    
    
    Leased
    
    12/31/2011Wilson, NC
    
    Manufacturing
    
    
    125,000
    
    
    Owned
    
    Valencia, CA
    
    Manufacturing
    
    
    52,500
    
    
    Leased
    
    8/31/2012
      
 ITEM 3. LEGAL PROCEEDINGS
  Product Liability
  22




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Breach of OTC Supply Contracts
    Breach of Raw Material Supply Agreement
  Pseudophedrine Product Liability
  23




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Other Civil Litigation
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  24




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  25




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ITEM 6. SELECTED FINANCIAL DATA
  March 29,
    
    
    March 27,
    
    
    March 26,
    
    
    March 25,
    
    
    March 31,2003 (1)
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007(dollars in thousands)Consolidated Statement of Operations Data:Net sales
    
    $
    574,281
    
    
    $
    661,045
    
    
    $
    684,901
    
    
    $
    669,561
    
    
    $
    735,236Cost of sales
    
    
    430,090
    
    
    
    486,554
    
    
    
    512,871
    
    
    
    533,215
    
    
    
    576,794Gross profit
    
    
    144,191
    
    
    
    174,491
    
    
    
    172,030
    
    
    
    136,346
    
    
    
    158,442Marketing, selling and distribution expenses
    
    
    48,600
    
    
    
    56,448
    
    
    
    58,532
    
    
    
    58,444
    
    
    
    64,631General and administrative expenses
    
    
    43,931
    
    
    
    41,041
    
    
    
    34,134
    
    
    
    35,725
    
    
    
    44,817Research and development expenses
    
    
    5,487
    
    
    
    5,670
    
    
    
    5,299
    
    
    
    4,551
    
    
    
    5,123Amortization of other intangibles
    
    
    1,585
    
    
    
    447
    
    
    
    250
    
    
    
    638
    
    
    
    1,169Asset impairment (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,507Restructuring charges (3)
    
    
    (245
    )
    
    
    
    
    
    
    
    
    
    
    3,836
    
    
    
    Recapitalization expenses
    
    
    
    
    
    
    
    
    
    
    87,982
    
    
    
    
    
    
    
    Other operating expense (income) (4)
    
    
    (77,708
    )
    
    
    1,528
    
    
    
    2,386
    
    
    
    1,113
    
    
    
    2,155Operating income (loss)
    
    
    122,541
    
    
    
    69,357
    
    
    
    (16,553
    )
    
    
    32,039
    
    
    
    24,040Interest expense, net
    
    
    18,809
    
    
    
    18,954
    
    
    
    32,346
    
    
    
    36,869
    
    
    
    39,989Income (loss) before income taxes
    
    
    103,732
    
    
    
    50,403
    
    
    
    (48,899
    )
    
    
    (4,830
    )
    
    
    (15,949
    )Provision for (benefit from) income taxes
    
    
    15,587
    
    
    
    11,347
    
    
    
    (987
    )
    
    
    (1,062
    )
    
    
    6,340Income (loss) before extraordinary item and cumulative
effect of change in accounting principle
    
    
    88,145
    
    
    
    39,056
    
    
    
    (47,912
    )
    
    
    (3,768
    )
    
    
    (22,289
    )Extraordinary gain, net
    
    
    68,106
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle, net
    
    
    (10,521
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    145,730
    
    
    
    39,056
    
    
    
    (47,912
    )
    
    
    (3,768
    )
    
    
    (22,289
    )Accretion on preferred stock
    
    
    (8,083
    )
    
    
    (12,105
    )
    
    
    (39,212
    )
    
    
    
    
    
    
    Net income (loss) attributable to common shareholder
    
    $
    137,647
    
    
    $
    26,951
    
    
    $
    (87,124
    )
    
    $
    (3,768
    )
    
    $
    (22,289
    )Other Financial Data:Cash flow from (used in) operating activities
    
    $
    87,368
    
    
    $
    37,766
    
    
    $
    (39,605
    )
    
    $
    19,301
    
    
    $
    44,541Cash flow (used in) investing activities
    
    
    (8,807
    )
    
    
    (13,175
    )
    
    
    (20,935
    )
    
    
    (35,601
    )
    
    
    (19,258
    )Cash flow (used in) from financing activities
    
    
    (82,851
    )
    
    
    (9,834
    )
    
    
    40,867
    
    
    
    10,980
    
    
    
    (10,590
    )Capital expenditures
    
    
    5,648
    
    
    
    10,413
    
    
    
    17,991
    
    
    
    13,244
    
    
    
    15,346Consolidated Balance Sheet Data (as of end of period):Cash and cash equivalents
    
    $
    17,547
    
    
    $
    33,824
    
    
    $
    16,951
    
    
    $
    7,731
    
    
    $
    22,717Working capital
    
    
    103,805
    
    
    
    135,928
    
    
    
    135,643
    
    
    
    134,680
    
    
    
    112,498Total assets
    
    
    337,529
    
    
    
    387,727
    
    
    
    416,798
    
    
    
    416,098
    
    
    
    378,618Total debt
    
    
    174,630
    
    
    
    171,006
    
    
    
    396,526
    
    
    
    402,617
    
    
    
    396,444Series A redeemable preferred stock
    
    
    28,083
    
    
    
    40,188
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity (deficit)
    
    
    23,183
    
    
    
    51,014
    
    
    
    (122,974
    )
    
    
    (115,082
    )
    
    
    (137,071
    )
 
 (1)
    
    We consummated a plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code and
emerged from court protection on April 19, 2002.(2)
    
    We recorded an asset impairment charge of $16.5 million in the fourth quarter of fiscal 2007
related to the restructuring and consolidation plan.(3)
    
    In fiscal 2006, restructuring charges of $3.8 million is related to severance and other related
costs incurred in connection with the workforce reduction.(4)
    
    Other operating expense (income) includes $98,380 in fiscal 2003, representing settlement
awards received in connection with an antitrust suit against some of our raw material suppliers,
net of legal and consulting fees and other costs of approximately $19,186. 26




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 As used in the managements discussion and analysis section of this report, unless the context
indicates otherwise the terms our company, we, our, and us refer collectively to Leiner
Health Products Inc. and its subsidiaries (the Company), including Vita Health Products Inc. of
Canada (Vita), a wholly owned subsidiary. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our consolidated financial
statements contained elsewhere in this report. We report on a 52-week or 53-week fiscal year,
falling on the last Saturday in March each year. Our fiscal years ended March 26, 2005, March 25,
2006 were comprised of 52-week periods and our fiscal year ended March 31, 2007 was comprised of a
53-week period.
 Overview
  Your Life ® Pharmacist Formula ®
    Recent Developments
  27




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General
 Revenue Recognition in Financial Statements Revenue
Recognition
    Amendments to our Credit Facility
  28




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29




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Acquisition
     Consideration and acquisition costs:Cash paid to PFI
    
    $
    22.9Acquisition costs
    
    
    1.5Working capital adjustment
    
    
    (1.5
    )$
    22.9Allocation of purchase price:Current assets
    
    $
    13.8Property, plant and equipment
    
    
    2.4Acquired intangibles
    
    
    5.8Goodwill
    
    
    5.8Other liabilities assumed
    
    
    (4.9
    )$
    22.9
  Year endedMarch 26, 2005
    
    March 25, 2006Net sales
    
    $
    747.5
    
    
    $
    698.2Operating income (loss)
    
    
    (24.5
    )
    
    
    24.7Net loss
    
    
    (56.2
    )
    
    
    (11.2
    )
 Recapitalization (Recapitalization)
  30




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##### Table of Contents



Results of Operations
  Percentage of Net SalesYear EndedMarch 26,
    
    March 25,
    
    March 31,2005
    
    2006
    
    2007 (1)Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    74.9
    
    
    
    79.6
    
    
    
    78.4Gross profit
    
    
    25.1
    
    
    
    20.4
    
    
    
    21.6Marketing, selling and distribution expenses
    
    
    8.5
    
    
    
    8.7
    
    
    
    8.8General and administrative expenses
    
    
    5.0
    
    
    
    5.3
    
    
    
    6.1Research and development expenses
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.7Amortization of other intangibles
    
    
    
    
    
    
    0.1
    
    
    
    0.2Asset impairment
    
    
    
    
    
    
    
    
    
    
    2.3Restructuring charges
    
    
    
    
    
    
    0.6
    
    
    
    Recapitalization expenses
    
    
    12.9
    
    
    
    
    
    
    
    Other operating expense
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3Operating (loss) income
    
    
    (2.4
    )
    
    
    4.8
    
    
    
    3.2Interest expense, net
    
    
    4.7
    
    
    
    5.5
    
    
    
    5.4Loss before income taxes
    
    
    (7.1
    )
    
    
    (0.7
    )
    
    
    (2.2
    )Provision for (benefit from) Income taxes
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    0.9Net loss
    
    
    (7.0
    )
    
    
    (0.6
    )
    
    
    (3.1
    )Accretion on preferred stock
    
    
    (5.7
    )
    
    
    
    
    
    
    Net loss attributable to common shareholders
    
    
    (12.7
    )%
    
    
    (0.6
    )%
    
    
    (3.1
    )%
 
 (1)
    
    Due to rounding, individual subtotals and totals may not recalculate. 31




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Fiscal 2007 Compared to Fiscal 2006
     
    
    VMS products net sales were $451.6 million in fiscal 2007, an increase of $32.7
million, or 7.8%, from $418.9 million in fiscal 2006. Management estimates that the impact
of the extra week in fiscal 2007 was approximately $7.7 to $8.3 million. The increase in
the VMS net sales from year-to-year was primarily attributable to higher sales of fish
oil, CoQ10, and multivitamins in the U.S, partially offset by the decrease in sales of
joint care products and decreases in sales in our Canadian operations.
    
    OTC product net sales were $216.7 million in fiscal 2007, an increase of $18.0 million,
or 9.1%, from $198.7 million in fiscal 2006. Management estimates that the impact of the
extra week in fiscal 2007 was approximately $3.3 to $3.7 million. The increase in OTC
product net sales from year-to-year was primarily attributable to higher U.S. sales of
analgesics products resulting from the PFI acquisition partially offset by decreases in OTC sales related to the recent OTC issues. OTC product net sales in our
Canadian operations remain relatively unchanged from year to year.
    
    Contract manufacturing services net sales were $66.9 million in fiscal 2007, an
increase of $14.9 million, or 28.7% from $52.0 million in fiscal 2006. Management
estimates that the impact of the extra week in fiscal 2007 was approximately $1.0 million.
The increase was primarily due to the launch of new product sales in the second quarter of
fiscal year 2007 and promotional activities at our key contract manufacturing customer.
   32




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##### Table of Contents



Fiscal 2006 Compared to Fiscal 2005
   33




---



##### Table of Contents




    
    VMS products net sales were $418.9 million in fiscal 2006, a decrease of $0.6 million,
or 0.1%, from $419.5 million in fiscal 2005. The VMS category was impacted in fiscal 2006
by product mix changes, the absence of branded new products sales, the establishment of
reserves for product returns, higher future chargebacks expenses and lower sales in Canada
as described above.
    
    OTC product net sales were $198.7 million in fiscal 2006, a decrease of $14.7 million,
or 6.9%, from $213.4 million in fiscal 2005. The decrease was primarily attributable to
price adjustments in our Loratadine products in the U.S. and lower sales of OTC products
in Canada. In addition, the decrease in sales of our OTC products was partly offset by
$17.4 million sales of PFI acquired products.
    
    Contract manufacturing services net sales were $52.0 million in fiscal 2006 as compared
to $52.0 million in fiscal 2005. We expect our contract manufacturing services business to
grow in fiscal 2007 as we have signed and/or expect to sign a number of major contracts
with certain pharmaceutical companies.
         34




---



##### Table of Contents



35




---



##### Table of Contents



Liquidity and Capital Resources
   
    
    We entered into our Credit Facility with several lenders on May 27, 2004. The Credit
Facility provides for aggregate maximum borrowings of $290.0 million under (i) the Term
Facility providing for a term B loan in an aggregate principal amount of $240.0 million and
(ii) the Revolving Facility providing for up to $50.0 million in revolving loans (including
standby and commercial letters of credit and swingline loans) outstanding at any time.
    
    On May 27, 2004, after the Recapitalization, we assumed $150.0 million in Notes.
    
    The repayment of all outstanding amounts under our pre-existing senior credit facilities
was made and commitments under those facilities were terminated.
       36




---



##### Table of Contents



Other Factors Affecting Liquidity
  Covenant Restrictions
   37




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##### Table of Contents



Consolidated Indebtedness toCredit Agreement EBITDA (1)Test Period
    
    Leverage RatioJune 30, 2007
    
    
    6.15 to 1.00September 29, 2007
    
    
    6.15 to 1.00December 29, 2007
    
    
    6.15 to 1.00March 29, 2008
    
    
    6.15 to 1.00June 28, 2008
    
    
    6.10 to 1.00September 27, 2008
    
    
    6.10 to 1.00December 27, 2008
    
    
    6.00 to 1.00March 28, 2009
    
    
    5.75 to 1.00June 28, 2009
    
    
    5.75 to 1.00September 27, 2009
    
    
    5.50 to 1.00December 27, 2009
    
    
    5.50 to 1.00March 28, 2010
    
    
    5.25 to 1.00June 28, 2010
    
    
    5.00 to 1.00Any Test Period Thereafter
    
    
    4.75 to 1.00
 Credit Agreement EBITDA (1)to ConsolidatedInterest Expense RatioJune 30, 2007
    
    
    1.60 to 1.00September 29, 2007
    
    
    1.60 to 1.00December 29, 2007
    
    
    1.60 to 1.00March 29, 2008
    
    
    1.60 to 1.00June 28, 2008
    
    
    1.60 to 1.00September 27, 2008
    
    
    1.60 to 1.00December 27, 2008
    
    
    1.60 to 1.00March 28, 2009
    
    
    1.65 to 1.00June 28, 2009
    
    
    1.70 to 1.00September 27, 2009
    
    
    1.75 to 1.00December 27, 2009
    
    
    1.80 to 1.00March 28, 2010
    
    
    1.90 to 1.00June 28, 2010
    
    
    2.00 to 1.00Any Test Period Thereafter
    
    
    2.15 to 1.00
 
 Note:
 (1)
    
    See Credit Agreement EBITDA for more information regarding this term.
   38




---



##### Table of Contents



Credit Agreement EBITDA
   Year EndedMarch 25,
    
    
    March 31,2006
    
    
    2007Net income (loss)
    
    $
    (3,768
    )
    
    $
    (22,289
    )Interest expense, net
    
    
    36,869
    
    
    
