<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7335
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LEE PHARMACEUTICALS
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(Exact name of small business issuer as specified in its charter)
California 95-2680312
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1444 Santa Anita Avenue, South El Monte, California 91733
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(Address of principal executive offices)
(Zip Code)
(818) 442-3141
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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As of December 31, 1996, there were outstanding 4,135,162 shares of common
stock of the registrant.
Transitional Small Business Disclosure Format (check one):
Yes No X
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Form 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
Cash $ 52
Accounts and notes receivable (net of allowances: $445) 795
Due from related party 91
Inventories:
Raw materials $ 1,598
Work in process 279
Finished goods 797
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Total inventories 2,674
Other current assets 1,158
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Total current assets 4,770
Property, plant and equipment (less
accumulated depreciation and
amortization: $6,010) 553
Goodwill and other assets, net of
accumulated amortization 3,659
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TOTAL $ 8,982
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See notes to financial statements.
<PAGE>
Form 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LIABILITIES
Bank overdraft $ 170
Note payable to bank 8
Notes payable, other 721
Current portion - royalty agreements 660
Current portion - note payable related party 100
Accounts payable 1,548
Other accrued liabilities 997
Due to related parties 368
Deferred income 65
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Total current liabilities 4,637
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Long-term notes payable to related parties 3,220
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Long-term notes payable, other 1,129
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Long-term notes payable to bank 346
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Long-term payable-royalty agreements, less current portion $660 616
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Deferred income 191
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock, $.10 par value; authorized, 7,500,00 shares;
issued and outstanding, 4,135,162 shares 413
Additional paid-in capital 4,222
Accumulated deficit (5,792)
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Total stockholders' deficiency (1,157)
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TOTAL $ 8,982
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See notes to financial statements.
<PAGE>
Form 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1996 1995
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(UNAUDITED) (UNAUDITED)
Gross revenues $ 1,992 $ 1,970
Less: Sales returns (219) (167)
Cash discounts and others (27) (18)
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Net revenues 1,746 1,785
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Costs and expenses:
Cost of sales 767 729
Selling and advertising expense 713 774
General and administrative expense 342 347
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Total costs and expenses 1,822 1,850
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Loss from operations (76) (65)
Other income 59 16
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Net loss $ (17) $ (49)
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Per share:
Net loss $ (.00) $ (.01)
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See notes to financial statements.
<PAGE>
Form 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1996 1995
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(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net (loss)....................................... $ (17) $ (49)
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Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation..................................... 28 48
Amortization of intangibles...................... 327 68
(Decrease) in deferred income.................... (16) (16)
(Gain) on disposal of property, plant, and
equipment....................................... (43) --
Change in operating assets and liabilities:
Decrease in accounts receivable.................. 317 118
(Increase) in due from related party............. (18) --
(Increase) in inventories........................ (376) (31)
(Increase) in other current assets............... (8) (47)
(Decrease) in accounts payable................... (96) (5)
Increase (decrease) in accounts payable
related party................................... 50 (235)
Increase in notes payable, other................. 12 79
Increase in other accrued liabilities............ 398 105
(Decrease) in accrued royalties.................. (76) --
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Total adjustments................................ 499 84
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Net cash provided by operating activities...... 482 35
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Cash flows from investing activities:
Additions to property, plant, and equipment...... (10) (9)
Proceeds from sale of equipment.................. 43 --
Acquisition of product brands.................... (1,188) (29)
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Net cash (used in) investing activities........ (1,155) (38)
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Cash flows from financing activities:
(Payments on) bank loans......................... (31) --
(Payments on) notes payable to related party..... (19) (53)
Proceeds from notes payable, other............... 829 --
(Decrease) in long-term royalty agreements....... (165) --
Increase in bank overdraft....................... 98 --
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Net cash provided by (used in) financing
activities.................................... 712 (53)
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Net Increase (decrease) in cash.................... 39 (56)
Cash, beginning of year............................ 13 123
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Cash, end of period................................ $ 52 $ 67
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ........................................ $ 93 $ 57
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Acquisition of product brands:
Fair value of assets acquired.................... 1,670 29
Fair value of liabilities incurred............... $ (482) --
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Net cash payments.............................. $ 1,188 29
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See notes to financial statements.
