<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 1-7335
--------------------
LEE PHARMACEUTICALS
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-2680312
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 Santa Anita Avenue, South El Monte, California 91733
---------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(818) 442-3141
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of March 31, 1995 there were outstanding 4,135,162 shares of common
stock of the registrant.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Cash $ 33
Accounts and notes receivable (net of allowances: $498) 1,642
Inventories:
Raw materials $2,243
Work in process 548
Finished goods 471
------
Total inventories 3,262
Other current assets 803
------
Total current assets 5,740
Property, plant and equipment (less
accumulated depreciation and
amortization: $6,607) 659
Goodwill and other assets, net of
accumulated amortization 1,460
------
TOTAL $7,859
======
</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
LIABILITIES
Bank overdraft $ 46
Accounts payable 1,580
Accounts payable, related party 321
Notes payable, other 100
Customer advances and deposits 202
Accrued salaries and wages 42
Other accrued liabilities 588
Deferred income 65
------
Total current liabilities 2,944
------
Long term notes payable to related parties 3,441
------
Other long term notes payable 410
------
Deferred income 305
------
STOCKHOLDERS' EQUITY
Common stock--authorized, 7,500,000 shares of
$.10 par value each; issued and outstanding,
4,135,162 shares. 413
Additional paid-in capital 4,222
Retained deficit (3,876)
------
Total stockholders' equity 759
------
TOTAL $7,859
======
</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenues $2,885 $3,434 $5,386 $6,233
Less: Sales returns (597) (247) (682) (638)
Cash discounts and others (21) (24) (41) (39)
------ ------ ------ ------
Net revenues 2,267 3,163 4,663 5,556
------ ------ ------ ------
Costs and expenses:
Cost of sales 1,160 1,363 2,084 2,522
Selling and advertising expense 1,182 1,383 2,189 2,608
General and administrative expense 412 441 792 859
------ ------ ------ ------
Total costs and expenses 2,754 3,187 5,065 5,989
------ ------ ------ ------
Loss from operations (487) (24) (402) (433)
Other income 30 29 48 48
------ ------ ------ ------
Net (loss) income $ (457) $ 5 $ (354) $ (385)
====== ====== ====== ======
Per share:
Net (loss) income $ (.11) $ .00 $ (.09) $ (.09)
====== ====== ====== ======
</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
1995 1994
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $(354) $(385)
----- -----
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 137 214
Amortization. . . . . . . . . . . . . . . . . . . . . . . 143 53
Amortization of deferred income . . . . . . . . . . . . . (32) (32)
(Gain) on disposal of property, plant, and equipment. . . (11) --
(Increase) in accounts receivable . . . . . . . . . . . . (710) (543)
Decrease in inventories . . . . . . . . . . . . . . . . . 254 145
Decrease (increase) in other current assets . . . . . . . 86 (176)
(Increase) in other assets. . . . . . . . . . . . . . . . (372) --
Increase in accounts payable. . . . . . . . . . . . . . . 302 481
Increase (decrease) in accounts payable related party . . 156 (231)
Increase (decrease) in customer advances and deposits . . 176 (88)
(Decrease) in accrued salaries and wages. . . . . . . . . (6) (12)
(Decrease) in other accrued liabilities . . . . . . . . . (37) (150)
Increase in deferred income . . . . . . . . . . . . . . . -- 164
----- -----
Total adjustments . . . . . . . . . . . . . . . . . . . . 86 (175)
----- -----
Net cash (used in) operating activities . . . . . . . . . (268) (560)
----- -----
Cash flows from investing activities:
Purchase of certain assets from The Fleetwood Company. . . (66) --
Purchase of certain assets from Alivio Products Inc. . . . (28) --
Purchase of certain assets from Medtech Laboratories, Inc. -- (100)
Proceeds from sale of equipment. . . . . . . . . . . . . . 11 --
Purchase of property, plant and equipment. . . . . . . . . (52) (190)
----- -----
Net cash (used in) investing activities. . . . . . . . . . (135) (290)
----- -----
Cash flows from financing activities:
Payments on other notes payable. . . . . . . . . . . . . . (4) (6)
Proceeds from bank loan. . . . . . . . . . . . . . . . . . -- 4
Increase in bank overdraft . . . . . . . . . . . . . . . . 46 191
Proceeds from notes payable to related parties . . . . . . 288 410
----- -----
Net cash provided by financing activities. . . . . . . . 330 599
----- -----
Net (decrease) in cash. . . . . . . . . . . . . . . . . . . (73) (251)
Cash at beginning of period . . . . . . . . . . . . . . . . 106 292
----- -----
Cash at end of period . . . . . . . . . . . . . . . . . . . $ 33 $ 41
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 87 $ 86
===== =====
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of March 31, 1995, and the statements of
operations and cash flows for the periods ended March 31, 1995, and 1994,
have not been audited by independent accountants but reflect all
adjustments, consisting of any normal recurring adjustments, which are, in
the opinion of management, necessary to a fair statement of the results
for such periods. The results of operations for the three months and six
months ended March 31, 1995, are not necessarily indicative of results to be
expected for the year ending September 30, 1995. This is as a result of
a number of factors including the seasonal nature of the market for a
number of the Company's products.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the
Securities and Exchange Commission, although the Company believes that the
disclosures included in these financial statements are adequate to make
the information not misleading.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1994.
