<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7335
LEE PHARMACEUTICALS
(Name of small business issuer in its charter)
CALIFORNIA 95-2680312
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1444 SANTA ANITA AVENUE, SOUTH EL MONTE, CALIFORNIA 91733
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(Address of principal executive offices) (Zip code)
ISSUER'S TELEPHONE NUMBER: (626) 442-3141
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT
Name of Each Exchange
Title of Each Class on Which Registered
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None
SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE EXCHANGE ACT: Common stock,
par value $.10 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $9,675,000 Gross
As of the close of business on November 28, 1997, the aggregate market value of
Lee Pharmaceuticals common stock held by nonaffiliates was $795,560.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. Common stock, par value $.10;
4,135,162 shares outstanding as of the close of business on November 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Lee Pharmaceuticals is engaged in the research, development, purchase,
manufacture, and marketing of consumer personal care products and
professional dental products, all of which are targeted for the improved
well-being of the human body. The Company's business is directed to two main
areas: (a) the development and marketing of a range of consumer products
including nail extenders and strengtheners, depilatories, feminine hygiene
products and over-the-counter drug items and (b) the manufacture and sale of
materials and supplies for use in the professional dental health field. For
all years presented, revenues, operating results and identifiable assets of
the consumer products group were in excess of 90% of total company operations.
Lee Pharmaceuticals' executive offices are located at 1444 Santa Anita
Avenue, South El Monte, California 91733, and its telephone number is (626)
442-3141. The Company was incorporated in April 1971 as a California
corporation.
CONSUMER PRODUCTS SEGMENT
The Company's consumer products line consists primarily of a variety of
artificial fingernail extenders and related fingernail products. In
addition, the Company manufactures and sells hair removal and related
feminine products, antacid tablets, nasal care products, infant items and a
variety of over-the-counter drug products. The Company's product lines have
been developed internally, particularly in the case of fingernail products,
and by outside product line acquisitions.
In fiscal years 1993 and 1994, the research and development capability
of Lee Pharmaceuticals generated several new product entries, including Lee
Press-On Body Tattoos, Lee Brush-On Nail Bleach, Lee Nail Whitener, and the
Lee Fancy Fingers Nail Jewelry Kit. In addition, the consumer products line
of the Company was further diversified by the acquisition of seven products
from other manufacturers, including six over-the-counter drug products and
Sundance, a line of aloe vera skin care products.
In fiscal year 1995, the research and development capability of Lee
Pharmaceuticals generated several new product entries, including a new
product line -- Lee Press-On Nails - Professional Salon Style in fourteen
high fashion nail colors plus a nail extender product line known as Lee
Elegant Edge Nail Tip kits. In addition, there was further diversification
of the Company's consumer products line by the acquisition of products from
other manufacturers, including aloe vera skin care products, a line of men's
after shave lotions, infant care items, and additional over-the-counter drug
products.
In fiscal 1996, the research and development capability of Lee
Pharmaceuticals generated new product entries primarily in the nail care
category-specifically eight new colors of Lee Press On Nails in trendy,
fashionable colors. In addition, two holiday displays-Lee Halloween Fun
Press On Nails and Lee Holiday Elegance-Christmas, were developed. Lee
Pharmaceuticals expanded it's personal care category of products through two
acquisitions. On February 15, 1996, Lee acquired the Breath-Gard-TM- breath
tablets from Sundance Healthcare Products, Inc. in Valencia, California. On
September 20, 1996, Lee Pharmaceuticals acquired the full line of
Aquafilter-Registered Trademark- Cigarette Holders from the Aquafilter
Corporation, Ft. Lauderdale, FL. The acquisition of this well recognized
filtration system and its assimilation into the Lee Pharmaceuticals marketing
and distribution program is intended to be an important contribution to the
Company's growth in 1997 and beyond.
In fiscal 1997, the Company purchased two oral care brands from Lactona
Corporation for $175,000 including inventory valued at approximately $30,000.
Also, in fiscal 1997, the Company purchased twenty-eight (28) brands
including ointments, nutritional supplements, vitamins, analgesics, and
various over-the-counter (OTC) brands from Roberts Laboratories, Inc. for
$1,168,089. During fiscal 1997 Lee Lip-Ex Lip Balms were internally
developed. The Lip-Ex line includes three lip balms and six glossy flavored
lip balms.
DOMESTIC CONSUMER PRODUCTS MARKETING
Consumer products are sold nationally, principally through major retail
drug, food and discount department store chains. Retail distribution is
primarily accomplished through a network of independent general merchandise
sales representatives. All lines are advertised in a variety of media,
including television, magazines and newspapers.
CONSUMER PRODUCTS COMPETITION
The Consumer Products Division of Lee Pharmaceuticals operates in a
highly competitive environment. In the area of fingernail extension, Lee
Pharmaceuticals competes with five to six companies, some of which are larger
companies with greater financial resources.
Competition in the depilatory product category is intense, with
competitors even more numerous than in the artificial fingernail field. The
acquisition of Zip Wax and Bikini Bare brands of hair removal products has
given Lee Pharmaceuticals two brands in this category.
Lee Pharmaceuticals continues to expand its product line via a
combination of acquisitions and in-house research and development activity.
The consumer products line was historically dominated by nail extension, nail
treatment, and nail decor products, but it now includes depilatory products,
wax hair removal products, a nail biting deterrent product, nasal care items,
over-the-counter drug products, skin care products, men's fragrance products,
tobacco accessory products, and lip balms. The Company's consumer products
line today is no longer restricted solely to the cosmetics business.
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3
REGULATION OF CONSUMER PRODUCTS
The Company's consumer products are regulated by the Food and Drug
Administration. The regulations deal principally with consumer safety and
with the effectiveness of the products for the purposes for which they are
proposed to be used. For many years, the cosmetic regulations were applied
only in cases of adulteration or misbranding. Under the Fair Packaging and
Labeling Act (1966), the FDA has moved to require new labeling data as to
ingredients in cosmetics.
The Company believes that all its cosmetic products are manufactured and
sold in compliance with the laws of each state and that no pre-marketing
clearance of its products is required from any state. The Company maintains
a comprehensive data file on each of its consumer products and believes that
it would be able to apply for any required clearances expeditiously if data
were ever required for its cosmetic products.
To the extent the Company's products are marketed in foreign countries,
foreign laws are applicable as well as FDA regulations which control export
of cosmetics. To date, where regulations have been established by foreign
ministries of health which differ from those established in the United
States, the Company has been able to make acceptable substitutions. As a
result, marketing of the products has not been significantly impeded by
foreign regulations.
Material Safety Data Sheets (MSDS) are available on all its consumer
finished products. The MSDS's are supplied to the Company's customers upon
request.
All products for export shipped by air or sea which contain listed
hazardous materials meet United Nations Standards as of January 1991. The
requirements are based on the U.N.'s performance-oriented packaging (POP)
specifications found in the "Transport of Dangerous Goods" commonly called
"The Orange Book".
DENTAL PRODUCTS SEGMENT
From its inception in 1971 through 1997, the Company at various times
introduced dental products designed to satisfy specific material or supply
requirements of the practicing dental professional and of the orthodontic and
endodontic specialist.
Its dental product line consists of a variety of restorative materials
(filling materials, core build up materials), splints, orthodontic brackets,
Maryland bridge adhesives, and enamel and dentin bonding materials and
related products.
In 1991, the Company licensed the right to certain patents and
technology developed by the American Dental Association Health Foundation
through research it sponsored at the Paffenbarger Center for Excellence in
Dental Research at the National Institute of Technology and Standards for
fabricating dental inserts and inlays of special formulas of beta quartz.
The Company has been marketing nine shapes and sizes, and has introduced
twenty-six more sizes and shapes which are intended to offer the dentist
several new classes of restorations between amalgam and composite
restorations on the one hand, and laboratory inlays on the other hand. Beta
quartz designs are intended to permit the dentist to prepare inlays in one
visit, directly at the chairside, without the need for time consuming
impressions, or the need for expensive laboratory work.
DENTAL MARKETING IN THE UNITED STATES
The Company markets its dental, orthodontic and endodontic products in
the United States through telephone solicitation, direct mail, advertisement
in trade journals, attendance at conventions, and dental dealers. The
Company plans and executes its own marketing programs, prepares its own
technical literature, produces its own clinical and marketing films, and
displays its dental products at conventions throughout the country.
DENTAL MARKETING OUTSIDE THE UNITED STATES
The Company markets dental products outside the United States through
foreign dental distributors who either solicit individual dentists and
orthodontists and sell the Company's products to them directly for use in the
treatment of their patients, or sell through local dealers whom they engage
to sell the Company's products on their behalf. The Company plans and
executes its own international marketing programs and regularly displays its
dental products at international conventions.
DENTAL COMPETITION
The dental preventive and restorative materials industry is highly
competitive, and the Company's market share in the total industry is
insignificant. The Company competes with larger corporations which have
greater financial resources and believes other companies may enter this
field. The Company's principal competitors are 3M Dental Division, Kerr,
Dentsply, and Unitek. The principal methods of competition are in the area
of product marketing performance, technical assistance provided to the
customer, and price.
REGULATION OF DENTAL PRODUCTS
FOOD AND DRUG ADMINISTRATION
Dental materials are classified as devices under the Medical Device
Amendments of 1976 to the Federal Food, Drug and Cosmetic Act.
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4
All the dental device products marketed by the Company were registered
as devices with the FDA at the mandatory time (December 31, 1977). All new
devices marketed after May 28, 1976, must be processed under the FDA
premarketing notification regulation (510 k) for determination of equivalency
to preenactment devices, or the product must be submitted as a new device
which requires providing considerable extra test data.
The Safe Medical Devices Act (SMDA) became law on November 28, 1990,
requiring all serious injuries and serious illness contributed to or caused
by medical devices to be reported to distributors, manufacturers and the FDA.
SMDA also requires all premarket submissions to the FDA to contain adequate
information on safety and effectiveness.
As required by the FDA, the Company observes certain procedures and
policies in the manufacture, quality control, and after-sale monitoring of
performance for its products. Although the various criteria to be used by
the FDA in regulating devices have not been finalized, the Company believes
that all of its products and procedures comply with all current and
anticipated device regulations. Over half the Company's products fall into
the FDA's Class II classification which requires that those products must
meet certain performance standards. The Company believes that all affected
products meet all current performance standards.
For those products placed in Class II, final marketing approval from the
FDA is contingent on final acceptance of the Panel's findings and on
development of standards (in large part being done by the American Dental
Association). It is expected that, based upon current available information,
most of the Company's products will meet the standards currently anticipated;
for the products that do not meet the standards, the Company will have to
submit adequate data directly to the FDA. Failure to gain approval by the
FDA could impede the marketing of these devices to the point of removal from
the market until such time as clearance is obtained.
OTHER GOVERNMENTAL REGULATIONS
To the extent the Company's products are marketed in foreign countries,
the Company believes it has complied with the laws of such countries, and
with the FDA regulations which control export of devices. In those countries
which ban use of certain ingredients, the Company has reformulated certain of
its products to meet the specifications of that particular country.
There is generally world wide movement to increase and/or streamline the
regulations controlling medical devices. The twenty two countries in Europe
have consolidated their regulations into a joint code referred to as ISO
9000. This code regulates the manufacture and distribution of medical devices
in Europe. One of the provisions of the code is that the company maintain a
quality control system very much like the FDA system, but with some
differences. It appears that these differences are being negotiated so that
both regulations will be equivalent.
