<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 December 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)
<TABLE>
<CAPTION>
<S> <C>
California 95-2680312
- --------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
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)
Check whether the registrant (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 December 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>
FORM 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Cash $ 67
Accounts and notes receivable (net of allowances: $372) 1,213
Inventories:
Raw materials $1,781
Work in process 249
Finished goods 461
-------
Total inventories 2,491
Other current assets 1,134
-------
Total current assets 4,905
Property, plant and equipment (less
accumulated depreciation and
amortization: $6,567) 548
Goodwill and other assets, net of
accumulated amortization 2,894
-------
TOTAL $ 8,347
-------
-------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Note payable to bank $ 283
Notes payable, other 250
Current portion - royalty agreements 743
Accounts payable 1,631
Other accrued liabilities 563
Due to related parties 153
Deferred income 65
-------
Total current liabilities 3,688
-------
Long-term notes payable to related parties 3,293
-------
Long-term payable--royalty agreements, less
current portion $743,000 1,329
-------
Deferred income 256
-------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock, $.10 par value; authorized,
7,500,00 shares; issued and outstanding,
4,135,162 shares 413
Additional paid-in capital 4,222
Accumulated deficit (4,854)
-------
Total stockholders' deficiency (219)
-------
TOTAL $ 8,347
-------
-------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1995 1994
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Gross revenues $ 1,970 $ 2,501
Less: Sales returns (167) (85)
Cash discounts and others (18) (20)
-------- -------
Net revenues 1,785 2,396
-------- -------
Costs and expenses:
Cost of sales 729 924
Selling and advertising expense 774 1,007
General and administrative expense 347 380
-------- -------
Total costs and expenses 1,850 2,311
-------- -------
(Loss) income from operations (65) 85
Other income 16 18
-------- -------
Net (loss) income $ (49) $ 103
-------- -------
-------- -------
Per share:
Net (loss) income $ (.01) $ .02
-------- -------
-------- -------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1995 1994
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . $ (49) $ 103
------- -------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . 48 69
Amortization of intangibles . . . . . . . . 68 72
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable. 118 (553)
(Increase) decrease in inventories . . . . (31) 60
(Increase) decrease in other current assets (47) 64
(Decrease) increase in accounts payable . . (5) 303
(Decrease) in accounts payable
related party . . . . . . . . . . . . . . (235) (5)
(Decrease) in note payable bank . . . . . . (6) (2)
Increase in notes payable - other . . . . . 85 --
Increase (decrease) in other accrued
liabilities . . . . . . . . . . . . . . . 105 (89)
(Decrease) in deferred income . . . . . . . (16) (16)
------- -------
Total adjustments . . . . . . . . . . . . . 84 (97)
------- -------
Net cash provided by operating activities . 35 6
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment (9) (35)
Acquisition of product brands . . . . . . . (29) (335)
------- -------
------- -------
Net cash (used in) investing activities . . (38) (370)
Cash flows from financing activities:
Increase in bank overdraft. . . . . . . . . -- 20
------- -------
(Payments on) proceeds from notes payable
to related parties . . . . . . . . . . . (53) 250
------- -------
Net cash (used in) provided by financing
activities. . . . . . . . . . . . . . . (53) 270
------- -------
Net (decrease) in cash . . . . . . . . . . . (56) (94)
Cash, beginning of year . . . . . . . . . . . 123 106
------- -------
Cash, end of year . . . . . . . . . . . . . . $ 67 $ 12
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . $ 57 $ 33
------- -------
------- -------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of December 31, 1995, and the statements
of operations and cash flows for the periods ended December 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 ended December
31, 1995, are not necessarily indicative of results to be expected for the
year ending September 30, 1996.
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, 1995.
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, 1995. The
ultimate outcome of these matters cannot presently be determined.
Environmental expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are expensed. The Company's proportionate share of the
liabilities are recorded when environmental remediation and/or cleanups are
probable, and the costs can be reasonably estimated.
