##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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
    
    95-3431709(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
 N/A
 (Former name or former address, if changed since last report)
 o þ
 o þ
  o o þ
 o þ
 o þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 þ o
 APPLICABLE ONLY TO CORPORATE ISSUERS




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##### Table of Contents



LEINER HEALTH PRODUCTS INC.
Report on Form 10-Q
For the Quarter Ended June 30, 2007
 Table of Contents
 PART I.Financial InformationITEM 1.Financial Statements
    
    
    3Condensed Consolidated Balance Sheets at June 30, 2007 (Unaudited) and March 31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited)  For the three
months ended June 30, 2007 and June 24, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)  For the three
months ended June 30, 2007 and June 24, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20ITEM 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    29ITEM 4.Controls and Procedures
    
    
    30PART II.Other InformationITEM 1. Legal Proceedings
    
    
    31ITEM 1A. Risk Factors
    
    
    32ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32ITEM 3. Defaults Upon Senior Securities
    
    
    32ITEM 4.Submission of Matters to a Vote of Security Holders
    
    
    32ITEM 5.Other Information
    
    
    32ITEM 6.Exhibits
    
    
    32SIGNATURES
    
    
    33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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##### Table of Contents



PART I. Financial Information
 
 Item 1. Financial Statements
  
 
 June 30, 2007
    
    
    March 31, 2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,333
    
    
    $
    22,717Accounts receivable, net of allowances of $1,505 and $2,014 at June 30, 2007
and March 31, 2007, respectively
    
    
    46,473
    
    
    
    66,600Inventories
    
    
    150,806
    
    
    
    134,639Income tax receivable
    
    
    2,109
    
    
    
    2,565Prepaid expenses and other current assets
    
    
    8,215
    
    
    
    7,982Total current assets
    
    
    215,936
    
    
    
    234,503Property, plant and equipment, net
    
    
    63,735
    
    
    
    66,113Goodwill
    
    
    58,557
    
    
    
    58,284Other noncurrent assets
    
    
    21,474
    
    
    
    19,718Total assets
    
    $
    359,702
    
    
    $
    378,618LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    80,732
    
    
    $
    85,875Accrued compensation and benefits
    
    
    9,396
    
    
    
    8,271Customer allowances payable
    
    
    5,680
    
    
    
    7,153Accrued interest
    
    
    1,492
    
    
    
    5,662Other accrued expenses
    
    
    10,886
    
    
    
    9,139Current portion of long-term debt
    
    
    5,996
    
    
    
    5,905Total current liabilities
    
    
    114,182
    
    
    
    122,005Long-term debt
    
    
    398,726
    
    
    
    390,539Other noncurrent liabilities
    
    
    8,892
    
    
    
    3,145Total liabilities
    
    
    521,800
    
    
    
    515,689Commitments and contingenciesShareholders DeficitCommon stock, $0.01 par value; 3,000,000 shares authorized, 1,000 shares issued
and outstanding at June 30, 2007 and March 31, 2007
    
    
    
    
    
    
    Capital in excess of par value
    
    
    13,480
    
    
    
    13,474Accumulated deficit
    
    
    (180,321
    )
    
    
    (152,414
    )Accumulated other comprehensive income
    
    
    4,743
    
    
    
    1,869Total shareholders deficit
    
    
    (162,098
    )
    
    
    (137,071
    )Total liabilities and shareholders deficit
    
    $
    359,702
    
    
    $
    378,618
 See accompanying notes to condensed consolidated financial statements.
 3




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Three months endedJune 30, 2007
    
    
    June 24, 2006Net sales
    
    $
    107,444
    
    
    $
    163,910Cost of sales
    
    
    86,300
    
    
    
    123,982Gross profit
    
    
    21,144
    
    
    
    39,928Marketing, selling and distribution
expenses
    
    
    12,953
    
    
    
    15,194General and administrative
expenses
    
    
    15,744
    
    
    
    9,665Research and development
expenses
    
    
    1,458
    
    
    
    1,081Amortization of other
intangibles
    
    
    91
    
    
    
    282Restructuring
charges
    
    
    7,315
    
    
    
    Other operating expense
(income)
    
    
    
    
    
    
    (67
    )Operating income
(loss)
    