Prior to this time, the Company generally had to apply to each
individual country to obtain permission to sell in that country. With the
consolidated regulations, a company needs only to apply to one. At the
moment all test data needed for an application must be generated in Europe or
validated in Europe. The resolution of differences between the FDA and the
ISO 9000 regulations will probably result in U.S. data being accepted in
Europe, and vice versa. Whether this consolidation will apply to
prescription drugs is uncertain.
The Company has elected to process applications for sale of three of its
major dental brands in Europe. These brands will be labeled with CE markings
indicating their clearance for sale. The Company has been assisted in this
program by the California Manufacturing Technology Center, a program of the
State of California and the U.S. Department of Commerce.
The Company believes that all its dental products are manufactured and
sold in compliance with the laws of each state and country to whom the
Company exports and that no premarketing clearance of its products is
required from any state.
DEPARTMENT OF TRANSPORTATION
The Materials Transportation Bureau administers the Hazardous Materials
Regulation, effective July 7, 1975. It has been ascertained that those
dental products and components marketed by the Company which fall within the
provisions of the regulations are brought into compliance by proper labeling
and/or filing for exemptions. The Company believes that it is in full
compliance with all bureau regulations applicable to its products and that
compliance with these regulations will not significantly impede the marketing
of its products.
APPLICABLE TO ALL SEGMENTS
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
YEAR ENDED SEPTEMBER 30
-----------------------
1997 1996 1995
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(000) (000) (000)
United States export sales
(except Canada) . . . . . . . . . $ 827 $ 834 $1,161
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5
RESEARCH PROGRAM
The recent Company trend has been in the direction of brand acquisitions rather
than extensive internal research and development. Effective July 1996 the
Company eliminated its internal research and development department, and decided
that future testing and research, that cannot be absorbed by its quality
assurance and production control departments, will be placed outside the
Company. As needed, clinical research on products is also done under contract
with dental schools and clinics. The Company follows the policy of expensing
all research and development costs when incurred. During the years ended
September 30, 1997, 1996, and 1995, the Company spent approximately $0,
$178,000, and $186,000, respectively, on research activities relating to the
development of new products or the improvement of existing products.
RAW MATERIALS
The raw materials used by the Company in the manufacture of most of its
dental and consumer products are obtained from commercial sources where they
are presently available in sufficient quantities and are refined by the
Company as needed for use in its products. The Company generally carries
sufficient amounts of raw materials inventory to meet the delivery
requirements of customers.
PATENTS AND TRADEMARKS
The Company has adopted the policy of making patent disclosures on its
products and of filing applications for patents on the products or on aspects of
their manufacture or use when appropriate. The Company owns forty U.S. patents,
and owns the rights in a number of other U. S. patent applications pending. A
U.S. patent on sculptured nails has been granted. There are currently ten
foreign patents held by the Company. In addition, one design patent has been
granted for a nail buffer and for artificial nails. There is no assurance that
any of the patent applications will be granted or that, if granted, the Company
will be afforded any competitive advantages thereby. The Company believes that,
while patent protection is desirable in certain areas, it is not essential;
therefore, certain foreign patents have been abandoned as not necessary to the
interest of the Company. In addition to the forty patents noted above, which
apply to dental and consumer products, the Company has been assigned three U.S.
patents which relate to general epoxy chemistry. Two of these may be used by
the Epoxylite Corporation for other than medical and dental products without the
payment of any royalty or other consideration. United States trademarks for the
major dental products have been granted. Additional trademarks for other
products have been applied for, both in the U. S. and in foreign countries.
Trademarks for certain minor products, or in countries with minor market
potential, have been abandoned as not necessary to the interest of the Company.
The Company has a license to manufacture and sell two dental products from the
American Dental Association Health Research Foundation, which operates a dental
research facility in the complex of the National Institute of Standards and
Technology. The Company has made considerable investment in further developing
this product and has been issued one patent (December 15, 1997) and has two more
pending.
CURRENT REGULATORY REGISTRATION
The Company is registered with the federal and State of California FDA
agencies as a manufacturer and distributor of Drugs, Medical Devices and
Cosmetics. The Company is also registered as a waste generator with the
Environmental Protection Agency (EPA).
ENVIRONMENTAL PROTECTION REGULATION AND LITIGATION
The Company believes that its manufacturing facilities are operated in
compliance with all federal, state and local provisions regulating the discharge
of materials into the environment or otherwise relating to the protection of the
environment.
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The "RWQCB")
ordered the Company in 1988 and 1989 to investigate the contamination on its
property (relating to soil and groundwater contamination). The Company engaged
a consultant who performed tests and reported to the then Chairman of the
Company. On August 12, 1991, the RWQCB issued a "Cleanup and Abatement Order"
directing the Company to conduct further testing and cleanup the site. In
October 1991, the Company received from an environmental consulting firm an
estimate of $465,200 for investigation and cleanup costs. The Company believed
that this estimate was inconclusive and overstated the contamination levels.
The Company believes that subsequent investigations will support the Company's
conclusions about that estimate. 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 on-site, and resulted from either past or current
operations on the property. The Company may be liable for all or part of the
costs of remediating the contamination on its property. The EPA has not taken
any further action in this matter, but may do so in the future.
The Company and nearby property owners have engaged a consultant to
perform a site investigation with respect to soil and shallow groundwater
contamination. 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.
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6
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 Company does not
believe there is any basis for the allegations and is vigorously defending
the lawsuit. 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. In 1995,
the Company was informed that the EPA estimated the cleanup costs for the
South El Monte's portion of the San Gabriel Valley Superfund site to be $30
million. The Company's potential share of such amount has not been
determined. Superfund PRPs are jointly and severally liable for superfund
site costs, and are responsible for negotiating among themselves the
allocation of the costs based on, among other things, the outcome of
environmental investigation.
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 which has been accrued for in the accompanying financial
statements during fiscal year 1995.
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. 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 Company has received a report from Geomatrix Consultants, Inc.,
dated December 1, 1997 (the "Report"), containing a site assessment to
evaluate the impact of volatile organic compounds on the soil and groundwater
at the Lidcombe and Santa Anita Avenue site located in South El Monte,
California (which includes the Company's facilities). The Report has been
submitted to the RWQCB for its comments and response. While the Report
appears to indicate generally low concentrations of tetrachloroethene,
trichloaethene and trichloroethane, until the comments and response of the
RWQCB have been received and analyzed, no determination can be made as to
what, if any, cleanup will be required by the Company or what, if any,
additional environmental costs the Company may incur. The Company is
optimistic that since the sources of these chemicals appear to be upgradient
from the Company facilities as a result of the most recent testing done in
1997, the cleanup of those sources should materially reduce any cleanup costs
of the Company, an engineering position that the Company has maintained for
years.
The Company has been seeking reimbursement of cleanup costs from its
insurance carriers. One carrier has paid certain amounts towards cleanup
costs that may be incurred by buying back its policy and legal fees actually
incurred. The Company continues to seek reimbursement from other carriers,
although no such other payments have been received or agreed to, and there
can be no assurances that any such payments will be received. Some carriers
have denied liability for 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.
The total amount of environmental investigation and cleanup costs that
the Company may incur with respect to the foregoing is not known at this
time. However, based upon information available to the Company at this time,
the Company has expensed a total of $261,000, of which $126,000 were legal
fees, since 1991 for environmental investigation and cleanup costs. The
actual costs could differ materially from the amounts expensed for
environmental investigation and cleanup costs to date.
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.
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7
OTHER REGULATIONS
During the last several years, several state, local and federal agencies
have finalized or proposed regulations relating to hazardous materials. These
include Los Angeles County Hazardous Materials Business Plan, California and
federal OSHA "right to know" laws, EPA "community right to know" laws and
Extremely Hazardous Substance Regulations, Los Angeles County's program for
monitoring and closing underground tanks, the California Safe Drinking and Toxic
Enforcement Act of 1986 (Prop 65), California Connelly-Sterling Toxic Hot Spots
Information Act and AQMD's New Source of Carcinogenic Air Contaminants (Rule
1401). The Company believes it is in compliance with these regulations that are
in effect and is anticipating it will be in compliance with those of these acts
yet to be finalized.
The Internal Standards Organization in September 1996 released
specifications (ISO 14000) for companies to use as guidelines in reducing
worldwide contamination and improving on recycling operations. The Company
believes that demonstrating that the Company meets these specifications is good
citizenship and also in time will be necessary for international trade. The
Company is proceeding to apply for an ISO 14000 rating.
EMPLOYEES
The Company's work force of 101 presently includes 29 permanent
employees, both salaried and hourly, and 72 personnel leased through
employment agencies.
OTHER
The Company is not dependent upon any one supplier for any important raw
material item. Most raw material items are commodities and readily available
in the market. In most instances, the Company utilizes two or more suppliers
to furnish raw materials as needed. Sources are believed to be sufficient to
satisfy current and anticipated needs.
Demand for the Company's principal product line is not seasonal. The
depilatory line of products is, however, generally seasonal, with demand
significantly higher during the spring and summer months.
Although the Company does not believe that it is dependent upon any one
customer or distributor, a customer accounted for 14% and 11% of the
Company's net revenues during fiscal 1997 and 1996, respectively. No other
customer accounted for 10% or more of the Company's net revenues for those
fiscal years.
Backlog is not a significant factor in the Company's business. Most
orders are filled immediately and in any event, are cancelable under certain
conditions. There are no material contracts with distributors.
Consumer Products Division returns must include proof of purchase, sales
receipt and a written explanation of the reason for the return. The Company
generally provides credits for replacement of product, however, on occasion
it may provide a cash refund.
In addition, discontinued or overstocked items may be returned once the
customer receives a computer printed "return authorization" and "shipping
labels" for full case stock of factory fresh product to be sent freight
prepaid to the Company's warehouse. The customer will not receive credit for
additional merchandise that may have been added to the return.
The Company's sales return policy for the Dental Division, is as
follows: "products returned to Lee Pharmaceuticals for credit must be sent
postage paid and within 90 days of purchase". Defective merchandise can be
replaced free of charge at any time prior to the date of expiration.
Excessively used or improperly stored merchandise is not eligible for
replacement.
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8
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company occupies, through ownership or lease, seven buildings on
contiguous lots in South El Monte, California. The Company owns the following:
APPROXIMATE
SQUARE
ADDRESS FOOTAGE USAGE
- ------- ------- -----
1428 Santa Anita Avenue 10,000 Chemical processing and filling
The Company leases the following:
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE LEASE
SQUARE ANNUAL EXPIRATION
ADDRESS FOOTAGE RENTAL DATE USAGE
- ------- ------- ------ ---- -----
<S> <C> <C> <C> <C>
1434 Santa Anita Avenue 11,000 $52,812** 11/30/2000 Inventory control, personnel, data processing,
accounting offices and dental production/shipping
1460 Santa Anita Avenue (1) 15,000 64,728** 11/30/2000 Effective January 15, 1996, the building was
subleased.
1470 Santa Anita Avenue (2) 8,000 43,056** 11/30/2000 Effective July 16, 1996, the building was subleased.
1500 Santa Anita Avenue 18,000 85,884** 11/30/2000 Warehouse, consumer packaging operations,
injection molding and corrugated printing
1516 Santa Anita Avenue 18,000 87,960** 11/30/2000 Sales/marketing offices, purchasing, consumer
shipping, and warehouse
1444 Santa Anita Avenue (3) 10,000 67,302* 11/30/2005 Executive office, consumer production,
quality control and bottle printing
1427 Lidcombe Avenue 6,000 28,134** 11/30/2000 Maintenance and chemical processing
(rear building)
1425 Lidcombe Avenue 6,000 28,134** 11/30/2000 Chemical processing and packaging
1445 Lidcombe Avenue (3) (4) 8,000 63,177* 11/30/2005 Effective November 8, 1995, the building was
subleased on a one-year agreement. Subsequent
to November 1996, the subleasee is on a month
to month agreement with a 45-day advance
notice to relocate.