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. Change in accounting policy:
The Company has changed its method of accounting for royalty agreements in
connection with brand acquisitions. Minimum royalty obligations that are
fixed and certain in amount are "grossed up" and recorded as liabilities.
The related intangible assets acquired are amortized over the life of the
royalty agreement. This change which is a grossing up of assets and
liabilities, in equal amounts, has no effect on the statements of operations.
Certain reclassifications have been made in the Statement of Cash Flows for
the quarter ending December 31, 1994, to make the statement comparable to the
December 31, 1995 presentation.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995, AND DECEMBER 31, 1994
Gross revenues declined by 21% from $2,501,000 in the quarter ended
December 31, 1994, to $1,970,000 in the quarter ended December 31, 1995.
The lower gross revenues were attributed to a decrease in the Company's
nail products. The reduced sales volume was the result of customer
consolidations by the retailers and an overall decline in the nail extender
market. The reduction in gross revenues was marginally offset by sales of
the newly acquired over-the-counter brands such as; XS-Registered Trademark-,
Baby Gasz-TM-, Baby Gumz-TM-, and Brush 'n Floss-Registered Trademark-.
<PAGE>
FORM 10-QSB
Net revenues decreased by approximately $611,000 or 26% for the three
months ended December 31, 1995, as compared to the three months ended
December 31, 1994. The reduction in net revenue was due to the same reasons
noted above regarding gross revenues. In addition, the sales returns
increased $82,000 or 96% when comparing the three months ended December 31,
1995, and 1994. The sales returns during the quarter ended December 31,
1994, were abnormally low. The Company's percentage of sales returns
to gross sales varies from quarter to quarter, but the overall average
is approximately 8 - 12%.
Cost of sales was 37% of gross revenues for the quarters ended
December 31, 1995, and December 31, 1994. The percentage remained constant
due to the Company's ability to consolidate its production facilities
(reducing overall occupied facility square footage by 25%) since August
1995 and decreasing other manufacturing overhead costs because of the
lower sales volume.
Selling and advertising expenses declined $233,000 or 23% when comparing
the three months ended December 31, 1995, with three months ended
December 31, 1994. The reduction of expenses was mainly due to the
following factors; 1) decrease in payroll and related fringe benefits
due to cutbacks of personnel, 2) decline in advertising promotional
costs, 3) lower manufacturer representative commissions (lower sales
volume) and 4) lower freight and amortization expenses.
General and administrative expenses decreased when comparing the
quarters ended December 31, 1995, and 1994. The decrease of
approximately $33,000 or 9% was primarily due to the reduction in payroll
and related fringe benefits due to cutbacks of personnel. This decrease
was partially offset by an increase in interest expense due to an increase
in the average debt outstanding and higher average monthly interest rates.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 1995, working capital decreased
to $1,217,000 from $1,260,000 at September 30, 1995. The Company's
current ratio was 1.3 to 1 at December 31, 1995, and September 30, 1995.
The Company has taken steps to conserve cash by reducing its occupied
facility square footage by 25% since August 1995. The six month advance
rent buyout and subleases associated with two vacated facilities will
have an annualized economic savings of approximately $133,000.
Additionally, the Company is conducting a review of its inventory and is
diligently working to reduce the amount of working capital tied up in
inventory.
The Company has an accumulated deficit of $4,854,000. The Company's
recurring losses from operations and inability to generate sufficient
cash flow from normal operations to meet its obligations as they came
due raise substantial doubt about the Company's ability to continue
as a going concern. The Company's ability to continue in existence is
dependent upon future developments, including obtaining additional
financing and achieving a level of profitable operations sufficient to
enable it to meet its obligations as they become due.
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 groundwater 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 groundwater 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 onsite, 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.
<PAGE>
FORM 10-QSB
The Company and nearby property owners are in the process of engaging a
consultant to perform a site investigation with respect to soil and
shallow groundwater contamination. Based upon proposals received to
date, the Company currently estimates the cost to perform the site
investigation to be $175,000. Accordingly, while recognizing it may
be jointly and severally liable for the entire cost, the financial
statements as of September 30, 1995, recognized the proportionate amount
($87,500) which the Company believes is its liability for a site
investigation.