    
    (16,417
    )
    
    
    13,773Interest expense, net
    
    
    9,639
    
    
    
    10,045Income (loss) before income
taxes
    
    
    (26,056
    )
    
    
    3,728Provision for income taxes
    
    
    1,431
    
    
    
    1,741Net income (loss)
    
    $
    (27,487
    )
    
    $
    1,987
 See accompanying notes to condensed consolidated financial statements.
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Three months endedJune 30, 2007
    
    
    June 24, 2006Operating activitiesNet income (loss)
    
    $
    (27,487
    )
    
    $
    1,987Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation
    
    
    3,820
    
    
    
    3,891Amortization of other intangibles and other
contracts
    
    
    171
    
    
    
    427Amortization of deferred financing charges
    
    
    485
    
    
    
    485Restructuring charges
    
    
    7,315
    
    
    
    Provision for doubtful accounts and allowances
    
    
    419
    
    
    
    639Provision for excess and obsolete inventory
    
    
    2,220
    
    
    
    5,991Deferred income taxes
    
    
    (1,096
    )
    
    
    Gain (loss) on disposal of assets
    
    
    51
    
    
    
    (4
    )Stock option compensation expense
    
    
    6
    
    
    
    7Translation adjustment
    
    
    (2,882
    )
    
    
    (1,154
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    20,144
    
    
    
    11,699Inventories
    
    
    (17,172
    )
    
    
    (24,774
    )Income tax receivable
    
    
    539
    
    
    
    1,832Accounts payable
    
    
    (5,397
    )
    
    
    2,965Accrued compensation and benefits
    
    
    1,021
    
    
    
    (1,437
    )Customer allowances payable
    
    
    (1,525
    )
    
    
    927Accrued interest
    
    
    (4,170
    )
    
    
    (3,618
    )Other accrued expenses
    
    
    (5,644
    )
    
    
    (1,606
    )Other current assets
    
    
    558
    
    
    
    752Other liabilities
    
    
    5,748
    
    
    
    Net cash used in operating activities
    
    
    (22,876
    )
    
    
    (991
    )Investing activitiesAdditions to property, plant and equipment
    
    
    (1,205
    )
    
    
    (3,299
    )Increase in other noncurrent assets
    
    
    (1,053
    )
    
    
    (497
    )Net cash used in investing activities
    
    
    (2,258
    )
    
    
    (3,796
    )Financing activitiesNet borrowings under bank revolving credit facility
    
    
    10,000
    
    
    
    5,000Payments under bank term credit facility
    
    
    (600
    )
    
    
    (600
    )Increase in deferred financing charges
    
    
    (739
    )
    
    
    Proceeds from the exercise of stock options
    
    
    
    
    
    
    4Net payments on capital leases and other long-term debt
    
    
    (1,234
    )
    
    
    (1,027
    )Net cash provided by financing activities
    
    
    7,427
    
    
    
    3,377Effect of exchange rate changes
    
    
    3,323
    
    
    
    1,218Net decrease in cash and cash equivalents
    
    
    (14,384
    )
    
    
    (192
    )Cash and cash equivalents at beginning of period
    
    
    22,717
    
    
    
    7,731Cash and cash equivalents at end of period
    
    $
    8,333
    
    
    $
    7,539
 See accompanying notes to condensed consolidated financial statements.
 5




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1. Basis of Presentation
 General
       2. Fiscal Year
  3. Recent Accounting Pronouncements
 Fair Value Measurements (SFAS 157)
 6




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The Fair Value Option for Financial Assets and
Liabilities  Including an amendment of FASB Statement No. 115 (SFAS 159)
 4. Fair Values of Debt Instruments
  June 30, 2007Total
    
    Fair ValueVariable rate ($US)
    
    $
    242,800
    
    
    $
    242,800Average interest rate
    
    
    9.80
    %Fixed rate ($US)
    
    $
    150,000
    
    
    $
    142,688Average interest rate
    
    
    11.00
    %
  5. Comprehensive Income (loss)
  Three months endedJune 30, 2007
    
    
    June 24, 2006Net income (loss)
    
    $
    (27,487
    )
    
    $
    1,987Foreign currency translation adjustment
    
    
    2,874
    
    
    
    1,154Comprehensive income (loss)
    