    39,989Provision for (benefit from) income taxes
    
    
    (1,062
    )
    
    
    6,340Depreciation and amortization
    
    
    16,634
    
    
    
    18,293Asset write-down (1)
    
    
    5,659
    
    
    
    Non-cash stock compensation expense (2)
    
    
    20
    
    
    
    25Expenses related to permitted acquisition (3)
    
    
    1,937
    
    
    
    Expenses related to joint care and other products (4)
    
    
    12,400
    
    
    
    Restructuring charges (5)
    
    
    3,000
    
    
    
    Price difference between PFIs purchased inventory
and Leiners manufacturing cost (6)
    
    
    572
    
    
    
    Expenses related to supplies to customers of PFI (7)
    
    
    1,279
    
    
    
    Management fees (8)
    
    
    1,262
    
    
    
    2,771Non-cash OTC related charges and reserves (9)
    
    
    
    
    
    
    43,869Credit Agreement EBITDA
    
    $
    74,802
    
    
    $
    88,998
 
 (1)
    
    Represents the establishment of a reserve for anticipated customer returns and the reduction
of the carrying value of inventory related to certain branded products in the first quarter of
fiscal 2006. This charge resulted in a reduction to gross profit in the consolidated statement of
operations and in operating activities in the consolidated statement of cash flows.(2)
    
    Non-cash compensation expenses are included in the general and administrative expenses in the
consolidated statement of operations and in operating activities in the consolidated statement of
cash flows. 39




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##### Table of Contents



(3)
    
    Represents internal expenses incurred in connection with the PFI Acquisition. These expenses
are included in the general and administrative expenses in the consolidated statement of operations
and in operating activities in the consolidated statement of cash flows.(4)
    
    Represents add-back of expense incurred in connection with the joint care customer in-stock
investments, inventory reduction impact and other expenses as stipulated in the Amendment. These
expenses resulted in a reduction to gross profit in the consolidated statement of operations for
the year ended March 25, 2006.(5)
    
    Represents expenses incurred in connection with operating facilities that prior to the PFI
acquisition were operated by the PFI business and to provide adequate inventory and to ensure
continuous supplies to customers of PFI business. This charge resulted in a reduction to gross
profit in the consolidated statement of operations and in operating activities in the consolidated
statement of cash flows.(6)
    
    Represents the value of inventory purchased solely in connection with the PFI Acquisition for
prices above our manufacturing cost. This charge resulted in a reduction to gross profit in the
consolidated statement of operations and in operating activities in the consolidated statement of
cash flows.(7)
    
    Represents expenses incurred in connection with operating facilities that prior to the PFI
Acquisition were operated by the PFI Business and to provide adequate inventory and to ensure
continuous supplies to customers of PFI Business. This charge resulted in a reduction to gross
profit in the consolidated statement of operations and in operating activities in the consolidated
statement of cash flows.(8)
    
    Management fees, which primarily include professional fees incurred in connection with the
Amendment, are included in other operating expenses in the consolidated statement of operations and
in operating activities in the consolidated statement of cash flows.(9)
    
    Represents non-cash items including impairment charge and the inventory write-down related to
the Companys OTC events. Excludes add-backs of $6.3 million to Credit Agreement EBITDA
for period ending after March 31, 2007.
 Sources and Uses of Cash
    Off-Balance Sheet Arrangements
  40




---



##### Table of Contents



Contractual Obligations
  Payments Due by PeriodLess than
    
    
    1 to 2
    
    
    2 to 3
    
    
    3 to 4
    
    
    4 to 5
    
    
    After 5Contractual obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years
    
    
    years
    
    
    yearsTerm B Loan
    
    $
    233,400
    
    
    $
    1,800
    
    
    $
    2,400
    
    
    $
    2,400
    
    
    $
    2,400
    
    
    $
    224,400
    
    
    $
    Senior Subordinated Notes
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Industrial Development Revenue Bond
    
    
    3,600
    
    
    
    500
    
    
    
    500
    
    
    
    500
    
    
    
    500
    
    
    
    500
    
    
    
    1,100Capitalized leases
    
    
    9,444
    
    
    
    3,008
    
    
    
    3,216
    
    
    
    2,421
    
    
    
    691
    
    
    
    108
    
    
    
    Operating lease obligations
    
    
    45,789
    
    
    
    7,835
    
    
    
    7,439
    
    
    
    7,281
    
    
    
    7,107
    
    
    
    6,747
    
    
    
    9,380Other
    
    
    57
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    442,290
    
    
    $
    13,200
    
    
    $
    13,555
    
    
    $
    12,602
    
    
    $
    10,698
    
    
    $
    231,755
    
    
    $
    160,480
  Critical Accounting Policies and Estimates
 Estimates
  Revenue Recognition
 Revenue Recognition in
Financial Statements Revenue Recognition
 Contractual Allowances
 Future Chargebacks
 41




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##### Table of Contents



Product Returns
   Reserve for
    
    
    Reserve for
    
    
    Reserve forContractual
    
    
    Future
    
    
    ProductAllowances
    
    
    Chargebacks
    
    
    ReturnsBalance at March 27, 2004
    
    $
    9,436
    
    
    $
    735
    
    
    $
    630Current provision
    
    
    44,197
    
    
    
    4,823
    
    
    
    2,996Actual returns or credits
    
    
    (43,447
    )
    
    
    (4,955
    )
    
    
    (2,865
    )Balance at March 26, 2005
    
    
    10,186
    
    
    
    603
    
    
    
    762Current provision
    
    
    46,037
    
    
    
    8,391
    
    
    
    6,618Actual returns or credits
    
    
    (45,036
    )
    
    
    (7,923
    )
    
    
    (4,515
    )Balance at March 25, 2006
    
    
    11,187
    
    
    
    1,071
    
    
    
    2,865Current provision
    
    
    37,454
    
    
    
    9,207
    
    
    
    3,192Actual returns or credits
    
    
    (40,872
    )
    
    
    (9,633
    )
    
    
    (4,042
    )Balance at March 31, 2007
    
    $
    7,769
    
    
    $
    645
    
    
    $
    2,014
 
 42




---



##### Table of Contents



Allowance for Uncollectible Accounts
  Inventories
   Property, Plant and Equipment
  Goodwill
  Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
 43




---



##### Table of Contents



Income Taxes
   Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  Forward-looking Statements
  44




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Exchange Rate Market Risk
  Interest Rate Market Risk
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  
 ITEM 9B. OTHER INFORMATION
  45




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   Name
    
    Age
    
    PositionRobert M. Kaminski
    
    
    56
    
    
    Chief Executive Officer and Vice Chairman of the Board of
DirectorsRobert K. Reynolds
    
    
    50
    
    
    President, Chief Operating Officer and DirectorRobert J. La Ferriere
    
    
    57
    
    
    Senior Executive Vice President, Supply ChainKevin J. Lanigan
    
    
    60
    
    
    Executive Vice President and Corporate General ManagerKevin P. McDonnell
    
    
    45
    
    
    Executive Vice President and Chief Financial OfficerCharles F. Baird, Jr.
    
    
    53
    
    
    Chairman of the Board of DirectorsPrescott H. Ashe
    
    
    39
    
    
    DirectorJohn E. Gilligan
    
    
    30
    
    
    DirectorKen J. Diekroeger
    
    
    44
    
    
    DirectorGale K. Bensussen
    
    
    60
    
    
    DirectorMonty Sharma
    
    
    42
    
    
    Director
 Robert M. Kaminski, Chief Executive Officer and Vice Chairman of the Board of Directors,
 Robert K. Reynolds, President, Chief Operating Officer and Director.
 Robert J. La Ferriere, Senior Executive Vice President, Supply Chain.
 Kevin J. Lanigan, Executive Vice President and Corporate General Manager,
 Kevin P. McDonnell, Executive Vice President and Chief Financial Officer,
 46




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##### Table of Contents



Charles F. Baird, Jr., Chairman
 Prescott H. Ashe, Director,
 Gale K. Bensussen, Director,
 Monty Sharma Director
 Kenneth J. Diekroeger, Director,
 John E. Gilligan, Director , .
  Audit Committee Financial Expert
   47




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##### Table of Contents



Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
  
 ITEM 11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
 Overview
   Compensation Philosophy and Objective
   
    
    review the basic philosophy and policy governing the compensation of the Companys
management and other personnel;
    
    review at least annually the salaries of members of senior management and their
performance against objectives and potential;
    
    review and approve the methodology and implementation of an annual incentive bonus
program. Factors to be considered include the financial and strategic performance of the
Company versus objectives, individual performance and comparative industry compensation
information;
    
    review and approve salary and incentive programs for all employees;
    
    review and recommend to the board adoption of, and changes to, stock option and other
incentive programs and plans for key employees;
    
    consider and approve, upon recommendation of the chief executive, individuals eligible
for, and the number, kind and terms of stock options;
    
    review other employee benefits plans such as pension, 401(k) and other retirement plans;
    
    review medical plans and other health plans; and
    
    consider and approve, upon recommendation of the chief executive, employer contributions
to the 401(k) benefit plan.
 48




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##### Table of Contents



Determination of Compensation Awards
     Executive Compensation Components
  
    
    base salary;
    
    performance-based cash incentive bonus
    
    long term incentives through stock option and restricted stock awards
    
    perquisites and other benefits
    
    executive employment agreements  severance
 Base Salary
  49




---



##### Table of Contents



Performance-Based Cash Incentive Bonuses.
     Stock Option and Restricted Stock Awards.
 Perquisites and Other Benefit.
  50




---



##### Table of Contents



Employment Contracts and Severance Benefit Agreements.
  Compensation Committee Report
  
 Compensation Committee Interlocks and Insider Participation
  51




---



##### Table of Contents



Summary Compensation Table
  Change in PensionValue andNonqualifiedNon-Eeqity
    
    DeferredStock Awards
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherSalary
    
    Bonus
    
    (1)
    
    Awards (1)
    
    Compensation (2)
    
    Earnings
    
    CompensationName and Principal Position
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Robert M. KaminskiChief Executive Officer
    
    $
    559,134
    
    
    $
    
    
    
    $
    6,582
    
    
    $
    
    
    
    $
    137,500
    
    
    $
    
    
    
    $
    182,859Robert K. ReynoldsPresident, Chief Operating Officer
    
    
    382,212
    
    
    
    
    
    
    
    3,291
    
    
    
    597
    
    
    
    93,750
    
    
    
    
    
    
    
    79,649Kevin P. McDonnellExecutive Vice President,Chief Financial Officer
    
    
    213,462
    
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    55,000
    
    
    
    
    
    
    
    60,345Robert J. La FerriereSenior Executive Vice President,
Supply Chain
    
    
    310,865
    
    
    
    
    
    
    
    1,646
    
    
    
    418
    
    
    
    198,250
    
    
    
    
    
    
    
    62,209Kevin J. LaniganExecutive Vice President/
Corporate General Manager
    
    
    275,096
    
    
    
    
    
    
    
    1,646
    
    
    
    
    
    
    
    121,500
    
    
    
    
    
    
    
    66,320
 
 (1)
    
    Represents the amounts of expense recognized for financial accounting purposes pursuant to FAS
123(R). See Footnote 9 to the consolidated financial statements.(2)
    
    The amounts represent bonuses earned in fiscal year 2007 under the performance-based cash
incentive bonus and supplemental executive bonus plans. Also see Compensation Discussion &
AnalysisPerformance-Based Cash Incentive Bonus. All Other Compensation
  Escrow
    
    Membership
    
    Insurance
    
    OtherPayments
    
    Dues
    
    Premium
    
    Benefits
    
    TotalName and Principal Position
    
    ($)(1)
    
    ($)(2)
    
    ($)(3)
    
    ($)(4)
    
    ($)Robert M. KaminskiChief Executive Officer
    
    $
    161,358
    
    
    $
    7,040
    
    
    $
    14,461
    
    
    $
    
    
    
    $
    182,859Robert K. ReynoldsPresident, Chief Operating Officer
    
    
    59,084
    
    
    
    7,945
    
    
    
    12,620
    
    
    
    
    
    
    
    79,649Kevin P. McDonnellExecutive Vice President,
Chief Financial Officer
    
    
    
    
    
    
    1,900
    
    
    
    8,445
    
    
    
    50,000
    
    
    
    60,345Robert J. La FerriereSenior Executive Vice President,
Supply Chain
    
    
    38,529
    
    
    
    9,719
    
    
    
    13,961
    
    
    
    
    
    
    
    62,209Kevin J. LaniganExecutive Vice President/
Corporate General Manager
    
    
    49,562
    
    
    
    6,529
    
    
    
    10,229
    
    
    
    
    
    
    
    66,320
 
 (1)
    
    Escrow payments  See Escrow Payment under Item 13  Certain Relationships and Related
Transaction for further discussion.(2)
    
    Represents reimbursements for club membership dues incurred by the Named Executive Officers.(3)
    
    Insurance premium consists of the cost of life insurance coverage over the $50,000 salary
limitation as well as medical, dental and vision insurance premiums paid by the Company on
behalf of the Named Executive Officers.(4)
    
    Represents a sign-on incentive paid to Mr. McDonnell in July 2006 as part of his employment
offer with the Company. 52




---



##### Table of Contents



Grants of Plan-Based Awards Table
 All Other
    
    All OtherStock
    
    Option
    
    
    
    
    
    GrantAwards:
    
    Awards:
    
    Exercise
    
    Date FairEstimated Future Payouts
    
    Estimated Future Payouts
    
    Number of
    
    Number of
    
    or Base
    
    Value ofUnder
    
    Under
    
    Shares of
    
    Securities
    
    Price of
    
    Stock andGrant
    
    Non-Equity Incentive Plan Awards (1)
    
    Equity Incentive Plan Awards
    
    Stock or
    
    Underlying
    
    Option
    
    OptionDate
    
    Threshold
    
    Target
    
    Maximum
    
    Threshold
    
    Target
    
    Maximum
    
    Units
    
    Options
    
    Awards
    
    AwardsName and Principal Position
    
    
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    ($/Sh)
    
    ($)Robert M. KaminskiChief Executive Officer
    
    
    
    
    
    $
    412,500
    
    
    $
    550,000
    
    
    $
    687,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert K. ReynoldsPresident, Chief Operating Officer
    
    
    
    
    
    
    281,250
    
    
    
    375,000
    
    
    
    468,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kevin P. McDonnellExecutive Vice President,
Chief Financial Officer
    
    
    
    
    
    
    150,000
    
    
    
    225,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert J. La FerriereSenior Executive Vice President,
Supply Chain
    
    
    
    
    
    
    152,500
    
    
    
