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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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7335
LEE PHARMACEUTICALS
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(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
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
ISSUER'S TELEPHONE NUMBER: (626) 442-3141
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
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
--- ---
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. [ ]
State issuer's revenues for its most recent fiscal year: $9,059,000 Gross
As of the close of business on November 30, 1998, the aggregate market value
of Lee Pharmaceuticals common stock held by nonaffiliates was $515,889.
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
30, 1998.
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, 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 91% 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 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 was 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.
In fiscal 1998, the Company expanded its Lee-Registered
Trademark-Lip-Ex-TM- line to include lip balms with an SPF 8 protection and
also packaged the Lip-Ex into convenient tin top jars. The Company purchased
several new OTC items including Pain-A-Lay-Registered Trademark-, an oral
anesthetic/analgesic, and EVAC-U-GEN-Registered Trademark-, a chewable
laxative.
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
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3
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.
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 1998, 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 by way of its distributors.
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.
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4
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.
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 elected to have three of its major dental brands obtain the
CE markings in order to continue to distribute those brands throughout
Europe. The Company received the CE Markings on Prosthodent-Registered
Trademark-, Insta-Bond-TM- and Beta Quartz-TM- Glass Ceramic Inserts and
Inlays.
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
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YEAR ENDED SEPTEMBER 30
1998 1997 1996
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(000) (000) (000)
<S> <C> <C> <C>
United States export sales
(except Canada)............................... $ 430 $ 827 $ 834
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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. The Company did
not have any internal research and development expenses during fiscal years
September 30, 1998 and 1997.
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 nine U.S.
patents, including Dental Restoration System and Method which was recently
granted during the year, and owns the rights in a number of other U. S.
patent applications pending. 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.
United States trademarks for the major dental products as well as some
consumer 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.
CURRENT REGULATORY REGISTRATION
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 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).
The Company has been granted CE Certification for three dental products:
Prosthodent VL Core Build Up Material, Lee Insta-Bond Orthodontic Bracket
Adhesive, and Lee Beta Quartz Glass Ceramic Modular Inserts and Inlays.
The Company applied for a Controlled Substance License with the Drug
Enforcement Agency (DEA) due to the new product lines the Company has
recently acquired. Effective November 23, 1998, the Company was granted its
DEA license.
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. The Company resisted further work on its property until the
property upgradient was tested in greater detail since two "apparent source"
lots had not been tested. 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 for the reasons listed above as well as "financial
constraints". 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, in consort with their
comprehensive general liability (CGL) carriers, have engaged a consultant to
perform a site investigation with respect to soil and shallow groundwater
contamination over the entire city block. The CGL carriers provided $290,000
in funding which paid for the $220,000 study, $20,000 in legal fees for
project oversight, and a $50,000 balance in the operating fund. Earlier the
Company had accrued $87,500 as its proportionate share of the earlier quote
of $175,000. Since that time, the overall scope of the project was increased
to $205,000 plus $15,000 for waste water disposal,
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6
bringing the total to the above listed $220,000. The $87,500 accrual was not
spent on this project (as the entire cost was borne by the CGL carriers), but
remains on the books as an accrual against the cost of remediation of the
same site that was included in the study.
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 $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 of 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 has been completed but the
final program has not been reported. 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 and other property owners engaged Geomatrix Consultants,
Inc., to do a survey of vadose soil and shallow groundwater in the "hot
spots" detected in the previous studies. Geomatrix issued a report dated
December 1, 1997 (the "Report"), on 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 indicated generally low concentrations of
tetrachloroethene, trichloaethene and trichloroethane in the groundwater of
the upgradient neighbor. The Report was submitted to the RWQCB for its
comments and response. A meeting with the parties and RWQCB was held on
February 10, 1998. The RWQCB had advised companies that vadose soil
contamination is minimal and requires no further action. However, there is an
area of shallow groundwater which has a higher than desired level of
chlorinated solvents, and the RWQCB requested a proposed work plan be
submitted by Geomatrix. Geomatrix has submitted a "Focused Feasibility Study"
which concludes that there are five possible methods for cleanup. The most
expensive are for a pump and sewer remediation which would cost between
$1,406,000 and $1,687,000. The Company is actively exploring the less
expensive alternative remediation methods, of which the two proposed
alternatives range in cost between $985,000 and $1,284,000. Accordingly, the
Company has taken the average of the two amounts ($985,000 and $1,284,000) as
the total amount of estimated cost. Since there are four economic entities
involved, the Company's best estimate at this time, in their judgment, would
be that their forecasted share would be 25% or $284,000 less the liability
already recognized on the books of $162,000 thereby requiring an additional
$122,000 liability. Accordingly, the Company recorded an additional accrual
of $122,000 in the third quarter of fiscal 1998. The $122,000 accrual is in
addition to the $79,000 accrual for the Monterey Site as will be explained in
the following paragraph. The $79,000 accrual, in the third quarter of fiscal
1998, related to the Monterey Site is not included in the $284,000 figure
above. No assurances can be given that any of the alternative remediation
methods will be feasible or that the actual cost to the Company of the
remediation will not exceed the amount of the Company's current accruals of
$284,000 (which includes the $122,000 charge to income in the third quarter
of fiscal 1998).
Without any prior correspondence or inkling of the Company's potential
liability, the EPA has recently informed the Company that the Company may
have potential liability for the ongoing remediation of Operating Industries,
Inc. (as they have gone out of business) Landfill Superfund Site in Monterey
Park, California (the "Monterey Site"). The Monterey Site is a 190 acre
landfill that operated from 1948 to 1984, in which the Company disposed of
non toxic pH balanced waste water on six occasions between 1974 and 1978.
Over 4,000 companies have been identified as having contributed waste to the
Monterey Site. The EPA has offered to settle the Company's potential
liability with respect to the Monterey Site for a cost to the Company of
$79,233. The Company
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7
accrued a $79,000 charge in the third quarter of fiscal 1998 with respect to
this possible liability. The Company has elected to file for relief from
these obligations under the financial hardship option in the EPA's response
form.