<PAGE>
Form 10-QSB
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of December 31, 1996, and the statements
of operations and cash flows for the periods ended December 31, 1996, and
1995, have not been audited by independent accountants but reflect all
adjustments, consisting of any normal recurring adjustments, which are, in
the opinion of management, necessary to a fair statement of the results for
such periods. The results of operations for the three months ended
December 31, 1996, are not necessarily indicative of results to be expected
for the year ending September 30, 1997.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these financial statements are adequate to make the information
not misleading.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1996.
The Company is involved in various matters involving environmental cleanup
issues. SEE "Item 2. Management's Discussion and Analysis or Plan of
Operations" and Note 10 of Notes to Financial Statements included in the
Company's Form 10-KSB for the fiscal year ended September 30, 1996. The
ultimate outcome of these matters cannot presently be determined.
Environmental expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are expensed. The Company's proportionate share of the
liabilities are recorded when environmental remediation and/or cleanups are
probable, and the costs can be reasonably estimated.
2. Net loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during the periods presented. Common stock
equivalents (common stock options) are not included in these calculations
where their effect on net loss per share is anti-dilutive. The weighted
average number of shares was 4,135,162 for all periods presented.
3. Note payable to bank:
Effective April 26, 1996, the Company renewed its real estate loan with the
bank. The note payable to the bank, secured by deed on land and building,
requires a monthly payment of $4,200, including interest at Bank of
America's base rate plus 4%, maturing March 2001. At December 31, 1996,
the interest rate was 12.25%. The note is guaranteed by the former
Chairman of the Company and the Company's President.
4. Line of credit:
In May 1996, the Company obtained $1,000,000 of financing, in the form of a
revolving credit facility. The financing is secured by accounts
receivable, equipment, inventories and certain other assets. It is a two
year agreement, maturing May 1998, and will automatically continue
thereafter until either party terminates on a 90 day prior written notice.
The loan and security agreement is subject to a minimum interest of $3,000
per month. The loan bears interest at Bank of America's prime plus 8%.
5. Acquisitions:
On October 16, 1996, the Company purchased certain assets from Lactona
Corporation for $175,000 plus inventory valued at approximately $30,000.
The Company remitted $75,000 at closing. Payments of $3,000, including
interest, are due the 16th of each month starting November 1996 and ending
September 1999 and any remaining amount on October 16, 1999. Interest is
to be computed at the highest prime rate for the period, currently 8.25%.
<PAGE>
Form 10-QSB
On October 21, 1996, the Company purchased certain assets from Roberts
Laboratories, Inc. for $1,168,089. The Company remitted $100,000 at
closing. Payments of $19,751.85 are due on the first of each month
starting November 1, 1996, and ending on October 1, 2000. Any remaining
unpaid balance is due on November 1, 2000. Interest shall be paid at the
highest prime rate during the preceding month. At the closing, a $50,000
down payment was made toward the purchase of inventory. The balance,
approximately $70,000, is due 30 days after receipt of the inventory.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996, AND DECEMBER 31, 1995
Gross revenues increased $22,000 from $1,970,000 in the quarter ended
December 31, 1995, to $1,992,000 in the quarter ended December 31, 1996.
The Company's gross revenues from nail products have continued to decline,
primarily due to customers discontinuance of several of the nail extender
SKU's (stock keeping units). In addition, sales returns from this category
have increased. The aforementioned lower gross revenues has been more than
offset by the new brand acquisitions. The Company completed two
acquisitions in October 1996. These acquisitions are discussed in Note 6
above. Also, the acquisition of Aquafilter in September 1996 contributed
positively to the higher sales volume. The Aquafilter line of disposable
cigarette filters generated in excess of $235,000 of gross revenues.
Net revenues declined by approximately $39,000 or 2% for the three months
ended December 31, 1996, as compared to the three months ended December 31,
1995. The change in net revenues was due to the same reasons discussed
above regarding gross revenues. In addition, the sales returns increased
$52,000 or 31% when comparing the three months ended December 31, 1996, and
1995. The higher sales returns during the current quarter was the result
of returns related to the various nail products. This was due to the
continued customer consolidations by the retailer industry, and changes in
the retailers planogram with fewer SKU's of the Company's product being
carried. The Company's percentage of sales returns to gross sales varies
from quarter to quarter, but the overall average is approximately 8 - 12%.