    228,750
    
    
    
    305,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kevin J. LaniganExecutive Vice President/
Corporate General Manager
    
    
    
    
    
    
    135,000
    
    
    
    202,500
    
    
    
    270,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents target incentive bonus for fiscal year 2007. See Compensation Discussion &
AnalysisPerformance-Based Cash Incentive Bonus for further detail. The actual amounts paid under
the bonus plan are reflected in the Summary Compensation Table. Outstanding Equity Awards at Fiscal Year-End
  Option Awards
    
    Stock AwardsEquityEquity
    
    Incentive PlanEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incentive Plan
    
    Awards:Incentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    
    
    
    
    Number of
    
    Payout ValueNumber of
    
    
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    
    
    
    
    Unearned
    
    of UnearnedNumber of
    
    Number of
    
    Securities
    
    
    
    
    
    
    
    
    
    Shares or
    
    Shares or
    
    
    
    
    
    Shares, Units
    
    Shares, UnitsSecurities
    
    Securities
    
    Underlying
    
    
    
    
    
    
    
    
    
    Units of Stock
    
    Units of Stock
    
    
    
    
    
    or other
    
    or ohterUnderlying
    
    Underlying
    
    Unexercised
    
    Option
    
    Option
    
    That
    
    That Have Not
    
    
    
    
    
    Rights That
    
    Rights ThatUnexercised
    
    Unexercised
    
    Unearned
    
    Exercise
    
    Expiration
    
    Have Not
    
    Vested
    
    
    
    
    
    Have Not
    
    Have NotOptions (#)
    
    Options (#)
    
    Options
    
    Price
    
    Date
    
    Vested
    
    (1)
    
    Total
    
    Vested
    
    VestedName and Principal Position
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    ($)
    
    
    
    
    
    (#)
    
    ($)
    
    ($)
    
    (#)
    
    ($)Robert M. KaminskiChief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    39,135
    
    
    $
    2.37
    
    
    $
    92,750
    
    
    
    
    
    
    
    Robert K. Reynolds
President,
Chief Operating Officer
    
    
    1,250
    
    
    
    3,750
    
    
    
    
    
    
    
    2.37
    
    
    
    12/31/2015
    
    
    
    19,567
    
    
    
    2.37
    
    
    
    46,374
    
    
    
    
    
    
    
    Kevin P. McDonnellExecutive Vice President,
Chief Financial Officer
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    2.37
    
    
    
    9/13/2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert J. La FerriereSenior Executive Vice President,
    
    
    750
    
    
    
    2,250
    
    
    
    
    
    
    
    2.37
    
    
    
    12/31/2015
    
    
    
    9,784
    
    
    
    2.37
    
    
    
    23,188
    
    
    
    
    
    
    
    Supply Chain
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2.37
    
    
    
    9/13/2016Kevin J. LaniganExecutive Vice President,
Corporate General Manager
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,784
    
    
    
    2.37
    
    
    
    23,188
    
    
    
    
    
    
    
    
 
 (1)
    
    The Company does not annually value its stock. For the purposes of valuing the restricted stock
awards in the table, the Company has used $2.37 per share, the original cost of the Companys stock
in the Recapitalization. 53




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##### Table of Contents



Option Exercises and Stock Vested
 Option Awards
    
    Stock AwardsNumber of Shares
    
    Value Realized
    
    Number of Shares
    
    Value RealizedAcquired on Exercise
    
    on Exercise
    
    Acquired on Vesting
    
    on VestingName and Principal Position
    
    (#)
    
    ($)
    
    (#)
    
    ($)Robert M. Kaminski Chief Executive Officer
    
    
    
    
    
    $
    
    
    
    
    19,567
    
    
    $
    46,374Robert K. ReynoldsPresident, Chief Operating Officer
    
    
    
    
    
    
    
    
    
    
    9,783
    
    
    
    23,188Kevin P. McDonnellExecutive Vice President,
Chief Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert J. La FerriereSenior Executive Vice President,
Supply Chain
    
    
    
    
    
    
    
    
    
    
    4,892
    
    
    
    11,594Kevin J. LaniganExecutive Vice President,
Corporate General Manager
    
    
    
    
    
    
    
    
    
    
    4,892
    
    
    
    11,594
 Non-Qualified Deferred Compensation
   54




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##### Table of Contents



Executive
    
    Registrant
    
    Aggregate
    
    Aggregate
    
    AggregateContributions
    
    Contributions
    
    Earnings in
    
    Withdrawals/
    
    Balance atin Last FY
    
    in Last FY
    
    Last FY
    
    Distributions
    
    Last FYE (1)Name and Principal Position
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Robert M. KaminskiChief Executive Officer
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,001,488Robert K. ReynoldsPresident, Chief Operating Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,469,828Kevin P. McDonnellExecutive Vice President,
Chief Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert J. La FerriereSenior Executive Vice President,
Supply Chain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    394,125Kevin J. LaniganExecutive Vice President,
Corporate General Manager
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,424,686
 
 (1)
    
    The Company does not annually value its stock. For the purposes of valuing the stock options in
the table, the Company has used $2.37 and $100.00, for common stock and preferred stock,
respectively, the original cost of the Companys stock in the Recapitalization. Potential Payments Upon Termination or Change in Control
   Robert M. Kaminski.
 Robert K. Reynolds.
 55




---



##### Table of Contents



Kevin P. McDonnell.
 Robert J. La Ferriere.
 Kevin J. Lanigan.
  Severance (1)
    
    Outplacement (2)
    
    TotalName and Principal Position
    
    ($)
    
    ($)
    
    ($)Robert M. KaminskiChief Executive Officer
    
    
    2,000,000
    
    
    
    20,000
    
    
    
    2,020,000Robert K. ReynoldsPresident, Chief Operating Officer
    
    
    843,750
    
    
    
    
    
    
    
    843,750Kevin P. McDonnellExecutive Vice President,
Chief Financial Officer
    
    
    1,050,000
    
    
    
    
    
    
    
    1,050,000Robert J. La FerriereSenior Executive Vice President,
Supply Chain
    
    
    533,750
    
    
    
    20,000
    
    
    
    553,750Kevin J. LaniganExecutive Vice President,
Corporate General Manager
    
    
    1,417,500
    
    
    
    20,000
    
    
    
    1,437,500
 
 (1)
    
    Severance includes both salary and bonus related payouts as described above.(2)
    
    Executives to receive up to indicated amounts for reimbursement of outplacement-related costs. Change of Control Benefits
  56




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##### Table of Contents



Director Compensation
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF RELATED
STOCKHOLDER MATTERS
  57




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##### Table of Contents



Number of sharesReserved forIssued and
    
    FutureDescription
    
    Authorized
    
    Outstanding
    
    IssuanceSeries A Preferred Stock
    
    
    3,000,000
    
    
    
    2,651,832
    
    
    
    Series B Preferred Stock
    
    
    1,000,000
    
    
    
    
    
    
    
    600,000
    (2)Series C Preferred Stock
    
    
    200,000
    
    
    
    130,000
    (3)
    
    
    Common Stock
    
    
    6,000,000
    
    
    
    176,656
    (1)
    
    
    5,600,000
    (2)
 
 (1)
    
    Includes restricted stock issued and outstanding under the LHP Holdings Corp. 2004 Restricted Stock Plan
(the Stock Plan) of 176,108 shares. The restricted stock has various restrictive Call Rights retained by us after
issuance. Although the timing of the removal of the Call Rights is dependant upon the future
employment status of the employee, generally, the Call Rights are removed over a pro-rata period of
six years from the date of the Recapitalization.(2)
    
    600,000 shares reserved for conversion of delayed delivery shares (DDS) Series B Preferred
Stock. 600,000 shares reserved for issuance of DDS Common Stock and 5,000,000 shares reserved for
conversion of Series A Preferred Stock.(3)
    
    In fiscal 2006, 130,000 shares of Series C Preferred Stock under the LHP Holdings were issued
and outstanding in connection with the PFI acquisition.  Name
    
    Preferred Stock (2)
    
    Common Stock (3)Number of
    
    Percentage of
    
    Number of
    
    Percentage ofShares
    
    Class
    
    Shares
    
    ClassPrincipal Stockholders:GGC Investment Fund II, L.P. and Related Entities (4)
    
    
    1,380,000
    (11)
    
    
    46.82
    %
    
    
    
    
    
    
    North Castle Partners III-A, L.P. and Related Entities (5)
    
    
    1,380,000
    (10)
    
    
    46.82
    %
    
    
    
    
    
    
    Directors and Executive Officers:Robert M. Kaminski (6)
    
    
    29,320
    
    
    
    0.99
    %
    
    
    88,023
    
    
    
    26.62
    %Robert K. Reynolds (6)
    
    
    14,358
    
    
    
    0.49
    %
    
    
    44,960
    
    
    
    13.60
    %Gale K. Bensussen (6)
    
    
    27,233
    
    
    
    0.92
    %
    
    
    46,800
    
    
    
    14.15
    %Kevin P. McDonnell (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert J. La Ferriere (6)
    
    
    3,850
    
    
    
    0.13
    %
    
    
    19,276
    
    
    
    5.83
    %Kevin J. Lanigan (6)
    
    
    42,204
    
    
    
    1.43
    %
    
    
    48,130
    
    
    
    14.56
    %Charles F. Baird, Jr. (7) (8)
    
    
    50,000
    
    
    
    1.70
    %
    
    
    
    
    
    
    Prescott H. Ashe (9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Monty Sharma (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kenneth J. Diekroeger (9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John E.
Gilligan (9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    All directors and executive officers as a group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11 persons)
    
    
    166,965
    
    
    
    5.66
    %
    
    
    247,189
    
    
    
    74.76
    %
 58




---



##### Table of Contents



(1)
    
    Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person has
beneficial ownership of any securities as to which such person, directly or indirectly, through any
contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or
investment power and as to which such person has the right to acquire such voting and/or investment
power within 60 days. Percentage of beneficial ownership as to any person as of a particular date
is calculated by dividing the number of shares beneficially owned by such person by the sum of the
number of shares outstanding as of such date and the number of shares as to which such person has
the right to acquire voting and/or investment power within 60 days.(2)
    
    Preferred Stock includes Series A Preferred Stock, issued and outstanding, Series B Preferred
Stock, reserved for delayed delivery, and Series C Preferred Stock, issued and outstanding.(3)
    
    Common stock includes common stock reserved for delayed delivery, exercisable Restricted Stock
and exercisable Options granted on Common Stock.(4)
    
    The address is 1 Embarcadero Center, 33rd Floor, San Francisco, California 94111.(5)
    
    The address is 183 Putnam Avenue, Greenwich, Connecticut 06831.(6)
    
    The address is c/o Leiner Health Products Inc., 901 East 233rd Street, Carson, California
90745.(7)
    
    The address is c/o North Castle Partners III-A, L.P., 183 Putnam Avenue, Greenwich, Connecticut
06831. Mr. Baird is Managing Director of North Castle Partners, L.L.C., which is the manager of
North Castle Partners III-A, L.P. By virtue of his status, Mr. Baird may be deemed to have or share
voting and investment power with respect to the shares in which North Castle Partners, L.L.C. and
North Castle Partners III-A, L.P. have direct or indirect beneficial ownership but he disclaims the
beneficial ownership of the shares held directly or indirectly by such entities except to the
extent of his proportionate ownership interests therein.(8)
    
    Includes 50,000 shares of Series A Preferred Stock held of record by North Castle GP III-A,
L.L.C., which is general partner of the general partner of North Castle Partners III-A, L.P. and of
which Mr. Baird is the managing member. By virtue of his status as the managing member of North
Castle GP III-A, L.L.C., Mr. Baird may be deemed to have voting and investment power with respect
to the 50,000 shares of Series A Preferred Stock held of record by North Castle GP III-A, L.L.C.(9)
    
    The address is c/o GGC Investment Fund II, L.P., 1 Embarcadero Center, 33rd Floor, San
Francisco, California 94111. Messrs. Ashe, Diekroeger and
Gilligan are affiliates of Golden Gate Capital which is the
general partner of the GGC Investment Fund II, L.P. They disclaim the beneficial ownership of
the shares held by such entities except to the extent of their
respective proportionate ownership interests
therein.(10)
    
    Consists of (i) 1,265,000 shares of Series A preferred stock owned by North Castle Partners
III-A, L.P., (ii) 50,000 shares of Series A Preferred Stock held of record by North Castle GP
III-A, L.L.C., and (iii) 65,000 shares of Series C Preferred Stock held of record by North Castle
GP III-A, L.L.C.(11)
    
    Consists of: (i) 361,976.73 shares of Series A preferred stock and 19,223 shares of Series C
preferred stock owned by CCG Investment Fund, L.P., (ii) 18,196.22 shares of Series A preferred
stock and 966 shares of Series C preferred stock owned by CCG Associates QP, LLC, (iii) 1,691.94
shares of Series A preferred stock and 90 shares of Series C preferred stock owned by CCG
Associates AI, LLC, (iv) 4,849.27 shares of Series A preferred stock and 258 shares of Series C
preferred stock owned by CCG Investment Fund  AI, L.P., (v) 36,694.06 shares of Series A
preferred stock and 1,948 shares of Series C preferred stock owned by CCG AV, LLC-Series C, (vi)
14,085 shares of Series A preferred stock and 748 shares of Series C preferred stock owned by CCG
AV, LLC-Series F, (vii) 657,433.77 shares of Series A preferred stock and 36,058 shares of Series C
preferred stock owned by Golden Gate Capital Investment Fund II, L.P., (viii) 17,411.28 shares of
Series A preferred stock and 925 shares of Series C preferred stock owned by Golden Gate Capital
Associates II-QP, LLC, (ix) 91,001.64 shares of Series A preferred stock owned by CCG CI, LLC, (x)
92,678.63 shares of Series A preferred stock and 3,776 shares of Series C preferred stock owned by
Golden Gate Capital Investment Fund II-A, L.P., (xi) 16,395 shares of Series A preferred stock and
899 shares of Series C preferred stock owned by Golden Gate Capital Investment Fund II, (AI) L.P.,
(xii) 2,311.21 shares of Series A preferred stock and 94 shares of Series C preferred stock owned
by Golden Gate Capital Investment Fund II-A, (AI) L.P., and (xiii) 275.25 shares of Series A
preferred stock and 15 shares of Series C preferred stock owned by Golden Gate Capital Associates
II-AI, LLC. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Stockholders Agreement
   Board of Directors
 59




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##### Table of Contents



 Approval of Significant Transactions.
  Transfer Restrictions
  Participation Rights
  Take-Along Sale of Capital Stock
  Piggyback Registration Rights.
  Demand Registration.
  Holdback Agreement for Demand Registrations
  Preemptive Rights.
 Indemnification.
  Affiliate Transactions.
 60




---



##### Table of Contents



Consulting Agreement
    Recapitalization Agreement and Plan of Merger
     61




---



##### Table of Contents



Escrow Agreement
   Management Equity Arrangements
    Commercial Agreements
  62




---



##### Table of Contents



Legal
Services
  Review, Approval or Ratification of Transactions with Related Persons
  Director Independence
  
 ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
  Year EndedMarch 25, 2006
    
    
    March 31, 2007Audit fees (1)
    
    $
    945,000
    
    
    $
    891,521Audit-related fees (2)
    
    
    147,305
    
    
    
    Tax fees (3)
    
    
    51,260
    
    
    
    99,109Total
    
    $
    1,143,565
    
    
    $
    990,630
 
 (1)
    
    Audit fees consisted of fees for professional services provided in connection with the audit of
our annual consolidated financial statements, the performance of limited reviews of our quarterly
unaudited financial information, and audit services provided in connection with SEC filings and
other statutory or regulatory filings.(2)
    
    Audit-related fees consisted primarily of professional services rendered in connection with
other activities not explicitly related to the audit of our financial statements, including the
consultations concerning financial accounting and reporting standards and the PFI Acquisition.(3)
    
    Tax fees consisted primarily of services related to tax compliance, tax planning and tax
advice. Audit Committees pre-approval policies and procedures
    63




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##### Table of Contents



64




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
  1.
    