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 since 1988 a total of $486,000, of which $89,000
were legal fees, exclusive of legal fees expended in connection with the SEC
environmental investigation. The actual costs could differ materially from
the amounts expensed for environmental investigation and cleanup costs to
date.
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 97 presently includes 26 permanent
employees, both salaried and hourly, and 71 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 9% and 14% of the Company's
net revenues during fiscal 1998 and 1997, respectively. No other customer
accounted for 8% 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.
<PAGE>
8
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies, through ownership or lease, seven buildings on
contiguous lots in South El Monte, California. The Company owns the following:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
ADDRESS FOOTAGE USAGE
- ------- ------- -----
<S> <C> <C>
1428 Santa Anita Avenue 10,000 Chemical processing and filling
</TABLE>
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 sublessee 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 $67,268.
In April 1997 the sublessee commenced occupancy of the entire 15,000 square
footage (previously occupied 13,000 square feet). The annual rental income
for fiscal year 1998 includes a cost of living adjustment regarding the
sublease effective 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 was 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 $3,678. The Company will continue to
sublease the building until the owner can locate a buyer or the Company
gives notice to the tenant and takes back the facility to expand its
operations.
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" for additional
information concerning certain litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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:
<TABLE>
<CAPTION>
QTR HIGH LOW
<S> <C> <C> <C>
FY 1998 1Q $.3125 $.2500
2Q .3400 .2000
3Q .3600 .2000
4Q .2000 .1550
FY 1997 1Q $.2200 $.1400
2Q .2000 .1500
3Q .3200 .2500
4Q .3250 .2500
</TABLE>
There were approximately 776 shareholders of record of the Company's
Common Stock as of the close of business on September 30, 1998.
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, 1998, AND SEPTEMBER 30, 1997
Net revenues decreased during fiscal 1998 by $563,000 or 6% when
compared to fiscal 1997. The decrease in net revenues was due to the reduced
sales revenues of the nail category products and depilatories. The above
decrease in sales revenues was partially offset by volume generated from
recently acquired brands such as: Klutch-Registered Trademark- and
Painalay-Registered Trademark-, plus the in-house product Lee-Registered
Trademark- Lip-Ex-TM-. The newly acquired brand acquisitions accounted for
approximately $445,000 or 5% of the Company's total net revenues. Also, the
Company's sales returns decreased approximately $53,000 or 6% when comparing
fiscal years 1998 and 1997. The lower sales returns during the current fiscal
year was primarily the result of a 57% decrease in 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.
The financial crisis overseas has helped slow the Company's foreign
sales in fiscal 1998. The economic crisis in Japan contributed to the
Company's plummeting sales (66% in Japan) during fiscal 1998 compared to
fiscal 1997. As a result, foreign market sales were down 48% overall.
As noted under "Description of Business - Consumer Products Segment" the
Company has pursued a policy of diversifying its product line via product
line acquisitions. Certain of the Company's products have been expanded into
dollar stores and convenience stores in an attempt to increase the number of
outlets carrying the Company's products.
Cost of sales as a percentage of gross revenues was 42% for fiscal year
1998, compared to 40% for fiscal year 1997. The cost of sales percentage was
higher due to increased raw material purchases (normal quantity reordered,
per purchase order, was tripled for
<PAGE>
10
certain high turnover items), increased manufacturing labor dollars as a
result of two (September 1997 and March 1998) hourly rate increases (15%) in
minimum wages and sale of some slow moving finished goods at lower than
normal margins. The above explanations were somewhat offset by benefits
achieved from the production learning curve, associated with the previously
acquired brands, increased production runs, and a favorable product mix.
Selling and advertising expenses increased $99,000 or 3% when comparing
fiscal years 1998 and 1997. The increases in expenses were primarily due to
the following factors; (1) an increase in salaries and wages plus related
fringe benefits, the result of new hires which includes two outside salesmen
($183,000), and higher related travel and entertainment expenses ($55,000),
(2) higher manufacture representative commissions ($56,000), and (3) an
increase in the amortization expense (approximately $40,000) related to
acquisitions by the Company during September 1997 and February 1998. The
aforementioned increased expenses were offset, in part, by a decrease in the
cooperative advertising ($171,000) and non-recurring "special allowance"
($62,000) which was awarded to a key customer in fiscal 1997.
Research and development expenses were non-existent for fiscal year 1998
versus 1997. The Company trend over the last two plus years 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.
General and administrative expenses increased $273,000 or 24% when
comparing fiscal years 1998 and 1997. This significant increase was
principally due to; (1) employee new hires (salary and wages) plus related
fringe benefits (approximately $75,000), (2) an accrual of $79,000
(non-recurring) related to the Monterey Park waste site cleanup, and (3) an
accrual of $122,000 related to the Company's best estimate of its share of
the remediation costs as described in Note 10 to the financial statements
under the caption "Assessment for environmental cleanup."
Interest expense increased $52,000 or 9% when comparing fiscal years
1998 and 1997. The higher interest expense was attributed to the increased
borrowings from the Company's asset based financing lender and increased
borrowings on notes payable plus a higher rate of interest (from 15% to 20%)
paid 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 a negative $719,000 at September 30, 1998, as
compared with $114,000 at September 30, 1997. The decrease in working capital
of $833,000 was primarily due to an increase in current liabilities of
$56,000 (basically an increase in the current portion of notes payable as a
result of newly acquired product brands and an increase in the environmental
cleanup liability) and a decrease in current assets of $777,000 primarily due
to a decrease in accounts receivable and deposits. The ratio of current
assets to current liabilities was .8 to 1 at September 30, 1998, and 1.0 to 1
at September 30, 1997.