The tenants of nearby properties upgradient have sued the Company
alleging that hazardous materials from the Company's property caused
contamination on the properties leased by the tenants. The case name
is DEL RAY INDUSTRIAL ENTERPRISES, INC. v. ROBERT MALONE, ET AL.,
Los Angeles County Superior Court, Northwest District, commenced
August 21, 1991. In this action, the plaintiff alleges environmental
contamination by defendants of its property, and seeks a court order
preventing further contamination and monetary damages. 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
been notified that it is a potentially responsible party ("PRP") for
the contamination. The cost of 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 groundwater 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.
In August 1995, the Company was informed that the EPA entered into an
Administrative Order on Consent with Cardinal Industrial Finishes
("Cardinal") for a PRP lead remedial investigation and feasibility study
(the "Study") which the EPA states, will both characterize the extent
of groundwater contamination in South El Monte and analyze alternatives
to control the spread of contamination. The Company and others have
entered into the South El Monte Operable Unit Site Participation Agreement
with Cardinal pursuant to which, among other things, Cardinal will contract
with an environmental firm to conduct the Study. The Study is anticipated
to take eighteen to twenty-four months. The Company's share of the cost
of the Study is currently $15,000 and was accrued for in the financial
statements as of September 30, 1995.
The City of South El Monte, the city in which the Company has it's
manufacturing facility, is located in the San Gabriel Valley. The
San Gabriel Valley has been declared a Superfund site. The 1995 Water
Quality Control Plan issued by the California Regional Water Quality
Control Board states that the primary groundwater basin pollutants in the
San Gabriel Valley are volatile organic compounds from industry, nitrates
from subsurface sewage disposal and past agricultural activities. In
addition, the Plan noted that hundreds of underground storage tanks leaking
gasoline and other toxic chemicals have existed in the San Gabriel Valley.
The California Department of Toxic Substance Control have declared large
areas of the San Gabriel Valley to be environmentally hazardous and subject
to cleanup work.
The Company believes 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
groundwater, 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.
Currently, the Company does not have any reliable information on the
likely cleanup costs of its property. 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>
FORM 10-QSB
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, 1995.
Item 6. Exhibits
The following exhibits have previously been filed by the Company:
3.1 - Articles of Incorporation, as amended (1)
3.4 - By-laws, as amended December 20, 1977 (2)
3.5 - Amendment of By-laws effective March 14, 1978 (2)
3.6 - Amendment to by-laws effective November 1, 1980 (3)
10.1 - Qualified Stock Option Plan including forms of grant (4)
10.2 - 1985 Employee Incentive Stock Option Plan (5)
10.3 - Description of bonus agreements between the Registrant and its
officers (2)
10.4 - Lease dated December 1, 1990, for the premises located at 1470
Santa Anita Avenue, South El Monte, California (6)
10.5 - Lease dated April 16, 1990, for the premises located at 1425 and
1427 Lidcombe Avenue, South El Monte, California (6)
10.6 - Lease dated April 16, 1990, for the premises located at 1434
Santa Anita Avenue, South El Monte, California (6)
10.7 - Lease dated April 16, 1990, for the premises located at 1460
Santa Anita Avenue, South El Monte, California (6)
10.8 - Lease dated April 16, 1990, for the premises located at 1457
Lidcombe, South El Monte, California (6)
10.9 - Lease dated April 16, 1990, for the premises located at 1500
Santa Anita Avenue, South El Monte, California (6)
10.10 - Lease dated April 16, 1990, for the premises located at 1516
Santa Anita Avenue, South El Monte, California (6)
10.11 - Lease dated March 1, 1991, for the premises located at 1444