The Company is involved in various matters involving environmental cleanup
issues. SEE "Item 2. Management's Discussion and Analysis or Plan of
Operations" and Note 10 of Notes to Financial Statements included in the
Company's Form 10-KSB for the fiscal year ended September 30, 1994. The
ultimate outcome of these matters cannot presently be determined.
Accordingly, no provision for any loss that may result from the resolution
of these matters has been made in the accompanying financial statements.
2. Net income (loss) per share:
Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding during the periods presented. Common
stock equivalents are included in these calculations where their effect on
net income per share is dilutive. The weighted average number of shares was
4,135,162 for all periods presented.
3. Acquisition:
In October, 1994, the Company finalized the agreement reached on August 31,
1994, to purchase certain assets of the "WATE-ON-Registered Trademark-" and
"SUPER WATE-ON-Registered Trademark-" line of nutritional products from The
Fleetwood Company for approximately $67,000 in cash. In addition, the
Company remitted $100,000 to the seller which was due upon closing. A
royalty agreement was entered into whereby the Company is required to
remit approximately $6,900 per month for thirty-six months. The royalty
amount is to be expensed over the length of the agreement which expires on
August 31, 1999.
In October, 1994, the Company finalized the agreement reached on August 31,
1994, to purchase certain assets of the Aloe E and Aloe 99 line of
aloe vera products from Alivio Products, Inc. for approximately $50,000 in
cash. A royalty agreement was entered into whereby the Company is required
to remit $120,000 payable over twelve (12) months commencing on
September 30, 1994.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995, AND MARCH 31, 1994
Gross revenues decreased by 16% from $3,434,000 in the quarter ended
March 31, 1994, to $2,885,000 in the quarter ended March 31, 1995. The
decline in gross revenues was attributed to lower sales of the Company's
nail products. The reduced sales volume was due to contracting inventory
levels by the retailers and an overall decline in the nail extender market.
The reduction in gross revenues was partially offset by sales of the newly
acquired over-the-counter brand WATE-ON-Registered Trademark- and SUPER
WATE-ON-Registered Trademark- plus increased sales volume in one of our
previously acquired personal care brands.
Also, the Company's sales returns for the quarter increased $350,000 or
142% in the quarter ended March 31, 1995, when compared to the quarter
ended March 31, 1994. The increased returns were partially due to the
shrinking of the shelf space, by our major retail customers, allocated to
our major product category--Lee nail care products. Also, the continued
consolidation of our retail customers via the route of mergers has had a
definite impact on the level of returns.
Cost of sales was a constant 40% of gross revenues when comparing the
quarters ended March 31, 1995, and March 31, 1994. The Company is
consolidating its manufacturing area within fewer facilities. This should
allow the Company to operate more efficiently while utilizing reduced
facilities.
Selling and advertising expenses were lower by $201,000 when comparing the
three months ended March 31, 1995, with the three months ended March 31,
1994. The reduction of expenses were primarily the result of overall
payroll and related fringe benefit costs reductions due to a cutback of
staff personnel. In addition, the advertising and promotion expenditures
declined in the current quarter ending March 31, 1995, versus the
comparative quarter ending March 31, 1994.
General and administrative expenses remained relatively constant,
$412,000 compared to $441,000, for the quarters ended March 31, 1995,
versus March 31, 1994, respectively.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1995, AND MARCH 31, 1994
Gross revenues for the six months ended March 31, 1995, were $5,386,000, a
decrease of approximately $847,000 or 14% from the comparable six month
period ended March 31, 1994. The decline in gross revenues was due to
lower sales of the Company's nail extender products. The reduced sales
volume was due to contracting inventory levels by the retailers and an
overall decline in the marketplace for nail extender items. Net revenues
for the six months ended March 31, 1995, were $4,663,000, a decrease of
$893,000 or 16%, from the comparable six month period ended March 31, 1994.
Cost of sales as a percentage of gross revenues for the six months ended
March 31, 1995, as compared to the six month period ended March 31, 1994,
was relatively constant, 39% versus 40%, respectively.
Selling and advertising expenses decreased $419,000 or 16% when comparing
the six months ended March 31, 1995, with the six months ended March 31,
1994. The reduction of costs occurred in several major expense
classifications, namely; payroll and related fringe benefits, cutback of
staff personnel, and advertising/promotion costs.