In comparing fiscal years 1998 and 1997, accounts receivable turnover
increased (7.5 versus 7.3) primarily due to the Company's reduction in
extended credit terms. Accounts payable as a percentage of total costs and
expenses was constant (12% in fiscal 1998 and 1997) due to the Company's
continued 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 1998 and
may continue in fiscal 1999. Management continues to face lower retail store
inventory levels and expanded computerization in the field such as; EDI
(electronic data interchange), ASN (advance shipping notice), and UCC-128
(Uniform Code Council) bar code labels.
Due to the inventory acquired from product line acquisitions, the
inventory increased $142,000. Partially offsetting the overall increase in
inventory, the Company continued to reduce it's inventory of slow moving
items at a price below the listed sales price and scrapping obsolete
inventory items.
Effective May 21, 1998, the Company renewed its accounts receivable
financing, maturing May 2000, whereby 75% of the eligible domestic accounts
receivable, not to exceed the greater of $1,100,000 or $1,100,000 less
amounts advanced on inventory, can be advanced. The new financing agreement
includes a $400,000 term loan on inventory which is incorporated in the
working capital line of credit above. Additionally, there is a separate
$440,000 term loan on the Company's equipment. This financing is secured by a
security interest in all of the Company's assets.
See "Business - Applicable to All Segments - Environmental protection
regulation and litigation" for a description of certain environmental matters
relating to the Company.
The Company has an accumulated deficit of $6,734,000. The Company's past
recurring losses and fiscal 1997's 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 does not believe that inflation had a significant impact on its
operations during fiscal years 1998 and 1997.
<PAGE>
11
YEAR 2000 READINESS
Most companies have computer systems that use two digits to identify a
year in the date field (e.g. "98" for 1998). These systems must be modified
to handle turn-of-the century calculations. If not corrected, systems
failures or miscalculations could occur, potentially causing disruptions of
operations, including, among other things, the inability to process
transactions, send invoices, or engage in other normal business activities.
This creates potential risk for all companies, even if their own computer
systems are Year 2000 compliant.
In 1998, the Company initiated a comprehensive review of its computer
systems to identify processes that could be adversely affected by Year 2000
issues. In addition, the Company identified computer application systems that
required modification or replacement.
The Company will be required to modify or replace certain portions of
its software so that its systems will function properly with respect to dates
in the Year 2000 and thereafter. The Company has replaced its existing
hardware computer system and has solicited the assistance of a software
reengineering company specializing in services to resolve the Year 2000
problem to remediate non-compliant code in existing applications and systems.
The Company is also utilizing internal resources to reprogram or replace and
test the software for Year 2000 modifications.
The Company has an ongoing program of communicating with suppliers and
vendors to determine the extent to which those companies are addressing Year
2000 compliance issues. There can be no assurance that the Company will be
able to develop a contingency plan that will adequately address issues that
may arise in the Year 2000.
In 1999, a contingency plan will be developed in the event key or
critical suppliers or vendors are unable to meet the Year 2000 compliance. If
needed, such steps as identifying alternative suppliers and vendors will be
addressed. The timeframe for completing or documenting contingency plans has
not been finalized.
The Company estimates that the cost of remediation will be less than
$100,000. The remediation costs include internal labor costs, as well as fees
and expenses paid to outside contractors specifically associated with
programming and purchased hardware and upgraded software.
The Company's Year 2000 plans, including costs, preparation for testing,
and completion schedules (by October 1999), are based on management's best
estimates. These estimates were derived using assumptions of future events
including third party input, availability of qualified personnel, and other
factors.
Based on currently available information, management does not believe
that the Year 2000 matters discussed above will have a material adverse
impact on the Company's financial condition or results of operations;
however, because of the uncertainties in this area, no assurances can be
given in this regard.
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
INDEX TO FINANCIAL STATEMENTS NUMBER
<S> <C>
Independent Auditor's Report 12
Financial Statements:
Balance sheet as of September 30, 1998 13
Statements of operations for each of the years in
the two-year period ended September 30, 1998 14
Statements of changes in stockholders' deficiency for each of
the years in the two-year period ended September 30, 1998 15
Statements of cash flows for each of the years in the two-year
period ended September 30, 1998 16
Notes to financial statements 17-25
</TABLE>
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, 1998 and the related statements of operations, changes in
stockholders' deficiency, and cash flows for each of the years in the
two-year period ended September 30, 1998. 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, 1998, and the results of its operations and its cash flows for
each of the years in the two-year period ended September 30, 1998, 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 ("Continued Existence"), the Company's current
and recurring past losses from operations, fiscal 1997's 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, 1998
Beverly Hills, California
<PAGE>
13
LEE PHARMACEUTICALS
BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash............................................................................................ $ 42,000
Accounts receivable, less allowance for doubtful accounts of $38,000
and sales returns allowance of $141,000....................................................... 894,000
Due from related party.......................................................................... 251,000
Inventories..................................................................................... 2,122,000
Prepaid royalties............................................................................... 132,000
Deposits........................................................................................ 229,000
Other current assets............................................................................ 142,000
-----------
TOTAL CURRENT ASSETS.......................................................................... 3,812,000
-----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land............................................................................................ 49,000
Building........................................................................................ 217,000
Machinery and equipment......................................................................... 6,017,000
Leasehold improvements.......................................................................... 375,000
-----------
6,658,000
Less accumulated depreciation and amortization.................................................. (6,174,000)
-----------
NET PROPERTY, PLANT AND EQUIPMENT............................................................. 484,000
-----------
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $5,791,000......................... 2,167,000
-----------
TOTAL.............................................................................................. $ 6,463,000
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft.................................................................................. $ 86,000
Notes payable................................................................................... 815,000
Current portion - notes payable, other (long-term).............................................. 582,000
Current portion - royalty agreements............................................................ 132,000
Current portion - note payable related party.................................................... 375,000
