<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-7335
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LEE PHARMACEUTICALS
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-2680312
- ---------------------------------- -----------------------------------
(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)
(626) 442-3141
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(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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As of December 31, 1998, there were outstanding 4,135,162 shares of
common stock of the registrant.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
ASSETS
<S> <C> <C>
Cash $ 23
Accounts and notes receivable (net of allowances: $201) 678
Due from related party 269
Inventories:
Raw materials $ 1,605
Work in process 235
Finished goods 463
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Total inventories 2,303
Other current assets 600
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Total current assets 3,873
Property, plant and equipment (less
accumulated depreciation and
amortization: $6,207) 472
Goodwill and other assets, (net of
accumulated amortization: $6,000) 2,973
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TOTAL $ 7,318
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</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
LIABILITIES
<S> <C>
Bank overdraft $ 35
Note payable to bank 1,312
Notes payable, other 857
Current portion - royalty agreements 95
Current portion - note payable related party 405
Accounts payable 1,243
Other accrued liabilities 364
Environmental cleanup liability 288
Due to related parties 532
Deferred income 65
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Total current liabilities 5,196
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Long-term notes payable to related parties 2,909
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Long-term notes payable, other 1,178
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Long-term notes payable to bank 215
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Environmental cleanup liability - Casmalia Site 374
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Deferred income 60
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock, $.10 par value; authorized, 7,500,00 shares;
issued and outstanding, 4,135,162 shares 413
Additional paid-in capital 4,222
Accumulated deficit (7,249)
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Total stockholders' deficiency (2,614)
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TOTAL $ 7,318
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</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
1998 1997
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(unaudited) (unaudited)
<S> <C> <C>
Gross revenues $ 2,133 $ 2,636
Less: Sales returns (127) (160)
Cash discounts and others (16) (23)
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Net revenues 1,990 2,453
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Costs and expenses:
Cost of sales 936 1,023
Selling and advertising expense 719 930
General and administrative expense 303 362
Interest expense 188 147
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Total costs and expenses 2,146 2,462
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(Loss) from operations (156) (9)
Other income 15 18
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Net (loss) income before extraordinary item (141) 9
Extraordinary loss related to Casmalia Disposal Site cleanup (374)
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Net (loss) income $ (515) $ 9
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Per share:
Net (loss) income per share before extraordinary loss $ (.03) $ .00
Extraordinary loss (.09)
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Net (loss) income $ (.12) $ .00
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</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
1998 1997
---------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.......................................................... $ (515) $ 9
Loss from extraordinary item............................................. 374 -
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Net (loss) income before extraordinary item................................ (141) 9
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Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation............................................................... 33 28
Amortization of intangibles................................................ 209 237
(Decrease) in deferred income.............................................. (16) (16)
(Gain) on disposal of property, plant, and equipment....................... - (2)
Change in operating assets and liabilities:
Decrease in accounts receivable............................................ 216 401
(Increase) in due from related party....................................... (18) (70)
(Increase) in inventories ................................................. (181) (170)
Increase (decrease) in other current assets................................ (97) 169
Increase in accounts payable............................................... 185 140
Increase in accounts payable related party................................. 58 52
Increase (decrease) in notes payable, other................................ 740 (196)
(Decrease) increase in other accrued liabilities........................... (34) 168
(Decrease) in accrued royalties............................................ (295) (583)
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Total adjustments.......................................................... 800 158
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Net cash provided by operating activities................................ 659 167
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Cash flows from investing activities:
Additions to property, plant, and equipment................................ (21) (2)
Proceeds from sale of equipment............................................ - 2
Acquisition of product brands.............................................. (930) -
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Net cash (used in) investing activities.................................. (951) -
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Cash flows from financing activities:
(Payments on) bank loans................................................... (2) (71)
(Payments on) notes payable to related party............................... - (33)
Proceeds from notes payable, other......................................... 326 100
(Decrease) in long-term royalty agreements................................. - (40)
(Decrease) in bank overdraft............................................... (51) (122)
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Net cash provided by (used in) financing activities...................... 273 (166)
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Net (decrease) increase in cash............................................... (19) 1
Cash, beginning of year....................................................... 42 26
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Cash, end of period........................................................... $ 23 $ 27
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................... $ 148 $ 125
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Acquisition of product brands:
Fair value of assets acquired.............................................. 1,015 -
Fair value of liabilities incurred......................................... $ (85) -
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Net cash payments........................................................ $ 930 -
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</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of December 31, 1998, and the statements
of operations and cash flows for the periods ended December 31, 1998, and
1997, have not been audited by independent accountants but reflect all
adjustments, consisting of any normal recurring adjustments, which are, in
the opinion of management, necessary to a fair statement of the results for
such periods. The results of operations for the three months ended December
31, 1998, are not necessarily indicative of results to be expected for the
year ending September 30, 1999.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these financial statements are adequate to make the information
not misleading.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1998.