    Financial Statement.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:
 PageIndex to Consolidated Financial Statements
    
    F-1Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of March 25, 2006 and March 31, 2007
    
    F-3Consolidated Statements of Operations for the years ended March 26, 2005, March 25, 2006 and March 31, 2007
    
    F-4Consolidated Statements of Shareholders Equity (Deficit) for the years ended March 26, 2005,
March 25, 2006 and March 31, 2007
    
    F-5Consolidated Statements of Cash Flows for the years ended March 26, 2005, March 25, 2006 and March 31, 2007
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 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.
 Schedule IIConsolidated Valuation and Qualifying Accounts
    

    S-1
 65




---



##### Table of Contents



3. List of Exhibits.
 ExhibitNumber
    
    Exhibit Description
    
    Cross Reference2.1
    
    Recapitalization Agreement and Plan of Merger, dated
April 15, 2004, between Leiner Health Products Inc. and
Leiner Merger Corporation.
    
    Filed as Exhibit
2.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.2.2
    
    First Amendment to the Recapitalization Agreement and
Plan of Merger, dated May 26, 2004, between Leiner
Health Products Inc. and Leiner Merger Corporation.
    
    Filed as Exhibit
2.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.2.3
    
    Amendment and Restated Asset Purchase and Sale
Agreement dated as of September 9, 2005, among Leiner
Health Products L.L.C. and Pharmaceutical Formulations,
Inc.
    
    Filed as Exhibit
10.11 to the
Quarterly Report on
Form 10-Q of Leiner
Health Products
Inc. for the
Quarter Ended
September 24, 2005,
and incorporated
herein by
reference.3.1
    
    Amended and Restated Certificate of Incorporation of
Issuer.
    
    Filed as Exhibit
3.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.2
    
    Bylaws of Issuer.
    
    Filed as Exhibit
3.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.3
    
    Certificate of Formation of Leiner Health Products, LLC.
    
    Filed as Exhibit
3.3 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.4
    
    Limited Liability Company Agreement of Leiner Health
Products, LLC.
    
    Filed as Exhibit
3.4 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.5
    
    Certificate of Incorporation of Leiner Health Services
Corp. and certificates of amendment.
    
    Filed as Exhibit
3.5 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.6
    
    Bylaws of Leiner Health Services Corp.
    
    Filed as Exhibit
3.6 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.4.1
    
    Indenture, dated as of May 27, 2004, among Leiner
Merger Corporation, the companies named therein as
guarantors, and U.S. Bank National Association, as
Trustee.
    
    Filed as Exhibit
4.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.4.2
    
    Supplemental Indenture, dated as of May 27, 2004, among
the Issuer, Leiner Health Services Corp. and Leiner
Health Products, LLC, as Guarantors, and U.S. Bank
National Association, as Trustee.
    
    Filed as Exhibit
4.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.1
    
    Credit Agreement, dated May 27, 2004, among Issuer,
guarantors party thereto, UBSAG, Stamford Branch, as
administrative agent and collateral agent, UBS
Securities LLC and Morgan Stanley Senior Funding, Inc.,
as joint lead arrangers and joint book runners, Morgan
Stanley Senior Funding, Inc., as syndication agent,
Credit Suisse First Boston, as documentation agent, UBS
Loan Finance LLC, as swingline lender, and the other
financial institutions named therein.
    
    Filed as Exhibit
10.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.2
    
    Stockholders Agreement, dated May 27, 2004, among LHP
Holding Corp. (Parent) and its stockholders named
therein.
    
    Filed as Exhibit
10.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.3
    
    Amended and Restated Severance Benefit Agreement, dated
as of July 11, 2002, between the Issuer and Gale
Bensussen.
    
    Filed as Exhibit
10.3 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.4
    
    Amended and Restated Severance Benefit Agreement, dated
as of July 1, 2002, between the Issuer and Robert
Kaminski.*
    
    Filed as Exhibit
10.4 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.5
    
    Severance Benefit Agreement, dated as of November 21,
1991, between P. Leiner Nutritional Products, Inc. and
Kevin J. Lanigan and Assignment and Assumption
Agreement, dated April 11, 2002, between the Issuer and
Leiner Health Products, LLC.*
    
    Filed as Exhibit
10.5 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.6
    
    Employment Agreement, dated January 28, 2002, between
    
    Filed as Exhibit
10.6 to the
Registration Statement on
 66




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Cross Referencethe Issuer and Robert K. Reynolds and Assignment and
Assumption Agreement, dated February 24, 2004 between
the Issuer and Leiner Health Products, LLC.*
    
    Form
S-4 and
incorporated herein
by reference.10.7
    
    Employment Offer Letter dated July 13, 2006 between the
Issuer and Kevin McDonnell.*
    
    Filed herewith10.8
    
    Consulting Agreement, dated as of May 27, 2004, the
Issuer, Leiner Health Products, LLC, LHP Holding Corp.,
North Castle Partners, L.L.C. and GGC Administration,
LLC.
    
    Filed as Exhibit
10.8 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.9
    
    Amendment No. 1 and Acknowledgement dated September 23,
2005 to the Credit Agreement dated May 27, 2004 between
Issuer and the senior lenders.
    
    Filed as Exhibit
10.11 to the
Quarterly Report on
Form 10-Q of Leiner
Health Products
Inc. for the
Quarter Ended
September 24, 2005,
and incorporated
herein by
reference.10.10
    
    Amendment No. 2 and Waiver dated June 22, 2007
to the Credit Agreement dated May 27, 2004, as amended, between
Issuer and the certain lenders.
    
    Filed herewith14.1
    
    Code of Ethics.
    
    Filed as Exhibit
14.1 to the
Companys annual
report Form 10-K
for the year ended
March 26, 2005.21.1
    
    Subsidiaries of Registrant.
    
    Filed as Exhibit
21.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.31.1
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
    
    Filed herewith.31.2
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
    
    Filed herewith.32.1
    
    Certification of Chief Executive Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
    
    Filed herewith.32.2
    
    Certification of Chief Financial Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
    
    Filed herewith.
 
 *
    
    Indicates a management contract or compensatory plan or arrangement (c)
    
    ExhibitsSee Item 15(a)(3) above.
 (d)
    
    Financial Statement SchedulesSee Item 15(a)(2) above.
 67




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##### Table of Contents



SIGNATURES
  LEINER HEALTH PRODUCTS INC.By:
    
    /s/ KEVIN P. MCDONNELL

Name: Kevin P. McDonnellTitle: Executive Vice President and Chief Financial Officer
  Name
    
    Title
    
    Date/s/ CHARLES F. BAIRD, JR.

Charles F. Baird, Jr.
    
    Chairman of the Board and Director
    
    June 29, 2007/s/ ROBERT M. KAMINSKI

Robert M. Kaminski
    
    Chief Executive Officer (Principal Executive
Officer) and Director
    
    June 29, 2007/s/ ROBERT K.REYNOLDS

Robert K. Reynolds
    
    President, Chief Operating Officer and Director
    
    June 29, 2007/s/ KEVIN P. McDONNELL

Kevin P. McDonnell
    
    Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
    
    June 29, 2007/s/ JOHN E. GILLIGAN

John E. Gilligan
    
    Director
    
    June 29, 2007/s/ MONTY SHARMA

Monty Sharma
    
    Director
    
    June 29, 2007
 68




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##### Table of Contents



LEINER HEALTH PRODUCTS INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of March 25, 2006 and March 31, 2007
    
    
    F-3Consolidated Statements of Operations for the years ended March 26, 2005, March 25, 2006 and March 31, 2007
    
    
    F-4Consolidated Statements of Shareholders Equity (Deficit) for the years ended March 26, 2005, March 25,
2006 and March 31, 2007
    
    
    F-5Consolidated Statements of Cash Flows for the years ended March 26, 2005, March 25, 2006 and March 31, 2007
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F - 1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 F-2




---



##### Table of Contents



LEINER HEALTH PRODUCTS INC.
 
 CONSOLIDATED BALANCE SHEETS
 (dollars in thousands, except share data)
 March 25, 2006
    
    
    March 31, 2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,731
    
    
    $
    22,717Accounts receivable, net of allowances of $3,545 and $2,014 at March 25, 2006
and March 31, 2007, respectively
    
    
    73,211
    
    
    
    66,600Inventories
    
    
    165,714
    
    
    
    134,639Income tax receivable
    
    
    56
    
    
    
    2,565Prepaid expenses and other current assets
    
    
    16,484
    
    
    
    7,982Total current assets
    
    
    263,196
    
    
    
    234,503Property, plant and equipment, net
    
    
    72,618
    
    
    
    66,113Goodwill
    
    
    58,245
    
    
    
    58,284Other noncurrent assets
    
    
    22,039
    
    
    
    19,718Total assets
    
    $
    416,098
    
    
    $
    378,618LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    77,648
    
    
    $
    85,875Accrued compensation and benefits
    
    
    9,994
    
    
    
    8,271Customer allowances payable
    
    
    10,522
    
    
    
    7,153Accrued interest
    
    
    10,436
    
    
    
    5,662Other accrued expenses
    
    
    14,418
    
    
    
    9,139Current portion of long-term debt
    
    
    5,498
    
    
    
    5,905Total current liabilities
    
    
    128,516
    
    
    
    122,005Long-term debt
    
    
    397,119
    
    
    
    390,539Other noncurrent liabilities
    
    
    5,545
    
    
    
    3,145Total liabilities
    
    
    531,180
    
    
    
    515,689Commitments and contingenciesShareholders DeficitCommon stock, $0.01 par value; 3,000,000 shares authorized, 1,000 shares issued
and outstanding at March 25, 2006 and March 31, 2007
    
    
    
    
    
    
    Capital in excess of par value
    
    
    13,489
    
    
    
    13,474Accumulated deficit
    
    
    (130,125
    )
    
    
    (152,414
    )Accumulated other comprehensive income
    
    
    1,554
    
    
    
    1,869Total shareholders deficit
    
    
    (115,082
    )
    
    
    (137,071
    )Total liabilities and shareholders deficit
    
    $
    416,098
    
    
    $
    378,618
  F-3




---



##### Table of Contents



LEINER HEALTH PRODUCTS INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (dollars in thousands)
 Year EndedMarch 26, 2005
    
    
    March 25, 2006
    
    
    March 31, 2007Net sales
    
    $
    684,901
    
    
    $
    669,561
    
    
    $
    735,236Cost of sales
    
    
    512,871
    
    
    
    533,215
    
    
    
    576,794Gross profit
    
    
    172,030
    
    
    
    136,346
    
    
    
    158,442Marketing, selling and distribution expenses
    
    
    58,532
    
    
    
    58,444
    
    
    
    64,631General and administrative expenses
    
    
    34,134
    
    
    
    35,725
    
    
    
    44,817Research and development expenses
    
    
    5,299
    
    
    
    4,551
    
    
    
    5,123Amortization of other intangibles
    
    
    250
    
    
    
    638
    
    
    
    1,169Asset impairment
    
    
    
    
    
    
    
    
    
    
    16,507Restructuring charges
    
    
    
    
    
    
    3,836
    
    
    
    Recapitalization expenses
    
    
    87,982
    
    
    
    
    
    
    
    Other operating expense
    
    
    2,386
    
    
    
    1,113
    
    
    
    2,155Operating (loss) income
    
    
    (16,553
    )
    
    
    32,039
    
    
    
    24,040Interest expense, net
    
    
    32,346
    
    
    
    36,869
    
    
    
    39,989Loss before income taxes
    
    
    (48,899
    )
    
    
    (4,830
    )
    
    
    (15,949
    )Provision for (benefit from) income taxes
    
    
    (987
    )
    
    
    (1,062
    )
    
    
    6,340Net loss
    
    
    (47,912
    )
    
    
    (3,768
    )
    
    
    (22,289
    )Accretion on preferred stock
    
    
    (39,212
    )
    
    
    
    
    
    
    Net loss attributable to common shareholder
    
    $
    (87,124
    )
    
    $
    (3,768
    )
    
    $
    (22,289
    )
  F-4




---



##### Table of Contents



LEINER HEALTH PRODUCTS INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
 (dollars in thousands except share data)
 RetainedPreferred Stock
    
    
    
    
    
    
    
    
    
    
    Capital in
    
    
    Earnings
    
    
    Accumulated Other
    
    
    TotalSeries A Redeemable
    
    
    
    Series B Junior Convertible
    
    
    Series C Junior
    
    
    Common Stock
    
    
    Excess
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    of Par Value
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    Equity (Deficit)Balance at March 27, 2004
    
    
    200,000
    
    
    
    40,188
    
    
    
    
    7,500
    
    
    
    6,616
    
    
    
    7,000
    
    
    
    6,178
    
    
    
    1,139,394
    
    
    
    11
    
    
    
    21,841
    
    
    
    16,259
    
    
    
    109
    
    
    
    51,014Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,912
    )
    
    
    
    
    
    
    (47,912
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,805
    
    
    
    2,805Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,107
    )Accretion on preferred stock
    
    
    
    
    
    
    29,812
    
    
    
    
    
    
    
    
    8,578
    
    
    
    
    