    $
    (24,613
    )
    
    $
    3,141
 6. Restructuring Charges
  7




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Costs forEmployeesTerminatedBalance at March 31, 2007
    
    $
    57New charges
    
    
    7,315Cash payments
    
    
    (691
    )Balance at June 30, 2007
    
    $
    6,681
 7. Inventories
  June 30, 2007
    
    
    March 31, 2007Inventories:Raw materials, bulk vitamins and
packaging materials
    
    $
    31,159
    
    
    $
    22,181Work-in-process
    
    
    62,011
    
    
    
    59,721Finished products
    
    
    57,636
    
    
    
    52,737$
    150,806
    
    
    $
    134,639
 8. Debt
  June 30, 2007
    
    
    March 31, 2007Credit Facility:Revolving facility
    
    $
    10,000
    
    
    $
    Term facility
    
    
    232,800
    
    
    
    233,400Total credit facility
    
    
    242,800
    
    
    
    233,400Senior subordinated notes
    
    
    150,000
    
    
    
    150,000Capital lease obligations
    
    
    8,822
    
    
    
    9,444Industrial development revenue bond loan
    
    
    3,100
    
    
    
    3,600404,722
    
    
    
    396,444Less current portion
    
    
    (5,996
    )
    
    
    (5,905
    )Total long-term debt
    
    $
    398,726
    
    
    $
    390,539
  9. Income Taxes
   8




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10. Employee Benefits
 2004 Option Plan
  Outstanding
    
    ExercisableAverage
    
    Weighted
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    AverageNumber of
    
    Contractual
    
    Exercise
    
    Number of
    
    ExerciseExercise price
    
    Shares
    
    Life (years)
    
    Price
    
    Shares
    
    Price$2.37
    
    109,558
    
    8.52
    
    $2.37
    
    24,279
    
    $2.37
   Restricted Stock Plan
  Outstanding
    
    First Call Rights ReleasedAverage
    
    Weighted
    
    
    
    WeightedRemaining Call
    
    Average
    
    
    
    AverageNumber of
    
    Right Life
    
    Purchase
    
    Number of
    
    PurchasePurchase Price
    
    Shares
    
    (years)
    
    Price
    
    Shares
    
    Price$2.37
    
    176,108
    
    3.25
    
    $2.37
    
    132,081
    
    $2.37
  11. Contingencies
  Product Liability
  10




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Breach of OTC Supply Contracts
    Breach of Raw Material Supply Agreement
   Other Civil Litigation
  11




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12. Supplemental Cash Flow Information
 June 30, 2007
    
    June 24, 2006(in thousands)Cash paid during the three months ended:Interest
    
    $
    13,445
    
    
    $
    13,237Income taxes, net of refunds received
    
    
    422
    
    
    
    (96
    )Non cash increase in capital leases
    
    
    111
    
    
    
    
 13. Business Segment Information
  12




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ConsolidatedLeiner U.S.
    
    Vita Health
    
    TotalsThree months ended June 30, 2007:Net sales to external customers
    
    $
    95,458
    
    
    $
    11,986
    
    
    $
    107,444Intersegment sales
    
    
    327
    
    
    
    (264
    )
    
    
    Depreciation and amortization, excluding deferred financing
charges
    
    
    3,637
    
    
    
    354
    
    
    
    3,991Segment operating income (loss)
    
    
    (17,072
    )
    
    
    655
    
    
    
    (16,417
    )Interest expense, net (1)
    
    
    9,700
    
    
    
    (61
    )
    
    
    9,639Income tax expense
    
    
    1,188
    
    
    
    243
    
    
    
    1,431Segment assets
    
    
    316,018
    
    
    
    43,684
    
    
    
    359,702Additions to property, plant and equipment
    
    
    740
    
    
    
    465
    
    
    
    1,205Three months ended June 24, 2006:Net sales to external customers
    
    $
    152,032
    
    
    $
    11,878
    
    
    $
    163,910Intersegment sales
    
    
    474
    
    
    
    588
    
    
    
    Depreciation and amortization, excluding deferred financing
charges
    
    
    3,917
    
    
    
    401
    
    
    
    4,318Segment operating income
    
    
    13,207
    
    
    
    566
    
    
    