Accounts payable................................................................................ 1,058,000
Accrued royalties............................................................................... 289,000
Accrued liabilities............................................................................. 366,000
Environmental cleanup liability................................................................. 289,000
Due to related parties.......................................................................... 474,000
Deferred income................................................................................. 65,000
-----------
TOTAL CURRENT LIABILITIES..................................................................... 4,531,000
LONG-TERM NOTES PAYABLE TO RELATED PARTIES......................................................... 2,939,000
LONG-TERM NOTES PAYABLE, other..................................................................... 1,016,000
DEFERRED INCOME.................................................................................... 76,000
-----------
TOTAL LIABILITIES............................................................................. 8,562,000
-----------
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............................................................................. (6,734,000)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY................................................................ (2,099,000)
-----------
TOTAL.............................................................................................. $ 6,463,000
-----------
-----------
</TABLE>
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>
1998 1997
---- ----
<S> <C> <C>
GROSS REVENUES................................................ $9,059,000 $9,675,000
Less: Sales returns, discounts and allowances.............. (807,000) (860,000)
---------- ----------
NET REVENUES.................................................. 8,252,000 8,815,000
---------- ----------
COSTS AND EXPENSES:
Cost of sales.............................................. 3,839,000 3,820,000
Selling and advertising.................................... 3,472,000 3,373,000
General and administrative................................. 1,399,000 1,126,000
---------- ----------
TOTAL COSTS AND EXPENSES...................................... 8,710,000 8,319,000
---------- ----------
OPERATING (LOSS) INCOME....................................... (458,000) 496,000
INTEREST EXPENSE.............................................. (602,000) (550,000)
GAIN ON SALE OF BUILDINGS AND OTHER........................... 65,000 65,000
OTHER INCOME.................................................. 7,000 18,000
---------- ----------
NET (LOSS) INCOME............................................. $ (988,000) $ 29,000
---------- ----------
---------- ----------
PER SHARE:
Net (loss) income.......................................... $ (.24) $ .01
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
15
LEE PHARMACEUTICALS
STATEMENTS OF CHANGES IN STOCKHOLDERS' 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, 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)
Net (loss) (988,000) (988,000)
--------- ---------- ----------- ----------- -----------
Balance at September 30, 1998 4,135,162 $ 413,000 $ 4,222,000 $(6,734,000) $(2,099,000)
--------- ---------- ----------- ----------- -----------
--------- ---------- ----------- ----------- -----------
</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>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................................... $ (988,000) $ 29,000
--------------- ---------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation.............................................................. 119,000 113,000
Amortization of intangibles............................................... 922,000 1,416,000
(Decrease) in deferred income ............................................ (65,000) (65,000)
(Gain) on disposal of property, plant and equipment....................... (7,000) (17,000)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable................................ 409,000 (191,000)
(Increase) in due from related party...................................... (143,000) (35,000)
(Increase) decrease in inventories........................................ (142,000) 318,000
Decrease (increase) in other current assets............................... 669,000 (22,000)
Increase (decrease) in notes payable...................................... 99,000 (150,000)
Increase (decrease) in accounts payable................................... 38,000 (624,000)
Increase in due to related parties........................................ 69,000 57,000
Increase in accrued and environmental cleanup liabilities................. 79,000 266,000
(Decrease) in accrued royalties........................................... (535,000) (69,000)
--------------- ---------------
Total adjustments......................................................... 1,512,000 997,000
--------------- ---------------
Net cash provided by operating activities............................... 524,000 1,026,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................................ (94,000) (77,000)
Proceeds from sale of equipment........................................... 13,000 17,000
Acquisition of product brands............................................. (80,000) (260,000)
Increase in long-term deposits............................................ (14,000) -
--------------- ---------------
Net cash (used in) investing activities................................. (175,000) (320,000)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) notes payable to related party.............................. (5,000) -
Net (decrease) in notes payable-other..................................... (84,000) (170,000)
Net (decrease) in long-term royalty agreements............................ (121,000) (660,000)
(Decrease) increase in bank overdraft..................................... (123,000) 137,000
---------------- ---------------
Net cash (used) by financing activities................................. (333,000) (693,000)
--------------- ---------------
NET INCREASE IN CASH......................................................... 16,000 13,000
Cash, beginning of year...................................................... 26,000 13,000
--------------- ---------------
Cash, end of year............................................................ $ 42,000 $ 26,000
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................................. $ 508,000 $ 524,000
--------------- ---------------
--------------- ---------------
Acquisition of product brands:
Fair value of assets acquired............................................. $ 270,000 $ 1,403,000
Fair value of liabilities incurred........................................ (190,000) (1,143,000)
--------------- ---------------
Net cash payments....................................................... $ 80,000 $ 260,000
--------------- ---------------
--------------- ---------------
</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
$6,734,000. The Company's recurring losses 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. 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 ($800,000 for fiscal year 1998) over the
maximum period of the royalty agreement. All other intangibles are
amortized ($649,000 for fiscal year 1998) 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. A
provision of $122,000 has been accrued for in fiscal 1998. In
addition, $79,000 has been provided in fiscal 1998 for the Monterey
Site. Management believes that the total amount provided at September
30, 1998 for remedial cost studies is adequate based on current
information available. See Note 10 - "Assessment for environmental
cleanup."
MAJOR CUSTOMER
The Company had one major customer with sales volume approximating 9%
and 14% of the Company's net revenues for the years ending September
30, 1998, and 1997, respectively. The amount due from the customer was
$180,000 and $542,000 at September 30, 1998, and 1997, 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 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.
<PAGE>
18
FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the
Company's long-term debt approximates the carrying value. Furthermore,
the carrying value of all other financial instruments potentially
subject to valuation risk (principally consisting of accounts
receivable and accounts payable) also approximates fair value.