The gross monthly rental income is $3,676.
</TABLE>
* Revised biannually for consumer price index change.
** Can be revised biannually for consumer price index change, but has not been
adjusted, by the owner, on December 1, 1992, December 1, 1994 or
December 1, 1996.
(1) The Company entered into a sublease agreement, effective January 15,
1996, which expires November 30, 2000. The gross annual rental income
is $66,395. In April 1997 the subleasee commenced occupancy of the entire
15,000 square footage (previously occupied 13,000 square feet). The
sublease includes a cost of living adjustment in June 1998.
(2) The Company entered into a sublease agreement, effective July 16, 1996,
which expires November 30, 2000. The gross annual rental income is
$39,312. In July 1998 the sublease will be adjusted from $3,276 per
month to $3,360 per month.
(3) This property is treated as a sale leaseback agreement between the
Company and one of its directors (former Chairman). The monthly lease
payments were set at the prevailing rates in the area at the time the
leases were written. The buildings were bought by Ronald G. Lee,
President, from Dr. Henry L. Lee, former Chairman, in December 1995.
(4) The gross monthly rental income is $3,676. The Company will continue to
sublease the building until the owner can locate a buyer.
All of the Company's business segments use the properties owned or leased
by the Company except for 1470 Santa Anita Avenue (subleased effective
July 16, 1996), 1460 Santa Anita Avenue (subleased effective January 15,
1996), and 1445 Lidcombe Avenue (subleased effective November 8, 1995).
The Company has a right of first refusal to acquire most of the buildings
which it leases.
<PAGE>
9
The Company believes that its existing facilities are adequate to enable it
to continue to produce its products at their present volume together with
any moderate increases thereto.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is involved from time
to time in litigation. In the opinion of management of the Company none of
the litigation currently pending will have a material effect on its business
or financial condition. See Item I -- "Applicable to all segments --
Environmental protection regulation and litigation" (including the SEC formal
investigation) for additional information concerning certain litigation and
an investigation by the Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE>
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
During January 1996 the Company's Common Stock was delisted from the
American Stock Exchange (AMEX) and was no longer traded on the AMEX. The
Company did not meet the guidelines for continued listing of the Company's
Common Stock on the American Stock Exchange. Effective January 25, 1996, the
Company's Common Stock commenced trading on the electronic over-the-counter
bulletin board under the trading symbol LPHM. For the two most recent fiscal
years, its shares have closed at high and low trading prices as follows:
QTR HIGH LOW
FY 1997 1Q $ .2200 $ .1400
2Q .2000 .1500
3Q .3200 .2500
4Q .3250 .2500
FY 1996 1Q $ .6875 $ .2500
2Q .4375 .0625
3Q .2500 .0938
4Q .2000 .1400
There were approximately 812 shareholders of record of the Company's
Common Stock as of the close of business on September 30, 1997.
The Company has not paid any cash dividends and has no present intention
of paying cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FISCAL YEARS ENDED SEPTEMBER 30, 1997, AND SEPTEMBER 30, 1996
Net revenues increased during fiscal 1997 by $1,878,000 or 27% when
compared to fiscal 1996. The increase in net revenues was the result of sales
of the newly acquired brand acquisitions. The newly acquired brand
acquisitions accounted for $2,272,000 or 26% of the Company's total net
revenues. The aforementioned sales volume increase was partially offset by a
decline in the overall nail extender products (approximately 15%). Also, the
Company's sales returns decreased approximately $321,000 or 27% when
comparing fiscal years 1997 and 1996. The lower sales returns during the
current fiscal year was the result of fewer returns related to the nail
extender category. This was due to the continued decline in the nail products
sales volume. The Company's retail customers have continued to change their
planograms, where they are stocking fewer SKU's (stock keeping units) of the
Company's products.
As noted under "Description of Business -- Consumer Products Segment" the
Company has pursued a policy of diversifying its product line and has
increasingly emphasized lower priced products.
Cost of sales as a percentage of gross revenues was constant (40%) when
comparing fiscal years 1997 and 1996. The constant (40%) cost of sales
percentage was due to several factors such as; (1) a favorable product mix,
(2) continued utilization of less direct labor manpower, and (3) ability to
manufacture recently acquired brands in-house thereby capturing more
manufacturing overhead. Also, the Company has been able to continue
experiencing the benefits of the consolidated production facilities (reducing
the overall occupied facility square footage by 32%) since August 1995. The
above favorable explanations were somewhat offset by non-recurring freight
charges related to the transporting of inventory and equipment (to the
Company) related to acquired brands, and an increase in manufacturing labor
dollars as a result of two (September 1996 and March 1997) hourly rate
increases in the minimum wage.
Selling and advertising expenses increased $267,000 or 9% when comparing
fiscal years 1997 and 1996. The increases in expenses were mainly due to the
following factors; (1) an increase in the bad debt allowance account
($80,000) with no recurring entry in fiscal 1996, (2) an increase in the
amortization expense (approximately $435,000) related to acquisitions by the
Company during October 1996, (3) an increase in temporary (agency) help
payroll ($55,000), and (4) a write off of the impairment of goodwill
($26,000). The above category expense increases were partially offset by a
decrease in advertising expense ($89,000), a non-recurring "special
allowance" ($126,000) which was awarded to a key customer in fiscal 1996,
overall lower salaries, wages and commissions plus related fringe benefits
($62,000) and lesser royalty expense ($50,000).
Research and development expenses decreased $178,000 when comparing fiscal
year 1997 versus 1996. The Company trend over the last fifteen (15) months
has been in the direction of brand acquisitions rather than extensive
internal research and development. Effective July 1996 the Company eliminated
it's internal research and development department, and decided that future
testing and research, that cannot be absorbed by its quality assurance and
production control departments, will be placed outside the Company.
<PAGE>
11
General and administrative expenses increased $39,000 or 4% when comparing
fiscal years 1997 and 1996. This increase was due to higher salaries and
wages, the result of employee new hires, plus various rate increases
($85,000) which was partially offset (decrease) by management's decision not
to renew its Directors and Officers insurance coverage ($50,000).
Interest expense increased $169,000 or 44% when comparing fiscal years
1997 and 1996. The higher interest expense was attributed to the increased
borrowings from the Company's asset based financing lender and a higher prime
interest rate (from 8.25% to 8.5%) charged on various notes payable.
Gain on sale of buildings relates to the sale leaseback arrangement since
1991 whereby the Company is realizing a constant deferred gain over the lease
term.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $114,000 at September 30, 1997, as compared with
$395,000 at September 30, 1996. The decrease in working capital of $281,000
was primarily due to an increase in current liabilities of $224,000
(basically increased notes payable (current portion) as a result of newly
acquired product brands and an increase in other accrued liabilities) and a
decrease in current assets of $57,000 primarily due to a decline in
inventory. The ratio of current assets to current liabilities was 1.0 to 1 at
September 30, 1997, and 1.1 to 1 at September 30, 1996.
In comparing fiscal years 1997 and 1996, accounts receivable turnover
increased (7.3 versus 5.8) primarily due to the Company's reduction in
extended credit terms. Accounts payable as a percentage of total costs and
expenses decreased (12% in fiscal 1997 versus 22% in fiscal 1996) due to
improved timely payments to vendors plus payment of several non-recurring
commitments the result of better cash flow from accounts receivable
collections.
Customer consolidations, as expected, materialized in fiscal 1997 and may
continue in fiscal 1998. Management continues to face lower retail store
inventory levels and expanded computerization (EDI - electronic data
interchange) in the field.
The Company has an accumulated deficit of $5,746,000. The Company's past
recurring losses and current nominal profit from operations and inability to
generate sufficient cash flow from normal operations to meet its obligations
as they come 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 retaining current financing
and achieving a level of profitable operations sufficient to enable it to
meet its obligations as they become due.
The Company has continued to reduce it's inventory of slow moving items at
a price below the listed sales price and scrapping excess inventory items in
light of the reduced facility square footage (refer to above comment on cost
of sales). The overall reduction in inventory was $318,000. Effective May 21,
1996, the Company obtained accounts receivable financing whereby 65% of the
eligible domestic accounts receivable, not to exceed $1,000,000, can be
financed. Effective July 1997, the rate of eligible domestic accounts
receivable was favorably increased from 65% to 70%. The financing is secured
by accounts receivable, equipment, inventories, and certain other assets.
The Company does not believe that inflation had a significant impact on
its operations during fiscal years 1997 and 1996.
ITEM 7. FINANCIAL STATEMENTS.
PAGE
INDEX TO FINANCIAL STATEMENTS NUMBER
Independent Auditor's Report 12
Financial Statements:
Balance sheet as of September 30, 1997 13
Statements of operations for each of the years in the
two-year period ended September 30, 1997 14
Statements of changes in stockholders' equity (deficiency)for each
of the years in the two-year period ended September 30, 1997 15
Statements of cash flows for each of the years in the two-year
period ended September 30, 1997 16
Notes to financial statements 17-25
All schedules not filed or included herein are omitted either because they
are not applicable or not required, or the required information is included
in the financial statements or notes thereto.
<PAGE>
12
GEORGE BRENNER
CERTIFIED PUBLIC ACCOUNTANT
9300 WILSHIRE BOULEVARD, SUITE 480
BEVERLY HILLS, CALIFORNIA 90212
Independent Auditor's Report
Board of Directors
Lee Pharmaceuticals
South El Monte, California
I have audited the accompanying balance sheet of Lee Pharmaceuticals as of
September 30, 1997 and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lee Pharmaceuticals as of
September 30, 1997, and the results of its operations and its cash flows for
each of the years in the two-year period ended September 30, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1
to the financial statements, the Company's recurring past losses from
operations, its current nominal profit, and inability to generate sufficient
cash flow from normal operations raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Notes 1 and 15. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the possible inability of the Company to
continue as a going concern.
As discussed in Note 10, "Commitments and Contingencies - Assessment for
environmental cleanup," the Company is attempting to quantify its cleanup
cost liability, however, the ultimate outcome of this liability cannot
presently be determined.
GEORGE BRENNER
George Brenner, CPA
December 9, 1997
Beverly Hills, California
<PAGE>
13
LEE PHARMACEUTICALS
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,000
Accounts receivable, less allowance for doubtful accounts
of $39,000 and sales returns allowance of $161,000. . . . . 1,303,000
Due from related party . . . . . . . . . . . . . . . . . . . . 108,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,000
Prepaid royalties. . . . . . . . . . . . . . . . . . . . . . . 660,000
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,000
Other current assets . . . . . . . . . . . . . . . . . . . . . 87,000
----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . 4,589,000
----------
Property, plant and equipment, at cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,000
Machinery and equipment. . . . . . . . . . . . . . . . . . . . 5,986,000
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 369,000
----------
6,608,000
Less accumulated depreciation and amortization . . . . . . . . 6,091,000
----------
NET PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . 517,000
----------
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization
of $4,869,000. . . . . . . . . . . . . . . . . . . . . . . . . 2,804,000
----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,910,000
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . $ 209,000
Notes payable, other . . . . . . . . . . . . . . . . . . . . . 716,000
Current portion - notes payable, other (long-term) . . . . . . 273,000
Current portion - royalty agreements . . . . . . . . . . . . . 667,000
Current portion - note payable related party . . . . . . . . . 255,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 1,020,000
Accrued royalties. . . . . . . . . . . . . . . . . . . . . . . 458,000
Other accrued liabilities. . . . . . . . . . . . . . . . . . . 407,000
Due to related parties . . . . . . . . . . . . . . . . . . . . 405,000
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . 65,000
----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . 4,475,000
LONG-TERM NOTES PAYABLE TO RELATED PARTIES. . . . . . . . . . . . 3,064,000
LONG-TERM PAYABLE - royalty agreements, less current portion
$667,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,000
LONG-TERM NOTES PAYABLE, other. . . . . . . . . . . . . . . . . . 1,219,000
DEFERRED INCOME . . . . . . . . . . . . . . . . . . . . . . . . . 142,000
----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . 9,021,000
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, $.10 par value; authorized 7,500,000 shares;
issued and outstanding, 4,135,162 shares. . . . . . . . . . 413,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . 4,222,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (5,746,000)
----------
TOTAL STOCKHOLDERS' DEFICIENCY . . . . . . . . . . . . . . . . (1,111,000)
----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,910,000
----------
----------
The accompanying notes are an integral part of the financial statements.