The Company is involved in various matters involving environmental cleanup
issues. SEE "Item 2. Management's Discussion and Analysis or Plan of
Operations" and Note 10 of Notes to Financial Statements included in the
Company's Form 10-KSB for the fiscal year ended September 30, 1998. The
ultimate outcome of these matters cannot presently be determined.
Environmental expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are expensed. The Company's proportionate share of the
liabilities are recorded when environmental remediation and/or cleanups are
probable, and the costs can be reasonably estimated.
The Company accrued a $374,000 charge in the first quarter of fiscal 1999
with respect to a possible environmental cleanup liability related to the
Casmalia Disposal Site. The Company will be filing for relief from this
obligation under the financial hardships option in the EPA's response form
"Instructions for Applying for Financial Review," consequently, the
$374,000 accrual is presented as a long-term liability.
2. Net loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during the periods presented. Common stock
equivalents (common stock options) are not included in these calculations
where their effect on net loss per share is anti-dilutive. The weighted
average number of shares was 4,135,162 for all periods presented.
3. Note payable to bank:
Effective April 26, 1996, the Company renewed its real estate loan with the
bank. The note payable to the bank, secured by deed on land and building,
requires a monthly payment of $4,200, including interest at the bank's
reference rate plus 4%, maturing March 2001. At December 31, 1998, the
interest rate was 11.75%. The note is guaranteed by the former Chairman of
the Company and the Company's President.
4. Line of credit:
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 agreement may be
renewable for successive one year periods thereafter. Also, the agreement
requires minimum monthly interest of $3,000 with an interest rate of 5%
above Bank of America's prime rate. The new financing agreement includes a
$400,000 term loan on inventory which is incorporated in the working
capital line of credit above. This term loan requires monthly payments of
$11,110 with an interest rate of 6% above Bank of America's prime rate.
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 and requires monthly payments of $11,800 including
interest at Bank of America's prime rate plus 6%.
<PAGE>
5. Acquisitions:
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.
On February 17, 1998, the Company purchased certain assets of the
PAIN-A-LAY-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.
On October 1, 1998, the Company purchased certain assets of the
Cheracol-Registered Trademark- cough syrup, Comhist-Registered Trademark-
decongestant tablets and Entuss-Registered Trademark- expectorant product
lines from Roberts Pharmaceutical Corporation for $684,934. The Company
remitted $600,000 at closing and is required to make monthly payments of
$3,538, plus interest at prime, commencing January 1, 1999, and ending
November 1, 2000. In addition, the Company purchased certain inventory
for $150,800 for which the Company is required to make monthly payments
of $6,283, plus interest at prime, commencing January 1, 1999, and ending
November 1, 2000. On December 1, 1998, the Company purchased certain
assets of seven over-the-counter products from Numark Laboratories, Inc.
for $430,000. The Company remitted the full $430,000 at closing.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998, AND DECEMBER 31, 1997
Gross revenues for the three months ended December 31, 1998, were
$2,133,000, a decrease of approximately $503,000 or 19% from the
comparable three months period ended December 31, 1997. The decrease in
gross revenues was the result of declining sales in the depilatory
category plus several of the over-the-counter items. Also, the nail
extender category experienced a slight reduction ($29,000) in gross
revenues. These decreases accounted for over $500,000 in revenues which
was partially offset by volume generated from the newly acquired brands
such as; EVAC-U-GEN-Registered Trademark-, Cheracol-Registered Trademark-,
and PAIN-A-LAY-Registered Trademark- as well as other over-the-counter
items.
Net revenues decreased approximately $463,000 or 19% for the three months
ended December 31, 1998, as compared to the three months ended December 31,
1997. The change in net revenues was due to the same explanations discussed
above. The Company's sales returns decreased approximately $33,000 or 20%
when comparing fiscal years 1999 and 1998. The lower sales returns was
primarily the result of a decrease of returns in the nail extender
category.