ACCOUNTING FOR STOCK BASED COMPENSATION
Stock option grants are set at the closing price of the Company's
common stock on the day prior to the date of grant. Therefore, under
the principles of APB Opinion No. 25, the Company does not recognize
compensation expense associated with the grant of stock options. SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the use
of option valuation models to provide supplemental information
regarding options granted after 1994. Pro forma information regarding
net income and earnings per share shown below was determined as if the
Company had accounted for its employee stock options under the fair
value method of that statement.
The fair value of the options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.0%; dividend yields
of 0% for 1998 and 1997; volatility factors of the expected market
price of the Company's common stock of 50% for 1998 and 1997; and
expected life of the options of two years. These assumptions resulted
in weighted average fair values of $0.08 and $0.09 per share for stock
options outstanding in 1998 and 1997 respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee
stock options have characteristics significantly different from those
of traded options such as vesting restrictions and extremely limited
transferability.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option vesting periods. The pro forma
effect on net income for 1998 and 1997 is not representative of the
pro forma effect on net income in future years because it does not
take into consideration pro forma compensation expense related to
grants made prior to 1995. Pro forma information in future years will
reflect the amortization of a larger number of stock options granted
in several succeeding years. The Company's pro forma information is as
follows (in thousands except share data) for years ended September 30:
<TABLE>
<CAPTION>
1998 1997
---- -----
<S> <C> <C>
Pro forma net income (loss) $(1,015) $2
Pro forma (loss) per share $ (0.25) $0.00
</TABLE>
Information regarding stock options outstanding as of September 30,
1998 is included in Note 11 "Stock Options."
NOTE 2 - NET INCOME (LOSS) PER SHARE
Net loss per share for fiscal 1998 and net profit per share for fiscal
1997 are based on 4,135,162 common shares outstanding. Common stock
equivalents (common stock options) were not considered in the net loss
per share calculation since the effect is anti-dilutive. For fiscal
1997 common stock equivalents were not considered in the calculation
of earnings per share calculation since the effect is immaterial.
NOTE 3 - INVENTORIES
Inventories consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Raw materials............................. $2,070,000
Work-in-process........................... 272,000
Finished goods............................ 275,000
----------
2,617,000
Allowance for obsolescence................ (495,000)
----------
Total..................................... $2,122,000
----------
----------
</TABLE>
NOTE 4 - INTANGIBLE AND OTHER ASSETS
The Company acquired certain product lines in 1998 (See Note 14) and
prior years. Amounts related to these acquisitions were allocated to
intangible assets. Included in intangible assets at September 30,
1998, are the following:
<TABLE>
<CAPTION>
Amortization
Cost period (years)
----------- --------------
<S> <C> <C>
Goodwill.................................. $ 1,583,000 4 - 40
Covenants not to compete.................. 2,840,000 1 - 5
Trademark................................. 322,000 5
Royalty agreements........................ 2,802,000 4 - 6
Other..................................... 411,000 2 - 3
-----------
Total..................................... 7,958,000
Less: accumulated amortization........... (5,791,000)
-----------
Intangibles - net......................... $ 2,167,000
-----------
-----------
</TABLE>
<PAGE>
19
NOTE 5 - NOTES PAYABLE - CURRENT
<TABLE>
<S> <C>
A. Note payable to bank (accounts receivable financing), secured by
accounts receivable, equipment, inventories, and certain other
assets, maximum revolving advance is $1,100,000 (based on
domestic accounts receivable as defined in the agreement), requires
minimum monthly interest of $3,000, interest rate is 5% above
prime rate. The agreement, as renewed, is for a term of two years
from May 1998 and is renewable for successive one year periods
thereafter. $514,000
B. Note payable to bank, secured by inventory, maximum amount of
term loan is $400,000, requires monthly payments of $11,110,
interest rate is 6% above prime rate, maturing May 2000. 250,000
C. Note payable to bank, maximum amount of term loan is $440,000,
secured by the Company's machinery and equipment, requires
monthly payments of $11,800 including interest at the bank's
prime rate plus 6%, maturing May 2000. 51,000
--------
$815,000
--------
--------
</TABLE>
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 1998 and 1997 was $65,000.
The amounts of rents paid to related parties were $133,000 and
$133,000 for September 30, 1998, and 1997, respectively.
During the fiscal year ending September 30, 1998, the total interest
expensed to related parties (Note 7) was $276,000 out of which
$182,000 was paid and $472,000 was accrued as of September 30, 1998.
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.
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
<TABLE>
<S> <C>
A. Notes payable to related parties, unsecured, bearing interest at bank's
prime rate (8.5% at September 30, 1998), maturing January 2005. $ 85,000
B. Note payable to officer, unsecured, bearing interest at bank's prime
rate (8.5% at September 30, 1998), 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, 1998), 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, 1998), 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, 1998), 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, 1998), 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, 1998), 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, 1998), 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, 1998), 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, 1998), principal is maturing and accrued interest is
payable in January 2005. 250,000
</TABLE>
<PAGE>
20
<TABLE>
<S> <C>
K. Note payable to officer, unsecured, bearing interest at bank's prime
rate (8.5% at September 30, 1998), maturing January 2005. 10,000
----------
3,314,000
Less current portion ($255,000 in arrears) (375,000)
----------
$2,939,000
----------
----------
</TABLE>
NOTE 8 - NOTES PAYABLE, OTHER - NONCURRENT
<TABLE>
<S> <C>
A. 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, 1998, was 8.5%. $ 43,000
B. 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, 1998, was 8.5%. 474,000
C. 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. 241,000
D. Note payable to seller on acquisition of product brand payable in equal
monthly installments of $5,300 plus interest until August 25, 2001, with
any unpaid balance payable September 25, 2001. 190,000
E. Note payable secured by product brands, bearing interest at 20%, interest
payable monthly, maturity January 1, 2000. The previous notes were
canceled, consolidated and converted into one new note. The terms of the
new note require monthly principal payments of $20,000 to be made
commencing January 1, 1999. 600,000
F. Note payable secured by product brand bearing interest at 20%. The note,
as renewed, matures July 1999. 50,000
----------
1,598,000
Less current portion (582,000)
----------
$1,016,000
----------
----------
</TABLE>
NOTE 9 - LONG-TERM DEBT MATURITIES
At September 30, 1998, the Company was committed to the following
minimum principal payments.