<PAGE>
14
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
GROSS REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,675,000 $8,118,000
Less: Sales returns, discounts and allowances. . . . . . . . . . . . . . . . . . (860,000) (1,181,000)
---------- ----------
NET REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,815,000 6,937,000
---------- ----------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,820,000 3,228,000
Selling and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,373,000 3,106,000
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,126,000 1,087,000
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,000
---------- ----------
TOTAL COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,319,000 7,599,000
---------- ----------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,000 (662,000)
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (550,000) (381,000)
GAIN ON SALE OF BUILDINGS AND OTHER. . . . . . . . . . . . . . . . . . . . . . . . . 65,000 65,000
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 8,000
---------- ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,000 $ (970,000)
---------- ----------
---------- ----------
PER SHARE:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .01 $ (.23)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
15
LEE PHARMACEUTICALS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
COMMON STOCK Retained
------------------ Additional Earnings
Number of Paid-in (Accumulated
Shares Amount Capital Deficit) Total
--------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 4,135,162 413,000 4,222,000 (4,805,000) (170,000)
Net loss (970,000) (970,000)
--------- ---------- ---------- ------------ -----------
Balance at September 30, 1996 4,135,162 $ 413,000 $4,222,000 $ (5,775,000) $(1,140,000)
Net income 29,000 29,000
--------- ---------- ---------- ------------ -----------
Balance at September 30, 1997 4,135,162 $ 413,000 $4,222,000 $ (5,746,000) $(1,111,000)
--------- ---------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
16
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1996
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,000 $ (970,000)
------------- ---------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,000 162,000
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,416,000 950,000
(Decrease) in deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . (65,000) (65,000)
(Gain) on disposal of property, plant and equipment. . . . . . . . . . . . . . . . (17,000) (9,000)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . (191,000) 219,000
(Increase) in due from related party . . . . . . . . . . . . . . . . . . . . . . . (35,000) (73,000)
Decrease in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318,000 162,000
(Increase) in other current assets . . . . . . . . . . . . . . . . . . . . . . . . (22,000) (63,000)
(Decrease) in notes payable-other. . . . . . . . . . . . . . . . . . . . . . . . . (150,000) --
(Decrease) increase in accounts payable. . . . . . . . . . . . . . . . . . . . . . (624,000) 8,000
Increase (decrease) in due to related parties. . . . . . . . . . . . . . . . . . . 57,000 (40,000)
Increase in other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 266,000 144,000
(Decrease) in accrued royalties. . . . . . . . . . . . . . . . . . . . . . . . . . (69,000) (7,000)
------------- ---------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997,000 1,388,000
------------- ---------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 1,026,000 418,000
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . . (77,000) (146,000)
Proceeds from sale of equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 9,000
Acquisition of product brands. . . . . . . . . . . . . . . . . . . . . . . . . . . (260,000) (622,000)
------------- ---------------
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . . (320,000) (759,000)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from bank loans . . . . . . . . . . . . . . . . . . . . . . (63,000) 88,000
Proceeds from (payments on) notes payable to related party . . . . . . . . . . . . -- (37,000)
(Payments on) proceeds from notes payable-other. . . . . . . . . . . . . . . . . . (107,000) 852,000
(Decrease) in long-term royalty agreements . . . . . . . . . . . . . . . . . . . . (660,000) (744,000)
Increase in bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,000 72,000
------------- ---------------
Net cash (used) provided by financing activities. . . . . . . . . . . . . . . (693,000) 231,000
------------- ---------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 (110,000)
Cash, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 123,000
------------- ---------------
Cash, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,000 $ 13,000
------------- ---------------
------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 524,000 $ 270,000
------------- ---------------
------------- ---------------
Acquisition of product brands:
Fair value of assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,403,000 $ 922,000
Fair value of liabilities incurred . . . . . . . . . . . . . . . . . . . . . . . . (1,143,000) (300,000)
------------- ---------------
Net cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 260,000 $ 622,000
------------- ---------------
------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
17
LEE PHARMACEUTICALS
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company manufactures and markets consumer products to national and
regional retailers of varying financial strength. The Company also
manufactures and sells dental products to dental service providers
principally in the United States. For all years presented, sales,
operating results and identifiable assets of the consumer products
group were in excess of 91% of total company operations.
CONTINUED EXISTENCE
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has an accumulated deficit
of $5,746,000. The Company's past recurring losses and current
nominal profit from operations and inability to generate sufficient
cash flow from normal operations to meet its obligation 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 retaining current
financing and achieving a level of profitable operations sufficient to
enable it to meet its obligations as they become due. Management's
plans in regard to these matters are described in Note 15 -
"Subsequent Events." The financial statements do not include any
adjustments to reflect the possible future effects of the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
INVENTORIES
Inventories are stated at the lower of average cost or market using
the first-in, first-out method.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are depreciated using the straight-line
method over estimated useful lives of three to ten years for machinery
and equipment and building improvements and thirty-one years for the
building. Leasehold improvements are amortized over the shorter of
the estimated useful lives of the assets or the related lease term.
Royalties are amortized ($808,000 per year) over the maximum period of
the royalty agreement. All other intangibles are amortized ($582,000
per year) over estimated useful lives which range from six (6) to
forty (40) years.
ENVIRONMENTAL EXPENDITURES
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.
Management believes that the amount accrued at September 30, 1995 for
remedial cost studies ($102,500) is still adequate based on current
information available. Consequently, no additional provision has been
recorded in fiscal year 1997 or 1996. See Note 10 - "Assessment for
environmental cleanup."
MAJOR CUSTOMER
The Company had one major customer with sales volume approximating 14%
and 11% of the Company's net revenues for the years ending September
30, 1997, and 1996, respectively. The amount due from the customer
was $542,000 and $249,000 at September 30, 1997, and 1996,
respectively, and is included in accounts receivable in these
financial statements.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and trade receivables.
The Company places its cash with high credit quality financial
institutions. At times such investments may be in excess of the FDIC
limit. In regards to trade receivables, the risk is limited due to
the large number of customers comprising the customer base, and the
dispersion in different industries and geographies. Generally, the
Company does not require collateral for its trade receivables.
INCOME TAXES
Income taxes are provided based on earnings reported for financial
statement purposes. In accordance with FASB Statement No. 109, the
asset and liability method requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between tax basis and financial reporting basis
of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and
<PAGE>
18
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - NET INCOME (LOSS) PER SHARE
Net profit per share for fiscal 1997 and net loss per share for fiscal
1996 are based on 4,135,162 common shares outstanding. Common stock
equivalents (common stock options) were not considered in the earnings
per share calculation since the effect was immaterial.
NOTE 3 - INVENTORIES
Inventories consist of the following at September 30, 1997:
Raw materials . . . . . . . . . . . . $ 1,952,000
Work-in-process . . . . . . . . . . . 292,000
Finished goods. . . . . . . . . . . . 298,000
------------
2,542,000
Allowance for obsolescence. . . . . . 562,000
------------
Total . . . . . . . . . . . . . . . . $ 1,980,000
------------
------------
NOTE 4 - INTANGIBLE AND OTHER ASSETS
The Company acquired certain product lines in 1997 (See Note 14) and
prior years. Certain amounts related to these acquisitions were
allocated to intangible assets. Included in intangible assets at
September 30, 1997, are the following:
<TABLE>
<CAPTION>
Amortization
Cost period (years)
<S> <C> <C>
Goodwill. . . . . . . . . . . . . . . $ 1,583,000 4 - 40
Covenants not to compete. . . . . . . 2,640,000 1 - 5
Trademark . . . . . . . . . . . . . . 322,000 5
Royalty agreements. . . . . . . . . . 2,802,000 4 - 6
Other . . . . . . . . . . . . . . . . 326,000 2 - 3
------------
Total . . . . . . . . . . . . . . . . 7,673,000
Less: accumulated amortization . . . (4,869,000)
------------
Intangibles - Net . . . . . . . . . . $ 2,804,000
------------
------------
</TABLE>
NOTE 5 - NOTES PAYABLE, OTHER - CURRENT
A. Note payable to bank (accounts receivable
financing), secured by accounts receivable,
equipment, inventories, and certain other
assets, maximum revolving advance is $1,000,000
(based on domestic accounts receivable as
defined in the agreement), requires minimum
monthly interest of $3,000, interest rate is 8%
above the prime rate. The agreement is for a
term of two years from May 1996 and is renewable
for successive one year periods thereafter. $491,000
B. Note payable to seller on acquisition of product
brand payable in one installment of $7,000, plus
interest, on October 8, 1997, and eleven equal
monthly installments of $8,000, plus interest,
ending on September 8, 1998. The interest rate
is the highest prime rate during the period.
The interest rate at September 30, 1997, was 8.5% 95,000
C. Note payable to bank, secured by production
equipment related to a product brand acquisition,
requires monthly payments of $5,500, including
interest at the bank's prime rate plus 8%,
maturing May 1998. 128,000
D. Notes Payable Other 2,000
------------
$ 716,000
------------
------------
NOTE 6 - RELATED PARTY TRANSACTIONS
In 1991 the Company sold and leased back two of its operating facilities in
a transaction with its former Chairman. An initial gain was recognized and
a deferred gain was recorded which is to be amortized over the term of the
two leases which expire November 2000. The amount of deferred gain
realized during 1997 and 1996 was $65,000.
The amounts of rents paid to related parties were $133,000 and $133,000 for
September 30, 1997, and 1996, respectively.
<PAGE>
19
During the fiscal year ending September 30, 1997, the total interest
expensed to related parties (Note 7) was $275,000 out of which $188,000 was
paid and $405,000 was accrued as of September 30, 1997.
During the fiscal year ending September 30, 1996, the total interest
expensed to related parties (Note 7) was $281,000 out of which $270,000 was
paid and $329,000 was accrued as of September 30, 1996, in addition to
other accruals of $19,000.
The Company's primary agent for purchasing television advertising was
Western International Media Corp. (WIMC) whose President and Chief
Executive Officer, Dennis F. Holt, was a Director of the Company during
fiscal year 1995 and resigned in October 1995.