    
    
    822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,212
    )
    
    
    
    
    
    
    (29,812
    )Repurchase and retirement of
preferred stock
    
    
    (200,000
    )
    
    
    (70,000
    )
    
    
    
    (7,500
    )
    
    
    (15,194
    )
    
    
    (7,000
    )
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,194
    )Recapitalization (Note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,138,394
    )
    
    
    (11
    )
    
    
    (21,841
    )
    
    
    (55,492
    )
    
    
    
    
    
    
    (77,344
    )Restricted stock issued in
connection with long-term
incentive program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    464Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Balance at March 26, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    469
    
    
    
    (126,357
    )
    
    
    2,914
    
    
    
    (122,974
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,768
    )
    
    
    
    
    
    
    (3,768
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,360
    )
    
    
    (1,360
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,128
    )Capital contribution from parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    13,000Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Balance at March 25, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    13,489
    
    
    
    (130,125
    )
    
    
    1,554
    
    
    
    (115,082
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,289
    )
    
    
    
    
    
    
    (22,289
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315
    
    
    
    315Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,974
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Repurchase of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    (47
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Balance at March 31, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    1,000
    
    
    $
    
    
    
    $
    13,474
    
    
    $
    (152,414
    )
    
    $
    1,869
    
    
    $
    (137,071
    )
  F-5




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##### Table of Contents



LEINER HEALTH PRODUCTS INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year EndedMarch 26, 2005
    
    
    March 25, 2006
    
    
    March 31, 2007Operating activitiesNet loss
    
    $
    (47,912
    )
    
    $
    (3,768
    )
    
    $
    (22,289
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation
    
    
    11,948
    
    
    
    15,235
    
    
    
    16,301Amortization of other intangibles and other contracts
    
    
    1,774
    
    
    
    1,399
    
    
    
    1,992Amortization of deferred financing charges
    
    
    5,445
    
    
    
    1,866
    
    
    
    1,941Asset impairment
    
    
    
    
    
    
    
    
    
    
    16,507Provision for doubtful accounts and allowances
    
    
    4,791
    
    
    
    5,153
    
    
    
    3,367Provision for excess and obsolete inventory
    
    
    8,028
    
    
    
    12,430
    
    
    
    46,866Deferred income taxes
    
    
    (1,176
    )
    
    
    1,369
    
    
    
    2,920(Gain) loss on disposal of assets
    
    
    (52
    )
    
    
    6
    
    
    
    (35
    )Stock compensation expense
    
    
    5
    
    
    
    20
    
    
    
    25Translation adjustment
    
    
    (2,805
    )
    
    
    1,360
    
    
    
    (315
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,464
    )
    
    
    10,108
    
    
    
    3,299Inventories
    
    
    (26,842
    )
    
    
    (6,548
    )
    
    
    (15,596
    )Income tax receivable
    
    
    (1,729
    )
    
    
    3,029
    
    
    
    (3,530
    )Accounts payable
    
    
    9,840
    
    
    
    (29,125
    )
    
    
    8,205Accrued compensation and benefits
    
    
    (4,992
    )
    
    
    302
    
    
    
    (1,738
    )Customer allowances payable
    
    
    599
    
    
    
    910
    
    
    
    (3,379
    )Accrued interest
    
    
    7,971
    
    
    
    1,340
    
    
    
    (4,776
    )Other accrued expenses
    
    
    2,862
    
    
    
    2,784
    
    
    
    (4,315
    )Other
    
    
    (896
    )
    
    
    1,431
    
    
    
    (909
    )Net cash (used in) provided by operating activities
    
    
    (39,605
    )
    
    
    19,301
    
    
    
    44,541Investing activitiesAdditions to property, plant and equipment
    
    
    (17,991
    )
    
    
    (13,244
    )
    
    
    (15,346
    )Acquisition of business
    
    
    
    
    
    
    (22,922
    )
    
    
    Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    625
    
    
    
    162Increase in other noncurrent assets
    
    
    (2,944
    )
    
    
    (60
    )
    
    
    (4,074
    )Net cash used in investing activities
    
    
    (20,935
    )
    
    
    (35,601
    )
    
    
    (19,258
    )Financing activitiesNet borrowings under bank revolving credit facility
    
    
    
    
    
    
    5,000
    
    
    
    (5,000
    )Borrowings under bank term credit facility
    
    
    240,000
    
    
    
    
    
    
    
    Payments under bank term credit facility
    
    
    (1,200
    )
    
    
    (2,400
    )
    
    
    (3,000
    )Payments under old credit facility
    
    
    (159,788
    )
    
    
    
    
    
    
    Issuance of senior subordinated debt
    
    
    150,000
    
    
    
    
    
    
    
    Increase in deferred financing charges
    
    
    (15,753
    )
    
    
    (760
    )
    
    
    Capital contribution from parent
    
    
    251,500
    
    
    
    13,000
    
    
    
    Repurchase and retirement of preferred stock
    
    
    (92,194
    )
    
    
    
    
    
    
    Repurchase and retirement of common stock and common equity rights
    
    
    (328,380
    )
    
    
    
    
    
    
    Repurchase of restricted stock
    
    
    
    
    
    
    
    
    
    
    (47
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    7Net payments on capital leases and other long-term debt
    
    
    (3,318
    )
    
    
    (3,860
    )
    
    
    (2,550
    )Net cash provided by (used in) financing activities
    
    
    40,867
    
    
    
    10,980
    
    
    
    (10,590
    )Effect of exchange rate changes
    
    
    2,800
    
    
    
    (3,900
    )
    
    
    293Net (decrease) increase in cash and cash equivalents
    
    
    (16,873
    )
    
    
    (9,220
    )
    
    
    14,986Cash and cash equivalents at beginning of period
    
    
    33,824
    
    
    
    16,951
    
    
    
    7,731Cash and cash equivalents at end of period
    
    $
    16,951
    
    
    $
    7,731
    
    
    $
    22,717
  F-6




---



##### Table of Contents



LEINER HEALTH PRODUCTS INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2007
 1. Formation and Operations
 General
     2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Fiscal Year
  Use of Estimates
  Cash Equivalents
  F-7




---



##### Table of Contents



Fair Values of Financial Instruments
  March 31, 2007Total
    
    Fair ValueVariable rate ($US)
    
    $
    233,400
    
    
    $
    233,400Average interest rate
    
    
    8.60
    %Fixed rate ($US)
    
    $
    150,000
    
    
    $
    149,600Average interest rate
    
    
    11.00
    %
  Revenue Recognition
 Revenue Recognition in
Financial Statements Revenue Recognition
 Contractual Allowances
 Future Chargebacks
 Product Returns
 Allowances for Uncollectible Accounts
  F-8




---



##### Table of Contents



Inventories
   Property, Plant and Equipment
  Goodwill
  Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
  F-9




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##### Table of Contents



Other Intangible Assets
  Weighted-Average
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Impairment
    
    
    Accumulated
    
    
    Net CarryingPeriod
    
    
    Value
    
    
    Loss
    
    
    Amortization
    
    
    ValueBalance at March 25, 2006:Customer base
    
    5.0 years
    
    $
    2,710
    
    
    $
    
    
    
    $
    1,864
    
    
    $
    846Purchased patents
    
    6.0 years
    
    
    7,598
    
    
    
    
    
    
    
    3,214
    
    
    
    4,384Trademarks
    
    14.0 years
    
    
    207
    
    
    
    
    
    
    
    161
    
    
    
    46Total intangibles assets
    
    
    
    
    
    $
    10,515
    
    
    $
    
    
    
    $
    5,239
    
    
    $
    5,276Balance at March 31, 2007:Customer base
    
    5.0 years
    
    $
    2,710
    
    
    $
    
    
    
    $
    2,052
    
    
    $
    658Purchased patents
    
    5.0 years
    
    
    7,598
    
    
    
    2,811
    
    
    
    4,189
    
    
    
    598Trademarks
    
    14.0 years
    
    
    207
    
    
    
    
    
    
    
    167
    
    
    
    40Total intangibles assets
    
    
    
    
    
    $
    10,515
    
    
    $
    2,811
    
    
    $
    6,408
    
    
    $
    1,296
  Fiscal year2008
    
    $
    3652009
    
    
    3652010
    
    
    3652011
    
    
    1852012
    
    
    6Thereafter
    
    
    10Total
    
    $
    1,296
 Deferred Market Development Costs
  F-10




---



##### Table of Contents



Income Taxes
  Foreign Currency Translation
  Stock-Based Compensation
 Share-Based Payments
 Shipping and Handling Fees and Costs
  Advertising Costs
  F-11




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 Accounting for Income Taxes
  3. Acquisition
     Consideration and acquisition costs:Cash paid to PFI
    
    $
    22,862Acquisition costs
    
    
    1,537Working capital adjustment
    
    
    (1,477
    )$
    22,922Allocation of purchase price:Current assets
    
    $
    13,859Property, plant and equipment
    
    
    2,367Acquired intangibles
    
    
    5,810Goodwill
    
    
    5,795Other liabilities assumed
    
    
    (4,909
    )$
    22,922
  F-12




---



##### Table of Contents



4. Restructuring charges
   Costs forEmployeesTerminatedBalance at March 26, 2005
    
    $
    Additions to reserve
    
    
    3,836Cash payments
    
    
    (1,490
    )Balance at March 25, 2006
    
    $
    2,346Adjustments
    
    
    Cash payments
    
    
    (2,289
    )Balance at March 31, 2007
    
    $
    57
 5. Recapitalization
      F-13




---



##### Table of Contents



Assumption of Debt from Mergeco:Credit Facility
    
    $
    (245,000
    )Notes
    
    
    (150,000
    )
    
    $
    (395,000
    )Excess funds from Mergeco
    
    
    
    
    
    
    317,656Recapitalization
    
    
    
    
    
    $
    (77,344
    )
  6. Debt
  March 25, 2006
    
    
    March 31, 2007Credit Facility:Revolving facility
    
    $
    5,000
    
    
    $
    Term facility
    
    
    236,400
    
    
    
    233,400Total credit facility
    
    
    241,400
    
    
    
    233,400Senior subordinated notes
    
    
    150,000
    
    
    
    150,000Capital lease obligations
    
    
    7,117
    
    
    
    9,444Industrial development revenue bond loan
    
    
    4,100
    
    
    
    3,600402,617
    
    
    
    396,444Less current portion
    
    
    (5,498
    )
    
    
    (5,905
    )Total long-term debt
    
    $
    397,119
    
    
    $
    390,539
 Credit Facility
   F-14




---



##### Table of Contents



Senior Subordinated Notes
  F-15




---



##### Table of Contents



Capital Lease Obligations
  Industrial Development Revenue Bond Loan (IRB Loan)
  Industrial Opportunities Program Loan
  Minimum payments
  Fiscal Year2008
    
    $
    5,3082009
    
    
    6,1162010
    
    
    5,3202011
    
    
    3,5922012
    
    
    225,008Thereafter
    
    
    151,100$
    396,444
 7. Preferred Stock
 Series A Redeemable Preferred Stock
   Series B Junior Convertible Preferred Stock
  F-16




---



##### Table of Contents



Series C Junior Preferred Stock
   8. Income Taxes
  Year EndedMarch 26, 2005
    
    
    March 25, 2006
    
    
    March 31, 2007U.S.
    
    $
    (56,183
    )
    
    $
    (10,159
    )
    
    $
    (19,201
    )Foreign
    
    
    7,284
    
    
    
    5,329
    
    
    
    3,252$
    (48,899
    )
    
    $
    (4,830
    )
    
    $
    (15,949
    )
 F-17




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##### Table of Contents



Year EndedMarch 26,
    
    March 25,
    
    March 31,2005
    
    2006
    
    2007Provision/(benefit) at U.S. statutory rates
    
    
    (35
    )%
    
    
    (35
    )%
    
    
    (35
    )%State income taxes, net of federal tax benefit
    
    
    (2
    )
    
    
    16
    
    
    
    (5
    )Non deductible recapitalization expenses
    
    
    21
    
    
    
    4
    
    
    
    Higher/(lower) effective rate of foreign
operations
    
    
    1
    
    
    
    (14
    )
    
    
    (3
    )Imputed interest on foreign intercompany loan
    
    
    2
    
    
    
    12
    
    
    
    4Reserve for uncertain tax positions
    
    
    
    
    
    
    16
    
    
    
    (10
    )Non-deductible goodwill
    
    
    
    
    
    
    37
    
    
    
    Property, plant and equipment basis tax
attributes
    
    
    
    
    
    
    46
    
    
    
    Tax credits
    
    
    
    
    
    
    (3
    )
    
    
    (2
    )Other
    
    
    
    
    
    
    1
    
    
    
    Change in valuation allowance
    
    
    11
    
    
    
    (102
    )
    
    
    91Effective income tax rate
    
    
    (2
    )%
    
    
    (22
    )%
    
    
    40
    %
  Year EndedMarch 26,
    
    
    March 25,
    
    
    March 31,2005
    
    
    2006
    
    
    2007Current:Federal
    
    $
    (237
    )
    
    $
    (3,678
    )
    
    $
    3,625State
    
    
    264
    
    
    
    (455
    )
    
    
    (446
    )Foreign
    
    
    162
    
    
    
    1,749
    
    
    
    241Total current
    
    
    189
    
    
    
    (2,384
    )
    
    
    3,420Deferred:Federal
    
    
    (1,172
    )
    
    
    3,789
    
    
    
    (399
    )State
    
    
    (4
    )
    
    
    (364
    )
    
    
    2,688Foreign
    
    
    
    
    
    
    (2,103
    )
    
    
    631Total deferred
    
    
    (1,176
    )
    
    
    1,322
    
    
    
    2,920Total provision for (benefit from) income taxes
    
    $
    (987
    )
    
    $
    (1,062
    )
    
    $
    6,340
  F-18




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##### Table of Contents



March 25, 2006
    
    
    March 31, 2007Deferred tax assets:Compensation related accruals
    
    $
    8,468
    
    
    $
    8,026Net operating loss carry forwards
    
    
    2,398
    
    
    
    821Property, plant and equipment and intangibles asset
    
    
    1,500
    
    
    
    3,126Inventory obsolescence reserves
    
    
    4,638
    
    
    
    13,710Inventory capitalization
    
    
    966
    
    
    
    1,784Restructuring charges
    
    
    657
    
    
    
    24Allowances for doubtful accounts and sales returns
    
    
    568
    
    
    
    674Other
    
    
    1,045
    
    
    
    828Total deferred tax assets
    
    
    20,240
    
    
    
    28,993Valuation allowance
    
    
    (6,902
    )
    