<TABLE>
<CAPTION>
YEAR ENDING RELATED
SEPTEMBER 30, PARTIES OTHERS
------------- ---------- ----------
<S> <C> <C>
1999 $ 375,000 $ 582,000
2000 120,000 580,000
2001 120,000 267,000
2002 120,000 24,000
2003 120,000 24,000
Thereafter 2,459,000 121,000
---------- ----------
Total $3,314,000 $1,598,000
---------- ----------
---------- ----------
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At September 30, 1998, the Company was committed to its Chairman and
to others under noncancelable operating leases for land and buildings
requiring minimum annual rentals as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, OTHERS CHAIRMAN
------------- -------- ---------
<S> <C> <C>
1999 $391,000 $134,000
2000 391,000 134,000
2001 65,000 134,000
2002 - 134,000
2003 - 134,000
Thereafter - 290,000
-------- --------
Total $847,000 $960,000
-------- --------
-------- --------
</TABLE>
<PAGE>
21
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, 1998, and 1997, was $521,000 and $521,000, 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:
<TABLE>
<CAPTION>
YEAR ENDING SUBLEASE
SEPTEMBER 30, REVENUES
------------ ---------
<S> <C>
1999 $ 97,600
2000 97,600
2001 16,300
2002 -
--------
Total $211,500
--------
--------
</TABLE>
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 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. The Company resisted
further work on its property until the property upgradient was tested
in greater detail since two "apparent source" lots had not been
tested. 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 for the
reasons listed above as well as "financial constraints". 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 re mediating 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, in consort with their
comprehensive general liability (CGL) carriers, have engaged a
consultant to perform a site investigation with respect to soil and
shallow groundwater contamination over the entire city block. The CGL
carriers provided $290,000 in funding which paid for the $220,000
study, $20,000 in legal fees for project oversight, and a $50,000
balance in the operating fund. Earlier the Company had accrued $87,500
as its proportionate share of the earlier quote of $175,000. Since
that time, the overall scope of the project was increased to $205,000
plus $15,000 for waste water disposal, bringing the total to the above
listed $220,000. The $87,500 accrual was not spent on this project (as
the entire cost was borne by the CGL carriers), but remains on the
books as an accrual against the cost of remediation of the same site
that was included in the study.
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 $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 of 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 has been completed but the final program has not
been reported. 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.
<PAGE>
22
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 and other property owners engaged Geomatrix Consultants,
Inc., to do a survey of vadose soil and shallow groundwater in the
"hot spots" detected in the previous studies. Geomatrix issued a
report dated December 1, 1997 (the "Report"), on 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 indicated
generally low concentrations of tetrachloroethene, trichloaethene and
trichloroethane in the groundwater of the upgradient neighbor. The
Report was submitted to the RWQCB for its comments and response. A
meeting with the parties and RWQCB was held on February 10, 1998. The
RWQCB had advised companies that vadose soil contamination is minimal
and requires no further action. However, there is an area of shallow
groundwater which has a higher than desired level of chlorinated
solvents, and the RWQCB requested a proposed work plan be submitted by
Geomatrix. Geomatrix has submitted a "Focused Feasibility Study" which
concludes that there are five possible methods for cleanup. The most
expensive are for a pump and sewer remediation which would cost
between $1,406,000 and $1,687,000. The Company is actively exploring
the less expensive alternative remediation methods, of which the two
proposed alternatives range in cost between $985,000 and $1,284,000.
Accordingly, the Company has taken the average of the two amounts
($985,000 and $1,284,000) as the total amount of estimated cost. Since
there are four economic entities involved, the Company's best estimate
at this time, in their judgment, would be that their forecasted share
would be 25% or $284,000 less the liability already recognized on the
books of $162,000 thereby requiring an additional $122,000 liability.
Accordingly, the Company recorded an additional accrual of $122,000 in
the third quarter of fiscal 1998. The $122,000 accrual is in addition
to the $79,000 accrual for the Monterey Site as will be explained in
the following paragraph. The $79,000 accrual, in the third quarter of
fiscal 1998, related to the Monterey Site is not included in the
$284,000 figure above. No assurances can be given that any of the
alternative remediation methods will be feasible or that the actual
cost to the Company of the remediation will not exceed the amount of
the Company's current accruals of $284,000 (which includes the
$122,000 charge to income in the third quarter of fiscal 1998).
Without any prior correspondence or inkling of the Company's potential
liability, the EPA has recently informed the Company that the Company
may have potential liability for the ongoing remediation of Operating
Industries, Inc. (as they have gone out of business) Landfill
Superfund Site in Monterey Park, California (the "Monterey Site"). The
Monterey Site is a 190 acre landfill that operated from 1948 to 1984,
in which the Company disposed of non toxic pH balanced waste water on
six occasions between 1974 and 1978. Over 4,000 companies have been
identified as having contributed waste to the Monterey Site. The EPA
has offered to settle the Company's potential liability with respect
to the Monterey Site for a cost to the Company of $79,233. The Company
accrued a $79,000 charge in the third quarter of fiscal 1998 with
respect to this possible liability. The Company has elected to file
for relief from these obligations under the financial hardship option
in the EPA's response form.
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 since 1988 a total of $486,000, of
which $89,000 were legal fees, exclusive of legal fees expended in
connection with the SEC environmental investigation. The actual costs
could differ materially from the amounts expensed for environmental
investigation and cleanup costs to date.
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.