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
A. Notes payable to related parties, unsecured, bearing
interest at bank's prime rate (8.5% at September
30, 1997), maturing January 2005. $ 90,000
B. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.5% at September 30, 1997),
principal is maturing and accrued interest is payable
in January 2005. 193,000
C. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.5% at September 30, 1997),
principal is maturing and accrued interest is payable
in January 2005. 150,000
D. Note payable to officer, unsecured, bearing interest
at bank's prime rate (8.5% at September 30, 1997),
principal is maturing and accrued interest is payable
in January 2005. 371,000
E. Notes payable to related party, secured by product
brand, bearing interest at bank's prime rate (8.5%
at September 30, 1997), principal is maturing and
accrued interest is payable in January 2005. 400,000
F. Note payable to related party, secured by assets of
the Company (secondary position) bearing interest at
bank's prime rate (8.5% at September 30, 1997), and
principal payable based on a twelve (12) year fully
amortized schedule commencing March 15, 1997. 1,440,000
G. Notes payable to officer, secured by product brand,
bearing interest at bank's prime rate (8.5% at
September 30, 1997), principal is maturing and accrued
interest is payable in January 2005. 250,000
H. Note payable to officer, secured by product brand,
bearing interest at bank's prime rate (8.5% at
September 30, 1997), principal is maturing and accrued
interest is payable in January 2005. 100,000
I. Note payable to officer, unsecured, bearing interest
at bank's prime rate (8.5% at September 30, 1997),
principal is maturing and accrued interest is payable
in July 1998. 65,000
J. Note payable to officer, unsecured, bearing interest
at bank's prime rate (8.5% at September 30, 1997),
principal is maturing and accrued interest is payable
in January 2005. 250,000
K. Note payable to officer, unsecured, bearing interest
at bank's prime rate (8.5% at September 30, 1997),
maturing January 2005. 10,000
-----------
$3,319,000
Less current portion (255,000)
-----------
$3,064,000
-----------
-----------
In connection with the sale of two buildings by the former Chairman to the
current Chairman, certain notes were exchanged between the two parties and
an early note payment of $27,000 was made to the current Chairman.
NOTE 8 - NOTES PAYABLE, OTHER - NONCURRENT
A. Note payable secured by product brand, bearing interest
at 15%, interest payable monthly, maturing December 1998.
The note was further modified from its original maturity
date of July 1996. Effective November 1, 1997, the
interest rate will be 20%. $ 50,000
<PAGE>
20
<TABLE>
<CAPTION>
<S> <C>
B. Note payable secured by product brand, bearing interest at 15%,
interest payable monthly, maturing December 1998. The note was
further modified from its original maturity date of July 1996.
Effective November 1, 1997, the interest rate will be 20%. 50,000
C. Note payable secured by product brands, bearing interest at 15%,
interest payable monthly, maturing December 1998. The note was
further modified from its original maturity date of July 1996.
Effective November 1, 1997, the interest rate will be 20%. 100,000
D. Note payable secured by product brand, bearing interest at 20%,
interest payable monthly, maturing November 1998. 100,000
E. Note payable secured by product brand, bearing interest at 15%,
interest payable monthly, maturing December 1998. The note was
modified from its original maturity date of October 1996. Effective
November 1, 1997, the interest rate will be 20%. 50,000
F. Note payable secured by product brands, bearing interest at 15%,
interest payable monthly, maturing December 1998. The note was
modified from its original maturity date of February 1997. Effective
November 1, 1997, the interest rate will be 20%. 100,000
G. Note payable to seller on acquisition of product brand payable in
equal monthly installments of $3,000 principal and interest until
September 16, 1999. The balance of unpaid principal and accrued
interest is payable on October 16, 1999. The interest rate is the
highest prime rate during any payment period. The interest rate at
September 30, 1997, was 8.5%. 71,000
H. Note payable to seller on acquisition of product brands (28) payable
in equal monthly installments of $19,751, plus interest, until
October 1, 2000, with any unpaid balance payable November 1, 2000.
The interest rate is the highest prime rate during the previous month.
The interest rate at September 30, 1997, was 8.5%. 711,000
I. Notes payable to bank, secured by a deed on land and building,
requires monthly payments of $4,200, including interest at the
bank's reference rate plus 4%, maturing March 2001. The note is
guaranteed by the President and former Chairman. 260,000
-----------
1,492,000
Less current portion (273,000)
-----------
$ 1,219,000
-----------
-----------
</TABLE>
NOTE 9 - LONG-TERM DEBT MATURITIES
At September 30, 1997, the Company was committed to the following minimum
principal payments.
YEAR ENDING RELATED
SEPTEMBER 30, PARTIES OTHERS
1998 $ 255,000 $ 281,000
1999 120,000 730,000
2000 120,000 245,000
2001 120,000 236,000
2002 120,000 -
Thereafter 2,584,000 -
------------ ------------
Total $ 3,319,000 $ 1,492,000
------------ ------------
------------ ------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At September 30, 1997, the Company was committed to its Chairman and to
others under noncancelable operating leases for land and buildings
requiring minimum annual rentals as follows:
<PAGE>
21
YEAR ENDING
SEPTEMBER 30, OTHERS CHAIRMAN
1998 $ 391,000 $ 134,000
1999 391,000 134,000
2000 391,000 134,000
2001 65,000 134,000
2002 - 134,000
Thereafter - 293,000
------------ ------------
Total $ 1,238,000 $ 963,000
------------ ------------
------------ ------------
Generally, the leases provide that maintenance, insurance and a portion of
property taxes are to be paid by the Company. The Company also has a right
of first refusal to acquire most of the buildings which it leases. The
Company's rental expense for the years ended September 30, 1997, and 1996,
was $521,000 and $523,000, respectively.
Some of the above leases are subleased to other companies. Two of the
three subleases are long term with annual rental revenues as follows:
YEAR ENDING SUBLEASE
SEPTEMBER 30, REVENUES
1998 $ 96,800
1999 97,600
2000 97,600
2001 16,300
------------
Total $ 308,300
------------
------------
ASSESSMENT FOR ENVIRONMENTAL CLEANUP
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB") ordered the Company in 1998 and 1989 to investigate the
contamination on its property (relating to soil and groundwater
contamination). The Company engaged a consultant who performed tests
and reported to the then Chairman of the Company. On August 12, 1991,
the RWQCB issued a "Cleanup and Abatement Order" directing the Company
to conduct further testing and cleanup the site. In October 1991, the
Company received from an environmental consulting firm an estimate
of $465,200 for investigation and cleanup costs. The Company believed
that this estimate was inconclusive and overstated the contamination
levels. The Company believes that subsequent investigations will support
the Company's conclusions about that estimate. 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 on-site, and resulted from either past or current operations
on the property. The Company may be liable for all or part of the costs
of remediating the contamination on its property. The EPA has not taken
any further action in this matter, but may do so in the future.
The Company and nearby property owners have engaged a consultant to
perform a site investigation with respect to soil and shallow groundwater
contamination. The Company currently estimates the cost to perform the
site investigation to be $175,000. Accordingly, while reorganizing 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. In 1995, the Company was informed that the EPA
estimated the cleanup costs for the South El Monte's portion of the
San Gabriel Valley Superfund site to be be $30 million. The Company's
potential share of such amount has not been determined. Superfund
PRPs are jointly and severally liable for superfund site costs, and
are responsible for negotiating among themselves the allocation of the
costs based on, among other things, the outcome of environmental
investigation.
<PAGE>
22
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 its
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 Company has received a report from Geomatrix Consultants, Inc., dated
December 1, 1997 (the "Report"), containing a site assessment to evaluate the
impact of volatile organic compounds on the soil and groundwater at the
Lidcombe and Santa Anita Avenue site located in South El Monte, California
(which includes the Company's facilities). The Report has been submitted to
the RWQCB for its comments and response. While the Report appears to indicate
generally low concentrations of tetrachloroethene, trichloaethene and
trichloroethane, until the comments and response of the RWQCB have been
received and analyzed, no determination can be made as to what, if any,
cleanup will be required by the Company or what, if any, additional
environmental costs the Company may incur. The Company is optimistic that
since the sources of these chemicals appear to be upgradient from the Company
facilities as a result of the most recent testing done in 1997, the cleanup
of those sources should materially reduce any cleanup costs of the Company,
an engineering position that the Company has maintained for years.
The Company has been seeking reimbursement of cleanup costs from its
insurance carriers. One carrier has paid certain amounts towards cleanup
costs that may be incurred by buying back its policy and legal fees actually
incurred. The Company continues to seek reimbursement from other carriers,
although no such other payments have been received or agreed to, and there
can be no assurances that any such payments will be received. Some carriers
have denied liability for 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.
The total amount of environmental investigation and cleanup costs that the
Company may incur with respect to the foregoing is not known at this time.
However, based upon information available to the Company at this time, the
Company has expensed a total of $261,000, of which $126,000 were legal fees,
since 1991 for environmental investigation and cleanup costs. The actual
costs could differ materially from the amounts expensed for environmental
investigation and cleanup costs to date.
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.
NOTE 11 - STOCK OPTIONS
Under the Company's 1985 Employee Incentive Stock Option Plan, as amended,
common stock options may be granted to officers and other key employees
for the purchase of up to a total of 580,000 shares of common stock of the
Company at a price per share equal to its fair market value on the date of
grant. Options expire five years from the date of grant, are contingent
upon continued employment and become exercisable in equal installments
during each of the three years beginning eighteen months after the date of
grant.
The following table sets forth the number of shares under option and the
related option prices at September 30, 1996, and 1997:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
<S> <C> <C>
Outstanding at September 30, 1995............ 467,000 $0.50 -- $1.3125
Canceled................................ (261,500) $0.50 -- $1.3125
----------
Outstanding at September 30, 1996, and 1997 205,500 $0.50 -- $1.3125
----------
----------
</TABLE>
<PAGE>
23
At September 30, 1997, 130,000 shares are eligible to be exercised. No
additional options can be granted under this plan.
The 1987 Stock Option Plan was adopted by the Board of Directors on
January 4, 1988, and was approved by the Company's shareholders on March
8, 1988. This Stock Option Plan provides for the granting of options to
the Company's outside directors for the purchase of a total of 50,000
shares of common stock of the Company at a price per share equal to the
fair market value on the date of grant. Options expire five years from
the date of grant and become exercisable in equal installments during
each of the three years beginning eighteen months after the date of grant.
At September 30, 1997, options to purchase 16,600 shares were outstanding
and 13,300 shares are eligible to be exercised at an average price of
$1.21 per share. No additional options can be granted under this plan.
The 1997 Employee Incentive Stock Option Plan was adopted by the Board of
Directors on January 20, 1997, and was approved by the Company's
shareholders on March 11, 1997. The Employee Incentive Stock Option Plan
provides for the granting of options to selected officers and key
employees of the Company for the purchase of a total of 980,000 shares of
common stock of the Company at a price per share equal to the fair market
value on the date of grant. Options expire five years from the date of
grant.
Only incentive stock options may be granted under the Employee Incentive
Stock Option Plan. The price per share of the shares subject to each
option shall not be less than 100% of the fair market value of such stock
on the date the stock option is granted. Stock options shall not be
exercisable until one and one-half years from the date of grant.
Commencing eighteen (18), thirty (30), and forty-two (42) months,
respectively, after the date of grant, an option may be exercised to the
extent of one third of the total number of shares to which it relates.
Upon a change in control of the Company (as defined), all stock options
granted to any optionee will become fully exercisable. Any stock option
granted to an employee who at the time the option is granted, owns stock
representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, will be granted at a price
equal to one hundred and ten percent (110%) of the fair market value
determined as of the date the stock option is granted. The Employee
Incentive Stock Option Plan will expire on December 31, 2006.