General and administrative expenses decreased $67,000 (8%) to $792,000 for
the six month period ended March 31, 1995, as compared to $859,000 for the
six month period ended March 31, 1994. A reduction in staff personnel
explains the reduction in expenditures.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1995, working capital decreased to
$2,796,000 from $3,042,000 at September 30, 1994. The Company's current
ratio at March 31, 1995, was 1.9 to 1 compared to 2.3 to 1 at September 30,
1994.
Management believes that the current level of sales and working capital
will allow it to meet its short term obligations on a current basis.
ENVIRONMENTAL MATTERS
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB"), has alleged that the soil and shallow ground water at the site
are contaminated. On August 12, 1991, the Board issued a "Cleanup and
Abatement Order" directing the Company to conduct further testing and
cleanup the site. The Company did not complete the testing, and in June,
1992, the RWQCB requested that the EPA evaluate the contamination and take
appropriate action. At the EPA's request, Ecology & Environment, Inc.
conducted an investigation of soil and ground water on the Company's
property. Ecology & Environment Inc.'s Final Site Assessment Report, which
was submitted to the EPA in June, 1994, did not rule out the possibility
that some of the contamination originated on-site, and resulted from
either past or current operations on the property. While the Company may be
liable for all or part of the costs of remediating the contamination on its
property, the remediation cost is not known at this time. The EPA has not
taken any further action in this matter, but may do so in the future.
The tenants of nearby properties upgradient have sued the Company alleging
that hazardous material from the Company's property caused contamination
on the properties leased by the tenants. The Company does not believe
there is any basis for the allegations and is vigorously defending the
lawsuit.
The Company's South El Monte manufacturing facility is also located over a
large area of possibly contaminated regional groundwater which is part of
the San Gabriel Valley Superfund site. The Company has not been notified
that it is a potentially responsible party ("PRP") for the contamination,
but may be in the future. The cost of any cleanup of the groundwater is not
known at this time. In September, 1992, EPA announced that the levels of
contamination in the Whittier Narrows area of the superfund site were
sufficiently low and that it was not planning a cleanup at this time, but
rather would continue to monitor the ground water for an indefinite
period. The Company's property is adjacent to the Whittier Narrows area.
Except as described above, it is not clear what action the EPA will take
with respect to the Company's property.
The City of South El Monte, the city in which the Company has its
manufacturing facility, is located in the San Gabriel Valley. The San
Gabriel Valley has been declared a Superfund site, chiefly because of
chlorinated solvents released onto and into the vadose soil and ground water
by various manufacturing companies during World War II and in subsequent
decades, until the presence and persistence of these solvents was
recognized and they were declared to be environmentally hazardous and
subject to cleanup work.
The Company believes that the City of South El Monte does not appear to be
located over any of the major plumes. However, the EPA recently announced
it is studying the possibility that, although the vadose soil and ground
water, while presenting cleanup problems, there may be a contamination by
DNAPs (dense non-aqueous phase liquids), i.e., "sinkers", usually
chlorinated organic cleaning solvents. The EPA has proposed to drill six
"deep wells" throughout the City of South El Monte at an estimated cost of
$1,400,000. The EPA is conferring with SEMPOA (South El Monte Property
Owners Association) as to cost sharing on this project. SEMPOA has
obtained much lower preliminary cost estimates. The outcome cost and
exact scope of this are unclear at this time.
The Securities and Exchange Commission has issued a formal order of
investigation concerning certain matters, including the Company's
environmental liabilities. The Company is cooperating with the
investigation.
<PAGE>
At this time, the company does not have any reliable information on the
likely cleanup costs of either its property or the properties that are the
subject of the lawsuit described above. Thus, it cannot determine the
extent, if any, of its share of liability for any such costs. The Company
has been seeking reimbursement of costs from its insurance carriers who
have denied reimbursement of costs, based on their review and analysis of
the insurance policies, the history of the site, the nature of the claims
and current court decisions in such cases.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations -- Environmental Matters" is incorporated herein
by reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for
the fiscal year ended September 30, 1994.
SIGNATURES
In accordance with the requirements of the Securities Exchange
Acts of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LEE PHARMACEUTICALS
-------------------
(Registrant)
Date: MAY 11, 1995 /s/ RONALD G. LEE
------------------- -------------------------
Ronald G. Lee
President
Date: MAY 11, 1995 /s/ MICHAEL L. AGRESTI
------------------- -------------------------
Michael L. Agresti
Vice President -- Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 33
<SECURITIES> 0
<RECEIVABLES> 2,140
<ALLOWANCES> 498
<INVENTORY> 3,262
<CURRENT-ASSETS> 5,740
<PP&E> 7,266
<DEPRECIATION> 6,607
<TOTAL-ASSETS> 7,859
<CURRENT-LIABILITIES> 2,944
<BONDS> 0
<COMMON> 413
0
0
<OTHER-SE> 346
<TOTAL-LIABILITY-AND-EQUITY> 7,859
<SALES> 4,637
<TOTAL-REVENUES> 4,663
<CGS> 2,084
<TOTAL-COSTS> 4,890
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> (354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (354)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