    13,773Interest expense (income), net (1)
    
    
    10,143
    
    
    
    (98
    )
    
    
    10,045Income tax expense
    
    
    1,300
    
    
    
    441
    
    
    
    1,741Segment assets
    
    
    383,088
    
    
    
    38,876
    
    
    
    421,964Additions to property, plant and equipment
    
    
    3,004
    
    
    
    295
    
    
    
    3,299
 
 (1)
    
    Interest expense, net includes the amortization of deferred financing charges.  Three months endedJune 30, 2007
    
    %
    
    June 24, 2006
    
    %VMS products
    
    $
    87,542
    
    
    
    81
    %
    
    $
    100,048
    
    
    
    61
    %OTC products (1)
    
    
    7,166
    
    
    
    7
    %
    
    
    50,040
    
    
    
    31
    %Contract manufacturing services/Other
    
    
    12,736
    
    
    
    12
    %
    
    
    13,822
    
    
    
    8
    %Total
    
    $
    107,444
    
    
    
    100
    %
    
    $
    163,910
    
    
    
    100
    %
 
 (1)
    
    OTC product sales for the three months ended June 30, 2007 primarily represent sales from the
Companys Canadian operations.
 14. Financial information for subsidiary guarantor and subsidiary non-guarantor
  13




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June 30, 2007Company &
    
    
    Non-
    
    
    Eliminations andGuarantor
    
    
    Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,032
    
    
    $
    4,301
    
    
    $
    
    
    
    $
    8,333Accounts receivable, net of allowances
    
    
    41,112
    
    
    
    5,361
    
    
    
    
    
    
    
    46,473Inventories
    
    
    133,660
    
    
    
    17,146
    
    
    
    
    
    
    
    150,806Income tax receivable
    
    
    904
    
    
    
    1,205
    
    
    
    
    
    
    
    2,109Prepaid expenses and other current assets
    
    
    6,629
    
    
    
    1,586
    
    
    
    
    
    
    
    8,215Total current assets
    
    
    186,337
    
    
    
    29,599
    
    
    
    
    
    
    
    215,936Intercompany receivable
    
    
    33,061
    
    
    
    100
    
    
    
    (33,161
    )
    
    
    Property, plant and equipment, net
    
    
    54,314
    
    
    
    9,421
    
    
    
    
    
    
    
    63,735Goodwill
    
    
    55,019
    
    
    
    3,538
    
    
    
    
    
    
    
    58,557Other noncurrent assets
    
    
    20,448
    
    
    
    1,026
    
    
    
    
    
    
    
    21,474Total assets
    
    $
    349,179
    
    
    $
    43,684
    
    
    $
    (33,161
    )
    
    $
    359,702LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    77,610
    
    
    $
    3,122
    
    
    $
    
    
    
    $
    80,732Accrued compensation and benefits
    
    
    8,195
    
    
    
    1,201
    
    
    
    
    
    
    
    9,396Customer allowances payable
    
    
    4,872
    
    
    
    808
    
    
    
    
    
    
    
    5,680Accrued interest
    
    
    1,492
    
    
    
    
    
    
    
    
    
    
    
    1,492Other accrued expenses
    
    
    9.871
    
    
    
    1,015
    
    
    
    
    
    
    
    10.886Current portion of long-term debt
    
    
    5,988
    
    
    
    8
    
    
    
    
    
    
    
    5,996Total current liabilities
    
    
    108,028
    
    
    
    6,154
    
    
    
    
    
    
    
    114,182Intercompany payable
    
    
    100
    
    
    
    33,061
    
    
    
    (33,161
    )
    
    
    Long-term debt
    
    
    398,726
    
    
    
    
    
    
    
    
    
    
    
    398,726Other noncurrent liabilities
    
    
    8,892
    
    
    
    
    
    
    
    
    
    
    
    8,892Total liabilities
    
    
    515,746
    
    
    
    39,215
    
    
    
    (33,161
    )
    
    
    521,800Shareholders deficit:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par value
    
    
    13,480
    
    
    
    
    
    
    
    
    
    
    
    13,480Accumulated deficit
    
    
    (180,047
    )
    
    
    (274
    )
    
    
    
    
    
    
    (180,321
    )Accumulated other comprehensive income
    
    
    
    
    