Cost of sales was 39% of gross revenues for the quarter ended December 31,
1996, compared to 37% for the quarter ended December 31, 1995. The
percentage was slightly higher due to the non-recurring start-up costs
associated with the internal production of the recent brand acquisitions
previously discussed as well as the non-recurring freight charges regarding
the transporting of the inventory and equipment related to the acquired
brands.
Selling and advertising expenses declined $61,000 or 8% when comparing the
three months ended December 31, 1996, with the three months ended December
31, 1995. The reduction of expenses were mainly due to the following
factors; (1) lower salary and wages and related fringe benefits, (2) less
commission expense due to a decrease in the commission rate and a
structural change in responsibility from actual geography (geographic
territory) to specific accounts in that geography, and (3) decline in
royalty expense due to reduced sales revenues of certain product brands.
The previously mentioned reduced expenses were slightly offset by an
increase in amortization costs because of the recent acquisitions; one
brand in late September 1996 and two brands in October 1996.
General and administrative expenses decreased when comparing the quarters
ended December 31, 1996, and 1995. The nominal decrease was approximately
$5,000 or 1%.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 1996, working capital declined
to $133,000 from $395,000 at September 30, 1996. The ratio of current
assets to current liabilities was 1.03 to 1 at December 31, 1996, and 1.09
to 1 at September 30, 1996. The decrease in working capital of $262,000
was primarily due to an increase in current liabilities of $386,000 related
to the accrued liabilities of the unpaid product brand acquisitions.
<PAGE>
Form 10-QSB
The Company has an accumulated deficit of $5,792,000. The Company's
recurring losses from operations and inability to generate sufficient cash
flow from normal operations to meet its obligations as they came due raise
substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue in existence is dependent upon
future developments, including obtaining additional financing and achieving
a level of profitable operations sufficient to enable it to meet its
obligations as they become due.
ENVIRONMENTAL MATTERS
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB"), has alleged that the soil and shallow groundwater at the site are
contaminated. On August 12, 1991, the Board issued a "Cleanup and
Abatement Order" directing the Company to conduct further testing and
cleanup the site. The Company did not complete the testing, and in June,
1992, the RWQCB requested that the EPA evaluate the contamination and take
appropriate action. At the EPA's request, Ecology & Environment, Inc.
conducted an investigation of soil and groundwater on the Company's
property. Ecology & Environment Inc.'s Final Site Assessment Report, which
was submitted to the EPA in June, 1994, did not rule out the possibility
that some of the contamination originated onsite, and resulted from either
past or current operations on the property. While the Company may be
liable for all or part of the costs of remediating the contamination on its
property, the remediation cost is not known at this time. The EPA has not
taken any further action in this matter, but may do so in the future.
The Company and nearby property owners are in the process of engaging a
consultant to perform a site investigation with respect to soil and shallow
groundwater contamination. Based upon proposals received to date, the
Company currently estimates the cost to perform the site investigation to
be $175,000. Accordingly, while recognizing it may be jointly and
severally liable for the entire cost, the financial statements as of
September 30, 1995, recognized the proportionate amount ($87,500) which the
Company believes is its liability for a site investigation.
The tenants of nearby properties upgradient have sued the Company alleging
that hazardous materials from the Company's property caused contamination
on the properties leased by the tenants. The case name is DEL RAY
INDUSTRIAL ENTERPRISES, INC. v. ROBERT MALONE, ET AL., Los Angeles County
Superior Court, Northwest District, commenced August 21, 1991. In this
action, the plaintiff alleges environmental contamination by defendants of
its property, and seeks a court order preventing further contamination and
monetary damages. The Company does not believe there is any basis for the
allegations and is vigorously defending the lawsuit.
The Company's South El Monte manufacturing facility is also located over a
large area of possibly contaminated regional groundwater which is part of
the San Gabriel Valley Superfund site. The Company has been notified that
it is a potentially responsible party ("PRP") for the contamination. The
cost of cleanup of the groundwater is not known at this time. In September
1992, EPA announced that the levels of contamination in the Whittier
Narrows area of the Superfund site were sufficiently low and that it was
not planning a cleanup at this time, but rather would continue to monitor
the groundwater for an indefinite period. The Company's property is
adjacent to the Whittier Narrows area. Except as described above, it is
not clear what action the EPA will take with respect to the Company's
property.