<PAGE>
23
The following table sets forth the number of shares under option and
the related option prices at September 30, 1997, and 1998:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
------- -------------------
<S> <C> <C>
Outstanding at September 30, 1996 and 1997.............. 205,500 $0.50 -- $1.3125
Canceled............................................ 0
-------
Outstanding at September 30, 1998....................... 205,500 $0.50 -- $1.3125
-------
-------
</TABLE>
At September 30, 1998, 167,700 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, 1998, options to purchase 16,600 shares were
outstanding and 14,900 shares are eligible to be exercised at an
average price of $1.13 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, 1998:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
------- -------------------
<S> <C> <C>
Outstanding at September 30, 1997....................... 768,000 $.16-- $.176
Granted............................................. 212,000 $.22
-------
Outstanding at September 30, 1998....................... 980,000 $.16-- $.22
-------
-------
</TABLE>
As of September 30, 1998, options to purchase 980,000 shares were
outstanding and 256,000 shares are eligible to be exercised at an
average price of $.17 per share under the 1997 Employee Incentive
Stock Option Plan. No additional options can be granted under this
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.
<PAGE>
24
The following table sets forth the number of shares under option and
the related option price at September 30, 1998:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
------- -------------------
<S> <C> <C>
Outstanding at September 30, 1997....................... 150,000 $.16
Granted............................................. 0
-------
Outstanding at September 30, 1998....................... 150,000 $.16
-------
-------
</TABLE>
At September 30, 1998, 50,000 shares are eligible to be exercised
under the 1997 Stock Option Plan. There are no shares available for
future grant under the plan as of September 30, 1998.
NOTE 12 - INCOME TAXES
As of September 30, 1998, the Company had net operating loss (NOL)
carryforwards of approximately $9,604,000 for Federal and $3,930,000
for California which for tax purposes can be used to offset future
Federal and California income taxes. 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 2007 through 2013. 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 in the
aggregate.
NOTE 14 - ACQUISITIONS
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
On February 17, 1998, the Company purchased certain assets of the
Painalay-Registered Trademark- throat spray line from Medtech
Laboratories, Inc. for $70,000. The Company is required to make five
payments of $14,000 each plus interest at 10% starting 61 days after
the close. In addition, the Company purchased for cash inventory
valued at $27,764.
On September 28, 1998, the Company purchased certain assets of the
Evac-U-Gen-Registered Trademark- brand of laxatives from Walker, Corp.
& Co., Inc. for $234,000. The Company remitted $100,000 at closing and
is required to make monthly payments of $5,300, plus interest,
beginning November 25, 1998 and ending September 25, 2001. This note
is personally guaranteed by the Company's Chairman. The interest rate
is equal to the highest prime rate during any one period. In addition,
the Company purchased certain inventories from Walker, Corp. & Co.,
Inc. for $54,500 at closing.
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
The Company has completed its financial obligation regarding an annual
minimum royalty commitment of $500,000. In addition, the Company has
borrowed funds to acquire other product lines which management
believes will be profitable contributors to the Company's overall
financial situation. The amount of borrowed funds is in the form of a
promissory note. The $500,000 promissory note requires monthly
payments of $14,000 each plus interest at 15%, commencing January 1,
1999 and continuing until November 1, 2001, plus one payment of all
remaining principal, plus interest, on December 1, 2001. This note is
personally guaranteed by the Company's Chairman. Management believes
that from actions such as the aforementioned, it will be able to meet
its obligations as they become due. However, there can be no assurance
that this will occur.
NOTE 16 - FOURTH QUARTER RESULTS (UNAUDITED)
The Company's unaudited operating loss for the fourth quarter, ended
September 30, 1998, was $129,000. The Company's average loss over the
prior three quarters, during fiscal 1998, was approximately $287,000.
The fourth quarter loss of $129,000 was comparatively lower due to the
cost cutting measures the Company adopted in June 1998 by laying off
several permanent and/or temporary employees.
On October 1, 1998, the Company purchased certain assets from Roberts
Pharmaceutical Corporation for $685,000. The Company remitted $600,000
at closing and is required to make monthly payments of $3,538 plus
interest at a rate equal to the highest prime rate (published in the
Wall Street Journal) during the preceding month commencing January 1,
1999 and ending on November 1, 2000, and a final payment of all
remaining principal due on December 1, 2000. In addition, the Company
purchased certain inventories valued at approximately $184,000 at
closing.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable
<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 72 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 46 President, Chairman 1977 President and since April 1995, Chairman of
and Director the Board of the Company
Michael L. Agresti 56 Vice President - 1977 Vice President - Finance, Treasurer and
Finance, Treasurer Secretary of the Company
and Secretary
William M. Caldwell IV 51 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 $100,000 for services in all capacities while
acting as officers and directors of the Company during the fiscal years ended
September 30, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- -----------
Name and Other Annual All Other
Principal Position Year Salary ($) Compensation ($) Options (#) Compensation ($)
- ------------------ ---- --------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Ronald G. Lee 1998 222,574 3,471 (1) 212,000 (2) --
President, Chairman 1997 220,616 5,617 (1) 568,000 (2) --
(since April 26, 1995) 1996 179,624 2,382 (1) -- --
& Director
</TABLE>
(1) Includes reimbursement of medical and dental expenses not covered by
the Company's insurance plan of $3,471, $5,617, and $2,382,
respectively, in 1998, 1997, and 1996.
(2) The Company granted 212,000 stock options on January 28, 1998 which
had an option price of $.22 at the date of grant and 568,000 stock
options on March 12, 1997, which had an option price of $.176 at the
date of grant.