    
    4,743
    
    
    
    
    
    
    
    4,743Total shareholders deficit
    
    
    (166,567
    )
    
    
    4,469
    
    
    
    
    
    
    
    (162,098
    )Total liabilities and shareholders deficit
    
    $
    349,179
    
    
    $
    43,684
    
    
    $
    (33,161
    )
    
    $
    359,702
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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
 15




---



##### Table of Contents



Three months ended June 30, 2007Parent &
    
    
    Non-
    
    
    Eliminations andGaurantor
    
    
    Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    95,785
    
    
    $
    11,722
    
    
    $
    (63
    )
    
    $
    107,444Cost of sales
    
    
    77,425
    
    
    
    8,938
    
    
    
    (63
    )
    
    
    86,300Gross profit
    
    
    18,360
    
    
    
    2,784
    
    
    
    
    
    
    
    21,144Marketing, selling and distribution expenses
    
    
    11,774
    
    
    
    1,179
    
    
    
    
    
    
    
    12,953General and administrative expenses
    
    
    14,946
    
    
    
    798
    
    
    
    
    
    
    
    15,744Research and development expenses
    
    
    1,255
    
    
    
    203
    
    
    
    
    
    
    
    1,458Amortization of other intangibles
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Restructuring charges
    
    
    7,315
    
    
    
    
    
    
    
    
    
    
    
    7,315Other operating expense (income)
    
    
    51
    
    
    
    (51
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    (17,072
    )
    
    
    655
    
    
    
    
    
    
    
    (16,417
    )Interest expense (income), net
    
    
    9,700
    
    
    
    (61
    )
    
    
    
    
    
    
    9,639Income (loss) before income taxes
    
    
    (26,772
    )
    
    
    716
    
    
    
    
    
    
    
    (26,056
    )Provision for income taxes
    
    
    1,188
    
    
    
    243
    
    
    
    
    
    
    
    1,431Net income (loss)
    
    $
    (27,960
    )
    
    $
    473
    
    
    $
    
    
    
    $
    (27,487
    )
 16




---



##### Table of Contents



Three months ended June 24, 2006Parent &
    
    
    Non-
    
    
    Eliminations andGaurantor
    
    
    Guarantor
    
    
    ConsolidatingSubsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    152,506
    
    
    $
    12,466
    
    
    $
    (1,062
    )
    
    $
    163,910Cost of sales
    
    
    115,083
    
    
    
    9,961
    
    
    
    (1,062
    )
    
    
    123,982Gross profit
    
    
    37,423
    
    
    
    2,505
    
    
    
    
    
    
    
    39,928Marketing, selling and distribution expenses
    
    
    14,086
    
    
    
    1,108
    
    
    
    
    
    
    
    15,194General and administrative expenses
    
    
    8,778
    
    
    
    887
    
    
    
    
    
    
    
    9,665Research and development expenses
    
    
    1,063
    
    
    
    18
    
    
    
    
    
    
    
    1,081Amortization of other intangibles
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    282Other operating expense (income)
    
    
    7
    
    
    
    (74
    )
    
    
    
    
    
    
    (67
    )Operating income
    
    
    13,207
    
    
    
    566
    
    
    
    
    
    
    
    13,773Interest expense (income), net
    
    
    10,143
    
    
    
    (98
    )
    
    
    
    
    
    
    10,045Income before income taxes
    
    
    3,064
    
    
    
    664
    
    
    
    
    
    
    
    3,728Provision for income taxes
    
    
    1,300
    
    
    
    441
    
    
    
    
    
    
    
    1,741Net income
    
    $
    1,764
    
    
    $
    223
    
    
    $
    
    
    
    $
    1,987
 17




---



##### Table of Contents



Three months ended June 30, 2007Parent &
    
    
    Non-Gaurantor
    
    
    GuarantorSubsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    (27,960
    )
    
    $
    473
    
    
    $
    (27,487
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation
    
    
    3,466
    
    
    
    354
    
    
    
    3,820Amortization of other intangibles and other contracts
    
    
    171
    
    
    
    
    
    
    
    171Amortization of deferred financing charges
    
    
    485
    
    
    
    
    
    
    
    485Restructuring charges
    
    
    7,315
    
    
    
    
    
    
    