Santa Anita Avenue, South El Monte, California (6)
10.12 - Lease dated March 1, 1991, for the premises located at 1445
Lidcombe Avenue, South El Monte, California (7)
10.13 - Promissory notes which were amended in September 1992 evidencing
advances by the Registrant's officers and directors (8)
10.14 - Promissory notes which were amended in September 1994 evidencing
advances by the Registrant's officers and directors (9)
10.15 - Promissory notes evidencing advances made by the Registrant's
officers and directors (9)
<PAGE>
FORM 10-QSB
10.16 - Promissory notes evidencing advances made to the Registrant (9)
10.17 - Promissory notes which were amended in January 1995 evidencing
advances by the Registrant's officers and directors (10)
10.18 - Promissory notes evidencing advances made by the Registrant's
officers and directors (10)
10.19 - Promissory notes which were amended in July 1995 evidencing
advances made to the Registrant (10)
10.20 - Royalty agreement dated August 31, 1994, between Lee
Pharmaceuticals and The Fleetwood Company, regarding a brand
acquisition (10)
10.21 - Royalty agreement dated October 4, 1988, between Lee
Pharmaceuticals and Roberts Proprietaries, Inc., regarding a
brand acquisition (10)
27 - Financial Data Schedule
(1) Filed as an Exhibit of the same number with the Company's Form S-1
Registration Statement filed with the Securities and Exchange
Commission on February 5, 1973, (Registrant No. 2-47005), and
incorporated herein by reference.
(2) Filed as Exhibits 3.4, 3.5, and 13.18 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1978, filed
with the Securities and Exchange Commission and incorporated
herein by reference.
(3) Filed as an Exhibit of the same number with the Company's Form
10-K Annual Report for the fiscal year ended September 30, 1979,
filed with the Securities and Exchange Commission and incorporated
herein by reference.
(4) Filed as Exhibit 5.1 with the Company's Form 10-K Annual Report
for the fiscal year ended September 30, 1973, filed with the
Securities and Exchange Commission and incorporated herein by
reference.
(5) Filed as Exhibits 13.27 and 13.28 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1986, filed
with the Securities and Exchange Commission and incorporated
herein by reference.
(6) Filed as Exhibit 13.31 with the Company's Form 10-K Annual Report
for the fiscal year ended September 30, 1990, filed with the
Securities and Exchange Commission and incorporated herein by
reference.
(7) Filed as Exhibit 13.32 with the Company's Form 10-K Annual Report
for the fiscal year ended September 30, 1991, filed with the
Securities and Exchange Commission and incorporated herein by
reference.
(8) Filed as Exhibit 13.33 with the Company's Form 10-K Annual Report
for the fiscal year ended September 30, 1992, filed with the
Securities and Exchange Commission and incorporated herein by
reference.
(9) Filed as Exhibit 13.34 with the Company's Form 10-KSB Annual Report
for the fiscal year ended September 30, 1994, filed with the
Securities and Exchange Commission in December 1994 and
incorporated herein by reference.
(10) Filed as Exhibits 10.17, 10.18, 10.19, 10.20, and 10.21 with the
Company's Form 10-KSB Annual Report for the fiscal year ended
September 30, 1995, filed with the Securities and Exchange
Commission and incorporated herein by reference.
<PAGE>
FORM 10-QSB
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: 02/09/96 RONALD G. LEE
--------------------- -----------------------------------
Ronald G. Lee
President
Date: 02/09/96 MICHAEL L. AGRESTI
--------------------- -----------------------------------
Michael L. Agresti
Vice President - Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 67
<SECURITIES> 0
<RECEIVABLES> 1,585
<ALLOWANCES> (372)
<INVENTORY> 2,491
<CURRENT-ASSETS> 4,905
<PP&E> 7,115
<DEPRECIATION> (6,567)
<TOTAL-ASSETS> 8,347
<CURRENT-LIABILITIES> 3,688
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> (632)
<TOTAL-LIABILITY-AND-EQUITY> 8,347
<SALES> 1,785
<TOTAL-REVENUES> 1,970
<CGS> 729
<TOTAL-COSTS> 1,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> (49)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