    
    (21,354
    )Deferred tax assets
    
    
    13,338
    
    
    
    7,639Deferred tax liabilities:Inventory capitalization
    
    
    
    
    
    
    (1,407
    )Property, plant and equipment and intangibles asset
    
    
    (4,186
    )
    
    
    Deferred tax liabilities
    
    
    (4,186
    )
    
    
    (1,407
    )Net deferred tax assets
    
    $
    9,152
    
    
    $
    6,232
       F-19




---



##### Table of Contents



9. Employee Benefits
 Stock-Option Plan
     Available
    
    Number
    
    Exercise
    
    Averagefor Grant
    
    of Shares
    
    Price
    
    Exercise PriceBalance at March 26, 2005
    
    
    78,271
    
    
    
    39,138
    
    
    $
    2.37
    
    
    $
    2.37Options forfeited
    
    
    5,166
    
    
    
    (5,166
    )
    
    
    2.37
    
    
    
    2.37Balance at March 25, 2006
    
    
    83,437
    
    
    
    33,972
    
    
    
    2.37
    
    
    
    2.37Options granted
    
    
    (80,000
    )
    
    
    80,000
    
    
    
    2.37
    
    
    
    2.37Options exercised
    
    
    
    
    
    
    (2,943
    )
    
    
    2.37
    
    
    
    2.37Options forfeited
    
    
    1,471
    
    
    
    (1,471
    )
    
    
    2.37
    
    
    
    2.37Balance at March 31, 2007
    
    
    4,908
    
    
    
    109,558
    
    
    
    2.37
    
    
    
    2.37
  Outstanding
    
    ExcercisableAverage
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    Weighted
    
    
    
    
    
    AverageNumber of
    
    Contractual Life
    
    Average
    
    Number of
    
    ExerciseExercise price
    
    Shares
    
    (years)
    
    Exercise Price
    
    Shares
    
    Price$
    2.37
    
    
    
    109,558
    
    
    
    8.77
    
    
    $
    2.37
    
    
    
    24,279
    
    
    $
    2.37
  Restricted Stock Plan:
  F-20




---



##### Table of Contents



Restricted Shares OutstandingShares
    
    
    
    
    
    
    
    
    
    WeightedAvailable
    
    Number
    
    Purchase
    
    Averagefor Issuance
    
    of Shares
    
    Price
    
    Purchase PriceBalance at March 26, 2005
    
    
    
    
    
    
    195,676
    
    
    $
    2.37
    
    
    $
    2.37Restricted Stock Issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 25, 2006
    
    
    
    
    
    
    195,676
    
    
    
    2.37
    
    
    
    2.37Restricted Stock Issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchased and retired
    
    
    19,568
    
    
    
    (19,568
    )
    
    
    2.37
    
    
    
    2.37Balance at March 31, 2007
    
    
    19,568
    
    
    
    176,108
    
    
    $
    2.37
    
    
    $
    2.37
  Outstanding
    
    First Call Rights ReleasedAverage
    
    
    
    
    
    
    
    
    
    WeightedRemaining Call
    
    Weighted
    
    
    
    
    
    AverageNumber of
    
    Right Life
    
    Average
    
    Number of
    
    PurchasePurchase price
    
    Shares
    
    (years)
    
    Purchase Price
    
    Shares
    
    Price$
    2.37
    
    
    
    176,108
    
    
    
    3.25
    
    
    $
    2.37
    
    
    
    88,054
    
    
    $
    2.37
    Year EndedMarch 25,
    
    March 31,2006
    
    2007Risk free interest rate
    
    
    4.20
    %
    
    
    4.56
    %Expected term in years
    
    
    5.00
    
    
    
    5.00Expected volatility
    
    
    34.69
    %
    
    
    34.69
    %Expected dividend rate
    
    
    13.00
    %
    
    
    13.00
    %Expected forfeiture rate
    
    
    
    %
    
    
    
    %
 Contributory Retirement Plans
  F-21




---



##### Table of Contents



10. Related Parties
    11. Commitments
   Fiscal year2008
    
    $
    7,8352009
    
    
    7,4392010
    
    
    7,2812011
    
    
    7,1072012
    
    
    6,747Thereafter
    
    
    9,380Total minimum lease payments
    
    $
    45,789
  12. Contingencies
  F-22




---



##### Table of Contents



Breach of OTC Supply Contracts
    Breach of Raw Material Supply Agreement
   Other Civil Litigation
  13. Concentration of Credit Risk and Significant Customers, Suppliers and Products
  F-23




---



##### Table of Contents



Year EndedMarch 26,
    
    March 25,
    
    March 31,2005
    
    2006
    
    2007Customer A
    
    
    43
    %
    
    
    44
    %
    
    
    43
    %Customer B
    
    
    20
    %
    
    
    24
    %
    
    
    25
    %
  Year EndedMarch 26,
    
    March 25,
    
    March 31,2005
    
    2006
    
    2007Division 1
    
    
    25
    %
    
    
    24
    %
    
    
    24
    %Division 2
    
    
    18
    %
    
    
    20
    %
    
    
    19
    %
  Year EndedMarch 26,
    
    March 25,
    
    March 31,2005
    
    2006
    
    2007Top ten customers
    
    
    85
    %
    
    
    87
    %
    
    
    86
    %
      F-24




---



##### Table of Contents



14. Business Segment Information
   Leiner
    
    Vita
    
    ConsolidatedU.S.
    
    Health
    
    TotalsYear ended March 26, 2005Net sales to external customers
    
    $
    610,915
    
    
    $
    73,986
    
    
    $
    684,901Intersegment sales
    
    
    4,566
    
    
    
    21
    
    
    
    Depreciation and amortization, excluding deferred financing charges
    
    
    11,107
    
    
    
    2,615
    
    
    
    13,722Segment operating income (loss)
    
    
    (25,485
    )
    
    
    8,932
    
    
    
    (16,553
    )Interest expense, net (1)
    
    
    30,698
    
    
    
    1,648
    
    
    
    32,346Income tax expense (benefit)
    
    
    (1,149
    )
    
    
    162
    
    
    
    (987
    )Segment assets
    
    
    367,036
    
    
    
    49,762
    
    
    
    416,798Additions to property, plant and equipment
    
    
    16,646
    
    
    
    1,630
    
    
    
    18,276Year ended March 25, 2006Net sales to external customers
    
    $
    614,662
    
    
    $
    54,899
    
    
    $
    669,561Intersegment sales
    
    
    2,244
    
    
    
    98
    
    
    
    Depreciation and amortization, excluding deferred financing charges
    
    
    14,362
    
    
    
    2,272
    
    
    
    16,634Segment operating income
    
    
    26,820
    
    
    
    5,219
    
    
    
    32,039Interest expense (income), net (1)
    
    
    36,979
    
    
    
    (110
    )
    
    
    36,869Income tax expense (benefit)
    
    
    (708
    )
    
    
    (354
    )
    
    
    (1,062
    )Segment assets
    
    
    378,153
    
    
    
    37,945
    
    
    
    416,098Additions to property, plant and equipment
    
    
    19,460
    
    
    
    1,143
    
    
    
    20,603Year ended March 31, 2007Net sales to external customers
    
    $
    683,924
    
    
    $
    51,312
    
    
    $
    735,236Intersegment sales
    
    
    1,776
    
    
    
    1,664
    
    
    
    Depreciation and amortization, excluding deferred financing charges
    
    
    16,815
    
    
    
    1,478
    
    
    
    18,293Segment operating income
    
    
    20,920
    
    
    
    3,120
    
    
    
    24,040Interest expense (income), net (1)
    
    
    40,121
    
    
    
    (132
    )
    
    
    39,989Income tax expense
    
    
    5,468
    
    
    
    872
    
    
    
    6,340Segment assets
    
    
    338,963
    
    
    
    39,655
    
    
    
    378,618Additions to property, plant and equipment
    
    
    17,861
    
    
    
    1,861
    
    
    
    19,722
 
 (1)
    
    Interest expense, net includes the amortization of deferred financing charges. F-25




---



##### Table of Contents



Year EndedMarch 25,
    
    
    
    
    
    March 31,March 26, 2005
    
    %
    
    2006
    
    %
    
    2007
    
    %VMS products
    
    $
    419,491
    
    
    
    61
    %
    
    $
    418,858
    
    
    
    62
    %
    
    $
    451,580
    
    
    
    61
    %OTC products
    
    
    213,402
    
    
    
    31
    %
    
    
    198,681
    
    
    
    30
    %
    
    
    216,717
    
    
    
    30
    %Contract manufacturing services/Other
    
    
    52,008
    
    
    
    8
    %
    
    
    52,022
    
    
    
    8
    %
    
    
    66,939
    
    
    
    9
    %Total
    
    $
    684,901
    
    
    
    100
    %
    
    $
    669,561
    
    
    
    100
    %
    
    $
    735,236
    
    
    
    100
    %
 15. Financial information for subsidiary guarantor and subsidiary non-guarantor
  F-26




---



##### Table of Contents



Leiner Health Products Inc.
Consolidating Balance Sheets
(in thousands)
 March 25, 2006Company &
    
    
    
    
    
    
    Eliminations andGuarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,766
    
    
    $
    3,965
    
    
    $
    
    
    
    $
    7,731Accounts receivable, net of allowances
    
    
    68,314
    
    
    
    4,897
    
    
    
    
    
    
    
    73,211Inventories
    
    
    150,922
    
    
    
    14,792
    
    
    
    
    
    
    
    165,714Income tax receivable
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    56Prepaid expenses and other current assets
    
    
    13,659
    
    
    
    2,825
    
    
    
    
    
    
    
    16,484Total current assets
    
    
    236,717
    
    
    
    26,479
    
    
    
    
    
    
    
    263,196Intercompany receivable
    
    
    32,875
    
    
    
    
    
    
    
    (32,875
    )
    
    
    Property, plant and equipment, net
    
    
    64,378
    
    
    
    8,240
    
    
    
    
    
    
    
    72,618Goodwill
    
    
    55,019
    
    
    
    3,226
    
    
    
    
    
    
    
    58,245Other noncurrent assets
    
    
    22,039
    
    
    
    
    
    
    
    
    
    
    
    22,039Total assets
    
    $
    411,028
    
    
    $
    37,945
    
    
    $
    (32,875
    )
    
    $
    416,098LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    75,122
    
    
    $
    2,526
    
    
    $
    
    
    
    $
    77,648Accrued compensation and benefits
    
    
    8,749
    
    
    
    1,245
    
    
    
    
    
    
    
    9,994Customer allowances payable
    
    
    9,831
    
    
    
    691
    
    
    
    
    
    
    
    10,522Accrued interest
    
    
    10,370
    
    
    
    66
    
    
    
    
    
    
    
    10,436Other accrued expenses
    
    
    12,323
    
    
    
    2,095
    
    
    
    
    
    
    
    14,418Current portion of long-term debt
    
    
    5,487
    
    
    
    11
    
    
    
    
    
    
    
    5,498Total current liabilities
    
    
    121,882
    
    
    
    6,634
    
    
    
    
    
    
    
    128,516Intercompany payable
    
    
    
    
    
    
    32,875
    
    
    
    (32,875
    )
    
    
    Long-term debt
    
    
    397,110
    
    
    
    9
    
    
    
    
    
    
    
    397,119Other noncurrent liabilities
    
    
    5,545
    
    
    
    
    
    
    
    
    
    
    
    5,545Total liabilities
    
    
    524,537
    
    
    
    39,518
    
    
    
    (32,875
    )
    
    
    531,180Commitments and contingenciesShareholders deficit:Capital in excess of par value
    
    
    13,489
    
    
    
    
    
    
    
    
    
    
    
    13,489Accumulated deficit
    
    
    (126,998
    )
    
    
    (3,127
    )
    
    
    
    
    
    
    (130,125
    )Accumulated other comprehensive income
    
    
    
    
    
    
    1,554
    
    
    
    
    
    
    
    1,554Total shareholders deficit
    
    
    (113,509
    )
    
    
    (1,573
    )
    
    
    
    
    
    
    (115,082
    )Total liabilities and shareholders deficit
    
    $
    411,028
    
    
    $
    37,945
    
    
    $
    (32,875
    )
    
    $
    416,098
 F-27




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##### Table of Contents



Leiner Health Products Inc.
Consolidating Balance Sheets
(in thousands)
 March 31, 2007Company &
    
    
    
    
    
    
    Eliminations andGuarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,506
    
    
    $
    5,211
    
    
    $
    
    
    
    $
    22,717Accounts receivable, net of allowances
    
    
    61,377
    
    
    
    5,223
    
    
    
    
    
    
    
    66,600Inventories
    
    
    120,918
    
    
    
    13,721
    
    
    
    
    
    
    
    134,639Income tax receivable
    
    
    1,612
    
    
    
    953
    
    
    
    
    
    
    
    2,565Prepaid expenses and other current assets
    
    
    6,650
    
    
    
    1,332
    
    
    
    
    
    
    
    7,982Total current assets
    
    
    208,063
    
    
    
    26,440
    
    
    
    
    
    
    
    234,503Intercompany receivable
    
    
    32,652
    
    
    
    413
    
    
    
    (33,065
    )
    
    
    Property, plant and equipment, net
    
    
    57,360
    
    
    
    8,753
    
    
    
    
    
    
    
    66,113Goodwill
    
    
    55,019
    
    
    
    3,265
    
    
    
    
    
    
    
    58,284Other noncurrent assets
    
    
    18,934
    
    
    
    784
    
    
    
    
    
    
    
    19,718Total assets
    
    $
    372,028
    
    
    $
    39,655
    
    
    $
    (33,065
    )
    
    $
    378,618LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    82,725
    
    
    $
    3,150
    
    
    $
    
    
    
    $
    85,875Accrued compensation and benefits
    
    
    6,932
    
    
    
    1,339
    
    
    
    
    
    
    
    8,271Customer allowances payable
    
    
    6,625
    
    
    
    528
    
    
    
    
    
    
    
    7,153Accrued interest
    
    
    5,662
    
    
    
    
    
    
    
    
    
    
    
    5,662Other accrued expenses
    
    
    8,285
    
    
    
    854
    
    
    
    
    
    
    
    9,139Current portion of long-term debt
    
    
    5,895
    
    
    
    10
    
    
    
    
    
    
    
    5,905Total current liabilities
    
    
    116,124
    
    
    
    5,881
    
    
    
    
    
    
    
    122,005Intercompany payable
    
    
    413
    
    
    
    32,652
    
    
    
    (33,065
    )
    
    
    Long-term debt
    
    
    390,539
    
    
    
    
    
    
    
    
    
    
    