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
<TABLE>
<CAPTION>
Number of Unexercised Options
at Fiscal Year End (#)
-----------------------------
Name Exercisable/Unexercisable
-----------------------------
<S> <C>
Ronald G. Lee 297,666/617,334
</TABLE>
<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 1998 all participants
account balances have been distributed by the Company except for a few former
participants account balances of less than $100 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, 1998,
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 1,152,783 shares 26%
1444 Santa Anita Avenue
South El Monte, CA 91733
Common Stock Dr. Henry L. Lee 197,334 shares (1) 5%
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.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- -------------- ---------------- ----------------------- --------
<S> <C> <C> <C>
Common Stock Ronald G. Lee 1,152,783 (1) 26%
Common Stock Dr. Henry L. Lee 197,334 (2) 5%
Common Stock All officers and directors
as a group (4 persons) 1,530,586 (1) (2) 33%
</TABLE>
(1) Includes shares subject to options exercisable at or within 60 days after
December 31, 1998.
(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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 exhibit is filed herewith:
27 - Financial data schedule
The following exhibits have previously been filed by the Company:
3.1 - Articles of Incorporation, as amended (1)
3.4 - By-laws, as amended December 20, 1977 (2)
3.5 - Amendment of By-laws effective March 14, 1978 (2)
3.6 - Amendment to By-laws effective November 1, 1980 (3)
10.1 - Qualified Stock Option Plan including forms of grant (4)
10.2 - 1985 Employee Incentive Stock Option Plan (5)
10.3 - Description of bonus agreements between the Registrant and
its officers (2)
10.4 - Lease dated December 1, 1990, for the premises located at
1470 Santa Anita Avenue, South El Monte, California (6)
10.5 - Lease dated April 16, 1990, for the premises located at
1425 and 1427 Lidcombe Avenue, South El Monte, California
(6)
10.6 - Lease dated April 16, 1990, for the premises located at
1434 Santa Anita Avenue, South El Monte, California (6)
10.7 - Lease dated April 16, 1990, for the premises located at
1460 Santa Anita Avenue, South El Monte, California (6)
10.8 - Lease dated April 16, 1990, for the premises located at
1457 Lidcombe, South El Monte, California (6)
10.9 - Lease dated April 16, 1990, for the premises located at
1500 Santa Anita Avenue, South El Monte, California (6)
10.10 - Lease dated April 16, 1990, for the premises located at
1516 Santa Anita Avenue, South El Monte, California (6)
10.11 - Lease dated March 1, 1991, for the premises located at
1444 Santa Anita Avenue, South El Monte, California (6)
10.12 - Lease dated March 1, 1991, for the premises located at
1445 Lidcombe Avenue, South El Monte, California (7)
10.13 - Promissory notes which were amended in September 1992
evidencing advances by the Registrant's officers and
directors (8)
10.14 - Promissory notes which were amended in September 1994
evidencing advances by the Registrant's officers and
directors (9)
10.15 - Promissory notes evidencing advances made 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)
<PAGE>
31
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)
10.33 - Promissory note which was amended in October 1997
evidencing advances made to the Registrant (14)
10.34 - Promissory notes which were amended (modified) in December
1997 evidencing advances made to the Registrant (14)
10.35 - Modification of loan and security agreement dated
September 10, 1997, between Lee Pharmaceuticals and
Preferred Business Credit, Inc. (14)
10.36 - Promissory note which was amended in February 1997
evidencing advances made to the Registrant (14)
10.37 - Secured promissory note dated October 21, 1996, between
Lee Pharmaceuticals and Roberts Laboratories, Inc. (14)
10.38 - Promissory note evidencing advance made to the Registrant
(15)
10.39 - Promissory note evidencing advance made to the Registrant
(15)
10.40 - Modification of loan and security agreement dated May 21,
1996, between Lee Pharmaceuticals and Preferred Business
Credit, Inc. regarding a revolving credit facility financing
(16)
10.41 - Modification of secured promissory note dated August 29,
1997, between Lee Pharmaceuticals and Preferred Business
Credit, Inc. (16)
10.42 - Secured promissory note dated May 15, 1998, between Lee
Pharmaceuticals and Preferred Business Credit, Inc. (16)
10.43 - Continuing guaranty dated May 15, 1998, between Lee
Pharmaceuticals and Preferred Business Credit, Inc. (16)
(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.
<PAGE>
32
(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.
(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.
(14) Filed as exhibits 10.33, 10.34, 10.35, 10.36, and 10.37 with the
Company's Form 10-KSB Annual Report for the fiscal year ended
September 30, 1997, filed with the Securities and Exchange Commission
in December 1997 and incorporated herein by reference.
(15) Filed as Exhibits 10.33 and 10.34 with the Company's Form 10-QSB
Quarterly Report for the three months ended December 31, 1997, filed
with the Securities and Exchange Commission in February 1998 and
incorporated herein by reference.
(16) Filed as Exhibits 10.35, 10.36, 10.37, and 10.38 with the Company's
Form 10-QSB Quarterly Report for the nine months ended June 30, 1998,
filed with the Securities and Exchange Commission in August 1998 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, 1998 RONALD G. LEE
-------------------------- -----------------------------------
Ronald G. Lee
Chairman of the Board and President
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, 1998 RONALD G. LEE
-------------------------- -----------------------------------
Ronald G. Lee
Chairman of the Board & President
(Principal Executive, Financial
and Accounting Officer) and
Director
Date: DECEMBER 23, 1998 HENRY L. LEE, JR.
-------------------------- -----------------------------------
Henry L. Lee, Jr.
Director
Date: DECEMBER 23, 1998 WILLIAM M. CALDWELL IV
-------------------------- -----------------------------------
William M. Caldwell IV
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 42
<SECURITIES> 0
<RECEIVABLES> 1,073
<ALLOWANCES> (179)
<INVENTORY> 2,122
<CURRENT-ASSETS> 3,812
<PP&E> 6,658
<DEPRECIATION> (6,174)
<TOTAL-ASSETS> 6,463
<CURRENT-LIABILITIES> 4,531
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> (2,512)
<TOTAL-LIABILITY-AND-EQUITY> 6,463
<SALES> 8,252
<TOTAL-REVENUES> 9,059
<CGS> 3,839
<TOTAL-COSTS> 8,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 602
<INCOME-PRETAX> (988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (988)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