In August 1995, the Company was informed that the EPA entered into an
Administrative Order on Consent with Cardinal Industrial Finishes
("Cardinal") for a PRP lead remedial investigation and feasibility study
(the "Study") which, the EPA states, will both characterize the extent of
groundwater contamination in South El Monte and analyze alternatives to
control the spread of contamination. The Company and others have entered
into the South El Monte Operable Unit Site Participation Agreement with
Cardinal pursuant to which, among other things, Cardinal will contract with
an environmental firm to conduct the Study. The Study is anticipated to
take eighteen to twenty-four months. The Company's share of the cost of
the Study is currently $15,000 and was accrued for in the financial
statements as of September 30, 1995.
The City of South El Monte, the city in which the Company has it's
manufacturing facility, is located in the San Gabriel Valley. The San
Gabriel Valley has been declared a Superfund site. The 1995 Water Quality
Control Plan issued by the California Regional Water Quality Control Board
states that the primary groundwater basin pollutants in the San
Gabriel Valley are volatile organic compounds from
<PAGE>
Form 10-QSB
industry, nitrates from subsurface sewage disposal and past agricultural
activities. In addition, the Plan noted that hundreds of underground
storage tanks leaking gasoline and other toxic chemicals have existed in
the San Gabriel Valley. The California Department of Toxic Substance
Control have declared large areas of the San Gabriel Valley to be
environmentally hazardous and subject to cleanup work.
The Company believes the City of South El Monte does not appear to be
located over any of the major plumes. However, the EPA recently announced
it is studying the possibility that, although the vadose soil and
groundwater, while presenting cleanup problems, there may be a
contamination by DNAPs (dense non-aqueous phase liquids), i.e., "sinkers",
usually chlorinated organic cleaning solvents. The EPA has proposed to
drill six "deep wells" throughout the City of South El Monte at an
estimated cost of $1,400,000. The EPA is conferring with SEMPOA (South El
Monte Property Owners Association) as to cost sharing on this project.
SEMPOA has obtained much lower preliminary cost estimates. The outcome
cost and exact scope of this are unclear at this time.
The Securities and Exchange Commission has issued a formal order of
investigation concerning certain matters, including the Company's
environmental liabilities. The Company is cooperating with the
investigation.
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 and legal fees actually incurred. The Company
continues to seek reimbursement from other carriers, although no such
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.
Currently, the Company does not have any reliable information on the likely
cleanup costs of its property. Thus, it cannot determine the extent, if
any, of its share of liability for any such cleanup costs.
<PAGE>
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations - Environmental Matters" is incorporated herein
by reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for the
fiscal year ended September 30, 1996.
Item 6. Exhibits
The following exhibits have previously been filed by the Company:
3.1 - Articles of Incorporation, as amended (1)
3.4 - By-laws, as amended December 20, 1977 (2)
3.5 - Amendment of By-laws effective March 14, 1978 (2)
3.6 - Amendment to By-laws effective November 1, 1980 (3)
27 - Financial Data Schedule
(1) Filed as an Exhibit of the same number with the Company's
Form S-1 Registration Statement filed with the Securities and
Exchange Commission on February 5, 1973, (Registrant No.
2-47005), and incorporated herein by reference.
(2) Filed as Exhibits 3.4 and 3.5 with the Company's Form
10-K Annual Report for the fiscal year ended September 30,
1978, filed with the Securities and Exchange Commission and
incorporated herein by reference.
(3) Filed as an Exhibit of the same number with the Company's Form
10-K Annual Report for the fiscal year ended September 30,
1979, filed with the Securities and Exchange Commission and
incorporated herein by reference.
<PAGE>
Form 10-QSB
SIGNATURES
In accordance with the requirements of the Securities Exchange Acts of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEE PHARMACEUTICALS
-------------------
(Registrant)
Date: February 6, 1997 /s/ Ronald G. Lee
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Ronald G. Lee
President
Date: February 6, 1997 /s/ Michael L. Agresti
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Michael L. Agresti
Vice President - Finance
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<PAGE>
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<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 1,240
<ALLOWANCES> (445)
<INVENTORY> 2,674
<CURRENT-ASSETS> 4,770
<PP&E> 6,563
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<TOTAL-ASSETS> 8,982
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0
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<TOTAL-LIABILITY-AND-EQUITY> 8,982
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