    7,315Provision for doubtful accounts and allowances
    
    
    411
    
    
    
    8
    
    
    
    419Provision for excess and obsolete inventory
    
    
    1,951
    
    
    
    269
    
    
    
    2,220Deferred income taxes
    
    
    (1,096
    )
    
    
    
    
    
    
    (1,096
    )Loss on disposal of assets
    
    
    51
    
    
    
    
    
    
    
    51Stock option compensation expense
    
    
    6
    
    
    
    
    
    
    
    6Translation adjustment
    
    
    
    
    
    
    (2,882
    )
    
    
    (2,882
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    19,854
    
    
    
    290
    
    
    
    20,144Inventories
    
    
    (14,693
    )
    
    
    (2,479
    )
    
    
    (17,172
    )Income tax receivable
    
    
    708
    
    
    
    (169
    )
    
    
    539Accounts payable
    
    
    (5,115
    )
    
    
    (282
    )
    
    
    (5,397
    )Accrued compensation and benefits
    
    
    1,263
    
    
    
    (242
    )
    
    
    1,021Customer allowances payable
    
    
    (1,754
    )
    
    
    229
    
    
    
    (1,525
    )Accrued interest
    
    
    (4,170
    )
    
    
    
    
    
    
    (4,170
    )Other accrued expenses
    
    
    (5,729
    )
    
    
    85
    
    
    
    (5,644
    )Other current assets
    
    
    697
    
    
    
    (139
    )
    
    
    558Other liabilities
    
    
    5,748
    
    
    
    
    
    
    
    5,748Net cash used in operating activities
    
    
    (18,391
    )
    
    
    (4,485
    )
    
    
    (22,876
    )Investing activitiesAdditions to property, plant and equipment
    
    
    (740
    )
    
    
    (465
    )
    
    
    (1,205
    )Decrease in other noncurrent assets
    
    
    (1,053
    )
    
    
    
    
    
    
    (1,053
    )Net cash used in investing activities
    
    
    (1,793
    )
    
    
    (465
    )
    
    
    (2,258
    )Financing activitiesNet borrowings under bank revolving credit facility
    
    
    10,000
    
    
    
    
    
    
    
    10,000Payments under bank term credit facility
    
    
    (600
    )
    
    
    
    
    
    
    (600
    )Increase in deferred financing charges
    
    
    (739
    )
    
    
    
    
    
    
    (739
    )Net payments on capital leases and other long-term debt
    
    
    (1,231
    )
    
    
    (3
    )
    
    
    (1,234
    )Net cash provided by (used in) financing activities
    
    
    7,430
    
    
    
    (3
    )
    
    
    7,427Intercompany
    
    
    (719
    )
    
    
    719
    
    
    
    Effect of exchange rate changes
    
    
    
    
    
    
    3,323
    
    
    
    3,323Net decrease in cash and cash equivalents
    
    
    (13,473
    )
    
    
    (911
    )
    
    
    (14,384
    )Cash and cash equivalents at beginning of period
    
    
    17,506
    
    
    
    5,211
    
    
    
    22,717Cash and cash equivalents at end of period
    
    $
    4,033
    
    
    $
    4,300
    
    
    $
    8,333
 18




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##### Table of Contents



Three months ended June 24, 2006Parent &
    
    
    Non-Gaurantor
    
    
    GuarantorSubsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating activitiesNet income
    
    $
    1,764
    
    
    $
    223
    
    
    $
    1,987Adjustments to reconcile net income to net cash used in
operating activities:Depreciation
    
    
    3,490
    
    
    
    401
    
    
    
    3,891Amortization of other intangibles and other contracts
    
    
    427
    
    
    
    
    
    
    
    427Amortization of deferred financing charges
    
    
    485
    
    
    
    
    
    
    
    485Provision for doubtful accounts and allowances
    
    
    639
    
    
    
    
    
    
    
    639Provision for excess and obsolete inventory
    
    
    5,896
    
    
    
    95
    
    
    
    5,991Gain on disposal of assets
    
    
    (2
    )
    
    
    (2
    )
    
    
    (4
    )Stock option compensation expense
    
    
    7
    
    
    
    
    
    
    
    7Translation adjustment
    
    
    
    
    
    
    (1,154
    )
    