    390,539Other noncurrent liabilities
    
    
    3,145
    
    
    
    
    
    
    
    
    
    
    
    3,145Total liabilities
    
    
    510,221
    
    
    
    38,533
    
    
    
    (33,065
    )
    
    
    515,689Commitments and contingenciesShareholders deficit:Capital in excess of par value
    
    
    13,474
    
    
    
    
    
    
    
    
    
    
    
    13,474Accumulated deficit
    
    
    (151,667
    )
    
    
    (747
    )
    
    
    
    
    
    
    (152,414
    )Accumulated other comprehensive income
    
    
    
    
    
    
    1,869
    
    
    
    
    
    
    
    1,869Total shareholders deficit
    
    
    (138,193
    )
    
    
    1,122
    
    
    
    
    
    
    
    (137,071
    )Total liabilities and shareholders deficit
    
    $
    372,028
    
    
    $
    39,655
    
    
    $
    (33,065
    )
    
    $
    378,618
 F-28




---



##### Table of Contents



Leiner Health Products Inc.
Consolidating Statement of Operations
(in thousands)
 Year Ended March 26, 2005Company &
    
    
    
    
    
    
    Eliminations andGuarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    615,481
    
    
    $
    74,007
    
    
    $
    (4,587
    )
    
    $
    684,901Cost of sales
    
    
    461,348
    
    
    
    56,110
    
    
    
    (4,587
    )
    
    
    512,871Gross profit
    
    
    154,133
    
    
    
    17,897
    
    
    
    
    
    
    
    172,030Marketing, selling and distribution expenses
    
    
    53,711
    
    
    
    4,821
    
    
    
    
    
    
    
    58,532General and administrative expenses
    
    
    30,031
    
    
    
    4,103
    
    
    
    
    
    
    
    34,134Research and development expenses
    
    
    5,299
    
    
    
    
    
    
    
    
    
    
    
    5,299Amortization of other intangibles
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Recapitalization expenses
    
    
    87,950
    
    
    
    32
    
    
    
    
    
    
    
    87,982Other operating expense
    
    
    2,377
    
    
    
    9
    
    
    
    
    
    
    
    2,386Operating income (loss)
    
    
    (25,485
    )
    
    
    8,932
    
    
    
    
    
    
    
    (16,553
    )Interest expense, net
    
    
    30,698
    
    
    
    1,648
    
    
    
    
    
    
    
    32,346Income (loss) before income taxes
    
    
    (56,183
    )
    
    
    7,284
    
    
    
    
    
    
    
    (48,899
    )Provision for (benefit from) income taxes
    
    
    (1,149
    )
    
    
    162
    
    
    
    
    
    
    
    (987
    )Net income (loss)
    
    
    (55,034
    )
    
    
    7,122
    
    
    
    
    
    
    
    (47,912
    )Accretion on preferred stock
    
    
    (39,212
    )
    
    
    
    
    
    
    
    
    
    
    (39,212
    )Net income (loss) attributable to common shareholders
    
    $
    (94,246
    )
    
    $
    7,122
    
    
    $
    
    
    
    $
    (87,124
    )
 F-29




---



##### Table of Contents



Leiner Health Products Inc.
Consolidating Statement of Operations
(in thousands)
 Year Ended March 25, 2006Company &
    
    
    
    
    
    
    Eliminations andGuarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    616,906
    
    
    $
    54,997
    
    
    $
    (2,342
    )
    
    $
    669,561Cost of sales
    
    
    493,534
    
    
    
    42,023
    
    
    
    (2,342
    )
    
    
    533,215Gross profit
    
    
    123,372
    
    
    
    12,974
    
    
    
    
    
    
    
    136,346Marketing, selling and distribution expenses
    
    
    54,194
    
    
    
    4,250
    
    
    
    
    
    
    
    58,444General and administrative expenses
    
    
    32,417
    
    
    
    3,308
    
    
    
    
    
    
    
    35,725Research and development expenses
    
    
    4,275
    
    
    
    276
    
    
    
    
    
    
    
    4,551Amortization of other intangibles
    
    
    638
    
    
    
    
    
    
    
    
    
    
    
    638Restructuring charges
    
    
    3,836
    
    
    
    
    
    
    
    
    
    
    
    3,836Other operating (income) expense
    
    
    1,192
    
    
    
    (79
    )
    
    
    
    
    
    
    1,113Operating income
    
    
    26,820
    
    
    
    5,219
    
    
    
    
    
    
    
    32,039Interest (income) expense, net
    
    
    36,979
    
    
    
    (110
    )
    
    
    
    
    
    
    36,869Income (loss) before income taxes
    
    
    (10,159
    )
    
    
    5,329
    
    
    
    
    
    
    
    (4,830
    )Benefit from income taxes
    
    
    (708
    )
    
    
    (354
    )
    
    
    
    
    
    
    (1,062
    )Net income (loss)
    
    $
    (9,451
    )
    
    $
    5,683
    
    
    $
    
    
    
    $
    (3,768
    )
 F-30




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##### Table of Contents



Leiner Health Products Inc.
Consolidating Statement of Operations
(in thousands)
 Year Ended March 31, 2007Company &
    
    
    
    
    
    
    Eliminations andGuarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    685,700
    
    
    $
    52,976
    
    
    $
    (3,440
    )
    
    $
    735,236Cost of sales
    
    
    538,107
    
    
    
    42,127
    
    
    
    (3,440
    )
    
    
    576,794Gross profit
    
    
    147,593
    
    
    
    10,849
    
    
    
    
    
    
    
    158,442Marketing, selling and distribution expenses
    
    
    60,037
    
    
    
    4,594
    
    
    
    
    
    
    
    64,631General and administrative expenses
    
    
    41,486
    
    
    
    3,331
    
    
    
    
    
    
    
    44,817Research and development expenses
    
    
    4,847
    
    
    
    276
    
    
    
    
    
    
    
    5,123Amortization of other intangibles
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    1,169Asset impairment
    
    
    16,507
    
    
    
    
    
    
    
    
    
    
    
    16,507Other operating (income) expense
    
    
    2,627
    
    
    
    (472
    )
    
    
    
    
    
    
    2,155Operating income
    
    
    20,920
    
    
    
    3,120
    
    
    
    
    
    
    
    24,040Interest (income) expense, net
    
    
    40,121
    
    
    
    (132
    )
    
    
    
    
    
    
    39,989Income (loss) before income taxes
    
    
    (19,201
    )
    
    
    3,252
    
    
    
    
    
    
    
    (15,949
    )Provision for (benefit from) income taxes
    
    
    5,468
    
    
    
    872
    
    
    
    
    
    
    
    6,340Net income (loss)
    
    $
    (24,669
    )
    
    $
    2,380
    
    
    $
    
    
    
    $
    (22,289
    )
 F-31




---



##### Table of Contents



Leiner Health Products Inc.
Consolidating Statement of Cash Flows
(in thousands)
 Year Ended March 26, 2005Company &Guarantor
    
    
    Non-GuarantorSubsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    (55,034
    )
    
    $
    7,122
    
    
    $
    (47,912
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation
    
    
    9,333
    
    
    
    2,615
    
    
    
    11,948Amortization of other intangibles and other contracts
    
    
    1,774
    
    
    
    
    
    
    
    1,774Amortization of deferred financing charges
    
    
    5,009
    
    
    
    436
    
    
    
    5,445Provision for doubtful accounts and allowances
    
    
    4,791
    
    
    
    
    
    
    
    4,791Provision for excess and obsolete inventory
    
    
    8,028
    
    
    
    
    
    
    
    8,028Deferred income taxes
    
    
    (1,176
    )
    
    
    
    
    
    
    (1,176
    )Gain on disposal of assets
    
    
    (52
    )
    
    
    
    
    
    
    (52
    )Stock option compensation expense
    
    
    5
    
    
    
    
    
    
    
    5Translation adjustment
    
    
    
    
    
    
    (2,805
    )
    
    
    (2,805
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,431
    )
    
    
    (2,033
    )
    
    
    (6,464
    )Inventories
    
    
    (24,417
    )
    
    
    (2,425
    )
    
    
    (26,842
    )Income tax receivable
    
    
    (1,827
    )
    
    
    98
    
    
    
    (1,729
    )Accounts payable
    
    
    9,287
    
    
    
    553
    
    
    
    9,840Accrued compensation and benefits
    
    
    (5,308
    )
    
    
    316
    
    
    
    (4,992
    )Customer allowances payable
    
    
    614
    
    
    
    (15
    )
    
    
    599Accrued interest
    
    
    8,184
    
    
    
    (213
    )
    
    
    7,971Other accrued expenses
    
    
    2,623
    
    
    
    239
    
    
    
    2,862Other
    
    
    (817
    )
    
    
    (79
    )
    
    
    (896
    )Net cash provided by (used in) operating activities
    
    
    (43,414
    )
    
    
    3,809
    
    
    
    (39,605
    )Investing activitiesAdditions to property, plant and equipment
    
    
    (16,361
    )
    
    
    (1,630
    )
    
    
    (17,991
    )(Increase) decrease in other noncurrent assets
    
    
    (2,952
    )
    
    
    8
    
    
    
    (2,944
    )Net cash used in investing activities
    
    
    (19,313
    )
    
    
    (1,622
    )
    
    
    (20,935
    )Financing activitiesBorrowings under bank term credit facility
    
    
    240,000
    
    
    
    
    
    
    
    240,000Payments under bank term credit facility
    
    
    (1,200
    )
    
    
    
    
    
    
    (1,200
    )Payments under old credit facility
    
    
    (140,508
    )
    
    
    (19,280
    )
    
    
    (159,788
    )Issuance of senior subordinated debt
    
    
    150,000
    
    
    
    
    
    
    
    150,000Increase in deferred financing charges
    
    
    (15,343
    )
    
    
    (410
    )
    
    
    (15,753
    )Capital contribution from parent
    
    
    251,500
    
    
    
    
    
    
    
    251,500Repurchase and retirement of preferred stock
    
    
    (92,194
    )
    
    
    
    
    
    
    (92,194
    )Repurchase and retirement of common stock and common equity rights
    
    
    (328,380
    )
    
    
    
    
    
    
    (328,380
    )Net payments on other long-term debt
    
    
    (2,194
    )
    
    
    (1,124
    )
    
    
    (3,318
    )Net cash provided by (used in) financing activities
    
    
    61,681
    
    
    
    (20,814
    )
    
    
    40,867Intercompany
    
    
    (12,885
    )
    
    
    12,885
    
    
    
    Effect of exchange rate changes
    
    
    
    
    
    
    2,800
    
    
    
    2,800Net decrease in cash and cash equivalents
    
    
    (13,931
    )
    
    
    (2,942
    )
    
    
    (16,873
    )Cash and cash equivalents at beginning of period
    
    
    25,601
    
    
    
    8,223
    
    
    
    33,824Cash and cash equivalents at end of period
    
    $
    11,670
    
    
    $
    5,281
    
    
    $
    16,951
 F-32




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##### Table of Contents



Leiner Health Products Inc.
Consolidating Statement of Cash Flows
(in thousands)
 Year Ended March 25, 2006Company &Guarantor
    
    
    Non-GuarantorSubsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    (9,451
    )
    
    $
    5,683
    
    
    $
    (3,768
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    12,963
    
    
    
    2,272
    
    
    
    15,235Amortization of other intangibles and other contracts
    
    
    1,399
    
    
    
    
    
    
    
    1,399Amortization of deferred financing charges
    
    
    1,866
    
    
    
    
    
    
    
    1,866Provision for doubtful accounts and allowances
    
    
    5,153
    
    
    
    
    
    
    
    5,153Provision for excess and obsolete inventory
    
    
    10,712
    
    
    
    1,718
    
    
    
    12,430Deferred income taxes
    
    
    3,424
    
    
    
    (2,055
    )
    
    
    1,369(Gain) loss on disposal of assets
    
    
    30
    
    
    
    (24
    )
    
    
    6Stock option compensation expense
    
    
    20
    
    
    
    
    
    
    
    20Translation adjustment
    
    
    
    
    
    
    1,360
    
    
    
    1,360Changes in operating assets and liabilities:Accounts receivable
    
    
    5,993
    
    
    
    4,115
    
    
    
    10,108Inventories
    
    
    (13,224
    )
    
    
    6,676
    
    
    
    (6,548
    )Income tax receivable
    
    
    2,254
    
    
    
    775
    
    
    
    3,029Accounts payable
    
    
    (22,762
    )
    
    
    (6,363
    )
    
    
    (29,125
    )Accrued compensation and benefits
    
    
    727
    
    
    
    (425
    )
    
    
    302Customer allowances payable
    
    
    1,319
    
    
    
    (409
    )
    
    
    910Accrued interest
    
    
    1,346
    
    
    
    (6
    )
    
    
    1,340Other accrued expenses
    
    
    2,439
    
    
    
    345
    
    
    
    2,784Other
    
    
    1,909
    
    
    
    (478
    )
    
    
    1,431Net cash provided by operating activities
    
    
    6,117
    
    
    
    13,184
    
    
    
    19,301Investing activitiesAdditions to property, plant and equipment
    
    
    (12,101
    )
    
    
    (1,143
    )
    
    
    (13,244
    )Acquisition of business
    
    
    (22,922
    )
    
    
    
    
    
    
    (22,922
    )Proceeds from sale of fixed assets
    
    
    625
    
    
    
    
    
    
    
    625(Increase) decrease in other noncurrent assets
    
    
    (1,097
    )
    
    
    1,037
    
    
    
    (60
    )Net cash used in investing activities
    
    
    (35,495
    )
    
    
    (106
    )
    
    
    (35,601
    )Financing activitiesNet borrowings under bank revolving credit facility
    
    
    5,000
    
    
    
    
    
    
    
    5,000Payments under bank term credit facility
    
    
    (2,400
    )
    
    
    
    
    
    
    (2,400
    )Increase in deferred financing charges
    
    
    (760
    )
    
    
    
    
    
    
    (760
    )Capital contribution from parent
    
    
    13,000
    
    
    
    
    
    
    
    13,000Net payments on other long-term debt
    
    
    (2,786
    )
    
    
    (1,074
    )
    
    
    (3,860
    )Net cash provided by (used in) financing activities
    
    
    12,054
    
    
    
    (1,074
    )
    
    
    10,980Intercompany
    
    
    9,420
    
    
    
    (9,420
    )
    
    
    Effect of exchange rate changes
    
    
    
    
    
    
    (3,900
    )
    
    
    (3,900
    )Net decrease in cash and cash equivalents
    
    
    (7,904
    )
    
    
    (1,316
    )
    