The following table sets forth the number of shares under option and the
related option price at September 30, 1997:
OPTION PRICE RANGE
NUMBER PER SHARE
Outstanding at September 30, 1996............. -0-
Granted.................................. 768,000 $.16 -- $.176
---------
Outstanding at September 30, 1997............. 768,000 $.16 -- $.176
---------
---------
As of September 30, 1997, there were no shares exercisable under the 1997
Employee Incentive Stock Option Plan, and there were 212,000 shares
available for future grant under the 1997 Employee Incentive Stock Option
Plan.
The 1997 Stock Option Plan was adopted by the Board of Directors on
January 20, 1997, and was approved by the Company's shareholders on March
11, 1997. This Stock Option Plan provides for the granting of options to
the Company's outside directors for the purchase of a total of 150,000
shares of common stock of the Company at a price per share equal to the
fair market value on the date of grant. Options expire five years from
the date of grant.
Only nonqualified stock options may be granted under the 1997 Stock Option
Plan. The price per share of the shares subject to each option shall not
be less than 100% of the fair market value of such stock on the date the
stock option is granted. Stock options shall not be exercisable until one
and one-half years from the date of grant. Commencing eighteen (18),
thirty (30) and forty-two (42) months, respectively, after the date of
grant, an option may be exercised to the extent of one third of the total
number of shares to which it relates. Upon a change in control of the
Company (as defined), all stock options granted to any optionee will
become fully exercisable. The 1997 Stock Option Plan will expire on
December 31, 2006.
The following table sets forth the number of shares under option and the
related option price at September 30, 1997:
OPTION PRICE RANGE
NUMBER PER SHARE
Outstanding at September 30, 1996.......... -0-
Granted............................... 150,000 $.16
----------
Outstanding at September 30, 1997.......... 150,000 $.16
----------
----------
<PAGE>
24
There were no shares exercisable under the 1997 Stock Option Plan as of
September 30, 1997. There are no shares available for future grant under
the plan as of September 30, 1997.
NOTE 12 - INCOME TAXES
As of September 30, 1996, the Company had net operating loss (NOL)
carryforwards of approximately $6,770,000 for Federal and $3,920,000 for
California which for tax purposes can be used to offset future Federal and
California income taxes of which $55,000 was carried forward to offset
1997 taxable income. The differences in the state carryforwards relate
primarily to the treatment of loss carryforwards and depreciation of
property, plant and equipment. The carryforwards expire from 2005 through
2011. The Company has provided an allowance for the entire amount of the
deferred asset applicable to the NOL.
NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company established an Employee Stock Ownership Plan and Trust
("Plan") effective December 1, 1985. The Plan is a tax-qualified employee
stock ownership plan which is designed to invest primarily in the common
stock of the Company for the benefit of the employees and their
beneficiaries.
The benefits provided by the Plan are paid for entirely by the Company.
The Company contributions are used to purchase the common stock of the
Company which is credited to the individual accounts maintained for each
participant. For each twelve-consecutive-month period of employment,
employees receive a one-year period of service credit. After three years
of service employees have a 20% vested interest in their accounts under
the Plan, increasing at a rate of 20% per year with full vesting occurring
at seven years of service.
The Plan consists of a stock bonus plan, ("Plan A") and a money purchase
pension plan, ("Plan B"). Under Plan A, the Company's Board of Directors
annually determines the amount to be contributed to the Plan. The
contribution by the Company for any single plan year (October 1 through
September 30) cannot exceed fifteen percent (15%) of the total
compensation paid to Plan participants for the year. Plan B requires an
automatic contribution equal to ten percent (10%) of participant
compensation each Plan Year. The Company did not make any contributions
(expense) related to Plan A for the year ending September 30, 1996, or
September 30, 1995.
Effective June 30, 1993, Plan B was terminated; therefore, there was no
contribution under Plan B for the year ended September 30, 1996, or for
the period October 1, 1994, through September 30, 1995. All participants
under Plan B became 100% vested on July 1, 1993, due to the termination of
Plan B.
Effective September 30, 1995, Plan A was terminated. All participants
under Plan A became 100% vested on September 30, 1995, due to the
termination of Plan A.
In November 1996 the Company received its final determination letter from
the Internal Revenue Service. During fiscal 1997 all participants account
balances have been distributed by the Company except for a few former
participants account balances of less than $100.00 in the aggregate.
NOTE 14 - ACQUISITIONS
On September 20, 1996, the Company purchased certain assets of the
Aquafilter line of disposable cigarette filters from Aquafilter
Corporation, a wholly owned subsidiary of Scott's Liquid Gold Inc., for
$800,000. The Company remitted $500,000 at closing. Payments of $50,000
are due on each of November 1, 1996, December 1, 1996, January 2, 1997,
and January 10, 1997, plus $100,000 due on April 1, 1997, plus accrued
interest at 8.25%. All amounts payable to the Seller by the Company
(Buyer) after closing date are personally guaranteed by the Company's
Chairman.
On October 16, 1996, the Company purchased certain assets of the
Vince-Registered Trademark- mouthwash rinse and Perma-Grip-Registered
Trademark- denture adhesive line from Lactona Corporation for $175,000.
The Company remitted $75,000 at closing and is required to make monthly
payments of $3,000, including interest at prime, commencing November 16,
1996, and ending September 16, 1999. Lastly, one final payment of any
remaining principal and accrued interest is payable on October 16, 1999.
On October 21, 1996, the Company purchased certain assets from Roberts
Laboratories for $1,048,089. The Company remitted $100,000 at closing and
is required to make monthly payments of $19,751 plus interest at prime
beginning November 1, 1996, and ending October 1, 2000. In addition, the
Company purchased certain inventories from Roberts Laboratories for
$193,000.
On September 8, 1997, the Company purchased certain assets of the
Klutch-Registered Trademark- denture adhesive powder line from I. Putnam,
Inc. for $320,000. The Company remitted $225,000 at closing and is
required to make one payment of $7,000 plus interest, and eleven equal
monthly payments of $8,000, plus interest at the prime rate. In addition,
the Company purchased certain inventories from I. Putnam, Inc., for
$51,063 at closing.
<PAGE>
25
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
The Company has improved from a prior year loss of $970,000 to a nominal
profit of $29,000 (approximately $1,000,000 change). The Company believes
the profit trend plus the programs currently in effect, inventory reduction
and manufacturing internally (to the extent possible) its newly acquired
brands should generate sufficient cash to meet its obligations.
NOTE 16 - FOURTH QUARTER RESULTS
The Company's unaudited operating profit for the fourth quarter, ended
September 30, 1997, was $67,000. The $67,000 profit was related to: (1)
higher than normal sales volume, and (2) slightly lower general and
administrative expenses. However, the preceding was somewhat offset by
increased sales and marketing expenses, due to new hires, during the fourth
quarter. In the first three quarters the Company averaged over $2,300,000
in gross revenues per quarter. However, during the fourth quarter, gross
revenues were approximately $2,800,000 or a more than 22% increase in the
average gross sales volume from the prior three (3) quarters.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
As previously reported in a Current Report on Form 8-K, on September 27,
1995, the Board of Directors of Lee Pharmaceuticals authorized, effective
September 27, 1995, (1) the termination of the engagement of Meir & Meir as
independent auditors for Lee Pharmaceuticals for the fiscal year ended
September 30, 1995 and (2) the engagement of Jeffery, Corrigan & Shaw, 245
South Los Robles Avenue, Suite 400, Pasadena, California 91101-2894, as
independent auditors for Lee Pharmaceuticals for fiscal 1995. Jeffery,
Corrigan & Shaw was engaged as the Company's principal independent auditors
on September 29, 1995.
During the fiscal year ended September 30, 1994 and through September 27,
1995 there were no disagreements with Meir & Meir on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Meir &
Meir would have caused them to make reference in connection with their report
to the subject matter. The Company had been informed by Meir & Meir that
information had come to their attention that made them conclude that the
scope of the audit should be expanded to include an expert opinion regarding
the environmental issues the Company is involved with. The finding of such
expert may materially impact the fairness or reliability of the previously
issued audit reports or the underlying financial statements, or the financial
statements to be issued covering the fiscal periods subsequent to the date of
the most recent audited financial statements (including information that
might preclude the issuance of an unqualified report). The request by Meir &
Meir to include the expert opinion in the fiscal 1995 audit was not the basis
for the Company's change in independent accountants.
Prior to such firm's engagement, Jeffery, Corrigan & Shaw was not
consulted by the Company (or anyone acting on its behalf) regarding (1)
either the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on Lee Pharmaceuticals' financial statements or (2) any matter that
was either the subject of a "disagreement" of a "reportable event" as such
terms are defined in Regulation S-K promulgated by the Securities and
Exchange Commission.
As previously reported in a Current Report on Form 8-K, on October 27,
1995, the Board of Directors of Lee Pharmaceuticals authorized, effective
October 27, 1995, (1) the termination of the engagement of Jeffery, Corrigan
& Shaw as independent auditors for Lee Pharmaceuticals for the fiscal year
ended September 30, 1995 and (2) the engagement of George Brenner, CPA, 9300
Wilshire Boulevard, Suite 480, Beverly Hills, California 90212, as
independent auditor for Lee Pharmaceuticals for fiscal 1995. George Brenner,
CPA was engaged as the Company's principal independent auditor on October 27,
1995.
In connection with its activities for the period September 27, 1995, (the
date Jeffery, Corrigan & Shaw was engaged), through October 27, 1995, there
were no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Jeffery, Corrigan & Shaw
would have caused them to make reference in connection with their report to
the subject matter. Jeffery, Corrigan & Shaw was unable to proceed with the
audit engagement because of its failure to obtain the insurance it believed
was necessary.
Prior to such firm's engagement, George Brenner, CPA was not consulted by
the Company (or anyone acting on its behalf) regarding (1) either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Lee Pharmaceuticals' financial statements or (2) any matter that was either
the subject of a "disagreement" of a "reportable event" as such terms are
defined in Regulation S-K promulgated by the Securities and Exchange
Commission.
<PAGE>
26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
Directors are elected to serve until the next annual stockholders'
meeting or until their respective successors have been elected and qualified
or as otherwise provided in the bylaws. Set forth below for the current
directors and executive officers are their ages, principal occupations during
the past five years, and the period during which they have served as a
director or officer of the Company.
<TABLE>
<CAPTION>
A DIRECTOR
POSITIONS HELD OR OFFICER PRINCIPAL OCCUPATION
NAME AGE WITH COMPANY SINCE DURING THE PAST FIVE YEARS (1)
<S> <C> <C> <C> <C>
Dr. Henry L. Lee 71 Director 1971 Chairman of the Board of Lee
Pharmaceuticals through April 1995
when he retired, available as a
consultant, currently a Director of
the Company
Ronald G. Lee 45 President, Chairman 1977 President and since April 1995,
and Director Chairman of the Board
of the Company
Michael L. Agresti 55 Vice President - 1977 Vice President - Finance,
Finance, Treasurer and Treasurer and Secretary
Secretary of the Company
William M. Caldwell IV 50 Director 1987 President of Union Jack Group, a
merchant banking firm
</TABLE>
(1) None of the companies named, other than the Company, is a parent,
subsidiary or other affiliate of the Company.
FAMILY RELATIONSHIPS
Ronald G. Lee is the son of Dr. Henry L. Lee.