    
    (1,154
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    10,904
    
    
    
    795
    
    
    
    11,699Inventories
    
    
    (24,507
    )
    
    
    (267
    )
    
    
    (24,774
    )Income tax receivable
    
    
    1,469
    
    
    
    363
    
    
    
    1,832Accounts payable
    
    
    3,348
    
    
    
    (383
    )
    
    
    2,965Accrued compensation and benefits
    
    
    (1,482
    )
    
    
    45
    
    
    
    (1,437
    )Customer allowances payable
    
    
    792
    
    
    
    135
    
    
    
    927Accrued interest
    
    
    (3,550
    )
    
    
    (68
    )
    
    
    (3,618
    )Other accrued expenses
    
    
    (1,386
    )
    
    
    (220
    )
    
    
    (1,606
    )Other
    
    
    922
    
    
    
    (170
    )
    
    
    752Net cash used in operating activities
    
    
    (784
    )
    
    
    (207
    )
    
    
    (991
    )Investing activitiesAdditions to property, plant and equipment
    
    
    (3,004
    )
    
    
    (295
    )
    
    
    (3,299
    )Decrease in other noncurrent assets
    
    
    (497
    )
    
    
    
    
    
    
    (497
    )Net cash used in investing activities
    
    
    (3,501
    )
    
    
    (295
    )
    
    
    (3,796
    )Financing activitiesNet borrowings under bank revolving credit facility
    
    
    5,000
    
    
    
    
    
    
    
    5,000Payments under bank term credit facility
    
    
    (600
    )
    
    
    
    
    
    
    (600
    )Proceeds from the exercise of stock options
    
    
    4
    
    
    
    
    
    
    
    4Net payments on other long-term debt
    
    
    (1,024
    )
    
    
    (3
    )
    
    
    (1,027
    )Net cash provided by (used in) financing activities
    
    
    3,380
    
    
    
    (3
    )
    
    
    3,377Intercompany
    
    
    582
    
    
    
    (582
    )
    
    
    Effect of exchange rate changes
    
    
    
    
    
    
    1,218
    
    
    
    1,218Net increase (decrease) in cash and cash equivalents
    
    
    (323
    )
    
    
    131
    
    
    
    (192
    )Cash and cash equivalents at beginning of period
    
    
    3,766
    
    
    
    3,965
    
    
    
    7,731Cash and cash equivalents at end of period
    
    $
    3,443
    
    
    $
    4,096
    
    
    $
    7,539
 19




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##### Table of Contents



Item 2. 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 Health), a wholly owned subsidiary.
 Overview
      20




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##### Table of Contents



Results of Operations
  Percentage of Net Sales (1)Three months endedJune 30, 2007
    
    
    June 24, 2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    80.3
    
    
    
    75.6Gross profit
    
    
    19.7
    
    
    
    24.4Selling, general
and administrative
expenses
    
    
    26.7
    
    
    
    15.2Research and
development
expenses
    
    
    1.4
    
    
    
    0.7Amortization of
other
intangibles
    
    
    0.1
    
    
    
    0.2Restructuring
charges
    
    
    6.8
    
    
    
    Other operating
expense
    
    
    
    
    
    
    Operating income
(loss)
    
    
    (15.3
    )
    
    
    8.3Interest expense,
net
    
    
    9.0
    
    
    
    6.1Income (loss)
before income
taxes
    
    
    (24.3
    )
    
    
    2.2Provision for
income taxes
    
    
    1.3
    
    
    
    1.1Net income
(loss)
    
    
    (25.6)
    %
    
    
    1.1
    %
 
 (1)
    
    Due to rounding, individual subtotals and totals may not recalculate.    
    
    VMS product net sales were $87.5 million in the first quarter of fiscal 2008, a
decrease of $12.5 million, or 12.5%, from $100.1 million in the first quarter of fiscal
2007. The decrease in VMS category sales was primarily due to lower sales of joint care,
CoQ10 and multivitamins products in the U.S. offset by a slight increase in sales of fish
oil products.
    
    OTC product net sales were $7.2 million in the first quarter of fiscal 2008, a decrease
of $42.9 million, or 85.7% from $50.0 million in the first quarter of fiscal 2007. The
decrease in OTC net sales for the three months ended June 30, 2007 was primarily
attributable to the voluntary suspension on sales of U.S. OTC products as a result of the
FDA inspection in March 2007.
    