    
    (9,220
    )Cash and cash equivalents at beginning of period
    
    
    11,670
    
    
    
    5,281
    
    
    
    16,951Cash and cash equivalents at end of period
    
    $
    3,766
    
    
    $
    3,965
    
    
    $
    7,731
 F-33




---



##### Table of Contents



Leiner Health Products Inc.
Consolidating Statement of Cash Flows
(in thousands)
 Year Ended March 31, 2007Company &Guarantor
    
    
    Non-GuarantorSubsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    (24,669
    )
    
    $
    2,380
    
    
    $
    (22,289
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    14,823
    
    
    
    1,478
    
    
    
    16,301Amortization of other intangibles and other contracts
    
    
    1,992
    
    
    
    
    
    
    
    1,992Amortization of deferred financing charges
    
    
    1,941
    
    
    
    
    
    
    
    1,941Asset impairment
    
    
    16,507
    
    
    
    
    
    
    
    16,507Provision for doubtful accounts and allowances
    
    
    3,537
    
    
    
    (170
    )
    
    
    3,367Provision for excess and obsolete inventory
    
    
    46,059
    
    
    
    807
    
    
    
    46,866Deferred income taxes
    
    
    2,289
    
    
    
    665
    
    
    
    2,954Gain on disposal of assets
    
    
    (28
    )
    
    
    (7
    )
    
    
    (35
    )Stock option compensation expense
    
    
    25
    
    
    
    
    
    
    
    25Translation adjustment
    
    
    
    
    
    
    (315
    )
    
    
    (315
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    3,400
    
    
    
    (101
    )
    
    
    3,299Inventories
    
    
    (16,055
    )
    
    
    459
    
    
    
    (15,596
    )Income tax receivable
    
    
    (1,556
    )
    
    
    (1,974
    )
    
    
    (3,530
    )Accounts payable
    
    
    7,603
    
    
    
    602
    
    
    
    8,205Accrued compensation and benefits
    
    
    (1,818
    )
    
    
    80
    
    
    
    (1,738
    )Customer allowances payable
    
    
    (3,205
    )
    
    
    (174
    )
    
    
    (3,379
    )Accrued interest
    
    
    (4,708
    )
    
    
    (68
    )
    
    
    (4,776
    )Other accrued expenses
    
    
    (4,037
    )
    
    
    (278
    )
    
    
    (4,315
    )Other
    
    
    (1,030
    )
    
    
    87
    
    
    
    (943
    )Net cash provided by operating activities
    
    
    41,070
    
    
    
    3,471
    
    
    
    44,541Investing activitiesAdditions to property, plant and equipment
    
    
    (13,485
    )
    
    
    (1,861
    )
    
    
    (15,346
    )Proceeds from sale of fixed assets
    
    
    146
    
    
    
    16
    
    
    
    162Decrease in other noncurrent assets
    
    
    (4,074
    )
    
    
    
    
    
    
    (4,074
    )Net cash used in investing activities
    
    
    (17,413
    )
    
    
    (1,845
    )
    
    
    (19,258
    )Financing activitiesNet borrowings under bank revolving credit facility
    
    
    (5,000
    )
    
    
    
    
    
    
    (5,000
    )Payments under bank term credit facility
    
    
    (3,000
    )
    
    
    
    
    
    
    (3,000
    )Repurchase of restricted stock
    
    
    (47
    )
    
    
    
    
    
    
    (47
    )Proceeds from exercise of stock options
    
    
    7
    
    
    
    
    
    
    
    7Net payments on capital leases and other long-term debt
    
    
    (2,539
    )
    
    
    (11
    )
    
    
    (2,550
    )Net cash used in financing activities
    
    
    (10,579
    )
    
    
    (11
    )
    
    
    (10,590
    )Intercompany
    
    
    662
    
    
    
    (662
    )
    
    
    Effect of exchange rate changes
    
    
    
    
    
    
    293
    
    
    
    293Net increase in cash and cash equivalents
    
    
    13,740
    
    
    
    1,246
    
    
    
    14,986Cash and cash equivalents at beginning of period
    
    
    3,766
    
    
    
    3,965
    
    
    
    7,731Cash and cash equivalents at end of period
    
    $
    17,506
    
    
    $
    5,211
    
    
    $
    22,717
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16. Composition of Certain Financial Statement Items
 March 25, 2006
    
    
    March 31, 2007(in thousands)Inventories:Raw materials, bulk
vitamins and packaging materials
    
    
    
    
    
    $
    36,026
    
    
    $
    22,181Work-in-process
    
    
    
    
    
    
    57,972
    
    
    
    59,721Finished products
    
    
    
    
    
    
    71,716
    
    
    
    52,737$
    165,714
    
    
    $
    134,639Depreciable Lives(years)Property, plant and equipment:Land
    
    
    
    
    
    $
    727
    
    
    $
    730Buildings and
improvements
    
    
    31 - 40
    
    
    
    12,465
    
    
    
    12,644Leasehold
improvements
    
    
    7 - 40
    
    
    
    29,777
    
    
    
    25,679Machinery and
equipment
    
    
    3 - 20
    
    
    
    134,365
    
    
    
    146,030Furniture and
fixtures
    
    
    3 - 10
    
    
    
    3,200
    
    
    
    3,204180,534
    
    
    
    188,287Less accumulated
depreciation and
amortization
    
    
    
    
    
    
    (107,916
    )
    
    
    (122,174
    )$
    72,618
    
    
    $
    66,113
 Year EndedMarch 26, 2005
    
    
    March 25, 2006
    
    
    March 31, 2007(in thousands)Other operating expense(Gain) loss on disposal of assets
    
    $
    (52
    )
    
    $
    6
    
    
    $
    (35
    )Management fees (Note 10)
    
    
    3,258
    
    
    
    1,262
    
    
    
    2,771Other
    
    
    (820
    )
    
    
    (155
    )
    
    
    (581
    )$
    2,386
    
    
    $
    1,113
    
    
    $
    2,155
 17. Supplementary Cash Flow Information
 Year EndedMarch 26,
    
    March 25,
    
    March 31,2005
    
    2006
    
    2007(in thousands)Cash paid during the year for:Interest
    
    $
    18,917
    
    
    $
    33,781
    
    
    $
    42,953Income taxes, net of refunds received
    
    
    (30
    )
    
    
    (7,259
    )
    
    
    8,473Non cash increase in capital leases
    
    
    285
    
    
    
    7,359
    
    
    
    4,376
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18. Quarterly Results (unaudited)
  Quarter EndedMarch 25, 2006
    
    December 24,
    
    September 24,(1)
    
    2005(1)
    
    2005
    
    June 25, 2005Net sales
    
    $
    173,796
    
    
    $
    181,243
    
    
    $
    168,935
    
    
    $
    145,587Gross profit
    
    
    42,585
    
    
    
    41,961
    
    
    
    29,497
    
    
    
    22,303Net income (loss)
    
    
    363
    
    
    
    1,497
    
    
    
    (1,433
    )
    
    
    (4,195
    )
 Quarter EndedMarch 31, 2007
    
    December 30,
    
    September 30,(2)
    
    2006
    
    2006
    
    June 24, 2006Net sales
    
    $
    175,239
    
    
    $
    198,121
    
    
    $
    197,966
    
    
    $
    163,910Gross profit
    
    
    16,184
    
    
    
    51,339
    
    
    
    50,990
    
    
    
    39,928Net income (loss)
    
    
    (39,199
    )
    
    
    8,857
    
    
    
    6,066
    
    
    
    1,987
 
 (1)
    
    During the third and fourth quarter of fiscal year 2006, the Company recorded $1.3 million
and $2.5 million, respectively, in charges related to restructuring.(2)
    
    During the fourth quarter of fiscal year 2007, the Company recorded $29.6 million in inventory
reserve and $16.5 million in asset impairment charges related to the restructuring and
consolidation plan. 19. Subsequent Event
  F-36




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##### Table of Contents




    
    asset relocation and related costs of approximately $5.0 to $6.0 million,
    
    severance, relocation and other employee related costs of approximately $9.0 to $11.0 million, and
    
    facility consolidation and other contractual costs of approximately $8.0 to $10.0 million.
  F-37




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##### Table of Contents



SCHEDULE II
 LEINER HEALTH PRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
 Balance at
    
    Charged to Costs and
    
    
    
    
    
    Balance at End ofBeginning of Period
    
    Expenses
    
    Deductions
    
    PeriodYear ended March 26, 2005:Accounts receivable
allowances
    
    $
    2,970
    
    
    $
    4,791
    
    
    $
    4,648
    
    
    $
    3,113Inventory valuation
reserve
    
    
    11,512
    
    
    
    8,028
    
    
    
    8,550
    
    
    
    10,990Year ended March 25, 2006:Accounts receivable
allowances
    
    $
    3,113
    
    
    $
    5,153
    
    
    $
    4,721
    
    
    $
    3,545Inventory valuation
reserve
    
    
    10,990
    
    
    
    14,865
    
    
    
    8,055
    
    
    
    17,800Year ended March 31, 2007:Accounts receivable
allowances
    
    $
    3,545
    
    
    $
    3,367
    
    
    $
    4,898
    
    
    $
    2,014Inventory valuation
reserve
    
    
    17,800
    
    
    
    46,866
    
    
    
    17,921
    
    
    
    46,745
 S-1




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Description
    
    Cross Reference2.1
    
    Recapitalization Agreement and Plan of Merger, dated
April 15, 2004, between Leiner Health Products Inc. and
Leiner Merger Corporation.
    
    Filed as Exhibit
2.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.2.2
    
    First Amendment to the Recapitalization Agreement and
Plan of Merger, dated May 26, 2004, between Leiner
Health Products Inc. and Leiner Merger Corporation.
    
    Filed as Exhibit
2.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.2.3
    
    Amendment and Restated Asset Purchase and Sale
Agreement dated as of September 9, 2005, among Leiner
Health Products L.L.C. and Pharmaceutical Formulations,
Inc.
    
    Filed as Exhibit
10.11 to the
Quarterly Report on
Form 10-Q of Leiner
Health Products
Inc. for the
Quarter Ended
September 24, 2005,
and incorporated
herein by
reference.3.1
    
    Amended and Restated Certificate of Incorporation of
Issuer.
    
    Filed as Exhibit
3.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.2
    
    Bylaws of Issuer.
    
    Filed as Exhibit
3.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.3
    
    Certificate of Formation of Leiner Health Products, LLC.
    
    Filed as Exhibit
3.3 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.4
    
    Limited Liability Company Agreement of Leiner Health
Products, LLC.
    
    Filed as Exhibit
3.4 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.5
    
    Certificate of Incorporation of Leiner Health Services
Corp. and certificates of amendment.
    
    Filed as Exhibit
3.5 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.3.6
    
    Bylaws of Leiner Health Services Corp.
    
    Filed as Exhibit
3.6 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.4.1
    
    Indenture, dated as of May 27, 2004, among Leiner
Merger Corporation, the companies named therein as
guarantors, and U.S. Bank National Association, as
Trustee.
    
    Filed as Exhibit
4.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.4.2
    
    Supplemental Indenture, dated as of May 27, 2004, among
the Issuer, Leiner Health Services Corp. and Leiner
Health Products, LLC, as Guarantors, and U.S. Bank
National Association, as Trustee.
    
    Filed as Exhibit
4.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.1
    
    Credit Agreement, dated May 27, 2004, among Issuer,
guarantors party thereto, UBSAG, Stamford Branch, as
administrative agent and collateral agent, UBS
Securities LLC and Morgan Stanley Senior Funding, Inc.,
as joint lead arrangers and joint book runners, Morgan
Stanley Senior Funding, Inc., as syndication agent,
Credit Suisse First Boston, as documentation agent, UBS
Loan Finance LLC, as swingline lender, and the other
financial institutions named therein.
    
    Filed as Exhibit
10.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.2
    
    Stockholders Agreement, dated May 27, 2004, among LHP
Holding Corp. (Parent) and its stockholders named
therein.
    
    Filed as Exhibit
10.2 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.3
    
    Amended and Restated Severance Benefit Agreement, dated
as of July 11, 2002, between the Issuer and Gale
Bensussen.
    
    Filed as Exhibit
10.3 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.4
    
    Amended and Restated Severance Benefit Agreement, dated
as of July 1, 2002, between the Issuer and Robert
Kaminski.*
    
    Filed as Exhibit
10.4 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.5
    
    Severance Benefit Agreement, dated as of November 21,
1991, between P. Leiner Nutritional Products, Inc. and
Kevin J. Lanigan and Assignment and Assumption
Agreement, dated April 11, 2002, between the Issuer and
Leiner Health Products, LLC.*
    
    Filed as Exhibit
10.5 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.6
    
    Employment Agreement, dated January 28, 2002, between
    
    Filed as Exhibit
10.6 to the
Registration Statement on




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Cross Referencethe Issuer and Robert K. Reynolds and Assignment and
Assumption Agreement, dated February 24, 2004 between
the Issuer and Leiner Health Products, LLC.*
    
    Form
S-4 and
incorporated herein
by reference.10.7
    
    Employment Offer Letter dated July 13, 2006 between the
Issuer and Kevin McDonnell.*
    
    Filed herewith10.8
    
    Consulting Agreement, dated as of May 27, 2004, the
Issuer, Leiner Health Products, LLC, LHP Holding Corp.,
North Castle Partners, L.L.C. and GGC Administration,
LLC.
    
    Filed as Exhibit
10.8 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.10.9
    
    Amendment No. 1 and Acknowledgement dated September 23,
2005 to the Credit Agreement dated May 27, 2004 between
Issuer and the senior lenders.
    
    Filed as Exhibit
10.11 to the
Quarterly Report on
Form 10-Q of Leiner
Health Products
Inc. for the
Quarter Ended
September 24, 2005,
and incorporated
herein by
reference.10.10
    
    Amendment No. 2 and Waiver dated June 22, 2007
to the Credit Agreement dated May 27, 2004, as amended, between
Issuer and the certain lenders.
    
    Filed herewith14.1
    
    Code of Ethics.
    
    Filed as Exhibit
14.1 to the
Companys annual
report Form 10-K
for the year ended
March 26, 2005.21.1
    
    Subsidiaries of Registrant.
    
    Filed as Exhibit
21.1 to the
Registration
Statement on Form
S-4 and
incorporated herein
by reference.31.1
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
    
    Filed herewith.31.2
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
    
    Filed herewith.32.1
    
    Certification of Chief Executive Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
    
    Filed herewith.32.2
    
    Certification of Chief Financial Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
    
    Filed herewith.
 
 *
    
    Indicates a management contract or compensatory plan or arrangement