<PAGE>
27
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information with respect to remuneration
paid by the Company to the executive officers of the Company with total
annual salary and bonus of at least $100,000 for services in all capacities
while acting as officers and directors of the Company during the fiscal years
ended September 30, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ -------------
Name and Other Annual All Other
Principal Position Year Salary ($) Compensation ($) Options (#) Compensation ($)
- ------------------ ---- ---------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Ronald G. Lee 1997 220,616 5,617 (1) 568,000 (2) --
President, Chairman 1996 179,624 2,382 (1) -- --
(since April 26, 1995) 1995 178,595 5,734 (1) 80,000 (2) --
& Director
Theo. H. Dettlaff, Vice 1997 -- -- -- --
President, President 1996 118,224 -- -- --
of Consumer Products 1995 167,575 -- -- --
Division & Director (3)
</TABLE>
(1) Includes reimbursement of medical and dental expenses not covered by the
Company's insurance plan of $5,617, $2,382, and $5,081, respectively, in
1997, 1996, and 1995 and non cash fringe benefits of $653 in 1995.
(2) The Company granted 568,000 stock options on March 12, 1997 which had an
option price of $.176 at the date of grant and 80,000 stock options on
May 8, 1995, which had an option price of $.50 at the date of grant.
(3) Mr. Dettlaff ceased being an officer and director of the Company in
March 1996.
Each of the directors of the Company who is not employed by the Company
receives a director's fee of $750 for each quarter and $500 for each
meeting of the Board of Directors attended, except Dr. Henry L. Lee.
As holder of the honorary title of Founder Chairman Dr. Lee waived his
fees.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Number of Unexercised Options
at Fiscal Year End (#)
-----------------------------
Name Exercisable/Unexercisable
- ---- ------------------------------
Ronald G. Lee 81,666/621,334
<PAGE>
28
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company established an Employee Stock Ownership Plan and Trust
("Plan") effective December 1, 1985. The Plan is a tax-qualified employee
stock ownership plan which is designed to invest primarily in the common
stock of the Employer for the benefit of the employees and their
beneficiaries.
The benefits provided by the Plan are paid for entirely by the Employer.
The Employer contributions are used to purchase the common stock of the
Employer, which is credited to the individual accounts maintained for each
participant. In addition to providing an opportunity for employees to
participate in the Employer's growth through stock ownership and to provide
funds for employees' retirement, the Plan is designed to be available as a
technique of corporate finance to the Employer.
All employees who had completed at least a six-month period of service
with the Employer as of the effective date of this Plan (December 1, 1985)
became participants in the Plan as of such date. Every other employee will
become a participant in the Plan as of the first day of the month coinciding
with or next following the date upon which he completes a six-month period of
service provided that he is employed by the Employer on such date.
The Employer makes contributions only on behalf of the participants who
are employed by it on the last day of each Plan year, September 30.
Contributions made on behalf of the employees will not be taxable to them
until the time benefits are actually paid to them.
Effective October 1, 1989, the Plan consists of two (2) parts: Plan A,
a stock bonus plan, and Plan B, a money purchase pension plan. The Company's
Board of Directors determines the amount to be contributed annually to Plan A
up to a maximum of fifteen percent (15%) participant compensation for the
Plan year (October 1 through September 30). The contribution under Plan B is
a non-discretionary amount equal to ten percent (10%) of participant
compensation for the Plan year. The contribution by the Company to the Trust
for any single Plan year cannot exceed twenty-five percent (25%) of the total
compensation paid to Plan participants for the year.
Company contributions are allocated to each Participant's Company
Contribution Account in the proportion that his compensation for the Plan
year bears to the total compensation paid to all participants for the Plan
year. Forfeitures which arise under Plan A are allocated to the accounts of
the other participants at the end of the Plan year during which the
forfeitures arise due to termination of employment in the same manner as
Company contributions are allocated. Forfeitures which arise under Plan B
are used to offset the Company's required contribution under Plan B.
The term "vested" as applied in the context of employee benefit plans
refers to that portion of a participant's accounts which has become
nonforfeitable because the participant has accrued a certain number of
period-of-service credits. If a participant reaches normal retirement age
(age 65), becomes permanently disabled, dies or retires at age 65, his
interest in his accounts becomes immediately 100% vested, i.e. nonforfeitable.
Effective July 1, 1993, the plan was amended for a second time. On June
30, 1993, Plan B was terminated; therefore, all participants became 100%
vested, in Plan B only, effective July 1, 1993. No contribution was made to
Plan A or B for the period October 1, 1993, through September 30, 1994.
Effective September 30, 1995, Plan A was terminated. All participants
under Plan A became 100% vested on September 30, 1995, due to the termination
of Plan A. No contribution was made to Plan A or B for fiscal year 1995 or
1996. In connection with the termination of Plan A, the Company wrote off the
Employee Stock Ownership Plan and Trust receivable as of September 30, 1995.
In November 1996 the Company received its final determination letter from the
Internal Revenue Service. During fiscal 1997 all participants account
balances have been distributed by the Company except for a few former
participants account balances of less than $100.00 in the aggregate.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the persons who, as of November 30, 1997,
were known to the Company to be beneficial owner of more than five percent of
the Company's Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C> <C>
Common Stock Ronald G. Lee 728,783 shares 18%
1444 Santa Anita Avenue
South El Monte, CA 91733
Common Stock Dr. Henry L. Lee 292,334 shares (1) 7%
1444 Santa Anita Avenue
South El Monte, CA 91733
</TABLE>
(1) Includes 28,000 shares of the Company's common stock which Dr. Lee holds
as trustee for the benefit of certain family members. He has the right
to vote such shares but otherwise disclaims beneficial ownership.
<PAGE>
29
The following table sets forth the ownership of the Company's Common Stock
by its directors and its named executive officers and all executive officers and
directors as a group.
NAME OF AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
Common Stock Ronald G. Lee 728,783 (1) 18%
Common Stock Dr. Henry L. Lee 292,334 (2) 7%
Common Stock William M. Caldwell IV 13,267 (1) *
Common Stock All officers and directors
as a group (4 persons) 1,097,144 (1)(2) 27%
(1) Includes shares subject to options exercisable at or within 60 days after
December 31, 1997.
(2) Includes 28,000 shares of the Company's common stock which Dr. Lee holds as
trustee for the benefit of certain family members. He has the right to
vote such shares but otherwise disclaims beneficial ownership.
* Less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's primary agent for purchasing television advertising was Western
International Media Corp. (WIMC) whose President and Chief Executive Officer,
Dennis F. Holt, was a Director of the Company during fiscal year 1995 and
resigned in October 1995.
The information regarding borrowings from and sale and leaseback transactions
between the Company and it's Chairman of the Board which is contained in Item 6
and Note 6 of Notes to Financial Statements is incorporated herein by this
reference.
<PAGE>
30
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits have been or are being filed
herewith, and are numbered in accordance with Item 601 of
Regulation S-B:
The following exhibits are filed herewith:
10.33 - Promissory note which was amended in October 1997
evidencing advances made to the Registrant
10.34 - Promissory notes which were amended (modified) in
December 1997 evidencing advances made to the Registrant
10.35 - Modification of loan and security agreement dated
September 10, 1997, between Lee Pharmaceuticals and
Preferred Business Credit, Inc.
10.36 - Promissory note which was amended in February 1997
evidencing advances made to the Registrant
10.37 - Secured promissory note dated October 21, 1996, between
Lee Pharmaceuticals and Roberts Laboratories, Inc.
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)
<PAGE>
31
10.15 - Promissory notes evidencing advances made to the
Registrant's officers and directors (9)
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)
10.22 - Note payable to bank dated April 26, 1996, between Lee
Pharmaceuticals and San Gabriel Valley Bank, secured by
the deed on land and building (11)
10.23 - Loan and security agreement dated May 21, 1996, between
Lee Pharmaceuticals and Preferred Business Credit, Inc.
regarding a revolving credit facility financing (11)
10.24 - Secured promissory note dated September 17, 1996, between
Lee Pharmaceuticals and Preferred Business Credit,
Inc. (12)
10.25 - Promissory notes evidencing advances made by the
Registrant (12)
10.26 - Promissory notes which were amended in July 1996
evidencing advances made to the Registrant (12)
10.27 - Sublease dated November 22, 1995, for the premises
located at 1460 Santa Anita Avenue, South El Monte,
California (12)
10.28 - Sublease dated June 11, 1996, for the premises located
at 1470 Santa Anita Avenue, South El Monte,
California (12)
10.29 - Lease dated December 1, 1995, for the premises located at
1444 Santa Anita Avenue, South El Monte, California (12)
10.30 - Lease dated December 1, 1995, for the premises located at
1445 Lidcombe Avenue, South El Monte, California (12)
10.31 - 1997 Employee Incentive Stock Option Plan (13)
10.32 - 1997 Stock Option Plan (13)
(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 in December 1978 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 in December 1979 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 in December 1973 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 in December 1986 and incorporated
herein by reference.
<PAGE>
32
(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 in December 1990 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 in December 1991 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 in December 1992 and incorporated herein by
reference.
(9) Filed as Exhibits 10.14, 10.15, and 10.16 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
in December 1995 and incorporated herein by reference.
(11) Filed as Exhibits 10.22 and 10.23 with the Company's Form 10-QSB
Quarterly Report for the nine months ended June 30, 1996, filed with
the Securities and Exchange Commission in August 1996 and incorporated
herein by reference.
(12) Filed as exhibits 10.24, 10.25, 10.26, 10.27, 10.28, 10.29, and 10.30
with the Company's Form 10-KSB Annual Report for the fiscal year ended
September 30, 1996, filed with the Securities and Exchange Commission
in December 1996 and incorporated herein by reference.
(13) Included as an attachment to the Company's definitive Proxy Statement
to shareholders for the meeting dated March 11, 1997 and incorporated
herein by reference.
(b) Reports on Form 8-K:
None
<PAGE>
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LEE PHARMACEUTICALS
Date: DECEMBER 23, 1997 RONALD G. LEE
------------------------------ --------------------------------------
Ronald G. Lee
Chairman of the Board
In accordance with the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: DECEMBER 23, 1997 RONALD G. LEE
---------------------------- --------------------------------------------
Ronald G. Lee
Chairman of the Board
(Principal Executive Officer) and Director
Date: DECEMBER 23, 1997 HENRY L. LEE, JR.
---------------------------- --------------------------------------------
Henry L. Lee, Jr.
Director
Date: DECEMBER 23, 1997 WILLIAM M. CALDWELL IV
---------------------------- --------------------------------------------
William M. Caldwell IV
Director
Date: DECEMBER 23, 1997 MICHAEL L. AGRESTI
---------------------------- --------------------------------------------
Michael L. Agresti
Vice President - Finance
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT 10.33
Page 1
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on October 15, 1996, Lee Pharmaceuticals ("Maker") and Mark
DiSalvo ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Mark DiSalvo the sum of Fifty Thousand Dollars;
and
WHEREAS, the parties thereto now desire to further modify said Note;
NOW, THEREFORE, the parties modify said Note as follows:
1. The maturity date of the Note is extended from November 1, 1997, until
December 1, 1998.
2. The per annum interest rate has been increased from 15% to 20%
effective November 1, 1997.
3. All other terms and conditions of the Note remain the same.
Date this 27 day of October, 1997.
Ronald G. Lee
-----------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
Mark Disalvo
-----------------------------
Mark DiSalvo
<PAGE>
EXHIBIT 10.34
Page 1
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on July 3, 1995, Lee Pharmaceuticals ("Maker") and Sass DiSalvo
("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was
to pay to Sass DiSalvo the sum of Fifty Thousand Dollars; and
WHEREAS, on July 6, 1996, the parties thereto modified said Note to
extend the maturity date from July 6, 1996, until December 8, 1997, (a copy
of said Modification to Promissory Note is attached for reference as Exhibit
A); and
WHEREAS, the parties thereto now desire to further modify said Note and
Modification;
NOW, THEREFORE, the parties modify said Note and Modification as follows:
1. The maturity date of the Note is extended from December 8, 1997,
until December 1, 1998.