    Contract manufacturing services net sales were $12.7 million in the first quarter of
fiscal 2008, a decrease of $1.1 million, or 7.9%, from $13.8 million in the first quarter
of fiscal 2007. The decrease was impacted by the suspension of sales of OTC products to
our key contract manufacturing customers.
  21




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##### Table of Contents



Concentration of Credit Risk and Significant Customers, Suppliers and Products
  22




---



##### Table of Contents



June 30,
    
    June 24,2007
    
    2006Customer A
    
    
    44
    %
    
    
    43
    %Customer B
    
    
    25
    %
    
    
    23
    %
  June 30,
    
    June 24,2007
    
    2006Division 1
    
    
    25
    %
    
    
    24
    %Division 2
    
    
    19
    %
    
    
    19
    %
  June 30,
    
    June 24,2007
    
    2006Top ten customers
    
    
    92
    %
    
    
    86
    %
   Liquidity and Capital Resources
     23




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##### Table of Contents



Covenant Restrictions
   24




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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.  25




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##### Table of Contents



Credit Agreement EBITDA
   Year EndedJune 30, 2007
    
    
    June 24, 2006Net income (loss)
    
    $
    (27,487
    )
    
    $
    1,987Interest expense, net
    
    
    9,639
    
    
    
    10,045Provision for income taxes
    
    
    1,431
    
    
    
    1,741Depreciation and amortization
    
    
    3,991
    
    
    
    4,318Non-cash stock compensation expense (1)
    
    
    6
    
    
    
    7Expenses related to permitted acquisition (2)
    
    
    (17
    )
    
    
    Restructuring charges (3)
    
    
    7,315
    
    
    
    Management fees (4)
    
    
    
    
    
    
    9Permitted add-backs (5)
    
    
    22,615
    
    
    
    Credit Agreement EBITDA
    
    $
    17,493
    
    
    $
    18,107
 
 (1)
    
    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.(2)
    
    Represents cost adjustments in connection with potential 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. 26




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##### Table of Contents



(3)
    
    Represents expenses incurred in connection with the Companys plan to consolidate its
manufacturing and packaging operations. These expenses are included in restructuring charges in the
consolidated statement of operations for the three months ended June 30, 2007.(4)
    
    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.(5)
    
    The Second Amendment provided add-backs for certain items related to the voluntary suspension
of the Companys OTC shipments. Sources and Uses of Cash
    Critical Accounting Policies and Estimates
 Revenue Recognition
  Reserve for
    
    
    Reserve for
    
    
    Reserve forContractual
    
    
    Future
    
    
    ProductAllowances
    
    
    Chargebacks
    
    
    ReturnsBalance at March 31, 2007
    
    $
    7,769
    
    
    $
    645
    
    
    $
    2,014Current provision
    
    
    7,267
    
    
    
    723
    
    
    
    660Actual returns or credits
    
    
    (8,967
    )
    
    
    (828
    )
    
    
    (977
    )Balance at June 30, 2007
    
    $
    6,069
    
    
    $
    540
    
    
    $
    1,697
  Forward-looking Statements
  27




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##### Table of Contents



28




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##### Table of Contents



ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
  29




---



##### Table of Contents



ITEM 4 Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures
  (b) Changes in Internal Controls
   30




---



##### Table of Contents



PART II Other Information
 
 Item 1. Legal Proceedings.
  Product Liability
  Breach of OTC Supply Contracts
    Breach of Raw Material Supply Agreement
  Other Civil Litigation
  31




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##### Table of Contents



Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act, as amended31.2
    
    Certification of Executive Vice Present and Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended32.1
    
    Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Executive Vice President and Chief Financial Officer, pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 32




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##### Table of Contents



SIGNATURES
  Leiner Health Products Inc.Date: August 14, 2007
    By:
    /s/ Kevin McDonnellKevin McDonnellExecutive Vice President and Chief Financial Officer 33




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##### Table of Contents



Exhibit Index
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act, as amended31.2
    
    Certification of Executive Vice Present and Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended32.2
    
    Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Executive Vice President and Chief Financial Officer, pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 34