Cost of sales as a percentage of gross revenues was 44% for the three
months ended December 31, 1998, compared to 39% for the comparative three
month period ended December 31, 1997. The higher cost of sales percentage
was due primarily to off pricing to several retailers. Also, the
unfavorable product mix contributed to the higher cost of sales percentage.
Selling and advertising expenses decreased $211,000 or 23% when comparing
the three months ended December 31, 1998, with the three months ended
December 31, 1997. The decrease in expenses was mainly due to the following
factors; 1) lower commissions ($50,000) due to reduced sales revenues and
decreased commission rates, 2) lower freight costs ($13,000), 3) decrease
in royalty expense of $141,000, the result of the final minimum royalty due
($125,000 per quarter) on a
<PAGE>
brand acquisition which ended on September 30, 1998, and 4) reduction in
temporary help expense ($19,000). The above decreases were somewhat offset
by an increase in amortization expense ($16,000) the result of recent brand
acquisitions.
General and administrative expenses decreased $59,000 or 16% when comparing
the three months ended December 31, 1998, with the three months ended
December 31, 1997. The decrease in expenses was mainly due to the following
factors; 1) lower salaries and wages plus related fringe benefits
($51,000), 2) reduced legal expenses ($11,000) and a decrease in printing
material and supplies ($21,000). The above decreases were partially offset
by an increase in management information systems (MIS) consulting services
($22,000) related to electronic data interchange (EDI) and Year 2000
readiness.
Interest expense increased $41,000 or 28% when comparing the three months
ended December 31, 1998, with the three months ended December 31, 1997. The
increase was due to increased borrowings from the Company's asset based
financing lender and additional liability commitments as a result of recent
brand acquisitions. This was somewhat offset by a decrease in the prime
rate, 7.75% versus 8.5%, at December 31, 1998 and December 31, 1997
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 1998, working capital was a
negative $1,323,000 compared with a negative $719,000 as of September
30,1998. The ratio of current assets to current liabilities was .7 to 1 at
December 31, 1998, and .8 to 1 at September 30, 1998. The increase in the
Company's negative working capital was basically due to a decease in
accounts receivable and increases in notes payable to bank.
The Company has an accumulated deficit of $7,249,000. 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.
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.
<PAGE>
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.
ENVIRONMENTAL MATTERS
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,
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.
<PAGE>
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 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 Company was recently notified by the EPA that the Company may have
potential liability for waste material it disposed of at the Casmalia
Disposal Site ("Site") located on a 252-acre parcel in Santa Barbara
County, California. The Site was operational from 1973 to 1989 and over
10,000 separate parties disposed of waste there. The EPA stated that
federal, state and local governmental agencies along with the numerous
private entities that used the Site for waste disposal will be expected to
pay their share as part of this settlement. The U.S. EPA is also pursuing
the owner(s)/operator(s) of the Site to pay for Site remediation. The EPA
has a settlement offer to the Company with respect to the Site for a cost
of $373,950. The Company accrued a $374,000 charge in the first quarter of
fiscal 1999 with respect to this possible liability. The Company has
elected to file for relief from these obligations under the financial
hardships option in the EPA's response form "Instructions for Applying for
Financial Review."
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 $860,000, 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations - Environmental Matters" is incorporated herein
by reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for the
fiscal year ended September 30, 1998.
Item 6. The following exhibits are 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)
(1) Filed as an Exhibit of the same number with the Company's
Form S-1 Registration Statement filed with the Securities
and Exchange Commission on February 5, 1973, (Registrant
No. 2-47005), and incorporated herein by reference.
(2) Filed as Exhibits 3.4 and 3.5 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1978,
filed with the Securities and Exchange Commission and
incorporated herein by reference.
(3) Filed as an Exhibit of the same number with the Company's
Form 10-K Annual Report for the fiscal year ended September
30, 1979, filed with the Securities and Exchange Commission
and incorporated herein by reference.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Acts of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LEE PHARMACEUTICALS
-------------------
(Registrant)
Date: FEBRUARY 9, 1999 RONALD G. LEE
------------------- ------------------------------------
Ronald G. Lee
Chairman of the Board, President and
Chief Financial and Accounting Officer
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