2. The per annum interest rate has been increased from 15% to 20%
effective November 1, 1997.
3. All other terms and conditions of the Note remain the same.
Date this 2 day of December, 1997.
Ronald G. Lee
------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
Sass DiSalvo
------------------------------
Sass DiSalvo
<PAGE>
EXHIBIT 10.34
Page 2
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on July 3, 1995, Lee Pharmaceuticals ("Maker") and Mark DiSalvo
("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was
to pay to Mark DiSalvo the sum of Fifty Thousand Dollars; and
WHEREAS, on July 6, 1996, the parties thereto modified said Note to
extend the maturity date from July 6, 1996, until December 8, 1997, (a copy
of said Modification to Promissory Note is attached for reference as Exhibit
A); and
WHEREAS, the parties thereto now desire to further modify said Note and
Modification;
NOW, THEREFORE, the parties modify said Note and Modification as follows:
1. The maturity date of the Note is extended from December 8, 1997,
until December 1, 1998.
2. The per annum interest rate has been increased from 15% to 20%
effective November 1, 1997.
3. All other terms and conditions of the Note remain the same.
Date this 2 day of December, 1997.
Ronald G. Lee
------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
Mark DiSalvo
------------------------------
Mark DiSalvo
<PAGE>
EXHIBIT 10.34
Page 3
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on December 20, 1995, Lee Pharmaceuticals ("Maker") and Mark
DiSalvo ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Mark DiSalvo the sum of One Hundred Thousand
Dollars; and
WHEREAS, on July 22, 1996, the parties thereto modified said Note to
extend the maturity date from July 22, 1996, until December 22, 1997, (a copy
of said Modification to Promissory Note is attached for reference as Exhibit
A); and
WHEREAS, the parties thereto now desire to further modify said Note and
Modification;
NOW, THEREFORE, the parties modify said Note and Modification as follows:
1. The maturity date of the Note is extended from December 22, 1997,
until December 1, 1998.
2. The per annum interest rate has been increased from 15% to 20%
effective November 1, 1997.
3. All other terms and conditions of the Note remain the same.
Date this 2 day of December, 1997.
Ronald G. Lee
------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
Mark DiSalvo
------------------------------
Mark DiSalvo
<PAGE>
EXHIBIT 10.35
Page 1
MODIFICATION OF LOAN AND SECURITY AGREEMENT
WHEREAS, this agreement is in reference to a loan which is evidenced by
an instrument entitled LOAN AND SECURITY AGREEMENT ("AGREEMENT"), dated May
21, 1996, executed by and between LEE PHARMACEUTICALS as "BORROWER" and
PREFERRED BUSINESS CREDIT, INC. ("PBC"), as "LENDER."
NOW THEREFORE, it is agreed by the undersigned parties that the AGREEMENT
shall be amended in the following respect:
In Section 2.1(a) of the AGREEMENT, PBC agrees to make revolving advances
to Borrower in an amount equal to the lesser of (I) Seventy percent (70%) of
the amount of Eligible Accounts; and (II) an amount equal to Borrower's cash
collections for the immediately preceding forty-five (45) day period.
Except as noted above, all the terms, conditions and provisions of said
AGREEMENT shall remain unchanged and in full force and effect.
DATE: September 10, 1997
PREFERRED BUSINESS CREDIT, INC. AGREED AND ACCEPTED:
LEE PHARMACEUTICALS
BY:
Farhad Motia
- -------------------------------
Farhad Motia, President
BY: Ronald G. Lee
-------------------------
Ronald G. Lee, President
<PAGE>
EXHIBIT 10.36
Page 1
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on February 20, 1996, Lee Pharmaceuticals ("Maker") and Mark
DiSalvo ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Mark DiSalvo the sum of One Hundred Thousand
Dollars; and
WHEREAS, the parties thereto now desire to further modify said Note;
NOW, THEREFORE, the parties modify said Note as follows:
1. The maturity date of the Note is extended from February 20, 1997,
until December 1, 1998.
2. The per annum interest rate has been increased from 15% to 20%
effective November 1, 1997.
3. All other terms and conditions of the Note remain the same.
Date this 13 day of February, 1997.
Ronald G. Lee
------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
Mark DiSalvo
------------------------------
Mark DiSalvo
<PAGE>
EXHIBIT 10.37
Page 1
PROMISSORY NOTE
$948,089
Dated: October 21, 1996 At: South El Monte, California
FOR VALUE RECEIVED, the undersigned LEE PHARMACEUTICALS, INC., a
California corporation with its principal place of business located at 1444
Santa Anita Avenue, South El Monte, California 91733 ("Maker"), promises to
pay to the order of ROBERTS LABORATORIES INC., a New Jersey corporation with
its principal place of business located at Meridian Center II, Four
Industrial Way West, Eatontown, New Jersey 07724-2274 ("Lender"), the
principal sum of Nine Hundred Forty-Eight Thousand Eighty Nine Dollars
($948,089) (the "Principal sum"), with interest thereon at the rate equal to
the prime rate as it may exist from time to time which is equal to the
highest prime rate reported from time to time by the Wall Street Journal (but
in no case more than any interest rate permitted by law) from the date set
forth above, to be paid in lawful money of the United States of America, at
Lender's address set forth above or such other place as Lender may from time
to time designate in writing. All references to Lender in this Note shall be
deemed to mean and include any subsequent holder hereof.
1. PAYMENT OF PRINCIPAL AND INTEREST. The indebtedness evidenced
hereby shall be repaid in equal monthly installments of principal in the
amount of Nineteen Thousand Seven Hundred Fifty-One Dollars and Eighty-Five
Cents ($19,751.85) each, commencing on November 1, 1996 and continuing
monthly thereafter until October 1, 2000 and one payment on November 1, 2000
of the entire remaining principal balance then outstanding, plus all accrued
and unpaid interest and all other applicable fees, costs and charges if any
shall have been paid in full. Interest shall accrue on all of the unpaid
outstanding balance of the purchase price and shall be paid monthly
commencing November 1, 1996, at a rate equal to the highest prime rate
published in the Wall Street Journal during the month preceding the month in
which the interest payment is due and continuing until the entire outstanding
amount of the purchase price shall have been paid in full. In no case,
however, shall the interest rate be higher than that rate permitted by
applicable law.
2. SECURITY. This Note and all the obligations of Maker hereunder are
secured by the security interests granted in the Security Agreement of even
date herewith executed by Maker (the "Security Agreement"). This Note, and
the Security Agreement, together with all other documents now or at any time
hereafter creating, evidencing or securing the indebtedness evidenced by this
Note, are herein referred to collectively as the "Loan Documents."
3. APPLICATION OF PROCEEDS. Maker is giving this Note to Lender
pursuant to an Asset Purchase and Sale Agreement of even date herewith
between Maker and Lender (the "Asset Purchase Agreement") to purchase the
Assets (as that term is defined in the Asset Purchase Agreement).
<PAGE>
EXHIBIT 10.37
Page 2
4. PREPAYMENT RIGHTS. Maker shall have the right to prepay at any time
and from time to time all or any portion of the entire principal balance of
this Note and interest thereon, together with all other indebtedness
evidenced hereby, without penalty, provided that Lender shall have received
at least ten (10) days prior written notice of prepayment and Maker shall pay
all accrued and unpaid interest thereon and all other fees and costs, if any,
due to Lender under this Note. Any partial prepayment will be applied first
against any fees or charges due under the Loan Documents, if applicable, and
then against accrued and unpaid interest and then against the principal of
this Note. No partial prepayment will excuse any future payment of principal
or interest as long as any amounts remain unpaid.
5. DEFAULT PROVISIONS. The occurrence of any one or more of the
following events shall constitute an Event of Default under this Note: (a)
failure of Maker to pay when due any amount required to be paid; (b) the
Maker shall be adjudicated a bankrupt or insolvent, or admit in writing its
inability to pay its debts as they mature, or make an assignment for the
benefit of creditors, or the Maker shall apply for or consent to the
appointment of a receiver, trustee, or similar officer for it or for all or
any substantial part of its property, or such receiver, trustee or similar
officer shall be appointed without the application or consent of the Maker
and such appointment shall continue undischarged for a period of ninety (90)
days, or the Maker shall institute (by petition, application, answer, consent
or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating
to it under the laws of any jurisdiction, or any such proceeding shall be
instituted (by petition, application or otherwise) against the Maker and
shall remain undismissed for a period of ninety (90) days, or (c) any default
under the Security Agreement; provided, however, that no Event of Default
shall be deemed to have occurred if: (a) there continues to exist a good
faith disagreement between Maker and Robert Laboratories, Inc. with respect
to the proper amount payable by Maker in respect of this Note or (b) if there
exists a good faith disagreement during the term of this Note regarding the
Assets conveyed by Roberts Laboratories, Inc. as seller to Maker as purchaser
under the Asset Purchase and Sale Agreement. Whenever there is an Event of
Default under this Note, Lender shall give Maker written notice of such Event
of Default and if such Event of Default is not cured within 30 days of
receipt of such written notice, Lender may, at its option, declare the unpaid
balance of the principal amount, together with all accrued and unpaid
interest and all other indebtedness evidenced hereby, to be immediately due
and payable, and exercise any and all rights and remedies available to Lender
hereunder, under applicable laws and under any of the other Loan Documents,
all of which rights and remedies are cumulative.
6. PAYMENT OF COLLECTION COSTS. If Lender requires the services of an
attorney to enforce the payment of this Note or the performance of the other
Loan Documents, or if this Note is collected through any lawsuit, bankruptcy,
or other proceeding, Maker agrees to pay Lender an amount equal of reasonable
attorneys' fees and other actual collection costs.
7. WAIVER OF CERTAIN RIGHTS OF MAKER. As to this Note and the Security
Agreement, and all other Loan Documents, the undersigned waives all
applicable exemption
<PAGE>
EXHIBIT 10.37
Page 3
rights, whether under any State Constitution or otherwise, and also waives
valuation and appraisement, presentment, protest and demand, notice of
protest, demand and dishonor and nonpayment of this Note, and expressly
agrees that the maturity of this Note, or any payment hereunder, may be
extended from time to time without in any way affecting the liability of
Maker.
8. NON-WAIVER OF CERTAIN RIGHTS OF HOLDER. Any failure by the holder
hereof to insist upon the strict performance of any of the terms and
provisions of this Note or of any of the other Loan Documents shall not be
deemed to be a waiver of any of the terms and provisions hereof, and the
holder hereof, notwithstanding any such failure, shall have the right
thereafter to insist upon the strict performance by maker of any and all of
the terms and provisions of this Note and the other Loan Documents.
9. INVALIDITY OF PROVISIONS. In the event that any one or more of the
provisions contained in this Note or any of the other Loan Documents shall
for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Note or any of the other Loan Documents, and each
term and provision of this Note and the other Loan Documents shall be valid
and enforceable to the fullest extent permitted by law.
10. AMENDMENTS MUST BE IN WRITING. This Note may not be changed orally,
but only by an agreement in writing signed by Maker.
11. GOVERNING LAW. This Note is to be construed according to the laws
of the State of California and shall be binding upon and inure to the benefit
of Maker and Lender and their respective successors and assigns.
12. CAPTIONS. The captions of this Note are for convenience only and
shall neither limit nor enlarge the provisions hereof.
Executed as of the day and year first above written.
LEE PHARMACEUTICALS, INC.
By: Ronald G. Lee
-----------------------------
Ronald G. Lee
Title: President and CEO
Date: October 21, 1996
---------------------------
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